The estimation of fair value and subsequent changes of fair value of investment securities, other real estate, repossessions and intangible assets can have a significant impact on the value of the Corporation, as well as have an impact on the recorded values and subsequently reported net income.
Changes in interest rates is the primary determining factor in the fair value of investment securities, and the value at which these assets are reported in the Corporation's financial statements. Local economic conditions are often the key factor in the valuation of other real estate and repossessed assets. Changes in these factors can cause assets to be written down and have an impact on the financial results. The overall financial condition and results of operations of the banking unit is the primary determinant as to the value of recorded intangible assets.
Results of Operations
The following financial review is presented to provide an analysis of the results of operations of the Corporation and the Bank for the three months ended March 31, 2009 and 2008, compared. This review should be used in conjunction with the condensed consolidated financial statements included in the Form 10-Q. Three Months Ended March 31, 2009 and 2008, Compared Summary
Net income for the three months ended March 31, 2009 was $209,327, a decrease of $103,407, or 33.1%, from the same period in 2008. The primary reasons for the decrease were a decrease in net interest income and an increase in the provision made for the allowance for losses on loans. These are discussed in detail below. During the first quarter, the Corporation completed an analysis of its expenses and specifically made a determination as to which were "controllable" and which were not. The Corporation identified several categories of expenses that were either "discretionary" or could potentially be eliminated. The result of this analysis was the establishment of the expense control program that is referenced in the discussion below.
Additionally, the balance sheet of the Corporation significantly changed during the first quarter of 2009 as a result of significant reductions of deposits from two customers totaling approximately $69 million. This reduction was anticipated by the Corporation as one of the depositors represented was holding a temporary deposit where the customer would be disbursing the funds for a project over the course of 2009. The other item represented a seasonal property tax receipt deposit for a local municipal government, which was planned to be disbursed to its operating departments during the quarter. For the temporary transaction, approximately $35 million of the funds were either disbursed or placed in investments during the quarter. For the seasonal deposit, approximately $34 million were distributed to the departments. As these deposits are subject to immediate withdrawal, the Corporation invests them in short term, highly liquid deposits or investment securities.

Net Interest Income
Net interest income was $3,207,787 during the first quarter of 2009, a reduction of $212,617 (6.2%) from the level experienced during the same period in 2008. Total interest income decreased $1,431,726 (21.6%) in the first quarter of 2009. A major part of the decrease was the effect of the significant reduction of the overnight fed funds rate by the Federal Reserve and the reductions impact on market rates charged on various loans, including, but not limited to, the prime rate. The most recent rate reduction of 75 basis points was made in mid-December 2008 and capped a total 400 basis points reduction in a series of actions during 2008. Interest and fees on loans was lower by $972,000 and this resulted in a reduction in the rate earned to 6.00% compared to 7.35% in the 2008 period. A major contributing factor to the decline in yield and interest income was the approximately $8,946,000 increase in non accrual loans at March 31, 2009 as compared to March 31, 2008. These revenue declines were partially offset by increased earning assets as average loans for the period ended March 31, 2009 were $3,052,000 higher than the average for the same period in 2008 and average total earning assets were $39,646,000 higher. Total interest expense for the first quarter of 2009 decreased by $1,219,109 (37.9%) compared to the first quarter of 2008. The reduction in interest rates impacts interest bearing liabilities more slowly because time deposits maintain their rate until they can be repriced at their maturity. The effect of lower rates was countered by the decrease in interest bearing liabilities of $39,970,000 (10.6%) between the periods.
Both the increase in earning assets and the decrease in liabilities were primarily the result of the temporary or seasonal transactions for the two customers described above. The net interest margin decreased to 2.85% in the quarter from 3.33% in the same period in 2008. The effect of lower rates and the increased asset size at lower spreads caused by the transactions discussed above were the major factors in this reduction. Provision for Loan Losses
The provision for loan losses totaled $360,000 for the first quarter of 2009 as compared to $240,000 for the same period in 2008. The increase to the Bank's provision is reflective of historical loan losses, the additional non accrual loans being carried and growth in the loan portfolio. For further discussion of these changes see Allowance for Loan Losses below. Noninterest Income
Total noninterest income decreased $13,997 or 1.3% for the first quarter of 2009. Revenue from service charges and fees on deposit accounts increased approximately $39,600 (4.9%). This increase was more than offset by reductions in fees from the origination of mortgage loans (reduction of $28,000) and fees from insurance and securities sales (reduction of $45,000).

