<PAGE>
 
                           SCHEDULE 14A INFORMATION
                   Proxy Statement Pursuant to Section 14(a)
                    of the Securities Exchange Age of 1934



Filed by the Registrant  [X]

Filed by a Party other than the Registrant  [_]

Check the appropriate box:

[_]      Preliminary Proxy Statement

[_]      Confidential, for Use of the Commission Only (as permitted by Rule 14a-
         6(6)(2)

[X]      Definitive Proxy Statement

[_]      Definitive Additional Materials

[_]      Soliciting Material Pursuant to Section 240.14a-11(c) or Section
         240.14a-12

                         UNITED COMMUNITY BANKS, INC.
                         ---------------------------
               (Name of Registrant as Specified in Its Charter)


                               -----------------
                  (Name of Person(s) Filing Proxy Statement)

Payment of Filing Fee (Check the appropriate box):

[X]      No fee required.

[_]      Fee computed on table below per Exchange Act Rules 14a-6(i)(1)(4) and
         0-11.

         (1)      Title of each class of securities to which transaction
                  applies:

                  ---------------------------------------------------------

         (2)      Aggregate number of class of securities to which transaction
                  applies:

                  ---------------------------------------------------------

         (3)      Per unit price or other underlying value of transaction
                  computed pursuant to Exchange Act Rule 0-11 (set forth the
                  amount on which the filing fee is calculated and state how it
                  was determined):

<PAGE>
 
[_]   Check box if any part of the fee is offset as provided by Exchange Act
      Rule O-11(a)(2) and identify the filing for which the offsetting fee was
      paid previously. Identify the previous filing by registration statement
      number, or the Form or Schedule and the date of its filing.

      1)      Amount Previously Paid:

              ----------------------------------------------------------------

      2)      Form, Schedule or Registration Statement No.:

              ----------------------------------------------------------------

      3)      Filing Party:

              ----------------------------------------------------------------

      4)      Date Filed:

              ----------------------------------------------------------------

<PAGE>
 
===============================================================================

                      [UNITED COMMUNITY BANKS, INC. LOGO]



                         Notice of 1997 Annual Meeting









                               =================

                                Proxy Statement

                               =================









                          Annual Financial Statements
                           and Review of Operations


===============================================================================

<PAGE>
 
                               Table of Contents


<TABLE> 
<CAPTION> 
                                                                                                               Page
                                                                                                               ----
<S>                                                                                                            <C> 
Notice of Annual Meeting of Shareholders.....................................................................    i

Proxy Statement..............................................................................................    1

         Voting Securities and Principal Holders.............................................................    2
         Nomination and Election of Directors................................................................    2
         Information About Nominees for Director.............................................................    3
         Proposal to Amend the United Community Banks, Inc. Key Employee Stock Option Plan...................    5
         Executive Compensation..............................................................................    8
         Compensation Committee Interlocks and Insider Participation.........................................   10
         Joint Report On Executive Compensation..............................................................   10
         Shareholder Return Performance Graph................................................................   12
         Meetings and Committees of The Board of Directors...................................................   13
         Information Concerning United's Accountants.........................................................   13
         Shareholder Proposals...............................................................................   13
         Other Matters That May Come Before the Meeting......................................................   13

Appendix:  Annual Report to Shareholders.....................................................................  A-1

         General Description of the Business.................................................................  A-2
         Selected Financial Data.............................................................................  A-3
         Management's Discussion and Analysis of Financial Condition and Results of Operations...............  A-4
         Market and Dividend Data............................................................................ A-19
         Report of Independent Certified Public Accountants.................................................. A-20
         Consolidated Balance Sheets - December 31, 1996 and 1995............................................ A-21
         Consolidated Statements of Earnings - December 31, 1996 and 1995.................................... A-22
         Consolidated Statements of Changes in Stockholders'
            Equity - December 31, 1996 and 1995.............................................................. A-23
         Consolidated Statements of Cash Flows............................................................... A-24
         Notes to Consolidated Financial Statements.......................................................... A-25

</TABLE>
 

<PAGE>
 
                                LETTERHEAD LOGO
 
                                                                  April 1, 1997


Dear Shareholder:

     It is my pleasure to invite you to attend the 1997 Annual Meeting of
Shareholders of United Community Banks, Inc. which will be held Thursday, April
17, 1997 at The Brasstown Valley Resort, Trackrock Amphitheater, Highway 515,
Young Harris, Georgia at 2:30 p.m. The accompanying Notice of Annual Meeting of
Shareholders and Proxy Statement describe the items of business which will be
discussed during the meeting. A report to shareholders, containing certain
financial information, is included as an appendix to the Proxy Statement.

     To be sure that your vote is counted, we urge you to carefully review the
Proxy Statement and vote your choices on the enclosed proxy card as soon as
possible. If you wish to attend the meeting, any ballot that you submit at the
meeting will supersede your proxy.

     On behalf of the management, employees and directors of United Community
Banks, Inc., I want to thank you for your continued support.



                                           Sincerely,


                                           Jimmy C. Tallent,
                                           President and Chief Executive Officer

<PAGE>
 
                         UNITED COMMUNITY BANKS, INC.
                                59 Highway 515
                                 P.O. Box 398
                          Blairsville, Georgia 30512

              ---------------------------------------------------


                   NOTICE OF ANNUAL MEETING OF SHAREHOLDERS

              ---------------------------------------------------

                         To be Held on April 17, 1997


     The annual meeting of shareholders of United Community Banks, Inc.
("United") will be held on Thursday, April 17, 1997 at 2:30 p.m. at The
Brasstown Valley Resort, Trackrock Amphitheater, Highway 515, Young Harris,
Georgia, for the purposes of considering and voting upon:

         1. The election of eleven directors to constitute the Board of
     Directors to serve until the next annual meeting and until their successors
     are elected and qualified; and

         2. An amendment to the United Community Banks, Inc. Key Employee Stock
     Option Plan (the "Plan") to increase the number of shares of Common Stock
     authorized pursuant to the Plan; and

         3. Such other matters as may properly come before the meeting or any
     adjournment thereof.

     Only shareholders of record at the close of business on March 17, 1997 will
be entitled to notice of and to vote at the meeting or any adjournment thereof.

     A Proxy Statement and a Proxy solicited by the Board of Directors are
enclosed herewith. Please sign, date and return the Proxy promptly in the
enclosed business reply envelope. If you attend the meeting you may, if you
wish, withdraw your Proxy and vote in person.

     Also enclosed as an appendix to the Proxy Statement is a report to
shareholders, including United's audited annual financial statements,
management's discussion and analysis of financial condition and results of
operations, selected financial data and certain other matters.

                                           By Order of the Board of Directors,



                                           Jimmy C. Tallent,
                                           President and Chief Executive Officer

A
pril 1, 1997

- -------------------------------------------------------------------------------
PLEASE COMPLETE AND RETURN THE ENCLOSED PROXY PROMPTLY SO THAT YOUR VOTE MAY BE
RECORDED AT THE MEETING IF YOU DO NOT ATTEND PERSONALLY.
- -------------------------------------------------------------------------------


                                      (i)


<PAGE>
 
                         UNITED COMMUNITY BANKS, INC.

                                59 Highway 515
                                 P.O. Box 398
                          Blairsville, Georgia 30512

                             ---------------------

                                Proxy Statement

                             ---------------------

     This Proxy Statement is furnished in connection with the solicitation of
Proxies by the Board of Directors of United Community Banks, Inc. ("United") for
use at the Annual Meeting of Shareholders of United to be held on April 17,
1997, and any adjournment thereof, for the purposes set forth in the
accompanying notice of the meeting. The expenses of this solicitation, including
the cost of preparing and mailing this Proxy Statement, will be paid by United.
Copies of solicitation materials may be furnished to banks, brokerage houses and
other custodians, nominees and fiduciaries for forwarding to beneficial owners
of shares of United's Common Stock, and normal handling charges may be paid for
such forwarding services. In addition to solicitations by mail, directors and
regular employees of United may solicit Proxies in person or by telephone. It is
anticipated that this Proxy Statement and the accompanying Proxy will first be
mailed to shareholders on April 1, 1997.

     The record of shareholders entitled to vote at the Annual Meeting was taken
as of the close of business on March 17, 1997. On that date, United had
outstanding and entitled to vote 6,438,848 shares of common stock, par value
$1.00 per share (the "Common Stock").

     Any Proxy given pursuant to this solicitation may be revoked by any
shareholder who attends the meeting and gives oral notice of his or her election
to vote in person, without compliance with any other formalities. In addition,
any Proxy given pursuant to this solicitation may be revoked prior to the
meeting by delivering an instrument revoking it or a duly executed Proxy bearing
a later date to the Secretary of United. If the Proxy is properly completed and
returned by the shareholder and is not revoked, it will be voted at the meeting
in the manner specified thereon. If the Proxy is returned but no choice is
specified thereon, it will be voted for all the persons named below under the
caption "Information About Nominees For Director" and for approval of the
proposal described below under the caption "Proposal to Amend the United
Community Banks, Inc. Key Employee Stock Option Plan."

     The percentages outstanding of Common Stock are based on 6,637,248 shares
of Common Stock, including 140,000 shares deemed outstanding pursuant United's
prime plus 1/4% Convertible Subordinated Payable-in-Kind Debentures due December
31, 2006 ("2006 Debentures") and presently exercisable options to acquire 58,400
shares.

     United will furnish without charge a copy of its Annual Report on Form 10-K
filed with the Securities and Exchange Commission (the "SEC") for the fiscal
year ended December 31, 1996, including financial statements and schedules, to
any record or any beneficial owner of its Common Stock as of March 17, 1997 who
requests a copy of such report. Any request for the Form 10-K should be in
writing and addressed to:

                                  Lois Jones
                                59 Highway 515
                                 P.O. Box 398
                          Blairsville, Georgia 30512

     If the person requesting the report was not a shareholder of record on
March 17, 1997, the request must include a representation that the person was a
beneficial owner of United's Common Stock on that date. Copies of any exhibits
to the Form 10-K will also be furnished on request and upon the payment of
United's expense in furnishing the exhibits.

                                       1

<PAGE>
 

                    VOTING SECURITIES AND PRINCIPAL HOLDERS

   The following table sets forth as of December 31, 1996, beneficial ownership
of United's Common Stock by each "person" (as that term is defined by the SEC)
known by United to be the beneficial owner of more than 5% of United's voting
securities and all directors and executive officers of United as a group.


<TABLE> 
<CAPTION> 

 
      Name and Address                                Number of Shares           Percent
       of Beneficial Owner                            Owned Beneficially          of Class
       -------------------                            ------------------          --------
       <S>                                            <C>                         <C> 
       Robert L. Head, Jr.
       Blairsville Highway
       Blairsville, Georgia  30512.................         716,513(1)              11.1%

       W. C. Nelson, Jr.
       P.O. Box 127
       Blairsville, Georgia  30512.................         686,463(2)              10.6%

       All directors and executive
          officers as a group (17 persons).........       2,465,372(3)              37.3%
</TABLE>
 
- -----------------------
*    Less than one percent
(1)  Includes 52,758 shares beneficially owned by Mr. Head as custodian for his
     children and 10,000 shares owned pursuant to the 2006 Debentures. Does not
     include 16,965 shares owned by Mr. Head's wife, for which he disclaims
     beneficial ownership.
(2)  Includes 11,250 shares beneficially owned by a trust over which Mr. Nelson
     has voting power and 10,000 shares owned pursuant to the 2006 Debentures.
     Does not include 5,000 shares owned by Mr. Nelson's wife, for which he
     disclaims beneficial ownership.
(3)  Includes presently exerciseable options to acquire 54,100 shares and
     122,000 shares beneficially owned pursuant to the 2006 Debentures.

                     NOMINATION AND ELECTION OF DIRECTORS

                                 (Proposal 1)

     The Bylaws of United provide that the Board of Directors shall consist of
eleven directors. The number of directors may be increased or decreased from the
foregoing from time to time by the Board of Directors by amendment of the
Bylaws, but no decrease shall have the effect of shortening the term of an
incumbent director. The terms of office for directors continue until the next
annual meeting and until their successors are elected and qualified.

     Each Proxy executed and returned by a shareholder will be voted as
specified thereon by the shareholder. If no specification is made, the Proxy
will be voted for the election of the nominees named below to constitute the
entire Board of Directors. In the event that any nominee withdraws or for any
reason is not able to serve as a director, the Proxy will be voted for such
other person as may be designated by the Board of Directors as a substitute
nominee, but in no event will the Proxy be voted for more than eleven nominees.
Management of United has no reason to believe that any nominee will not serve if
elected. All of the nominees are currently directors of United.

     Directors are elected by a plurality of the votes cast by the holders of
the shares entitled to vote in an election at a meeting at which a quorum is
present. A quorum is present when the holders of a majority of the shares
outstanding on the record date are present at a meeting in person or by proxy.
An abstention and a broker non-vote would be included in determining whether a
quorum is present at a meeting, but would not have an effect on the outcome of a
vote.

                                      -2-

<PAGE>
 
                    INFORMATION ABOUT NOMINEES FOR DIRECTOR


     The following information as of December 31, 1996 has been furnished by the
respective nominees for director. Except as otherwise indicated, each nominee
has been or was engaged in his present or last principal employment, in the same
or a similar position, for more than five years.


<TABLE> 
<CAPTION> 

                                                                                         Number of Shares
                                                  Information                           Owned Beneficially
         Name (Age)                              About Nominee                          (Percent of Class)
         ----------                              -------------                          ------------------
<S>                            <C>                                                      <C> 
Jimmy C. Tallent.........      President, Chief Executive Officer and Director of       145,272 (2.3%) (1)
   (44)                            Union County Bank ("UCB") since 1984 and of
                                   United since 1987. Director of Carolina
                                   Community Bank, Murphy, North Carolina
                                   ("Carolina") since 1990, of Peoples Bank of
                                   Fannin County ("Peoples") since 1992 and of
                                   White County Bank since 1995 ("White") and as
                                   Chairman of the Board of Towns County Bank
                                   ("Towns") since 1992.

James A. Brackett, Jr....      Director of United since 1988 and of UCB since           167,855 (2.6%) (2)
   (66)                            1980;  Secretary and Treasurer of United.  
                                   Mr. Brackett owns Brackett Auto Parts, an auto
                                   salvage business in Blairsville, Georgia.

Billy M. Decker..........      Senior Vice President and Cashier of UCB                 130,002 (2.0%) (3)
   (53)                            from 1986 until 1990,  Mr. Decker became
                                   President, Chief Executive Officer and
                                   Director of Carolina in 1990. He has been a
                                   Director of United since 1988, a Vice
                                   President of United since 1992 and a Director
                                   of UCB since 1980. He has been Secretary and
                                   Treasurer of United since 1988.

Thomas C. Gilliland......      A Director of United since 1992 and Vice                 176,449 (2.7%) (4)
   (48)                            Chairman of the Peoples Board since 1986,  
                                   Mr. Gilliland became President and Chief
                                   Executive Officer of Peoples and Vice
                                   President of United in 1993 and was named
                                   Executive Vice President of United in 1994.
                                   From 1986 through 1992, Mr. Gilliland was a
                                   partner in the law firm of Hurt, Richardson,
                                   Garner, Todd & Cadenhead in Atlanta, Georgia.
</TABLE>
 

                                      -3-

<PAGE>
 

<TABLE> 
<CAPTION> 
<S>                            <C>                                                      <C> 
Robert L. Head, Jr.......      Chairman of the Board of Directors of United             716,513 (11.1%) (5)
   (57)                            since 1988, Mr. Head has served as a Director
                                   of UCB since 1973. Mr. Head operates Head
                                   Construction Company, a general construction
                                   firm, and Head-Westgate  Corp., a construction
                                   and  real  estate  development  firm,  in
                                   Blairsville, Georgia.  He also owns Mountain
                                   Building Supply in Blairsville, Georgia.

Charles E. Hill..........      A Director of United since 1988 and of UCB since         174,792 (2.7%) (6)
   (59)                            1972, Mr. Hill is the Director of the
                                   Pharmacy at Union General Hospital in
                                   Blairsville, Georgia.

Hoyt O. Holloway.........      A Director of United since 1993 and of Peoples           47,985 * (7)
   (57)                            since 1986, Mr. Holloway owns H&H Farms, a
                                   poultry farm in Blue Ridge, Georgia.

P. Deral Horne...........      A Director of Carolina since 1988 and of United          27,500* (8)
   (70)                            since 1992, Mr. Horne owns Mountain and
                                   Valley Properties, a land development and
                                   sales business in Murphy, North Carolina.

Clarence W. Mason, Sr....      Chairman of the Board of Directors of Peoples            81,190 (1.3%) (9)
   (60)                            since 1986 and a Director of United since
                                   1992, Mr. Mason owns Mason Tractor, a retail
                                   equipment sales operation in Blue Ridge,
                                   Georgia.

W. C. Nelson, Jr.........      A Director of United since 1988 and of UCB since         686,463 (10.6%) (10)
   (53)                            1975, Mr. Nelson is Vice Chairman of the
                                   United Board of Directors and owns Nelson
                                   Tractor Company, a retail equipment sales
                                   firm in Blairsville, Georgia.

Charles E. Parks               A retired businessman, Mr. Parks is the former           96,167 (1.5%) (11)
   (67)                            owner of Parks Lumber Co., a retail building
                                   supply firm located in Murrayville, Georgia.
</TABLE>
 

- -----------------
  *     Less than one percent.
(1)     Includes 10,000 shares beneficially owned by Mr. Tallent pursuant to the
        2006 Debentures and 14,250 shares beneficially owned by Mr. Tallent
        pursuant to currently-exercisable options. Does not include 15 shares
        owned by Mr. Tallent's daughter, for which he disclaims beneficial
        ownership.
(2)     Includes 10,000 shares beneficially owned pursuant to the 2006
        Debentures. Does not include 59,710 shares owned by Mr. Brackett's wife
        and 23,035 shares owned by his daughters, for which he disclaims
        beneficial ownership.
(3)     Includes 10,000 shares beneficially owned by Mr. Decker pursuant to the
        2006 Debentures and 5,700 shares beneficially owned by Mr. Decker
        pursuant to currently-exercisable options. Does not include 9,040 shares
        owned by Mr. Decker's wife, for which he disclaims beneficial ownership.
(4)     Includes 6,270 shares beneficially owned by Mr. Gilliland as custodian
        for his children, 10,000 shares beneficially owned pursuant to the 2006
        Debentures and 8,550 shares beneficially owned pursuant to currently
        exercisable stock options.

