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 September 30, 2008

OR

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.

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

(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

Common stock, par value $1 per share: 47,596,119 shares
outstanding as of September 30, 2008

 

 

INDEX

PART I — Financial Information
Item 1. Financial Statements.			2
Consolidated Statement of Income (unaudited) for the Three and Nine Months Ended September 30, 2008 and 2007			2
Consolidated Balance Sheet at September 30, 2008 (unaudited), December 31, 2007 (audited) and September 30, 2007 (unaudited)			3
Consolidated Statement of Changes in Shareholders’ Equity (unaudited) for the Nine Months Ended September 30, 2008 and 2007			4
Consolidated Statement of Cash Flows (unaudited) for the Nine Months Ended September 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.			11
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.			30
Exhibit 31.1
Exhibit 31.2
Exhibit 32

Part I — Financial Information

Item 1 — Financial Statements

UNITED COMMUNITY BANKS, INC.

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
(in thousands, except per share data)		2008				2007				2008				2007
Interest revenue:
Loans, including fees		$	93,233			$	127,213			$	299,550			$	361,085
Investment securities:
Taxable			18,258				16,637				55,765				46,081
Tax exempt			348				428				1,140				1,313
Federal funds sold and deposits in banks			100				134				372				272
Total interest revenue			111,939				144,412				356,827				408,751
Interest expense:
Deposits:
NOW			6,778				12,046				22,581				34,143
Money market			2,296				5,002				7,519				11,082
Savings			153				553				560				1,236
Time			39,044				42,862				116,756				126,466
Total deposit interest expense			48,271				60,463				147,416				172,927
Federal funds purchased, repurchase agreements, & other short-term borrowings			1,116				4,738				7,254				10,226
Federal Home Loan Bank advances			2,105				5,902				10,668				15,738
Long-term debt			2,227				2,100				6,366				6,505
Total interest expense			53,719				73,203				171,704				205,396
Net interest revenue			58,220				71,209				185,123				203,355
Provision for loan losses			76,000				3,700				99,000				26,100
Net interest (loss) revenue after provision for loan losses			(17,780	)			67,509				86,123				177,255
Fee revenue:
Service charges and fees			8,171				7,855				23,941				23,083
Mortgage loan and other related fees			1,410				2,118				5,575				6,817
Consulting fees			1,727				2,381				5,786				6,369
Brokerage fees			905				895				2,812				3,031
Securities gains, net			120				225				477				1,818
Losses on prepayment of borrowings			—				—				—				(1,164	)
Other			788				2,141				3,832				6,597
Total fee revenue			13,121				15,615				42,423				46,551
Total revenue			(4,659	)			83,124				128,546				223,806
Operating expenses:
Salaries and employee benefits			28,626				29,698				86,133				88,037
Communications and equipment			3,909				3,936				11,593				11,593
Occupancy			3,905				3,617				11,325				10,124
Advertising and public relations			1,399				1,537				4,759				5,651
Postage, printing and supplies			1,493				1,479				4,533				4,819
Professional fees			1,596				1,920				5,196				5,409
Amortization of intangibles			752				771				2,264				1,968
Other			15,290				5,224				28,457				13,124
Total operating expenses			56,970				48,182				154,260				140,725
(Loss) income before income taxes			(61,629	)			34,942				(25,714	)			83,081
Income tax (benefit) expense			(21,755	)			12,406				(9,011	)			29,289
Net (loss) income		$	(39,874	)		$	22,536			$	(16,703	)		$	53,792
Net (loss) income available to common shareholders		$	(39,878	)		$	22,532			$	(16,715	)		$	53,778
(Loss) earnings per common share:
Basic		$	(.84	)		$	.47			$	(.35	)		$	1.18
Diluted			(.84	)			.46				(.35	)			1.16
Cash dividends per common share			.00				.09				.18				.27
Stock dividends per common share			.09				.00				.09				.00
Weighted average common shares outstanding:
Basic			47,304				48,348				47,111				45,452
Diluted			47,304				48,977				47,111				46,235

See notes to Consolidated Financial Statements

UNITED COMMUNITY BANKS, INC.

