UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

For the quarterly period ended June 30, 2004

For the transition period from                    to                    

Commission File Number 0-24399

UNITED COMMUNITY FINANCIAL CORP.

(330) 742-0500

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.

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION

ITEM 1. Financial Statements

UNITED COMMUNITY FINANCIAL CORP.

See Notes to Consolidated Financial Statements.

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UNITED COMMUNITY FINANCIAL CORP.

See Notes to Consolidated Financial Statements.

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UNITED COMMUNITY FINANCIAL CORP.

See Notes to Consolidated Financial Statements.

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UNITED COMMUNITY FINANCIAL CORP.

See Notes to Consolidated Financial Statements.

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UNITED COMMUNITY FINANCIAL CORP.

     1. STOCK COMPENSATION

     Employee compensation expense under stock option plans is reported if options are granted below market price at grant date. Pro forma disclosures of net income and earnings per share are shown using the fair value method of FASB Statement No. 123 to measure expense for options granted after 1994, using an option pricing model to estimate fair value.

     Employee compensation expense under stock options is reported using the intrinsic value method. No stock-based compensation cost is reflected in net income, as all options granted had an exercise price equal to or greater than the market price of the underlying common stock at date of grant. The following table illustrates the effect on net income and earnings per share if expense was measured using the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation.

     The pro forma effects are computed using option pricing models, using the following weighted-average assumptions as of grant date:

     2. BASIS OF PRESENTATION

United Community Financial Corp. (United Community) was incorporated under Ohio law in February 1998 by The Home Savings & 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 and loan association (Conversion). Upon consummation of the Conversion on July 8, 1998, United Community became the unitary savings and loan holding company for Home Savings. Home Savings has 35 full service offices and five loan production offices throughout northern and central 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 has twelve office locations providing a full range of investment alternatives for individuals, companies and not-for-profit organizations throughout Ohio and western Pennsylvania.

The accompanying consolidated financial statements of United Community have been prepared in accordance with instructions 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), which are, in the opinion of management, necessary for a fair statement of results for the interim periods.

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The results of operations for the six months ended June 30, 2004 are not necessarily indicative of the results to be expected for the year ending December 31, 2004. 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, 2003, contained in United Community’s Form 10-K for the year ended December 31, 2003.

     3. MORTGAGE BANKING ACTIVITIES

Mortgage loans serviced for others, which are not reported as assets, totaled $642.9 million at June 30, 2004.

Activity for capitalized mortgage servicing rights, included in other assets, was as follows in 2004:

Activity in the valuation allowance for mortgage servicing rights was as follows in 2004:

     4. SEGMENT INFORMATION

United Community has two principal segments, retail banking and investment advisory services. Retail banking provides consumer and corporate banking services. Investment advisory services provides investment brokerage and a network of integrated financial services. Condensed statements of income by operating segment for the three and six months ended June 30, 2004 and 2003 are as follows:

Three Months Ended June 30, 2004

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Three Months Ended June 30, 2003

Six Months Ended June 30, 2004

Six Months Ended June 30, 2003

     5. LONG-TERM INCENTIVE

     On July 12, 1999, shareholders approved the United Community Financial Corp. Long-Term Incentive Plan (Incentive Plan). The purpose of the Incentive Plan is to promote and advance the interests of United Community and its shareholders by enabling

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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 Incentive 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 Incentive Plan is 3,471,562, all of which have been granted. All of the options awarded become exercisable on the date of grant. The option period expires 10 years from the date of grant. A summary of activity in the Incentive Plan is as follows:

     6. 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 and restricted stock awards.

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     7. OTHER POSTRETIREMENT BENEFIT PLANS

Home Savings sponsors a defined benefit health care plan that was curtailed in 2000 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/(gain) are as follows:

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

UNITED COMMUNITY FINANCIAL CORP.