                                      -4-

<PAGE>
 
(5)     Includes 52,758 shares beneficially owned by Mr. Head as custodian for
        his children and 10,000 shares owned pursuant to the 2006 Debentures.
        Does not include 16,965 shares owned by Mr. Head's wife, for which he
        disclaims beneficial ownership.
(6)     Includes 10,000 shares beneficially owned by Mr. Hill pursuant to the
        2006 Debentures. Does not include 87,105 shares owned by Mr. Hill's
        wife, for which he disclaims beneficial ownership.
(7)     Includes 10,000 shares beneficially owned pursuant to the 2006
        Debentures and 35,565 beneficially owned by Holloway Motors, Inc., a
        company 100% owned by Mr. Holloway. Does not include 485 shares owned by
        Mr. Holloway's wife, for which he disclaims beneficial ownership.
(8)     Includes 10,000 shares beneficially owned pursuant to the 2006
        Debentures.
(9)     Includes 10,000 shares beneficially owned pursuant to the 2006
        Debentures.
(10)    Includes 11,250 shares beneficially owned by a trust over which 
        Mr. Nelson has voting power and 10,000 shares owned pursuant to the 2006
        Debentures; does not include 5,000 shares owned by Mr. Nelson's wife, 
        for which he disclaims beneficial ownership. 
(11)    Includes 10,000 shares beneficially owned pursuant to the 2006
        Debentures.

     There are no family relationships between any director, executive officer
or nominee for director of United or any of its subsidiaries.

              PROPOSAL TO AMEND THE UNITED COMMUNITY BANKS, INC.
                        KEY EMPLOYEE STOCK OPTION PLAN
 
                                (Proposal 2)

Amendment

     The Board of Directors has approved an amendment to the Plan to increase
the shares of Common Stock authorized for issuance under the Plan from 150,000
shares to 300,000 shares (the "Amendment"), subject to shareholder approval. The
following general description of the material aspects of the Plan and the
Amendment is a summary and is qualified in its entirety by reference to the Plan
and Amendment, a copy of which will be provided to any shareholder upon written
request to Lois Jones at United's address.

     The Plan became effective on April 4, 1994 upon approval by the Board of
Directors and shareholders and terminates on the 10th anniversary of such date.
Outside directors are not eligible for grants under the Plan. The Plan provides
for the grant of incentive stock options (the "ISOs") and supplemental stock
options (the "SSOs") to key employees of United, its subsidiaries and any other
corporation designated by the compensation committee of the Board of Directors
(the "Committee") as being eligible under the Plan (each of which individually
is sometimes hereinafter referred to as the "Employer"). A maximum of 150,000
shares of the Common Stock is now authorized for issuance with respect to
options granted under the Plan, and the Board proposes to increase the shares of
Common Stock authorized for issuance to 300,000. Options for 92,000 shares are
currently outstanding under the Plan.

Purpose

     The purpose of the Plan is to promote the long-term success of United and
its subsidiaries by providing financial incentives to key employees who are in
positions to make significant contributions toward such success. The Plan is
designed to attract individuals of outstanding ability to employment with United
and its subsidiaries, to encourage key employees to acquire a proprietary
interest in United and to continue their employment with United or its
subsidiaries and to render superior performance during such employment.

Administration

     The Plan is administered by the Committee, which has authority to
determine the individuals to whom awards will be granted, the form and amount of
the awards, the dates of the grant and other terms of each award. The Committee
is composed at all times of not less than three members of the Board of
Directors who are not employees of United and who are not, at the time they are
exercising discretion in administering the Plan, eligible, and have not 

                                      -5-

<PAGE>
 
at any time within one year prior thereto been eligible, for selection as a
person to whom options may be granted under the Plan or any other similar
discretionary plan of United.

Description of Options

      Key employees of an Employer are eligible for consideration as
participants under the Plan. The Plan provides for grants to key employees of an
Employer of both ISOs, as defined in Section 422 of the Internal Revenue Code of
1986, as amended, ("IRC") and SSOs. The exercise price of an option granted
under the Plan is determined by the Committee at the time of grant. The exercise
price of an ISO may not be less than the fair market value of the shares subject
to such option (or 110% of such fair market value in the case of an ISO granted
to an individual who is a 10% stockholder of United). The exercise price of an
SSO, however, may, at the discretion of the Committee, be less than the fair
market value of the shares subject to such option at the time of grant. Full
payment of the option exercise price must be made by the optionee when an option
is exercised. The exercise price may be paid in cash or in such other form as
the Committee may approve, including shares of the Common Stock valued at their
fair market value (as defined in the Plan) on the date of option exercise. The
proceeds received by United from exercises of options under the Plan are used
for general corporate purposes. The period of exercise of an option is
determined by the Committee at the time of grant, but in any event, no option
may expire any later than the tenth anniversary of the date of grant.

      Options granted under the Plan generally are not exercisable sooner
than 90 days after the date of grant and are not exercisable later than 10 years
after the date of grant. No option may be exercised more than three months after
the optionee's retirement from employment with an Employer. The exercise period
described in the preceding sentence, however, is expanded to one year if the
employment of the optionee is terminated due to total and permanent disability
(as defined in the Plan), and to two years, or such later time as may be
approved by the Committee, if the employment of the optionee is terminated due
to the death of the optionee. Options will expire immediately upon the
termination of employment of or by the optionee for any reason other than
retirement, total and permanent disability or death.

      The receipt of stock upon the exercise of any option granted under the
Plan is contingent upon the advice of counsel to United that any shares to be
delivered comply with federal or state securities laws. The Committee may, in
its sole discretion, postpone the issuance or delivery of any shares issuable
upon exercise of an option for federal or state regulatory compliance reasons.
In the event of changes in the outstanding shares of the Common Stock by reason
of stock dividends, recapitalizations, reclassifications, split-ups or
consolidation or other change in the Common Stock, the aggregate number and
class of shares available under the Plan and the maximum number of shares as to
which options may be granted shall be appropriately adjusted by the Committee.
In the event of an exchange of the outstanding Common Stock in connection with a
merger, consolidation or other reorganization, or a sale by United of all or a
portion of its assets for a different number or class of shares or other
securities of United or for shares of any other corporation, the Committee shall
appropriately adjust, in such manner as it determines in its sole discretion,
the number and class of shares or other securities which shall be subject to
options and/or the purchase price per share which must be paid thereafter upon
exercise. Options will not be transferable by the holder other than by will or
applicable laws of descent and distribution.

      The Plan may, from time to time, be terminated, suspended or amended by
the Board of Directors in such respects as it shall deem advisable, including
any amendment effected (i) so that an ISO granted under the Plan shall be an
"incentive stock option" as such term is defined in Section 422 of the IRC, or
(ii) to conform to any change in any law or regulation governing the Plan or the
options granted thereunder. However, without the approval of the shareholders,
no such amendment may change: (a) the maximum aggregate number of shares for
which options may be granted under the Plan, except as required under any
adjustment described above; (b) the option exercise price, except for any change
in such price required as a result of any adjustment described above, and except
for changes in determining fair market value of shares of the Common Stock to
conform with any then applicable provision of the IRC or regulations promulgated
thereunder; (c) the maximum period during which options may be exercised; (d)
the termination date of the Plan in order to extend the same; or (e) the Plan's
participation requirements in any material respect. All options granted under
the Plan terminate on the date of liquidation or dissolution of United.

                                      -6-

<PAGE>
 
Tax Consequences

      Under current tax law, a holder of an ISO under the Plan does not realize
taxable income upon the grant or exercise thereof. However, depending upon the
holder's income tax situation, the exercise of the ISO may have alternative
minimum tax implications. The amount of gain which the optionee must recognize
is equal to the amount by which the value of the Common Stock on the date of the
sale exceeds the option price. If the optionee disposes of the stock after the
required holding period, that is, no earlier than a date which is two years
after the date of grant of the option and one year after the date of exercise,
the gain is capital gain income. If disposition occurs prior to expiration of
the holding period, the gain is ordinary income, and United is entitled to a tax
deduction equal to the amount of income recognized by the optionee.

      An optionee will not realize income when an SSO option is granted to him.
Upon exercise of such option, however, the optionee must recognize ordinary
income to the extent that the fair market value of the Common Stock on the date
the option is exercised exceeds the option price. Any such gain is taxed in the
same manner as ordinary income in the year the option is exercised. Any gain
recognized upon the disposition of the shares of stock obtained by the exercise
of an SSO will be taxed at capital gains rates if the employee holds the shares
of stock for at least one year after the exercise of the SSO. United will not
experience any tax consequences upon the grant of an SSO, but will be entitled
to take an income tax deduction equal to the amount which the option holder
includes in income (if any) when the SSO is exercised.

Vote Required and Recommendation of the Board

      Shareholder approval of the Amendment is required under the IRC and the
terms of the Plan because the Amendment would increase the maximum aggregate
number of shares for which options may be granted under the Plan.
For this reason, shareholder approval is sought for the Amendment.

      The Amendment to the Plan must be approved by the holders of a majority of
the Common Stock having voting power and present in person or by proxy at a
meeting at which a quorum is present. A quorum is present when the holders of a
majority of the shares outstanding on the record date are present at a meeting
in person or by proxy. Abstentions and broker non-votes would be included in
determining whether a quorum is present at a meeting. A broker non-vote would
have no effect on the outcome of the vote on the proposal to amend the Plan, but
an abstention would have the effect of a vote against the Amendment to the Plan.

T
HE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" APPROVAL OF THE PROPOSAL, AND THE
ENCLOSED PROXY WILL BE VOTED IN THAT MANNER UNLESS THE SHAREHOLDER EXECUTING THE
PROXY SPECIFICALLY VOTES TO THE CONTRARY OR ABSTAINS FROM VOTING ON THIS
PROPOSAL.

                                      -7-

<PAGE>

 

                            EXECUTIVE COMPENSATION


     United did not pay any remuneration to its executive officers during the
year ended December 31, 1996, other than directors' fees to the executive
officers who served on the Board of Directors of United. The table below sets
forth the annual and other compensation paid by United and its bank subsidiaries
to the following persons who served in the designated offices during 1996: Jimmy
C. Tallent, President and Chief Executive Officer of United and UCB, Billy M.
Decker, President and Chief Executive Officer of Carolina, Guy Freeman, Vice
President of United and Executive Vice President of Carolina, and Thomas C.
Gilliland, President and Chief Executive Officer of Peoples and Executive Vice
President of United (the "Named Executive Officers"). No other executive officer
of United was paid $100,000 or more during 1996.


<TABLE> 
<CAPTION> 
                                                                                              Long-Term
                                                   Annual Compensation                     Compensation
                                   ----------------------------------------------------    ----------------
                                                                                             Securities            All
   Name and Principal Offices                                                                Underlying           Other
        Held During 1996            Year         Salary         Bonus           Other          Options         Compensation
  ----------------------------     --------    -----------    ----------     -----------   ----------------    ------------
<S>                                <C>         <C>            <C>           <C>            <C>                 <C> 
Jimmy C. Tallent...................  1996       $188,650       $65,000        $10,000/(1)/     8,750             $23,781/(2)/
     President and Chief             1995        167,200        57,000          9,000/(1)/    12,500              21,085
     Executive Officer of United     1994        151,251        50,000          8,100/(1)/       --               15,250
     and UCB                                                                

Thomas C. Gilliland................  1996       $142,188       $35,000         $6,400/(1)/     5,250             $12,086/(3)/
     President and Chief             1995        132,563        30,000          5,400/(1)/     7,500               6,628
     Executive Office of             1994        121,395        25,000          5,400/(1)/       --                4,249
     Peoples; Executive Vice                                                
     President of United                                                       
                                                                                  
Billy M. Decker....................  1996       $107,500       $35,500        $10,000/(1)/     3,500             $13,115/(3)/
     President and Chief             1995         98,010        30,000          8,100/(1)/     5,000              11,957
     Executive Officer of            1994         90,905        23,000          8,100/(1)/       --               11,090
     Carolina; Vice President of                                            
     United                                                                    

Guy W. Freeman                       1996       $117,500       $20,000          3,850/(1)/     3,500             $14,335/(3)/
     Executive Vice President of     1995         87,929/(4)/   10,000          1,400          5,000                 --
     Carolina; Vice President of     1994            --            --             --             --                  --
     United                                                                     
</TABLE>
 

- ---------------------------
/(1)/  Directors' fees for service on United's bank subsidiaries' boards of
       directors. Other perquisites do not meet the Securities and Exchange
       Commission threshold for disclosure.
/(2)/  Represents a contribution by United of $23,016 on behalf of Mr. Tallent
       to United's Profit Sharing Plan and insurance premiums of approximately
       $766 paid by United on behalf of Mr. Tallent on a life insurance policy.
/(3)/  United's contribution on behalf of the named individual to United's
       Profit Sharing Plan.
/(4)/  Mr. Freeman commenced employment with United and its subsidiaries in
       March 1995.  Mr. Freeman owns 24,495 shares of Common Stock.

     United has never granted restricted stock, stock appreciation rights or
similar awards to any of its present or past executive officers, other than
awards of stock options under the United Community Banks Key Employee Stock
Option Plan.

     Directors of United, other than a President of a bank subsidiary who serves
on United's Board of Directors, received $750 per board meeting attended during
1996. Certain members of United's Board of Directors also serve as members of
one or more of the Boards of Directors of United's bank subsidiaries, for which
they are compensated by the bank subsidiaries.

                                      -8-

<PAGE>
 
Option Grants In Last Fiscal Year

     The following table sets forth information concerning stock options granted
to the Named Executive Officers under the Plan during fiscal year 1996 and the
projected value of those options at assumed annual rates of appreciation.


<TABLE> 
<CAPTION> 
- -----------------------------------------------------------------------------------------------------------------------
                                                                                          Potential Realizable Value
                                                                                            at Assumed Annual Rates
                                                                                          of Stock Price Appreciation
                                 Individual Grants                                            for Option Term/(2)/
- -----------------------------------------------------------------------------------------------------------------------
                            Number of
                           Securities     Percent of Total
                           Underlying     Options Granted    Exercise or
                             Options      to Employees in     Base Price   Expiration
          Name             Granted/(1)/     Fiscal Year       ($/Share)       Date        0%         5%         10%
- ------------------------------------------------------------------------------------------------------------------------
<S>                        <C>            <C>                <C>           <C>            <C>    <C>           <C> 
Jimmy C. Tallent              8,750            20.83%           $18.00       1/1/06       $0     $99,050       $251,015
- ------------------------------------------------------------------------------------------------------------------------
Thomas C. Gilliland           5,250            12.50%           $18.00       1/1/06       $0     $59,430       $150,610
- ------------------------------------------------------------------------------------------------------------------------
Billy M. Decker               3,500            8.33%            $18.00       1/1/06       $0     $39,620       $100,405
- ------------------------------------------------------------------------------------------------------------------------
Guy W. Freeman                3,500            8.33%            $18.00       1/1/06       $0     $39,620       $100,405
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>

- --------------------------
/(1)/  Twenty percent of the options were vested at grant and an additional 20%
       vest at each of the first four anniversaries of the grant date.
/(2)/  "Potential Realizable Value" is disclosed in response to SEC regulations
       that require such disclosure for illustration only. The values disclosed
       are not intended to be, and should not be interpreted as, representations
       or projections of the future value of the Company's Common Stock or of
       the stock price. Amounts are calculated at 0%, 5% and 10% assumed
       appreciation of the value of the Common Stock (compounded annually over
       the option term) and are not intended to forecast actual expected future
       appreciation, if any, of the Common Stock. The potential realizable value
       to the optionee is the difference between the exercise price and the
       appreciated stock price at the assumed annual rates of appreciation
       multiplied by the number of shares underlying the options.

                                      -9-

<PAGE>
 
Option Fiscal Year-End Values

     Shown below is information with respect to unexercised options to purchase
the Common Stock granted under the Plan to the Named Executive Officers and held
by them at December 31, 1996. No options were exercised during 1996 by a Named
Executive Officer.


<TABLE> 
<CAPTION> 
- --------------------------------------------------------------------------------------------------------------------
                                           Fiscal Year-End Option Values
                                           -----------------------------
- --------------------------------------------------------------------------------------------------------------------
                                            Number of Unexercised
                                          Options at Fiscal Year End           Value of Unexercised in the Money
        Name                            Exercisable/Unexercisable (#)          Options at Fiscal Year End ($)(1)
- --------------------------------------------------------------------------------------------------------------------
<S>                                     <C>                                    <C> 
Jimmy C. Tallent                                14,250 / 7,000                              $142,750
- --------------------------------------------------------------------------------------------------------------------
Thomas C. Gilliland                              8,550 / 4,200                                86,650
- --------------------------------------------------------------------------------------------------------------------
Billy M. Decker                                  5,700 / 2,800                                57,100
- --------------------------------------------------------------------------------------------------------------------
Guy W. Freeman                                   5,700 / 2,800                                57,100
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
 
- --------------------
(1) Based on $21.00 per share, the last sale price known to United during 1996.
United's Common Stock is not publicly traded.


 
         COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

     The Board of Directors of United reviewed the compensation of Messrs.
Tallent, Gilliland, Freeman and Decker and of United's other executive officers
for the 1996 fiscal year. Although all members of the Board of Directors
participated in deliberations regarding the salaries of executive officers, none
of such officers participated in any decisions regarding his own compensation as
an executive officer.

         Carolina, UCB, Towns and Peoples have retained the services of a
construction company operated by Robert L. Head, Jr., who is Chairman of the
Board of Directors of United and a director of UCB. During 1996, UCB and Towns
made payments of approximately $89,900 to such construction company for a
leasehold improvement in Dahlonega and remodeling of Towns' existing facilities.

         The Banks have had, and expect to have in the future, banking
transactions in the ordinary course of business with directors and officers of
United and their associates, including corporations in which such officers or
directors are shareholders, directors and/or officers, on the same terms
(including interest rates and collateral) as those prevailing at the time for
comparable transactions with unaffiliated third parties. Such transactions have
not involved more than the normal risk of collectability or presented other
unfavorable features.

                    JOINT REPORT ON EXECUTIVE COMPENSATION

General

     Under rules established by the SEC, United is required to provide certain
information with respect to compensation provided to United's President and
Chief Executive Officer and to United's other executive officers. United had no
executive officers other than Mr. Tallent, Mr. Gilliland, Mr. Decker and Mr.
Freeman who earned $100,000 or more during 1996. The SEC regulations require a
report setting forth a description of United's 

                                      -10-

<PAGE>
 
executive compensation policy in general and the considerations that led to the
compensation decisions affecting Mr. Tallent, Mr. Gilliland, Mr. Decker and Mr.
Freeman. In fulfillment of this requirement, the Board of Directors and
Compensation Committee has prepared the following report for inclusion in this
Proxy Statement.

