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, 2009

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.)

(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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes o      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)		Small 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. 30,897,826 common shares as of April 30, 2009.

 

 

TABLE OF CONTENTS

		PAGE
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Condition as of March 31, 2009 (Unaudited) and December 31, 2008			1
Consolidated Statements of Income for the Three Months Ended March 31, 2009 and 2008 (Unaudited)			2
Consolidated Statement of Shareholders’ Equity for the Three Months ended March 31, 2009 (Unaudited)			4
Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2009 and 2008 (Unaudited)			5
Notes to Consolidated Financial Statements			6 - 18
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			19-27
Item 3. Quantitative and Qualitative Disclosures about Market Risk			28
Item 4. Controls and Procedures			29
Part II. OTHER INFORMATION
Item 1. Legal Proceedings			30
Item 1A. Risk Factors			30
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			30
Item 3. Defaults Upon Senior Securities (None)
Item 4. Submission of Matters to a Vote of Security Holders			30
Item 5. Other Information (None)
Item 6. Exhibits			30
Signatures			31
Exhibits			32-54
EX-10.1
EX-10.2
EX-10.3
EX-10.4
EX-31.1
EX-31.2
EX-32

PART I — FINANCIAL INFORMATION

ITEM 1. Financial Statements

UNITED COMMUNITY FINANCIAL CORP.

		March 31,				December 31,
		2009				2008
		(Dollars in thousands)
Assets:
Cash and deposits with banks		$	20,059			$	21,745
Federal funds sold and other			26,724				21,672
Total cash and cash equivalents			46,783				43,417
Securities:
Available for sale, at fair value			248,981				215,731
Loans held for sale			14,170				16,032
Loans, net of allowance for loan losses of $37,856 and $35,962, respectively			2,114,855				2,203,453
Federal Home Loan Bank stock, at cost			26,464				26,464
Premises and equipment, net			24,649				25,015
Accrued interest receivable			9,237				10,082
Real estate owned and other repossessed assets			30,430				29,258
Core deposit intangible			824				884
Cash surrender value of life insurance			25,337				25,090
Assets of discontinued operations—Butler Wick Corp.			—				5,562
Other assets			20,858				17,085
Total assets		$	2,562,588			$	2,618,073
Liabilities and Shareholders’ Equity
Liabilities:
Deposits:
Interest bearing		$	1,722,746			$	1,779,676
Non-interest bearing			112,769				106,255
Total deposits			1,835,515				1,885,931
Borrowed funds:
Federal Home Loan Bank advances			334,828				337,603
Repurchase agreements and other borrowings			119,401				125,269
Total borrowings			454,229				462,872
Advance payments by borrowers for taxes and insurance			14,067				19,806
Accrued interest payable			3,039				3,077
Liabilities of discontinued operations—Butler Wick Corp.			—				2,388
Accrued expenses and other liabilities			16,441				9,076
Total liabilities			2,323,291				2,383,150
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 and 30,897,825 shares outstanding			146,178				146,439
Retained earnings			168,717				165,447
Accumulated other comprehensive income			4,545				3,635
Unearned employee stock ownership plan shares			(7,188	)			(7,643	)
Treasury stock, at cost, 6,906,632 shares			(72,955	)			(72,955	)
Total shareholders’ equity			239,297				234,923
Total liabilities and shareholders’ equity		$	2,562,588			$	2,618,073

See Notes to Consolidated Financial Statements.

UNITED COMMUNITY FINANCIAL CORP.

		For the Three Months Ended
		March 31,
		2009				2008
		(Dollars in thousands, except per share data)
Interest income
Loans		$	31,067			$	35,808
Loans held for sale			263				188
Securities:
Available for sale			2,770				3,241
Federal Home Loan Bank stock dividends			299				332
Other interest earning assets			29				58
Total interest income			34,428				39,627
Interest expense
Deposits			12,651				17,036
Federal Home Loan Bank advances			1,858				3,692
Repurchase agreements and other			1,190				1,957
Total interest expense			15,699				22,685
Net interest income			18,729				16,942
Provision for loan losses			8,444				2,466
Net interest income after provision for loan losses			10,285				14,476
Non-interest income
Non-deposit investment income			304				477
Service fees and other charges			1,512				1,765
Net gains (losses):
Securities available for sale			—				931
Other than temporary impairment charges on securities available for sale			(150	)			—
Loans sold			1,140				2,184
Real estate owned and other repossessed assets sold			(1,138	)			(140	)
Other income			1,075				1,053
Total non-interest income			2,743				6,270
Non-interest expense
Salaries and employee benefits			8,023				9,050
Occupancy			984				947
Equipment and data processing			1,730				1,721
Franchise tax			592				580
Advertising			229				265
Amortization of core deposit intangible			60				78
Deposit insurance premiums			1,783				51
Professional fees			716				586
Real estate owned and other repossessed asset expenses			951				388
Other expenses			1,331				1,298
Total non-interest expenses			16,399				14,964
Income (loss) before income taxes and discontinued operations			(3,371	)			5,782
Income taxes expense (benefit)			(1,692	)			2,018
Net income (loss) before discontinued operations			(1,679	)			3,764
Discontinued operations
Net income of Butler Wick Corp., net of tax			4,949				279
Net income		$	3,270			$	4,043

(Continued)

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

Comprehensive income (loss)		$	4,180			$	6,178
Earnings (loss) per share
Basic—continuing operations		$	(0.06	)		$	0.13
Basic—discontinued operations			0.17				0.01
Basic			0.11				0.14
Diluted—continuing operations			(0.06	)			0.13
Diluted—discontinued operations			0.17				0.01
Diluted			0.11				0.14

See Notes to Consolidated Financial Statements.

