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

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

UNITED COMMUNITY BANKS, INC.

Georgia		58-1807304
(State of Incorporation)		(I.R.S. Employer Identification No.)
63 Highway 515
Blairsville, Georgia		30512
Address of Principal		(Zip Code)
Executive Offices

(706) 781-2265

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

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

YES o NO þ

 

 

INDEX

PART I — Financial Information
Item 1. Financial Statements
Consolidated Statement of Income (unaudited) for the Three and Six Months Ended June 30, 2008 and 2007			2
Consolidated Balance Sheet at June 30, 2008 (unaudited), December 31, 2007 (audited) and June 30, 2007 (unaudited)			3
Consolidated Statement of Changes in Shareholders’ Equity (unaudited) for the Six Months Ended June 30, 2008 and 2007			4
Consolidated Statement of Cash Flows (unaudited) for the Six Months Ended June 30, 2008 and 2007			5
Notes to Consolidated Financial Statements			6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			12
Item 3. Quantitative and Qualitative Disclosures About Market Risk			29
Item 4. Controls and Procedures			29
PART II — Other Information
Item 1. Legal Proceedings			30
Item 1A. Risk Factors			30
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			30
Item 3. Defaults Upon Senior Securities			30
Item 4. Submission of Matters to a Vote of Security Holders			30
Item 5. Other Information			30
Item 6. Exhibits			31
Exhibit 31.1
Exhibit 31.2
Exhibit 32

Part I — Financial Information

Item 1 — Financial Statements

UNITED COMMUNITY BANKS, INC.

		Three Months Ended								Six Months Ended
		June 30,								June 30,
(in thousands, except per share data)		2008				2007				2008				2007
Interest revenue:
Loans, including fees		$	97,051			$	119,799			$	206,317			$	233,872
Investment securities:
Taxable			18,879				15,476				37,507				29,444
Tax exempt			398				438				792				885
Federal funds sold and deposits in banks			50				80				272				138
Total interest revenue			116,378				135,793				244,888				264,339
Interest expense:
Deposits:
NOW			7,216				11,470				15,803				22,097
Money market			2,310				3,540				5,223				6,080
Savings			180				374				407				683
Time			38,828				41,979				77,712				83,604
Total deposit interest expense			48,534				57,363				99,145				112,464
Federal funds purchased, repurchase agreements, & other short-term borrowings			1,820				3,671				6,138				5,488
Federal Home Loan Bank advances			2,818				5,035				8,563				9,836
Long-term debt			2,059				2,201				4,139				4,405
Total interest expense			55,231				68,270				117,985				132,193
Net interest revenue			61,147				67,523				126,903				132,146
Provision for loan losses			15,500				18,700				23,000				22,400
Net interest revenue after provision for loan losses			45,647				48,823				103,903				109,746
Fee revenue:
Service charges and fees			7,957				7,975				15,770				15,228
Mortgage loan and other related fees			2,202				2,476				4,165				4,699
Consulting fees			2,252				2,241				4,059				3,988
Brokerage fees			814				1,192				1,907				2,136
Securities gains, net			357				1,386				357				1,593
Losses on prepayment of borrowings			—				(1,164	)			—				(1,164	)
Other			1,523				2,448				3,044				4,456
Total fee revenue			15,105				16,554				29,302				30,936
Total revenue			60,752				65,377				133,205				140,682
Operating expenses:
Salaries and employee benefits			28,753				30,022				57,507				58,339
Communications and equipment			3,852				3,845				7,684				7,657
Occupancy			3,704				3,316				7,420				6,507
Advertising and public relations			2,009				2,098				3,360				4,114
Postage, printing and supplies			1,448				1,680				3,040				3,340
Professional fees			1,679				2,010				3,600				3,489
Amortization of intangibles			745				633				1,512				1,197
Other			7,571				4,098				13,167				7,900
Total operating expenses			49,761				47,702				97,290				92,543
Income before income taxes			10,991				17,675				35,915				48,139
Income taxes			3,898				5,764				12,744				16,883
Net income		$	7,093			$	11,911			$	23,171			$	31,256
Net income available to common shareholders		$	7,089			$	11,906			$	23,163			$	31,246
Earnings per common share:
Basic		$	.15			$	.26			$	.49			$	.71
Diluted			.15				.26				.49				.70
Dividends per common share			.09				.09				.18				.18
Weighted average common shares outstanding:
Basic			47,060				44,949				47,013				43,980
Diluted			47,249				45,761				47,260				44,842

See notes to Consolidated Financial Statements

UNITED COMMUNITY BANKS, INC.