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Forward Looking Statements

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

Comparison of Financial Condition at June 30, 2004 and December 31, 2003

Total assets increased by $109.7 million, or 5.3%, to $2.2 billion at June 30, 2004, compared to December 31, 2003. The net change in assets was a result of increases of $177.5 million in loans, $14.0 million in trading securities and $5.8 million in other assets. These increases were partially offset by decreases of $39.0 million in cash and cash equivalents, $29.0 million in available for sale securities and $19.6 million in loans held for sale. Total liabilities increased $145.3 million primarily as a result of a $17.4 million increase in interest-bearing deposits, a $9.1 million increase in non-interest bearing deposits, a $107.7 million increase in short-term borrowings and an increase of $12.4 million in long-term borrowed funds.

Funds that are available for general corporate purposes, such as loan originations, enhanced customer services and possible acquisitions, are invested in overnight funds and marketable and mortgage-related securities available for sale. Cash and deposits with banks increased $4.2 million, or 11.6%, to $40.5 million at June 30, 2004, compared to $36.3 million at December 31, 2003. Federal funds sold and other overnight funds decreased $43.2 million or 96.5% to $1.6 million at June 30, 2004 from $44.8 million at December 31, 2003. The decrease is primarily as a result of the completion of the self-tender offer whereby United Community purchased 3,667,227 shares of its stock at an average per share price of $12.50.

Available for sale securities decreased $29.0 million or 12.8% from December 31, 2003 to June 30, 2004 as a result of sales aggregating $40.8 million and paydowns and maturities of $29.5 million. Purchases of $44.0 million in securities partially offset the decrease. Trading securities increased $14.0 million or 89.5% to $29.6 million at June 30, 2004, from $15.6 million at December 31, 2003. The primary reason for the change is an increase in trading securities held in Butler Wick’s portfolio of $13.9 million, most of which relate to short sales entered into at June 30, 2004.

Net loans increased $177.5 million, or 11.3%, from December 31, 2003 to June 30, 2004. Home Savings had increases of $12.7 million in real estate loans, $50.0 million in construction loans, $74.3 million in consumer loans and $30.0 million in commercial loans. Loans held for sale decreased $19.6 million, or 52.0%, to $18.1 million at June 30, 2004 compared to $37.7 million at December 31, 2003. During the first six months of 2004, Home Savings sold approximately $94.1 million in fixed-rate loans to help manage interest rate risk. Home Savings anticipates continued sales as a part of its strategic plan to manage interest rate risk.

The allowance for loan losses increased to $16.3 million at June 30, 2004, from $15.1 million at December 31, 2003. The change in the allowance for loan losses is based on an analytical review giving consideration to levels and trends of delinquencies, charge-offs and recoveries, volume, terms of loans, reserve coverage ratios and other factors in the portfolio. The allowance for loan losses as a percentage of total loans decreased two basis points to 0.92% at June 30, 2004 compared to December 31, 2003. The allowance for loan losses as a percent of non-performing loans increased to 118.8% at June 30, 2004 compared to 100.7% at December 31, 2003.

Nonperforming assets, which include nonaccrual and restructured loans and real estate owned, decreased approximately $1.9 million, or 11.9%, to $14.4 million at June 30, 2004, from $16.3 million at December 31, 2003, primarily due to a decrease in all nonperforming asset categories. Total nonaccrual and restructured loans accounted for 0.77% of net loans receivable at June 30, 2004 and 0.94% of net loans receivable at December 31, 2003. Total nonperforming assets were 0.66% of total assets as of June 30, 2004 and 0.79% as of December 31, 2003.

Other assets increased by $5.8 million, or 53.1%, to $16.7 million at June 30, 2004 from $10.9 million at December 31, 2003. The primary reason for the change is an increase of $2.5 million in accounts receivable at Butler Wick as a result of an increase in receivables from brokers and dealers of $1.7 million and an increase of $817,000 due from customers. An increase in prepaid Ohio franchise tax of $855,000 also contributed to the change.

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Total deposits increased $26.5 million, or 1.9% from December 31, 2003 to June 30, 2004. This increase is mainly due to a $7.8 million increase in savings accounts and a $20.8 million increase in certificates of deposit, which were partially offset by a $2.2 million decrease in NOW accounts.