UNITED COMMUNITY FINANCIAL CORP.

																		Unearned
																		Employee
														Accumulated				Stock
														Other				Ownership
		Shares				Common				Retained				Comprehensive				Plan				Treasury
		Outstanding				Stock				Earnings				Income (Loss)				Shares				Stock				Total
		(Dollars thousands, except per share data)
Balance December 31, 2008			30,898			$	146,439			$	165,447			$	3,635			$	(7,643	)		$	(72,955	)		$	234,923
Comprehensive income:
Net income			—				—				3,270				—				—				—				3,270
Change in net unrealized gain/(loss) on securities, net of taxes of $490			—				—				—				910				—				—				910
Comprehensive income			—				—				—				—				—				—				4,180
Shares allocated to ESOP participants			—				(261	)			—				—				455				—				194
Balance March 31, 2009			30,898			$	146,178			$	168,717			$	4,545			$	(7,188	)		$	(72,955	)		$	239,297

See Notes to Consolidated Financial Statements.

UNITED COMMUNITY FINANCIAL CORP.

		Three Months Ended March 31,
		2009				2008
		(Dollars in thousands)
Cash Flows from Operating Activities
Net income		$	3,270			$	4,043
Adjustments to reconcile net income to net cash provided by operating activities
Provision for loan losses			8,444				2,466
Net gains on loans			(1,140	)			(2,184	)
Net losses on real estate owned and other repossessed assets			1,138				140
Net gains on other assets			(21	)			(905	)
Other than temporary impairment of securities available for sale			150				—
Amortization of premiums and accretion of discounts			1,061				583
Depreciation and amortization			586				653
Federal Home Loan Bank stock dividends			—				(332	)
Decrease in interest receivable			845				1,392
(Decrease) increase in interest payable			(38	)			165
(Increase) decrease in prepaid and other assets			(4,150	)			9,890
Increase (decrease) in other liabilities			2,436				(9,524	)
Decrease in trading securities			—				(27	)
Stock based compensation			—				306
Net principal disbursed on loans originated for sale			(134,445	)			(64,005	)
Proceeds from sale of loans originated for sale			137,447				140,158
ESOP Compensation			194				428
Operating cash flows from discontinued operations			(4,949	)			(279	)
Net cash from operating activities			10,828				82,968
Cash Flows from Investing Activities
Proceeds from principal repayments and maturities of:
Securities available for sale			10,011				18,268
Proceeds from sale of:
Securities available for sale			—				38,299
Real estate owned and other repossessed assets			3,085				3,654
Purchases of:
Securities available for sale			(42,050	)			(115,672	)
Net change in loans			76,035				39,381
Loans purchased			(1,476	)			(24,066	)
Purchases of premises and equipment			(190	)			(220	)
Investing cash flows from discontinued operations			11,921				(16	)
Net cash from investing activities			57,336				(40,372	)
Cash Flows from Financing Activities
Net increase in checking, savings and money market accounts			19,872				47,845
Net decrease in certificates of deposit			(70,288	)			(47,082	)
Net decrease in advance payments by borrowers for taxes and insurance			(5,739	)			(4,962	)
Proceeds from Federal Home Loan Bank advances			172,000				217,100
Repayment of Federal Home Loan Bank advances			(174,775	)			(272,971	)
Net change in repurchase agreements and other borrowed funds			(5,868	)			19,324
Cash dividends paid			—				(2,709	)
Net cash from financing activities			(64,798	)			(43,455	)
Change in cash and cash equivalents			3,366				(859	)
Cash and cash equivalents, beginning of period			43,417				33,502
Cash and cash equivalents, end of period		$	46,783			$	32,643

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.

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, 2009, are not necessarily indicative of the results to be expected for the year ending December 31, 2009. 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, 2008, contained in United Community’s Form 10-K for the year ended December 31, 2008.

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

     2. REGULATORY ENFORCEMENT ACTION

On August 8, 2008, the board of directors of United Community approved a Stipulation and Consent to Issuance of Order to Cease and Desist (OTS Order) with the OTS. Simultaneously, the board of directors of Home Savings approved a Stipulation and Consent to the Issuance of an Order to Cease and Desist (Bank Order) with the FDIC and the Ohio Division. Although United Community and Home Savings have agreed to the issuance of the OTS Order and the Bank Order, respectively, neither has admitted or denied any allegations of unsafe or unsound banking practices, or any legal or regulatory violations. No monetary penalties were assessed by the OTS, the FDIC, or the Ohio Division.

The OTS Order requires UCFC to obtain OTS approval prior to: (i) incurring or increasing its debt position; (ii) repurchasing any UCFC stock; or (iii) paying any dividends. The OTS Order also requires UCFC to develop a debt reduction plan and submit the plan to the OTS for approval.