		June 30,				December 31,				June 30,
(in thousands, except share and per share data)		2008				2007				2007
		(unaudited)				(audited)				(unaudited)
ASSETS
Cash and due from banks		$	176,240			$	157,549			$	171,095
Interest-bearing deposits in banks			12,455				62,074				23,146
Cash and cash equivalents			188,695				219,623				194,241
Securities available for sale			1,430,588				1,356,846				1,213,659
Mortgage loans held for sale			27,094				28,004				30,615
Loans, net of unearned income			5,933,141				5,929,263				5,999,093
Less allowance for loan losses			91,035				89,423				92,471
Loans, net			5,842,106				5,839,840				5,906,622
Premises and equipment, net			181,395				180,088				171,327
Accrued interest receivable			50,399				62,828				64,538
Goodwill and other intangible assets			323,296				325,305				326,467
Other assets			220,478				194,768				180,198
Total assets		$	8,264,051			$	8,207,302			$	8,087,667
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Deposits:
Demand		$	696,575			$	700,941			$	773,435
NOW			1,541,609				1,474,818				1,447,789
Money market			418,935				452,917				504,730
Savings			187,088				186,392				207,468
Time:
Less than $100,000			1,744,217				1,573,604				1,651,486
Greater than $100,000			1,573,078				1,364,763				1,428,841
Brokered			534,954				322,516				347,520
Total deposits			6,696,456				6,075,951				6,361,269
Federal funds purchased, repurchase agreements, and other short-term borrowings			288,650				638,462				238,429
Federal Home Loan Bank advances			285,807				519,782				499,060
Long-term debt			107,996				107,996				113,151
Accrued expenses and other liabilities			47,252				33,209				47,027
Total liabilities			7,426,161				7,375,400				7,258,936
Shareholders’ equity:
Preferred stock, $1 par value; $10 stated value; 10,000,000 shares authorized; 25,800, 25,800 and 32,200 shares issued and outstanding			258				258				322
Common stock, $1 par value; 100,000,000 shares authorized; 48,809,301, 48,809,301 and 48,781,351 shares issued			48,809				48,809				48,781
Common stock issuable; 105,579, 73,250 and 60,761 shares			2,696				2,100				1,816
Capital surplus			462,939				462,881				461,226
Retained earnings			362,089				347,391				329,229
Treasury stock; 1,713,310 and 1,905,921 shares, at cost			(39,222	)			(43,798	)			—
Accumulated other comprehensive income (loss)			321				14,261				(12,643	)
Total shareholders’ equity			837,890				831,902				828,731
Total liabilities and shareholders’ equity		$	8,264,051			$	8,207,302			$	8,087,667

See notes to Consolidated Financial Statements

UNITED COMMUNITY BANKS, INC.

																										Accumulated
										Common																Other
		Preferred				Common				Stock				Capital				Retained				Treasury				Comprehensive
(in thousands, except share and per share data)		Stock				Stock				Issuable				Surplus				Earnings				Stock				Income (Loss)				Total
Balance, December 31, 2006		$	322			$	42,891			$	862			$	270,383			$	306,261			$	—			$	(3,952	)		$	616,767
Comprehensive income:
Net income																			31,256												31,256
Other comprehensive income:
Unrealized holding losses on available for sale securities, net of deferred tax benefit and reclassification adjustment																											(5,517	)			(5,517	)
Unrealized losses on derivative financial instruments qualifying as cash flow hedges, net of deferred tax benefit																											(3,174	)			(3,174	)
Comprehensive income																			31,256								(8,691	)			22,565
Cash dividends declared on common stock ($.18 per share)																			(8,278	)											(8,278	)
Common stock issued for acquisitions ( 5,691,948 shares)							5,692								185,649																191,341
Exercise of stock options (78,228 shares)							78								722																800
Common stock issued to Dividend Reinvestment Plan and employee benefit plans (90,002 shares)							90								2,791																2,881
Amortization of stock option and restricted stock awards															1,630																1,630
Vesting of restricted stock (30,310 shares issued, 2,750 shares deferred)							30				81				(111	)															—
Deferred compensation plan, net, including dividend equivalents											873																				873
Tax benefit from options exercised															162																162
Dividends declared on preferred stock ($.30 per share)																			(10	)											(10	)
Balance, June 30, 2007		$	322			$	48,781			$	1,816			$	461,226			$	329,229			$	—			$	(12,643	)		$	828,731
Balance, December 31, 2007		$	258			$	48,809			$	2,100			$	462,881			$	347,391			$	(43,798	)		$	14,261			$	831,902
Comprehensive income:
Net income																			23,171												23,171
Other comprehensive income:
Unrealized holding losses on available for sale securities, net of deferred tax benefit and reclassification adjustment																											(15,203	)			(15,203	)
Unrealized gains on derivative financial instruments qualifying as cash flow hedges, net of deferred tax expense																											1,263				1,263
Comprehensive income																			23,171								(13,940	)			9,231
Cash dividends declared on common stock ($.18 per share)																			(8,465	)											(8,465	)
Exercise of stock options (62,860 shares)															(717	)							1,529								812
Common stock issued to Dividend Reinvestment Plan and employee benefit plans (113,047 shares)															(1,024	)							2,648								1,624
Amortization of stock options and restricted stock															1,944																1,944
Vesting of restricted stock (15,159 shares issued, 8,700 shares deferred)											264				(626	)							362								—
Deferred compensation plan, net, including dividend equivalents											374																				374
Shares issued from deferred compensation plan (1,545 shares)															(42	)			5								37				—
Tax benefit from options exercised															476																476
Dividends declared on preferred stock ($.30 per share)																			(8	)											(8	)
Balance, June 30, 2008		$	258			$	48,809			$	2,696			$	462,939			$	362,089			$	(39,222	)		$	321			$	837,890