     The fundamental policy of United's compensation program is to offer
competitive compensation and benefits for all employees, including the President
and Chief Executive Officer and the other officers of United, in order to
compete for and retain talented personnel who will lead United in achieving
levels of financial performance which enhance shareholder value. United's
executive compensation package historically has consisted of salary, annual
incentive compensation, matching profit sharing contributions and other
customary fringe benefits. The grant of stock options under the Plan is also a
part of United's compensation package for certain executive officers, including
the Named Executive Officers.

Salary

     All members of the Board of Directors of United participated in
deliberation regarding salaries of executive officers. Although subjective in
nature, factors considered by the Board in setting the salaries of executive
officers other than Mr. Tallent were Mr. Tallent's recommendations, compensation
paid by comparable banks to their executive officers (although such information
was obtained informally and United did not attempt to pay any certain percentage
of salary for comparable positions with other banks), each individual's own
performance and contribution to United, the individual's tenure in his or her
position and internal comparability considerations. The Board of Directors set
the salary of Mr. Tallent, considering Mr. Tallent's salary during the preceding
fiscal year, Mr. Tallent's tenure, salaries of chief executive officers of
comparable banks (although such information was obtained informally and United
did not attempt to pay any certain percentage of salary for a comparable
position with other banks) and the increase in earnings of United in recent
years. The Board did not assign relative weights to the factors considered in
setting salaries of executive officers, including Mr. Tallent.

Annual Incentive Compensation

     Annual incentive compensation for 1996, paid in the form of a cash bonus
during the fourth quarter of the fiscal year, was based on annual financial
results of United's bank subsidiaries, including general targets with respect to
net earnings and return on average assets. Cash bonuses were granted by the
Board to Mr. Tallent, and the Board set a range of bonuses (based on a
percentage of salary) for all employees other than Mr. Tallent, within which
range Mr. Tallent determined each officer's bonus, based on individual
performance.

Key Employee Stock Option Plan

     Options to acquire 42,000 shares of Common Stock were awarded under the
Plan in fiscal 1996, including options to acquire 21,000 shares of Common Stock
awarded to the Named Executive Officers by the Compensation Committee.


<TABLE> 
<CAPTION> 
                United Community Banks, Inc. Board of Directors
           <S>                                     <C> 
           Jimmy C. Tallent                        Charles E. Hill
           James A. Brackett, Jr.                  Hoyt O. Holloway
           Billy M. Decker                         P. Deral Horne
           Thomas C. Gilliland                     Clarence W. Mason, Sr.
           Robert L. Head, Jr.                     W. C. Nelson, Jr.
</TABLE>
 

                                      -11-

<PAGE>
 

<TABLE> 
<CAPTION> 
               Compensation Committee of the Board of Directors
           <S>                                     <C> 
           James A. Brackett, Jr.                  Hoyt O. Holloway
           Robert L. Head, Jr.                     P. Deral Horne
           Charles E. Hill                         Clarence W. Mason, Sr.
                                                   W. C. Nelson, Jr.
</TABLE>
 

                     SHAREHOLDER RETURN PERFORMANCE GRAPH

     Set forth below is a line graph comparing the yearly percentage change in
the cumulative total shareholder return on United's Common Stock against the
cumulative total return on The Nasdaq Stock Market (U.S. Companies) Index and
The Nasdaq Bank Stocks Index for the period commenced on June 28, 1993, the date
on which United's Common Stock was registered under the Securities Exchange Act
of 1934, as amended, and ended on December 31, 1996. United's Common Stock is
not publicly traded; therefore, the total shareholder return is based on stock
trades known to United during the period presented.

                     Comparison of Cumulative Total Return
                 Among United, The Nasdaq Stock Market (U.S.)
                            and Nasdaq Bank Stocks


<TABLE> 
<CAPTION> 
                                                                  Cumulative Total Return
                                               -------------------------------------------------------------
                                                6/93         12/93         12/94         12/95        12/96
<S>                                            <C>           <C>           <C>           <C>          <C> 
United Community Banks, Inc.                     100          119           187           301          397

NASDAQ Stock Market -US                          100          111           108           153          188

NASDAQ Bank                                      100          107           106           158          209
</TABLE>
 

                                      -12-

<PAGE>
 
               MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS


     The United Board of Directors held four meetings during 1996. All of the
directors attended at least seventy-five percent (75%) of the meetings of the
Board and committees of the Board on which they sat that were held during their
tenure as directors.

     The Board of Directors does not have a standing audit or nominating
committee. The compensation committee of the Board of Directors is comprised of
all members of the Board who are not employees of the bank subsidiaries of
United. The compensation committee makes compensation decisions for executive
officers and key employees and administers the Plan.


                  INFORMATION CONCERNING UNITED'S ACCOUNTANTS

     Porter Keadle Moore, LLP ("Porter Keadle") (successor to the practice of
Evans, Porter, Bryan & Co.) was the principal independent public accountant for
United during the year ended December 31, 1996. Representatives of Porter Keadle
are expected to be present at the annual meeting and will have the opportunity
to make a statement if they desire to do so and to respond to appropriate
questions. United anticipates that Porter Keadle will be United's accountants
for the current fiscal year.

                             SHAREHOLDER PROPOSALS

     Proposals of shareholders intended to be presented at United's 1998 annual
meeting must be received by December 12, 1997, in order to be eligible for
inclusion in United's Proxy Statement and Proxy for that meeting.

                OTHER MATTERS THAT MAY COME BEFORE THE MEETING

     Management of United knows of no matters other than those stated above that
are to be brought before the meeting. If any other matters should be presented
for consideration and voting, however, it is the intention of the persons named
as proxies in the enclosed Proxy to vote in accordance with their judgment as to
what is in the best interest of United.


                                         By Order of the Board of Directors,



                                         Jimmy C. Tallent
                                         President and Chief Executive Officer

                                      -13-

<PAGE>
 
                                     Appendix A

<PAGE>
 
                      GENERAL DESCRIPTION OF THE BUSINESS

     United Community Banks, Inc. ("United") was incorporated under the laws of
Georgia in 1987 and commenced operations in 1988 by acquiring 100% of the
outstanding shares of Union County Bank ("UCB"). United is a registered bank
holding company. All of United's activities are currently conducted by its
wholly-owned subsidiaries, UCB, which was organized as a Georgia banking
corporation in 1950, Carolina Community Bank, Murphy, North Carolina
("Carolina"), which United acquired in 1990, Peoples Bank, Blue Ridge, Georgia
("Peoples"), which United acquired in 1992, Towns County Bank, Hiawassee,
Georgia ("Towns"), which United also acquired in 1992 and White County Bank,
Cleveland, Georgia ("White"), which United acquired in 1995.

     UCB, Carolina, Peoples, Towns and White (collectively, the "Banks") are
community-oriented, with an emphasis on retail banking, and offer such customary
banking services as customer and commercial checking accounts, NOW accounts,
savings accounts, certificates of deposit, lines of credit, Mastercard and VISA
accounts, money transfers and trust services. The Banks finance commercial and
consumer transactions, make secured and unsecured loans, including residential
mortgage loans, and provide a variety of other banking services. UCB also offers
travel agency services for the Banks' customers.

     The Mortgage People Company ("MPC"), a division of UCB, is a full-service
mortgage lending operation approved as a seller/servicer for Federal National
Mortgage Association and Federal Home Mortgage Corporation. MPC was organized to
provide fixed and adjustable-rate mortgages. United Family Finance Company is a
traditional consumer finance company which is based in Hiawassee, Georgia and
also has been granted a license to conduct business in Blue Ridge, Georgia.

                                      A-2

<PAGE>
 
                      [UNITED COMMUNITY BANKS, INC. LOGO]


SELECTED FINANCIAL DATA


<TABLE> 
<CAPTION> 

                                                    1996          1995          1994          1993          1992
                                                               (in thousands except per share data)
<S>                                            <C>             <C>           <C>           <C>           <C> 
FOR THE YEAR
Net interest income                            $   31,368      $  22,919     $  18,217     $  14,516     $  11,131
Provision for loan losses                           1,411          1,040           935           842           472
Noninterest income                                  5,368          4,264         3,762         3,700         2,157
Noninterest expense                                23,313         17,854        13,902        11,705         8,635
Income taxes                                        3,811          2,238         1,942         1,467         1,055
Net earnings                                   $    8,201          6,051         5,200         4,202         3,126

PER COMMON SHARE
Net earnings                                   $     1.31           1.04          0.93          0.76          0.57
Cash dividends declared                              0.08           0.07          0.04          0.04          0.05
Book value                                           8.14           7.03          5.41          4.55          3.81

AT YEAR END
Loans                                          $  591,398        449,595       341,621       283,611       224,057
Earning assets                                    770,179        611,237       422,091       368,013       309,744
Assets                                            828,030        659,669       456,936       393,632       332,013
Deposits                                          720,726        590,656       393,270       349,765       300,020
Stockholders' equity                               52,401         44,027        30,217        25,449        20,942
Common shares outstanding                       6,438,848      6,260,280     5,589,365     5,589,365     5,500,115

AVERAGE BALANCES
Loans                                          $  514,724        395,503       309,493       250,479       199,383
Earning assets                                    674,356        523,545       395,121       336,931       278,306
Assets                                            730,124        562,392       427,695       362,000       300,438
Deposits                                          647,499        498,247       376,369       324,460       267,787
Stockholders' equity                               48,214         37,123        27,833        23,196        19,455
Weighted average shares outstanding             6,260,769      5,813,615     5,589,365     5,545,110     5,492,435

KEY PERFORMANCE RATIOS
Return on average assets                             1.10%          1.08%         1.22%         1.16%         1.04%
Return on average stockholders' equity              17.01%         16.30%        18.68%        18.12%        16.07%
Net interest margin, taxable equivalent              4.83%          4.60%         4.88%         4.57%         4.27%
Efficiency ratio                                    63.44%         65.69%        63.36%        64.79%        65.49%
Dividend payout ratio                                6.11%          6.91%         4.30%         4.62%         7.91%
Average equity to average assets                     6.60%          6.60%         6.51%         6.41%         6.47%
</TABLE>
 

                                      A-3

<PAGE>
 

                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                 FINANCIAL CONDITION AND RESULTS OF OPERATIONS


General

     United was incorporated under the laws of Georgia in 1987 and commenced
operations in 1988 by acquiring 100% of the outstanding shares of UCB. United is
a registered bank holding company. All of United's activities are currently
conducted by its wholly-owned subsidiaries, UCB, which was organized as a
Georgia banking corporation in 1950, Carolina, which United acquired in 1990,
Peoples, which United acquired in 1992, Towns, which United also acquired in
1992 and White, which United acquired in 1995.

     The following discussion focuses on significant changes in the financial
condition and results of operations of United and the Banks during the three
years ended December 31, 1996. The discussion and analysis is intended to
supplement and highlight, and should be read in conjunction with, information
contained in the accompanying consolidated financial statements.

Financial Highlights

     Year Ended December 31, 1996. Net earnings totaled over $8 million for the
year ended December 31, 1996, an increase of 36% from the $6 million earned in
1995. Net earnings per common share were $1.31 for 1996 compared to $1.04
reported for 1995, an increase of 26%. Return on assets and return on equity for
the year ended December 31, 1996, was 1.10% and 17.01%, respectively. The 1995
return on assets and return on equity was 1.08% and 16.30%, respectively.

     United's balance sheet grew 26% during the year as assets ended the year at
$828 million. Net loans increased 34% during the year and deposits grew over
22%. The increases in both loans and deposits reflect a strengthening economic
environment as well as market share gains from competition. Stockholders' equity
increased to $52 million and represented 6% of year end assets.

Capital Issues

     On March 6, 1997, the Company completed a filing with the Securities and
Exchange Commission for the purpose of registering for sale 250,000 shares of
its $1 par value common stock. The sale is estimated to yield $5.4 million after
deducting certain issuance costs. United intends to use these proceeds to invest
additional capital into UCB and Carolina to support the asset growth that both
banks are experiencing.

     On December 31, 1996, United completed a private placement of convertible
subordinated payable-in-kind debentures due December 31, 2006 (the "2006
Debentures"). The 2006 Debentures bear interest at the rate of one quarter of
one percentage point over the prime rate per annum as quoted in the Wall Street
Journal, payable on April 1, July 1, October 1 and January 1 of each year
commencing on April 1, 1997, to holders of record at the close of business on
the 15th day of the month immediately preceding the interest payment date.
Interest is computed on the basis of the actual number of days elapsed in a year
of 365 or 366 days, as applicable.

     The 2006 Debentures may be redeemed, in whole or in part from time to time
on or after January 1, 1998, at the option of United upon at least 20 days and
not more than 60 days notice, at a redemption price equal to 100% of the
principal amount of the Debentures to be redeemed plus interest accrued and
unpaid as of the date of redemption. The holders of the 2006 Debentures not
redeemed will have the right, excercisable at any time up to December 31, 2006,
to convert such debenture at the principal amount thereof into shares of Common
Stock of United at the conversion price of $25 per share, subject to adjustment
for stock splits and stock dividends.

     In August 1995, United completed an offering to the public of 215,515
shares of United Common Stock registered under the Securities Act of 1933
pursuant to which $2,434,000 in additional capital was raised. United used the
proceeds of the offering primarily to invest additional capital in Carolina and
Towns. The additional capital for Towns was used to support the asset growth
experienced by Towns. The additional capital for Carolina was necessitated by
Carolina's asset growth and the acquisition of the Andrews, Franklin and
Waynesville branch banking offices.

                                      A-4

<PAGE>
 
Expansions

     Effective July 1, 1996, the Georgia bank branching laws were amended to
permit subsidiary banks of Georgia bank holding companies to branch in an
aggregate of three additional locations prior to July 1, 1998, after which time
statewide branching would be permitted. On July 1, 1996, UCB changed its name
from Union County Bank to United Community Bank and established a branch office
in Dahlonega, Lumpkin County, Georgia. UCB simultaneously filed a tradename
filing to permit it to conduct its operations in Union County, Georgia under the
tradename Union County Bank. On September 28, 1996, UCB assumed deposits of
$23.7 million and purchased assets of $33.2 million in Cornelia, Habersham
County, Georgia, from a banking institution which sold off its operations in the
county. In Habersham County, UCB operates under the trade name of First Bank of
Habersham, and in Lumpkin County, UCB does business as United Community Bank. On
July 1, 1996, Carolina opened a loan production office in Sylva, North Carolina.

     In 1995, United's subsidiary, Carolina, assumed deposits totaling $32
million and purchased certain assets totaling $12 million of three branch banks
in the Western North Carolina cities of Andrews, Franklin and Waynesville.

     Effective August 31, 1995, United completed the acquisition of White County
Bancshares, Inc., the parent company of the $71 million asset, White County Bank
in Cleveland, Georgia. United issued 455,400 shares of its common stock in
addition to a previously issued exchangeable payable in kind debenture for all
of the issued and outstanding shares of White. This transaction was accounted
for as a purchase.

Net Interest Income

     Net interest income (the difference between the interest earned on assets
and the interest paid on deposits and liabilities) is the single largest
component of United's operating income. United actively manages this income
source to provide the largest possible amount of income while balancing interest
rate, credit, and liquidity risks.

     Net interest income, on a taxable equivalent basis, was $36.2 million in
1996, compared to $24.1 million in 1995 and $19.3 million in 1994. The 35%
increase in 1996 was the result of increased volume of net earning assets
partially augmented by a 27 basis point increase in the interest rate spread.

     Interest income increased over 28% in 1996 and 44% in 1995, respectively.
The increase in 1996 was again primarily a result of an increase in interest and
fees on loans of over $12.6 million. Interest on investment securities and other
earning assets increased $1.4 million or 16%.

     Average earning assets in 1996 increased 29% when compared to 1995 due to
increases in average loans of $120 million and average investment securities of
$30 million. Increases in average earning assets of 33% were experienced in 1995
over 1994 primarily due to increases in average loans of $86 million. Table 1
represents net interest income, yields and rates on a taxable-equivalent basis
and average balances for the years 1996, 1995 and 1994.

                                      A-5

<PAGE>
 
Table 1    -   Consolidated Average Balances, Interest and Rates
               Taxable Equivalent Basis
               (dollars in thousands)



<TABLE> 
<CAPTION> 
                                                              Years Ended December 31,           
                                                              ------------------------           
                                                   1996                                   1995            
                                                   ----                                   ----            

                                      Average      Interest      Yield/        Average                 Yield/
                                      Balance                     Rate         Balance    Interest      Rate

                                   --------------------------------------------------------------------------
ASSETS                                                                                                     

<S>                                <C>             <C>           <C>           <C>        <C>          <C>  
Interest earning assets:                                                                                   
    Federal funds sold               $  18,705         1,009        5.39%     $ 17,467       1,113      6.37%       
    Interest bearing deposits                                                                                       
      with other banks                     918           101       11.00%          286           3      1.05%       
    Investment securities:                                                                                          
      Taxable                          105,693         6,120        5.79%       78,684       4,791      6.09%       
      Tax-exempt                        34,316         2,886        8.41%       31,605       2,797      8.85%       
                                       -------        ------                  --------     -------  
    Total investment securities        140,009         9,006        6.43%      110,289       7,588      6.88%       
                                       -------        ------                  --------     -------  
    Loans:                                                                                                          
      Taxable                          507,928        53,508       10.53%      389,565      40,943     10.51%       
      Tax-exempt                         6,796           732       10.77%        5,938         653     11.00%       
                                       -------        ------                  --------     -------  
      Total loans                      514,724        54,240       10.54%      395,503      41,596     10.52%       
                                       -------        ------                  --------     ------- 
Total interest earning assets          674,356        64,356        9.54%      523,545      50,300      9.61%       
                                       -------        ======                  --------     ------- 
Allowance for loan losses               (7,163)                                 (5,367)                             
Cash and due from banks                 19,706                                  15,891                              
Premises and equipment                  16,599                                  13,456                              
Other assets                            26,626                                  14,867                              
                                       -------                                --------   
    Total assets                     $ 730,124                                $562,392     
                                       =======                                ========   
                                                                                                                    