The Bank Order requires Home Savings, within specified timeframes, to take or refrain from certain actions, including: (i) retaining a bank consultant to assess Home Savings management needs and submitting a management plan that identifies officer positions needed, identifies and establishes board and internal operating committees, evaluates Home Savings’ senior officers, and provides for the hiring of any additional personnel; (ii) seeking regulatory approval prior to adding any individuals to the board of directors or employing any individual as a senior executive officer of Home Savings; (iii) not extending additional credit to classified borrowers; (iv) establishing a compliant Allowance for Loan and Lease Loss methodology; (v) enhancing its risk management policies and procedures; (vi) adopting and implementing plans to reduce its classified assets and delinquent loans, and to reduce loan concentrations in nonowner-occupied commercial real estate and construction, land development, and land loans; (vii) establishing board of directors committees to evaluate and approve certain loans and oversee Home Savings’ compliance with the Bank Order; (viii) revising its loan policy and enhancing its underwriting and credit administration functions; (ix) developing a strategic plan and budget and profit plan; (x) correcting all violations of laws, rules, and regulations and implementing procedures to ensure future compliance; (xi) increasing its Tier 1 capital to 8% and its total risk based capital to 12% by December 31, 2008; and (xii) seeking regulatory approval prior to declaring or paying any cash dividend. At March 31, 2009, Home Savings’ Tier 1 capital was 8.33% and its total risk based capital was 12.48%. Because of the consent to the Bank Order, Home Savings is deemed ‘adequately capitalized’ for regulatory capital purposes.

United Community and Home Savings are moving toward compliance with the OTS Order and Bank Order. As part of its plan to improve capital, the Company may sell securities or other assets and restrict lending activities and invest the capital in Home Savings.

     3. DISCONTINUED OPERATIONS

On August 12, 1999, United Community acquired Butler Wick Corp. (Butler Wick), the parent company for two wholly owned subsidiaries: Butler Wick & Co., Inc. and Butler Wick Trust Company. On December 31, 2008, the Company completed the sale of Butler Wick & Co., Inc., to Stifel Financial Corp. for $12.0 million. On March 31, 2009, the Company completed the sale of Butler Wick Trust to Farmers National Banc Corp. for $12.1 million. As a result, Butler Wick has been reported as a discontinued operation and consolidated financial statement information for all periods presented has been reclassified to reflect this presentation. Butler Wick’s results of operations summarized are as follows:

		For the Three Months
		Ended March 31,
		2009				2008
		(Dollars in thousands)
Income
Interest income		$	32			$	229
Brokerage commissions			—				6,101
Service fees and other charges			1,287				1,690
Underwriting and investment banking			—				29
Gain on the sale of Butler Wick Trust			7,904				—
Other income			—				27
Total income			9,223				8,076
Expenses
Interest expense on borrowings			—				69
Salaries and employee benefits			1,198				5,679
Occupancy expenses			68				388
Equipment and data processing			84				619
Other expenses			258				865
Total expenses			1,608				7,620
Income before taxes			7,615				456
Income tax			2,666				177
Net income		$	4,949			$	279

     4. RECENT ACCOUNTING DEVELOPMENTS

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 adoption of this standard had no impact on United Community’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. The adoption of this standard had no impact on United Community’s consolidated financial statements.

In March 2008, the FASB issued Statement of Financial Accounting Standards No. 161, Disclosures about Derivative Instruments and Hedging Activities – an amendment of FASB Statement No. 133. SFAS No. 161 requires enhanced disclosures about an entity’s derivative and hedging activities and thereby improves the transparency of financial reporting. SFAS No. 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The adoption of this standard had no impact on United Community’s consolidated financial statements.

In May 2008, the FASB issued Statement of Financial Accounting Standards No. 162, The Hierarchy of Generally Accepted Accounting Principles. This statement identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles (GAAP) in the United States. This statement will be effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411. The adoption of SFAS No. 162 is not expected to impact United Community’s consolidated financial statements.

On February 20, 2008, the FASB issued Staff Position FAS 140-3, Accounting for Transfers of Financial Assets and Repurchase Financing Transactions, to resolve questions about the accounting for repurchase financings. This FSP is effective for repurchase financings in which the initial transfer is entered into in fiscal years beginning after November 15, 2008. Management is currently evaluating the impact, if any, of FSP 140-3 on United Community’s consolidated financial statements.

On April 25, 2008, the FASB issued Staff Position FAS 142-3, Determination of the Useful Life of Intangible Assets, which amends the list of factors an entity should consider in developing renewal or extension assumptions used in determining the useful life of recognized intangible assets under SFAS No. 142, Goodwill and Other Intangible Assets. FSP FAS 140-3 is effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2008. The adoption of FSP FAS 140-3 did not have a material impact to United Community’s consolidated financial statements.

On May 9, 2008, the FASB issued Staff Position APB 14-1, Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement). FSP APB 14-1 is effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2008. The adoption of FSP APB 14-1 did not materially affect United Community’s consolidated financial statements.

On June 16, 2008, the FASB issued Staff Position EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities. The FSP addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and, therefore, need to be included in the earnings allocation in computing earnings per share under the two-class method described in paragraphs 60 and 61 of FASB Statement No. 128, Earnings Per Share. FSP EITF 03-6-1 is effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2008. The adoption of FSP EITF 03-6-1 did not materially affect United Community’s consolidated financial statements.