		September 30,				December 31,				September 30,
(in thousands, except share and per share data)		2008				2007				2007
		(unaudited)				(audited)				(unaudited)
ASSETS
Cash and due from banks		$	126,033			$	157,549			$	162,710
Interest-bearing deposits in banks			40,707				62,074				75,745
Cash and cash equivalents			166,740				219,623				238,455
Securities available for sale			1,400,827				1,356,846				1,296,826
Mortgage loans held for sale			17,763				28,004				23,717
Loans, net of unearned income			5,829,937				5,929,263				5,952,749
Less allowance for loan losses			111,299				89,423				90,935
Loans, net			5,718,638				5,839,840				5,861,814
Premises and equipment, net			179,727				180,088				174,918
Accrued interest receivable			47,920				62,828				67,385
Goodwill and other intangible assets			322,544				325,305				326,080
Other assets			218,384				194,768				191,405
Total assets		$	8,072,543			$	8,207,302			$	8,180,600
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Deposits:
Demand		$	680,196			$	700,941			$	737,357
NOW			1,393,928				1,474,818				1,464,956
Money market			394,358				452,917				495,092
Savings			179,274				186,392				195,132
Time:
Less than $100,000			1,814,926				1,573,604				1,595,515
Greater than $100,000			1,481,512				1,364,763				1,358,302
Brokered			745,141				322,516				307,954
Total deposits			6,689,335				6,075,951				6,154,308
Federal funds purchased, repurchase agreements, and other short-term borrowings			119,699				638,462				502,081
Federal Home Loan Bank advances			285,362				519,782				519,381
Long-term debt			137,996				107,996				107,996
Accrued expenses and other liabilities			23,271				33,209				63,073
Total liabilities			7,255,663				7,375,400				7,346,839
Shareholders’ equity:
Preferred stock, $1 par value; $10 stated value; 10,000,000 shares authorized; 25,800, 25,800 and 25,800 shares issued and outstanding			258				258				258
Common stock, $1 par value; 100,000,000 shares authorized; 48,809,301, 48,809,301 and 48,809,301 shares issued			48,809				48,809				48,809
Common stock issuable; 116,567, 73,250 and 66,366 shares			2,762				2,100				1,954
Capital surplus			457,779				462,881				462,499
Retained earnings			317,544				347,391				347,478
Treasury stock; 1,213,182, 1,905,921 and 1,266,935 shares, at cost			(27,024	)			(43,798	)			(30,969	)
Accumulated other comprehensive income			16,752				14,261				3,732
Total shareholders’ equity			816,880				831,902				833,761
Total liabilities and shareholders’ equity		$	8,072,543			$	8,207,302			$	8,180,600