LIABILITIES AND STOCKHOLDERS' EQUITY                                                                                                
                                                                                                                    
Interest bearing liabilities:                                                                                       
    Deposits:                                                                                                       
      Demand                         $ 161,038         5,167        3.20%     $ 97,103       3,585      3.69%       
      Savings                           39,084         1,050        2.68%       33,057       1,023      3.09%       
      Time                             378,478        23,611        6.24%      317,938      19,735      6.21%       
    Federal funds purchased                947            51        5.39%          975          56      5.74%       
    FHLB advances                       17,237           981        5.69%       11,889         899      7.56%       
    Long-term debt                      10,291           808        7.85%        9,537         820      8.60%       
    Convertible subordinated                                                                                        
      debentures                         1,000            90        9.00%        1,000          90      9.00%       
                                       -------        ------                  --------     -------                  
Total interest bearing liabilities     608,075        31,758        5.22%      471,499      26,208      5.56%       
                                       -------        ------                  --------     -------                  
Noninterest bearing demand                                                                                          
    deposits                            68,899                                  50,149                              
Other liabilities                        4,936                                   3,621                              
Stockholders' equity                    48,214                                  37,123                              
                                        ------                                  ------                              
Total liabilities and                                                                                               
  stockholders' equity               $ 730,124                                 562,392                              
                                       =======                                ========                              
Net interest income                                   32,598                                24,092                   
                                                      ======                               =======                  
Net interest spread                                                 4.32%                               4.05%           
                                                                    ====                                ====         
Net interest margin                                                 4.83%                               4.60%          
                                                                    ====                                ====         
Taxable equivalent adjustments:                                                                                     
    Loans                                          $     249                                   222
    Investment securities                                981                                   951
                                                         ---                               ------- 
    Total taxable equivalent                                                                                        
      adjustments                                      1,230                                 1,173
                                                      ------                              -------- 
Net interest income                                $  31,368                               $22,919
                                                      ======                               =======
<CAPTION> 
                                                    1994                     
                                                    ----                     

                                      Average                    Yield/               
                                      Balance      Interest       Rate                

                                   ------------------------------------                
ASSETS                                                                                 
                                                                                       
<S>                                <C>             <C>            <C>                  
Interest earning assets:                                                               
    Federal funds sold                $3,270            135       4.13%                       
    Interest bearing deposits                                                                           
      with other banks                   502             20       3.98%                                 
    Investment securities:                                                                              
      Taxable                         51,194          2,924       5.71%                                 
      Tax-exempt                      30,662          2,747       8.96%                                 
                                    --------        ------- 
    Total investment securities       81,856          5,671       6.93%                                 
                                    --------        ------- 
    Loans:                                                                                              
      Taxable                        304,961         28,683       9.41%                                 
      Tax-exempt                       4,532            424       9.36%                                 
                                    --------        -------  
      Total loans                    309,493         29,107       9.40%                                 
                                    --------        -------  
Total interest earning assets        395,121         34,933       8.84%                                 
                                    --------        -------  
Allowance for loan losses             (3,712)                                                           
Cash and due from banks               13,504                                                            
Premises and equipment                11,086                                                            
Other assets                          11,696                                                            
                                    --------                                                            
    Total assets                    $427,695                                                            
                                    ========                                                            
                                                                                                        
LIABILITIES AND STOCKHOLDERS' EQUITY                                                                                    
                                                                                                        
Interest bearing liabilities:                                                                           
    Deposits:                                                                                           
      Demand                         $86,224          2,874       3.33%                                 
      Savings                         30,172            926       3.07%                                 
      Time                           225,872         10,572       4.68%                                 
    Federal funds purchased            2,476            122       4.93%                                 
    FHLB advances                      8,096            415       5.13%                                 
    Long-term debt                     8,754            639       7.30%                                 
    Convertible subordinated                                                                            
      debentures                       1,000             90       9.00%                                 
                                    --------        -------  
Total interest bearing liabilities   362,594         15,638       4.31%                                 
                                    --------        -------                                             
Noninterest bearing demand                                                                              
    deposits                          34,101                                                            
Other liabilities                      3,167                                                            
Stockholders' equity                  27,833                                                            
                                    --------    
Total liabilities and                                                                                   
  stockholders' equity               427,695                                                            
                                    ========                                                            
Net interest income                                  19,295                                             
                                                    =======                                 
Net interest spread                                               4.53%                                                
                                                                  ====                 
Net interest margin                                               4.88%                                               
                                                                  ====                  
Taxable equivalent adjustments:                                                                         
    Loans                                               144                                           
    Investment securities                               934                                           
                                                    -------
    Total taxable equivalent                                                                            
      adjustments                                     1,078                      
                                                    -------                                       
Net interest income                                 $18,217                      
                                                    =======
</TABLE>
 

                                      A-6

<PAGE>
 
Consolidated Average Balances, Interest and Rates

     The banking industry uses two key ratios to measure relative profitability
of net interest income. The net interest rate spread measures the difference
between the average yield on earning assets and the average rate paid on
interest bearing sources of funds. The interest rate spread eliminates the
impact of non-interest bearing deposits and gives a direct perspective on the
effect of market interest rate movements. The net interest margin is defined as
net interest income as a percent of average total earning assets and takes into
account the positive impact of investing non-interest bearing deposits.

     The net interest spread was 4.32% in 1996, 4.05% in 1995 and 4.53% in 1994,
while the net interest margin was 4.83% in 1996, 4.60% in 1995 and 4.88% in
1994. The increase in the margin and spread are primarily due to an increase in
core deposits relative to total deposits. Core deposits represent approximately
42% of total deposits in 1996, an increase from 36% in 1995. The acquisition of
White County Bank contributed unfavorably to the net interest margin for 1995.
The decrease in 1995 compared to 1994 was also a result of competitive pricing
for time deposits and a rising rate environment. Table 2 shows the change in net
interest income for the past two years due to changes in volumes and rate.


<TABLE> 
<CAPTION> 

Table 2  -  Rate/Volume Variance Analysis
         Taxable Equivalent Basis
         (dollars in thousands)

                                                1996 Compared to 1995                    1995 Compared to 1994
                                        Increase (decrease) due to changes in    Increase (decrease) due to changes in
                                        -------------------------------------    -------------------------------------
                                                           Yield/      Net                        Yield/        Net
                                           Volume           Rate      Change        Volume         Rate       Change
                                           ------           ----      ------        ------         ----       ------
<S>                                     <C>                <C>        <C>        <C>               <C>        <C>  
Interest earned on:
   Federal funds sold                   $       89          (193)      (104)      $   905            73         978
   Interest bearing deposits
         with other banks                       19            79         98           (2)          (15)        (17)
   Investment securities:
         Taxable                             1,550          (221)     1,329         1,674           193       1,867
         Tax-exempt                            212          (123)        89            83          (33)          50

   Loans:
         Taxable                            12,469            96     12,565         8,892         3,368      12,260
         Tax-exempt                             92           (13)        79           155            74         229
                                          --------        ------   --------      --------       -------    --------

         Total interest income              14,431          (375)    14,056        11,707         3,660      15,367
                                            ------         -----     ------       -------         -----      ------

Interest paid on:
   Deposits:
         Demand                              1,975          (393)     1,582           402           309         711
         Savings                                98           (71)        27            89             8          97
         Time                                3,776           100      3,876         5,715         3,448       9,163
   Federal funds purchased                      (2)           (3)        (5)         (86)            20        (66)
   FHLB advances                               182          (100)        82           287           197         484
   Long-term debt                              122          (134)       (12)           67           114         181
                                               ---          ----    -------       -------        ------         ---

         Total interest expense              6,151          (601)     5,550         6,474         4,096      10,570
                                             -----          ----      -----        ------         -----      ------

         Net interest income            $    8,280           226      8,506        $5,233         (436)       4,797
                                             =====           ===      =====         =====        ======     =======
</TABLE>
 

                                      A-7

<PAGE>
 
Noninterest Income

     Noninterest income consists primarily of revenues generated from service
charges and fees on deposit accounts, mortgage loan and related fees and profits
earned through sales of credit life insurance. In addition, gains or losses
realized from the sale of investment portfolio securities are included in
noninterest income. Total noninterest income for 1996 increased 26% or $1.1
million, more than $625 thousand of which was contributed as a result of an
increase in service charges on demand deposits. Noninterest income for 1995
increased 13% or $502 thousand, $235 thousand of which was contributed as a
result of the White County Bank acquisition.

     The growth in non-interest income was the result of United's continuing
efforts to build stable sources of fee income, which includes services charges
on deposits and mortgage loan and related fees. This growth is being
accomplished through the building of customer market share and expansion of
United's locations.

     The primary contributor to non-interest income growth in both 1996 and 1995
was the continued growth in service charges on deposits. Fee income from service
charges on deposit accounts increased over 42% in 1996 following a 32% increase
in 1995. Continued emphasis on low cost checking account services, appropriate
pricing for transaction deposit accounts and fee collection practices for other
deposit services contributed to the increased levels of income for both years.
Increases during 1996 and 1995 were further influenced by the increase in both
the number of accounts and balances outstanding in transaction deposit accounts.

     Net gains on sales of investment securities increased $ 18 thousand from
1995 levels as management liquidated more investment securities to meet loan
demand.

     Mortgage loan and related fee income decreased 1% or $16 thousand during
1996 as compared to 1995 as the volume of loans refinanced remained relatively
flat.

Noninterest Expense

     Noninterest expenses for 1996 increased 31% following an increase of 28% in
1995. The increase was primarily due to the start up costs in new markets.
Salaries and employee benefits increased 28% from 1995 due to employee additions
resulting from the branch expansions together with the increases required to
maintain continued growth and cost of living raises.

     Net occupancy expense increased $591 thousand or 22% in 1996 following a
34% increase in 1995. The 1996 increase is due to the new physical locations in
Dahlonega and Cornelia, Georgia, as well as western North Carolina branch
expansions. The 1995 increase in occupancy expense was due primarily to
increased depreciation related to new banking facilities located in Blue Ridge,
Georgia and costs to operate the banking facilities in the expansion markets
acquired by Carolina.

     Deposit insurance premiums decreased $ 492 thousand or 96% as a result of
the recalculated FDIC assessment.

     Other non-interest expenses, including advertising, stationery and
supplies, increased $2.6 million or 54% compared to a 48% increase in 1995.
Management continues to emphasize the importance of expense management and
productivity throughout United in order to further decrease the cost of
providing expanded banking services to a growing market base.

Investment Securities

     The composition of the investment securities portfolio reflects United's
investment strategy of maintaining an appropriate level of liquidity while
providing a relatively stable source of income. The investment portfolio also
provides a balance to interest rate risk and credit risk in other categories of
the balance sheet while providing a vehicle for the investment of available
funds, furnishing liquidity, and supplying securities to pledge as required
collateral for certain deposits.

                                      A-8

<PAGE>
 
     During 1996, gross investment securities sales were $17 million as compared
to $15 million during 1995. Maturities and paydowns were $52 and $23 million,
representing 37% and 21%, respectively, of the average total portfolio for the
year. Net losses associated with the sales were approximately $14 thousand
during 1996 with net gains of $4 thousand during 1995, accounting for less than
1% of non-interest income. Gross unrealized gains in the total portfolio
amounted to approximately $1.1 million at year end 1996 and gross unrealized
losses amounted to approximately $872 thousand.

     Total average investment securities, including those available for sale,
increased 27% during 1996 Average investment securities during 1995 increased
35% from the 1994 average levels.


     Table 3 reflects the carrying amount of the investment securities portfolio
for the past three years.


<TABLE> 
<CAPTION> 

Table 3 - Carrying Value of Investments
(dollars in thousands)                                                     December 31,
                                              -----------------------------------------------------------------------
                                                         1996                    1995                   1994
=====================================================================================================================
<S>                                           <C>                       <C>                    <C>    
Securities held to maturity:
     U.S. Treasury                                     $ 1,868                     6,624                4,250
     U.S. Government agencies                           31,406                    37,736               20,556
     State and municipal                                31,630                    26,524               32,039
     Mortgage backed securities                          7,118                     7,937                6,103
                                              -----------------------------------------------------------------------
                                                        72,022                    78,821               62,948
                                              -----------------------------------------------------------------------
Securities available for sale:
     U.S. Treasury                                      11,332                    23,239                5,781
     U.S. Government agencies                           34,871                    28,341                6,733
     State and municipal                                 6,024                     6,321                    -
     Mortgage backed securities                         18,635                     4,290                  569
     Other                                               4,002                     2,855                1,864
                                              -----------------------------------------------------------------------
                                                        74,864                    65,046               14,947
                                              =======================================================================
     Total                                            $146,886                   143,867               77,895
                                              =======================================================================
</TABLE>
 

Carrying Value of Investments

     The December 31, 1996, market value of securities held to maturity, as a
percentage of amortized cost was 100%, down from 101% at December 31, 1995. The
market value of the portfolio of securities held to maturity will change as
interest rates change and such unrealized gains or losses will not flow through
the earnings statement unless the related securities are called at prices which
differ from the carrying value at the time of call.

     United utilizes its investment portfolio to offset some of the natural
mismatch of interest rate risk inherent in the loan and deposit portfolios.
United is fortunate to experience strong loan demand at all the Banks so there
is little need for investments solely to augment income or utilize uninvested
deposits. Accordingly, United must maintain a conservative posture with respect
to the types of securities in which it invests. The investment portfolio
consists primarily of U.S. Treasuries, U.S. Government agencies and tax-free
municipal securities with little principal risk.

Loans

     During 1996, average loans increased $120 million, or 30% and represented
76% of average interest earning assets and 70% of average total assets. This
growth generally occurred proportionally among the various loan categories and
can be attributed to additional products and services marketed to existing
customers and the successful business development efforts which resulted in
market share gains from competitors.

                                      A-9

<PAGE>
 
     The level of loans, when compared to the level of deposits, has been
relatively strong over the last three years. The average loan to deposit ratio
was 80%, 79% and 82% in 1996, 1995 and 1994, respectively. The decrease noted in
1995 is attributed to the infusion of deposits acquired from the White
acquisition together with the branch acquisitions.

     Table 4 breaks down the composition of the loan portfolio for each of the
past five years while Table 5 shows the amount of loans outstanding for selected
categories as of December 31, 1996, with maturities based on the remaining
scheduled repayments of principal.

Table 4 - Loan Portfolio
(dollars in thousands)


<TABLE> 
<CAPTION> 
                                                            December 31,                                    
                                                                                                                                 
                                -------------------------------------------------------------------                              
                                        1996                   1995                   1994                                       
- ---------------------------------------------------------------------------------------------------                              
                                            Percent                Percent               Percent                                 
                                  Amount    of Total     Amount    of Total    Amount    of Total                                
- ---------------------------------------------------------------------------------------------------                              
<S>                               <C>       <C>          <C>       <C>         <C>       <C>       
Commercial, financial and                                                                                                        
agricultural                      $176,486     29.8%      120,876     27.2%     105,644     32.1%                                
Real estate - construction          50,523      8.5%       29,538      6.7%      19,707      6.0%                                
Real estate - mortgage             275,164     46.5%      216,649     48.8%     144,971     44.0%                                
Installment loans to                                                                                                             
individuals                         90,178     15.2%       77,029     17.3%      58,904     17.9%                                
                                 ---------   -------     --------   -------    --------   -------                                
Total loans                        592,351    100.0%      444,092    100.0%     329,226    100.0%   
Less: Allowance for loan                                                                                                         
losses                               7,680                  6,545                 3,950                                          
                                -----------             ---------              --------                                          
                                  $584,671                437,547               325,276                                          
                                   =======                =======               =======                                          
</TABLE>
 


<TABLE> 
<CAPTION> 
                                           December 31,                                       
                                     
                                ------------------------------------------ 
                                        1993                1992               
- -------------------------------------------------------------------------- 
                                           Percent              Percent    
                                 Amount    of Total    Amount   of Total   
- -------------------------------------------------------------------------- 
<S>                              <C>       <C>         <C>      <C>       
Commercial, financial and                                                  
agricultural                       82,424     30.5%     67,208     30.7%   
Real estate - construction         21,984      8.1%      9,768      4.5%   
Real estate - mortgage            115,822     42.9%     98,427     45.0%   
Installment loans to                                                       
individuals                        49,770     18.5%     43,425     19.8%   
                                 --------     -----    -------   -------   
Total loans                       270,000    100.0%    218,828    100.0%   
Less: Allowance for loan                                        
losses                              3,237                2,592  
                                 --------             --------  
                                  266,763              216,236  
                                  =======              =======   
</TABLE>
 


<TABLE> 
<CAPTION> 

<PAGE>
     Table 5 - Loan Portfolio Maturity
     (dollars in thousands)
                                                                  Maturity                                  
                                  --------------------------------------------------------------------------
                                                       Over One Year                                        
                                      One Year            Through            Over Five                      
                                      or Less            Five Years            Years            Total       
- ------------------------------------------------------------------------------------------------------------
<S>                                  <C>                <C>                  <C>               <C> 
Commercial, financial and                                                                                   
agricultural                          $144,719             22,943               8,824           176,486     
Real estate - construction              46,481              4,042              --                50,523     
                                      --------            -------          ----------          --------     
                                      $191,200             26,985               8,824           227,009     
                                  ==========================================================================
</TABLE>
 


<TABLE> 
<CAPTION> 

                                     Rate Structure for Loans
                                      Maturing Over One Year
                                  ------------------------------
                                                     Floating or
                                   Predetermined     Adjustable
                                   Interest Rate        Rate
- ----------------------------------------------------------------
<S>                               <C>               <C>  
Commercial, financial and         
agricultural                           26,367           5,400
Real estate - construction              1,819           2,223
                                      -------           -----
                                       28,186           7,623
                                  ==============================
</TABLE>
 

Provision and Allowance for Loan Losses

     United manages asset quality and controls risk through diversification of
the loan portfolio and the application of policies designed to foster sound
underwriting and loan monitoring practices. United's loan administration
function is charged with monitoring asset quality, establishing credit policies
and procedures, and enforcing the consistent application of these policies and
procedures across United.

     The provision for loan losses is the annual cost of providing an adequate
allowance for anticipated potential future losses on loans. The amount each year
is dependent upon many factors including loan growth, net charge-offs, changes
in the composition of the loan portfolio, delinquencies, management's assessment
of loan portfolio quality, the value of collateral, and economic factors and
trends.

     Reviews of non-performing, past due loans and larger credits, designed to
identify potential charges to the allowance for loan losses, as well as
determine the adequacy of the allowance, are made on a regular basis during the
year. 

                                      A-10

<PAGE>
 
These reviews are made by the responsible lending officers, as well as a
separate credit administration department, and consider such factors as the
financial strength of borrowers, the value of the applicable collateral, past
loan loss experience, anticipated loan losses, growth in the loan portfolio, and
other factors, including prevailing and anticipated economic conditions.

     Whenever a loan, or portion thereof, is considered by management to be
uncollectible, it is charged against the allowance for loan losses. Management
believes that the allowance for loan losses is adequate. While management uses
available information to recognize losses on loans, future additions to the
allowance may be necessary based on changes in economic conditions. In addition,
various regulatory agencies, as an integral part of their examination process,
periodically review the Banks' allowance for loan losses. Such agencies may
require the Banks to recognize additions to the allowances based on their
judgments about information available to them at the time of their examination.

     The provision for loan losses increased 36% in 1996 compared to an 11%
increase in 1995 although the allowance for loan losses as a percentage of total
loans decreased from 1.47% in 1995 to 1.30% at year end 1996.