Noninterest Expense
Total noninterest expense decreased $184,227, or 4.6%, in the first quarter of 2009 compared to the same quarter of 2008 primarily as a result of the previously discussed expense control program. Salaries and benefits did increase as the bank put into service the new facility in Loxley, Alabama during the fourth quarter of 2008. Occupancy expense was lower in the quarter by $110,000 (16.1%) as costs for repairs, maintenance and insurance were closely managed. Other expenses were lower by $114,000 (9.9%). In the first quarter of 2008, the Corporation took a writedown of $85,000 in anticipation of the sale of an ORE property. There was no similar loss in the same period in 2009. Additionally, expenses in many categories were lower as a result of the expense control program. These reductions were evident in advertising (lower by $35,000) and legal/litigation fees (lower by $65,000). These declines were partially offset by expenses related to the new communications system ($23,000) and courier expenses associated with the new branch locations and increases in volume ($21,000).
Income Tax Benefits
Earnings before taxes for the first quarter of 2009 were $137,339 as compared to $299,726 in the first quarter of 2008, a decrease of $162,387 or 54.2%. Income tax benefits for the first quarter were $71,988 compared to $13,008 for the same period in 2008.
Financial Condition and Liquidity
Total assets on March 31, 2009 were $500,798,323, a decrease of $49,247,000 or 9.0% from December 31, 2008. At year end two customers had deposits which were either temporary or seasonal in nature. The temporary transactions have been discussed earlier and are primarily responsible for the reduction in deposits. The Corporation continues to take steps to maintain a strong liquidity position that is designed to provide sufficient availability of funds to meet planned needs. This liquidity position has been held at a higher than historical level because of the current economic uncertainty. The ratio of total loans to deposits plus repurchase agreements on March 31, 2009 was 63.8% as compared to 56.8% on December 31, 2008. This increase is the result of the decline in the temporary and seasonal transactions discussed earlier and growth in the loan portfolio of $3.6 million.
Cash and Cash Equivalents
Cash and cash equivalents as of March 31, 2009 decreased by $63,216,000, or by 44.0%, from December 31, 2009. The decrease is a result of the withdrawal of the temporary and seasonal deposits discussed earlier. Investment Securities - Available for Sale Investment securities available for sale decreased $8,645,000, or 10.1%, during the first quarter of 2009 as new investments and a portion of maturing and called investment securities were reinvested in the Held to Maturity category. Total investment securities showed an increase of $13.9 million during the quarter.

Investment Securities - Held to Maturity Investment securities held to maturity increased $22,538,000, or 344.1%, during the first quarter of 2009. The Corporation, in 2008, determined that a portion of the investment portfolio represented a permanent investment and purchased securities in that amount that were designated as held to maturity. The amount at March 31, 2009 represents the maximum that is to be considered permanent investments at this time. Securities designated as held to maturity are not liquid or subject to sale. The Corporation will review the limits on this category regularly.
Loans
Gross loans increased by $3,604,000 or 1.3% at March 31, 2009, from December 31, 2008. The increases are in both consumer and commercial loans in the markets served by the Corporation.
Allowance for Loan Losses
The allowance for losses on loans is maintained at levels that reflect the historic loss rate on the majority of the portfolio and the difference between the loan balance and value for loans that are considered to be impaired. A loan is considered to be impaired when it is 1) probable that the Corporation will be unable to collect all amounts due according to the contractual terms of the loan agreements or 2) the loan terms have be renegotiated to provide a reduction or deferral of interest or principal because of deterioration in the financial condition of the borrower. The historic loss rate is adjusted for the effects of: general economy, local economy, trends in problem loans and past due loans, growth in loans and peer levels of reserves. Loans that are deemed to be impaired are valued either at the present value of the cash flow anticipated or the value of the collateral, reduced by the estimated costs to sell. At the end of the first quarter of 2009, a reserve level of $3,913,301 was considered to be appropriate. This is equivalent to 1.38% of gross loans. The Bank's 1.38 reserve percentage represents an increase from the 1.28% carried at year end 2008. Net charged-off loans for the first three months of 2009 were $38,000, as compared to $319,000 for the same period in 2008.
The Corporation has in place procedures to identify and deal with problem loans and potential problem loans. It is the goal of the Corporation to identify any problems, to develop and execute strategies to deal with those identified and establish reserves to deal with identified and historic shortfalls. Although reserves may be considered appropriate at a point in time, future events may change the ability of a borrower to pay or the underlying value of collateral. The Corporation will continue to monitor closely the condition of the portfolio and, in the current, uncertain economy, continue with its program to strengthen the level of reserves.