In October 2008, the FASB issued Staff Position 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset is not Active. The provisions of FSP 157-3 are effective on issuance, or October 10, 2008. FSP 157-3 clarifies the application of SFAS No. 157, in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. Application issues addressed by the FSP include (a) how management’s internal assumptions should be considered when measuring fair value when relevant observable data do not exist, (b) how observable market information in a market that is not active should be considered when measuring fair value and (c) how the use of market quotes should be considered when assessing the relevance of observable and unobservable data available to measure fair value. The adoption of FSP 157-3 did not materially affect United Community’s consolidated financial statements.

Recently issued and not yet effective Accounting Standards:

In April 2009, the FASB issued Staff Position No. 115-2 and No. 124-2, Recognition and Presentation of Other-Than-Temporary Impairments, which amends existing guidance for determining whether impairment is other-than-temporary for debt securities. The FSP requires an entity to assess whether it intends to sell, or it is more likely than not that it will be required to sell a security in an unrealized loss position before recovery of its amortized cost basis. If either of these criteria is met, the entire difference between amortized cost and fair value is recognized in earnings. For securities that do not meet the aforementioned criteria, the amount of impairment recognized in earnings is limited to the amount related to credit losses, while impairment related to other factors is recognized in other comprehensive income. Additionally, the FSP expands and increases the frequency of existing disclosures about other-than-temporary impairments for debt and equity securities. This FSP is effective for interim periods ending after March 15, 2009. The Company plans to adopt this FSP in the second quarter, however does not expect the adoption to have a material effect on the results of operations or financial position.

In April 2009, the FASB issued Staff Position No. 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset and Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly. This FSP emphasizes that even if there has been a significant decrease in the volume and level of activity, the objective of a fair value measurement remains the same. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants. The FSP provides a number of factors to consider when evaluating whether there has been a significant decrease in the volume and level of activity for an asset or liability in relation to normal market activity. In addition, when transactions or quoted prices are not considered orderly, adjustments to those prices based on the weight of available information may be needed to determine the appropriate fair value. The FSP also requires increased disclosures. This FSP is effective for interim and annual reporting periods ending after June 15, 2009, and shall be applied prospectively. Early adoption is

permitted for periods ending after March 15, 2009. The Company plans to adopt this FSP in the second quarter, however, does not expect the adoption to have a material effect on the results of operations or financial position.

In April 2009, the FASB issued Staff Position No. 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments. This FSP amends FASB Statement No. 107, Disclosures about Fair Value of Financial Instruments, to require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies that were previously only required in annual financial statements. This FSP is effective for interim reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The Company plans to adopt this FSP in the second quarter.

     5. 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, 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 share at the grant date. The maximum number of common shares that may be issued under the plan is 3,569,766. There are currently 451,793 shares remaining in the plan that could be granted. 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 no stock-based incentive awards granted in the first quarter of 2009 and there were 243,721 stock options granted in 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.

A summary of activity in the plans is as follows:

		For the three months ended March 31, 2009
										Aggregate
						Weighted				intrinsic
						average				value (in
		Shares				exercise price				thousands)
Outstanding at beginning of year			2,092,128			$	9.08
Granted			—				—
Exercised			—				—
Forfeited			(178,113	)			9.10
Outstanding at end of period			1,914,015			$	9.08			$	—
Options exercisable at end of period			1,914,015			$	9.08			$	—

Information related to the stock option plan during the year follows (dollars in thousands, except per share amount):

		March 31,
		2009
Intrinsic value of options exercised		$	—
Cash received from option exercises			—
Tax benefit realized from option exercises			—
Weighted average fair value of options granted, per share			—

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 United Community’s common shares. United Community 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 the time of the grant.

Outstanding stock options have a weighted average remaining life of 4.47 years and may be exercised in the range of $5.89 to $12.38.

         6. SECURITIES

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

		March 31, 2009												December 31, 2008
		(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		$	37,295			$	897			$	(15	)		$	27,170			$	865			$	—
Equity securities			719				73				(455	)			910				70				(411	)
Mortgage-related securities			210,967				6,091				(119	)			187,651				4,527				(107	)
Total		$	248,981			$	7,061			$	(589	)		$	215,731			$	5,462			$	(518	)

Home Savings holds in its available-for-sale securities portfolio a Fannie Mae auction rate pass through trust security with an original cost basis of $5.0 million. This security represents an interest in a trust that is collateralized with Fannie Mae non-cumulative preferred stock. The market value of the security held by the Company declined following the September 7, 2008 announcement of the appointment of a conservator for Fannie Mae. Because the effects of the conservatorship may trigger the redemption provisions of the trust, UCFC management determined it was necessary for the Company to recognize a write-down of $4.9 million in 2008 and an additional write-down of $26,000 in the first quarter of 2009. Also, a write-down of the Company’s equity investment in the common shares of three financial institutions of $1.2 million was recognized in 2008. The Company determined that in the first quarter of 2009, further deterioration of the investment in one of those financial institutions caused the need to recognize an additional loss of $124,000. The cause of the deterioration was a result of recent regulatory enforcement actions imposed on that institution by its regulatory authorities.