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																			53,792												53,792
Other comprehensive income:
Unrealized holding gains on available for sale securities, net of deferred tax expense and reclassification adjustment																											3,282				3,282
Unrealized gains on derivative financial instruments qualifying as cash flow hedges, net of deferred tax expense																											4,402				4,402
Comprehensive income																			53,792								7,684				61,476
Retirement of preferred stock (6,400 shares)			(64	)																											(64	)
Cash dividends declared on common stock ($.27 per share)																			(12,561	)											(12,561	)
Common stock issued for acquisitions ( 5,691,948 shares)							5,692								185,649																191,341
Exercise of stock options (110,328 shares)							78								457								767								1,302
Common stock issued to Dividend Reinvestment Plan and employee benefit plans (123,692 shares)							118								3,360								139								3,617
Amortization of stock option and restricted stock awards															2,611																2,611
Vesting of restricted stock (30,310 shares issued, 3,125 shares deferred)							30				93				(123	)															—
Purchases of treasury stock (1,304,775 shares)																							(31,875	)							(31,875	)
Deferred compensation plan, net, including dividend equivalents											999																				999
Tax benefit from options exercised															162																162
Dividends declared on preferred stock ($.45 per share)																			(14	)											(14	)
Balance, September 30, 2007		$	258			$	48,809			$	1,954			$	462,499			$	347,478			$	(30,969	)		$	3,732			$	833,761
Balance, December 31, 2007		$	258			$	48,809			$	2,100			$	462,881			$	347,391			$	(43,798	)		$	14,261			$	831,902
Comprehensive income:
Net loss																			(16,703	)											(16,703	)
Other comprehensive (loss) income:
Unrealized holding losses on available for sale securities, net of deferred tax benefit and reclassification adjustment																											(3,009	)			(3,009	)
Unrealized gains on derivative financial instruments qualifying as cash flow hedges, net of deferred tax expense and reclassification adjustment																											5,500				5,500
Comprehensive (loss) income																			(16,703	)							2,491				(14,212	)
Cash dividends declared on common stock ($.18 per share)																			(8,465	)											(8,465	)
Stock dividends declared on common stock (360,155 shares, 1 for 130 shares)															(4,279	)			(4,667	)			8,906								(40	)
Exercise of stock options (79,935 shares)															(927	)							1,947								1,020
Common stock issued to Dividend Reinvestment Plan and employee benefit plans (233,276 shares)															(2,689	)							5,460								2,771
Amortization of stock options and restricted stock															2,928																2,928
Vesting of restricted stock (15,159 shares issued, 8,700 shares deferred)											264				(626	)							362								—
Deferred compensation plan, net, including dividend equivalents											512																				512
Shares issued from deferred compensation plan (4,214 shares)															(114	)			15								99				—
Tax benefit from options exercised															476																476
Dividends declared on preferred stock ($.45 per share)																			(12	)											(12	)
Balance, September 30, 2008		$	258			$	48,809			$	2,762			$	457,779			$	317,544			$	(27,024	)		$	16,752			$	816,880

See notes to Consolidated Financial Statements

UNITED COMMUNITY BANKS, INC.
Consolidated Statement of Cash Flows (Unaudited)

		Nine Months Ended
		September 30,
(in thousands)		2008				2007
Operating activities, net of effect of business combinations:
Net (loss) income		$	(16,703	)		$	53,792
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depreciation, amortization and accretion			11,134				10,553
Provision for loan losses			99,000				26,100
Stock based compensation			2,928				2,611
Gain on sale of securities available for sale			(477	)			(1,818	)
Loss (gain) on sale of other assets			16				(208	)
Loss (gain) on sale of other real estate			10,391				(412	)
Loss on prepayment of borrowings			—				1,164
Changes in assets and liabilities:
Other assets and accrued interest receivable			1,792				(8,737	)
Accrued expenses and other liabilities			86				(8,464	)
Mortgage loans held for sale			10,241				11,608
Net cash provided by operating activities			118,408				86,189
Investing activities, net of effect of business combinations:
Proceeds from sales of securities available for sale			84,955				106,709
Proceeds from maturities and calls of securities available for sale			396,673				248,991
Purchases of securities available for sale			(519,421	)			(484,229	)
Net increase in loans			(58,709	)			(81,394	)
Purchase of Bank Owned Life Insurance			—				(50,000	)
Proceeds from sales of premises and equipment			514				720
Purchases of premises and equipment			(8,960	)			(26,768	)
Net cash paid for acquisitions			—				(4,346	)
Proceeds from sale of other real estate			51,970				9,787
Net cash used by investing activities			(52,978	)			(280,530	)
Financing activities, net of effect of business combinations:
Net change in deposits			613,384				(186,423	)
Net change in federal funds purchased, repurchase agreements, and other short-term borrowings			(518,763	)			472,852
Repayments of other borrowings			—				(5,000	)
Proceeds from FHLB advances			400,000				950,000
Repayments of FHLB advances			(634,000	)			(931,164	)
Proceeds from issuance of subordinated debt			30,000				—
Proceeds from exercise of stock options			1,020				1,302
Proceeds from issuance of common stock for dividend reinvestment and employee benefit plans			2,771				3,617
Retirement of preferred stock			—				(64	)
Purchase of treasury stock			—				(31,875	)
Cash dividends on common stock			(12,713	)			(11,719	)
Cash dividends on preferred stock			(12	)			(14	)
Net cash (used) provided by financing activities			(118,313	)			261,512
Net change in cash and cash equivalents			(52,883	)			67,171
Cash and cash equivalents at beginning of period			219,623				171,284
Cash and cash equivalents at end of period		$	166,740			$	238,455
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest		$	173,976			$	203,519
Income taxes			20,124				37,661