     Net loan charge-offs for 1996 remained consistent with 1995, although the
average balance of loans increased 30%. United does not currently allocate the
allowance for loan losses to the various loan categories. Net charge-offs during
1997 are expected to approximate those experienced during 1996.

     Table 6 sets forth information with respect to United's loan and the
allowance for loan losses for each of the last five years.


<TABLE> 
<CAPTION> 

Table 6 - Analysis of the Allowance for Loan Losses
(dollars in thousands)                                                       Years Ended December 31,
                                                  -----------------------------------------------------------------------
                                                       1996           1995          1994          1993          1992
- -------------------------------------------------------------------------------------------------------------------------
<S>                                                  <C>            <C>           <C>            <C>          <C> 
Allowance for loan losses at beginning of year        $6,545         3,950         3,237         2,592         2,091
Charge-offs:
     Commercial, financial and agricultural              282           148            27             6            25
     Real estate - construction                           -             24             -             -             -
     Real estate - mortgage                               13           337            49            54            58
     Installment loans to individuals                    305           166           238           227           226
                                                  -----------------------------------------------------------------------
     Total charge-offs                                   600           675           314           287           309
                                                  -----------------------------------------------------------------------
Recoveries:
     Commercial, financial and agricultural              251           157             6             1            43
     Real estate - construction                           -            -               -             -             -
     Real estate - mortgage                               39           189             1            28            23
     Installment loans to individuals                     34            71            85            61            60
                                                  -----------------------------------------------------------------------
     Total recoveries                                    324           417            92            90           126
                                                  -----------------------------------------------------------------------
     Net charge-offs                                     276           258           222           197           183
                                                  -----------------------------------------------------------------------
Provisions charged to earnings                         1,411         1,040           935           842           472
Allowance for loan losses acquired from White             -          1,813             -             -             -
Allowance for loan losses acquired from Towns             -            -               -             -           212
                                                  -----------------------------------------------------------------------
Balance at end of year                                $7,680         6,545         3,950         3,237         2,592
                                                  =======================================================================
Ratio of net charge-offs to average loans
outstanding during the period                          0.05%         0.07%         0.07%         0.08%         0.09%

</TABLE>
 

                                      A-11

<PAGE>
 
Asset Quality

     At December 31, 1996, non-performing assets, comprised of nonaccrual loans,
other real estate owned and loans for which payments are more than 90 days past
due totaled $1.4 million compared to $2.2 million at year end 1995. The decrease
from 1995 is directly attributable to management's concerted efforts to reduce
the level of nonperforming assets acquired in the 1995 purchase of White County
Bank.

     It is the general policy of the Banks to stop accruing interest income and
place the recognition of interest on a cash basis when a loan is placed on
nonaccrual status and any interest previously accrued but not collected is
reversed against current income unless the collateral for the loan is sufficient
to cover the accrued interest or a guarantor assures payment of interest. Loans
made by United's Bank Subsidiaries to facilitate the sale of other real estate
are made on terms comparable to loans of similar risk. An adequate investment by
the buyer is required prior to the removal of other real estate from
non-performing assets.

     There were no commitments to lend additional funds on nonaccrual loans at
December 31, 1996. Table 7 summarizes United's non-performing assets for each of
the last five years.


<TABLE> 
<CAPTION> 

Table 7 - Risk Elements
(dollars in thousands)                                                December 31,
                                     --------------------------------------------------------------------------------
                                          1996            1995            1994            1993             1992
- ---------------------------------------------------------------------------------------------------------------------
<S>                                   <C>               <C>              <C>              <C>              <C> 
Loans on nonaccrual                   $    932            1,914            514             567              542
Loans 90 days past due                     236              226             85             197               36
Other real estate                          210               65              -               -               41
                                     ================================================================================
Total non-performing assets            $ 1,378            2,205            599             764              619
                                     ================================================================================
Total non-performing loans as a
     percentage of loans                 0.19%           0.48%           0.18%            0.21%           0.25%
Loans 90 days past due as a
     percentage of loans                 0.04%           0.05%           0.03%            0.07%           0.02%
</TABLE>
 

Risk Elements

     There may be additional loans within United's portfolio that may become
classified as conditions dictate; however, management was not aware of any such
loans that are material in amount at December 31, 1996. At December 31, 1996,
management was unaware of any known trends, events or uncertainties that will
have, or that are reasonably likely to have a material effect on United's
liquidity, capital resources or operations.

Deposits

     All major categories of average interest bearing deposits increased during
1996. The largest dollar increase in average interest bearing deposits was in
the interest bearing demand deposit category, rising over $64 million or 66%
from 1995 followed by the increase in average time deposits of $ 61 million or
19%. Average non-interest bearing demand deposits increased over $18 million or
37% after increasing 47% during 1995. The increases were primarily a result of
internally generated growth, as well as the previously discussed expansions.
Savings deposits, interest bearing demand deposits and non-interest bearing
demand deposits accounted for 42% of total average deposits during 1996. For
1995, these lower cost deposits were 36% of total average deposits. The
maturities of time deposits of $100,000 or more issued by United's bank
subsidiaries at December 31, 1996, are summarized in the following table:

<PAGE>
Table 8 - Maturities of Time Deposits Over $100,000
(dollars in thousands)
     Three months or less                                       $34,352
     Over three months through six months                        30,666
     Over six months through twelve months                       25,394
     Over twelve months                                          21,435
                                                         ------------------
                                                               $111,847
                                                         ==================

                                      A-12

<PAGE>
 
     At December 31, 1996, four of United's bank subsidiaries were shareholders
in the Federal Home Loan Bank of Atlanta. Through this affiliation, advances
totaling $35 million were outstanding at rates competitive with time deposits of
like maturities. United anticipates continued utilization of this short and long
term source of funds to minimize interest rate risk and provide competitive,
long-term fixed rate loans to its customers.

Interest Rate Sensitivity Management

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

     During 1996, United used derivative financial instruments to a limited
extent in its interest rate risk management. Interest rate swap contracts with
an aggregate notional amount of $35 million extending through various dates in
1997 and 1998 were executed to effectively convert certain fixed rate
liabilities to variable rates. From October 1, 1996, through December 1996,
United converted the effective interest rate of certain deposit liabilities from
7.25% to 6.46% with the execution of the swap agreements. Additionally, United
entered into an interest rate floor contract for the notional amount of $50
million extending through January 1998. For a one time premium upon the
execution of the contract, the floor agreement reduces United's interest rate
risk in the event of rate declines below a predetermined level. Notional amounts
of the swap and floor contracts only represent the basis for exchange of the
cash flows and do not represent credit risk. Credit risk is limited to the
positive market value of the derivative at a given date. United anticipates
continued use of derivative interest rate contracts when appropriate in its
asset-liability rate management.

     United uses income simulation modeling as the primary tool in measuring
interest rate risk and managing interest rate sensitivity. Simulation modeling
considers not only the impact of changing market rates of interest on future net
interest income, but also such other potential causes of variability as earning
asset volume, mix, yield curve relationships, customer preferences and general
market conditions.

     Interest rate sensitivity is a function of the repricing characteristics of
United's portfolio of assets and liabilities. These repricing characteristics
are the time frames within which the interest bearing assets and liabilities are
subject to change in interest rates either at replacement, repricing or maturity
during the life of the instruments. Interest rate sensitivity management focuses
on the maturity structure of assets and liabilities and their repricing
characteristics during periods of changes in market interest rates. Effective
interest rate sensitivity management seeks to ensure that both assets and
liabilities respond to changes in interest rates within an acceptable timeframe,
thereby minimizing the effect of interest rate movements on net interest income.
Interest rate sensitivity is measured as the difference between the volumes of
assets and liabilities in United's current portfolio that are subject to
repricing at various time horizons: immediate, one to three months, four to
twelve months, one to five years, over five years, and on a cumulative basis.
The differences are known as interest sensitivity gaps. Table 9 shows interest
sensitivity gaps for these different intervals as of December 31, 1996.

                                      A-13

<PAGE>
 

<TABLE> 
<CAPTION> 

Table 9 - Interest Rate Sensitivity Analysis
(dollars in thousands)                                                   December 31, 1996
                                          --------------------------------------------------------------------------------
                                                                           Four                    Over Five
                                                                         Through        One        Years amd
                                                         One Through      Twelve      Through      Non-Rate
                                            Immediate    Three Months     Months     Five Years    Sensitive     Total
=========================================================================================================================-
<S>                                       <C>            <C>           <C>           <C>          <C>          <C> 
Interest earning assets:
     Federal funds sold                    $  24,215          -             -             -           -           24,215
     Investment securities                      -            8,575        20,559        75,904      41,848       146,886
     Mortgage loans held for sale               -            6,727          -             -           -            6,727
     Loans                                    16,203       217,955       248,603        90,627      18,963       592,351
                                          --------------------------------------------------------------------------------
     Total interest earning assets            40,418       233,257       269,162       166,531      60,811       770,179
                                          --------------------------------------------------------------------------------
Interest bearing liabilities:
     Deposits:
     Demand                                     -          158,124          -             -           -          158,124
     Savings                                    -             -           39,001          -           -           39,001
     Time                                       -          143,400       196,942       105,112         239       445,693
     FHLB advances                            20,100         7,004         3,001         3,377       1,592        35,074
     Long-term debt                           10,453          -             -             -           -           10,453
     Convertible subordinated
         debentures                             -             -             -             -          3,500         3,500
                                          --------------------------------------------------------------------------------
     Total interest bearing
         liabilities                          30,553       308,528       238,944       108,489       5,331       691,845
                                          --------------------------------------------------------------------------------
Noninterest bearing sources of funds -
   net                                          -             -             -             -         77,908        77,908
                                          --------------------------------------------------------------------------------
Interest sensitivity gap                       9,865       (75,271)       30,218        58,042     (22,428)          426
                                          --------------------------------------------------------------------------------
Cumulative interest sensitivity gap         $  9,865       (65,406)      (35,188)       22,854         426          -
                                          ================================================================================
</TABLE>
 

     As seen in the preceding table, for the first 365 days 84% of earning asset
funding sources will reprice compared to 70% of all interest earning assets.
Changes in the mix of earning assets or supporting liabilities can either
increase or decrease the net interest margin without affecting interest rate
sensitivity. In addition, the interest rate spread between an asset and its
supporting liability can vary significantly while the timing of repricing for
both the asset and the liability remains the same, thus impacting net interest
income. This characteristic is referred to as basis risk and generally relates
to the possibility that the repricing characteristics of short-term assets tied
to United's prime lending rate are different from those of short-term funding
sources such as certificates of deposit.

     Varying interest rate environments can create unexpected changes in
prepayment levels of assets and liabilities which are not reflected in the
interest rate sensitivity analysis report. These prepayments may have
significant effects on United's net interest margin. Because of these factors an
interest sensitivity gap report may not provide a complete assessment of
United's exposure to changes in interest rates.

     Table 9 indicates United is in a liability sensitive or negative gap
position at twelve months. This liability sensitive position would generally
indicate that United's net interest income would decrease should interest rates
rise and would increase should interest rates fall. Due to the factors cited
previously, current simulation results indicate only minimal sensitivity to
parallel shifts in interest rates. Management also evaluates the condition of
the economy, the pattern of market interest rates and other economic data to
determine the appropriate mix and repricing characteristics of assets and
liabilities required to produce an optimal net interest margin.

                                      A-14

<PAGE>
 
     Table 10 represents the expected maturity of the total investment
securities by maturity date and average yields based on amortized cost (for all
obligations on a fully taxable basis assuming a 34% tax rate) at December 31,
1996. It should be noted that the composition and maturity/repricing
distribution of the investment portfolio is subject to change depending on rate
sensitivity, capital needs, and liquidity needs.

Table 10 - Expected Maturity of Investment Securities
(dollars in thousands)

<TABLE> 
<CAPTION> 
====================================================================================================================================
                                                     After One But         After Five But
                             Within One Year       Within Five Years      Within Ten Years       After Ten Years        Totals
                          ==========================================================================================================
                            Amount      Yield     Amount      Yield      Amount      Yield      Amount      Yield
====================================================================================================================================
<S>                       <C>         <C>        <C>        <C>         <C>        <C>         <C>        <C>        <C> 
Securities held to
   maturity:
U.S. Treasury
   securities               $ 1,375      6.01%        493      5.63%        -          -           -          -            1,868
U.S. Government
   Agencies                   9,933      5.24%     21,473      5.77%        -           -          -          -           31,406
State and municipal             971      8.31%      8,987      8.37%      17,844      7.68%       3,828      8.31%        31,630
Mortgage backed
   securities                 1,729      5.82%      3,282      6.70%        -          -          2,107      6.59%         7,118
                          ---------------------------------------------------------------------------------------------------------
                             14,008      5.60%     34,235      6.54%      17,844      7.68%       5,935      7.70%        72,022
                          ---------------------------------------------------------------------------------------------------------

Securities available
   for sale:
U.S. Treasury
   securities                 4,256      5.78%      7,014      6.18%        -          -           -          -           11,270
U.S. Government
   agencies                   9,890      5.68%     24,660      6.13%         505      6.50%        -          -           35,055
State and municipal           1,000     10.55%      3,803      9.59%         967      7.08%         109      7.80%         5,879
Mortgage backed
   securities                 3,973      6.38%      2,179      6.63%       3,754      6.78%       8,738      5.67%        18,644

Other                             -       -          -          -           -          -          4,104      6.70%         4,104
                          ---------------------------------------------------------------------------------------------------------
                             19,119      6.10%     37,656      6.52%       5,226      6.80%      12,951      6.01%        74,952
                          ---------------------------------------------------------------------------------------------------------
Total                       $33,127      5.89%     71,891      6.53%      23,070      7.48%      18,886      6.54%       146,974
                          =========================================================================================================
</TABLE>
 

                                      A-15

<PAGE>
 
Liquidity Management

     The objective of liquidity management is to ensure that sufficient funding
is available, at reasonable cost, to meet the ongoing operational cash needs of
United and to take advantage of income producing opportunities as they arise.
While the desired level of liquidity will vary depending upon a variety of
factors, it is the primary goal of United to maintain a high level of liquidity
in all economic environments. Liquidity is defined as the ability of a company
to convert assets into cash or cash equivalents without significant loss and to
raise additional funds by increasing liabilities. Liquidity management involves
maintaining United's ability to meet the day to day cash flow requirements of
the Banks' customers, whether they are depositors wishing to withdraw funds or
borrowers requiring funds to meet their credit needs. Without proper liquidity
management, United would not be able to perform the primary functions of a
financial intermediary and would, therefore, not be able to meet the needs of
the communities it serves.

     The primary function of asset and liability management is not only to
assure adequate liquidity in order for United to meet the needs of its customer
base, but to maintain an appropriate balance between interest-sensitive assets
and interest-sensitive liabilities so that the Company can also meet the
investment requirements of its shareholders. Daily monitoring of the sources and
use of funds is necessary to maintain an acceptable cash position that meets
both requirements. In a banking environment, both assets and liabilities are
considered sources of liquidity funding and both are, therefore, monitored on a
daily basis.

     The asset portion of the balance sheet provides liquidity primarily through
loan principal repayments, maturities of investment securities and, to a lesser
extent, sales of securities. Installment loan payments are becoming an
increasingly important source of liquidity for United as this portfolio
continues to grow. Mortgage loans held for sale totaled just over $6.7 million
at year end and typically turn over every 45 days. Real estate-construction and
commercial, financial and agricultural loans that mature in one year or less
amounted to $191 million or 32% of the total loan portfolio at December 31,
1996. Investment securities maturing in the same time frame totaled $33 million
or 23% of the total investment securities portfolio at year end 1996. Other
short-term investments such as federal funds sold and maturing interest bearing
deposits with other banks are additional sources of liquidity funding.

     The liability portion of the balance sheet provides liquidity through
various customers' interest bearing and non-interest bearing deposit accounts.
Federal funds purchased and securities sold under agreements to repurchase are
additional sources of liquidity and basically represent United's incremental
borrowing capacity. These sources of liquidity are short-term in nature and are
used as necessary to fund asset growth and meet short-term liquidity needs.

     As disclosed in United's Consolidated Statements of Cash Flows included
elsewhere herein, net cash provided by operating activities, net of the decrease
in mortgage loans held for sale, increased over $12 million primarily due to the
increase in net earnings coupled with increases in noncash expenses -
depreciation and amortization and provision for loan losses. Net cash used in
investing activities of $133 million consisted primarily of net loans originated
of $129 million and securities purchased of $72 million funded largely by sales,
maturities and paydowns of investment securities of over $68 million and cash
acquired from acquisitions and branch purchases of $3 million. This resulted
from management's continued efforts to reinvest new funds in higher-yielding
loans rather than investment securities. Net cash provided by financing
activities provided the remainder of funding sources for 1996. The $135 million
of net cash provided consisted primarily of a $106 million net increase in
demand, savings and time deposits coupled with net Federal Home Loan Bank
advances of $26 million.

     Management considers United's liquidity position at the end of 1996 to be
sufficient to meet its foreseeable cash flow requirements. Reference should be
made to the Consolidated Statements of Cash Flows appearing in the Consolidated
Financial Statements for a three-year analysis of the changes in cash and cash
equivalents resulting from operating, investing and financing activities.

                                      A-16

<PAGE>
 
Capital Resources and Dividends

     Stockholders' equity at December 31, 1996, increased 19% from December 31,
1995. Net earnings after dividends for 1996 accounted for over $7.7 million of
the increase in stockholders' equity while the conversion of debentures into
stock added $1 million.

     Dividends of $501,000 or $.08 per share were declared on the Common Stock
in 1996, which represented a 14% increase from the $0.07 declared in 1995.
United has historically retained the majority of its earnings in order to keep
pace with the rate at which assets have grown.

     Average stockholders' equity as a percentage of total average assets is one
measure used to determine capital strength. The ratio of average stockholders'
equity to average assets for 1996 and 1995 was 6.60%. United's asset growth has
continued to exceed the rate at which capital has been retained. Table 11
summarizes these and other key ratios for United for each of the last three
years.


Table 11 - Equity Ratios

<TABLE> 
<CAPTION> 
                                                                   Years Ended December 31,
                                          ---------------------------------------------------------------------------
                                                   1996                      1995                     1994
=====================================================================================================================
<S>                                       <C>                      <C>                       <C> 
Return on average assets                            1.10%                    1.08%                     1.22%
Return on average equity                           17.01%                   16.30%                    18.68%
Dividend payout ratio                               6.11%                    6.91%                     4.30%
Average equity to average assets                    6.60%                    6.60%                     6.51%
</TABLE>
 

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

     United's Tier I capital, which consists of stockholders' equity less
goodwill and deposit-based intangibles, amounted to $45.8 million at December
31, 1996. Tier II capital components include supplemental capital components
such as a qualifying allowance for loan losses and qualifying subordinated debt.
Tier I capital plus Tier II capital components is referred to as Total
Risk-based Capital and was $56.5 million at year end 1996. The percentage
ratios, as calculated under the guidelines, were 7.95% and 9.81% for Tier I and
Total Risk-based Capital, respectively, at year end 1996.