Securities pledged for public funds deposits were approximately $2.1 million at March 31, 2009, and $2.1 million at December 31, 2008. Securities sold under an agreement to repurchase are secured primarily by mortgage-backed securities with a fair value of approximately $136.3 million at March 31, 2009, and $131.5 million at December 31, 2008.

United Community had no securities classified as trading as of March 31, 2009 and December 31, 2008.

        7. LOANS

Portfolio loans consist of the following:

		March 31,				December 31,
		2009				2008
		(Dollars in thousands)
Real Estate:
One- to four-family residential		$	888,948			$	909,567
Multifamily residential			168,432				187,711
Nonresidential			381,263				375,463
Land			22,968				23,517
Construction:
One- to four-family residential			233,708				255,355
Multifamily and non-residential			33,992				35,797
Total real estate			1,729,311				1,787,410
Consumer			331,853				348,834
Commercial			90,089				101,489
Total loans			2,151,253				2,237,733
Less:
Allowance for loan losses			37,856				35,962
Deferred loan fees, net			(1,458	)			(1,682	)
Total			36,398				34,280
Loans, net		$	2,114,855			$	2,203,453

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,
		2009				2008
		(Dollars in thousands)
Balance, beginning of year		$	35,962			$	32,006
Provision for loan losses			8,444				25,329
Amounts charged off			(6,691	)			(22,088	)
Recoveries			141				715
Balance, end of period		$	37,856			$	35,962

Non-accrual loans were $101.6 million and $98.3 million at March 31, 2009, and December 31, 2008, respectively. Restructured loans were $2.7 million at March 31, 2009 and $1.8 million at December 31, 2008. Loans greater than 90 days past due and still accruing interest were $607,000 and $6.6 million at March 31, 2009 and December 31, 2008, 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,
		2009				2008
		(Dollars in thousands)
Impaired loans on which no specific valuation allowance was provided		$	48,407			$	43,256
Impaired loans on which a specific valuation allowance was provided			46,433				43,992
Total impaired loans at period-end		$	94,840			$	87,248
Specific valuation allowances on impaired loans at period-end		$	10,999			$	10,968
Average impaired loans during the period			90,326				85,812
Interest income recognized on impaired loans during the period			135				513
Interest income received on impaired loans during the period			135				513

     8. MORTGAGE BANKING ACTIVITIES

Mortgage loans serviced for others, which are not reported in United Community’s assets, totaled $942.4 million at March 31, 2009, and $921.0 million at December 31, 2008.

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,
		2009				2008
		(Dollars in thousands)
Balance, beginning of year		$	5,562			$	6,184
Originations			831				1,337
Amortized to expense			(710	)			(1,959	)
Balance, end of period			5,683				5,562
Less valuation allowance			(2,165	)			(2,233	)
Net balance		$	3,518			$	3,329

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

		March 31,				December 31,
		2009				2008
		(Dollars in thousands)
Balance, beginning of year		$	(2,233	)		$	(562	)
Impairment charges			—				(2,233	)
Recoveries			68				562
Balance, end of period		$	(2,165	)		$	(2,233	)

Fair value of mortgage servicing rights as of March 31, 2009 was approximately $4.4 million and at December 31, 2008 was $3.9 million.

Key economic assumptions in measuring the value of mortgage servicing rights at March 31, 2009 and December 31, 2008 were as follows:

		March 31,				December 31,
		2009				2008
Weighted average prepayment rate		621		PSA		644		PSA
Weighted average life (in years)			3.40				3.34
Weighted average discount rate			8	%			8	%

     9. OTHER REAL ESTATE OWNED AND OTHER REPOSSESSED ASSETS

Real estate owned and other repossessed assets at March 31, 2009 and December 31, 2008 were as follows:

		March 31,				December 31,
		2009				2008
		(Dollars in thousands)
Real estate owned and other repossessed assets		$	33,319			$	32,012
Valuation allowance			(2,889	)			(2,754	)
End of year		$	30,430			$	29,258

Activity in the valuation allowance was as follows:

		March 31,				December 31,
		2009				2008
		(Dollars in thousands)
Beginning of year		$	2,754			$	—
Additions charged to expense			713				3,753
Direct write-downs			(578	)			(999	)
End of year		$	2,889			$	2,754

Expenses related to foreclosed and repossessed assets include:

		For the three months ended
		March 31,
		2009				2008
		(Dollars in thousands)
Net loss on sales		$	425			$	95
Provision for unrealized losses			713				45
Operating expenses, net of rental income			951				388
Total expenses		$	2,089			$	528

     10. 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,
		2009				2008
		(Dollars in thousands)
Service cost		$	—			$	—
Interest cost			47				48
Expected return on plan assets			—				—
Net amortization of prior service cost			—				—
Net amortization of actuarial gain			(4	)			(3	)
Net periodic benefit cost		$	43			$	45
Assumptions used in the valuations were as follows:
Weighted average discount rate			6.00	%			6.00	%

     11. 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 securities available for sale are determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs) or matrix pricing, which is a mathematical technique widely used 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 (Level 2 inputs).

The fair value of impaired loans with specific allocations of the allowance for loan losses is generally based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are typically significant and result in a Level 3 classification of the inputs for determining fair value.