Comprehensive loss for the second quarter of 2008 was $31,569,000 and comprehensive income for the second quarter of 2007 was $511,000.

See notes to Consolidated Financial Statements

UNITED COMMUNITY BANKS, INC.

		Six Months Ended
		June 30,
(in thousands)		2008				2007
Operating activities, net of effect of business combinations:
Net income		$	23,171			$	31,256
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization and accretion			7,211				6,728
Provision for loan losses			23,000				22,400
Stock based compensation			1,944				1,630
Gain on sale of securities available for sale			(357	)			(1,593	)
Gain on sale of other assets			(29	)			(210	)
Loss on prepayment of borrowings			—				1,164
Changes in assets and liabilities:
Other assets and accrued interest receivable			(14,055	)			(5,732	)
Accrued expenses and other liabilities			25,309				(13,319	)
Mortgage loans held for sale			910				4,710
Net cash provided by operating activities			67,104				47,034
Investing activities, net of effect of business combinations:
Proceeds from sales of securities available for sale			79,735				44,150
Proceeds from maturities and calls of securities available for sale			344,597				187,556
Purchases of securities available for sale			(511,626	)			(300,857	)
Net increase in loans			(65,062	)			(113,609	)
Purchase of Bank Owned Life Insurance (BOLI)			—				(50,000	)
Proceeds from sales of premises and equipment			323				662
Purchases of premises and equipment			(7,291	)			(20,357	)
Net cash paid for acquisitions			—				(4,346	)
Proceeds from sale of other real estate			30,636				7,799
Net cash used by investing activities			(128,688	)			(249,002	)
Financing activities, net of effect of business combinations:
Net change in deposits			620,505				20,538
Net change in federal funds purchased, repurchase agreements, and other short-term borrowings			(349,812	)			209,200
Proceeds from FHLB advances			400,000				750,000
Repayments of FHLB advances			(634,000	)			(751,164	)
Proceeds from exercise of stock options			812				800
Proceeds from issuance of common stock for dividend reinvestment and employee benefit plans			1,624				2,881
Cash dividends on common stock			(8,465	)			(7,320	)
Cash dividends on preferred stock			(8	)			(10	)
Net cash provided by financing activities			30,656				224,925
Net change in cash and cash equivalents			(30,928	)			22,957
Cash and cash equivalents at beginning of period			219,623				171,284
Cash and cash equivalents at end of period		$	188,695			$	194,241
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest		$	120,314			$	130,527
Income taxes			20,098				26,984

See notes to Consolidated Financial Statements

United Community Banks, Inc.

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 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 2007 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.

Note 2 — 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, 2008, approximately 1,378,000 additional awards could be granted under the plan. Through June 30, 2008, only incentive stock options, nonqualified stock options and restricted stock awards had been granted under the plan.

The following table shows stock option activity for the first six months of 2008.

										Weighted-
										Average				Aggregate
						Weighted-				Remaining				Intrinisic
						Average Exercise				Contractual				Value
Options		Shares				Price				Term (Years)				($000)
Outstanding at December 31, 2007			2,912,557			$	21.57
Granted			582,750				13.79
Exercised			(68,039	)			13.51
Forfeited			(53,175	)			28.50
Expired			(23,275	)			24.21
Outstanding at June 30, 2008			3,350,818			$	20.26				6.5			$	74
Exercisable at June 30, 2008			2,025,341			$	18.88				4.9			$	74

The weighted average fair value of stock options granted in the second quarter of 2008 and 2007 was $2.93 and $8.30, 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 key assumptions used to determine the fair value of stock options are presented in the table below.