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 September 30, 2008, approximately 1,385,000 additional awards could be granted under the plan. Through September 30, 2008, 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 nine months of 2008.

										Weighted-
										Average
						Weighted-				Remaining				Aggregate
						Average Exercise				Contractual				Intrinsic
Options		Shares				Price				Term (Years)				Value ($000)
Outstanding at December 31, 2007			2,912,557			$	21.57
Stock dividend adjustment			25,770				—
Granted			594,750				13.76
Exercised			(87,941	)			13.41
Forfeited			(53,175	)			28.50
Expired			(34,370	)			24.08
Outstanding at September 30, 2008			3,357,591				20.10				6.3			$	995
Exercisable at September 30, 2008			2,027,290			$	18.81				4.7			$	950

The weighted average fair value of stock options granted in the first nine months of 2008 and 2007 was $2.90 and $8.29, 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.

		Nine Months Ended
		September 30,
		2008				2007
Expected volatility			23.42	%			20.00	%
Expected dividend yield			2.62	%			1.17	%
Expected life (in years)			6.25				6.27
Risk-free rate			3.44	%			4.60	%

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 $1,578,000 and $1,564,000 for the nine months ended September 30, 2008 and 2007, respectively, which was net of deferred tax benefits of $692,000 and $492,000, 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 nine months ended September 30, 2008 and 2007 was $391,000 and $2,163,000, respectively.

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

						Weighted-Average
						Grant-Date Fair
Restricted Stock		Shares				Value
Outstanding at December 31, 2007			84,413			$	29.26
Stock dividend adjustment			669				—
Granted			31,097				14.19
Vested			(23,859	)			26.95
Cancelled			(3,000	)			30.10
Outstanding at September 30, 2008			89,320			$	24.38

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 nine months ended September 30, 2008 and 2007, compensation expense of $659,000 and $555,000, respectively, was recognized related to restricted stock awards. The total intrinsic value of the restricted stock was $1,184,000 at September 30, 2008.

As of September 30, 2008, there was $7.9 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 1.4 years. The aggregate grant date fair value of options and restricted stock awards that vested during the nine months ended September 30, 2008, was $3.6 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 nine months ended September 30, 2008 and 2007, United issued 233,276 and 123,692 shares, respectively, and increased capital by $2.8 million and $3.6 million, 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 September 30, 2008 and 2007, 116,567 and 66,366 shares, respectively, were 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 nine months ended September 30, 2008 and 2007.

(in thousands, except per share data)

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2008				2007				2008				2007
Net income available to common shareholders		$	(39,878	)		$	22,532			$	(16,715	)		$	53,778
Weighted average shares outstanding:
Basic			47,304				48,348				47,111				45,452
Effect of dilutive securities(1)
Stock options and restricted stock			—				565				—				733
Common stock issuable under deferred compensation plan			—				64				—				50
Diluted			47,304				48,977				47,111				46,235
Earnings per common share:
Basic		$	(.84	)		$	.47			$	(.35	)		$	1.18
Diluted		$	(.84	)		$	.46			$	(.35	)		$	1.16

