Edgar Filing: UNITED COMMUNITY BANKS INC

Form 10-Q

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 June 30, 2010


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

For the Transition Period from to

Commission file number 0-21656

UNITED COMMUNITY BANKS, INC.

(Exact name of registrant as specified in its charter)


Georgia		58-1807304

(State of Incorporation)		(I.R.S. Employer Identification No.)

125 Highway 515 Blairsville, Georgia		30512

Address of Principal Executive Offices		(Zip Code)

(706) 781-2265
(Telephone Number)

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 Date 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, or a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.


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

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

YES o NO þ

Common stock, par value $1 per share 94,323,569 shares
outstanding as of July 31, 2010

INDEX


PART I — Financial Information

Item 1. Financial Statements

Consolidated Statement of Income (unaudited) for the Three and Six Months Ended June 30, 2010 and 2009			2

Consolidated Balance Sheet at June 30, 2010 (unaudited), December 31, 2009 (audited) and June 30, 2009 (unaudited)			3

Consolidated Statement of Changes in Shareholders’ Equity (unaudited) for the Six Months Ended June 30, 2010 and 2009			4

Consolidated Statement of Cash Flows (unaudited) for the Six Months Ended June 30, 2010 and 2009			5

Notes to Consolidated Financial Statements			6

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			21

Item 3. Quantitative and Qualitative Disclosures About Market Risk			47

Item 4. Controls and Procedures			47

PART II — Other Information

Item 1. Legal Proceedings			47

Item 1A. Risk Factors			47

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			47

Item 3. Defaults Upon Senior Securities			47

Item 4. (Removed and Reserved)			47

Item 5. Other Information			47

Item 6. Exhibits			48

Exhibit 3.4
Exhibit 3.5
Exhibit 31.1
Exhibit 31.2
Exhibit 32

Part I — Financial Information


Item 1		— Financial Statements

UNITED COMMUNITY BANKS, INC.

Consolidated Statement of Income (Unaudited)


	Three Months Ended						Six Months Ended
	June 30,						June 30,
(in thousands, except per share data)	2010			2009			2010			2009
Interest revenue:
Loans, including fees	$	70,611		$	81,691		$	142,826		$	163,571
Investment securities, including tax exempt of $295, $309, $606 and $628		15,829			20,485			32,032			41,237
Federal funds sold, commercial paper and deposits in banks		759			98			1,697			540

Total interest revenue		87,199			102,274			176,555			205,348


Interest expense:
Deposits:
NOW		1,745			2,843			3,599			6,180
Money market		1,829			2,269			3,586			4,506
Savings		83			121			167			248
Time		17,718			32,064			37,916			68,117

Total deposit interest expense		21,375			37,297			45,268			79,051
Federal funds purchased, repurchase agreements and other short-term borrowings		1,056			595			2,094			1,148
Federal Home Loan Bank advances		974			1,203			1,951			2,277
Long-term debt		2,667			2,760			5,329			5,529

Total interest expense		26,072			41,855			54,642			88,005

Net interest revenue		61,127			60,419			121,913			117,343
Provision for loan losses		61,500			60,000			136,500			125,000

Net interest revenue after provision for loan losses		(373	)		419			(14,587	)		(7,657	)


Fee revenue:
Service charges and fees		7,993			7,557			15,440			14,591
Mortgage loan and other related fees		1,601			2,825			3,080			5,476
Brokerage fees		586			497			1,153			1,186
Securities gains (losses), net		—			(711	)		61			(408	)
Gain from acquisition		—			11,390			—			11,390
Other		1,399			1,137			3,511			2,283

Total fee revenue		11,579			22,695			23,245			34,518

Total revenue		11,206			23,114			8,658			26,861


Operating expenses:
Salaries and employee benefits		23,590			26,305			47,950			53,618
Communications and equipment		3,511			3,571			6,784			7,217
Occupancy		3,836			3,818			7,650			7,587
Advertising and public relations		1,352			1,125			2,395			2,169
Postage, printing and supplies		765			1,288			1,990			2,463
Professional fees		2,178			3,195			4,121			6,476
Foreclosed property		14,540			5,737			25,353			10,056
FDIC assessments and other regulatory charges		3,566			6,810			7,192			9,492
Amortization of intangibles		794			739			1,596			1,478
Other		4,176			1,122			8,097			4,942
Loss on sale of nonperforming assets		45,349			—			45,349			—
Goodwill impairment		—			—			—			70,000
Severance costs		—			—			—			2,898

Total operating expenses		103,657			53,710			158,477			178,396

Loss from continuing operations before income taxes		(92,451	)		(30,596	)		(149,819	)		(151,535	)
Income tax benefit		(32,919	)		(14,529	)		(55,829	)		(31,539	)

Net loss from continuing operations		(59,532	)		(16,067	)		(93,990	)		(119,996	)
(Loss) income from discontinued operations, net of income taxes		—			66			(101	)		222
Gain from sale of subsidiary, net of income taxes and selling costs		—			—			1,266			—

Net loss		(59,532	)		(16,001	)		(92,825	)		(119,774	)
Preferred stock dividends and discount accretion		2,577			2,559			5,149			5,113

Net loss available to common shareholders	$	(62,109	)	$	(18,560	)	$	(97,974	)	$	(124,887	)


Loss from continuing operations per common share — Basic / Diluted	$	(.66	)	$	(.38	)	$	(1.05	)	$	(2.58	)
Loss per common share — Basic / Diluted		(.66	)		(.38	)		(1.04	)		(2.57	)
Weighted average common shares outstanding — Basic / Diluted		94,524			48,794			94,453			48,560

See accompanying notes to consolidated financial statements

UNITED COMMUNITY BANKS, INC.

Consolidated Balance Sheet


	June 30,			December 31,		June 30,
(in thousands, except share and per share data)	2010			2009		2009
	(unaudited)			(audited)		(unaudited)
ASSETS
Cash and due from banks	$	115,088		$	126,265	$	110,943
Interest-bearing deposits in banks		105,183			120,382		70,474
Federal funds sold, commercial paper and short-term investments		148,227			129,720		—

Cash and cash equivalents		368,498			376,367		181,417

Securities available for sale		1,165,776			1,530,047		1,816,787
Securities held to maturity (fair value $327,497)		322,148			—		—
Mortgage loans held for sale		22,705			30,226		42,185
Loans, net of unearned income		4,873,030			5,151,476		5,513,087
Less allowance for loan losses		174,111			155,602		145,678

Loans, net		4,698,919			4,995,874		5,367,409

Assets covered by loss sharing agreements with the FDIC		156,611			185,938		230,125
Premises and equipment, net		180,125			182,038		178,983
Accrued interest receivable		29,650			33,867		41,405
Goodwill and other intangible assets		223,600			225,196		251,821
Foreclosed property		123,910			120,770		104,754
Other assets		360,542			319,591		262,469

Total assets	$	7,652,484		$	7,999,914	$	8,477,355


LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Deposits:
Demand	$	779,934		$	707,826	$	714,630
NOW		1,326,861			1,335,790		1,273,368
Money market		756,370			713,901		573,463
Savings		185,176			177,427		180,368
Time:
Less than $100,000		1,575,211			1,746,511		1,992,056
Greater than $100,000		1,093,975			1,187,499		1,351,527
Brokered		611,985			758,880		763,348

Total deposits		6,329,512			6,627,834		6,848,760

Federal funds purchased, repurchase agreements, and other short-term borrowings		104,127			101,389		252,493
Federal Home Loan Bank advances		104,138			114,501		283,292
Long-term debt		150,106			150,066		150,026
Accrued expenses and other liabilities		60,184			43,803		87,512

Total liabilities		6,748,067			7,037,593		7,622,083


Shareholders’ equity:
Preferred stock, $1 par value; 10,000,000 shares authorized;
Series A; $10 stated value; 21,700 shares issued and outstanding		217			217		217
Series B; $1,000 stated value; 180,000 shares issued and outstanding		175,050			174,408		173,785
Common stock, $1 par value; 200,000,000 shares authorized; 94,280,925, 94,045,603 and 48,933,383 shares issued and outstanding		94,281			94,046		48,933
Common stock issuable; 284,771, 221,906 and 182,041 shares		3,898			3,597		3,383
Capital surplus		663,836			622,034		450,514
(Accumulated deficit) retained earnings		(77,590	)		20,384		136,624
Accumulated other comprehensive income		44,725			47,635		41,816

Total shareholders’ equity		904,417			962,321		855,272

Total liabilities and shareholders’ equity	$	7,652,484		$	7,999,914	$	8,477,355

See accompanying notes to consolidated financial statements

UNITED COMMUNITY BANKS, INC.

Consolidated Statement of Changes in Shareholders’ Equity (Unaudited)

For the Six Months Ended June 30,


														(Accumulated						Accumulated
	Series A			Series B				Common						Deficit)						Other
	Preferred			Preferred		Common		Stock			Capital			Retained			Treasury			Comprehensive
(in thousands, except share and per share data)	Stock			Stock		Stock		Issuable			Surplus			Earnings			Stock			Income			Total

Balance, December 31, 2008	$	258		$	173,180	$	48,809	$	2,908		$	460,708		$	265,405		$	(16,465	)	$	54,579		$	989,382
Comprehensive income:
Net loss															(119,774	)								(119,774	)
Other comprehensive loss:
Unrealized holding gains on available for sale securities, net of deferred tax expense and reclassification adjustment																					1,582			1,582
Unrealized losses on derivative financial instruments qualifying as cash flow hedges, net of deferred tax benefit																					(14,345	)		(14,345	)

Comprehensive loss															(119,774	)					(12,763	)		(132,537	)
Retirement of preferred stock (4,100 shares)		(41	)																					(41	)
Stock dividends declared on common stock (737,530 shares)							108					(8,893	)		(3,894	)		12,649						(30	)
Exercise of stock options (437 shares)												(6	)					8						2
Common stock issued to dividend Reinvestment plan and employee benefit plans (167,873 shares)							14					(2,474	)					3,434						974
Amortization of stock option and restricted stock												1,846												1,846
Vesting of restricted stock (12,447 shares issued, 16,162 shares deferred)							2		416			(658	)					240						—
Deferred compensation plan, net, including dividend equivalents									214															214
Shares issued from deferred compensation plan (5,687 shares)									(155	)		21						134						—
Tax on option exercise and restricted stock vesting												(30	)											(30	)
Dividends on Series A preferred stock ($.30 per share)															(8	)								(8	)
Dividends on Series B preferred stock (5%)					605										(5,105	)								(4,500	)

Balance, June 30, 2009	$	217		$	173,785	$	48,933	$	3,383		$	450,514		$	136,624		$	—		$	41,816		$	855,272


Balance, December 31, 2009	$	217		$	174,408	$	94,046	$	3,597		$	622,034		$	20,384		$	—		$	47,635		$	962,321
Comprehensive loss:
Net loss															(92,825	)								(92,825	)
Other comprehensive loss:
Unrealized holding gains on available for sale securities, net of deferred tax expense and reclassification adjustment																					2,750			2,750
Unrealized losses on derivative financial instruments qualifying as cash flow hedges, net of deferred tax benefit																					(5,660	)		(5,660	)

Comprehensive loss															(92,825	)					(2,910	)		(95,735	)
Issuance of equity instruments in private equity transaction												39,813												39,813
Common stock issued to dividend reinvestment plan and employee benefit plans (209,091 shares)							209					730												939
Amortization of stock options and restricted stock awards												1,428												1,428
Vesting of restricted stock (10,560 shares issued, 41,522 shares deferred)							10		607			(617	)											—
Deferred compensation plan, net, including dividend equivalents									162															162
Shares issued from deferred compensation plan (15,671 shares)							16		(468	)		448												(4	)
Dividends on Series A preferred stock ($.30 per share)															(7	)								(7	)
Dividends on Series B preferred stock (5%)					642										(5,142	)								(4,500	)

Balance, June 30, 2010	$	217		$	175,050	$	94,281	$	3,898		$	663,836		$	(77,590	)	$	—		$	44,725		$	904,417

Comprehensive loss for the second quarter of 2010 and 2009 was $60,133,000 and $32,735,000, respectively.

See accompanying notes to consolidated financial statements

UNITED COMMUNITY BANKS, INC.

Consolidated Statement of Cash Flows (Unaudited)


	Six Months Ended
	June 30,
(in thousands)	2010			2009
Operating activities:
Net loss	$	(92,825	)	$	(119,774	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation, amortization and accretion		7,747			7,215
Provision for loan losses		136,500			125,000
Goodwill impairment charge		—			70,000
Stock based compensation		1,428			1,846
Securities (gains) losses, net		(61	)		408
(Gains) losses on sale of other assets		(11	)		90
Losses and write downs on sales other real estate owned		19,289			4,198
Gain from sale of subsidiary		(2,110	)		—
Gain from acquisition		—			(11,390	)
Loss on sale of nonperforming assets		45,349			—
Changes in assets and liabilities:
Other assets and accrued interest receivable		(55,238	)		(20,721	)
Accrued expenses and other liabilities		(6,888	)		50,868
Mortgage loans held for sale		7,521			(21,851	)

Net cash provided by operating activities		60,701			85,889


Investing activities:
Investment securities held to maturity:
Proceeds from maturities and calls of securities held to maturity:		12,059			—
Purchases of securities held to maturity		(19,617	)		—
Investment securities available for sale:
Proceeds from sales of securities available for sale		40,817			15,017
Proceeds from maturities and calls of securities available for sale		432,436			399,401
Purchases of securities available for sale		(398,877	)		(584,100	)
Net decrease (increase) in loans		72,931			(12,617	)
Proceeds from sales of premises and equipment		39			547
Purchases of premises and equipment		(3,601	)		(6,237	)
Net cash received from sale of subsidiary		290			—
Net cash received from acquisition		—			63,618
Net cash received from sale of nonperforming assets		20,618			—
Proceeds from sale of other real estate		80,898			56,060

Net cash provided by (used in) investing activities		237,993			(68,311	)


Financing activities:
Net change in deposits		(295,729	)		(462,921	)
Net change in federal funds purchased, repurchase agreements, and other short-term borrowings		2,738			141,412
Proceeds from FHLB advances		—			130,000
Repayments of FHLB advances		(10,000	)		(135,000	)
Proceeds from exercise of stock options		—			2
Proceeds from issuance of common stock for dividend reinvestment and employee benefit plans		935			974
Redemption of preferred stock		—			(41	)
Cash dividends on preferred stock		(4,507	)		(4,008	)

Net cash used in financing activities		(306,563	)		(329,582	)


Net change in cash and cash equivalents		(7,869	)		(312,004	)

Cash and cash equivalents at beginning of period		376,367			493,421


Cash and cash equivalents at end of period	$	368,498		$	181,417


Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest	$	60,083		$	91,865
Income taxes		819			(23,850	)

See accompanying notes to consolidated financial statements

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 1 — Accounting Policies

The accounting and financial reporting policies of United Community Banks, Inc. (“United”) and its subsidiaries conform to accounting principles generally accepted in the United States of America (“GAAP”) and general banking industry practices. The accompanying interim consolidated financial statements have not been audited. All material intercompany balances and transactions have been eliminated. A more detailed description of United’s accounting policies is included in the 2009 annual report filed on Form 10-K.

In management’s opinion, all accounting adjustments necessary to accurately reflect the financial position and results of operations on the accompanying financial statements have been made. These adjustments are normal and recurring accruals considered necessary for a fair and accurate presentation. The results for interim periods are not necessarily indicative of results for the full year or any other interim periods.

United records all derivative financial instruments on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether United has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Derivatives may also be designated as hedges of the foreign currency exposure of a net investment in a foreign operation. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge. United may enter into derivative contracts that are intended to economically hedge certain of its risks, even though hedge accounting does not apply or United elects not to apply hedge accounting.

Foreclosed property is initially recorded at fair value, less cost to sell. If the fair value, less cost to sell at the time of foreclosure, is less than the loan balance, the deficiency is charged against the allowance for loan losses. If the fair value, less cost to sell, of the foreclosed property decreases during the holding period, a valuation allowance is established with a charge to operating expenses. When the foreclosed property is sold, a gain or loss is recognized on the sale for the difference between the sales proceeds and the carrying amount of the property. Financed sales of foreclosed property are accounted for in accordance with the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification Topic 360, Subtopic 20, Real Estate Sales.

Note 2 — Accounting Standards Updates

In May 2010, the FASB issued Accounting Standards Update No. 2010-19, Foreign Currency Issues: Multiple Foreign Currency Exchange Rates (“ASU No. 2010-19”). ASU No. 2010-19 codifies the SEC Staff Announcement on May 18, 2010, regarding the SEC’s view on certain foreign currency issues related to investments in Venezuela. This guidance was effective May 18, 2010 and is not applicable to United.

In July 2010, the FASB issued Accounting Standards Update No. 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses (“ASU No. 2010-20”). ASU No. 2010-20 requires disclosures regarding loans and the allowance for loan losses that are disaggregated by portfolio segment and class of financing receivable. Existing disclosures were amended to require a rollforward of the allowance for loan losses by portfolio segment, with the ending balance broken out by basis of impairment method, as well as the recorded investment in the respective loans. Nonaccrual and impaired loans by class must also be shown. ASU No. 2010-20 also requires disclosures regarding: 1) credit quality indicators by class, 2) aging of past due loans by class, 3) troubled debt restructurings (“TDRs”) by class and their effect on the allowance for loan losses, 4) defaults on TDRs by class and their effect on the allowance for loan losses, and 5) significant purchases and sales of loans disaggregated by portfolio segment. This guidance is effective for interim and annual reporting periods ending on or after December 15, 2010, for end of period type disclosures. Activity related disclosures are effective for interim and annual reporting periods beginning on or after December 15, 2010. ASU No. 2010-20 will have an impact on United’s disclosures, but not its financial position or results of operations.

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 3 — Mergers and Acquisitions

On June 19, 2009, United Community Bank (“UCB” or the “Bank”) purchased substantially all the assets and assumed substantially all the liabilities of Southern Community Bank (“SCB”) from the Federal Deposit Insurance Corporation (“FDIC”), as Receiver of SCB. SCB operated five commercial banking branches on the south side of Atlanta in Fayetteville, Peachtree City, Locust Grove and Newnan, Georgia. The FDIC took SCB under receivership upon SCB’s closure by the Georgia Department of Banking and Finance at the close of business June 19, 2009. UCB submitted a bid for the acquisition of SCB with the FDIC and the FDIC accepted the bid on June 16, 2009. The transaction resulted in a cash payment of $31 million from the FDIC to UCB. Further, UCB and the FDIC entered loss sharing agreements regarding future losses incurred on loans and foreclosed loan collateral existing at June 19, 2009. Under the terms of the loss sharing agreements, the FDIC will absorb 80 percent of losses and share 80 percent of loss recoveries on the first $109 million of losses and, absorb 95 percent of losses and share in 95 percent of loss recoveries on losses exceeding $109 million. The term for loss sharing on 1-4 Family loans is ten years, while the term for loss sharing on all other loans is five years.

Under the loss sharing agreement, the portion of the losses expected to be indemnified by FDIC is considered an indemnification asset in accordance with ASC 805. The indemnification asset, referred to as “estimated loss reimbursement from the FDIC” is included in the balance of “Assets covered by loss sharing agreements with the FDIC” on the Consolidated Balance Sheet. The indemnification asset was recognized at fair value, which was estimated at the acquisition date based on the terms of the loss sharing agreement. The indemnification asset is expected to be collected over a four-year average life. No valuation allowance was required.

Loans, foreclosed property and the estimated FDIC reimbursement resulting from the loss share agreements with the FDIC are reported as “assets covered by loss sharing agreements with the FDIC” in the consolidated balance sheet.

The table below shows the components of covered assets at June 30, 2010 (in thousands).


	Purchased		Other
	Impaired		Purchased
(in thousands)	Loans		Loans		Other		Total

Commercial (secured by real estate)	$	—	$	40,469	$	—	$	40,469
Commercial (commercial and industrial)		—		6,260		—		6,260
Construction and land development		6,432		16,905		—		23,337
Residential mortgage		183		9,954		—		10,137
Installment		19		533		—		552

Total covered loans		6,634		74,121		—		80,755
Covered forclosed property		—		—		32,730		32,730
Estimated loss reimbursement from the FDIC		—		—		43,126		43,126

Total covered assets	$	6,634	$	74,121	$	75,856	$	156,611

Covered loans are initially recorded at fair value at the acquisition date. Subsequent decreases in the amount expected to be collected results in a provision for loan losses charged to earnings and an increase in the estimated FDIC reimbursement. Covered foreclosed property is initially recorded at its estimated fair value.

On the acquisition date, the preliminary estimate of the contractually required payments receivable for all ASC 310-30 loans acquired was $70.8 million, the cash flows expected to be collected were $24.5 million including interest, and the estimated fair value of the loans was $23.6 million. These amounts were determined based upon the estimated remaining life of the underlying loans, which include the effects of estimated prepayments. A majority of these loans were valued based on the liquidation value of the underlying collateral, because the expected cash flows are primarily based on the liquidation of the underlying collateral and the timing and amount of the cash flows could not be reasonably estimated.

Note 4 — Securities

During the second quarter of 2010, securities available for sale with a fair value of $315 million were transferred to held to maturity. The securities were transferred at their fair value on the date of transfer. The unrealized gain of $7.1 million on the transferred securities on the date of transfer is being amortized into interest revenue as an adjustment to the yield on those securities over the remaining life of the transferred securities. Securities are classified as held to maturity when management has the positive intent and ability to hold them until maturity. Securities held to maturity are carried at amortized cost.

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

The amortized cost, gross unrealized gains and losses and fair value of securities held to maturity at June 30, 2010, are as follows (in thousands):


			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
As of June 30, 2010
U.S. Government agencies	$	70,284	$	1,076	$	—	$	71,360
State and political subdivisions		26,246		252		7		26,491
Mortgage-backed securities⁽¹⁾		225,618		4,046		18		229,646

Total	$	322,148	$	5,374	$	25	$	327,497


⁽¹⁾		All are residential type mortgage-backed securities

There were no securities classified as held to maturity at December 31, 2009 or June 30, 2009.