		Six Months Ended
		June 30,
		2008				2007
Expected volatility			23.4	%			20	%
Expected dividend yield		2.1% to 3.6%				1.1% to 1.2%
Expected life (in years)			6.25				6.25 to 6.50
Risk-free rate		2.9% to 3.9%				4.6% to 4.9%

United’s stock trading history began in March of 2002 when United listed on the Nasdaq National Market. For 2008 and 2007, expected volatility was determined using United’s historical monthly volatility over the period beginning in March of 2002 through the end of the last completed year. Compensation expense for stock options was $1.1 million and $1.0 million for the six months ended June 30, 2008 and 2007, respectively, which was net of deferred tax benefits of $445,000 and $293,000, respectively. 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, net of any applicable tax benefit, 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, 2008 and 2007 was $277,000 and $1.8 million, respectively.

The table below presents the activity in restricted stock awards for the first six months of 2008.

						Weighted-
						Average Grant-
Restricted Stock		Shares				Date Fair Value
Outstanding at December 31, 2007			84,413			$	29.26
Granted			29,597				14.11
Vested			(23,859	)			26.95
Cancelled			(3,000	)			30.10
Outstanding at June 30, 2008			87,151			$	24.72

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, 2008 and 2007, compensation expense of $441,000 and $324,000, respectively, was recognized related to restricted stock awards. The total intrinsic value of the restricted stock was $743,000 at June 30, 2008.

As of June 30, 2008, there was $8.9 million of unrecognized compensation cost related to nonvested stock options and restricted stock awards granted under the plan. That cost is expected to be recognized over a weighted-average period of 1.5 years. The aggregate grant date fair value of options and restricted stock awards that vested during the six months ended June 30, 2008, was $3.5 million.

Note 3 — Common Stock Issued / Common Stock Issuable

United provides a Dividend Reinvestment and Share Purchase Plan (DRIP) to its shareholders. Under the DRIP, shareholders of record can voluntarily reinvest all or a portion of their cash dividends into shares of United’s common stock, as well as purchase additional stock through the plan with cash. 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, 2008 and 2007, United issued 113,047 and 90,002 shares, respectively, and increased capital by $1.6 million and $2.9 million, respectively, through these programs.

In the fourth quarter of 2005, United began offering 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, 2008 and 2007, 105,579 and 60,761 shares, respectively, are issuable under the deferred compensation plan.

Note 4 — Earnings Per Share

The following table sets forth the computation of basic and diluted earnings per share for the three months and six months ended June 30.

		Three Months Ended								Six Months Ended
		June 30,								June 30,
(in thousands, except per share data)		2008				2007				2008				2007
Net income available to common shareholders		$	7,089			$	11,906			$	23,163			$	31,246
Weighted average shares outstanding:
Basic			47,060				44,949				47,013				43,980
Effect of dilutive securities
Stock options and restricted stock			91				760				155				819
Common stock issuable under deferred compensation plan			98				52				92				43
Diluted			47,249				45,761				47,260				44,842
Earnings per common share:
Basic		$	.15			$	.26			$	.49			$	.71
Diluted		$	.15			$	.26			$	.49			$	.70

Note 5 — Mergers and Acquisitions

On June 1, 2007, United acquired 100 percent of the outstanding common shares of Gwinnett Commercial Group, Inc. (Gwinnett), a community bank holding company headquartered in Lawrenceville, Georgia. Gwinnett’s results of operations are included in consolidated financial results from the acquisition date. Gwinnett was the parent company of First Bank of the South, a community bank with five full service banking offices serving the north metro Atlanta counties of Gwinnett, DeKalb and north Fulton and a commercial loan office in Walton County. United has continued to expand its presence in metropolitan Atlanta and the acquisition of Gwinnett accomplished a long-standing strategic goal of encircling metro Atlanta. Additionally, Gwinnett brought strong commercial lending experience to better diversify United’s business mix. The aggregate purchase price was approximately $222.9 million, including 5,691,948 shares of United’s common stock and $31.5 million in cash that was exchanged for all of the outstanding common shares and options to purchase common shares of Gwinnett. The value of the common stock issued of $33.62 per share was determined based on the average of the closing market price of United’s common shares over the period beginning two days before and ending two days after the terms of the acquisition were agreed to and announced.

The financial information below presents the pro forma earnings of United assuming that the results of operations of Gwinnett were included in consolidated earnings for the three and six months ended June 30.