Other borrowed funds, consisting of both long and short term debt, increased $120.1 million to $458.5 million at June 30, 2004 compared to $338.5 million at December 31, 2003. The increase is due to an increase in overnight advances from the Federal Home Loan Bank (FHLB) by Home Savings of $88.2 million, an increase in long-term advances from the FHLB by Home Savings of $9.1 million, sweep repurchase agreements by Home Savings of $2.1 million and $15.1 million in short term borrowings at Butler Wick. The borrowings were used to fund loan growth in excess of deposit growth, to complete the self-tender offer and to fund security purchases at Butler Wick.

Shareholders’ equity decreased $35.6 million, or 12.7%, to $244.3 million at June 30, 2004 from $279.8 million at December 31, 2003 primarily due to the self-tender offer. United Community repurchased 3,667,227 shares, or 10.4% of the shares outstanding, at a total price of $45.9 million. Also contributing to the decrease was a decrease in other comprehensive income of $2.0 million caused by unrealized losses on the available for sale securities portfolio. Tangible book value and book value per share were $6.65 and $7.84, respectively as of June 30, 2004.

Comparison of Operating Results for the Three Months Ended
June 30, 2004 and June 30, 2003

Net Income. Net income for the three months ended June 30, 2004 was $5.0 million, or $0.17 per diluted share, compared to net income of $7.0 million, or $0.22 per diluted share, for the three months ended June 30, 2003. Net interest income increased $24,000 and the provision for loan losses declined by $333,000. Noninterest income decreased $4.5 million and noninterest expense decreased $959,000. United Community’s annualized return on average assets and return on average equity were 0.94% and 8.12%, respectively, for the three months ended June 30, 2004. The annualized return on average assets and return on average equity for the comparable period in 2003 were 1.41% and 10.23%, respectively.

Net Interest Income. Net interest income for the quarter ended June 30, 2004 was $18.2 million compared to $18.1 million for the same period last year. Interest income decreased $665,000 for the second quarter as compared to the second quarter of 2003. The decrease was driven by decreases in interest earned on available for sale securities of $856,000 as a result of a decrease in the average balance of available for sale securities and a 14 basis point reduction in yield on those assets. Additionally, contributing to the change was a decrease in interest earned on loans held for sale of $308,000 driven by a decrease in the average balance of loans held for sale of $20.2 million and an 89 basis point reduction in the yield on those assets. These decreases were offset by an increase in interest income on net loans of $464,000. This increase was fueled by an increase in the average balance of net loans of $213.9 million.

Interest expense on deposits decreased $1.1 million as a result of a 24 basis point decrease in interest rates and a $24.3 million decrease in the average balance of savings accounts, a $14.1 million decrease in the average balance of NOW and money market accounts and a decrease of $8.2 million in the average balance of certificates of deposit. These decreases were offset by an increase in interest expense on other borrowed funds of $401,000. The increase in other borrowed funds was caused by an increase in the average balance of other borrowed funds of $160.6 million.

The following table provides specific information about interest rate and outstanding balance (volume) changes compared to the second quarter of last year. The interest rate spread for the three months ended June 30, 2004 was 3.39% compared to 3.54% for the quarter ended June 30, 2003. Net interest margin declined 20 basis points to 3.64% for the three months ended June 30, 2004 compared to 3.84% for the same quarter in 2003.

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Provision for Loan Losses. A provision for loan losses is charged to operations to bring the total allowance for loan losses to a level considered by management to be adequate to provide for probable incurred losses based on management’s evaluation of such factors as the delinquency status of loans, current economic conditions, the fair value of the underlying collateral, changes in the composition of the loan portfolio and prior loan loss experience. Based on the aforementioned factors, a $1.4 million provision for loan losses was recorded for the second quarter of 2004 compared to $1.7 million during the same period in 2003. Home Savings’ allowance for loan losses totaled $16.3 million at June 30, 2004, which was 0.92% of total loans, compared to 1.10% at June 30, 2003. The allowance for loan losses as a percent of non-performing loans increased to 118.81% at June 30, 2004 compared to 92.61% at June 30, 2003.