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

Fair Value Measurements at March 31, 2009 Using:

Quoted Prices in

Active Markets

Significant

for Identical

Significant Other

Unobservable

March 31,

Assets

Observable

Inputs

2009

(Level 1)

Inputs (Level 2)

(Level 3)

Assets:

Available for sale securities

$

248,981

$

644

$

248,337

$

—

Fair Value Measurements at December 31, 2008 Using:

Quoted Prices in

Active Markets

Significant

for Identical

Significant Other

Unobservable

December 31,

Assets

Observable

Inputs

2008

(Level 1)

Inputs (Level 2)

(Level 3)

Assets:

Available for sale securities

$

215,731

$

809

$

214,922

$

—

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

						Fair Value Measurements at March 31, 2009 Using:
						Quoted Prices in
						Active Markets								Significant
						for Identical				Significant Other				Unobservable
		March 31,				Assets				Observable				Inputs
		2009				(Level 1)				Inputs (Level 2)				(Level 3)
Assets:
Impaired loans		$	35,434				—				—			$	35,434
Mortgage servicing assets			3,518				—				3,518				—
Foreclosed assets			11,353				—				—				11,353

Fair Value Measurements at December 31, 2008 Using:

Quoted Prices in

Active Markets

Significant

for Identical

Significant Other

Unobservable

December 31,

Assets

Observable

Inputs

2008

(Level 1)

Inputs (Level 2)

(Level 3)

Assets:

Impaired loans

$

33,024

—

—

$

33,024

Mortgage servicing rights

2,421

—

2,421

—

Impaired loans, carried at fair value, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a carrying amount of $46.4 million at March 31, 2009, with a valuation allowance of $11.0 million, resulting in additional provision for loan losses of $31,000 during the period.

Mortgage servicing rights had a carrying amount of $4.6 million with a valuation allowance of $2.2 million, and are valued by an independent third party that is active in purchasing and selling these instruments. The value reflects the characteristics of the underlying loans discounted at a market multiple.

Foreclosed assets, carried at fair value, which is measured for impairment using the fair value of the property less estimated selling costs, had a carrying amount of $14.8 million, with a valuation allowance of $2.9 million.

     12. STATEMENT OF CASH FLOWS SUPPLEMENTAL DISCLOSURE

Supplemental disclosures of cash flow information are summarized below.

		March 31, 2009				March 31, 2008
		(Dollars in thousands)
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest on deposits and borrowings		$	15,738			$	22,589
Interest capitalized on borrowings			—				—
Income taxes			—				—
Supplemental schedule of noncash activities:
Transfers from loans to real estate owned and other repossessed assets			5,395				3,274

     13. SEGMENT INFORMATION

United Community’s chief decision-makers monitor the revenue streams of the various Company products and services. The identifiable segments are not material, operations are managed, and financial performance is evaluated on a Company-wide basis. Accordingly, all of the Company’s financial service operations are considered by management to be aggregated in one reportable operating segment, which is banking services.

Discontinued operations are essentially the results of operations from Butler Wick Corp which were previously reported as a separate segment, investment services. Refer to Note 3 for a discussion on discontinued operations and its impact on segment reporting.

     14. 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 common shares determined for the basic computation plus the dilutive effect of potential common shares that could be issued under outstanding stock options. Stock options for 1,687,388 shares were anti-dilutive for the three months ended March 31, 2009. Stock options for 2,344,914 shares were anti-dilutive for the three months ended March 31, 2008. Earnings per share for 2008 have been adjusted to reflect a stock dividend declared in November 2008.

		Three Months Ended
		March 31,
		2009				2008
Numerator:
Income (loss) from continuing operations		$	(1,679	)		$	3,764
Income from discontinued operations			4,949				279
Net income		$	3,270			$	4,043
Denominator:
Weighted average common shares outstanding—basic			29,632				29,349
Dilutive effect of stock options			—				—
Weighted average common shares outstanding—dilutive			29,632				29,349
Basic earnings (loss) per share:
Basic earnings (loss) per common share—continuing operations		$	(0.06	)		$	0.13
Basic earnings per common share—discontinued operations			0.17				0.01
Basic earnings (loss) per common share			0.11				0.14
Dilutive earnings (loss) per share:
Dilutive earnings (loss) per common share—continuing operations			(0.06	)			0.13
Dilutive earnings per common share—discontinued operations			0.17				0.01
Dilutive earnings (loss) per common share			0.11				0.14

     15. BROKERED CERTIFICATES OF DEPOSIT

Brokered deposits represent funds which Home Savings obtained, directly or indirectly, through a deposit broker. A deposit broker places deposits from third parties with insured depository institutions or places deposits with an institution for the purpose of selling interest in those deposits to third parties. Under the terms of the Bank Order, Home Savings cannot obtain additional brokered certificates of deposit without prior consent of the FDIC and Ohio Division. Home Savings had brokered deposits of $92.1 million with a weighted average rate of 4.07% at March 31, 2009. Home Savings had brokered deposits of $145.2 million with a weighted average rate of 3.77% at December 31, 2008.