The cost basis, unrealized gains and losses, and fair value of securities available for sale at June 30, 2010, December 31, 2009 and June 30, 2009 are presented below (in thousands):


			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
As of June 30, 2010
U.S. Government agencies	$	216,759	$	936	$	—	$	217,695
State and political subdivisions		32,998		1,001		14		33,985
Mortgage-backed securities⁽¹⁾		864,141		37,730		1,103		900,768
Other		13,160		168		—		13,328

Total	$	1,127,058	$	39,835	$	1,117	$	1,165,776

As of December 31, 2009
U.S. Government agencies	$	248,425	$	214	$	2,173	$	246,466
State and political subdivisions		62,046		1,371		124		63,293
Mortgage-backed securities⁽¹⁾		1,156,035		43,007		1,820		1,197,222
Other		22,701		382		17		23,066

Total	$	1,489,207	$	44,974	$	4,134	$	1,530,047

As of June 30, 2009
U.S. Treasuries	$	39,979	$	—	$	4	$	39,975
U.S. Government agencies		209,662		1,015		3,364		207,313
State and political subdivisions		55,194		619		310		55,503
Mortgage-backed securities⁽¹⁾		1,462,695		32,318		9,916		1,485,097
Other		28,645		311		57		28,899

Total	$	1,796,175	$	34,263	$	13,651	$	1,816,787


⁽¹⁾		All are residential type mortgage-backed securities

The following table summarizes held to maturity securities in an unrealized loss position as of June 30, 2010 (in thousands):


	Less than 12 Months				12 Months or More				Total
			Unrealized				Unrealized				Unrealized
	Fair Value		Loss		Fair Value		Loss		Fair Value		Loss
As of June 30, 2010
State and political subdivisions	$	1,145	$	7	$	—	$	—	$	1,145	$	7
Mortgage-backed securities		1,963		18		—		—		1,963		18

Total unrealized loss position	$	3,108	$	25	$	—	$	—	$	3,108	$	25

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

The following table summarizes available for sale securities in an unrealized loss position as of June 30, 2010, December 31, 2009 and June 30, 2009 (in thousands):


	Less than 12 Months				12 Months or More				Total
	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
As of June 30, 2010
State and political subdivisions	$	300	$	2	$	401	$	12	$	701	$	14
Mortgage-backed securities		19,499		456		25,639		647		45,138		1,103

Total unrealized loss position	$	19,799	$	458	$	26,040	$	659	$	45,839	$	1,117

As of December 31, 2009
U.S. Government agencies	$	151,838	$	2,173	$	—	$	—	$	151,838	$	2,173
State and political subdivisions		2,348		47		2,792		77		5,140		124
Mortgage-backed securities		84,024		838		22,358		982		106,382		1,820
Other		—		—		493		17		493		17

Total unrealized loss position	$	238,210	$	3,058	$	25,643	$	1,076	$	263,853	$	4,134

As of June 30, 2009
U.S. Treasuries	$	39,975	$	4	$	—	$	—	$	39,975	$	4
U.S. Government agencies		142,256		3,364		—		—		142,256		3,364
State and political subdivisions		4,524		106		4,317		204		8,841		310
Mortgage-backed securities		240,979		3,146		150,071		6,770		391,050		9,916
Other		479		22		479		35		958		57

Total unrealized loss position	$	428,213	$	6,642	$	154,867	$	7,009	$	583,080	$	13,651

Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to the length of time and the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, among other factors. In analyzing an issuer’s financial condition, management considers whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, and industry analyst’s reports. During the six months ended June 30, 2010, United recorded impairment losses of $950,000, on investments in financial institutions that showed evidence of other-than-temporary impairment. During the second quarter and six months ended June 30, 2009, United recognized an impairment loss of $744,000 on an equity investment in a financial institution that failed during the quarter.

At June 30, 2010, there were 21 available for sale securities totaling $45.8 million in that were in an unrealized loss position. There were 3 held to maturity securities totaling $3.1 million in that were in an unrealized loss position at June 30, 2010. United does not intend to sell nor believes it will be required to sell securities in an unrealized loss position prior to the recovery of its amortized cost basis. Unrealized losses at June 30, 2010 and 2009 were primarily attributable to changes in interest rates.

Realized gains and losses are derived using the specific identification method for determining the cost of securities sold. The following table summarizes securities sales activity for the three month and six month periods ended June 30, 2010 and 2009 (in thousands):


	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2010		2009			2010		2009

Proceeds from sales	$	—	$	798		$	40,817	$	15,017


Gross gains on sales	$	—	$	33		$	1,260	$	336
Gross losses on sales		—		—			249		—
Impairment losses		—		744			950		744


Net gains on sales of securities	$	—	$	(711	)	$	61	$	(408	)


Income tax expense attributable to sales	$	—	$	(277	)	$	24	$	(159	)

Securities with a carrying value of $1.4 billion, $1.5 billion, and $1.7 billion were pledged to secure public deposits, FHLB advances and other secured borrowings at June 30, 2010, December 31, 2009 and June 30, 2009.

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

The amortized cost and fair value of held to maturity and available for sale securities at June 30, 2010, by contractual maturity, are presented in the following table (in thousands).


	Available for Sale				Held to Maturity
	Amortized Cost		Fair Value		Amortized Cost		Fair Value

U.S. Government agencies:
Within 1 year	$	7,366	$	7,424	$	—	$	—
1 to 5 years		15,000		15,038		—		—
5 to 10 years		194,393		195,233		—		—
More than 10 years		—		—

		216,759		217,695		—		—


State and political subdivisions:
Within 1 year		4,441		4,484		—		—
1 to 5 years		17,000		17,543		—		—
5 to 10 years		10,209		10,575		50,669		51,357
More than 10 years		1,348		1,383		19,615		20,003

		32,998		33,985		70,284		71,360


Other:
Within 1 year		7,613		7,715		—		—
1 to 5 years		2,045		2,111		—		—
5 to 10 years		50		50		16,677		16,836
More than 10 years		3,452		3,452		9,569		9,655

		13,160		13,328		26,246		26,491


Total securities other than mortgage-backed securities:
Within 1 year		19,420		19,623		—		—
1 to 5 years		34,045		34,692		—		—
5 to 10 years		204,652		205,858		67,346		68,193
More than 10 years		4,800		4,835		29,184		29,658

Mortgage-backed securities		864,141		900,768		225,618		229,646


	$	1,127,058	$	1,165,776	$	322,148	$	327,497

Expected maturities may differ from contractual maturities because issuers and borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

Note 5 — Loans and Allowance for Loan Losses

The Bank makes loans and extensions of credit to individuals and a variety of firms and corporations located primarily in counties in north Georgia, the Atlanta, Georgia MSA, the Gainesville, Georgia MSA, coastal Georgia, western North Carolina and east Tennessee. Although the Bank has a diversified loan portfolio, a substantial portion of the loan portfolio is collateralized by improved and unimproved real estate and is dependent upon the real estate market.

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Major classifications of loans as of June 30, 2010, December 31, 2009 and June 30, 2009, are summarized as follows (in thousands):


	June 30,		December 31,		June 30,
	2010		2009		2009
Commercial (secured by real estate)	$	1,780,142	$	1,779,398	$	1,796,560
Commercial construction		342,140		362,566		378,779
Commercial (commercial and industrial)		441,097		390,520		399,564

Total commercial		2,563,379		2,532,484		2,574,903
Residential construction		819,930		1,050,065		1,315,353
Residential mortgage		1,355,582		1,427,198		1,469,754
Installment		134,139		141,729		153,077

Total loans		4,873,030		5,151,476		5,513,087
Less allowance for loan losses		174,111		155,602		145,678

Loans, net	$	4,698,919	$	4,995,874	$	5,367,409

At June 30, 2010, United had $163 million of loans classified as impaired. Of that amount, $12.5 million had specific reserves of $1.1 million allocated and the remaining $150 million did not have specific reserves allocated because they had either been written down to net realizable value ($100 million in charge-offs) or had sufficient collateral so that no allowance was required. At December 31, 2009, United had $198 million of loans classified as impaired. Of that amount, $16.1 million had specific reserves of $3 million allocated and the remaining $182 million did not have specific reserves allocated because they had either been written down to net realizable value ($115 million in charge-offs) or had sufficient collateral so that no allowance was required. At June 30, 2009, United had $224 million of loans classified as impaired. Of that amount, $113 million had specific reserves allocated of $24.9 million and $110 million did not have specific reserves allocated. The average recorded investment in impaired loans for the quarters ended June 30, 2010 and 2009 was $171 million and $248 million, respectively. There was no interest revenue recognized on loans while they were impaired for the three or six months ended June 30, 2010 or 2009.

Changes in the allowance for loan losses are summarized as follows (in thousands):


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2010		2009		2010		2009
Balance beginning of period	$	173,934	$	143,990	$	155,602	$	122,271
Provision for loan losses		61,500		60,000		136,500		125,000
Charge-offs:
Commercial (secured by real estate)		9,791		5,989		12,727		6,854
Commercial construction		1,460		757		3,671		811
Commercial (commercial and industrial)		1,764		4,977		6,318		6,185
Residential construction		41,781		44,645		85,971		82,612
Residential mortgage		6,752		3,589		11,392		6,700
Installment		1,417		981		2,546		1,907

Total loans charged-off		62,965		60,938		122,625		105,069

Recoveries:
Commercial (secured by real estate)		34		3		1,006		42
Commercial construction		—		1		5		1
Commercial (commercial and industrial)		897		1,870		1,341		2,205
Residential construction		266		405		1,356		610
Residential mortgage		235		64		324		191
Installment		210		283		602		427

Total recoveries		1,642		2,626		4,634		3,476

Net charge-offs		61,323		58,312		117,991		101,593

Balance end of period	$	174,111	$	145,678	$	174,111	$	145,678

At June 30, 2010, December 31, 2009 and June 30, 2009, loans with a carrying value of $1.5 billion, $1.5 billion and $1.6 billion were pledged as collateral to secure FHLB advances and other contingent funding sources.

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 6 — Goodwill

A summary of the changes in goodwill for the three and six months ended June 30, 2010 and 2009 is presented below, (in thousands).


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2010		2009		2010		2009

Beginning balance	$	210,590	$	235,590	$	210,590	$	305,590
Impairment		—		—		—		(70,000	)

Ending balance	$	210,590	$	235,590	$	210,590	$	235,590

United performs its annual goodwill impairment assessment during the fourth quarter of each year, or more often if events warrant an interim assessment. During the second quarter of 2010 and 2009, no events occurred that would lead management to believe that goodwill impairment might exist. During the first quarter of 2009, United updated its 2008 annual goodwill impairment assessment as a result of its stock price falling significantly below tangible book value. As a result of the updated assessment, goodwill was found to be impaired and was written down to its estimated fair value. The impairment charge of $70 million was recognized as an expense in the first quarter 2009 consolidated statement of income.

Note 7 — Earnings Per Share

The following table sets forth the computation of basic and diluted earnings per share for the three and six months ended June 30, 2010 and 2009 (in thousands, except per share data):


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2010			2009			2010			2009

Net loss available to common shareholders	$	(62,109	)	$	(18,560	)	$	(97,974	)	$	(124,887	)


Weighted average shares outstanding:
Basic		94,524			48,794			94,453			48,560
Effect of dilutive securities
Stock options		—			—			—			—
Warrants		—			—			—			—

Diluted		94,524			48,794			94,453			48,560


Loss per common share:
Basic	$	(.66	)	$	(.38	)	$	(1.04	)	$	(2.57	)

Diluted	$	(.66	)	$	(.38	)	$	(1.04	)	$	(2.57	)

There is no dilution from dilutive securities for the three and six months ended June 30, 2010 and 2009, due to the anti-dilutive effect of the net loss for those periods.

Note 8 — Derivatives and Hedging Activities

Risk Management Objective of Using Derivatives

United is exposed to certain risks arising from both its business operations and economic conditions. United principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. United manages interest rate risk primarily by managing the amount, sources, and duration of its investment securities portfolio and debt funding and through the use of interest rate derivatives. Specifically, United enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. United’s derivative financial instruments are used to manage differences in the amount, timing, and duration of United’s known or expected cash receipts and its known or expected cash payments principally related to United’s loans and wholesale borrowings.

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

The table below presents the fair value of United’s derivative financial instruments as well as their classification on the balance sheet as of June 30, 2010, December 31, 2009 and June 30, 2009.

Derivatives designated as hedging instruments under ASC 815 (in thousands).

Fair Value

Interest Rate

Balance Sheet

June 30,

December 31,

June 30,

Products

Location

2010

2009

Asset derivatives

Other assets

1,167

10,692

30,815

As of June 30, 2010, December 31, 2009 and June 30, 2009, United did not have any derivatives in a net liability position.

Cash Flow Hedges of Interest Rate Risk

United’s objectives in using interest rate derivatives are to add stability to net interest revenue and to manage its exposure to interest rate movements. To accomplish this objective, United primarily uses interest rate swaps as part of its interest rate risk management strategy. For United’s variable-rate loans, interest rate swaps designated as cash flow hedges involve the receipt of fixed-rate amounts from a counterparty in exchange for United making variable-rate payments over the life of the agreements without exchange of the underlying notional amount. Interest rate floors designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty if interest rates fall below the strike rate on the contract in exchange for an up front premium. As of June 30, 2010, United had no active derivatives designated as cash flow hedges of interest rate risk.

The effective portion of changes in the fair value of derivatives designated and qualifying as cash flow hedges is recorded in accumulated other comprehensive income and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. During 2010 and 2009, such derivatives were used to hedge the variable cash flows associated with existing prime-based, variable-rate loans. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. During the three and six months ended June 30, 2010 $120,000 and $642,000, respectively, in hedge ineffectiveness was recognized in other fee revenue, respectively, and during the three and six months ended June 30, 2009 no hedge ineffectiveness was recognized on derivative financial instruments designated as cash flow hedges.

Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest revenue as interest payments are received on United’s prime-based, variable-rate loans. During the next twelve months, United estimates that an additional $12.6 million will be reclassified as an increase to interest revenue.

Fair Value Hedges of Interest Rate Risk

United is exposed to changes in the fair value of certain of its fixed rate obligations due to changes in LIBOR, a benchmark interest rate. United uses interest rate swaps to manage its exposure to changes in fair value on these instruments attributable to changes in the benchmark interest rate. Interest rate swaps designated as fair value hedges involve the receipt of fixed-rate amounts from a counterparty in exchange for United making variable rate payments over the life of the agreements without the exchange of the underlying notional amount. As of June 30, 2010, United had three interest rate swaps with an aggregate notional amount of $195.0 million that were designated as fair value hedges of interest rate risk.

For derivatives designated and that qualify as fair value hedges, the gain or loss on the derivative as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in earnings. United includes the gain or loss on the hedged items in the same line item as the offsetting loss or gain on the related derivatives. During the three and six months ended June 30, 2010, United recognized net gains of $119,000 and $207,000, respectively, related to ineffectiveness of the fair value hedging relationships. During the three and six months ended June 30, 2009, United recognized net losses of $382,000 and $282,000, respectively, related to ineffectiveness of the fair value hedging relationships. United also recognized a net reduction of interest expense of $1.38 million and $1.32 million for the three months ended June 30, 2010 and 2009, respectively, related to United’s fair value hedges, which includes net settlements on the derivatives. For the six months ended June 30, 2010 and 2009, United recognized a net reduction of interest expense of $2.77 million and $3.16 million, related to United’s fair value hedges.

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Tabular Disclosure of the Effect of Derivative Instruments on the Income Statement

The tables below present the effect of United’s derivative financial instruments on the Consolidated Statement of Income for the three and six months ended June 30, 2010 and 2009.

Derivatives in Fair Value Hedging Relationships (in thousands).


Location of Gain (Loss)	Amount of Gain (Loss) Recognized in						Amount of Gain (Loss) Recognized in
Recognized in Income	Income on Derivative						Income on Hedged Item
on Derivative	2010			2009			2010		2009

Three Months Ended June 30,
Other fee revenue	$	(1,397	)	$	(176	)	$	1,516	$	140
Other expense		—			(636	)		—		290

Six Months Ended June 30,
Other fee revenue	$	(2,592	)	$	(259	)	$	2,799	$	431
Other expense		—			(1,566	)		—		1,112

Derivatives in Cash Flow Hedging Relationships (in thousands).


	Amount of Gain (Loss)
	Recognized in Other
	Comprehensive Income on					Gain (Loss) Reclassified from Accumulated Other
	Derivative (Effective Portion)					Comprehensive Income into Income (Effective Portion)
	2010		2009			Location	2010		2009

Three Months Ended June 30,
Interest rate products	$	840	$	(8,334	)	Interest revenue	$	5,042	$	10,188


Six Months Ended June 30,
Interest rate products	$	2,314	$	(5,216	)	Interest revenue	$	11,577	$	21,178

Credit-risk-related Contingent Features

United manages its credit exposure on derivatives transactions by entering into a bi-lateral credit support agreement with each counterparty. The credit support agreements require collateralization of exposures beyond specified minimum threshold amounts. The details of these agreements, including the minimum thresholds, vary by counterparty.

United’s agreements with each of its derivative counterparties contain a provision where if either party defaults on any of its indebtedness, then it could also be declared in default on its derivative obligations. The agreements with derivatives counterparties also include provisions that if not met, could result in United being declared in default. United has agreements with certain of its derivative counterparties that contain a provision where if United fails to maintain its status as a well-capitalized institution, the counterparty could terminate the derivative positions and United would be required to settle its obligations under the agreements. United has an agreement with one counterparty that contains a provision where if United fails to maintain a minimum shareholders’ equity of $300 million, it could be declared in default on its derivative obligations. An agreement with another counterparty contains a provision where if United fails to maintain a minimum Tier I leverage ratio of 5.0%, a minimum Tier I risk-based capital ratio of 6.0%, and a minimum total risk-based capital ratio of 10%, it could be declared in default on its derivative obligations. In addition, United has agreements with its derivative counterparties that require United’s debt to maintain an investment grade credit rating from each of the major credit rating agencies. If United’s credit rating is reduced below investment grade, then a termination event is deemed to have occurred and the non-affected counterparty shall have the right, but not the obligation, to terminate all affected transactions under the agreement.

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 9 — Stock-Based Compensation

United has an equity compensation plan that allows for grants of incentive stock options, nonqualified stock options, restricted stock awards (also referred to as “nonvested stock” awards), stock awards, performance share awards or stock appreciation rights. Options granted under the plan can have an exercise price no less than the fair market value of the underlying stock at the date of grant. The general terms of the plan include a vesting period (usually four years) with an exercisable period not to exceed ten years. Certain option and restricted stock awards provide for accelerated vesting if there is a change in control (as defined in the plan). As of June 30, 2010, approximately 1,172,000 additional awards could be granted under the plan. Through June 30, 2010, only incentive stock options, nonqualified stock options and restricted stock awards and units had been granted under the plan.

The following table shows stock option activity for the first six months of 2010.


						Weighted-
						Average
				Weighted-		Remaining		Aggregate
				Average Exercise		Contractual		Intrinsic
Options	Shares			Price		Term (Years)		Value ($000)

Outstanding at December 31, 2009		3,663,453		$	18.30
Granted		11,000			5.12
Exercised		—			—
Forfeited		(40,105	)		13.99
Expired		(177,127	)		13.17

Outstanding at June 30, 2010		3,457,221			18.57		5.1	$	—


Exercisable at June 30, 2010		2,778,835			19.63		4.4		—

The weighted average fair value of stock options granted in the second quarter of 2010 and 2009 was $3.34 and $2.88, respectively. The fair value of each option granted was estimated on the date of grant using the Black-Scholes model. Because United’s option plan has not been in place long enough to gather sufficient information about exercise patterns to establish an expected life, United uses the formula provided by the Securities and Exchange Commission in Staff Accounting Bulletin No. 107 to determine the expected life of options.

The weighted average assumptions used to determine the fair value of stock options are presented in the table below.


	Six Months Ended
	June 30,
	2010			2009

Expected volatility		55.00	%		40.68	%
Expected dividend yield		0.00	%		0.00	%
Expected life (in years)		6.14			6.25
Risk-free rate		3.19	%		3.35	%

United’s stock trading history began in March of 2002 when United listed on the Nasdaq National Market. For 2010 and 2009 expected volatility was determined using United’s historical monthly volatility for the seventy five months ended December 31, 2009. Seventy five months was chosen to correspond to the expected life of 6.25 years. Compensation expense for stock options was $1.1 million and $1.4 million for the six months ended June 30, 2010 and 2009, respectively. Deferred tax benefits of $430,000 and $498,000, respectively, were included in the determination of income tax benefit for the six-month periods ended June 30, 2010 and 2009. The amount of compensation expense for both periods was determined based on the fair value of the options at the time of grant, multiplied by the number of options granted that were expected to vest, which was then amortized over the vesting period. The forfeiture rate for options is estimated to be approximately 3% per year. The total intrinsic value of options exercised during the six months ended June 30, 2009 was $840. No options were exercised during the first six months of 2010.

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

The table below presents the activity in restricted stock awards for the first six months of 2010.


				Weighted-
				Average Grant-
Restricted Stock	Shares			Date Fair Value

Outstanding at December 31, 2009		167,559		$	12.86
Granted		425			5.05
Vested		(51,902	)		14.85
Cancelled		—			—

Outstanding at June 30, 2010		116,082			11.94

Compensation expense for restricted stock is based on the fair value of restricted stock awards at the time of grant, which is equal to the value of United’s common stock on the date of grant. The value of restricted stock grants that are expected to vest is amortized into expense over the vesting period. For the six months ended June 30, 2010 and 2009, compensation expense of $325,000 and $433,000, respectively, was recognized related to restricted stock awards. The total intrinsic value of the restricted stock was $459,000 at June 30, 2010.

