UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

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.

Yes     X                       No      

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

Yes     X                       No      

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

31,145,230 common shares as of April 30, 2004.

TABLE OF CONTENTS

     PART 1 — FINANCIAL INFORMATION

     ITEM 1. Financial Statements

UNITED COMMUNITY FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

See Notes to Consolidated Financial Statements.

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UNITED COMMUNITY FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)

See Notes to Consolidated Financial Statements.

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UNITED COMMUNITY FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

See Notes to Consolidated Financial Statements.

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UNITED COMMUNITY FINANCIAL CORP.
CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
(Unaudited)

See Notes to Consolidated Financial Statements.

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UNITED COMMUNITY FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

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 six loan production offices 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 has thirteen 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 three months ended March 31, 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 $633.8 million at March 31, 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 months ended March 31, 2004 and 2003 are as follows:

Three Months Ended March 31, 2004

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Three Months Ended March 31, 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 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 are 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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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 March 31, 2004 and December 31, 2003

Total assets increased by $9.5 million, or 0.46%, to $2.1 billion at March 31, 2004, compared to December 31, 2003. The net change in assets was a result of increases of $93.8 million in loans, $12.6 million in trading securities and $4.4 million in other assets that were partially offset by decreases of $47.3 million in cash and cash equivalents, $37.3 million in available for sale securities and $16.9 million in loans held for sale. Total liabilities increased $46.5 million primarily as a result of a $6.1 million increase in non-interest bearing deposits, a $13.1 million increase in short-term borrowings and a $32.7 million increase in accrued other expenses and other liabilities.

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 decreased $5.2 million, or 14.3%, to $31.1 million at March 31, 2004, compared to $36.3 million at December 31, 2003. Federal funds sold and other overnight funds decreased $42.1 million or 93.8% to $2.8 million at March 31, 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 per share.

Available for sale securities decreased $37.4 million or 16.4% from December 31, 2003 to March 31, 2004 primarily as a result of sales of $41.9 million and paydowns and maturities of $7.0 million. Purchases of $11.2 million partially offset the decrease. Trading securities increased $12.6 million or 80.5% to $28.2 million at March 31, 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 $12.5 million, most of which relate to short sales entered into at March 31, 2004.

Net loans increased $93.8 million, or 5.6%, from December 31, 2003 to March 31, 2004. Home Savings had increases of $26.7 million in real estate loans, $37.6 million in construction loans, $32.2 million in consumer loans and $17.8 million in commercial loans. Loans held for sale decreased $16.9 million, or 44.9%, to $20.8 million at March 31, 2004 compared to $37.7 million at December 31, 2003. During the first three months of 2004, Home Savings sold approximately $40.5 million in fixed-rate loans to help manage interest rate risk, and anticipates continued sales as a part of its strategic plan to manage interest rate risk.

The allowance for loan losses increased to $15.3 million at March 31, 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, reserve coverage ratios and other factors in the portfolio. The allowance for loan losses as a percentage of total loans decreased four basis points to 0.90% at March 31, 2004 compared to December 31, 2003. The allowance for loan losses as a percent of non-performing loans increased to 116.2% at March 31, 2004 compared to 100.7% at December 31, 2003.

Nonperforming assets, which include nonaccrual and restructured loans and real estate owned, decreased approximately $1.7 million, or 10.6%, to $14.6 million at March 31, 2004, from $16.3 million at December 31, 2003, primarily due to a decrease in restructured loans. Total nonaccrual and restructured loans accounted for 0.78% of net loans receivable at March 31, 2004 and 0.94% of net loans receivable at December 31, 2003. Total nonperforming assets were 0.70% of total assets as of March 31, 2004 and 0.79% as of December 31, 2003.

Total deposits increased $4.6 million, or 0.33% from December 31, 2003 to March 31, 2004. This increase is mainly due to a $5.1 million increase in savings accounts and a $3.0 million increase in NOW accounts, which were partially offset by a $3.5 million decrease in certificates of deposit. Assuming the current interest rate environment remains the same, United Community anticipates the change in deposits to continue to stabilize.

Other borrowed funds increased $11.6 million to $350.1 million at March 31, 2004 compared to $338.5 million at December 31, 2003. The increase consisted of an increase in short-term advances from the Federal Home Loan Bank (FHLB) of $12.7 million

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and $5.9 million in repurchase agreements. These increases were partially offset by declines in long-term FHLB advances and other short-term borrowings of Butler Wick.

Accrued expenses and other liabilities increased $32.7 million, or 162.2%, to $52.8 million at March 31, 2004 compared to $20.1 million at December 31, 2003. The reason for the change is unsettled security transactions at both Home Savings and Butler Wick. At March 31, 2004, Home Savings had an unsettled security purchase of $10.0 million and Butler Wick had unsettled transactions approximating $19.0 million.

Shareholders’ equity decreased $37.0 million, or 13.2%, to $242.8 million at March 31, 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. Tangible book value and book value per share were $6.61 and $7.80 as of March 31, 2004.

     Comparison of Operating Results for the Three Months Ended
     March 31, 2004 and March 31, 2003

Net Income. Net income for the three months ended March 31, 2004 was $5.5 million, or $0.18 per diluted share, compared to net income of $5.0 million, or $0.16 per diluted share, for the three months ended March 31, 2003. Net interest income decreased by $501,000. The provision for loan losses declined by $237,000. Noninterest income increased $2.4 million, which was partially offset by a $1.4 million increase in noninterest expense. United Community’s annualized return on average assets and return on average equity were 1.07% and 8.02%, respectively, for the three months ended March 31, 2004. The annualized return on average assets and return on average equity for the comparable period in 2003 were 1.00% and 7.25%, respectively.