     16. OTHER COMPREHENSIVE INCOME

Other comprehensive income (loss) included in the Consolidated Statements of Shareholders’ Equity consists of unrealized gains and losses on available for sale securities and changes in unrealized gains and losses on postretirement liability. The change includes reclassification of losses on sales of securities and impairment charges $150,000 at March 31, 2009, and $4.2 million at December 31, 2008.

Other comprehensive income (loss) components and related tax effects are as follows:

		March 31,				March 31,
		2009				2008
		(Dollars in thousands)
Unrealized holding gain on securities available for sale		$	1,250			$	4,216
Changes in net gains on postretirement benefit plan			—				—
Reclassification adjustment for losses (gains) realized in income			150				(931	)
Net unrealized gains			1,400				3,285
Tax effect (35%)			490				1,150
Net of tax amount		$	910			$	2,135

The following is a summary of accumulated other comprehensive income (loss) balances, net of tax:

		Balance at				Current				Balance at
		December 31,				Period				March 31,
		2008				Change				2009
Unrealized gains on securities available for sale		$	3,297			$	910			$	4,207
Unrealized gains on post-retirement benefits			338				—				338
Total		$	3,635			$	910			$	4,545

     17. REGULATORY CAPITAL REQUIREMENTS

Home Savings is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on Home Savings and United Community. The regulations require Home Savings to meet specific capital adequacy guidelines and the regulatory framework for prompt corrective action that involve quantitative measures of Home Savings’ assets, liabilities, and certain off balance sheet items as calculated under regulatory accounting practices. Home Savings’ capital classification is also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

Quantitative measures established by regulation for capital adequacy require Home Savings to maintain minimum amounts and ratios of Tier 1 (or Core) and Tangible capital (as defined in the regulations) to average total assets (as defined) and of total risk-based capital (as defined) to risk-weighted assets (as defined). Actual and statutory required capital amounts and ratios for Home Savings are presented below.

		As of March 31, 2009
										Minimum								To Be Well Capitalized
										Capital								Under Prompt Corrective
		Actual								Requirements								Action Provisions
		Amount				Ratio				Amount				Ratio				Amount				Ratio
		(Dollars in thousands)
Total risk-based capital to risk-weighted assets		$	240,930				12.48	%		$	154,498				8.00	%		$	193,122				10.00	%
Tier 1 capital to risk-weighted assets			216,620				11.22				*				*				115,873				6.00
Tier 1 capital to average total assets			216,620				8.33				104,030				4.00				130,038				5.00
Tangible capital to adjusted total assets			216,620				8.33				39,011				1.50				*				*

		As of December 31, 2008
										Minimum								To Be Well Capitalized
										Capital								Under Prompt Corrective
		Actual								Requirements								Action Provisions
		Amount				Ratio				Amount				Ratio				Amount				Ratio
										(Dollars in thousands)
Total risk-based capital to risk-weighted assets		$	242,944				12.06	%		$	161,163				8.00	%		$	201,454				10.00	%
Tier 1 capital to risk-weighted assets			217,630				10.80				*				*				120,872				6.00
Tier 1 capital to average total assets			217,630				8.20				106,180				4.00				132,724				5.00
Tangible capital to adjusted total assets			217,630				8.20				39,817				1.50				*				*

As of March 31, 2009 and December 31, 2008, the FDIC and OTS, respectively, categorized Home Savings as adequately capitalized pursuant to the Bank Order and OTS Order discussed in Note 2. The Bank Order provided for Home Savings to increase its Tier 1 leverage ratio to 8.0% and total risk-based capital ratio to 12.0% by December 31, 2008 and to maintain those minimums going forward. As depicted in the table above, Home Savings continues to exceed this requirement.

Management believes, as of March 31, 2009, that Home Savings meets all capital requirements to which it is subject, inclusive of the Bank Order. Events beyond management’s control, such as fluctuations in interest rates or a downturn in the economy in areas in which Home Savings’ loans and securities are concentrated, could adversely affect future earnings, and consequently Home Savings’ ability to meet its future capital requirements. Refer to Note 2 of the Consolidated Financial Statements for a complete discussion of the limitations of the regulatory enforcement actions.

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

UNITED COMMUNITY FINANCIAL CORP.

		At or For the Three
		Months Ended
		March 31,
		2009				2008
Selected financial ratios and other data: (1)
Performance ratios:
Return on average assets (2)			0.50	%			0.59	%
Return on average equity (3)			5.30	%			5.72	%
Interest rate spread (4)			2.74	%			2.21	%
Net interest margin (5)			3.04	%			2.61	%
Non-interest expense to average assets			2.51	%			2.17	%
Efficiency ratio (6)			71.85	%			66.39	%
Average interest-earning assets to average interest-bearing liabilities			111.51	%			111.59	%
Capital ratios:
Average equity to average assets			9.45	%			10.25	%
Equity to assets, end of period			9.34	%			10.01	%
Tier 1 leverage ratio			8.33	%			7.67	%
Tier 1 risk-based capital ratio			11.22	%			9.83	%
Total risk-based capital ratio			12.48	%			12.51	%
Asset quality ratios:
Non-performing loans to total loans at end of period (7)			4.96	%			4.71	%
Non-performing assets to average assets (8)			5.19	%			4.15	%
Allowance for loan losses as a percent of loans			1.76	%			1.48	%
Allowance for loan losses as a percent of nonperforming loans (7)			36.09	%			31.79	%
Office data:
Number of full service banking offices			39				39
Number of loan production offices			6				6
Per share data:
Basic earnings (loss) from continuing operations (9)		$	(0.06	)		$	0.13
Basic earnings from discontinued operations (9)			0.17				0.01
Basic earnings (loss) (9)			0.11				0.14
Diluted earnings (loss) from continuing operations (9)			(0.06	)			0.13
Diluted earnings from discontinued operations (9)			0.17				0.01
Diluted earnings (loss) (9)			0.11				0.14
Book value (10)			7.74				7.96
Tangible book value (11)			7.72				9.12