As of June 30, 2010, there was $3.5 million of unrecognized compensation cost related to non-vested stock options and restricted stock awards granted under the plan. That cost is expected to be recognized over a weighted-average period of 1.9 years. The aggregate grant date fair value of options and restricted stock awards that vested during the six months ended June 30, 2010, was $3.5 million.

Note 10 — Common Stock Issued / Common Stock Issuable

United sponsors a Dividend Reinvestment and Share Purchase Plan (“DRIP”) that allows participants who already own United’s common stock to purchase additional shares directly from the company. The DRIP also allows participants to automatically reinvest their quarterly dividends in additional shares of common stock without a commission. United’s 401(k) retirement plan regularly purchases shares of United’s common stock directly from United. In addition, United has an Employee Stock Purchase Program (“ESPP”) that allows eligible employees to purchase shares of common stock at a 5% discount, with no commission charges. For the six months ended June 30, 2010 and 2009, United issued 209,091 and 167,873 shares, respectively, and increased capital by $939,000 and $974,000, respectively, through these programs.

United offers its common stock as an investment option in its deferred compensation plan. The common stock component of the deferred compensation plan is accounted for as an equity instrument and is reflected in the consolidated financial statements as common stock issuable. At June 30, 2010 and 2009, 284,771 and 182,041 shares, respectively, were issuable under the deferred compensation plan.

Late in the third quarter of 2009, United completed a sale of 44,505,000 shares of its common stock at a price of $5.00 per share. The net proceeds of $211 million, after deducting the underwriters’ fees and expenses will be used for general corporate purposes. As a result of the stock sale, and pursuant to the terms of the warrant issued to the U.S. Treasury in connection with United’s participation in the U.S. Treasury’s Capital Purchase Program (“CPP”), the number of shares issuable upon exercise of the warrant issued to the U.S. Treasury in connection with the CPP was reduced by 50%, or 1,099,542 shares. The warrant has an exercise price of $12.28 and expires on the tenth anniversary of the date of issuance.

Note 11 — Stock Dividend

During the first and second quarters of 2009, United declared quarterly stock dividends at a rate of 1 new share for every 130 shares owned. The stock dividends have been reflected in the financial statements as an issuance of stock with no proceeds rather than a stock split and therefore prior period numbers of shares outstanding have not been adjusted. For the six months ended June 30, 2009, the amount of $30,000 shown in the equity statement as a reduction of capital related to the stock dividend is the amount of cash paid to shareholders for fractional shares. No stock dividends were declared or paid during the first six months of 2010.

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 12 — Assets and Liabilities Measured at Fair Value

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The table below presents United’s assets and liabilities measured at fair value on a recurring basis as of June 30, 2010, December 31, 2009 and June 30, 2009, aggregated by the level in the fair value hierarchy within which those measurements fall (in thousands).


June 30, 2010	Level 1		Level 2		Level 3		Total
Assets
Securities available for sale:
U.S. Government agencies	$	—	$	179,172	$	38,523	$	217,695
State and political subdivisions		—		33,985		—		33,985
Mortgage-backed securities		—		884,514		16,254		900,768
Other		—		12,278		1,050		13,328
Deferred compensation plan assets		2,701		—		—		2,701
Derivative financial instruments		—		1,167		—		1,167

Total	$	2,701	$	1,111,116	$	55,827	$	1,169,644


Liabilities
Deferred compensation plan liability	$	2,701	$	—	$	—	$	2,701

Total liabilities	$	2,701	$	—	$	—	$	2,701


December 31, 2009	Level 1		Level 2		Level 3		Total
Assets
Securities available for sale:
U.S. Government agencies	$	—	$	226,466	$	20,000	$	246,466
State and political subdivisions		—		63,293		—		63,293
Mortgage-backed securities		—		1,180,330		16,892		1,197,222
Other		—		21,066		2,000		23,066
Deferred compensation plan assets		4,818		—		—		4,818
Derivative financial instruments		—		10,692		—		10,692

Total	$	4,818	$	1,501,847	$	38,892	$	1,545,557


Liabilities
Deferred compensation plan liability	$	4,818	$	—	$	—	$	4,818

Total liabilities	$	4,818	$	—	$	—	$	4,818


June 30, 2009	Level 1		Level 2		Level 3		Total
Assets
Securities available for sale:
U.S. Treasuries	$	—	$	39,975	$	—	$	39,975
U.S. Government agencies		—		207,313		—		207,313
State and political subdivisions		—		55,503		—		55,503
Mortgage-backed securities		—		1,485,097		—		1,485,097
Other		—		28,899		—		28,899
Deferred compensation plan assets		3,976		—		—		3,976
Derivative financial instruments		—		30,815		—		30,815

Total	$	3,976	$	1,847,602	$	—	$	1,851,578


Liabilities
Deferred compensation plan liability	$	3,976	$	—	$	—	$	3,976

Total liabilities	$	3,976	$	—	$	—	$	3,976

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

The following table shows a reconciliation of the beginning and ending balances for assets measured at fair value on a recurring basis using significant unobservable inputs that are classified as Level 3 values (in thousands):


	Securities
	Available for Sale
Balance at December 31, 2009	$	38,892
Amounts included in earnings		(18	)
Impairment charges		(950	)
Purchases, sales, issuances, settlements, maturities, paydowns, net		38,511
Transfers between valuation levels, net		(20,608	)


Balance at June 30, 2010	$	55,827

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

United may be required, from time to time, to measure certain assets at fair value on a nonrecurring basis. These include assets that are measured at the lower of cost or market that were recognized at fair value below cost at the end of the period. The table below presents United’s assets and liabilities measured at fair value on a nonrecurring basis as of June 30, 2010, December 31, 2009 and June 30, 2009, aggregated by the level in the fair value hierarchy within which those measurements fall (in thousands):


June 30, 2010	Level 1		Level 2		Level 3		Total
Assets
Loans	$	—	$	—	$	140,807	$	140,807
Foreclosed properties		—		—		70,686		70,686


Total	$	—	$	—	$	211,493	$	211,493


December 31, 2009
Assets
Loans	$	—	$	—	$	153,038	$	153,038
Foreclosed properties		—		—		81,213		81,213


Total	$	—	$	—	$	234,251	$	234,251


June 30, 2009
Assets
Loans	$	—	$	—	$	174,005	$	174,005
Foreclosed properties		—		—		86,730		86,730
Goodwill		—		—		235,590		235,590


Total	$	—	$	—	$	496,325	$	496,325

Assets and Liabilities Not Measured at Fair Value

For financial instruments that have quoted market prices, those quotes are used to determine fair value. Financial instruments that have no defined maturity, have a remaining maturity of 180 days or less, or reprice frequently to a market rate, are assumed to have a fair value that approximates reported book value, after taking into consideration any applicable credit risk. If no market quotes are available, financial instruments are valued by discounting the expected cash flows using an estimated current market interest rate for the financial instrument. For off-balance sheet derivative instruments, fair value is estimated as the amount that United would receive or pay to terminate the contracts at the reporting date, taking into account the current unrealized gains or losses on open contracts.

The short maturity of United’s assets and liabilities results in having a significant number of financial instruments whose fair value equals or closely approximates carrying value. Such financial instruments are reported in the following balance sheet captions: cash and cash equivalents, mortgage loans held for sale, federal funds purchased, repurchase agreements and other short-term borrowings. The fair value of securities available for sale equals the balance sheet value. As of June 30, 2010, December 31, 2009 and June 30, 2009 the fair value of interest rate contracts used for balance sheet management was an asset of approximately $1.2 million, $10.7 million and $30.8 million, respectively.

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect the premium or discount on any particular financial instrument that could result from the sale of United’s entire holdings. Because no ready market exists for a significant portion of United’s financial instruments, fair value estimates are based on many judgments. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

Fair value estimates are based on existing on and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Significant assets and liabilities that are not considered financial instruments include the mortgage banking operation, brokerage network, deferred income taxes, premises and equipment and goodwill. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have significant effect on fair value estimates and have not been considered in the estimates.

Off-balance sheet instruments (commitments to extend credit and standby letters of credit) are generally short-term and at variable rates. Therefore, both the carrying amount and the estimated fair value associated with these instruments are immaterial.

The carrying amount and fair values for other financial instruments that are not measured at fair value in United’s balance sheet at June 30, 2010, December 31, 2009 June 30, 2009 are as follows (in thousands):


	June 30, 2010				December 31, 2009				June 30, 2009
	Carrying				Carrying				Carrying
	Amount		Fair Value		Amount		Fair Value		Amount		Fair Value
Assets:
Loans, net	$	4,698,919	$	4,407,376	$	4,995,874	$	4,529,755	$	5,367,409	$	5,369,542
Securities held to maturity		322,148		327,497		—		—		—		—

Liabilities:
Deposits		6,329,512		6,350,449		6,627,834		6,660,196		6,848,760		6,893,851
Federal Home Loan Bank advances		104,138		110,964		114,501		119,945		283,292		290,908
Long-term debt		150,106		122,949		150,066		111,561		150,026		87,907

Note 13 — Reclassifications

Certain 2009 amounts have been reclassified to conform to the 2010 presentation.

Note 14 — Transaction with Fletcher International

On April 1, 2010, United entered into a securities purchase agreement with Fletcher International, Ltd. and the Bank entered into an asset purchase and sale agreement with Fletcher International, Inc. and certain affiliates thereof. Under the terms of the agreements, the Bank sold $103 million in non-performing commercial and residential mortgage loans and foreclosed properties to Fletcher’s affiliates with a nominal aggregate sales price equal to the Bank’s carrying value. The non-performing assets sale transaction closed on April 30, 2010. The consideration for the sale consisted of $20.6 million in cash and a loan for $82.4 million. As part of the agreement, Fletcher received a warrant to acquire 7,058,824 shares of United’s common stock at a price of $4.25 per share. In accordance with the terms of the securities purchase agreement, Fletcher has the right during the next two years to purchase up to $65 million in United’s Series C Convertible Preferred Stock. The Series C Convertible Preferred Stock pays a dividend equal to the lesser of 8% or LIBOR plus 4%. The Series C Convertible Preferred Stock is convertible by Fletcher into common stock at $5.25 per share (12,380,952 shares). If Fletcher has not purchased all of the Series C Convertible Preferred Stock by May 26, 2011, it must pay United 5% of the commitment amount not purchased by such date, and it must pay United an additional 5% of the commitment amount not purchased by May 26, 2012. In addition, Fletcher will receive an additional warrant to purchase $35 million in common stock at $6.02 per share (5,813,953 shares) when it purchases the last $35 million of Series C Convertible Preferred Stock. The net shares to be delivered upon cashless exercise will be less than what would have been issuable if the warrant had been exercised for cash.

All of the components of the transaction, including all equity instruments issued under the Securities Purchase Agreement and the notes receivable received as consideration from the sale of nonperforming assets were recorded at fair value. Because the value of the equity instruments and assets exchanged in the transaction exceeded the value of the cash and notes receivable received, United recorded a loss of $45.3 million on the transaction with Fletcher.

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

The table below presents a summary of the assets and equity instruments transferred and received at their respective fair values ($ in thousands, except per share amounts).


		Fair Value	Fair
	Valuation Approach	Heirarchy	Value
Warrants Issued / Assets Transferred to Fletcher at Fair Value:
Warrant to purchase $30 million in common stock at $4.25 per share	Black-Scholes	Level 3	$	17,577
Option to purchase convertible preferred stock and warrant	Monte-Carlo Simulation	Level 3		22,236

Fair value of equity instruments recognized in capital surplus				39,813

Foreclosed properties transferred under Asset Purchase Agreement	Appraised Value	Level 2		33,434
Nonperforming loans transferred under Asset Purchase Agreement	Collateral Appraised Value	Level 2		69,655

Total nonperforming assets transferred				103,089

Total value of assets and equity instruments transferred				142,902


Cash and Notes Receivable Received in Exchange at Fair Value:
Cash down payment received from asset sale	NA	NA		20,618
Notes receivable (par value $82,471, net of $4,531 discount)	Discounted Cash Flows	Level 3		77,940

Total value of cash and notes receivable received				98,558


Fair value of assets and equity instruments transferred in excess of cash and notes received				44,344
Transaction fees				1,005

Loss recognized on Fletcher transaction			$	45,349

The $17.6 million value of the warrant to purchase $30 million in common stock was determined as of April 1, 2010, the date the terms were agreed to. The following modeling assumptions were used: dividend yield — 0%; risk-free interest rate — 3.89%; current stock price — $4.77; term — 9 years; and volatility — 33%. Although most of the modeling assumptions were based on observable data, because of the subjectivity involved in estimating expected volatility, the valuation is considered Level 3.

The $22.2 million value of the option to purchase convertible preferred stock and warrant was determined by an independent valuation firm using a Monte Carlo Simulation method appropriate for valuing complex securities with derivatives. The model uses 50,000 simulations of daily stock price paths using geometric Brownian motion and incorporates in a unified way all conversion, exercise and contingency conditions. Because of the significant assumptions involved in the valuation process, not all of which were based on observable data, the valuation is considered to be Level 3.

The $103 million of nonperforming assets sold were transferred at United’s carrying value which had been written down to appraised value. Because the appraisals were based on sales of similar assets (observable data), the valuation is considered to be Level 2.

The $82.5 million of notes receivable were recorded at their estimated fair value of $77.9 million, net of a $4.5 million interest discount, which was determined based on discounted expected cash flows over the term at a rate commensurate with the credit risk inherent in the notes. The contractual rate on the notes is fixed at 3.5% for five years. The discount rate used for purposes of determining the fair value of the notes was 5.48% based on the terms, structure and risk profile of the notes. Note prepayments were estimated based on the expected marketing time for the underlying collateral since the notes require that principal be reduced as the underlying assets are sold. The valuation is considered Level 3 due to estimated prepayments which have a significant impact on the value and are not based on observable data.

Note 15 — Discontinued Operations

On March 31, 2010, United completed the sale of its consulting subsidiary, Brintech, Inc. (“Brintech”). The sales price was $2.9 million with United covering certain costs related to the sale transaction resulting in a net, pre-tax gain of $2.1 million. As a result of the sale, Brintech is presented in the consolidated financial statements as a discontinued operation with all revenue and expenses related to the sold operations deconsolidated from the Consolidated Statement of Income for all periods presented. The net results of operations from Brintech are reported on a separate line on the Consolidated Statement of Income titled “(Loss) income from discontinued operations, net of income taxes.” The gain from the sale, net of income taxes and selling costs, is presented on a separate line titled “Gain from sale of subsidiary, net of income taxes and selling costs.”


Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

This Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, about United and its subsidiaries. These forward-looking statements are intended to be covered by the safe harbor for forward-looking statements provided by the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not statements of historical fact, and can be identified by the use of forward-looking terminology such as “believes”, “expects”, “may”, “will”, “could”, “should”, “projects”, “plans”, “goal”, “targets”, “potential”, “estimates”, “pro forma”, “seeks”, “intends”, or “anticipates” or the negative thereof or comparable terminology. Forward-looking statements include discussions of strategy, financial projections, guidance and estimates (including their underlying assumptions), statements regarding plans, objectives, expectations or consequences of various transactions, and statements about the future performance, operations, products and services of United and its subsidiaries. We caution our shareholders and other readers not to place undue reliance on such statements.

Our businesses and operations are and will be subject to a variety of risks, uncertainties and other factors. Consequently, actual results and experience may materially differ from those contained in any forward-looking statements. Such risks, uncertainties and other factors that could cause actual results and experience to differ from those projected include, but are not limited to, the risk factors contained in this Form 10-Q and set forth in our Annual Report on Form 10-K for the year ended December 31, 2009, as well as the following:

•

the condition of the banking system and financial markets;

•

our ability to become profitable;

•

the results of our most recent internal credit stress test may not accurately predict the impact on our financial condition if the economy was to continue to deteriorate;

•

our ability to raise capital consistent with our capital plan;

•

our ability to maintain liquidity or access other sources of funding;

•

changes in the cost and availability of funding;

•

the success of the local economies in which we operate;

•

our concentrations of residential and commercial construction and development loans and commercial real estate loans are subject to unique risks that could adversely affect our earnings;

•

changes in prevailing interest rates may negatively affect our net income and the value of our assets;

•

the accounting and reporting policies of United;

•

if our allowance for loan losses is not sufficient to cover actual loan losses;

•

we may be subject to losses due to fraudulent and negligent conduct of our loan customers, third party service providers or employees;

•

the adverse effects on future earnings resulting from non-cash charges for goodwill impairment;

•

our ability to fully realize our deferred tax asset balances;

•

competition from financial institutions and other financial service providers;

•

the United States Department of Treasury may change the terms of our Series B Preferred Stock;

•

risks with respect to future expansion and acquisitions;

•

conditions in the stock market, the public debt market and other capital markets deteriorate;

•

financial services laws and regulations change;

•

the failure of other financial institutions;

•

a special assessment that may be imposed by the Federal Deposit Insurance Corporation (“FDIC”) on all FDIC-insured institutions in the future, similar to the assessment in 2009 that decreased our earnings; and

•

unanticipated regulatory or judicial proceedings, board resolutions, informal memorandums of understanding or formal enforcement actions imposed by regulators that occur, or any such proceedings or enforcement actions that is more severe than we anticipate.

All written or oral forward-looking statements attributable to us or any person acting on our behalf made after the date of this prospectus supplement are expressly qualified in their entirety by the risk factors and cautionary statements contained in this Form 10-Q and set forth in our Annual Report on Form 10-K for the year ended December 31, 2009.

Overview

The following discussion is intended to provide insight into the results of operations and financial condition of United Community Bank, Inc. (“United”) and its subsidiaries and should be read in conjunction with the consolidated financial statements and accompanying notes.

United is a bank holding company registered with the Federal Reserve under the Bank Holding Company Act of 1956 that was incorporated under the laws of the state of Georgia in 1987 and commenced operations in 1988. At June 30, 2010, United had total consolidated assets of $7.7 billion, total loans of $4.9 billion, excluding the loans acquired from Southern Community Bank (“SCB”) that are covered by loss sharing agreements and therefore have a different risk profile, total deposits of $6.3 billion and stockholders’ equity of $904 million.

United’s activities are primarily conducted by its wholly owned Georgia banking subsidiary (the “Bank”). The Bank operations are conducted under a community bank model that operates 27 “community banks” with local bank presidents and boards in north Georgia, the Atlanta-Sandy Springs-Marietta, Georgia metropolitan statistical area (the “Atlanta, Georgia MSA”), the Gainesville, Georgia MSA, coastal Georgia, western North Carolina, and east Tennessee. On March 31, 2010, United sold Brintech, Inc., (“Brintech”) a consulting services firm for the financial services industry, resulting in a pre-tax gain of $2.1 million, net of selling costs. The income statements for all periods presented reflect Brintech as a discontinued operation with revenue, expenses and income taxes related to Brintech removed from revenue, expenses, income taxes and loss from continuing operations. The balance sheet and cash flow statement have not been adjusted to reflect Brintech as a discontinued operation as Brintech’s assets and contribution to cash flows were not material.

Operating loss from continuing operations and operating loss from continuing operations per diluted share are non-GAAP performance measures. United’s management believes that operating performance is useful in analyzing United’s financial performance trends since it excludes items that are non-recurring in nature and therefore most of the discussion in this section will refer to operating performance measures. A reconciliation of these operating performance measures to GAAP performance measures is included in the table on page 29.

United reported a net operating loss from continuing operations of $59.5 million for the second quarter of 2010. This compared to a net operating loss from continuing operations of $23.1 million for the second quarter of 2009. The increase in the net operating loss from continuing operations was primarily due to an after-tax loss of $30.0 million related to a transaction with Fletcher International to dispose of nonperforming assets in the second quarter of 2010. The net operating loss from continuing operations in the second quarter of 2009 excluded a non-recurring bargain purchase gain of $7.1 million, net of tax, for the acquisition of SCB. Diluted operating loss from continuing operations per common share was $.66 for the second quarter of 2010, compared to a diluted operating loss from continuing operations per common share of $.53 for the second quarter of 2009. The loss on sale of nonperforming assets to Fletcher added approximately $.32 to the diluted operating loss from continuing operations for the second quarter of 2010. The gain on acquisition of SCB, which has been excluded from operating earnings, represented $.15 of earnings per share for the second quarter of 2009, reducing the diluted loss from continuing operations per share to $.38. The second quarter of 2010 loss reflects the continuing recessionary economic environment and elevated credit and foreclosed property losses primarily resulting from the weak residential construction and housing market.

For the six months ended June 30, 2010, United reported a net operating loss from continuing operations of $94.0 million, which includes the $30.0 million after-tax loss from the Fletcher transaction. This compared to a net operating loss from continuing operations of $55.3 million for the six months ended June 30, 2009. Net loss for the six months ended June 30, 2010, which includes discontinued operations, totaled $92.8 million. For the same period of 2009, the net loss of $120 million included the $7.1 million gain on acquisition, net of tax, a $70 million charge for goodwill impairment and a $1.8 million charge for a reduction in workforce, net of tax. Diluted operating loss from continuing operations per common share was $1.05 for the six months ended June 30, 2010, compared with diluted operating loss from continuing operations per common share of $1.24 for the same period in 2009. The loss on sale of nonperforming assets in 2010 represented $.32 of loss per share. The diluted loss per share, which includes discontinued operations was $1.04 for the first six months of 2010. The gain on acquisition, goodwill impairment and severance costs represented $.15 of earnings per share, $1.45 of loss per share and $.04 of loss per share, respectively, for the six months ended June 30, 2009, bringing the diluted loss per share to $2.57.