The following is a summary of information pertaining to the identified classifications of impaired and past due loans:

                                                                      As of the three months ended
                                                                               March 31,
                                                                       2009                   2008

Impaired loans with a valuation allowance                         $    13,839,767         $  9,511,312
Impaired loans without a valuation allowance                            5,379,342                    -

Total impaired loans                                              $    19,219,109         $  9,511,312

Valuation allowance related to impaired loans                     $     2,004,794         $  2,159,505
Total nonaccrual loans                                                 19,345,112           10,399,244
Total loans past due ninety days or more and still accruing                30,715               17,157
Troubled debt restructured loans                                        2,439,955               31,724

Non-performing Assets: The following table sets forth the Corporation's non-performing assets at March 31, 2009 and December 31, 2008. Under the Corporation's nonaccrual policy, a loan is placed on nonaccrual status when collectibility of principal and interest is in doubt.

                                                                     March 31,          December 31,
    Description                                                        2009                 2008
                                                                         (Dollars in Thousands)

A   Loans accounted for on a nonaccrual basis                       $    19,345        $       14,700

B   Loans which are contractually past due ninety days or more
    as to interest or principal payments (excluding balances
    included in (A) above)                                                   31                    28

C   Loans, the terms of which have been renegotiated to
    provide a reduction or deferral of interest or principal
    because of a deterioration in the financial position of
    the borrower.                                                         2,440                 1,106

D   Other non-performing assets                                           5,547                 5,524


    Total                                                           $    27,363        $       21,358

Premises and Equipment
Premises and equipment decreased $309,218 during the first quarter of 2009. The Corporation has completed the currently planned addition of branches. The previously planned addition of one branch has been delayed until economic conditions become clearer. The reduction in this account is due to the assets being depreciated with little additional capital spending to counter the reduction.
Intangible Assets
As of March 31, 2009 and December 31, 2008, the Corporation had recorded $934,763 in intangible assets.
Florida Charter - On July 2, 2004, the Corporation acquired a State of Florida banking charter from a financial institution for $917,263. Subsequent to the purchase, the charter was terminated but the Corporation retained the legal right to branch into Florida through its existing Alabama bank charter. The Corporation accounts for the charter cost as an indefinite lived intangible asset because the legal right acquired does not have an expiration date under Florida banking laws and there is no renewal process to keep the branching rights. The Corporation tests the intangible asset each September 30 for impairment. At March 31, 2009, the Corporation operated three branch offices in Florida.
Internet Domain Address - On March 21, 2007, the Bank purchased the rights to the internet domain name www.unitedbank.com for $17,500. This internet domain is defined as an intangible asset with an indefinite life under FAS 142 and, as such, is not required to be amortized over any period of time.
For the three months ended March 31, 2009 no impairment was recorded related to the intangible assets.
Deposits
Total deposits decreased $47,027,000, or 9.6%, at March 31, 2009 from December 31, 2008, including decreases of $27,763,000 in non-interest bearing deposits and $19,265,000 in interest bearing deposits. As previously discussed, the temporary and seasonal transactions accounted for the decline. Core deposits have continued to grow during the first quarter, primarily in the time deposit (savings and certificates of deposit) accounts which increased $9,700,000. Repurchase Agreements
There was no amount held in securities sold under agreement to repurchase as of March 31, 2009, as compared to the balance of $1,861,237 as of December 31, 2008. This decrease is the result of customers choosing to move their funds into deposit accounts instead of repurchase agreements due to deposit products that offered higher interest rates, higher insurance coverage by the FDIC, or both.