     A minimum leverage ratio is required in addition to the risk-based capital
standards and is defined as period end stockholders' equity adjusted for
goodwill and deposit-based intangibles divided by average assets adjusted for
goodwill and deposit-based intangibles. Although a minimum leverage ratio of 4%
is required for the highest-rated bank holding companies which are not
undertaking significant expansion programs, the Federal Reserve Board requires a
bank holding company to maintain a leverage ratio greater than 4% if it is
experiencing or anticipating significant growth or is operating with less than
well-diversified risks in the opinion of the Federal Reserve Board. The Federal
Reserve Board uses the leverage ratio in tandem with the risk-based capital
ratios to assess capital adequacy of banks and bank holding companies. United's
leverage ratios at December 31, 1996 and 1995 were 5.75% and 6.70%,
respectively.

     Further analysis regarding the actual and required capital ratios of United
and its individual bank subsidiaries is provided in note 12 to the consolidated
financial statements.

     All three of the capital ratios of United and its bank subsidiaries
currently exceed the minimum ratios required in 1996 as defined by federal
regulators. United monitors these ratios to ensure that the company and the bank
subsidiaries remain within regulatory guidelines. Increased regulatory activity
in the financial industry as a whole will continue to impact the structure of
the industry; however, management does not anticipate any negative impact on the
capital resources or operations of United.

                                      A-17

<PAGE>
 
Income Tax Expense

     Income tax expense increased 70% for 1996 and 15% for 1995. The effective
tax rate as a percentage of pretax income was 32% in 1996 and 27% in 1995. The
effective income tax rate increased as tax exempt income decreased relative to
total earnings before taxes. These tax rates are lower than the statutory
Federal tax rate of 34% primarily due to interest income on tax exempt loans and
securities. See United's consolidated financial statements for an analysis of
income taxes.

     Impact of Inflation and Changing Prices. A bank's asset and liability
structure is substantially different from that of an industrial company in that
primarily all assets and liabilities of a bank are monetary in nature and
therefore differ greatly from most commercial and industrial companies that have
significant investments in fixed assets or inventories. Inflation does have an
important impact on the growth of total assets and the resulting need to
increase equity capital at higher than normal rates in order to maintain an
appropriate equity to assets ratio.

     United's management believes the impact of inflation on financial results
depends on United's ability to react to changes in interest rates and, by such
reaction, reduce the inflationary impact on performance. United has an
asset/liability management program which attempts to manage United's interest
rate sensitivity position. In addition, periodic reviews of banking services and
products are conducted to adjust pricing in view of current and expected costs.
Cost cutting and cost controlling measures have been implemented, including the
constant search for technological advancements in order to improve efficiency
and productivity.

                                      A-18

<PAGE>
 
                           MARKET AND DIVIDEND DATA


         Stock.  There is no established public trading market for United's 
Common Stock.   At December 31, 1996, there were 1,704 holders of record of 
Common Stock.

         Dividends. United paid semi-annual cash dividends of $.08 per share of
Common Stock to shareholders of record in 1996 and $.07 per share of Common
Stock to shareholders of record in 1995. United intends to continue paying cash
dividends on a semi-annual basis. However, the amount and frequency of dividends
will be determined by United's Board of Directors in light of the earnings,
capital requirements and the financial condition of United, and no assurance can
be given that dividends will be paid in the future.

                                      A-19

<PAGE>
 

              REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS



The Board of Directors and Stockholders
United Community Banks, Inc.
Blairsville, Georgia

We have audited the consolidated balance sheets of United Community Banks, Inc.
and subsidiaries as of December 31, 1996 and 1995 and the related statements of
earnings, changes in stockholders' equity, and cash flows for each of the three
years in the period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of United Community
Banks, Inc. and subsidiaries as of December 31, 1996 and 1995, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1996, in conformity with generally accepted accounting
principles.

                                                PORTER KEADLE MOORE, LLP



                                                Successor to the practice of
                                                Evans, Porter, Bryan & Co.

Atlanta, Georgia
March 5, 1997


                                     A-20


<PAGE>

 
                 UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS

                           DECEMBER 31, 1996 AND 1995


<TABLE>
<CAPTION>
                                        Assets
                                        ------
 
                                                                              1996            1995
                                                                              ----            ----
                                                                                 (In Thousands)
<S>                                                                          <C>              <C>
Cash and due from banks, including reserve requirements                               
  of $6,094 and $3,217                                                       $ 26,377          20,758
Federal funds sold                                                             24,215          11,230
                                                                              -------         -------
                                                                                      
       Cash and cash equivalents                                               50,592          31,988
                                                                              -------         -------

Securities held to maturity (estimated fair value of $72,335 and $79,650)      72,022          78,821
                                                                                      
Securities available for sale                                                  74,864          65,046
                                                                                      
Mortgage loans held for sale                                                    6,727          12,048
                                                                                      
Loans                                                                         592,351         444,092
  Less: Allowance for loan losses                                               7,680           6,545
                                                                              --------        -------
                                                                                      
       Loans, net                                                             584,671         437,547
                                                                              -------         -------

Bank premises and equipment                                                    18,650          15,997
Accrued interest receivable                                                     7,780           6,462
Other assets                                                                   12,724          11,760
                                                                              -------         -------
                                                                                      
                                                                             $828,030         659,669
                                                                              =======         =======
                                                                                      
                                Liabilities and Stockholders' Equity                  
                                ------------------------------------                  
Deposits:                                                                             
  Demand                                                                     $77,908           62,753 
  Interest-bearing demand                                                    158,124          114,825   
  Savings                                                                     39,001           38,947   
  Time                                                                       333,846          295,769   
  Time, in excess of $100,000                                                111,847           78,362   
                                                                             -------          -------   
                                                                                      
       Total deposits                                                        720,726          590,656   
Accrued expenses and other liabilities                                         5,876            3,676
FHLB advances                                                                 35,074            9,001
Long-term debt                                                                10,453           11,309
Convertible subordinated debentures                                            3,500            1,000
                                                                             -------          -------
                                                                                      
       Total liabilities                                                     775,629          615,642
                                                                             -------          -------
                                                                                      
Commitments                                                                           
                                                                                      
Stockholders' equity:                                                                 
  Preferred stock                                                                  -                -
  Common stock, $1 par value; 10,000,000 shares authorized;                                          
      6,438,848 and 6,260,280 shares issued and outstanding                    6,439            6,260
  Capital surplus                                                             15,341           14,520
  Retained earnings                                                           30,696           22,996
  Net unrealized gain (loss) on securities available for sale, net of tax        (75)             251
                                                                             -------          ------- 
                                                                                      
       Total stockholders' equity                                             52,401           44,027
                                                                             -------          -------
                                                                                      
                                                                             $828,030         659,669
                                                                             ========         =======
</TABLE>


See accompanying notes to consolidated financial statements.

                                     A-21


<PAGE>

 
                 UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF EARNINGS

             FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994


<TABLE>
<CAPTION>
                                                                  1996         1995         1994              
                                                                  ----         ----         ----              
                                                              (In Thousands Except Per Share Data)            
<S>                                                           <C>             <C>           <C>               
Interest income:                                                                                              
  Interest and fees on loans                                  $    53,991      41,374        28,963           
  Interest on deposits with other banks                               101           3            20           
  Interest on federal funds sold                                    1,009       1,113           135           
  Interest on investment securities:                                                                          
    U.S. Treasury & U.S. Government agencies                        6,120       4,791         2,924           
    State and municipal                                             1,905       1,846         1,813           
                                                                   ------      ------        ------           
                                                                                                              
       Total interest income                                       63,126      49,127        33,855           
                                                                   ------      ------        ------           
                                                                                                              
Interest expense:                                                                                             
  Interest on deposits:                                                                                       
    Demand                                                          5,167       3,585         2,874           
    Savings                                                         1,050       1,023           926           
    Time                                                           23,611      19,735        10,572           
                                                                   ------      ------        ------           
                                                                   29,828      24,343        14,372           
  Long-term debt, subordinated debentures,                                                                                
   federal funds purchased and FHLB advances                        1,930       1,865         1,266           
                                                                   ------      ------        ------           
                                                                                                              
       Total interest expense                                      31,758      26,208        15,638           
                                                                   ------      ------        ------           
                                                                                                              
       Net interest income                                         31,368      22,919        18,217           
                                                                                                              
Provision for loan losses                                           1,411       1,040           935           
                                                                   ------      ------        ------           

       Net interest income after provision for loan losses         29,957      21,879        17,282           
                                                                   ------      ------        ------           
                                                                                                              
Noninterest income:                                                                                           
  Service charges and fees                                          2,742       1,937         1,470           
  Gain (loss) on sales of investment securities                       (14)          4            38           
  Mortgage loan and other related fees                              1,566       1,582         1,639           
  Other noninterest income                                          1,074         741           615           
                                                                   ------      ------        ------           
                                                                                                              
       Total noninterest income                                     5,368       4,264         3,762           
                                                                   ------      ------        ------           
                                                                                                              
Noninterest expense:                                                                                          
  Salaries and employee benefits                                   12,693       9,890         7,856           
  Occupancy                                                         3,286       2,695         2,010           
  Deposit insurance premiums                                           22         514           816           
  Other noninterest expense                                         7,312       4,755         3,220           
                                                                   ------      ------        ------           
                                                                                                              
       Total noninterest expense                                   23,313      17,854        13,902           
                                                                   ------      ------        ------           

       Earnings before income taxes                                12,012       8,289         7,142           

Income taxes                                                        3,811       2,238         1,942           
                                                                   ------      ------        ------           

       Net earnings                                           $     8,201       6,051         5,200             
                                                                   ======      ======        ======           

Net earnings per common share                                 $      1.31        1.04          0.93           
                                                                   ======      ======        ======           

Weighted average common shares outstanding                          6,261       5,814         5,589           
                                                                   ======      ======        ======
</TABLE>


See accompanying notes to consolidated financial statements.

                                     A-22

<PAGE>
 
                 UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

          CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

             FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994


<TABLE>
<CAPTION>
                                                                                                          Net Unrealized           
                                                                                                           Gain (Loss)             
                                                                                                          On Securities            
                                                                  Common Stock      Capital   Retained    Available for     
                                                               ------------------                                                  
                                                               Shares      Amount   Surplus   Earnings   Sale, Net of Tax    Total 
                                                               ------      ------   -------   --------   ----------------    ----- 
                                                                                     (In Thousands Except Per Share Data) 
                                                                      
<S>                                                          <C>         <C>                                                       
Balance, December 31, 1993                                   5,589,365   $  5,589     7,474     12,386          -           25,449 
                                                                                                                                   
Cumulative effect of accounting change for investment                 
  securities, net of tax of $262                                   -          -         -          -            428            428 
                                                                                                                                   
Change in unrealized gain (loss) on securities                                                                                      

  available for sale, net of tax                                   -          -         -          -           (637)          (637)
                                                                                                                                   
Cash dividends declared, ($.04 per share)                          -          -         -         (223)         -             (223)
                                                                                                                                   
Net earnings                                                       -          -         -        5,200          -            5,200 
                                                             ---------     ------    ------     ------        -----         ------ 
                                                                                                                                   
Balance, December 31, 1994                                   5,589,365      5,589     7,474     17,363         (209)        30,217 
                                                                                                                                   
Issuance of common shares for bank acquisition                 455,400        455     4,828        -            -            5,283 
                                                                                                                                   
Proceeds from common stock offering, net of offering cost      215,515        216     2,218        -            -            2,434 
                                                                                                                                   
Change in unrealized gain (loss) on securities available                                                                            

  for sale, net of tax                                             -          -         -          -            460            460  

                                                                                                                                   
Cash dividends declared, ($.072  per share)                        -          -         -         (418)         -             (418)
                                                                                                                                   
Net earnings                                                       -          -         -        6,051          -            6,051 
                                                             ---------     ------    ------     ------        -----         ------ 
                                                                                                                                   
Balance, December 31, 1995                                   6,260,280      6,260    14,520     22,996          251         44,027 
                                                                                                                                   
Change in unrealized gain (loss) on securities                                                                                      

  available for sale, net of tax                                   -          -         -          -           (326)          (326) 

                                                                                                                                   
Cash dividends declared, ($.08 per share)                          -          -         -         (501)         -             (501)
                                                                                                                                   
Common stock issued in conversion of debentures                178,568        179       821        -            -            1,000 
                                                                                                                                   
Net earnings                                                       -          -         -        8,201          -            8,201 
                                                             ---------     ------    ------     ------        -----         ------ 
                                                                                                                                   
Balance, December 31, 1996                                   6,438,848   $  6,439    15,341     30,696          (75)        52,401 
                                                             =========     ======    ======     ======        =====         ====== 
</TABLE>
 

See accompanying notes to consolidated financial statements.

                                     A-23

<PAGE>
 
                 UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

             FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994


<TABLE>
<CAPTION>
                                                                               1996       1995      1994    
                                                                               ----       ----      ----    
                                                                                     (In Thousands)         
<S>                                                                         <C>         <C>       <C>       
Cash flows from operating activities:                                                                       
  Net earnings                                                              $   8,201     6,051     5,200   
  Adjustments to reconcile net earnings to net cash provided                                                
   by operating activities:                                                                                 
     Depreciation, amortization and accretion                                   2,176     1,715     1,471   
     Provision for loan losses                                                  1,411     1,040       935   
     Provision for deferred tax expense (benefit)                                 163       (83)       (3)  
     Loss (gain) on sale of securities available for sale                          14        (4)      (38)  
     Change in assets and liabilities, net of effects of acquisitions:                                      
        Interest receivable                                                    (1,318)   (1,658)     (910)   
        Interest payable                                                          285     1,286       407     
        Other assets                                                               23     1,035      (364)    
        Accrued expenses and other liabilities                                  1,093    (1,315)     (150)    
     Change in mortgage loans held for sale                                     5,321       347     1,216     
                                                                             --------   -------   -------       
          Net cash provided by operating activities                            17,369     8,414     7,764     
                                                                             --------   -------   -------       
Cash flows from investing activities, net of effects of acquisitions:    
  Cash acquired from acquisitions and branch purchases                          2,650    25,867         -     
  Net change in interest-bearing deposits with other banks                          -       299       693     
  Proceeds from maturities and calls of securities held to maturity            19,495    11,465     4,232     
  Purchases of securities held to maturity                                    (12,816)  (24,899)  (20,021)    
  Proceeds from sales of securities available for sale                         16,772    14,718    19,074     
  Proceeds from maturities and calls of securities                                                            
   available for sale                                                          32,001    11,299     8,660     
  Purchases of securities available for sale                                  (59,326)  (60,366)   (8,290)    
  Purchase of exchangeable payable in kind debenture                                -         -    (2,846)    
  Purchases of mortgage servicing rights                                            -         -    (2,022)    
  Net increase in loans                                                      (128,968)  (63,387)  (59,488)    
  Purchase of bank premises and equipment                                      (3,098)   (2,178)   (3,673)    
                                                                             --------   -------   -------       
          Net cash used in investing activities                              (133,290)  (87,182)  (63,681)    
                                                                             --------   -------   -------      
Cash flows from financing activities, net of effects of acquisitions: 
  Net change in demand and savings deposits                                    49,778    18,599    21,577     
  Net change in time deposits                                                  56,531    85,110    21,928     
  Net change in federal funds purchased                                             -    (8,300)    7,000     
  Proceeds from convertible subordinated debenture sale                         3,500         -         -     
  Proceeds from long-term debt                                                      -     2,539     2,800     
  Proceeds from FHLB advances                                                  29,375     8,596     5,956     
  Repayments of long-term debt                                                   (856)     (630)     (800)    
  Repayments of FHLB advances                                                  (3,302)  (11,744)     (283)    
  Proceeds from sale of common stock                                                -     2,434         -     
  Cash paid for dividends                                                        (501)     (418)     (223)    
                                                                             --------   -------   -------       
          Net cash provided by financing activities                           134,525    96,186    57,955     
                                                                             --------   -------   -------       
Net change in cash and cash equivalents                                        18,604    17,418     2,038     

Cash and cash equivalents at beginning of period                               31,988    14,570    12,532     
                                                                             --------   -------   -------       
Cash and cash equivalents at end of period                                  $  50,592    31,988    14,570     
                                                                             ========   =======   =======     
</TABLE>


See accompanying notes to consolidated financial statements.

                                     A-24

<PAGE>

 
                 UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES


                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     The accounting principles followed by United Community Banks, Inc. (United)
     and its subsidiaries and the methods of applying these principles conform
     with generally accepted accounting principles and with general practices
     within the banking industry. The following is a description of the more
     significant of those policies.

     ORGANIZATION
     ------------

     United is a five bank holding company whose business is conducted primarily
     by its wholly-owned bank subsidiaries. United is subject to regulation
     under the Bank Holding Company Act of 1956.

     The bank subsidiaries are commercial banks which serve markets throughout
     North Georgia and Western North Carolina and are insured and subject to the
     regulation of the Federal Deposit Insurance Corporation. The bank
     subsidiaries also provide a full range of customary banking services.

     BASIS OF PRESENTATION
     ---------------------

     The consolidated financial statements include the accounts of United
     Community Banks, Inc. and its wholly-owned commercial bank subsidiaries,
     United Community Bank, Blairsville, Georgia (UCB), Carolina Community Bank,
     Murphy, North Carolina, (Carolina), Peoples Bank, Blue Ridge, Georgia
     (Peoples), Towns County Bank, Hiawassee, Georgia (Towns) and White County
     Bank, Cleveland, Georgia (White) (collectively, the "Bank Subsidiaries")
     and United Family Finance Company, Inc. (Finance), a finance company
     subsidiary. All significant intercompany accounts and transactions have
     been eliminated in consolidation. Certain items in prior years' financial
     statements have been reclassified to conform with the current financial
     statement presentations.

     In preparing the financial statements, management is required to make
     estimates and assumptions that affect the reported amounts of assets and
     liabilities as of the date of the balance sheet and revenues and expenses
     for the period. Actual results could differ significantly from those
     estimates.

     Material estimates that are particularly susceptible to significant change
     relate to the determination of the allowance for loan losses and the
     valuation of real estate acquired in connection with foreclosures or in
     satisfaction of loans. In connection with these valuations, management
     obtains independent appraisals for significant properties.

     A substantial portion of United's loans are secured by real estate located
     in North Georgia and Western North Carolina. Accordingly, the ultimate
     collectibility of a substantial portion of United's loan portfolio is
     susceptible to changes in the real estate market conditions of this market
     area.