United’s approach to managing through the challenging economic cycle has been to aggressively deal with its credit problems and dispose of troubled assets quickly, taking losses as necessary. As a result, United’s provision for loan losses was $61.5 million for the three months ended June 30, 2010, compared to $60 million for the same period in 2009. Net charge-offs for the second quarter of 2010 were $61.3 million, compared to $58.3 million for the second quarter of 2009. For the six months ended June 30, 2010, United’s provision for loan losses was $136 million, compared to $125 million for the same period in 2009. Net charge-offs for the first six months of 2010 were $118 million, compared to $102 million for the first six months of 2009. As of June 30, 2010, United’s allowance for loan losses of $174.1 million was 3.57% of loans, compared to $146 million, or 2.64% of total loans at June 30, 2009. Nonperforming assets of $348 million, which excludes assets of SCB that are covered by loss sharing agreements with the FDIC, decreased to 4.55% of total assets at June 30, 2010, compared to 4.81% as of December 31, 2009, and 4.63% as of June 30, 2009. This decrease was the result of the sale of $103 million in non-performing assets to Fletcher International.

Taxable equivalent net interest revenue was $61.6 million for the second quarter of 2010, compared to $60.9 million for the same period of 2009. The increase in net interest revenue was the result of the 32 basis point increase in the net interest margin, which increased from 3.28% for the second quarter of 2009 to 3.60% for the second quarter of 2010. For the six months ended June 30, 2010, taxable equivalent net interest revenue was $123 million, compared to $118 million for the same period of 2009. Net interest margin increased from 3.18% for the six months ended June 30, 2009 to 3.55% for the same period in 2010. The margin improvement resulted from management’s ongoing efforts to manage loan and deposit pricing. The increase in the net interest margin more than offset the effect on net interest revenue of the $586 million decrease in average loan balances, due primarily to the run-off of the residential construction portfolio.

Operating fee revenue, increased $274,000, or 2%, and $117,000, or 1%, from the second quarter and first six months of 2009, respectively. The increase was primarily attributable to securities losses in 2009 and higher service charges and fees that were offset by lower mortgage fees, as refinancing activity continued to slow from the record levels of 2009. Included in the net securities gains for 2010, was a $950,000 impairment loss on a bank trust preferred securities investment, recognized in the first quarter that was more than offset by securities gains. Included in the net securities losses for 2009, was a $744,000 impairment loss on an equity investment in a failed financial institution, which was recognized in the second quarter.

For the second quarter of 2010, operating expenses of $58.3 million, excluding the $45.3 million loss from the sale of nonperforming assets, were up $4.6 million from the second quarter of 2009. Although United’s expense savings initiatives have been successful in lowering controllable expenses, foreclosed property costs were up $8.8 million from the second quarter of 2009. Other expense was up $3.1 million from the second quarter of 2009 mostly due to a $2.4 million recovery of a disputed charge related to United’s bank owned life insurance policies that had been expensed in a prior period. For the first six months of 2010, operating expenses of $113 million, excluding the $45.3 million loss from the sale of nonperforming assets, were up $7.6 million from the same period of 2009. Foreclosed property expense, which was up $15.3 million, was primarily responsible for the increase from 2009. The increase in foreclosed property expense was partially offset by a $5.7 million decrease in salaries and benefits expense reflecting the 10% staff reduction that began at the end of the first quarter of 2009. Operating expenses for 2009 exclude a $70 million goodwill impairment charge and $2.9 million in severance costs in the first quarter.

Critical Accounting Policies

The accounting and reporting policies of United are in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and conform to general practices within the banking industry. The more critical accounting and reporting policies include United’s accounting for the allowance for loan losses, fair value measurements, intangible assets and income taxes. In particular, United’s accounting policies related to allowance for loan losses, fair value measurements, intangibles and income taxes involve the use of estimates and require significant judgment to be made by management. Different assumptions in the application of these policies could result in material changes in United’s consolidated financial position or consolidated results of operations. See “Asset Quality and Risk Elements” herein for additional discussion of United’s accounting methodologies related to the allowance.

Mergers and Acquisitions

On June 19, 2009, the Bank acquired the banking operations of SCB from the FDIC. The Bank acquired $378 million of assets and assumed $367 million of liabilities. The Bank and the FDIC entered loss sharing agreements regarding future losses incurred on loans and foreclosed loan collateral existing at June 19, 2009. Under the terms of the loss sharing agreements, the FDIC will absorb 80% of losses and share in 80% of loss recoveries on the first $109 million of losses, and absorb 95% of losses and share in 95% of loss recoveries on losses exceeding $109 million. The term for loss sharing on 1 to 4 family loans is ten years, while the term for loss sharing on all other loans is five years. The SCB acquisition was accounted for under the purchase method of accounting in accordance with the Financial Accounting Standards Board’s Accounting Standards Codification, Topic 805, Business Combinations (“ASC 805”). United recorded a gain totaling $11.4 million in the second quarter of 2009 resulting from the acquisition, which is a component of fee revenue in the consolidated statement of income. The amount of the gain is equal to the amount by which the fair value of assets purchased exceeded the fair value of liabilities assumed. See Note 3 of the Notes to the unaudited consolidated financial statements for additional information regarding the acquisition.

The results of operations of SCB are included in the consolidated statement of income from the acquisition date of June 19, 2009.

GAAP Reconciliation and Explanation

This Form 10-Q contains non-GAAP financial measures determined by methods other than in accordance with GAAP. Such non-GAAP financial measures include, among others the following: operating revenue, operating expense, operating (loss) income from continuing operations, operating (loss) income, operating earnings (loss) from continuing operations per share, operating earnings (loss) per share, operating earnings (loss) from continuing operations per diluted share and operating earnings (loss) per diluted share. Management uses these non-GAAP financial measures because it believes they are useful for evaluating our operations and performance over periods of time, as well as in managing and evaluating our business and in discussions about our operations and performance. Management believes these non-GAAP financial measures provide users of our financial information with a meaningful measure for assessing our financial results and credit trends, as well as comparison to financial results for prior periods. These non-GAAP financial measures should not be considered as a substitute for operating results determined in accordance with GAAP and may not be comparable to other similarly titled financial measures used by other companies. A reconciliation of these operating performance measures to GAAP performance measures is included in on the table on page 29.

Discontinued Operations

Effective March 31, 2010, United sold its investment in Brintech. As a result, the operations of Brintech are being accounted for as a discontinued operation. All revenue, including the gain from the sale, expenses and income taxes relating to Brintech have been deconsolidated from the consolidated statement of income and are presented on one line titled “(Loss) income from discontinued operations” for all periods presented. Because Brintech’s assets, liabilities and cash flows were not material to the consolidated balance sheet and statement of cash flows, no such adjustments have been made to those financial statements.

Transaction with Fletcher International

The current banking environment, particularly within the Southeast and United’s footprint, has left many financial institutions with a surplus of foreclosed real estate and nonperforming loans, particularly residential construction. Disposing of these nonperforming assets has become increasingly challenging in this environment as those involved in the business of buying, developing and selling real estate — the typical purchasers of foreclosed properties — have themselves been negatively impacted by the housing market and therefore lack the ability to purchase surplus real estate. The build-up of residential construction inventory and lack of buyers, especially in the non-Atlanta markets, has created an imbalance between supply and demand that has sent prices spiraling downward. As a result, most dispositions of problem assets have occurred only by pricing properties at substantial discounts and incurring significant losses which results in a reduction of capital.

The challenge in this environment is to find ways to sell a large quantity of non-performing assets without significantly reducing capital. The transaction with Fletcher International Inc. (“Fletcher Inc.”) and Fletcher International Ltd (“Fletcher Ltd”, together with Fletcher Inc. and their affiliates, “Fletcher”) accomplishes that objective by combining the sale of nonperforming assets with the issuance of equity instruments. Although the transaction with Fletcher is described in more detail below, in essence, Fletcher agreed to acquire certain of United’s more illiquid nonperforming assets and received equity instruments that include a warrant to purchase common stock and the right to purchase convertible preferred stock with an additional warrant to purchase common stock. All of the assets and equity instruments transferred in the transaction were transferred at fair value, which resulted in the recognition of a loss in the consolidated financial statements. The transaction had a slight positive impact on total capital, since the equity instruments exchanged in the transaction increased shareholders’ equity which more than offset the after-tax loss on the transaction.

Description of Transaction

On April 1, 2010, the Bank entered into an asset purchase and sale agreement (the “Asset Purchase Agreement”) with Fletcher Inc. and five affiliated limited liability companies (“LLCs”) formed by Fletcher Inc. for the purpose of acquiring nonperforming assets under the Asset Purchase Agreement. United has no ownership interest in the LLCs. The asset sale transaction was completed on April 30, 2010 with the Bank transferring nonperforming commercial and residential construction loans and foreclosed properties having a carrying value of $103 million in exchange for cash of $20.6 million and notes receivable for $82.5 million. The loans accrue interest at a fixed rate of 3.5% and mature in five years. Principal and interest payments will be made quarterly based on a 30-year amortization schedule. Fletcher Inc. also contributed cash and securities to the LLCs equal to 17.5% of the purchase price to pre-fund the estimated carrying costs of the assets for approximately three years. These funds are held in escrow as additional collateral on the loans and cannot be removed by Fletcher without United’s consent. The securities that can be held by the LLCs are marketable equity securities and funds managed by Fletcher affiliates. Carrying costs include debt service payments, servicing fees and other direct costs associated with holding and managing the underlying properties.

Also on April 1, 2010, United and Fletcher Ltd. entered into a securities purchase agreement (the “Securities Purchase Agreement”) pursuant to which Fletcher Ltd. agreed to purchase from United, and United agreed to issue and sell to Fletcher Ltd., 65,000 shares of United’s Series C convertible preferred stock, par value $1.00 per share (the “Convertible Preferred Stock”), at a purchase price of $1,000 per share, for an aggregate purchase price of $65 million. The Convertible Preferred Stock will bear interest at an annual rate equal to the lesser of 8% or LIBOR + 4%. If all conditions precedent to Fletcher Ltd.’s obligations to purchase the Convertible Preferred Stock have been satisfied and Fletcher Ltd. has not purchased all of the Convertible Preferred Stock by May 26, 2011, it must pay United 5% of the commitment amount not purchased by that date, and it must also pay United an additional 5% of any commitment amount not purchased by May 26, 2012.

The Convertible Preferred Stock is redeemable by Fletcher Ltd. at any time into common stock or non-voting Common Stock Equivalent Junior Preferred Stock (“Junior Preferred Stock”) of United, at an equivalent price of $5.25 per share of common stock (equal to 12,380,952 shares of common stock), subject to certain adjustments. After May 26, 2015, if the closing stock price for United’s common stock is above $12.04, United has the right to require conversion and it is United’s intent to convert all of the then outstanding Convertible Preferred Stock into an equivalent amount of common stock or Junior Preferred Stock.

The Securities Purchase Agreement provides that United shall not effect any conversion or redemption of the Convertible Preferred Stock, and Fletcher Ltd. shall not have the right to convert or redeem any portion of the Convertible Preferred Stock, into common stock to the extent such conversion or redemption would result in aggregate issuances to Fletcher Ltd. in excess of 9.75% of the number of shares of common stock that would be outstanding after giving effect to such conversion or redemption. In the event that United cannot effect a conversion or redemption of the Convertible Preferred Stock into common stock due to this limit, the conversion or redemption shall be effected into an equal number of shares of Junior Preferred Stock.

Concurrently with the payment of the $10 million deposit under the Asset Purchase Agreement by Fletcher, United granted a warrant to Fletcher to purchase Junior Preferred Stock. The warrant was initially equal to $15 million and was increased to $30 million upon the completion of the asset sale pursuant to the Asset Purchase Agreement. An additional $35 million warrant will be issued on a dollar for dollar basis by the aggregate dollar amount of the Convertible Preferred Stock purchased under the Securities Purchase Agreement in excess of $30 million. The $30 million warrant price is equivalent to $4.25 per common share (cash exercise equal to 7,058,824 shares of common stock). The $35 million warrant price is equivalent to $6.02 per common share (cash exercise equal to 5,813,953 shares of common stock). The warrants may only be exercised by net share settlement (cashless exercise) and are exercisable for nine years from April 1, 2010, subject to limited extension upon certain events specified in the warrant agreement. The net shares to be issued to Fletcher Ltd. upon exercise of the warrants will be less than the total shares that would have been issuable (noted above) if the warrants had been exercised for cash payments.

The issuance of the securities described above and the increase in United’s authorized common stock in connection with such issuances required shareholder approval pursuant to the listing requirements of the Nasdaq Global Select Market, which was received at United’s annual meeting of shareholders on May 26, 2010.

Also, as part of the transaction, United and Fletcher entered into a servicing agreement whereby United will act as servicer of the nonperforming assets for Fletcher in exchange for a servicing fee of 20 basis points. The LLCs will pay all direct costs associated with the nonperforming loans and foreclosed properties. Because the servicing arrangement is considered a normal servicing arrangement and the fee is appropriate for the services provided, United did not recognize a servicing asset or liability related to the servicing agreement. Also as part of the servicing agreement, Fletcher maintains decision making authority with regard to the nonperforming loans and foreclosed properties except for minor, routine matters.

Accounting Treatment

The transaction with Fletcher encompasses the sale of nonperforming assets under the Asset Purchase Agreement and the issuance of equity instruments under the Securities Purchase Agreement. Although the Asset Purchase Agreement and the Securities Purchase Agreement are two separate agreements, they were accounted for as part of one transaction because they were entered into simultaneously and the Securities Purchase Agreement was dependent upon the sale of nonperforming assets. United evaluated this transaction to determine whether the transfer should be accounted for as a sale or a secured borrowing and whether the Fletcher LLCs should be consolidated with United. When evaluating whether the transfer should be accounted for as a sale, United primarily evaluated whether control had been surrendered, the rights of Fletcher to exchange and pledge the assets, and whether United retains effective control, which included evaluating any continuing involvement in the assets. Based on the evaluation, the transfer of assets under the Asset Purchase Agreement meets the definition as a sale under current accounting standards and was accounted for as such. United further evaluated whether the Fletcher LLCs should be consolidated which included evaluating whether United has a controlling financial interest and is therefore the primary beneficiary. This evaluation principally included determining whether United directs the activities that have the most significant impact on the LLCs economic performance and whether United has an obligation to absorb losses or the right to receive benefits that could be significant to the LLCs. Based on that evaluation, the LLCs have not been included as part of the consolidated group of subsidiaries in United’s consolidated financial statements.

In addition to evaluating the accounting for the transfer of assets, United considered whether the warrant and the option to purchase convertible preferred stock with an additional warrant should be accounted for as liabilities or equity instruments. In making this evaluation, United considered whether Fletcher or any subsequent holders of the instruments could require settlement of the instruments in cash or other assets rather than common or preferred stock. Because the transaction was structured so that the warrants and option to purchase convertible preferred stock and the additional warrant can only be settled through the issuance of common or preferred stock, United concluded that the warrant and option to purchase convertible preferred stock with an additional warrant should be accounted for as equity instruments.

The table below presents a summary of the assets and equity instruments transferred and received at their respective fair values ($ in thousands, except per share amounts).

Fair Value

Fair

Valuation Approach

Heirarchy

Value

Warrants Issued / Assets Transferred to Fletcher at Fair Value:

Warrant to purchase $30 million in common stock at $4.25 per share

Black-Scholes

Level 3

17,577

⁽¹⁾

Option to purchase convertible preferred stock and warrant

Monte-Carlo Simulation

Level 3

22,236

⁽²⁾

Fair value of equity instruments recognized in capital surplus

39,813

Foreclosed properties transferred under Asset Purchase Agreement

Appraised Value

Level 2

33,434

⁽³⁾

Nonperforming loans transferred under Asset Purchase Agreement

Collateral Appraised Value

Level 2

69,655

⁽³⁾

Total nonperforming assets transferred

103,089

Total value of assets and equity instruments transferred

142,902

Cash and Notes Receivable Received in Exchange at Fair Value:

Cash down payment received from asset sale

20,618

Notes receivable (par value $82,471, net of $4,531 discount)

Discounted Cash Flows

Level 3

77,940

⁽⁴⁾

Total value of cash and notes receivable received

98,558

Fair value of assets and equity instruments transferred in excess of cash and notes received

44,344

Transaction fees

1,005

Loss recognized on Fletcher transaction

45,349

Tax benefit

(15,367

)

After tax loss

29,982

Notes


⁽¹⁾		The $17.6 million value of the $30 million warrant was determined as of April 1, 2010, the date the terms were agreed to and signed. The following modeling assumptions were used: dividend yield — 0%; risk-free interest rate — 3.89%; current stock price — $4.77; term - 9 years; and volatility — 33%. Although most of the modeling assumptions were based on observable data, because of the subjectivity involved in estimating expected volatility, the valuation is considered Level 3.

⁽²⁾		The $22.2 million value of the option to purchase convertible preferred stock and warrant was determined by an independent valuation firm using a Monte Carlo Simulation method appropriate for valuing complex securities with derivatives. The model uses 50,000 simulations of daily stock price paths using geometric Brownian motion and incorporates in a unified way all conversion, exercise and contingency conditions. Because of the significant assumptions involved in the valuation process, not all of which were based on observable data, the valuation is considered to be Level 3.

⁽³⁾		The $103 million of nonperforming assets sold were transferred at United’s carrying value which had been written down to appraised value. Because the appraisals were based on sales of similar assets (observable data), the valuation is considered to be Level 2.

⁽⁴⁾		The $82.5 million of notes receivable were recorded at their estimated fair value of $77.9 million, net of a $4.5 million interest discount, which was determined based on discounted expected cash flows over the term at a rate commensurate with the credit risk inherent in the notes. The contractual rate on the notes is fixed at 3.5% for five years. The discount rate used for purposes of determining the fair value of the notes was 5.48% based on the terms, structure and risk profile of the notes. Note prepayments were estimated based on the expected marketing times for the underlying collateral since the notes require that principal be reduced as the underlying assets are sold. The valuation is considered Level 3 due to estimated prepayments which have a significant impact on the value and are not based on observable data.

Results of Operations

United reported a net operating loss from continuing operations of $59.5 million for the second quarter of 2010, which included an after-tax loss of $30 million resulting from the sale of nonperforming assets to Fletcher International. This compared to a net operating loss from continuing operations of $23.1 million for the same period in 2009. The 2009 net operating loss from continuing operations excluded a gain on the acquisition of SCB of $7.1 million, net of tax expense. Including the $7.1 million gain on acquisition, the net loss from continuing operations for the second quarter of 2009 was $16.0 million. For the second quarter of 2010, diluted operating loss from continuing operations per share was $.66. This compared to diluted operating loss from continuing operations per share of $.53 for the second quarter of 2009. The diluted operating loss from continuing operations per share for the second quarter of 2010 included $.32 in loss per share related to the sale of nonperforming assets. The diluted operating loss from continuing operations per share for the second quarter of 2009 excluded $.15 in earnings related to the gain on acquisition.

For the first six months of 2010, United reported a net operating loss from continuing operations of $94.0 million, which included the $30.0 million after-tax loss related to the Fletcher transaction. This compared to a net operating loss from continuing operations of $55.3 million for the first six months of 2009, which excluded the $7.1 million gain on acquisition net of tax, a non-recurring, non-cash goodwill impairment charge of $70 million and non-recurring severance costs of $1.8 million. The net loss for the six months ended June 30, 2010, which includes discontinued operations was $92.8 million. Including discontinued operations, the gain on acquisition, goodwill impairment charge and severance costs, net loss was $120 million for the six months ended June 30, 2009. Diluted operating loss from continuing operations per share for the six months ended June 30, 2010 was $1.05 of which the loss on the sale of nonperforming assets to Fletcher represented $.32. This compared to diluted operating loss from continuing operations of $1.24 for the same period in 2009. The diluted operating loss per share for the first six months of 2009 excluded $.15 in earnings per share related to the gain on acquisition and $1.45 and $.04 in loss per share related to the goodwill impairment charge and severance costs, respectively. The net operating losses from continuing operations in the second quarter and first six months of 2010 reflect a higher provision for loan losses, the loss on the sale of nonperforming assets to Fletcher and foreclosed property costs related to the continuing effect of the economic recession and the weak residential construction and housing markets.