Noninterest Income. Noninterest income decreased $4.5 million, or 34.2%, from $13.2 million for the three months ended June 30, 2003, to $8.7 million for the three months ended June 30, 2004, primarily due to decreases of $5.6 million in gains on loans sold and $532,000 in gains on trading securities. Gains on loans sold decreased $5.6 million, or 87.7% as a result of less activity in the secondary market in the second quarter of 2004 compared to the same period in 2003. During the second quarter of 2003, Home Savings sold newly originated loans and fixed rate loans from the portfolio to help manage interest rate risk. These sales resulted in gains of approximately $6.4 million compared to $788,000 in gains on newly originated loans during the same period in 2004. The decrease in gains on trading securities of $532,000, or 116.7% is related to the market valuation adjustment of retention plan assets. Partially offsetting these decreases were increases in service fees and other charges of $1.1 million from $1.6 million at June 30, 2003 to $2.7 million at June 30, 2004. Home Savings had increases in overdraft honors fees of $605,000 and mortgage loan servicing fee income of $136,000. In addition, Home Savings benefited from reduced amortization of mortgage servicing rights, which decreased $297,000. Butler Wick’s increase of $174,000 in service fees also contributed to the rise in service fees and other charges.

Noninterest Expense. Total noninterest expense decreased $959,000, or 5.1%, to $17.8 million for the three months ended June 30, 2004, from $18.7 million for the three months ended June 30, 2003. The decrease is primarily due to a $785,000

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decrease in salaries and employee benefits and a decrease in equipment and data processing expense of $273,000. The decrease in salaries and employee benefits is primarily due to lower expenses incurred in connection with the recognition and retention plan as well as the change in market value of retention plan assets and increased provisions for commissions earned as a result of increased brokerage activity. These decreases were partially offset by an increase of $169,000 in other expenses.

Federal Income Taxes. The provision for income taxes decreased $1.2 million, or 30.3% as a result of lower pretax income for the second quarter of 2004 compared to the second quarter of 2003. The effective tax rate for the quarter ending June 30, 2004 was 34.9% compared to 35.3% for the quarter ending June 30, 2003.

Comparison of Operating Results for the Six Months Ended
June 30, 2004 and June 30, 2003

Net Income. Net income for the six months ended June 30, 2004 was $10.5 million, or $0.35 per diluted share, compared to net income of $12.0 million, or $0.38 per diluted share, for the six months ended June 30, 2003. Net interest income decreased $479,000 and the provision for loan losses declined by $570,000. Noninterest income decreased $2.1 million and noninterest expense increased $399,000. United Community’s annualized return on average assets and return on average equity were 1.00% and 8.06%, respectively, for the six months ended June 30, 2004. The annualized return on average assets and return on average equity for the comparable period in 2003 were 1.20% and 8.74%, respectively.

Net Interest Income. Net interest income for the six months ended June 30, 2004 was $36.2 million compared to $36.6 million for the same period last year. Interest income decreased $3.3 million for the first six months of 2004 as compared to the first six months of 2003. The decrease was caused by decreases in interest earned on available for sale securities of $1.5 million driven by a decrease in the average balance of available for sale securities at Home Savings of $80.6 million, partially offset by an increase in the average balance in Butler Wick’s portfolio of $2.4 million. A 14 basis point reduction in yield on the entire available for sale portfolio was also a factor. Additionally, contributing to the change was a decrease in interest earned on net loans of $1.1 million as a result of a 91 basis point reduction in yield on those assets and a decrease in interest earned on loans held for sale of $580,000 driven by a decrease in the average balance of loans held for sale of $21.3 million and a 48 point reduction in the yield on those assets.

Interest expense on deposits decreased $3.6 million as a result of a 40 basis point decrease in interest rates and a $41.7 million decrease in the average balance of certificates of deposit, a decrease of $22.3 million in the average balance of savings accounts and a decrease of $9.5 million in the average balance of NOW and money market accounts. These decreases were offset by an increase in interest expense on other borrowed funds of $721,000. The increase is primarily a result of an increase in the average balance of other borrowed funds at Home Savings of $123.1 million and an increase in the average balance of other borrowed funds at Butler Wick of $9.2 million. This increase was partially offset by a decrease of 113 basis points in the cost of funds for the period ending June 30, 2004 as compared to the same period in 2003.