Net Interest Income. Net interest income for the quarter ended March 31, 2004 was $18.0 million compared to $18.5 million for the same period last year. The decline in net interest income occurred as interest earned on loans and securities declined more than interest paid on deposits and other borrowings. Specifically, interest income decreased by $2.7 million, compared to the same quarter on 2003 while interest expense dropped $2.2 million. The decrease in interest income was primarily rate driven as lower yields earned on loans and investment securities lowered interest income by $5.7 million. The decline in interest expense was primarily rate driven also and affected all deposit categories. Lower interest rates paid on savings, certificates of deposit and money market accounts along with borrowings decreased interest expense by $2.1 million. The following table provides specific information about interest rate and outstanding balance (volume) changes compared to the first quarter of last year. The interest rate spread for the three months ended March 31, 2004 was 3.47% compared to 3.59% for the quarter ended March 31, 2003. Net interest margin declined 16 basis points to 3.76% for the three months ended March 31, 2004 compared to 3.92% 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 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 $459,000 provision for loan losses was recorded for the first quarter of 2004. Home Savings’ allowance for loan losses totaled $15.2 million at March 31, 2004, which was 0.90% of total loans, compared to 1.04% at March 31, 2003. The allowance for loan losses as a percent of non-performing loans increased to 116.24% at March 31, 2004 compared to 105.78% at March 31, 2003.

Noninterest Income. Noninterest income increased $2.3 million, or 29.5%, from $8.0 million for the three months ended March 31, 2003, to $10.3 million for the three months ended March 31, 2004, primarily due to increases of $1.5 million in commission income and $1.1 million in service fees and other charges. Commissions increased $1.4 million, or 46.5% to $4.7 million for the first three months of 2004 compared to $3.1 million for the same period in 2003 primarily as a result of increased brokerage activity resulting from improved market conditions compared to last year as well as increases in securities and options trading and increases in inventory trading. Service fees and other charges increased $1.1 million from $1.8 million at March 31, 2003 to $2.9 million at March 31, 2004. Home Savings had increases in overdraft honors fees of $602,000, and mortgage loan servicing fee income of $168,000. In addition, Home Savings benefited from reduced amortization of mortgage servicing rights, which decreased $313,000. Butler Wick’s increase of $231,000 in service fees and other charges was partially offset by a decrease in NOW NSF charges of $277,000 at Home Savings. These increases were partially offset by a decline in gains on loans sold of $1.1 million during the first quarter. It is anticipated that the level of loan sales will be significantly lower during 2004 as compared to the previous year.

Noninterest Expense. Total noninterest expense increased $1.4 million, or 7.5%, to $19.5 million for the three months ended March 31, 2004, from $18.2 million for the three months ended March 31, 2003. The increase is primarily due to a $1.8 million increase in salaries and employee benefits. The increase in salaries and employee benefits is primarily due to the change

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in market value of retention plan assets and increased provisions for commissions earned as a result of increased brokerage activity. These increases were partially offset by a decrease of $324,000 in other expenses.

Federal Income Taxes. The provision for federal income taxes increased $240,000 for the three months ended March 31, 2004, compared to the three months ended March 31, 2003 due to higher pre-tax income in 2004. The effective tax rates were 34.6% and 34.8% for the three months ended March 31, 2004 and 2003, respectively.

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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 months ended March 31, 2004 and March 31, 2003. Average balance calculations were based on daily balances.

(1)

Nonaccrual loans are included in the average balance.

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ITEM 3. Quantitative and Qualitative Disclosures about Market Risk

United Community sold fixed rate mortgages during the last three months to help mitigate interest rate risk. This was the only material change in information about market risk from that provided in the 2003 Annual Report to Shareholders, which was incorporated by reference into United Community’s 2003 Annual Report on Form 10-K.

ITEM 4. Controls and Procedures

     An evaluation was carried out by United Community’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-14(c)/15d-14(c) of the Securities Exchange Act of 1934) as of March 31, 2004. Based on their evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that United Community’s disclosure controls and procedures are effective. During the three months ended March 31, 2004, there were no changes in United Community’s internal controls over financial reporting that materially affected, or were reasonably likely to materially affect United Community’s internal control over financial reporting.

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PART II. OTHER INFORMATION

UNITED COMMUNITY FINANCIAL CORP.

     Item 1 – Not applicable

     Item 2 – Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities

Issuer Purchases of Equity Securities

     Item 3, 4 and 5 – Not Applicable

     Item 6 – Exhibits and Reports on Form 8-K

a. Exhibits

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b. Reports on Form 8-K

On January 21, 2004 United Community filed an 8-K under Items 9 and 12, disclosing operating results for the quarter ended December 31, 2003.

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UNITED COMMUNITY FINANCIAL CORP.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	UNITED COMMUNITY FINANCIAL CORP.
Date: May 7, 2004	/s/ Douglas M. McKay
	Douglas M. McKay, Chief Executive Officer

Date:May 7, 2004	/s/ Patrick A. Kelly
	Patrick A. Kelly, Chief Financial Officer

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UNITED COMMUNITY FINANCIAL CORP.

Exhibit 3.1

Incorporated by reference to the Registration Statement on Form S-1 filed by United Community on March 13, 1998 with the Securities and Exchange Commission (SEC), Exhibit 3.1.

Exhibit 3.2

Incorporated by reference to the 1998 Form 10-K filed by United Community on March 31, 1999 with the SEC, Exhibit 3.2.

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