Table 1 — Financial Highlights
Selected Financial Information


																Second
	2010						2009									Quarter			For the Six						YTD
(in thousands, except per share	Second			First			Fourth			Third			Second			2010-2009			Months Ended						2010-2009
data; taxable equivalent)	Quarter			Quarter			Quarter			Quarter			Quarter			Change			2010			2009			Change
INCOME SUMMARY
Interest revenue	$	87,699		$	89,849		$	97,481		$	101,181		$	102,737					$	177,548		$	206,299
Interest expense		26,072			28,570			33,552			38,177			41,855						54,642			88,005

Net interest revenue		61,627			61,279			63,929			63,004			60,882			1	%		122,906			118,294			4	%
Provision for loan losses		61,500			75,000			90,000			95,000			60,000						136,500			125,000
Operating fee revenue⁽¹⁾		11,579			11,666			14,447			13,389			11,305			2			23,245			23,128			1

Total operating revenue ⁽¹⁾		11,706			(2,055	)		(11,624	)		(18,607	)		12,187			(4	)		9,651			16,422			(41	)
Operating expenses⁽²⁾		58,308			54,820			60,126			51,426			53,710			9			113,128			105,498			7
Loss on sale of nonperforming assets		45,349			—			—			—			—						45,349			—

Operating loss from continuing operations before taxes		(91,951	)		(56,875	)		(71,750	)		(70,033	)		(41,523	)					(148,826	)		(89,076	)
Operating income tax benefit		(32,419	)		(22,417	)		(31,687	)		(26,252	)		(18,394	)					(54,836	)		(33,815	)

Net operating loss from continuing operations⁽¹⁾⁽²⁾		(59,532	)		(34,458	)		(40,063	)		(43,781	)		(23,129	)					(93,990	)		(55,261	)
Gain from acquisition, net of tax expense		—			—			—			—			7,062						—			7,062
Noncash goodwill impairment charges		—			—			—			(25,000	)		—						—			(70,000	)
Severance costs, net of tax benefit		—			—			—			—			—						—			(1,797	)
(Loss) income from discontinued operations		—			(101	)		228			63			66						(101	)		222
Gain from sale of subsidiary, net of income taxes and selling costs		—			1,266			—			—			—						1,266			—

Net loss		(59,532	)		(33,293	)		(39,835	)		(68,718	)		(16,001	)					(92,825	)		(119,774	)
Preferred dividends and discount accretion		2,577			2,572			2,567			2,562			2,559						5,149			5,113

Net loss available to common shareholders	$	(62,109	)	$	(35,865	)	$	(42,402	)	$	(71,280	)	$	(18,560	)				$	(97,974	)	$	(124,887	)


PERFORMANCE MEASURES
Per common share:
Diluted operating loss from continuing operations⁽¹⁾⁽²⁾	$	(.66	)	$	(.39	)	$	(.45	)	$	(.93	)	$	(.53	)				$	(1.05	)	$	(1.24	)
Diluted loss from continuing operations		(.66	)		(.39	)		(.45	)		(1.43	)		(.38	)					(1.05	)		(2.58	)
Diluted loss		(.66	)		(.38	)		(.45	)		(1.43	)		(.38	)					(1.04	)		(2.57	)
Stock dividends declared⁽⁶⁾		—			—			—		1 for 130			1 for 130							—		2 for 130
Book value		7.71			7.95			8.36			8.85			13.87						7.71			13.87
Tangible book value⁽⁴⁾		5.39			5.62			6.02			6.50			8.85						5.39			8.85

Key performance ratios:
Return on equity⁽³⁾⁽⁵⁾		(35.89	)%		(20.10	)%		(22.08	)%		(45.52	)%		(11.42	)%					(27.87	)%		(36.20	)%
Return on assets⁽⁵⁾		(3.10	)		(1.70	)		(1.91	)		(3.32	)		(.78	)					(2.39	)		(2.93	)
Net interest margin⁽⁵⁾		3.60			3.49			3.40			3.39			3.28						3.55			3.18
Operating efficiency ratio from continuing operations⁽¹⁾⁽²⁾		141.60			75.22			78.74			68.35			73.68						108.48			74.38
Equity to assets		11.84			11.90			11.94			10.27			10.71						11.87			11.20
Tangible equity to assets⁽⁴⁾		9.26			9.39			9.53			7.55			7.96						9.32			8.10
Tangible common equity to assets⁽⁴⁾		6.91			7.13			7.37			5.36			5.77						7.02			5.93
Tangible common equity to risk-weighted assets⁽⁴⁾		9.97			10.03			10.39			10.67			7.49						9.97			7.49

ASSET QUALITY *
Non-performing loans	$	224,335		$	280,802		$	264,092		$	304,381		$	287,848					$	224,335		$	287,848
Foreclosed properties		123,910			136,275			120,770			110,610			104,754						123,910			104,754

Total non-performing assets (NPAs)		348,245			417,077			384,862			414,991			392,602						348,245			392,602
Allowance for loan losses		174,111			173,934			155,602			150,187			145,678						174,111			145,678
Net charge-offs		61,323			56,668			84,585			90,491			58,312						117,991			101,593
Allowance for loan losses to loans		3.57	%		3.48	%		3.02	%		2.80	%		2.64	%					3.57	%		2.64	%
Net charge-offs to average loans⁽⁵⁾		4.98			4.51			6.37			6.57			4.18						4.75			3.64
NPAs to loans and foreclosed properties		6.97			8.13			7.30			7.58			6.99						6.97			6.99
NPAs to total assets		4.55			5.32			4.81			4.91			4.63						4.55			4.63

AVERAGE BALANCES ($ in millions)
Loans	$	5,011		$	5,173		$	5,357		$	5,565		$	5,597			(10	)	$	5,091		$	5,636			(10	)
Investment securities		1,532			1,518			1,529			1,615			1,771			(13	)		1,525			1,742			(12	)
Earning assets		6,854			7,085			7,487			7,401			7,442			(8	)		6,969			7,486			(7	)
Total assets		7,704			7,946			8,287			8,208			8,212			(6	)		7,825			8,291			(6	)
Deposits		6,375			6,570			6,835			6,690			6,545			(3	)		6,472			6,662			(3	)
Shareholders’ equity		912			945			989			843			879			4			929			923			1
Common shares — basic (thousands)		94,524			94,390			94,219			49,771			48,794			94			94,453			48,560			95
Common shares — diluted (thousands)		94,524			94,390			94,219			49,771			48,794			94			94,453			48,560			95

AT PERIOD END ($ in millions)
Loans *	$	4,873		$	4,992		$	5,151		$	5,363		$	5,513			(12	)	$	4,873		$	5,513			(12	)
Investment securities		1,488			1,527			1,530			1,533			1,817			(18	)		1,488			1,817			(18	)
Total assets		7,652			7,837			8,000			8,444			8,477			(10	)		7,652			8,477			(10	)
Deposits		6,330			6,488			6,628			6,821			6,849			(8	)		6,330			6,849			(8	)
Shareholders’ equity		904			926			962			1,007			855			6			904			855			6
Common shares outstanding (thousands)		94,281			94,176			94,046			93,901			48,933			93			94,281			48,933			93


⁽¹⁾		Excludes the gain from acquisition of $11.4 million, (income tax expense of $4.3 million) in the second quarter of 2009 and revenue generated by discontinued operations in all periods presented.

⁽²⁾		Excludes goodwill impairment charges of $25 million and $70 million in the third and first quarters of 2009, respectively, severance costs of $2.9 million, (income tax benefit of $1.1 million) in the first quarter of 2009 and expenses relating to discontinued operations for all periods presented.

⁽³⁾		Net loss available to common shareholders, which is net of preferred stock dividends, divided by average realized common equity, which excludes accumulated other comprehensive income (loss).

⁽⁴⁾		Excludes effect of acquisition related intangibles and associated amortization.

⁽⁵⁾		Annualized.

⁽⁶⁾		Number of new shares issued for shares currently held.

*		Excludes loans and foreclosed properties covered by loss sharing agreements with the FDIC.

Table 1 Continued — Operating Earnings to GAAP Earnings Reconciliation
Selected Financial Information


	2010						2009									For the Six
(in thousands, except per share	Second			First			Fourth			Third			Second			Months Ended
data; taxable equivalent)	Quarter			Quarter			Quarter			Quarter			Quarter			2010			2009

Interest revenue reconciliation
Interest revenue — taxable equivalent	$	87,699		$	89,849		$	97,481		$	101,181		$	102,737		$	177,548		$	206,299
Taxable equivalent adjustment		(500	)		(493	)		(601	)		(580	)		(463	)		(993	)		(951	)

Interest revenue (GAAP)	$	87,199		$	89,356		$	96,880		$	100,601		$	102,274		$	176,555		$	205,348


Net interest revenue reconciliation
Net interest revenue — taxable equivalent	$	61,627		$	61,279		$	63,929		$	63,004		$	60,882		$	122,906		$	118,294
Taxable equivalent adjustment		(500	)		(493	)		(601	)		(580	)		(463	)		(993	)		(951	)

Net interest revenue (GAAP)	$	61,127		$	60,786		$	63,328		$	62,424		$	60,419		$	121,913		$	117,343


Fee revenue reconciliation
Operating fee revenue	$	11,579		$	11,666		$	14,447		$	13,389		$	11,305		$	23,245		$	23,128
Gain from acquisition		—			—			—			—			11,390			—			11,390

Fee revenue (GAAP)	$	11,579		$	11,666		$	14,447		$	13,389		$	22,695		$	23,245		$	34,518


Total revenue reconciliation
Total operating revenue	$	11,706		$	(2,055	)	$	(11,624	)	$	(18,607	)	$	12,187		$	9,651		$	16,422
Taxable equivalent adjustment		(500	)		(493	)		(601	)		(580	)		(463	)		(993	)		(951	)
Gain from acquisition		—			—			—			—			11,390			—			11,390

Total revenue (GAAP)	$	11,206		$	(2,548	)	$	(12,225	)	$	(19,187	)	$	23,114		$	8,658		$	26,861


Expense reconciliation
Operating expense	$	103,657		$	54,820		$	60,126		$	51,426		$	53,710		$	158,477		$	105,498
Noncash goodwill impairment charge		—			—			—			25,000			—			—			70,000
Severance costs		—			—			—			—			—			—			2,898

Operating expense (GAAP)	$	103,657		$	54,820		$	60,126		$	76,426		$	53,710		$	158,477		$	178,396


Loss from continuing operations before taxes reconciliation
Operating loss from continuing operations before taxes	$	(91,951	)	$	(56,875	)	$	(71,750	)	$	(70,033	)	$	(41,523	)	$	(148,826	)	$	(89,076	)
Taxable equivalent adjustment		(500	)		(493	)		(601	)		(580	)		(463	)		(993	)		(951	)
Gain from acquisition		—			—			—			—			11,390			—			11,390
Noncash goodwill impairment charge		—			—			—			(25,000	)		—			—			(70,000	)
Severance costs		—			—			—			—			—			—			(2,898	)

Loss from continuing operations before taxes (GAAP)	$	(92,451	)	$	(57,368	)	$	(72,351	)	$	(95,613	)	$	(30,596	)	$	(149,819	)	$	(151,535	)


Income tax benefit reconciliation
Operating income tax benefit	$	(32,419	)	$	(22,417	)	$	(31,687	)	$	(26,252	)	$	(18,394	)	$	(54,836	)	$	(33,815	)
Taxable equivalent adjustment		(500	)		(493	)		(601	)		(580	)		(463	)		(993	)		(951	)
Gain from acquisition, tax expense		—			—			—			—			4,328			—			4,328
Severance costs, tax benefit		—			—			—			—			—			—			(1,101	)

Income tax benefit (GAAP)	$	(32,919	)	$	(22,910	)	$	(32,288	)	$	(26,832	)	$	(14,529	)	$	(55,829	)	$	(31,539	)


Diluted loss from continuing operations per common share reconciliation
Diluted operating loss from continuing operations per common share	$	(.66	)	$	(.39	)	$	(.45	)	$	(.93	)	$	(.53	)	$	(1.05	)	$	(1.24	)
Gain from acquisition		—			—			—			—			.15			—			.15
Noncash goodwill impairment charge		—			—			—			(.50	)		—			—			(1.45	)
Severance costs		—			—			—			—			—			—			(.04	)

Diluted loss from continuing operations per common share (GAAP)	$	(.66	)	$	(.39	)	$	(.45	)	$	(1.43	)	$	(.38	)	$	(1.05	)	$	(2.58	)


Book value per common share reconciliation
Tangible book value per common share	$	5.39		$	5.62		$	6.02		$	6.50		$	8.85		$	5.39		$	8.85
Effect of goodwill and other intangibles		2.32			2.33			2.34			2.35			5.02			2.32			5.02

Book value per common share (GAAP)	$	7.71		$	7.95		$	8.36		$	8.85		$	13.87		$	7.71		$	13.87


Efficiency ratio from continuing operations reconciliation
Operating efficiency ratio from continuing operations		141.60	%		75.22	%		78.74	%		68.35	%		73.68	%		108.48	%		74.38	%
Gain from acquisition		—			—			—			—			(9.96	)		—			(5.53	)
Noncash goodwill impairment charge		—			—			—			33.22			—			—			45.69
Severance costs		—			—			—			—			—			—			1.89

Efficiency ratio from continuing operations (GAAP)		141.60	%		75.22	%		78.74	%		101.57	%		63.72	%		108.48	%		116.43	%


Average equity to assets reconciliation
Tangible common equity to assets		6.91	%		7.13	%		7.37	%		5.36	%		5.77	%		7.02	%		5.93	%
Effect of preferred equity		2.35			2.26			2.16			2.19			2.19			2.30			2.17

Tangible equity to assets		9.26			9.39			9.53			7.55			7.96			9.32			8.10
Effect of goodwill and other intangibles		2.58			2.51			2.41			2.72			2.75			2.55			3.10

Equity to assets (GAAP)		11.84	%		11.90	%		11.94	%		10.27	%		10.71	%		11.87	%		11.20	%


Actual tangible common equity to risk-weighted assets reconciliation
Tangible common equity to risk-weighted assets		9.97	%		10.03	%		10.39	%		10.67	%		7.49	%		9.97	%		7.49	%
Effect of other comprehensive income		(.87	)		(.85	)		(.87	)		(.90	)		(.72	)		(.87	)		(.72	)
Effect of deferred tax limitation		(2.47	)		(1.75	)		(1.27	)		(.58	)		(.22	)		(2.47	)		(.22	)
Effect of trust preferred		1.03			1.00			.97			.92			.90			1.03			.90
Effect of preferred equity		3.41			3.29			3.19			3.04			2.99			3.41			2.99

Tier I capital ratio (Regulatory)		11.07	%		11.72	%		12.41	%		13.15	%		10.44	%		11.07	%		10.44	%

Net Interest Revenue (Taxable Equivalent)

Net interest revenue (the difference between the interest earned on assets and the interest paid on deposits and borrowed funds) is the single largest component of total revenue. United actively manages this revenue source to provide optimal levels of revenue while balancing interest rate, credit and liquidity risks. Net interest revenue for the three months ended June 30, 2010 was $61.6 million, up $745,000, or 1%, from the second quarter of 2009. The increase in net interest revenue for the second quarter of 2010 compared to the second quarter of 2009 was due to improvement in the net interest margin, resulting from management’s focus on improving earnings performance. United intensified its focus on loan pricing to ensure that it was being adequately compensated for the credit risk it was taking. Most of the improvement in loan pricing was due to United’s ability to negotiate floors (minimum interest rates) into its floating rate loans. This loan spread improvement, combined with the effect of eased competition on deposit pricing, led to a steady improving trend in the net interest margin from the fourth quarter of 2008 to the second quarter of 2010. In addition, the transaction with Fletcher International removed approximately $70 million of nonperforming loans from United’s portfolio. The improved net interest margin more than offset the reduction in net interest revenue caused by the $588 million decrease in average interest-earning assets primarily due to the reduction in loan balances.

Average loans decreased $586 million, or 10%, from the second quarter last year. The decrease in the loan portfolio was a result of the slowdown in the housing market, particularly in the Atlanta, Georgia MSA, north Georgia and coastal Georgia where period-end loans decreased $232 million, $170 million and $99 million, respectively, from June 30, 2009. Weak lending conditions have also affected United’s other markets. Loan charge-offs, foreclosure activity and management’s efforts to rebalance the loan portfolio by reducing the concentration of residential construction loans have all contributed to declining loan balances. While loan balances have declined, United continues to make new loans. During the second quarter of 2010, United made $101 million in new loans, primarily commercial and small business loans in the Atlanta, Georgia MSA and north Georgia.

Average interest-earning assets for the second quarter 2010 decreased $588 million, or 8%, from the same period in 2009. Decreases of $586 million in average loans and $239 million in the investment securities portfolio were partially offset by a $238 million increase in federal funds sold and other interest-earning assets. Loan demand has been weak due to the poor economy and management’s efforts to reduce United’s exposure to residential construction loans. The increase in federal funds sold and other interest-earning assets was due to purchases of short-term commercial paper and bank certificates of deposit in an effort to temporarily invest excess liquidity. Average interest-bearing liabilities decreased $567 million, or 9%, from the second quarter of 2009 due to the rolling off of higher-cost certificates of deposit as funding needs decreased. The average yield on interest earning assets for the three months ended June 30, 2010, was 5.13%, down 40 basis points from 5.53% for the same period of 2009, reflecting the effect of lower short-term interest rates on United’s prime-based loans as well as increased levels of non-performing loans.

The average cost of interest-bearing liabilities for the second quarter of 2010 was 1.75% compared to 2.56% for the same period of 2009, reflecting the effect of falling rates on United’s floating rate liabilities and United’s ability to reduce deposit pricing. Also contributing to the overall lower rate on interest-bearing liabilities was a shift in the mix of deposits away from more expensive time deposits toward lower-rate transaction deposits. United’s shrinking balance sheet also permitted the reduction of more expensive wholesale borrowings.

The banking industry uses two ratios to measure relative profitability of net interest revenue. The net interest spread measures the difference between the average yield on interest-earning assets and the average rate paid on interest-bearing liabilities. The interest rate spread eliminates the effect of non-interest-bearing deposits and gives a direct perspective on the effect of market interest rate movements. The net interest margin is an indication of the profitability of a company’s investments, and is defined as net interest revenue as a percent of average total interest-earning assets, which includes the positive effect of funding a portion of interest-earning assets with customers’ non-interest bearing deposits and stockholders’ equity.

For the three months ended June 30, 2010 and 2009, the net interest spread was 3.38% and 2.97%, respectively, while the net interest margin was 3.60% and 3.28%, respectively. The improved net interest margin for the quarter reflects management’s focus on improving earnings performance. The margin had been on a downward trend leading up to the first quarter of 2009 as a result of a rise in non-performing assets and higher than normal deposit pricing resulting from competition for deposits. The intense competition occurred due to liquidity pressures affecting the banking industry as a whole in the second half of 2008. Although deposit pricing competition began to ease late in the fourth quarter of 2008, its effects continued to be felt in the second quarter of 2009. At the same time, United intensified its focus on loan pricing to ensure that it was being adequately compensated for the credit risk it was taking. The combined effect of the easing of deposit pricing competition and widening credit spreads in United’s loan portfolio led to the 32 basis point increase in the net interest margin from the second quarter of 2009 to the second quarter of 2010.

For the first six months of 2010, net interest revenue was $123 million, an increase of $4.6 million, or 4% from the first six months of 2009. Average earning assets decreased $517 million, or 7%, during the first six months of 2010 compared the same period a year earlier. The yield on earning assets decreased 42 basis points from 5.55% for the six months ended June 30, 2009, to 5.13% for the six months ended June 30, 2010, primarily as the result of lower interest rates on loans and investments, as well as the continued effects of interest reversals on nonperforming loans. The cost of interest-bearing liabilities over the same period decreased 88 basis points. This resulted in the net interest margin increasing 37 basis points from the six months ended June 30, 2009 to the six months ended June 30, 2010. Factors in the year over year increase were the same as those for the increase from the second quarter of 2009 to the second quarter of 2010.

The following table shows the relationship between interest revenue and expense, and the average amounts of interest-earning assets and interest-bearing liabilities for the three months ended June 30, 2010 and 2009.

Table 2 — Average Consolidated Balance Sheets and Net Interest Analysis
For the Three Months Ended June 30,


	2010								2009
	Average					Avg.			Average					Avg.
(dollars in thousands, taxable equivalent)	Balance			Interest		Rate			Balance			Interest		Rate
Assets:
Interest-earning assets:
Loans, net of unearned income ⁽¹⁾⁽²⁾	$	5,010,937		$	70,640		5.65	%	$	5,597,259		$	81,567		5.85	%
Taxable securities ⁽³⁾		1,503,162			15,534		4.13			1,742,620			20,176		4.63
Tax-exempt securities ⁽¹⁾⁽³⁾		28,920			482		6.67			28,862			506		7.01
Federal funds sold and other interest-earning assets		311,475			1,043		1.34			73,437			488		2.66


Total interest-earning assets		6,854,494			87,699		5.13			7,442,178			102,737		5.53

Non-interest-earning assets:
Allowance for loan losses		(193,998	)							(147,691	)
Cash and due from banks		100,931								101,830
Premises and equipment		181,064								179,446
Other assets ⁽³⁾		761,803								636,377

Total assets	$	7,704,294							$	8,212,140


Liabilities and Shareholders’ Equity:
Interest-bearing liabilities:
Interest-bearing deposits:
NOW	$	1,325,099		$	1,745		.53		$	1,258,134		$	2,843		.91
Money market		746,039			1,829		.98			521,989			2,269		1.74
Savings		186,628			83		.18			178,435			121		.27
Time less than $100,000		1,605,308			7,887		1.97			1,894,071			15,342		3.25
Time greater than $100,000		1,110,010			6,102		2.20			1,325,757			11,513		3.48
Brokered		642,954			3,729		2.33			686,070			5,209		3.05

Total interest-bearing deposits		5,616,038			21,375		1.53			5,864,456			37,297		2.55


Federal funds purchased and other borrowings		104,637			1,056		4.05			220,376			595		1.08
Federal Home Loan Bank advances		107,948			974		3.62			309,962			1,203		1.56
Long-term debt		150,097			2,667		7.13			151,019			2,760		7.33

Total borrowed funds		362,682			4,697		5.19			681,357			4,558		2.68


Total interest-bearing liabilities		5,978,720			26,072		1.75			6,545,813			41,855		2.56

Non-interest-bearing liabilities:
Non-interest-bearing deposits		758,558								680,081
Other liabilities		54,931								107,036

Total liabilities		6,792,209								7,332,930
Shareholders’ equity		912,085								879,210

Total liabilities and shareholders’ equity	$	7,704,294							$	8,212,140


Net interest revenue				$	61,627							$	60,882

Net interest-rate spread							3.38	%							2.97	%


Net interest margin ⁽⁴⁾							3.60	%							3.28	%


(1)		Interest revenue on tax-exempt securities and loans has been increased to reflect comparable interest on taxable securities and loans. The rate used was 39%, reflecting the statutory federal income tax rate and the federal tax adjusted state income tax rate.

(2)		Included in the average balance of loans outstanding are loans where the accrual of interest has been discontinued.

(3)		Securities available for sale are shown at amortized cost. Pretax unrealized gains of $43.6 million in 2010 and $14.7 million in 2009 are included in other assets for purposes of this presentation.

(4)		Net interest margin is taxable equivalent net-interest revenue divided by average interest-earning assets.