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2008				2007				2008				2007
Total revenue		$	60,752			$	69,221			$	133,205			$	151,930
Net income			7,093				13,016				23,171				35,514
Diluted earnings per common share			.15				.26				.49				.72

Note 6 — Assets and Liabilities Measured at Fair Value

On January 1, 2008, United adopted Statement of Financial Accounting Standards No. 157, Fair Value Measurements (“SFAS No. 157”). SFAS No. 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. SFAS No. 157 applies to reported balances that are required or permitted to be measured at fair value under existing accounting pronouncements; accordingly, the standard does not require any new fair value measurements of reported balances.

SFAS No. 157 emphasizes that fair value is a market-based measurement, not an entity-specific measurement. Therefore, a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, SFAS No. 157 establishes a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy).

Fair Value Hierarchy

	Level 1		Valuation is based upon quoted prices (unadjusted) in active markets for identical assets or liabilities that United has the ability to access.
	Level 2		Valuation is based upon quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability (other than quoted prices), such as interest rates, foreign exchange rates, and yield curves that are observable at commonly quoted intervals.
	Level 3		Valuation is generated from model-based techniques that use at least one significant assumption based on unobservable inputs for the asset or liability, which are typically based on an entity’s own assumptions, as there is little, if any, related market activity. In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. United’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.

The following is a description of valuation methodologies used for assets and liabilities recorded at fair value.

Securities Available for Sale

Investment securities available-for-sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange, U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets and money market funds. Level 2 securities include mortgage-backed securities issued by government sponsored entities, municipal bonds and corporate debt securities. Securities classified as Level 3 include asset-backed securities in less liquid markets.

Deferred Compensation Plan Assets and Liabilities

Included in other assets in the consolidated balance sheet are assets related to employee deferred compensation plans. The assets associated with these plans are invested in mutual funds and classified as Level 1. Deferred compensation liabilities, also classified as Level 1, are carried at the fair value of the obligation to the employee, which mirrors the fair value of the invested assets and is included in other liabilities in the consolidated balance sheet.

Loans Held for Sale

Loans held for sale are carried at the lower of cost or market value. The fair value of loans held for sale is based on what secondary markets are currently offering for portfolios with similar characteristics. As such, United classifies loans subjected to nonrecurring fair value adjustments as Level 2.

Loans

United does not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and an allowance for loan losses is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures impairment in accordance with SFAS 114, Accounting by Creditors for Impairment of a Loan, (SFAS 114). The fair value of impaired loans is estimated using one of several methods, including collateral value, market value of similar debt, enterprise value, liquidation value and discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. At June 30, 2008, substantially all of the total impaired loans were evaluated based on the fair value of the collateral. In accordance with SFAS 157, impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price or a current appraised value, United records the impaired loan as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, United records the impaired loan as nonrecurring Level 3.

Foreclosed Assets

Foreclosed assets are adjusted to fair value upon transfer of the loans to foreclosed assets. Subsequently, foreclosed assets are carried at the lower of carrying value or fair value. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral. When the fair value of the collateral is based on an observable market price or a current appraised value, United records the foreclosed asset as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, United records the foreclosed asset as nonrecurring Level 3.

Goodwill and Other Intangible Assets

Goodwill and identified intangible assets are subject to impairment testing. United’s approach to testing goodwill for impairment is to compare the business unit’s carrying value to the implied fair value based on multiples of earnings and tangible book value for recently completed merger transactions. In the event the fair value is determined to be less than the carrying value, the asset is recorded at fair value as determined by the valuation model. As such, United classifies goodwill and other intangible assets subjected to nonrecurring fair value adjustments as Level 3.

Derivative Financial Instruments

Currently, United uses interest rate swaps and interest rate floors to manage its interest rate risk. The valuation of these instruments is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities. The fair values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash receipts and the discounted expected variable cash payments. The variable cash payments are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves.

The fair values of interest rate options are determined using the market standard methodology of discounting the future expected cash receipts that would occur if variable interest rates fell below the strike rate of the floors. The variable interest rates used in the calculation of projected receipts on the floor are based on an expectation of future interest rates derived from observable market interest rate curves and volatilities. To comply with the provisions of SFAS No. 157, United incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, United has considered the effect of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees.

Although United has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. However, as of June 30, 2008, United has assessed the significance of the effect of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives. As a result, United has determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.

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, 2008, aggregated by the level in the fair value hierarchy within which those measurements fall.