     INVESTMENT SECURITIES
     ---------------------

     United classifies its securities in one of three categories: held to
     maturity, available for sale, or trading. Trading securities are bought and
     held principally for the purpose of selling them in the near term. United
     does not have investments classified in the trading category. Held to
     maturity securities are those securities for which United has the ability
     and intent to hold until maturity. All other securities are classified as
     available for sale.

     Available for sale securities are recorded at fair value. Held to maturity
     securities are recorded at cost, adjusted for the amortization or accretion
     of premiums or discounts. Unrealized holding gains and losses, net of the
     related tax effect, on securities available for sale are excluded from
     earnings and are reported as a separate component of stockholders' equity
     until realized. Transfers of securities between categories are recorded at
     fair value at the date of transfer. Unrealized holding gains or losses
     associated with transfers of securities from held to maturity to available
     for sale are recorded as a separate component of stockholders' equity. The
     unrealized holding gains or losses included in the separate component of
     stockholders' equity for securities transferred from available for sale to
     held to maturity are maintained and amortized into earnings over the
     remaining life of the security as an adjustment to yield in a manner
     consistent with the amortization or accretion of premium or discount on the
     associated security.

                                     A-25

<PAGE>

 
                 UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

     INVESTMENT SECURITIES, CONTINUED
     ---------------------           

     A decline in the market value of any available for sale or held to maturity
     investment below cost that is deemed other than temporary is charged to
     earnings and establishes a new cost basis for the security.

     Premiums and discounts are amortized or accreted over the life of the
     related security as an adjustment to the yield. Realized gains and losses
     for securities classified as available for sale and held to maturity are
     included in earnings and are derived using the specific identification
     method for determining the cost of securities sold.

     MORTGAGE LOANS HELD FOR SALE
     ----------------------------

     Mortgage loans held for sale are carried at the lower of aggregate cost or
     market value. The amount by which cost exceeds market value is accounted
     for as a valuation allowance. Changes in the valuation allowance are
     included in the determination of net earnings of the period in which the
     change occurs. No market valuation allowances were required at December 31,
     1996 or 1995.

     LOANS AND ALLOWANCE FOR LOAN LOSSES
     -----------------------------------

     All loans are stated at principal amount outstanding. Interest on loans is
     primarily calculated by using the simple interest method on daily balances
     of the principal amount outstanding.

     Accrual of interest is discontinued on a loan when management believes,
     after considering economic and business conditions and collection efforts,
     that the borrower's financial condition is such that collection of interest
     is doubtful. When a loan is placed on nonaccrual status, previously accrued
     and uncollected interest is charged to interest income on loans. Generally,
     payments on nonaccrual loans are applied to principal.

     Impaired loans are measured based on the present value of expected future
     cash flows, discounted at the loan's effective interest rate, or at the
     loan's observable market price, or the fair value of the collateral if the
     loan is collateral dependent. A loan is impaired when, based on current
     information and events, it is probable that all amounts due according to
     the contractual terms of the loan will not be collected. Interest income on
     impaired loans is recognized using the cash-basis method of accounting
     during the time within the period in which the loans were impaired.

     The allowance for loan losses is established through a provision for loan
     losses charged to expense. Loans are charged against the allowance for loan
     losses when management believes that the collectibility of the principal is
     unlikely. The allowance represents an amount which, in management's
     judgment, will be adequate to absorb probable losses on existing loans that
     may become uncollectible. Management's judgment in determining the adequacy
     of the allowance is based on evaluations of the collectibility of loans.
     These evaluations take into consideration such factors as changes in the
     nature and volume of the loan portfolio, current economic conditions that
     may affect the borrower's ability to pay, overall portfolio quality, and
     review of specific problem loans.

     Management believes that the allowance for loan losses is adequate. While
     management uses available information to recognize losses on loans, future
     additions to the allowance may be necessary based on changes in economic
     conditions. In addition, various regulatory agencies, as an integral part
     of their examination process, periodically review United's allowance for
     loan losses. Such agencies may require United to recognize additions to the
     allowance based on their judgments of information available to them at the
     time of their examination.

     BANK PREMISES AND EQUIPMENT
     ---------------------------

     Bank premises and equipment are stated at cost less accumulated
     depreciation. Depreciation is computed using primarily the straight-line
     method over the estimated useful lives of the related assets. Costs
     incurred for maintenance and repairs are expensed currently. The range of
     estimated useful lives for building and improvements is 15 to 40 years, and
     for furniture and equipment, 3 to 10 years.

                                     A-26

<PAGE>

 
                 UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued

     GOODWILL AND DEPOSIT-BASED INTANGIBLES
     --------------------------------------

     Goodwill, arising from the excess cost over the fair value of net assets
     acquired of purchased bank subsidiaries, is amortized on a straight-line
     basis over periods not exceeding 25 years. Deposit assumption premiums paid
     in connection with the branch bank purchases are being amortized over 15
     years, the estimated life of the deposit base acquired. On an ongoing
     basis, management reviews the valuation and amortization periods of
     goodwill and the deposit assumption premiums to determine if events and
     circumstances require the remaining lives to be reduced.

     MORTGAGE SERVICING RIGHTS
     -------------------------

     During 1995, United adopted the provisions of SFAS No. 122, "Accounting for
     Mortgage Servicing Rights." The standard requires a mortgage banking
     enterprise to recognize as a separate asset, rights to service mortgage
     loans for others regardless of whether the servicing rights are acquired
     through either purchase or origination. The standard also requires an
     impairment analysis of mortgage servicing rights regardless of whether
     purchased or originated.

     United's mortgage servicing rights represent the unamortized cost of
     purchased and originated contractual rights to service mortgages for others
     in exchange for a servicing fee and ancillary loan administration income.
     Mortgage servicing rights are amortized over the period of estimated net
     servicing income and are periodically adjusted for actual and anticipated
     prepayments of the underlying mortgage loans. Impairment analysis is
     performed quarterly after stratifying the rights by interest rate.
     Impairment, defined as the excess of the asset's carrying value over its
     current fair value, is recognized through a valuation allowance. At
     December 31, 1996 and 1995, no valuation allowances were required for
     United's mortgage servicing rights.

     INCOME TAXES
     ------------

     Deferred tax assets and liabilities are recorded for the future tax
     consequences attributable to differences between the financial statement
     carrying amounts of existing assets and liabilities and their respective
     tax bases. Future tax benefits, such as net operating loss carryforwards,
     are recognized to the extent that realization of such benefits is more
     likely than not. Deferred tax assets and liabilities are measured using
     enacted tax rates expected to apply to taxable income in the years in which
     the assets and liabilities are expected to be recovered or settled. The
     effect on deferred tax assets and liabilities of a change in tax rates is
     recognized in income tax expense in the period that includes the enactment
     date.

     In the event the future tax consequences of differences between the
     financial reporting bases and the tax bases of United's assets and
     liabilities results in deferred tax assets, an evaluation of the
     probability of being able to realize the future benefits indicated by such
     asset is required. A valuation allowance is provided for the portion of the
     deferred tax asset when it is more likely than not that some portion or all
     of the deferred tax asset will not be realized. In assessing the
     realizability of the deferred tax assets, management considers the
     scheduled reversals of deferred tax liabilities, projected future taxable
     income and tax planning strategies.

     INTEREST RATE RISK MANAGEMENT
     -----------------------------

     As part of United's overall interest rate risk management, interest rate
     swaps and interest rate floors are utilized. These contracts are designated
     by United as hedges of interest rate exposures, and interest income or
     expense derived from these contracts are recorded over the life of the
     contract as an adjustment to interest income or expense of the instruments
     hedged.

     NET EARNINGS PER COMMON SHARE
     -----------------------------

     Net earnings per common share are based on the weighted average number of
     common shares outstanding during each period. The assumed conversion of the
     convertible subordinated debentures and exercise of stock options do not
     result in material dilution. All share and per share data have been
     adjusted to reflect the five-for-one split, effected in the form of a stock
     dividend during 1995. 

                                     A-27

<PAGE>

 
                 UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

(1)  MERGERS AND ACQUISITIONS

     On September 28, 1996, UCB assumed deposits of $23.7 million and purchased
     certain assets totaling $33.2 million of a branch in Cornelia, Georgia.

     On August 31, 1995, United acquired all the outstanding common stock of
     White County Bancshares, Inc., (White Bancshares) the parent company of
     White County Bank, Cleveland, Georgia. United issued 455,400 shares of its
     common stock and approximately $10,000 in cash for fractional shares, in
     exchange for all the outstanding common shares of White Bancshares.
     Additionally, United exercised its option to convert the exchangeable
     payable in kind debenture previously acquired during 1994, and the related
     accrued interest into a majority interest in White County Bank. At the date
     of acquisition, White County Bank had total assets of $71 million and
     liabilities of $63 million. The original purchase price was allocated to
     assets and liabilities acquired based on their fair values at the date of
     acquisition. This transaction was accounted for as a purchase and,
     therefore, is not included in United's results of operations or statements
     of financial position prior to the date of acquisition.

     During 1995, Carolina assumed deposits totaling $32 million and purchased
     certain assets totaling $12 million of three branch banks in the Western
     North Carolina cities of Andrews, Franklin and Waynesville.

(2)  CASH FLOWS

     United paid approximately $31 million, $25 million and $15 million in
     interest on deposits and other liabilities during 1996, 1995 and 1994,
     respectively. In connection with United's 1995 acquisition of White, assets
     having a fair value of $71 million were acquired and liabilities totaling
     $63 million were assumed.


<TABLE>
<CAPTION>
                                                                         For the Years Ended December 31,      
                                                                         --------------------------------     
                                                                           1996        1995        1994       
                                                                           ----        ----        ----       
                                                                              (Dollars in thousands)          
     <S>                                                                  <C>         <C>         <C>          
     Schedule of noncash investing and financing activities:                                                  
       Conversion of subordinated debentures into 178,568 shares                                              
         of common stock                                                  $ 1,000        -           -        
       Common stock issued and conversion of exchangeable payable
         in kind debenture in connection with the acquisition of White        -        8,384         -
       Change in unrealized gain (loss) on securities available for sale,
         net of tax                                                          (326)       460        (209)
</TABLE>
 
 
(3)  INVESTMENT SECURITIES

     Investment securities at December 31, 1996 and 1995 are as follows (in 
     thousands):


<TABLE> 
<CAPTION>
                                                               December 31, 1996                 
                                                               -----------------                 
                                                               Gross       Gross      Estimated                                     

                                                 Amortized   Unrealized  Unrealized      Fair                                       

      SECURITIES AVAILABLE FOR SALE:               Cost        Gains       Losses       Value                                       

                                                 ---------   ----------  ----------   ---------                        
      <S>                                       <C>          <C>         <C>          <C>        
         U.S. Treasuries                        $  11,270         63           1        11,332                        
         U.S. Government agencies                  35,055         56         240        34,871                        
         State and municipal                        5,879        157          12         6,024                        
         Mortgage-backed securities                18,644         46          55        18,635                        
         Other                                      4,104          -         102         4,002                        
                                                   ------       ----        ----        ------                        
              
              Total                             $  74,952        322         410        74,864                        
                                                   ======       ====        ====        ======                        
                      
      SECURITIES HELD TO MATURITY:
              
         U.S. Treasuries                        $   1,868          6           -         1,874                        
         U.S. Government agencies                  31,406         28         274        31,160                        
         State and municipal                       31,630        638         164        32,104                        
         Mortgage-backed securities                 7,118        103          24         7,197                        
                                                   ------       ----        ----        ------                        
              
              Total                             $  72,022        775         462        72,335                        
                                                   ======       ====        ====        ======                        
</TABLE>


                                     A-28

<PAGE>
 
                 UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

(3)  INVESTMENT SECURITIES, CONTINUED


<TABLE>
<CAPTION>
                                                               December 31, 1996                
                                                               -----------------                
                                                               Gross       Gross      Estimated  
                                                 Amortized   Unrealized  Unrealized      Fair    
      SECURITIES AVAILABLE FOR SALE:               Cost        Gains       Losses       Value    
                                                 ---------   ----------  ----------   ---------  
      <S>                                       <C>          <C>         <C>          <C>        
         U.S. Treasuries                        $  23,128        112          1         23,239         
         U.S. Government agencies                  28,215        137         11         28,341         
         State and municipal                        6,007        314          -          6,321         
         Mortgage-backed securities                 4,310         14         34          4,290         
         Other                                      2,912          -         57          2,855         
                                                   ------      -----        ---         ------         
                                                                                                       
              Total                             $  64,572        577        103         65,046         
                                                   ======      =====        ===         ======         
                                                                                                       
      SECURITIES HELD TO MATURITY:                                                                  
                                                                                                       
         U.S. Treasuries                        $   6,624         31          4          6,651         
         U.S. Government agencies                  37,736        202        268         37,670         
         State and municipal                       26,524        864         76         27,312         
         Mortgage-backed securities                 7,937         99         19          8,017         
                                                   ------      -----        ---         ------         
                                                                                                       
              Total                             $  78,821      1,196        367         79,650         
                                                   ======      =====        ===         ======
</TABLE>


     The amortized cost and estimated fair value of the securities portfolio at
     December 31, 1996, by contractual maturity, is presented in the following
     table. Expected maturities may differ from contractual maturities because
     borrowers have the right to call or prepay obligations with or without call
     or prepayment penalties.

                                     A-29

<PAGE>
 
                 UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

(3)  INVESTMENT SECURITIES, CONTINUED


<TABLE>
<CAPTION>
                                                Securities Held     Securities Available
                                                  to Maturity             for Sale
                                               December 31, 1996      December 31, 1996
                                             ---------------------  ---------------------
                                             Amortized  Estimated   Amortized  Estimated
                                               Cost     Fair Value    Cost     Fair Value
                                             ---------  ----------  ---------  ----------
       <S>                                   <C>        <C>         <C>        <C>        
       U.S. Treasuries:        
          Within 1 year                      $   1,375       1,381      4,256       4,268
          1 to 5 years                             493         493      7,014       7,064
                                                ------      ------     ------      ------
                                               
                                             $   1,868       1,874     11,270      11,332
                                                ======      ======     ======      ======
                                               
       U.S. Government agencies:               
          Within 1 year                      $   9,933       9,893      9,890       9,845
          1 to 5 years                          21,473      21,267     24,660      24,528
          5 to 10 years                              -           -        505         498
                                                ------      ------     ------      ------
                                               
                                             $  31,406      31,160     35,055      34,871
                                                ======      ======     ======      ======
                                               
       State and municipal:                    
          Within 1 year                      $     971         980      1,000       1,007
          1 to 5 years                           8,987       9,205      3,803       3,948
          5 to 10 years                         17,844      18,043        967         960
          More than 10 years                     3,828       3,876        109         109
                                                ------      ------     ------      ------
                                               
                                             $  31,630      32,104      5,879       6,024
                                                ======      ======     ======      ======
                                               
       Other:                                  
          More than 10 years                 $       -           -      4,104       4,002
                                                ======      ======     ======      ======
                                               
       Total securities other than 
        mortgage-backed securities:                             
          Within 1 year                      $  12,279      12,254     15,146      15,120
          1 to 5 years                          30,953      30,965     35,477      35,540
          5 to 10 years                         17,844      18,043      1,472       1,458
          More than 10 years                     3,828       3,876      4,213       4,111
       Mortgage-backed securities                7,118       7,197     18,644      18,635
                                                ------      ------     ------      ------
                                               
                                             $  72,022      72,335     74,952      74,864
                                                ======      ======     ======      ======
</TABLE>


     In December 1995, United transferred securities with an amortized cost of
     $11 million from the held to maturity category to the available for sale
     category. At the date of transfer, the unrealized gain related to that
     transfer amounted to $312,500. These transfers were made as a result of
     United's reassessment of the appropriateness of its securities
     classifications as allowed by the Financial Accounting Standards Board's
     special report "A Guide to Implementation of Statement 115 on Accounting
     for Certain Investments in Debt and Equity Securities."

                                     A-30

<PAGE>
 
                 UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

(3)  INVESTMENT SECURITIES, CONTINUED

     There were no sales of securities held to maturity during 1996, 1995 or
     1994. Proceeds from sales of securities available for sale during 1996,
     1995 and 1994 were $16.8 million, $14.7 million and $19.1 million,
     respectively. Gross gains of $51,000, $113,000 and $143,000 for 1996, 1995
     and 1994, respectively, along with gross losses of $65,000, $109,000 and
     $105,000 for 1996, 1995 and 1994, respectively, were realized on those
     sales.
 
     Securities with a carrying value of $48.3 million and $38.9 million at
     December 31, 1996 and 1995, respectively, were pledged to secure public
     deposits as required by law.

(4)  LOANS AND ALLOWANCE FOR LOAN LOSSES

     Major classifications of loans at December 31, 1996 and 1995 are summarized
     as follows:


<TABLE>
<CAPTION>
                                                     1996                1995  
                                                     ----                ----
                                                      (dollars in thousands)  
       <S>                                        <C>                   <C> 
       Commercial, financial and agricultural     $ 176,486             120,876
       Real estate - construction                    50,523              29,538
       Real estate - mortgage                       275,164             216,649
       Consumer loans                                90,178              77,029
                                                    -------             -------
                                                                               
           Total loans                              592,351             444,092
                                                                               
       Less:  Allowance for loan losses               7,680               6,545
                                                    -------             -------
                                                                               
           Loans, net                             $ 584,671             437,547
                                                    =======             =======
</TABLE>


     The Bank Subsidiaries grant loans and extensions of credit to individuals
     and a variety of firms and corporations located primarily in counties in
     North Georgia and Western North Carolina. Although the Bank Subsidiaries
     have diversified loan portfolios, a substantial portion of the loan
     portfolios is collateralized by improved and unimproved real estate and is
     dependent upon the real estate market.

     During 1996 and 1995, certain executive officers and directors of United
     and its Bank Subsidiaries, including their immediate families and companies
     with which they are associated, maintained a variety of banking
     relationships with the Bank Subsidiaries. Total loans outstanding to these
     persons at December 31, 1996 and 1995 amounted to $11,394 and $8,528,
     respectively. The change from December 31, 1995 to December 31, 1996
     reflects payments amounting to $4,776 and advances of $7,642. Such loans
     are made in the ordinary course of business at normal credit terms,
     including interest rate and collateral requirements, and do not represent
     more than normal credit risk.