Table 3 — Average Consolidated Balance Sheets and Net Interest Analysis
For the Six Months Ended June 30,


	2010								2009
	Average					Avg.			Average					Avg.
(dollars in thousands, taxable equivalent)	Balance			Interest		Rate			Balance			Interest		Rate
Assets:
Interest-earning assets:
Loans, net of unearned income ⁽¹⁾⁽²⁾	$	5,091,445		$	142,859		5.66	%	$	5,635,942		$	163,316		5.84	%
Taxable securities ⁽³⁾		1,495,447			31,426		4.20			1,712,778			40,609		4.74
Tax-exempt securities ⁽¹⁾⁽³⁾		29,482			991		6.72			29,453			1,028		6.98
Federal funds sold and other interest-earning assets		352,683			2,272		1.29			107,788			1,346		2.50


Total interest-earning assets		6,969,057			177,548		5.13			7,485,961			206,299		5.55

Non-interest-earning assets:
Allowance for loan losses		(190,662	)							(138,297	)
Cash and due from banks		102,728								103,113
Premises and equipment		181,493								179,470
Other assets ⁽³⁾		762,014								661,520

Total assets	$	7,824,630							$	8,291,767


Liabilities and Shareholders’ Equity:
Interest-bearing liabilities:
Interest-bearing deposits:
NOW	$	1,343,297		$	3,599		.54		$	1,307,865		$	6,180		.95
Money market		734,817			3,586		.98			499,780			4,506		1.82
Savings		183,555			167		.18			175,587			248		.28
Time less than $100,000		1,648,739			16,778		2.05			1,918,349			32,559		3.42
Time greater than $100,000		1,132,767			12,872		2.29			1,359,286			24,338		3.61
Brokered		689,717			8,266		2.42			735,844			11,220		3.07

Total interest-bearing deposits		5,732,892			45,268		1.59			5,996,711			79,051		2.66


Federal funds purchased and other borrowings		103,355			2,094		4.09			185,639			1,148		1.25
Federal Home Loan Bank advances		111,150			1,951		3.54			257,742			2,277		1.78
Long-term debt		150,088			5,329		7.16			151,009			5,529		7.38

Total borrowed funds		364,593			9,374		5.18			594,390			8,954		3.04


Total interest-bearing liabilities		6,097,485			54,642		1.81			6,591,101			88,005		2.69

Non-interest-bearing liabilities:
Non-interest-bearing deposits		738,876								665,170
Other liabilities		59,605								112,382

Total liabilities		6,895,966								7,368,653
Shareholders’ equity		928,664								923,114

Total liabilities and shareholders’ equity	$	7,824,630							$	8,291,767


Net interest revenue				$	122,906							$	118,294

Net interest-rate spread							3.32	%							2.86	%


Net interest margin ⁽⁴⁾							3.55	%							3.18	%


(1)		Interest revenue on tax-exempt securities and loans has been increased to reflect comparable interest on taxable securities and loans. The rate used was 39%, reflecting the statutory federal income tax rate and the federal tax adjusted state income tax rate.

(2)		Included in the average balance of loans outstanding are loans where the accrual of interest has been discontinued.

(3)		Securities available for sale are shown at amortized cost. Pretax unrealized gains of $43.4 million in 2010 and $12.7 million in 2009 are included in other assets for purposes of this presentation.

(4)		Net interest margin is taxable equivalent net-interest revenue divided by average interest-earning assets.

The following table shows the relative effect on net interest revenue for changes in the average outstanding amounts (volume) of interest-earning assets and interest-bearing liabilities and the rates earned and paid on such assets and liabilities (rate). Variances resulting from a combination of changes in rate and volume are allocated in proportion to the absolute dollar amounts of the change in each category.

Table 4 — Change in Interest Revenue and Expense on a Taxable Equivalent Basis
(in thousands)


	Three Months Ended June 30, 2010									Six Months Ended June 30, 2010
	Compared to 2009									Compared to 2009
	Increase (decrease)									Increase (decrease)
	Due to Changes in									Due to Changes in
	Volume			Rate			Total			Volume			Rate			Total
Interest-earning assets:
Loans	$	(8,332	)	$	(2,595	)	$	(10,927	)	$	(15,401	)	$	(5,056	)	$	(20,457	)
Taxable securities		(2,605	)		(2,037	)		(4,642	)		(4,844	)		(4,339	)		(9,183	)
Tax-exempt securities		1			(25	)		(24	)		3			(40	)		(37	)
Federal funds sold and other interest-earning assets		901			(346	)		555			2,912			(1,986	)		926

Total interest-earning assets		(10,035	)		(5,003	)		(15,038	)		(17,330	)		(11,421	)		(28,751	)


Interest-bearing liabilities:
NOW accounts		144			(1,242	)		(1,098	)		163			(2,744	)		(2,581	)
Money market accounts		763			(1,203	)		(440	)		1,627			(2,547	)		(920	)
Savings deposits		6			(44	)		(38	)		11			(92	)		(81	)
Time deposits less than $100,000		(2,082	)		(5,373	)		(7,455	)		(4,100	)		(11,681	)		(15,781	)
Time deposits greater than $100,000		(1,663	)		(3,748	)		(5,411	)		(3,592	)		(7,874	)		(11,466	)
Brokered deposits		(311	)		(1,169	)		(1,480	)		(669	)		(2,285	)		(2,954	)

Total interest-bearing deposits		(3,143	)		(12,779	)		(15,922	)		(6,560	)		(27,223	)		(33,783	)

Federal funds purchased & other borrowings		(450	)		911			461			(698	)		1,644			946
Federal Home Loan Bank advances		(1,127	)		898			(229	)		(1,762	)		1,436			(326	)
Long-term debt		(17	)		(76	)		(93	)		(34	)		(166	)		(200	)

Total borrowed funds		(1,594	)		1,733			139			(2,494	)		2,914			420

Total interest-bearing liabilities		(4,737	)		(11,046	)		(15,783	)		(9,054	)		(24,309	)		(33,363	)


Increase in net interest revenue	$	(5,298	)	$	6,043		$	745		$	(8,276	)	$	12,888		$	4,612

Provision for Loan Losses

The provision for loan losses is based on management’s evaluation of losses inherent in the loan portfolio and corresponding analysis of the allowance for loan losses at quarter-end. The provision for loan losses was $61.5 million and $136.5 million for the second quarter and the first six months of 2010, respectively, compared with $60.0 million and $125 million, respectively, for the same periods in 2009. The amount of provision recorded in the second quarter was the amount required such that the total allowance for loan losses reflects, in the estimation of management, the amount of inherent losses in the loan portfolio. The increases in the provision and the allowance for loan losses compared to a year ago were due to continued elevated levels of substandard loans and increased charge-offs, deterioration in the collateral values leading to an expectation of higher charge-offs upon default, further weakening of the residential construction and housing markets, and the recessionary economic environment. For the three and six months ended June 30, 2010, net loan charge-offs as an annualized percentage of average outstanding loans were 4.98% and 4.75%, respectively, compared to 4.18% and 3.64%, respectively, for the same periods in 2009.

As the residential construction and housing markets have struggled, it has been difficult for many builders and developers to obtain cash flow from selling lots and houses needed to service debt. This deterioration of the residential construction and housing market was the primary factor that resulted in higher credit losses and increases in non-performing assets over the last two years. Although a majority of the losses have been within the residential construction and development portion of the portfolio, credit quality deterioration has migrated to other loan categories as unemployment levels have remained high throughout United’s markets. Additional discussion on credit quality and the allowance for loan losses is included in the Asset Quality and Risk Elements section of this report on page 38.

Fee Revenue

Fee revenue for the three and six months ended June 30, 2010 was $11.6 million and $23.2 million, respectively. Fee revenue for the three and six months ended June 30, 2009 was $22.7 million and $34.5 million, respectively. In 2009, fee revenue included an $11.4 million gain on the acquisition of SCB in the second quarter. Excluding the gain on acquisition in 2009, operating fee revenue increased $274,000, or 2%, and $117,000, or 1%, respectively, from the second quarter and first six months of 2009.

The following table presents the components of fee revenue for the second quarters of 2010 and 2009, and the first six months of 2010 and 2009.

Table 5 — Fee Revenue
(dollars in thousands)


	Three Months Ended								Six Months Ended
	June 30,								June 30,
	2010		2009			Change			2010		2009			Change

Service charges and fees	$	7,993	$	7,557			6	%	$	15,440	$	14,591			6	%
Mortgage loan and related fees		1,601		2,825			(43	)		3,080		5,476			(44	)
Brokerage fees		586		497			18			1,153		1,186			(3	)
Securities (losses) gains, net		—		(711	)					61		(408	)
Other		1,399		1,137			23			3,511		2,283			54

Operating fee revenue		11,579		11,305			2			23,245		23,128			1
Gain from acquisition		—		11,390						—		11,390

Total fee revenue	$	11,579	$	22,695			(49	)	$	23,245	$	34,518			(33	)

Service charges and fees of $8.0 million were up $436,000, or 6%, from the second quarter of 2009. For the first six months of 2010, service charges and fees of $15.4 million were up $849,000, or 6%, from the same period in 2009. This increase was primarily due to an increase in new accounts and ATM and debit card usage fees.

Mortgage loans and related fees for the second quarter and first six months of 2010, were down $1.2 million, or 43%, and $2.4 million, or 44%, respectively, from the same periods in 2009. In 2009, refinancing activity reached record levels due to historically low mortgage interest rates. In the second quarter of 2010, United closed 475 loans totaling $70 million compared with 1,008 loans totaling $168 million in the second quarter of 2009. Year-to-date mortgage production in 2010 amounted to 887 loans totaling $135 million, compared to 2,004 loans totaling $342 million for the same period in 2009.

United incurred net securities gains of $61,000 for the six months ended June 30, 2010, which included $950,000 in impairment charges on trust preferred securities of a bank whose financial condition had deteriorated. The impairment charge was more than offset by gains from securities sales. The securities losses of $711,000 and $408,000, respectively, for the second quarter and first six months of 2009 include a charge of $743,000 for the impairment of an equity investment in a financial institution that failed during the second quarter of 2009.

The gain from acquisition recorded in the second quarter of 2009 resulted from the SCB acquisition which was accounted for as a bargain purchase. In this bargain purchase, the fair values of the net assets and liabilities received from the acquisition exceeded the purchase price of those assets and liabilities. With the SCB acquisition, United received assets, including a cash payment from the FDIC, with an estimated fair value of $378 million and liabilities with an estimated fair value of $367 million. The difference between the assets received and liabilities assumed of $11.4 million resulted in a gain from the acquisition.

For the three and six months ended June 30, 2010, other fee revenue increased $262,000, or 23%, and $1.2 million, or 54%, respectively, from the same periods in 2009. This increase is partially due to the ineffectiveness of United’s cash flow and fair value hedges. In the second quarter of 2010, United recognized $239,000 in income from hedge ineffectiveness compared with $36,000 in losses in the second quarter of 2009. For the first six months of 2010, United recognized $849,000 in income from hedge ineffectiveness compared with $172,000 for the same period of 2009. Bank owned life insurance (“BOLI”) earnings also contributed to the year-to-date increase in other fee revenue. In the second half of 2008 and through the first quarter of 2009, United’s BOLI assets were held in money market funds that yielded nominal earnings on the cash surrender value due to a dispute with the carrier that was settled in the second quarter of 2009.

Operating Expenses

The following table presents the components of operating expenses for the three and six months ended June 30, 2010 and 2009. The table is presented to reflect Brintech as a discontinued operation, and accordingly, operating expenses associated with Brintech have been excluded from the table for all periods presented.

Table 6 — Operating Expenses
(dollars in thousands)


	Three Months Ended							Six Months Ended
	June 30,							June 30,
	2010		2009		Change			2010		2009		Change

Salaries and employee benefits	$	23,590	$	26,305		(10	)%	$	47,950	$	53,618		(11	)%
Communications and equipment		3,511		3,571		(2	)		6,784		7,217		(6	)
Occupancy		3,836		3,818		—			7,650		7,587		1
Advertising and public relations		1,352		1,125		20			2,395		2,169		10
Postage, printing and supplies		765		1,288		(41	)		1,990		2,463		(19	)
Professional fees		2,178		3,195		(32	)		4,121		6,476		(36	)
Foreclosed property		14,540		5,737		153			25,353		10,056		152
FDIC assessments and other regulatory charges		3,566		6,810		(48	)		7,192		9,492		(24	)
Amortization of intangibles		794		739		7			1,596		1,478		8
Other		4,176		1,122		272			8,097		4,942		64

		58,308		53,710		9			113,128		105,498		7
Loss on sale of nonperforming assets		45,349		—					45,349		—

Operating expenses, excluding non-recurring items		103,657		53,710		93			158,477		105,498		50
Goodwill impairment		—		—					—		70,000
Severance costs		—		—					—		2,898

Total operating expenses	$	103,657	$	53,710		93		$	158,477	$	178,396		(11	)

Operating expenses before the loss on sale of nonperforming assets and non-recurring items for the second quarter of 2010 were $58.3 million, up $4.6 million, or 9%, from the second quarter of 2009. The $45.3 million loss on the sale of nonperforming assets to Fletcher is primarily responsible for the increase in operating expenses excluding non-recurring items. Although the loss from the bulk sale of nonperforming assets resulted from an isolated event, because disposition of nonperforming assets is considered an operating activity, it is not excluded from operating expenses as a non-recurring item but has been separated to make trend comparisons more meaningful. For the six months ended June 30, 2010, total operating expenses before the loss on sale of nonperforming assets and non-recurring items were $113 million, compared to $105 million for the same period in 2009, which excluded a $70 million charge for goodwill impairment and $2.9 million in severance costs relating to a reduction in force. Including the loss on sale of nonperforming assets and those non-recurring charges, operating expenses for the second quarter of 2010 and 2009 were $104 million and $53.7 million, respectively, and for the first six months of 2010 and 2009 were $158 million and $178 million, respectively.

Salaries and employee benefits for the second quarter 2010 totaled $23.6 million, down $2.7 million, or 10%, from the same period of 2009. For the first six months of 2010, salaries and employee benefits of $48.0 million were down $5.7 million, or 11%, from the first six months of 2009. The decrease is related to the reduction in force at the end of the first quarter of 2009. Headcount totaled 1,821 at June 30, 2010, down from 1,956 at December 31, 2008, reflecting the reduction in force initiated at the end of the first quarter of 2009. This reduction in workforce was partially offset by the addition of 39 employees resulting from the acquisition of SCB in the second quarter of 2009.

Communications and equipment expense of $3.5 million and $6.8 million, respectively, for the three and six months ended June 30, 2010, was down $60,000, or 2% and $433,000 or 6%, respectively, compared to the same periods in 2009. The decrease was primarily due to a reduction in depreciation and maintenance charges.

Advertising and public relations expense of $1.4 million and $2.4 million, respectively, for the three and six months ended June 30, 2010, was up $227,000, or 20%, and $226,000, or 10%, respectively, compared to the same periods in 2009. The increase was primarily related to advertising campaigns and promotions aimed at increasing core transaction deposits through United’s “Strong Bank, Strong Service” marketing initiative which has been very successful in adding $224 million in core transaction deposits in the past twelve months.

Postage, printing and supplies expense for the second quarter of 2010 totaled $765,000, down $523,000, or 41%, from the same period of 2009. For the first six months of 2010, postage, printing and supplies expense of $2.0 million was down $473,000, or 19%, from the first six months of 2009. United continued its efforts to encourage customers to accept electronic statements and controlled courier expense through the use of remote capture technology.

Professional fees for the second quarter of 2010 of $2.2 million were down $1.0 million, or 32%, from the same period in 2009. Year-to-date professional fees of $4.1 million were down $2.4 million, or 36%, over the same period in 2009. During the first quarter of 2009, United was engaged in a project to improve operational efficiency and to reduce operating expenses. Consulting services related to that project were performed by Brintech, a wholly-owned subsidiary at the time. Since the table above is presented with Brintech as a discontinued operation, the fees charged by Brintech for those services are no longer eliminated in this table and the Consolidated Statement of Income, and are therefore reflected in the balance of professional fees for the second quarter and first six months of 2009. Lower legal fees in 2010 for credit-related work also contributed to the decrease in professional fees.

Foreclosed property expense of $14.5 million for the second quarter of 2010 was up $8.8 million from the second quarter of 2009. For the six months ended June 30, 2010, foreclosed property expense totaled $25.4 million, compared to $10.1 million for the same period in 2009. Foreclosed property expenses have remained elevated throughout the weak economic cycle. This expense category includes legal fees, property taxes, marketing costs, utility services, maintenance and repair charges, as well as realized losses and write downs associated with foreclosed properties. Realized losses and write downs totaled $11.2 million and $19.3 million for the three and six months ended June 30, 2010, respectively, compared to $2.6 million and $4.2 million for the same period of 2009.

FDIC assessments and other regulatory charges of $3.6 million, and $7.2 million, respectively, for the second quarter and first six months of 2010, decreased $3.3 million and $2.3 million, respectively, from the second quarter and first six months of 2009. The decrease was attributable to the one-time special assessment from the FDIC charged to all depository institutions in 2009.

Other expense of $4.2 million for the second quarter of 2010 increased $3.1 million from the second quarter of 2009. Year-to-date, other expenses of $8.1 million increased $3.2 million from the first six months of 2009. The increase was the result of an accrual reversal in the second quarter of 2009 for $2.4 million related to a disputed charge from the transfer of BOLI investments. The disputed charge was settled in United’s favor during the second quarter of 2009, and reduced other expenses for the period.

Income Taxes

Income tax benefit for the second quarter 2010 was $32.9 million as compared with income tax benefit of $14.5 million for the second quarter of 2009, representing an effective tax rate of 35.6% and 47.5%, respectively. For the first six months of 2010, income tax benefit was $55.8 million as compared with income tax benefit of $31.5 million for the same period in 2009, representing an effective tax rate of 37.3% and 20.8%, respectively. The effective tax rates were different from the statutory tax rates primarily due to interest revenue on certain investment securities and loans that are exempt from income taxes, tax exempt fee revenue, tax credits received on affordable housing investments, goodwill impairment charges and the change in valuation allowance on deferred tax assets as discussed below.

The effective tax rate for the second quarter and first six months of 2010 reflects the tax treatment of the loss on the sale of nonperforming assets to Fletcher and an increase in the valuation allowance on deferred tax assets related to state tax credits with short carryforward periods that are expected to expire unused. An effective tax rate of 40% is expected for the remainder of the year.

The effective tax rate for the second quarter of 2009 reflects a decision by management to reinstate certain BOLI policies which United had surrendered in the third quarter of 2008. United notified the carrier of its intent to surrender the policies in the fourth quarter of 2008 due to a dispute with the carrier. The policies required a six month waiting period before the surrender became effective. Prior to the expiration of the six month waiting period, United and the carrier were able to reach an acceptable settlement of the dispute and the surrender transaction was terminated. The tax charge recorded in 2008 was reversed during the second quarter of 2009. The effective tax rate for the second quarter of 2009, absent the BOLI credit, would have been 38%.

The effective tax rate for the first six months of 2009 also reflects the tax treatment of the $70 million goodwill impairment charge. Since the majority of United’s goodwill originated from acquisitions that were treated as tax-free exchanges, no goodwill was recognized for tax reporting purposes and therefore no tax deduction is allowed for the impairment charge. Likewise, no tax benefit is recognized in the financial statements relating to the $70 million charge. The year-to-date 2009 effective tax rate also reflects a valuation allowance established for deferred tax assets.

Management determined that it is more likely than not that approximately $5.2 million at June 30, 2010 and $2.3 million at June 30, 2009, net of Federal benefit, in state low income housing tax credits will expire unused due to their very short three to five year carry forward period. There were no unusual tax items in the second quarter or six months ended June 30, 2010, and the effective tax rate of 40% is the expected effective tax rate for the remainder of the year.

At June 30, 2010, United had net deferred tax assets of $127 million, including a valuation allowance of $5.2 million related to state tax credits that are expected to expire unused. Accounting Standards Codification Topic 740, Income Taxes, requires that companies assess whether a valuation allowance should be established against their deferred tax assets based on the consideration of all available evidence using a “more likely than not” standard. United’s management considers both positive and negative evidence and analyzes changes in near-term market conditions as well as other factors which may impact future operating results. In making such judgments, significant weight is given to evidence that can be objectively verified. At June 30, 2010, United’s management believes that it is more likely than not that, with the exception of those state tax credits that are expected to expire unused due to a relatively short carryforward period of only three to five years, it will be able to realize its deferred tax benefits through its ability to carry losses forward to future profitable years. Despite recent losses and the challenging economic environment, United has a history of strong earnings, is well-capitalized, continues to grow its core customer deposit base while maintaining very high customer satisfaction scores, and has cautiously optimistic expectations regarding future taxable income. The deferred tax assets are analyzed quarterly for changes affecting realizability, and there can be no guarantee that a valuation allowance will not be necessary in future periods.

Additional information regarding income taxes can be found in Note 14 to the consolidated financial statements filed with United’s 2009 Form 10-K.

Balance Sheet Review

Total assets at June 30, 2010 and 2009 were $7.7 billion and $8.5 billion, respectively. Average total assets for the second quarter of 2010 were $7.7 billion, down from $8.2 billion in the second quarter of 2009.

Loans

The following table presents a summary of the loan portfolio.