Liquidity
One of the Corporation's goals is to provide adequate funds to meet changes in loan demand or any potential increase in the normal level of deposit withdrawals. This goal is accomplished primarily by generating cash from operating activities and maintaining sufficient short-term assets. These sources, coupled with a stable deposit base, allow the Corporation to fund earning assets and maintain the availability of funds. Management believes that the Corporation's traditional sources of maturing loans and investment securities, cash from operating activities and a strong base of core deposits are adequate to meet the Corporation's liquidity needs for normal operations. To provide additional liquidity, the Corporation has historically utilized market based sources such as short-term financing through the purchase of federal funds, and a borrowing relationship with the Federal Home Loan Bank. In the current economy, these sources are not as reliable as in more normal times. The Corporation has chosen to maintain on balance sheet sources of liquidity such as federal funds sold and liquid short term investments at higher than historical levels to assure an adequate source of liquid funding. Should the Corporation's traditional sources of liquidity be constrained, forcing the Corporation to pursue avenues of funding not typically used, the Corporation's net interest margin could be impacted negatively. The Corporation's bank subsidiary has an Asset Liability Management Committee, which has as its primary objective the maintenance of specific funding and investment strategies to achieve short-term and long-term financial goals. The Corporation's liquidity at March 31, 2009 is considered appropriate by management.
Capital Adequacy
Total stockholders' equity on March 31, 2009, was $42,143,525, an increase of $5,813, from December 31, 2008. This small increase is a combination of current period earnings of $209,327, the decrease of accumulated other comprehensive income net of tax of $160,506, the payment of a preferred stock dividend of $74,389 related to the U.S. Treasury's Capital Purchase Program as described in the footnotes to the audited financial statements accompanying the Corporation's Form 10-K for the year ended December 31, 2008, an increase in additional paid in capital of $20,807 arising from 1) the dividend reinvestment plan 2) an offering under the Corporation's Employee Stock Purchase Plan and 3) compensation related to previous years' grants of stock options, and the reduction in unearned stock based compensation of $9,472.
The table below sets forth various capital ratios for the Corporation and the Bank. Under current regulatory guidelines, debt associated with trust preferred securities qualifies for Tier 1 capital treatment. At March 31, 2009, trust preferred securities included in Tier 1 capital totaled $10 million. Quantitative measures established by regulation to ensure capital adequacy require the Corporation and its Bank to maintain minimum total capital (Total Risk-Based Capital) of at least 8% of risk-weighted assets, minimum core capital (Tier I Risk-Based Capital) of at least 4% of risk-weighted assets, and a minimum leverage ratio of at least 4% of average assets. Management believes, as of March 31, 2009 that the Corporation and its Bank meet all capital adequacy requirements to which they are subject.

As of March 31, 2009, the most recent notification from the appropriate regulatory agencies categorized the Bank as "well capitalized" under the regulatory framework for prompt corrective action. To be categorized as "well capitalized", the Bank must maintain minimum Total Risk Based Capital, Tier I Risk-Based Capital, and leverage ratios of at least 10%, 6%, and 5% respectively. There are no conditions or events since that notification that management believes have changed the Bank's category.
Information regarding risk-based capital and leverage ratios of the Corporation and the Bank are set forth in the table below:

                                                                     Well
                                                   March 31,      Capitalized
                                                      2009         Treatment
         United Bancorporation of Alabama, Inc.
         Total risk-based capital                      16.43 %           N/A
         Tier 1 risk-based capital                     15.25             N/A
         Leverage Ratio                                 9.69             N/A

         United Bank
         Total risk-based capital                      16.04 %         10.00 %
         Tier 1 risk-based capital                     14.87            6.00
         Leverage ratio                                 9.45            5.00

Based on management's projections, existing regulatory capital should be sufficient to satisfy capital requirements in the foreseeable future for existing operations, and for some expansion efforts. Although the Bank has suspended further immediate expansion plans, continued growth into new markets may require the Corporation to further access external funding sources. There can be no assurance that such funding sources will be available to the Corporation.
Off Balance Sheet items
The Bank is a party to financial obligations with off-balance sheet risk in the normal course of business. The financial obligations include commitments to extend credit, standby letters of credit issued to customers, and standby letters of credit issued to the Bank by Federal Home Loan Bank of Atlanta ("FHLB") which are pledged as collateral to insure public deposits held in the SAFE Program of the Alabama State Treasurer.
The following table sets forth the off-balance sheet risk of the Bank as of the end of the period.

                                                    March 31,
                                                       2009

                   Commitments to extend credit   $ 36,338,000
                   Standby letters of credit         1,889,420