(in thousands)														Balance at
Description		Level 1				Level 2				Level 3				June 30, 2008
Assets
Securities available for sale		$	—			$	1,430,588			$	—			$	1,430,588
Deferred compensation plan assets			4,949				—				—				4,949
Derivative financial instruments			—				28,461				—				28,461
Total		$	4,949			$	1,459,049			$	—			$	1,463,998
Liabilities
Deferred compensation plan liability		$	4,949			$	—			$	—			$	4,949
Total liabilities		$	4,949			$	—			$	—			$	4,949

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 in accordance with U.S. Generally Accepted Accounting Principles. 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, 2008, aggregated by the level in the fair value hierarchy within which those measurements fall.

(in thousands)														Balance at
Description		Level 1				Level 2				Level 3				June 30, 2008
Assets
Loans		$	—			$	—			$	55,321			$	55,321
Foreclosed assets			—				—				17,567				17,567
Total		$	—			$	—			$	72,888			$	72,888

Note 7 — Recent Accounting Pronouncements

In February 2008, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position (“FSP”) 140-3 Accounting for Transfers of Financial Assets and Repurchase Financing Transactions. This statement provides guidance regarding the accounting for a transfer of a financial asset and repurchase financing where the counterparties for both transactions are the same. In these circumstances, certain criteria must be met in order to not account for the transactions as a linked transaction. This FSP becomes effective for fiscal years and interim periods within those fiscal years, beginning on or after November 15, 2008. United does not anticipate that this FSP will have a material effect on United’s financial position, results of operations, or disclosures.

In March 2008, the FASB issued Statement of Financial Accounting Standards No. 161 (SFAS No. 161), Disclosures about Derivative Instruments and Hedging Activities. This statement requires an entity to provide enhanced disclosures about how and why an entity uses derivative instruments, how derivative instruments and related items are accounted for under SFAS 133, Accounting for Derivative Instruments and Hedging Activities (“SFAS 133”) and its related interpretations, and how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. This statement is intended to enhance the current disclosure framework in SFAS 133, by requiring the objectives for using derivative instruments be disclosed in terms of underlying risk and accounting designation. This statement becomes effective for fiscal years and interim periods beginning within those years after November 15, 2008. As this statement is related to disclosures only, United does not anticipate that adoption of this standard will have a material effect on United’s financial position or results of operations.

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 regarding United Community Banks, Inc. (“United”), including, without limitation, statements relating to United’s expectations with respect to revenue, credit losses, levels of nonperforming assets, expenses, earnings and other measures of financial performance. Words such as “may”, “could”, “would”, “should”, “believes”, “expects”, “anticipates”, “estimates”, “intends”, “plans”, “targets” or similar expressions are intended to identify forward-looking statements. These forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties that are subject to change based on various factors (many of which are beyond United’s control). The following factors, among others, could cause United’s financial performance to differ materially from the expectations expressed in such forward-looking statements:

•

our recent operating results may not be indicative of future operating results;

•

our business is subject to the success of the local economies in which we operate;

•

our concentration of construction and land development loans is subject to unique risks that could adversely affect our earnings;

•

we may face risks with respect to future expansion and acquisitions or mergers;

•

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

•

if our allowance for loan losses is not sufficient to cover actual loan losses, our earnings would decrease;

•

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

•

competition from financial institutions and other financial service providers may adversely affect our profitability;

•

business increases, productivity gains and other investments are lower than expected or do not occur as quickly as anticipated;

•

competitive pressures among financial services companies increase significantly;

•

the success of our business strategy;

•

the strength of the United States economy in general changes;

•

change in trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System;

•

inflation or market conditions fluctuate;

•

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

•

financial services laws and regulations change;

•

technology changes and United fails to adapt to those changes;

•

consumer spending and saving habits change;

•

unanticipated regulatory or judicial proceedings occur; and

•

United is unsuccessful at managing the risks involved in the foregoing.

Additional information with respect to factors that may cause actual results to differ materially from those contemplated by such forward-looking statements may also be included in other reports that United files with the Securities and Exchange Commission. United cautions that the foregoing list of factors is not exclusive and not to place undue reliance on forward-looking statements. United does not intend to update any forward-looking statement, whether written or oral, relating to the matters discussed in this Form 10-Q.

Overview

The following discussion is intended to provide insight into the results of operations and financial condition of 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, 2008, United had total consolidated assets of $8.3 billion, total loans of $5.9 billion, total deposits of $6.7 billion and stockholders’ equity of $837.9 million.