Table 7 — Loans Outstanding (excludes loans covered by loss share agreement)
(dollars in thousands)


	June 30,			December 31,			June 30,
	2010			2009			2009
By Loan Type
Commercial (secured by real estate)	$	1,780,142		$	1,779,398		$	1,796,560
Commercial construction		342,140			362,566			378,779
Commercial (commercial and industrial)		441,097			390,520			399,564

Total commercial		2,563,379			2,532,484			2,574,903
Residential construction		819,930			1,050,065			1,315,353
Residential mortgage		1,355,582			1,427,198			1,469,754
Installment		134,139			141,729			153,077

Total loans	$	4,873,030		$	5,151,476		$	5,513,087


As a percentage of total loans:
Commercial (secured by real estate)		36	%		34	%		32	%
Commercial construction		7			7			7
Commercial (commercial and industrial)		9			8			7

Total commercial		52			49			46
Residential construction		17			20			24
Residential mortgage		28			28			27
Installment		3			3			3

Total		100	%		100	%		100	%


By Geographic Location
Atlanta MSA	$	1,373,631		$	1,435,223		$	1,604,501
Gainesville MSA		343,351			389,766			413,065
North Georgia		1,807,704			1,883,880			1,977,991
Western North Carolina		737,639			771,709			794,251
Coastal Georgia		355,719			405,689			455,143
East Tennessee		254,986			265,209			268,136

Total loans	$	4,873,030		$	5,151,476		$	5,513,087

Substantially all of United’s loans are to customers located in the immediate market areas of its community banks in Georgia, North Carolina, and Tennessee. At June 30, 2010, total loans, excluding loans acquired from SCB that are covered by loss sharing agreements with the FDIC, were $4.9 billion, a decrease of $640 million, or 12%, from June 30, 2009. The rate of loan growth began to decline in the first quarter of 2007 and the balances have continued to decline through 2008, 2009 and into 2010. The decrease in the loan portfolio began with deterioration in the residential construction and housing markets. This deterioration resulted in part in an oversupply of lot inventory, houses and land within United’s markets, which further slowed construction activities and acquisition and development projects. To date, the decline in the housing market has been most severe in the Atlanta, Georgia MSA although there has been migration of deterioration into United’s other markets, particularly north Georgia. The resulting recession that began in the housing market led to high rates of unemployment that resulted in stress in the other segments of United’s loan portfolio.

Asset Quality and Risk Elements

United manages asset quality and controls credit risk through review and oversight of the loan portfolio as well as adherence to policies designed to promote sound underwriting and loan monitoring practices. United’s credit administration function is responsible for monitoring asset quality, establishing credit policies and procedures and enforcing the consistent application of these policies and procedures among all of the community banks. Additional information on the credit administration function is included in Item 1 under the heading Loan Review and Non-performing Assets in United’s Annual Report on Form 10-K.

United classifies performing loans as substandard loans when there is a well-defined weakness or weaknesses that jeopardize the repayment by the borrower and there is a distinct possibility that United could sustain some loss if the deficiency is not corrected. The table below presents performing substandard loans for the last five quarters.

Table 8 — Performing Substandard Loans
(dollars in thousands)


	June 30,		March 31,		December 31,		September 30,		June 30,
	2010		2010		2009		2009		2009

Commercial (sec. by RE)	$	140,805	$	151,573	$	123,738	$	93,454	$	69,657
Commercial construction		78,436		75,304		51,696		50,888		36,316
Commercial & industrial		22,052		35,474		33,976		34,491		11,814

Total commercial		241,293		262,351		209,410		178,833		117,787
Residential construction		149,305		153,799		196,909		207,711		148,094
Residential mortgage		79,484		80,812		79,579		83,504		71,959
Installment		4,364		3,922		3,554		3,199		3,466

Total	$	474,446	$	500,884	$	489,452	$	473,247	$	341,306

At June 30, 2010, performing substandard loans totaled $474 million and decreased $26.4 million from the prior quarter-end, and increased $133 million from a year ago. Residential construction loans, particularly in Atlanta, have represented the largest proportion of both performing substandard and nonperforming loans. However, the balance of performing substandard residential construction loans has been declining since the third quarter of 2009, as problems in that portfolio segment are being resolved. The year-over-year increase in substandard residential mortgages is primarily related to rising unemployment rates. The year-over-year increase in substandard commercial loans reflects the recessionary economic environment. The amount of downgrades to the substandard category declined in the second quarter of 2010 leading to a decrease in performing substandard loans from March 31, 2010.

United classifies loans as non-accrual substandard loans (or “non-performing loans”) when the principal and interest on a loan is not likely to be repaid in accordance with the loan terms or when the loan becomes 90 days past due and is not well secured and in the process of collection. When a loan is classified on non-accrual status, interest previously accrued but not collected is reversed against current interest revenue. Payments received on a non-accrual loan are applied to reduce outstanding principal.

Reviews of substandard performing and non-performing loans, past due loans and larger credits, are conducted on a regular basis with management during the quarter and are designed to identify risk migration and potential charges to the allowance for loan losses. These reviews are performed by the responsible lending officers and the loan review department and also consider such factors as the financial strength of borrowers, the value of the applicable collateral, past loan loss experience, anticipated loan losses, changes in risk profile, prevailing economic conditions and other factors. United also uses external loan review in addition to United’s internal loan review and to ensure the independence of the loan review process.

The following table presents a summary of the changes in the allowance for loan losses for the three and six months ended June 30, 2010 and 2009.

Table 9 — Allowance for Loan Losses
(in thousands)


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2010			2009			2010			2009
Balance beginning of period	$	173,934		$	143,990		$	155,602		$	122,271
Provision for loan losses		61,500			60,000			136,500			125,000
Charge-offs:
Commercial (secured by real estate)		9,791			5,989			12,727			6,854
Commercial construction		1,460			757			3,671			811
Commercial (commercial and industrial)		1,764			4,977			6,318			6,185
Residential construction		41,781			44,645			85,971			82,612
Residential mortgage		6,752			3,589			11,392			6,700
Installment		1,417			981			2,546			1,907

Total loans charged-off		62,965			60,938			122,625			105,069

Recoveries:
Commercial (secured by real estate)		34			3			1,006			42
Commercial construction		—			1			5			1
Commercial (commercial and industrial)		897			1,870			1,341			2,205
Residential construction		266			405			1,356			610
Residential mortgage		235			64			324			191
Installment		210			283			602			427

Total recoveries		1,642			2,626			4,634			3,476

Net charge-offs		61,323			58,312			117,991			101,593

Balance end of period	$	174,111		$	145,678		$	174,111		$	145,678

Total loans: *
At period-end	$	4,873,030		$	5,513,087		$	4,873,030		$	5,513,087
Average		4,934,224			5,583,962			5,012,415			5,629,256

Allowance as a percentage of period-end loans		3.57	%		2.64	%		3.57	%		2.64	%

As a percentage of average loans:
Net charge-offs		4.98			4.18			4.75			3.64
Provision for loan losses		5.00			4.31			5.49			4.48
Allowance as a percentage of non-performing loans **		78			51			78			51


*		Excludes loans covered by loss sharing agreements with the FDIC

**		Excluding impaired loans with no allocated reserve, the coverage ratio was 234% and 82% at June 30, 2010 and 2009.

The provision for loan losses charged to earnings was based upon management’s judgment of the amount necessary to maintain the allowance at a level appropriate to absorb losses inherent in the loan portfolio at the balance sheet date. The amount each quarter is dependent upon many factors, including growth and changes in the composition of the loan portfolio, net charge-offs, delinquencies, management’s assessment of loan portfolio quality, the value of collateral, and other macro-economic factors and trends. The evaluation of these factors is performed quarterly by management through an analysis of the appropriateness of the allowance for loan losses. The increases in the provision and the allowance for loan losses compared to a year ago were due to increasing trends in substandard loans, deterioration in the collateral values leading to an expectation of higher charge-offs upon default, further weakening of the residential construction and housing markets, and the recessionary economic environment.

Management believes that the allowance for loan losses at June 30, 2010 reflects the losses inherent in the loan portfolio. This assessment involves uncertainty and judgment; therefore, the adequacy of the allowance for loan losses cannot be determined with precision and may be subject to change in future periods. In addition, bank regulatory authorities, as part of their periodic examination of the Bank, may require adjustments to the provision for loan losses in future periods if, in their opinion, the results of their review warrant such additions. See the “Critical Accounting Policies” section in United’s Annual Report on Form 10-K for additional information on the allowance for loan losses.

Non-performing Assets

The table below summarizes non-performing assets, excluding SCB’s assets covered by the loss-sharing agreement with the FDIC. Those assets have been excluded from non-performing assets, as the loss-sharing agreement with the FDIC and purchase price adjustments to reflect credit losses effectively eliminate the likelihood of recognizing any losses on the covered assets.

Table 10 — Non-Performing Assets
(dollars in thousands)


	June 30,			December 31,			June 30,
	2010			2009			2009
Non-performing loans*	$	224,335		$	264,092		$	287,848
Foreclosed properties (OREO)		123,910			120,770			104,754


Total non-performing assets	$	348,245		$	384,862		$	392,602


Non-performing loans as a percentage of total loans		4.60	%		5.13	%		5.22	%
Non-performing assets as a percentage of total loans and OREO		6.97			7.30			6.99
Non-performing assets as a percentage of total assets		4.55			4.81			4.63


*		There were no loans 90 days or more past due that were still accruing at period end.

At June 30, 2010, non-performing loans were $224 million, compared to $264 million at December 31, 2009 and $289 million at June 30, 2009. The ratio of non-performing loans to total loans decreased from December 31, 2009 and June 30, 2009 due the sale of approximately $70 million nonperforming loans to Fletcher. Non-performing assets, which include non-performing loans and foreclosed real estate, totaled $348 million at June 30, 2009, compared with $385 million at December 31, 2009 and $393 million at June 30, 2009. The sale of approximately $68 million of foreclosed properties in the second quarter of 2010, including $33 million to Fletcher, was offset by the addition of approximately $67 million of new foreclosed properties. United’s position throughout the recession has been to actively and aggressively work to dispose of problem assets quickly.

The following table summarizes non-performing assets by category and market. As with Tables 7, 8 and 10, assets covered by the loss-sharing agreement with the FDIC, related to the acquisition of SCB, are excluded from this table.

Table 11 — Nonperforming Assets by Quarter
(in thousands)


	June 30, 2010⁽¹⁾						December 31, 2009⁽¹⁾						June 30, 2009⁽¹⁾
	Nonaccrual		Foreclosed		Total		Nonaccrual		Foreclosed		Total		Nonaccrual		Foreclosed		Total
	Loans		Properties		NPAs		Loans		Properties		NPAs		Loans		Properties		NPAs
BY CATEGORY
Commercial (sec. by RE)	$	56,013	$	13,297	$	69,310	$	37,040	$	15,842	$	52,882	$	37,755	$	5,395	$	43,150
Commercial construction		17,872		11,339		29,211		19,976		9,761		29,737		15,717		5,847		21,564
Commercial & industrial		7,245		—		7,245		3,946		—		3,946		11,378		—		11,378

Total commercial		81,130		24,636		105,766		60,962		25,603		86,565		64,850		11,242		76,092
Residential construction		88,375		74,444		162,819		142,332		76,519		218,851		176,400		81,648		258,048
Residential mortgage		53,175		24,830		78,005		58,767		18,648		77,415		44,256		11,864		56,120
Consumer / installment		1,655		—		1,655		2,031		—		2,031		2,342		—		2,342

Total NPAs	$	224,335	$	123,910	$	348,245	$	264,092	$	120,770	$	384,862	$	287,848	$	104,754	$	392,602


BY MARKET
Atlanta MSA	$	74,031	$	30,605	$	104,636	$	106,536	$	41,125	$	147,661	$	148,155	$	50,450	$	198,605
Gainesville MSA		10,730		2,750		13,480		5,074		2,614		7,688		9,745		3,511		13,256
North Georgia		102,198		60,597		162,795		87,598		53,072		140,670		72,174		37,454		109,628
Western North Carolina		22,776		11,473		34,249		29,610		5,096		34,706		21,814		7,245		29,059
Coastal Georgia		8,341		16,548		24,889		26,871		17,150		44,021		30,311		3,904		34,215
East Tennessee		6,259		1,937		8,196		8,403		1,713		10,116		5,649		2,190		7,839

Total NPAs	$	224,335	$	123,910	$	348,245	$	264,092	$	120,770	$	384,862	$	287,848	$	104,754	$	392,602


(1)		Excludes non-performing loans and foreclosed properties covered by the loss-sharing agreement with the FDIC, related to the acquisition of SCB.

Non-performing assets in the residential construction category were $163 million at June 30, 2010, compared with $258 million at June 30, 2009, a decrease of $95.2 million, or 37%. While residential construction non-performing assets have begun to decrease, other categories of non-performing assets have experienced significant increases. Commercial non-performing assets of $106 million at June 30, 2010 increased $29.7 million over the prior year and residential mortgage non-performing assets of $78.0 million increased $21.9 million from June 30, 2009. As described previously, the majority of the increase in non-performing assets had been in the Atlanta, Georgia MSA, however Atlanta non-performing assets have been declining, down $94.0 million from June 30, 2009. At the same time, credit problems have migrated beyond Atlanta and are having a greater impact in United’s other markets. United’s north Georgia and western North Carolina markets have seen significant increases. Non-performing assets in the north Georgia market at June 30, 2010 were $163 million, compared to $110 million at the end of the second quarter of 2009. United’s western North Carolina market’s non-performing assets increased $5.2 million from June 30, 2009.

At June 30, 2010 and December 31, 2009, United had $77.9 million and $60.4 million, respectively, in loans with terms that have been modified in a troubled debt restructuring (“TDR”). Included therein were $11.0 million and $7.0 million of TDRs that were not performing in accordance with their modified terms and were included in non-performing loans. The remaining TDRs with an aggregate balance of $66.9 million and $53.4 million, respectively, were performing according to their modified terms and are therefore not considered to be non-performing assets. There were no TDRs reported as of June 30, 2009.

At June 30, 2010, December 31, 2009, and June 30, 2009, there were $163 million, $198 million and $224 million, respectively, of loans classified as impaired. Included in impaired loans at June 30, 2010, December 31, 2009 and June 30, 2009, was $150 million, $182 million and $110 million, respectively, that did not require specific reserves or had previously been charged down to net realizable value. The remaining balance of impaired loans at June 30, 2010, December 31, 2009 and June 30, 2009, of $12.5 million, $16.1 million and $113 million, respectively had specific reserves that totaled $1.1 million, $3.0 million and $24.9 million. The average recorded investment in impaired loans for the quarters ended June 30, 2010 and 2009 was $171 million and $248 million, respectively. There was no interest revenue recognized on loans while they were impaired for the first six months of 2010 or 2009.

The table below summarizes activity in non-performing assets by quarter. Assets covered by the loss sharing agreement with the FDIC, related to the acquisition of SCB, are not included in this table.

Table 12 — Activity in Nonperforming Assets by Quarter
(in thousands)


	Second Quarter 2010⁽¹⁾									Second Quarter 2009⁽¹⁾
	Nonaccrual			Foreclosed			Total			Nonaccrual			Foreclosed			Total
	Loans			Properties			NPAs			Loans			Properties			NPAs

Beginning Balance	$	280,802		$	136,275		$	417,077		$	259,155		$	75,383		$	334,538
Loans placed on non-accrual		155,007			—			155,007			169,351			—			169,351
Payments received		(12,189	)		—			(12,189	)		(15,597	)		—			(15,597	)
Loan charge-offs		(62,693	)		—			(62,693	)		(60,644	)		—			(60,644	)
Foreclosures		(66,994	)		66,994			—			(64,417	)		64,417			—
Capitalized costs		—			305			305			—			1,324			1,324
Note / property sales		(69,598	)		(68,472	)		(138,070	)		—			(33,752	)		(33,752	)
Write downs		—			(6,094	)		(6,094	)		—			(2,738	)		(2,738	)
Net gains (losses) on sales		—			(5,098	)		(5,098	)		—			120			120

Ending Balance	$	224,335		$	123,910		$	348,245		$	287,848		$	104,754		$	392,602


	First Six Months 2010⁽¹⁾									First Six Months 2009⁽¹⁾
	Nonaccrual			Foreclosed			Total			Nonaccrual			Foreclosed			Total
	Loans			Properties			NPAs			Loans			Properties			NPAs

Beginning Balance	$	264,092		$	120,770		$	384,862		$	190,723		$	59,768		$	250,491
Loans placed on non-accrual		294,037			—			294,037			345,110			—			345,110
Payments received		(17,922	)		—			(17,922	)		(40,375	)		—			(40,375	)
Loan charge-offs		(121,590	)		—			(121,590	)		(104,451	)		—			(104,451	)
Foreclosures		(116,227	)		116,227			—			(103,159	)		103,159			—
Capitalized costs		—			625			625			—			2,776			2,776
Note / property sales		(78,055	)		(94,423	)		(172,478	)		—			(56,751	)		(56,751	)
Write downs		—			(10,673	)		(10,673	)		—			(4,889	)		(4,889	)
Net gains (losses) on sales		—			(8,616	)		(8,616	)		—			691			691

Ending Balance	$	224,335		$	123,910		$	348,245		$	287,848		$	104,754		$	392,602


(1)		Excludes non-performing loans and foreclosed properties covered by the loss-sharing agreement with the FDIC, related to the acquisition of SCB.

Foreclosed property is initially recorded at fair value, less cost to sell. If the fair value, less costs to sell at the time of foreclosure, is less than the loan balance, the deficiency is charged against the allowance for loan losses. If the fair value, less estimated costs to sell, of the foreclosed property decreases during the holding period, a valuation allowance is established with a charge to foreclosed property costs. When the foreclosed property is sold, a gain or loss is recognized on the sale for the difference between the sales proceeds and the carrying amount of the property. Financed sales of OREO are accounted for in accordance with Accounting Standards Codification, Topic 360, Subtopic 20, Real Estate Sales. For the second quarter and first six months of 2010, United transferred foreclosures into OREO of $67.0 and $116 million, respectively. During the same periods, proceeds from sales of OREO were $68.5 million and $94.4 million, respectively. During the second quarter of 2010, United sold approximately $33 million in foreclosed properties to Fletcher.

Investment Securities

The composition of the investment securities portfolio reflects United’s investment strategy of maintaining an appropriate level of liquidity while providing a relatively stable source of revenue. The investment securities portfolio also provides a balance to interest rate risk and credit risk in other categories of the balance sheet while providing a vehicle for the investment of available funds, furnishing liquidity, and supplying securities to pledge as required collateral for certain deposits. Total investment securities at June 30, 2010 decreased $329 million from a year ago. During the second quarter of 2010, United transferred securities available for sale with a fair value of $315 million to held to maturity. At June 30, 2010, United had securities held to maturity with a carrying value of $322 million and securities available for sale totaling $1.2 billion. At June 30, 2010, December 31, 2009, and June 30, 2009, the securities portfolio represented approximately 19%, 19%, and 21% of total assets, respectively.

The investment securities portfolio primarily consists of U.S. Government sponsored agency mortgage-backed securities, non-agency mortgage-backed securities, U.S. Government agency securities, and municipal securities. Mortgage-backed securities rely on the underlying pools of mortgage loans to provide a cash flow of principal and interest. The actual maturities of these securities will differ from contractual maturities because loans underlying the securities can prepay. Decreases in interest rates will generally cause an acceleration of prepayment levels. In a declining interest rate environment, United may not be able to reinvest the proceeds from these prepayments in assets that have comparable yields. In a rising rate environment, the opposite occurs. Prepayments tend to slow and the weighted average life extends. This is referred to as extension risk which can lead to lower levels of liquidity due to the delay of cash receipts and can result in the holding of a below market yielding asset for a longer period of time.

Goodwill and Other Intangible Assets

United’s goodwill represents the premium paid for acquired companies above the fair value of the assets acquired and liabilities assumed, including separately identifiable intangible assets. United evaluates its goodwill annually, or more frequently if necessary, to determine if any impairment exists. United performed its annual goodwill impairment assessment as of December 31, 2009. United engaged the services of a national third party valuation expert who employed commonly used valuation techniques including an earnings approach that considered discounted future expected cash earnings and two market approaches. The annual goodwill impairment test performed as of December 31, 2009, did not result in the recognition of any goodwill impairment.

Conditions in the second quarter of 2010 did not lead management to believe that further impairment existed at the time. During the first quarter of 2009, United’s stock price fell from $13.58 at December 31, 2008 to a low of $2.28 in the first quarter and ended the first quarter of 2009 at $4.16. Management believed this fall in stock price reflected uncertainty about the economic cycle. Additionally, the stock prices of the peer group used as part of the valuation analysis in the December 31, 2008 goodwill impairment assessment experienced similar declines. The ongoing economic recession resulted in lower earnings with higher credit costs and those costs have been reflected in the income statement as well as valuation adjustments to the loan balances through increases to the level of the allowance for loan losses. With the stock price trading at a significant discount to book value and tangible book value, in addition to these other factors, management believed that goodwill should be re-assessed for impairment in the first quarter of 2009. As a result of this assessment, United recognized a goodwill impairment charge to earnings in the amount of $70 million during the first quarter of 2009. No goodwill impairment was recognized in the second quarter of 2009.

United will perform its annual goodwill impairment assessment in the fourth quarter of 2010 and will perform interim testing if conditions indicate that further impairment may be present. Events and conditions that could lead to further goodwill impairment include, among other things, changes in the long-term risk free interest rate or any of the risk premium assumptions used to compile the discount rate for the discounted cash flows valuation method used in Step 1, changes in stock price valuations for United or the selected peer group of banks used to determine United’s value under the guideline public companies method or further deterioration in United’s financial performance or outlook for future financial performance.

Other intangible assets, primarily core deposit intangibles representing the value of United’s acquired deposit base, are amortizing intangible assets that are required to be tested for impairment only when events or circumstances indicate that impairment may exist. There were no events or circumstances that led management to believe that any impairment exists in United’s other intangible assets.

Deposits

United initiated several programs in early 2009 to improve core earnings by growing customer transaction deposit accounts and lowering pricing on deposit accounts to improve its net interest margin and increase net interest revenue. The programs were very successful in increasing core transaction deposit accounts and reducing more costly time deposit balances as United’s funding needs decreased due to lower loan demand.

Total deposits as of June 30, 2010 were $6.3 billion, a decrease of $519 million, or 8%, from June 30, 2009. Total non-interest-bearing demand deposit accounts of $780 million increased $65.3 million, or 9%, due to the success of the core deposit programs. NOW, money market and savings accounts of $2.3 billion increased $241 million, or 12%, which included $83 million of growth in public NOW accounts.