Note 5 — 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 September 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 September 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 September 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				September 30, 2008
Assets
Securities available for sale		$	—			$	1,400,827			$	—			$	1,400,827
Deferred compensation plan assets			4,435				—				—				4,435
Derivative financial instruments			—				38,100				—				38,100
Total		$	4,435			$	1,438,927			$	—			$	1,443,362
Liabilities
Deferred compensation plan liability		$	4,435			$	—			$	—			$	4,435
Total liabilities		$	4,435			$	—			$	—			$	4,435

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 September 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				September 30, 2008
Assets
Loans		$	—			$	—			$	58,741			$	58,741
Foreclosed assets			—				—				33,746				33,746
Total		$	—			$	—			$	92,487			$	92,487

Note 6 — Stock Dividend

During the third quarter of 2008, United replaced its regular cash dividend with a stock dividend at a rate of 1 new share for every 130 shares owned. The stock dividend has been reflected in the financial statements as an issuance of stock with no proceeds rather than a stock split and therefore previously numbers of shares outstanding have not been adjusted. The amount of $40,000 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.

Note 7 — Issuance of Subordinated Debt

On August 29, 2008, United Community Bank, United’s wholly-owned banking subsidiary, issued $30 million in subordinated debt which qualifies as Tier II capital under Risk-Based Capital rules. The unsecured subordinated debt accrues interest at three-month LIBOR plus 4.00% and matures on August 29, 2015. The subordinated debt is pre-payable at any time without penalty.

Note 8 — Recent Accounting Pronouncements

In February 2008, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position (“FSP”) FAS 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 February 2008, the FASB issued FSP FAS 157-1 Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13 and FSP 157-2 Effective Date of FASB Statement No. 157. FSP FAS 157-1 excludes leases from the provisions of SFAS No. 157, unless the lease is valued under a transaction covered by Statement of Financial Accounting Standards No. 141(R) (SFAS No. 141). FSP FAS 157-2 delays implementation of SFAS No. 157 for nonfinancial assets and nonfinancial liabilities measured at fair value on a non-recurring basis until fiscal years beginning after November 15, 2008 and interim periods within those fiscal years. Because United does not have any leases which are subject to fair value accounting, and because United already discloses nonfinancial assets measured at fair value on a nonrecurring basis in the financial statements, United does not anticipate that these FSPs 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.

In September 2008, the FASB issued FASB Staff Positions FAS 133-1 (FSP FAS 133-1) and FIN 45-4, Disclosures about Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement No. 133 and FASB Interpretation No. 45; and Clarification of the Effective Date of FASB Statement No. 161. This staff position details the proper disclosure and reporting for credit derivatives for both the party that assumes credit risk (seller) and the party that is protected by the credit derivative (buyer). The disclosures should include the nature, term, reasoning, and events and circumstances that would require the seller to perform under the derivative contract. This FSP is effective for reporting periods ending after November 15, 2008. United is not the buyer or seller on any credit derivatives at this time, and thus United does not anticipate that adoption of this staff position will have a material effect on United’s financial position or results of operations.

On October 10, 2008, the FASB issued FASB Staff Position FAS 157-3 (FSP FAS 157-3), Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active. This staff position addressed concerns among financial entities regarding assets trading in markets that were at one time active but have subsequently become inactive. Under FSP FAS 157-3, firms must take into account the facts and circumstances to determine whether the known trades in an inactive market are reflective of orderly transactions that are not forced liquidations or distressed sales. If the firm makes this determination, they can classify the assets as Level 3 of the fair value hierarchy and use an appropriate valuation approach relying to an extent on unobservable inputs, and thus following the appropriate disclosures associated with a recurring Level 3 asset. United’s current portfolio does not include any securities for which FSP FAS 157-3 would apply. Thus, FSP FAS 157-3 is not expected to have a material effect on United’s financial position, results of operations, or disclosures.

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 September 30, 2008, United had total consolidated assets of $8.1 billion, total loans of $5.8 billion, total deposits of $6.7 billion and stockholders’ equity of $816.9 million.

United’s 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.