United activities are primarily conducted by its wholly-owned Georgia banking subsidiary (the “Bank”) and Brintech, Inc., a consulting firm providing professional services to the financial services industry. 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 metropolitan statistical area (“MSA”), the Gainesville MSA, coastal Georgia, western North Carolina, and east Tennessee.

Net income for the second quarter of 2007 included a special $15 million provision for fraud related loan losses involving two failed real estate developments near Spruce Pine, North Carolina. The after-tax effect of this provision was $9.2 million, or $.20 per diluted share. Because management believes these losses are an isolated and non-recurring event, we will highlight operating earnings information, which excludes the special provision to provide a better understanding of our ongoing earnings and credit trends.

Net operating income was $7.1 million for the second quarter of 2008, a decrease of 66% from the $21.1 million for the second quarter of 2007. Diluted operating earnings per common share was $.15 for the second quarter of 2008, a decrease of 67% from the $.46 for the second quarter of 2007. Operating return on tangible equity for the second quarter of 2008 was 5.86%, compared to 17.52% for the second quarter of 2007. Operating return on assets for the second quarter of 2008 was .34% as compared to 1.12% for the second quarter of 2007.

Net operating income was $23.2 million for the six months ended June 30, 2008, a decrease of 43% from the $40.4 million for the six months ended June 30, 2007. Diluted operating earnings per common share was $.49 for the six months ended June 30, 2008, a decrease of 46% from the $.90 for the six months ended June 30, 2007. Operating return on tangible equity for the six months ended June 30, 2008 was 9.46%, compared to 17.36% for the six months ended June 30, 2007. Operating return on assets for the six months ended June 30, 2008 was .56% as compared to 1.12% for the six months ended June 30, 2007.

Earnings decreased primarily as a result of higher credit costs and margin compression due to competitive deposit pricing and higher levels of non-performing assets. Housing starts remain at low levels, leaving a surplus of lot inventory in our footprint, most notably in the Atlanta MSA. This increase in lot inventory negatively affects both the cash flows of our residential construction and land development customers, and the demand for new land development loans.

Nonperforming assets increased to 1.84% of total assets as of June 30, 2008, a significant increase from .54% as of June 30, 2007. This increase is a reflection of the downstream effects of the lot inventory buildup in the Atlanta MSA, which itself is indicative of the regional economic slowdown that is occurring in much of the Southeast. To date, the rise in nonperforming assets has been mostly confined to the residential construction portfolio and predominantly within the Atlanta MSA.

Fee revenue decreased $1.4 million, or 9%, from the second quarter of 2007. Although service charges and fees and consulting fees remained near the same level as the second quarter of 2007, mortgage fees and brokerage fees saw declines reflecting the slow housing market and declining conditions in the financial markets. Other fee revenue was down from a year ago, primarily due to gains from the sale of foreclosed properties realized in the second quarter of 2007 and higher income from bank owned life insurance and deferred compensation plan assets in the second quarter of 2007.

Operating expenses increased $2.1 million, or 4%, from the second quarter of 2007, primarily due to higher expenses and losses on foreclosed real estate properties, higher FDIC insurance premiums and the additional operating expenses related to First Bank of the South. Because the acquisition of First Bank of the South occurred on June 1, 2007, second quarter 2007 expenses include only one month of expenses for the quarter compared to three months for 2008.

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 and accounting for intangible assets. In particular, United’s accounting policies related to allowance for loan losses and intangibles 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.

Non-GAAP Performance Measures

The presentation of United’s financial results herein include references to operating performance measures, which are measures of performance determined by methods other than GAAP. Management included non-GAAP performance measures because it believes they are useful for evaluating United’s operations and performance over periods of time. Also, United uses operating performance measures in managing and evaluating United’s business and intends to use them in discussions about United’s operations and performance.

Operating performance measures exclude the effect of a special $15 million fraud related provision for loan losses recorded in the second quarter of 2007 and an additional $3 million provision and $18 million in related charge-offs in the fourth quarter of 2007 involving lot loans near Spruce Pine, North Carolina. Management believes that the circumstances leading to the special provision and subsequent charge-offs were isolated, non-recurring events and do not reflect overall trends in United’s performance. Management also believes that these non-GAAP performance measures provide users of United’s financial information with a meaningful measure for assessing United’s financial results and credit trends and comparing financial results to prior periods.