Forward Looking Statements

When used in this Form 10-Q the words or phrases “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimate,” “project” or similar expressions are intended to identify “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are subject to certain risks and uncertainties including changes in economic conditions in United Community’s market area, changes in policies by regulatory agencies, fluctuations in interest rates, demand for loans in Home Savings’ market area, and competition, that could cause actual results to differ materially from results presently anticipated or projected. United Community cautions readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. United Community advises readers that the factors listed above could affect United Community’s financial performance and could cause United Community’s actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements.

Comparison of Financial Condition at March 31, 2009 and December 31, 2008

Total assets decreased $55.5 million to $2.6 billion at March 31, 2009, compared to December 31, 2008. Contributing to the change were decreases in net loans of $88.6 million, loans held for sale of $1.9 million, and assets of discontinued operations of $5.1 million. These decreases were offset partially by increases in cash and cash equivalents of $3.4 million, securities available for sale of $33.3 million, real estate owned and other repossessed assets of $1.2 million and other assets of $3.3 million.

Cash and cash equivalents increased $3.4 million to $46.8 million at March 31, 2009, compared to $43.4 million at December 31, 2008. This change is primarily the result of an increase in checks awaiting deposit at the Federal Reserve and cash maintained in Home Savings’ account at the Federal Reserve due to the sale of Butler Wick Trust. These increases were partially offset by a decrease in cash maintained by Home Savings’ branch locations.

Available for sale securities increased $33.3 million, or 15.4%, from December 31, 2008, to March 31, 2009. Home Savings purchased $42.0 million in securities during the first three months of 2009. These purchases were made primarily to replace the paydowns and maturities that occurred within the portfolio. These purchases were partially offset by paydowns and maturities of $10.0 million at Home Savings and other than temporary impairment charges of $150,000 at United Community. The remaining difference is a result of changes in the market valuation of the portfolio, net of any amortization or accretion.

Net loans decreased $88.6 million from December 31, 2008, to March 31, 2009. Real estate loans decreased $58.1 million, consumer loans decreased $17.0 million, and commercial loans decreased $11.4 million. The overall decrease in loans is attributable primarily to the strategic objective of reducing exposure to commercial real estate and construction lending. Furthermore, due to a much lower interest rate environment, refinance activity has accelerated. The result of this acceleration was a decline in the portfolio of one-to four-family loans as existing loans in the portfolio are refinanced and a majority of the newly originated loans are sold into the secondary market.

The allowance for loan losses increased to $37.9 million, or 1.76% of the net loan portfolio and 36.1% of nonperforming loans as of March 31, 2009, from $36.0 million or 1.61% of the net loan portfolio and 33.71% of nonperforming loans as of December 31, 2008. Provision totaling $8.4 million during the three months ended March 31, 2009 were partially offset by charge-offs totaling $6.7 million. The allowance for loan losses is a valuation allowance for probable credit losses. Loan losses are charged against the allowance when management believes the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. Management estimates the allowance balance required based on an analysis using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations, estimated collateral values, general economic conditions in the market area and other factors. The allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired. The general component covers pools of loans and is based on historical loss experience adjusted for current factors, but the entire allowance is available for any loan that, in management’s judgment, should be charged-off.

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

		Allowance For Loan Losses
		(Dollars in thousands)
		December 31,																March 31,
		2008				Provision				Recovery				Chargeoff				2009
Real Estate Loans
Permanent
One-to four-family residential		$	4,986			$	957			$	2			$	(1,098	)		$	4,847
Multifamily residential			2,344				578				3				(1,384	)			1,541
Nonresidential			4,870				1,333				1				(653	)			5,551
Land			585				50				—				—				635
Total			12,785				2,918				6				(3,135	)			12,574
Construction Loans
One-to four-family residential			10,620				3,814				4				(1,554	)			12,884
Multifamily and nonresidential			722				(15	)			—				—				707
Total			11,342				3,799				4				(1,554	)			13,591
Consumer Loans
Home Equity			1,386				503				—				(362	)			1,527
Auto			242				30				5				(64	)			213
Marine			1,504				125				4				(6	)			1,627
Recreational vehicle			1,425				548				22				(559	)			1,436
Other			313				88				100				(218	)			283
Total			4,870				1,294				131				(1,209	)			5,086
Commercial Loans
Secured			3,355				(340	)			—				(212	)			2,803
Unsecured			3,610				773				—				(581	)			3,802
Total			6,965				433				—				(793	)			6,605
Total		$	35,962			$	8,444			$	141			$	(6,691	)		$	37,856