Several significant events affecting the banking industry occurred during the third quarter of 2008, including the failure or near failure of several large financial institutions and the failure of Fannie Mae and Freddie Mac, two government sponsored enterprises or GSEs. These events led to serious concerns about the safety and soundness of the financial services industry that affected financial markets around the world. In response to the emerging crisis, on October 3, 2008, Congress passed and President Bush signed into law the Emergency Economic Stabilization Act of 2008 (The “Act”) which created a $700 billion Troubled Assets Relief Program (“TARP”) to purchase illiquid assets of troubled banks. The Act also raised the limits on FDIC insurance protection from $100,000 to $250,000 through the end of 2009. On October 14, the U.S. Treasury Department announced a voluntary capital purchase program that would allow the U.S. Treasury to purchase senior preferred shares in qualified financial institutions in an amount between 1% and 3% of the financial institutions’ risk-weighted assets.

United reported a net operating loss of $39.9 million for the third quarter of 2008, compared with net operating income of $22.5 million for the third quarter of 2007. Diluted operating loss per common share was $.84 for the third quarter of 2008, compared with diluted operating earnings per common share of $.46 for the third quarter of 2007. The loss in the third quarter of 2008 was due to a $76 million provision for loan losses and $10 million in writedowns and expenses on foreclosed properties that reflect the effect of further deterioration in credit conditions in United’s loan portfolio.

United reported a net operating loss of $16.7 million for the nine months ended September 30, 2008, compared with net operating income of $53.8 million for the nine months ended September 30, 2007. Diluted operating loss per common share was $.35 for the nine months ended September 30, 2008, compared with diluted operating earnings per common share of $1.36 for the nine months ended September 30, 2007.

Earnings decreased primarily as a result of a higher provision for loan losses related to the increase in charge-offs within the loan portfolio combined with margin compression due to an increase in non-performing assets, competitive deposit pricing and efforts to build liquidity. Housing sales remain at low levels, leaving a surplus of finished housing and lot inventory in our footprint, most notably in the Atlanta MSA. This decline in housing sales 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 2.20% of total assets as of September 30, 2008, compared to .77% as of September 30, 2007. This increase is a reflection of the downstream effects of declining home sales 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 and development portfolio and predominantly within the Atlanta MSA.

Fee revenue decreased $2.5 million, or 16%, from the third quarter of 2007. Although service charges and fees and brokerage fees remained near the same level as the third quarter of 2007, mortgage fees and consulting fees saw declines reflecting the slow housing market and a decline in demand for consulting services in the banking industry associated with earnings pressures. Other fee revenue was down from a year ago, primarily due to weak performance from bank owned life insurance assets and deferred compensation plan assets in the third quarter of 2008.

Operating expenses increased $8.8 million, or 18%, from the third quarter of 2007, primarily due to higher expenses associated with and writedowns on foreclosed real estate properties and higher FDIC insurance premiums.

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 in a failed real estate development 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
(in thousands, except per share data)