A reconciliation of operating earnings measures to reported earnings measures using GAAP is presented below:

Table 1 — Operating Earnings to GAAP Earnings Reconciliation

		2008								2007												For the Six Months Ended
		Second				First				Fourth				Third				Second				June 30
(in thousands, except per share data)		Quarter				Quarter				Quarter				Quarter				Quarter				2008				2007
Special provision for fraud related loan losses		$	—			$	—			$	3,000			$	—			$	15,000			$	—			$	15,000
Income tax effect of special provision			—				—				1,167				—				5,835				—				5,835
After-tax effect of special provision		$	—			$	—			$	1,833			$	—			$	9,165			$	—			$	9,165
Net Income Reconciliation
Operating net income		$	7,093			$	16,078			$	6,034			$	22,536			$	21,076			$	23,171			$	41,421
After-tax effect of special provision and merger-related charges			—				—				(1,833	)			—				(9,165	)			—				(9,165	)
Net income (GAAP)		$	7,093			$	16,078			$	4,201			$	22,536			$	11,911			$	23,171			$	32,256
Basic Earnings Per Share Reconciliation
Basic operating earnings per share		$	.15			$	.34			$	.13			$	.47			$	.47			$	.49			$	.92
Per share effect of special provision and merger-related charges			—				—				(.04	)			—				(.21	)			—				(.21	)
Basic earnings per share (GAAP)		$	.15			$	.34			$	.09			$	.47			$	.26			$	.49			$	.71
Diluted Earnings Per Share Reconciliation
Diluted operating earnings per share		$	.15			$	.34			$	.13			$	.46			$	.46			$	.49			$	.90
Per share effect of special provision and merger-related charges			—				—				(.04	)			—				(.20	)			—				(.20	)
Diluted earnings per share (GAAP)		$	.15			$	.34			$	.09			$	.46			$	.26			$	.49			$	.70
Provision for Loan Losses Reconciliation
Operating provision for loan losses		$	15,500			$	7,500			$	26,500			$	3,700			$	3,700			$	23,000			$	7,400
Special provision for fraud related loan losses			—				—				3,000				—				15,000				—				15,000
Provision for loan losses (GAAP)		$	15,500			$	7,500			$	29,500			$	3,700			$	18,700			$	23,000			$	22,400
Nonperforming Assets Reconciliation
Nonperforming assets excluding fraud-related assets		$	148,219			$	85,182			$	40,956			$	39,761			$	19,968			$	148,218			$	19,968
Fraud-related loans and OREO included in nonperforming assets			3,945				4,682				5,302				23,576				23,633				3,945				23,633
Nonperforming assets (GAAP)		$	152,164			$	89,864			$	46,258			$	63,337			$	43,601			$	152,163			$	43,601
Allowance for Loan Losses Reconciliation
Allowance for loan losses excluding special fraud-related allowance		$	91,035			$	89,848			$	89,423			$	75,935			$	77,471			$	91,035			$	77,471
Fraud-related allowance for loan losses			—				—				—				15,000				15,000				—				15,000
Allowance for loan losses (GAAP)		$	91,035			$	89,848			$	89,423			$	90,935			$	92,471			$	91,035			$	92,471
Net Charge Offs Reconciliation
Net charge offs excluding charge off of fraud-related loans		$	14,313			$	7,075			$	13,012			$	5,236			$	2,124			$	21,388			$	3,586
Fraud-related loans charged off			—				—				18,000				—				—				—				—
Net charge offs (GAAP)		$	14,313			$	7,075			$	31,012			$	5,236			$	2,124			$	21,388			$	3,586
Allowance for Loan Losses to Loans Ratio Reconciliation
Allowance for loan losses to loans ratio excluding fraud-related allowance			1.53	%			1.51	%			1.51	%			1.28	%			1.29	%			1.53	%			1.29	%
Portion of allowance assigned to fraud-related loans			—				—				—				.25				.25				—				.25
Allowance for loan losses to loans ratio (GAAP)			1.53	%			1.51	%			1.51	%			1.53	%			1.54	%			1.53	%			1.54	%
Nonperforming Assets to Total Assets Ratio Reconciliation
Nonperforming assets to total assets ratio excluding fraud-related assets			1.79	%			1.02	%			.50	%			.49	%			.25	%			1.79	%			.25	%
Fraud-related nonperforming assets			.05				.05				.06				.28				.29				.05				.29
Nonperforming assets to total assets ratio (GAAP)			1.84	%			1.07	%			.56	%			.77	%			.54	%			1.84	%			.54	%
Net Charge Offs to Average Loans Ratio Reconciliation
Net charge offs to average loans ratio excluding fraud-related loans			.97	%			.48	%			.87	%			.35	%			.15	%			.97	%			.13	%
Charge offs of fraud-related loans			—				—				1.20				—				—				—				—
Net charge offs to average loans ratio (GAAP)			.97	%			.48	%			2.07	%			.35	%			.15	%			.97	%			.13	%