The following table provides specific information about interest rate and outstanding balance (volume) changes compared to the first six months of last year. The interest rate spread for the six months ended June 30, 2004 was 3.43% compared to 3.56% for the six months ended June 30, 2003. Net interest margin declined 18 basis points to 3.70% for the six months ended June 30, 2004 compared to 3.88% for the same period in 2003.

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Provision for Loan Losses. A provision for loan losses is charged to operations to bring the total allowance for loan losses to a level considered by management to be adequate to provide for probable incurred losses based on management’s evaluation of such factors as the delinquency status of loans, current economic conditions, the fair value of the underlying collateral, changes in the composition of the loan portfolio and prior loan loss experience. Based on the aforementioned factors, a $1.8 million provision for loan losses was recorded for the first six months of 2004 compared to $2.4 million during the first six months of 2003. Home Savings’ allowance for loan losses totaled $16.3 million at June 30, 2004, which was 0.92% of total loans, compared to 1.10% at June 30, 2003. The allowance for loan losses as a percent of non-performing loans increased to 118.81% at June 30, 2004 compared to 92.61% at June 30, 2003.

Noninterest Income. Noninterest income decreased $2.1 million, or 10.1%, from $21.1 million for the six months ended June 30, 2003, to $19.0 million for the six months ended June 30, 2004, due to decreases of $6.8 million in gains on loans sold and $235,000 in gains on trading securities. Gains on loans sold decreased $6.8 million, or 80.0% as a result of less activity in the secondary market during the first six months of 2004 compared to the same period in 2003. During the first six months of 2003, Home Savings sold newly originated loans and fixed rate loans from the portfolio to help manage interest rate risk. These sales resulted in gains of approximately $8.4 million compared to $1.7 million in gains on newly originated loans during the same period in 2004. The decrease in gains on trading securities of $235,000, or 76.3% is related to the market valuation adjustment of retention plan assets. Partially offsetting these decreases were increases in service fees and other charges of $2.2 million and brokerage commissions of $1.5 million.

Service fees and other charges increased $2.2 million, or 62.9% for the first six months of 2004 as compared to the first six months of 2003. Factors contributing to the increase include an increase in overdraft honors of $1.2 million at Home Savings as well as an increase at Home Savings of $305,000 in collection fee income and a $610,000 decrease in mortgage servicing rights amortization. Butler Wick’s increase in service fees of $405,000 also contributed to the increase. Brokerage commissions

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increased $1.5 million, or 20.6% when comparing June 30, 2004 to the same period in 2003. The increase is due to higher commissions paid as a result of increased trading activity at Butler Wick.

Noninterest Expense. Total noninterest expense increased $399,000, or 1.1%, to $37.3 million for the six months ended June 30, 2004, from $36.9 million for the six months ended June 30, 2003. The increase is primarily due to a $979,000 increase in salaries and employee benefits. The increase in salaries and employee benefits is primarily due to lower expenses recognized in the recognition and retention plan as well as the change in market value of retention plan assets and increased provisions for commissions earned as a result of increased brokerage activity. This increase was partially offset by a decrease of $283,000 in equipment and data processing as well as a decrease in expenses related to the amortization of the core deposit intangible of $243,000.

Federal Income Taxes. The provision for income taxes decreased $921,000, or 14.2%, during the first six months of 2004 compared to the same period in 2003 as a result of lower pretax income in 2004 than in 2003. The effective tax rate for the six months ended June 30, 2004 was 34.7% as compared to 35.1% for the same period in 2003.

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UNITED COMMUNITY FINANCIAL CORP.
AVERAGE BALANCE SHEETS

The following table presents the total dollar amounts of interest income and interest expense on the indicated amounts of average interest-earning assets or interest-bearing liabilities together with the weighted average interest rates for the three month periods ended June 30, 2004 and 2003. Average balance calculations were based on daily balances.