		2008												2007								For the Nine Months Ended
		Third				Second				First				Fourth				Third				September 30
		Quarter				Quarter				Quarter				Quarter				Quarter				2008				2007
Special provision for fraud related loan losses		$	—			$	—			$	—			$	3,000			$	—			$	—			$	15,000
Income tax effect of special provision			—				—				—				1,167				—				—				5,835
After-tax effect of special provision		$	—			$	—			$	—			$	1,833			$	—			$	—			$	9,165
Net Income (Loss) Reconciliation
Operating net income (loss)		$	(39,874	)		$	7,093			$	16,078			$	6,034			$	22,536			$	(16,703	)		$	62,957
After-tax effect of special provision and merger-related charges			—				—				—				(1,833	)			—				—				(9,165	)
Net income (loss) (GAAP)		$	(39,874	)		$	7,093			$	16,078			$	4,201			$	22,536			$	(16,703	)		$	53,792
Basic Earnings (Loss) Per Share Reconciliation
Basic operating earnings (loss) per share		$	(.84	)		$	.15			$	.34			$	.13			$	.47			$	(.35	)		$	1.38
Per share effect of special provision and merger-related charges			—				—				—				(.04	)			—				—				(.20	)
Basic earnings (loss) per share (GAAP)		$	(.84	)		$	.15			$	.34			$	.09			$	.47			$	(.35	)		$	1.18
Diluted Earnings (Loss) Per Share Reconciliation
Diluted operating earnings (loss) per share		$	(.84	)		$	.15			$	.34			$	.13			$	.46			$	(.35	)		$	1.36
Per share effect of special provision and merger-related charges			—				—				—				(.04	)			—				—				(.20	)
Diluted earnings (loss) per share (GAAP)		$	(.84	)		$	.15			$	.34			$	.09			$	.46			$	(.35	)		$	1.16
Provision for Loan Losses Reconciliation
Operating provision for loan losses		$	76,000			$	15,500			$	7,500			$	26,500			$	3,700			$	99,000			$	11,100
Special provision for fraud related loan losses			—				—				—				3,000				—				—				15,000
Provision for loan losses (GAAP)		$	76,000			$	15,500			$	7,500			$	29,500			$	3,700			$	99,000			$	26,100
Nonperforming Assets Reconciliation
Nonperforming assets excluding fraud-related assets		$	174,227			$	148,219			$	85,182			$	40,956			$	39,761			$	174,227			$	39,761
Fraud-related loans and OREO included in nonperforming assets			3,477				3,945				4,682				5,302				23,576				3,477				23,576
Nonperforming assets (GAAP)		$	177,704			$	152,164			$	89,864			$	46,258			$	63,337			$	177,704			$	63,337
Allowance for Loan Losses Reconciliation
Allowance for loan losses excluding special fraud-related allowance		$	111,299			$	91,035			$	89,848			$	89,423			$	75,935			$	111,299			$	75,935
Fraud-related allowance for loan losses			—				—				—				—				15,000				—				15,000
Allowance for loan losses (GAAP)		$	111,299			$	91,035			$	89,848			$	89,423			$	90,935			$	111,299			$	90,935
Net Charge Offs Reconciliation
Net charge offs excluding charge off of fraud-related loans		$	55,736			$	14,313			$	7,075			$	13,012			$	5,236			$	77,124			$	8,822
Fraud-related loans charged off			—				—				—				18,000				—				—				—
Net charge offs (GAAP)		$	55,736			$	14,313			$	7,075			$	31,012			$	5,236			$	77,124			$	8,822
Allowance for Loan Losses to Loans Ratio Reconciliation
Allowance for loan losses to loans ratio excluding fraud-related allowance			1.91	%			1.53	%			1.51	%			1.51	%			1.28	%			1.91	%			1.28	%
Portion of allowance assigned to fraud-related loans			—				—				—				—				.25				—				.25
Allowance for loan losses to loans ratio (GAAP)			1.91	%			1.53	%			1.51	%			1.51	%			1.53	%			1.91	%			1.53	%
Nonperforming Assets to Total Assets Ratio Reconciliation
Nonperforming assets to total assets ratio excluding fraud-related assets			2.16	%			1.79	%			1.02	%			.50	%			.49	%			2.16	%			.49	%
Fraud-related nonperforming assets			.04				.05				.05				.06				.28				.04				.28
Nonperforming assets to total assets ratio (GAAP)			2.20	%			1.84	%			1.07	%			.56	%			.77	%			2.20	%			.77	%
Net Charge Offs to Average Loans Ratio Reconciliation
Net charge offs to average loans ratio excluding fraud-related loans			3.77	%			.97	%			.48	%			.87	%			.35	%			1.74	%			.21	%
Charge offs of fraud-related loans			—				—				—				1.20				—				—				—
Net charge offs to average loans ratio (GAAP)			3.77	%			.97	%			.48	%			2.07	%			.35	%			1.74	%			.21	%