Total time deposits, excluding brokered deposits, as of June 30, 2010 were $2.7 billion, down $675 million from June 30, 2009. Time deposits less than $100,000 totaled $1.6 billion, a decrease of $417 million, or 21%, from a year ago. Time deposits of $100,000 and greater totaled $1.1 billion as of June 30, 2010, a decrease of $258 million, or 19%, from June 30, 2009. During the second quarter of 2008, United made a decision to actively pursue time deposits by offering a 15 month certificate of deposit at an attractive rate, in order to increase liquidity. The program was successful in adding over $400 million of customer deposits. Most of those certificates of deposit matured in the third quarter of 2009 and United did not offer a special rate upon their maturity. Approximately half of the certificates of deposit that were part of the 15-month special renewed at standard rates in effect at the time of renewal. The other half left the bank, accounting for a large part of the decline in the balance in certificates of deposit from a year ago. United lowered its rates on non-special certificates during 2009, allowing balances to decline as United’s funding needs have declined due to weak loan demand. Brokered deposits as of June 30, 2010 were $612 million, compared to $763 million at June 30, 2009.

Wholesale Funding

The Bank is a shareholder in the Federal Home Loan Bank (“FHLB”) of Atlanta. Through this affiliation, FHLB secured advances totaled $104 million and $283 million as of June 30, 2010 and 2009, respectively. United anticipates continued use of this short- and long-term source of funds. FHLB advances outstanding at June 30, 2010 had fixed interest rates from 2.85% to 4.49%. Additional information regarding FHLB advances, is provided in Note 10 to the consolidated financial statements included in United’s 2009 Form 10-K.

At June 30, 2010, United had $104 million in Federal funds purchased, repurchase agreements, and other short-term borrowings outstanding, compared to $252 million outstanding at June 30, 2009. United takes advantage of these additional sources of liquidity when rates are favorable compared to other forms of short-term borrowings, such as FHLB advances and brokered deposits.

Interest Rate Sensitivity Management

The absolute level and volatility of interest rates can have a significant effect on United’s profitability. The objective of interest rate risk management is to identify and manage the sensitivity of net interest revenue to changing interest rates, in order to achieve United’s overall financial goals. Based on economic conditions, asset quality and various other considerations, management establishes tolerance ranges for interest rate sensitivity and manages within these ranges.

United’s net interest revenue, and the fair value of its financial instruments, are influenced by changes in the level of interest rates. United manages its exposure to fluctuations in interest rates through policies established by the Asset/Liability Management Committee (“ALCO”). ALCO meets periodically and has responsibility for approving asset/liability management policies, formulating and implementing strategies to improve balance sheet positioning and/or earnings, and reviewing United’s interest rate sensitivity.

One of the tools management uses to estimate the sensitivity of net interest revenue to changes in interest rates is an asset/liability simulation model. Resulting estimates are based upon a number of assumptions for each scenario, including the level of balance sheet growth, loan and deposit repricing characteristics and the rate of prepayments. The ALCO regularly reviews the assumptions for accuracy based on historical data and future expectations, however, actual net interest revenue may differ from model results. The primary objective of the simulation model is to measure the potential change in net interest revenue over time using multiple interest rate scenarios. The base scenario assumes rates remain flat and is the scenario to which all others are compared in order to measure the change in net interest revenue. Policy limits are based on gradually rising and falling rate scenarios, which are compared to this base scenario. Another commonly analyzed scenario is a most-likely scenario that projects the expected change in rates based on the slope of the yield curve. Other scenarios analyzed may include rate shocks, narrowing or widening spreads, and yield curve steepening or flattening. While policy scenarios focus on a twelve month time frame, longer time horizons are also modeled.

United’s policy is based on the 12-month impact on net interest revenue of interest rate ramps that increase 200 basis points and decrease 200 basis points from the base scenario. In the ramp scenarios, rates change 25 basis points per month over the initial eight months. The policy limits the change in net interest revenue over the next 12 months to a 10% decrease in either scenario. The policy ramp and base scenarios assume a static balance sheet. Historically low rates on June 30, 2010 made use of the down 200 basis points scenario problematic. At June 30, 2010 United’s simulation model indicated that a 200 basis point increase in rates would cause an approximate .4% increase in net interest revenue over the next twelve months, and a 25 basis point decrease would cause an approximate .2% decrease in net interest revenue over the next twelve months. At June 30, 2009, United’s simulation model indicated that a 200 basis point increase in rates would cause an approximate 1.2% decrease in net interest revenue over the next twelve months and a 25 basis point decrease in rates would cause an approximate .6% increase in net interest revenue over the next twelve months.

In order to manage its interest rate sensitivity, United uses off-balance sheet contracts that are considered derivative financial instruments. Derivative financial instruments can be a cost-effective and capital-effective means of modifying the repricing characteristics of on-balance sheet assets and liabilities. These contracts consist of interest rate swaps under which United pays a variable rate and receives a fixed rate.

The following table presents the interest rate derivative contracts outstanding.

Table 13 — Derivative Financial Instruments
As of June 30, 2010 (dollars in thousands)


			Rate
	Notional		Received /
Type/Maturity	Amount		Floor Rate			Rate Paid			Fair Value⁽³⁾
Fair Value Hedges:
LIBOR Swaps (Brokered CDs)
August 27, 2010⁽¹⁾	$	50,000		4.30	%		1.42	%	$	223
September 22, 2010⁽²⁾		50,000		4.25			1.59			295
September 30, 2010⁽¹⁾		95,000		4.25			1.42			649

Total Fair Value Hedges	$	195,000		4.26			1.46		$	1,167


(1)		Rate Paid equals 1-Month LIBOR plus 1.075

(2)		Rate Paid equals 1-Month LIBOR plus 1.2435

(3)		Excludes accrued interest

United’s derivative financial instruments are classified as either cash flow or fair value hedges. The change in fair value of cash flow hedges is recognized in other comprehensive income. Fair value hedges recognize currently in earnings both the effect of the change in the fair value of the derivative financial instrument and the offsetting effect of the change in fair value of the hedged asset or liability associated with the particular risk of that asset or liability being hedged. At June 30, 2010, United had receive fixed, pay LIBOR swap contracts with a total notional amount of $195 million that were accounted for as fair value hedges of brokered deposits.

From time to time, United will terminate swap or floor positions when conditions change and the position is no longer necessary to manage United’s overall sensitivity to changes in interest rates. In those situations where the terminated swap or floor was in an effective hedging relationship at the time of termination and the hedging relationship is expected to remain effective throughout the original term of the swap or floor, the resulting gain or loss at the time of termination is amortized over the remaining life of the original contract. For swap contracts, the gain or loss is amortized over the remaining original contract term using the straight line method of amortization. For floor contracts, the gain or loss is amortized over the remaining original contract term based on the original floorlet schedule. At June 30, 2010, United had $26.9 million in gains from terminated derivative positions included in Other Comprehensive Income that will be amortized into earnings over their remaining original contract terms.

United’s policy requires all derivative financial instruments be used only for asset/liability management through the hedging of specific transactions or positions, and not for trading or speculative purposes. Management believes that the risk associated with using derivative financial instruments to mitigate interest rate risk sensitivity is minimal and should not have any material unintended effect on the financial condition or results of operations. In order to mitigate potential credit risk, from time to time United may require the counterparties to derivative contracts to pledge securities as collateral to cover the net exposure.

Liquidity Management

The objective of liquidity management is to ensure that sufficient funding is available, at reasonable cost, to meet the ongoing operational cash needs and to take advantage of revenue producing opportunities as they arise. While the desired level of liquidity will vary depending upon a variety of factors, it is the primary goal of United to maintain a sufficient level of liquidity in all expected economic environments. Liquidity is defined as the ability to convert assets into cash or cash equivalents without significant loss and to raise additional funds by increasing liabilities. Liquidity management involves maintaining United’s ability to meet the daily cash flow requirements of the Bank’s customers, both depositors and borrowers. In addition, because United is a separate entity and apart from the Bank, it must provide for its own liquidity. United is responsible for the payment of dividends declared for its common and preferred shareholders, and interest and principal on any outstanding debt or trust preferred securities.

Two key objectives of asset/liability management are to provide for adequate liquidity in order to meet the needs of customers and to maintain an optimal balance between interest-sensitive assets and interest-sensitive liabilities to optimize net interest revenue. Daily monitoring of the sources and uses of funds is necessary to maintain a position that meets both requirements.

The asset portion of the balance sheet provides liquidity primarily through loan principal repayments and the maturities and sales of securities, as well as the ability to use these as collateral for borrowings on a secured basis. We also maintain excess funds in short-term interest-bearing assets that provide additional liquidity. Mortgage loans held for sale totaled $22.7 million at June 30, 2010, and typically turn over every 45 days as the closed loans are sold to investors in the secondary market.

The liability section of the balance sheet provides liquidity through interest-bearing and noninterest-bearing deposit accounts. Federal funds purchased, Federal Reserve short-term borrowings, FHLB advances and securities sold under agreements to repurchase are additional sources of liquidity and represent United’s incremental borrowing capacity. These sources of liquidity are generally short-term in nature and are used as necessary to fund asset growth and meet other short-term liquidity needs.

Substantially all of United’s liquidity is obtained from subsidiary service fees and dividends from the Bank, which is limited by applicable law.

At June 30, 2010, United had sufficient qualifying collateral to increase FHLB advances by $867 million and Federal Reserve discount window capacity of $301 million. United’s internal policy limits brokered deposits to 25% of total assets. At June 30, 2010, United had the capacity to increase brokered deposits by $1.3 billion and still remain within this limit. In addition to these wholesale sources, United has the ability to attract retail deposits at any time by competing more aggressively on pricing.

As disclosed in United’s consolidated statement of cash flows, net cash provided by operating activities was $60.7 million for the six months ended June 30, 2010. The net loss of $92.8 million for the six month period included non-cash expenses for provision for loan losses of $136 million and the loss on sale of nonperforming assets of $45.3 million. Net cash provided by investing activities of $238 million consisted primarily of purchases of securities of $418 million and purchases of premises and equipment of $3.6 million, that were offset by proceeds from sales of securities of $40.8 million, maturities and calls of investment securities of $444 million, proceeds from sales of other real estate of $80.9 million, a net decrease in loans of $72.9 million and cash received from Fletcher of $20.6 million. Net cash used in financing activities of $307 million consisted primarily of a net decrease of $296 million in deposits and a $10.0 million repayment of FHLB advances. In the opinion of management, United’s liquidity position at June 30, 2010, was sufficient to meet its expected cash flow requirements.

Capital Resources and Dividends

Shareholders’ equity at June 30, 2010 was $904 million, a decrease of $57.9 million from December 31, 2009. Accumulated other comprehensive income, which includes unrealized gains and losses on securities available for sale and the unrealized gains and losses on derivatives qualifying as cash flow hedges, is excluded in the calculation of regulatory capital adequacy ratios. Excluding the change in the accumulated other comprehensive income, shareholders’ equity decreased $55.0 million from December 31, 2009. During the second quarter of 2010, United recorded a $39.8 million increase to capital surplus as the result of the issuance of equity instruments to Fletcher International in conjunction with the sale of nonperforming assets. United paid $2.3 million in dividends on Series A and Series B preferred stock in the second quarter of 2010 and paid $4.5 million year-to-date. United recognizes that cash dividends are an important component of shareholder value, and therefore, intends to provide for cash dividends when earnings, capital levels and other factors permit.

United’s common stock trades on the Nasdaq Global Select Market under the symbol “UCBI”. Below is a quarterly schedule of high, low and closing stock prices and average daily volume for 2010 and 2009.

Table 14 — Stock Price Information


	2010								2009
							Avg Daily								Avg Daily
	High		Low		Close		Volume		High		Low		Close		Volume

First quarter	$	5.00	$	3.21	$	4.41		882,923	$	13.87	$	2.28	$	4.16		524,492
Second quarter		6.20		3.86		3.95		849,987		9.30		4.01		5.99		244,037
Third quarter										8.00		4.80		5.00		525,369
Fourth quarter										5.33		3.07		3.39		1,041,113

The Board of Governors of the Federal Reserve System has issued guidelines for the implementation of risk-based capital requirements by U.S. banks and bank holding companies. These risk-based capital guidelines take into consideration risk factors, as defined by regulators, associated with various categories of assets, both on and off-balance sheet. Under the guidelines, capital strength is measured in two tiers that are used in conjunction with risk-weighted assets to determine the risk-based capital ratios. The guidelines require an 8% total risk-based capital ratio, of which 4% must be Tier I capital. However, to be considered well-capitalized under the guidelines, a 10% total risk-based capital ratio is required, of which 6% must be Tier I capital.

Under the risk-based capital guidelines, assets and credit equivalent amounts of derivatives and off-balance sheet items are assigned to one of several broad risk categories according to the obligor, or, if relevant, the guarantor or the nature of the collateral. The aggregate dollar amount in each risk category is then multiplied by the risk weight associated with the category. The resulting weighted values from each of the risk categories are added together, and generally this sum is the company’s total risk weighted assets. Risk-weighted assets for purposes of United’s capital ratios are calculated under these guidelines.

A minimum leverage ratio is required in addition to the risk-based capital standards and is defined as Tier I capital divided by average assets adjusted for goodwill and deposit-based intangibles. Although a minimum leverage ratio of 3% is required for the highest-rated bank holding companies which are not undertaking significant expansion programs, the Federal Reserve Board requires a bank holding company to maintain a leverage ratio greater than 3% if it is experiencing or anticipating significant growth or is operating with less than well-diversified risks in the opinion of the Federal Reserve Board. The Federal Reserve Board uses the leverage and risk-based capital ratios to assess capital adequacy of banks and bank holding companies.

The following table shows United’s capital ratios, as calculated under regulatory guidelines, at June 30, 2010 and 2009.

Table 16 — Capital Ratios
(dollars in thousands)


	Regulatory						United Community Banks, Inc.
	Guidelines						(Consolidated)						United Community Bank
				Well			As of June 30,						As of June 30,
	Minimum			Capitalized			2010			2009			2010			2009

Risk-based ratios:
Tier I capital		4.0	%		6.0	%		11.07	%		10.44	%		11.94	%		10.90	%
Total capital		8.0			10.0			13.85			13.11			13.81			12.67
Leverage ratio		3.0			5.0			7.72			7.68			8.27			7.71

Tier I capital							$	568,047		$	607,265		$	611,990		$	638,943
Total capital								710,765			762,476			707,393			743,137

United’s Tier I capital excludes other comprehensive income, and consists of stockholders’ equity and qualifying capital securities, less goodwill and deposit-based intangibles. Tier II capital components include supplemental capital items such as a qualifying allowance for loan losses and qualifying subordinated debt. Tier I capital plus Tier II capital components is referred to as Total Risk-Based capital.

The capital ratios of United and the Bank currently exceed the minimum ratios as defined by federal regulators. United monitors these ratios to ensure that United and the Bank remain above the regulatory well capitalized guidelines.

Effect of Inflation and Changing Prices

A bank’s asset and liability structure is substantially different from that of an industrial firm in that primarily all assets and liabilities of a bank are monetary in nature with relatively little investment in fixed assets or inventories. Inflation has an important effect on the growth of total assets and the resulting need to increase equity capital at higher than normal rates in order to maintain an appropriate equity to assets ratio.

United’s management believes the effect of inflation on financial results depends on United’s ability to react to changes in interest rates, and by such reaction, reduce the inflationary effect on performance. United has an asset/liability management program to manage interest rate sensitivity. In addition, periodic reviews of banking services and products are conducted to adjust pricing in view of current and expected costs.


Item 3.		Quantitative and Qualitative Disclosure About Market Risk

There have been no material changes in United’s quantitative and qualitative disclosures about market risk as of June 30, 2010 from that presented in the Annual Report on Form 10-K for the year ended December 31, 2009. The interest rate sensitivity position at June 30, 2010 is included in management’s discussion and analysis on page 43 of this report.


Item 4.		Controls and Procedures

United’s management, including the Chief Executive Officer and Chief Financial Officer, supervised and participated in an evaluation of the company’s disclosure controls and procedures as of June 30, 2010. Based on, and as of the date of that evaluation, United’s Chief Executive Officer and Chief Financial Officer have concluded that the disclosure controls and procedures were effective in accumulating and communicating information to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures of that information under the Securities and Exchange Commission’s rules and forms and that the disclosure controls and procedures are designed to ensure that the information required to be disclosed in reports that are filed or submitted by United under the Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

There were no significant changes in the internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation.

Part II. Other Information


Item 1.		Legal Proceedings

In the ordinary course of operations, United and the Bank are defendants in various legal proceedings. In the opinion of management, there is no pending or threatened proceeding in which an adverse decision could result in a material adverse change in the consolidated financial condition or results of operations of United.


Item 1A.		Risk Factors

The Dodd-Frank Act and related regulations may adversely affect our business, financial condition, liquidity or results of operations.

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 was enacted on July 21, 2010. The Dodd-Frank Act creates a new Consumer Financial Protection Bureau with power to promulgate and enforce consumer protection laws. Smaller depository institutions, those with $10 billion or less in assets, will be subject to the Consumer Financial Protection Bureau’s rule-writing authority, and existing depository institution regulatory agencies will retain examination and enforcement authority for such institutions. The Dodd-Frank Act also establishes a Financial Stability Oversight Council chaired by the Secretary of the Treasury with authority to identify institutions and practices that might pose a systemic risk and, among other things, includes provisions affecting (1) corporate governance and executive compensation of all companies whose securities are registered with the SEC, (2) FDIC insurance assessments, (3) interchange fees for debit cards, which would be set by the Federal Reserve under a restrictive “reasonable and proportional cost” per transaction standard, (4) minimum capital levels for bank holding companies, subject to a grandfather clause for financial institutions with less than $15 billion in assets, (5) derivative and proprietary trading by financial institutions, and (6) the resolution of large financial institutions.

At this time, it is difficult to predict the extent to which the Dodd-Frank Act or the resulting regulations may adversely impact us. However, compliance with these new laws and regulations may increase our costs, limit our ability to pursue attractive business opportunities, cause us to modify our strategies and business operations and increase our capital requirements and constraints, any of which may have a material adverse impact on our business, financial condition, liquidity or results of operations.

Other than the additional risk factor mentioned above, there have been no material changes from the risk factors previously disclosed in United’s Form 10-K for the year ended December 31, 2009.


Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds — None


Item 3.		Defaults upon Senior Securities — None


Item 4.		(Removed and Reserved)


Item 5.		Other Information — None


Item 6.		Exhibits


	3.1			Restated Articles of Incorporation of United Community Banks, Inc., (incorporated herein by reference to Exhibit 3.1 to United Community Banks, Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2001, File No. 0-21656, filed with the Commission on August 14, 2001).

	3.2			Amendment to the Restated Articles of Incorporation of United Community Banks, Inc. (incorporated herein by reference to Exhibit 3.3 to United Community Banks, Inc.’s Registration Statement on Form S-4, File No. 333-118893, filed with the Commission on September 9, 2004).

	3.3			Certificate of Designation of the Common Stock Equivalent Junior Preferred Stock, dated March 31, 2010 (incorporated by reference to Exhibit 4.1 to United Community Banks, Inc.’s Current Report on Form 8-K, filed with the Commission on April 1, 2010.)

	3.4			Certificate of Rights and Preferences of the Series C Convertible Preferred Stock, dated April 1, 2010.

	3.5			Amendment to the Restated Articles of Incorporation, dated May 27, 2010.

	3.6			Amended and Restated Bylaws of United Community Banks, Inc., dated September 12, 1997 (incorporated herein by reference to Exhibit 3.1 to United Community Banks, Inc.’s Annual Report on Form 10-K, for the year ended December 31, 1997, File No. 0-21656, filed with the Commission on March 27, 1998).

	4.1			See Exhibits 3.1, 3.2 and 3.3 for provisions of the Restated Articles of Incorporation, as amended, and Amended and Restated Bylaws, which define the rights of the Shareholders.

	10.1			Asset Purchase Agreement, dated April 1, 2010 by and among United Community Bank and Fletcher International, Inc. and certain affiliates thereof who may become parties thereto as purchasers (incorporated by reference to Exhibit 1.1 to United Community Banks, Inc.’s Current Report on Form 8-K, filed with the Commission on April 1, 2010.)

	10.2			Securities Purchase Agreement, dated April 1, 2010 between United Community Banks, Inc. and Fletcher International, Ltd. (incorporated by reference to Exhibit 1.2 to United Community Banks, Inc.’s Current Report on Form 8-K, filed with the Commission on April 1, 2010.)

	10.3			Form of Warrant to be granted by United Community Banks, Inc. to Fletcher International, Ltd. (incorporated by reference to Exhibit 1.3 to United Community Banks, Inc.’s Current Report on Form 8-K, filed with the Commission on April 1, 2010.)

	10.4			Amendment to Securities Purchase Agreement, dated June 11, 2010 between United Community Banks, Inc. and Fletcher International, Ltd. (incorporated by reference to Exhibit 1.1 to United Community Banks, Inc.’s Current Report on Form 8-K, filed with the Commission on June 14, 2010.)

	10.5			Amendment to Warrants to Purchase Shares of Common Stock of United Community Banks, Inc., dated June 11, 2010, between United Community Banks, Inc. and Fletcher International, Ltd. (incorporated by reference to Exhibit 1.2 to United Community Banks, Inc.’s Current Report on Form 8-K, filed with the Commission on June 14, 2010.)

	31.1			Certification by Jimmy C. Tallent, President and Chief Executive Officer of United Community Banks, Inc., as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

	31.2			Certification by Rex S. Schuette, Executive Vice President and Chief Financial Officer of United Community Banks, Inc., as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

	32			Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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 BANKS, INC.

		*/s/ Jimmy C. Tallent* Jimmy C. Tallent
		President and Chief Executive Officer
		(Principal Executive Officer)

		*/s/ Rex S. Schuette* Rex S. Schuette
		Executive Vice President and
		Chief Financial Officer
		(Principal Financial Officer)

		*/s/ Alan H. Kumler* Alan H. Kumler
		Senior Vice President and Controller
		(Principal Accounting Officer)

		Date: August 4, 2010