                                     A-31

<PAGE>

 
                 UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

(4)  LOANS AND ALLOWANCE FOR LOAN LOSSES, CONTINUED

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


<TABLE>
<CAPTION>
                                                        1996     1995     1994 
                                                        ----     ----     ---- 
                                                        (dollars in thousands) 
       <S>                                            <C>        <C>      <C>  
       Balance at beginning of year                   $ 6,545    3,950    3,237
       Allowance for loan losses acquired from White      -      1,813      -  
       Provisions charged to earnings                   1,411    1,040      935
       Loans charged off                                 (600)    (675)    (314)
       Recoveries of loans previously charged off         324      417       92 
                                                        -----    -----    ----- 
                                                                                
       Balance at end of year                         $ 7,680    6,545    3,950 
                                                        =====    =====    ===== 
</TABLE>


     United serviced approximately $117.4 and $244.8 million of loans for others
     at December 31, 1996 and 1995, respectively.

(5)  BANK PREMISES AND EQUIPMENT

     Bank premises and equipment at December 31, 1996 and 1995 are summarized as
     follows:


<TABLE>
<CAPTION>
                                                        1996              1995  
                                                        ----              ----  
                                                        (dollars in thousands)  
       <S>                                            <C>                 <C>   
       Land and land improvements                     $  4,470             3,332
       Building and improvements                        11,371            10,122
       Furniture and equipment                          10,145             8,005
       Construction in progress                            167               616
                                                        ------            ------
                                                        26,153            22,075
       Less accumulated depreciation                     7,503             6,078
                                                        ------            ------
                                                                                
                                                      $ 18,650            15,997
                                                        ======            ======
</TABLE>
 
 
     Depreciation expense was approximately $1,438,000, $1,313,000 and $927,000
     in 1996, 1995 and 1994, respectively.
 
(6)  TIME DEPOSITS
      
     At December 31, 1996, contractual maturities of time deposits are
     summarized as follows (dollars in thousands):


<TABLE> 
<CAPTION> 
        Maturing In:                              
        ------------                              
        <S>                                                      <C> 
          1997                                                   $  333,750  
          1998                                                       86,213 
          1999                                                       16,383 
          2000                                                        7,943 
          2001 and thereafter                                         1,404
                                                                    -------
                                                                           
                                                                 $  445,693
                                                                    ======= 
</TABLE>


                                     A-32

<PAGE>
 
                 UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

(7)  FHLB ADVANCES

     United receives advances from the Federal Home Loan Bank (FHLB) with
     monthly interest payments and principal payments due at various maturity
     dates and interest rates ranging from 5.17% to 7.81% at December 31, 1996.
     The FHLB advances are collateralized by first mortgage loans, FHLB stock
     and other U.S. agency securities. Advances from FHLB outstanding at
     December 31, 1996 mature as follows (dollars in thousands):


<TABLE>
<CAPTION>
               Year                               Amount    
               ----                               ------    
               <S>                                <C>       
               1997                               $12,102   
               1998                                16,455   
               1999                                 4,306   
               2000                                   307   
               2001                                   307   
               2002 and thereafter                  1,597   
                                                   ------   
                                                            
                                                  $35,074   
                                                   ======   
</TABLE>
                                      

(8)  LONG-TERM DEBT

     Long-term debt at December 31, 1996 and 1995 totaled $10,453,100 and
     $11,309,000, respectively. Long-term debt consists of a note payable to a
     bank due in quarterly installments of $282,725, plus interest, through
     January 2005, secured by common stock of the Bank Subsidiaries. Interest is
     based on the prime rate less one hundred (100) basis points. The loan
     agreement contains covenants and restrictions pertaining to the maintenance
     of certain financial ratios, limitations on the incurrence of additional
     debt, and the declaration of dividends or other capital transactions.

     Aggregate maturities are approximately $1,130,900 for each of the next five
     years and $4,798,600 thereafter.

(9)  CONVERTIBLE SUBORDINATED DEBENTURES

     On December 31, 1996, the holders of convertible debentures of the Company
     due July 1, 2000 (the "2000 Debentures"), which bore interest at a fixed
     rate of 9% per annum, converted the 2000 Debentures into an aggregate of
     178,568 shares of common stock. The 2000 Debentures were converted in
     accordance with their terms and pursuant to an additional six month period
     for conversion extended by the Company in order to comply with certain
     obligations of the Company and to provide the holders with notice of the
     conversion termination date.

     On December 31, 1996, United also completed a private placement of
     convertible subordinated debentures due December 31, 2006 (the "2006
     Debentures"). The 2006 Debentures bear interest at the rate of one quarter
     of one percentage point over the prime rate per annum, payable in quarterly
     installments commencing on April 1, 1997. The 2006 Debentures may be
     redeemed, in whole or in part, on or after January 1, 1998, at the option
     of United at a redemption price equal to 100% of the principal amount of
     the 2006 Debentures to be redeemed plus interest accrued and unpaid as of
     the date of redemption. The holders of the 2006 Debentures not called for
     redemption will have the right, exercisable at any time up to December 31,
     2006, to convert such debenture at the principal amount into shares of
     common stock of United at the conversion price of $25 per share, subject to
     subsequent adjustment for stock splits and stock dividends.

     Certain directors and executive officers of United hold convertible
     debentures totaling $3,025,000 and $700,000 at December 31, 1996 and 1995,
     respectively.

                                     A-33

<PAGE>

 
 
                 UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

(10)   INCOME TAXES
       During 1996, 1995 and 1994, United made income tax payments of
       approximately $3,590,000, $2,315,000 and $2,147,000, respectively.

       The components of income tax expense for the years ended December 31,
       1996, 1995 and 1994 are as follows:


<TABLE>
<CAPTION>
                                             1996       1995       1994    
                                             ----       ----       ----    
                                               (dollars in thousands)     
<S>                                      <C>            <C>        <C> 
       Current                           $   3,648      2,321      1,945     
       Deferred (reduction)                    163        (83)        (3)    
                                             -----      -----      -----     
                                                                             
                                         $   3,811      2,238      1,942     
                                             =====      =====      =====      
</TABLE>


       The differences between the provision for income taxes and the amount
       computed by applying the statutory federal income tax rate (34 percent)
       to earnings before taxes are as follows:


<TABLE>
<CAPTION>
                                             1996       1995       1994   
                                             ----       ----       ----    
                                            (dollars in thousands)
<S>                                      <C>            <C>        <C>     
       Pretax income at statutory rates  $   4,084      2,818      2,428
       Add (deduct):                                                    
         Tax-exempt interest income           (797)      (767)      (704)
         Nondeductible interest expense        121        126         91
         Other                                 403         61        127
                                             -----      -----      -----
                                                                        
                                         $   3,811      2,238      1,942
                                             =====      =====      ===== 
</TABLE>


       The following summarizes the sources and expected tax consequences of
       future taxable deductions (income) which comprise the net deferred tax
       asset at December 31, 1996 and 1995:


<TABLE>
<CAPTION>
                                                              1996         1995         
                                                              ----         ----         
                                                           (dollars in thousands)       
<S>                                                       <C>              <C>  
       Deferred tax assets:                                                            
         Allowance for loan losses                        $   2,404        1,833       
         Mortgage loans                                           -           63       
         Net operating loss and credit carryforwards            349        1,044       
         Unrealized loss on securities available for sale        13            -       
         Other                                                  172            -       
                                                             ------       ------       
                                                                                       
             Gross deferred tax assets                        2,938        2,940       
                                                             ------       ------       
                                                                                       
       Deferred tax liabilities:                                                              
         Premises and equipment                              (1,207)      (1,074)      
         Unrealized gain on securities available for sale         -         (184)      
         Other                                                 (101)         (88)      
                                                             ------       ------       
                                                                                       
             Gross deferred tax liabilities                  (1,308)      (1,346)      
                                                             ------       ------                     
             Net deferred tax asset                       $   1,630        1,594       
                                                             ======       ======        
</TABLE>


       At December 31, 1996, United had remaining loss carryforwards of
       approximately $730,000 and $1.8 million for federal and state income
       taxes, respectively, which begin to expire in 2008. The use of these
       carryforwards is limited to future taxable earnings of United and to
       annual limitations imposed by the Internal Revenue Code.

                                     A-34

<PAGE>
 
                 UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


(11)  EMPLOYEE BENEFIT PLANS

      United has contributory employee benefit plans covering substantially all
      employees, subject to certain minimum service requirements. United's
      contribution to the plans is determined annually by the Board of Directors
      and amounted to approximately $564,000, $556,000 and $396,000 in 1996,
      1995, and 1994, respectively.

(12)  REGULATORY MATTERS

      The Company and the Bank Subsidiaries are subject to various regulatory
      capital requirements administered by the federal banking agencies. Failure
      to meet minimum capital requirements can initiate certain mandatory, and
      possibly additional discretionary, action by regulators that, if
      undertaken, could have a direct material effect on the consolidated
      financial statements. Under capital adequacy guidelines and the regulatory
      framework for prompt corrective action, the Bank Subsidiaries must meet
      specific capital guidelines that involve quantitative measures of the
      Banks' assets, liabilities, and certain off-balance sheet items as
      calculated under regulatory accounting practices. The Banks' capital
      amounts and classification are also subject to qualitative judgements by
      the regulators about components, risk weightings, and other factors.

      Quantitative measures established by regulation to ensure capital adequacy
      require the Company and the Bank Subsidiaries to maintain minimum amounts
      and ratios of total and Tier 1 capital (as defined) to risk-weighted
      assets (as defined), and of Tier 1 capital (as defined) to average assets
      (as defined). Management believes, as of December 31, 1996 and 1995, that
      the Company and the Bank Subsidiaries meet all capital adequacy
      requirements to which they are subject.

      Minimum ratios required to ensure capital adequacy are 8% for total
      capital to risk weighted assets and 4% for Tier 1 capital to risk weighted
      assets and Tier 1 capital to average assets. Minimum ratios required by
      the Bank Subsidiaries to be well capitalized under prompt corrective
      action provisions are 10% for total capital to risk weighted assets, 6%
      for Tier 1 capital to risk weighted assets and 5% for Tier 1 capital to
      average assets. Minimum amounts required for capital adequacy purposes and
      to be well capitalized under prompt corrective action provisions are
      presented below (in thousands). Prompt corrective action provisions do not
      apply to bank holding companies.


<TABLE>
<CAPTION>
                               Minimum               Minimum               Minimum         
                            Total Risk Based     Tier 1 Risk Based      Tier 1 Leverage   
                          --------------------  --------------------  --------------------
                                      Prompt                Prompt                Prompt  
                          Capital   Corrective  Capital   Corrective  Capital   Corrective
               1996       Adequacy    Action    Adequacy    Action    Adequacy    Action  
               ----       --------    ------    --------    ------    --------    ------  
          <S>             <C>       <C>         <C>       <C>         <C>       <C>       
          Consolidated     $46,088       N/A      23,044       N/A      31,896       N/A  
          UCB               19,746      24,682     9,873      14,809    12,401      15,502
          Carolina          11,736      14,670     5,868       8,802     8,870      11,087
          Peoples            6,620       8,275     3,310       4,965     4,610       5,763
          Towns              3,397       4,246     1,698       2,547     2,319       2,898
          White              4,654       5,818     2,327       3,491     3,530       4,413
                                                                                          
               1995                                                                       
               ----                                                                       
                                                                                          
          Consolidated     $34,649       N/A      17,324       N/A      22,496       N/A  
          UCB               14,408      18,010     7,204      10,806     9,630      12,038
          Carolina           8,920      11,150     4,460       6,690     5,988       7,485
          Peoples            5,545       6,931     2,772       4,159     4,208       5,260
          Towns              2,552       3,190     1,276       1,914     1,760       2,201
          White              3,664       4,580     1,832       2,748     2,868       3,585 
</TABLE>


                                     A-35

<PAGE>
 
                 UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

(12)  REGULATORY MATTERS, CONTINUED

      Actual capital amounts and ratios for each of the Bank Subsidiaries and on
      a consolidated basis at December 31, 1996 and 1995 are as follows (in
      thousands):


<TABLE>
<CAPTION>
 
                                  Actual              Actual             Actual      
                             Total Risk Based   Tier 1 Risk Based   Tier 1 Leverage 
                             -----------------  ------------------  ----------------
                 1996         Amount    Ratio    Amount    Ratio    Amount    Ratio 
                 ----         ------    -----    ------    -----    ------    ----- 
          <S>             <C>           <C>      <C>       <C>       <C>      <C>   
          Consolidated    $    56,522    9.81%    45,815     7.95%   45,815    5.75%
          UCB                  25,036   10.14%    22,518     9.12%   22,518    7.26%
          Carolina             17,052   11.62%    15,259    10.40%   15,259    6.88%
          Peoples               8,857   10.70%     7,853     9.49%    7,853    6.81%
          Towns                 4,263   10.04%     3,808     8.97%    3,808    6.57%
          White                 8,125   13.97%     7,383    12.96%    7,383    8.37%
                                                                                    
                 1995                                                               
                 ----                                                               
                                                                                    
          Consolidated    $    44,133   10.19%    37,705     8.71%   37,705    6.70%
          UCB                  20,696   11.49%    18,580    10.32%   18,580    7.72%
          Carolina             12,559   11.26%    11,165    10.01%   11,165    7.46%
          Peoples               7,851   11.33%     6,994    10.09%    6,994    6.65%
          Towns                 3,574   11.20%     3,230    10.13%    3,230    7.34%
          White                 8,935   19.50%     8,356    18.24%    8,356   11.65% 
</TABLE>


      As of December 31, 1996 all of the Bank Subsidiaries are well capitalized.
      As described at note 14, United is in the process of raising additional
      capital for which part of the proceeds will be used to inject capital into
      certain Bank Subsidiaries to finance growth.

(13)  COMMITMENTS

      The Bank Subsidiaries are parties to financial instruments with off-
      balance-sheet risk in the normal course of business to meet the financing
      needs of their customers. These financial instruments include commitments
      to extend credit, standby letters of credit and financial guarantees.
      These instruments involve, to varying degrees, elements of credit risk in
      excess of the amount recognized in the balance sheets. The contract
      amounts of these instruments reflect the extent of involvement the Bank
      Subsidiaries have in particular classes of financial instruments.

      The exposure to credit loss in the event of nonperformance by the other
      party to the financial instrument for commitments to extend credit and
      standby letters of credit and financial guarantees written is represented
      by the contractual amount of these instruments. The Bank Subsidiaries use
      the same credit policies in making commitments and conditional obligations
      as for on-balance-sheet instruments. In most cases collateral or other
      security is required to support financial instruments with credit risk.

                                     A-36

<PAGE>
 
                 UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

(13)  COMMITMENTS, CONTINUED

      The following table summarizes, as of December 31, the contract or
      notional amount of off-balance sheet instruments:


<TABLE>
<CAPTION>
                                                                             1996        1995
                                                                          ----------  ----------
                                                                          (dollars in thousands)
Financial instruments whose contract amounts represent credit risk:
       <S>                                                             <C>                <C> 
       Commitments to extend credit                                    $      60,064      47,173
       Standby letters of credit                                       $       1,721       1,760
       Interest rate contracts:
       Swap agreements                                                 $      35,000         -
       Floors purchased                                                $      50,000         -
</TABLE>


      Commitments to extend credit are agreements to lend to a customer as long
      as there is no violation of any condition established in the contract.
      Commitments generally have fixed expiration dates or other termination
      clauses and may require payment of a fee. Since many of the commitments
      may expire without being drawn upon, the total commitment amounts do not
      necessarily represent future cash requirements. The Bank Subsidiaries
      evaluate each customer's creditworthiness on a case-by-case basis. The
      amount of collateral obtained, if deemed necessary, upon extension of
      credit is based on management's credit evaluation. Collateral held varies
      but may include unimproved and improved real estate, certificates of
      deposit, personal property or other acceptable collateral.

      Standby letters of credit and financial guarantees written are conditional
      commitments issued by the Bank Subsidiaries to guarantee the performance
      of a customer to a third party. Those guarantees are primarily issued to
      local businesses. The credit risk involved in issuing letters of credit is
      essentially the same as that involved in extending loan facilities to
      customers. The Bank Subsidiaries hold real estate, certificates of
      deposit, equipment and automobiles as collateral supporting those
      commitments for which collateral is deemed necessary. The extent of
      collateral held for those commitments varies.

      Derivative financial instruments include forwards, futures, swaps,
      options, and other instruments with similar characteristics. In general
      terms, derivative instruments are contracts or agreements whose value can
      be derived from interest rates, currency exchange rates and financial
      indices. The Bank Subsidiaries use interest rate contracts in balance
      sheet management activities, the objective of which is to minimize the
      risk inherent in the asset and liability interest rate structure. The Bank
      Subsidiaries do not use derivative financial instruments for trading
      purposes. Interest rate contracts include an agreement with a counterparty
      to exchange cash flow based on the movement of an underlying interest rate
      such as the prime rate or the London Interbank Borrowing Rate (LIBOR). A
      swap agreement involves the exchanges of a series of interest payments,
      either at a fixed or variable rate, based on a notional amount without the
      exchange of the underlying principal. An interest rate floor contract
      allows a party, for a purchase premium, to receive income if a
      predetermined interest rate falls below a predetermined level. Income or
      expense on interest rate contracts used by the Bank Subsidiaries to manage
      interest rate exposure is recorded on an accrual basis as an adjustment to
      the yield of the related interest earning asset or interest bearing
      liability over the period covered by the contracts.

      The Bank Subsidiaries' exposure from these interest rate contracts results
      from the possibility that one party may default on its contractual
      obligation (credit risk) or from the movement of interest rates (market
      risk). Credit risk is limited to the positive market value of the
      derivative, which is significantly less than its notional value since the
      notional amount only represents the basis for determining the exchange of
      the cash flows. Credit risk is minimized by performing credit reviews of
      the counterparties to the contract or by conducting activities through
      organized exchanges. There were no derivative financial instruments held
      at December 31, 1995.

                                     A-37

<PAGE>
 
                 UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

(14)  STOCKHOLDERS' EQUITY

      Dividends paid by the Bank Subsidiaries are the primary source of funds
      available to United for payment of dividends to its shareholders and other
      needs. Applicable federal and state statutes and regulations impose
      restrictions on the amount of dividends that may be declared by the Bank
      Subsidiaries. At December 31, 1996, approximately $7.5 million of the Bank
      Subsidiaries' net assets were available for payment of dividends without
      prior approval from the regulatory authorities. In addition to the formal
      statutes and regulations, regulatory authorities also consider the
      adequacy of each Bank Subsidiary's total capital in relation to its
      assets, deposits and other such items. Capital adequacy considerations
      could further limit the availability of dividends from the Bank
      Subsidiaries.

      During 1996, the Company's Board of Directors authorized an offering of
      its common stock at a price of $22 per share. The offering is expected to
      take place in March, 1997. The Company anticipates proceeds from the
      offering, net of certain issuance costs, of approximately $5.4 million.
      Proceeds from the offering will be used to inject capital into the Bank
      Subsidiaries and for other general corporate purposes.

      During 1995, United's Board of Directors declared a five-for-one stock
      split effected in the form of a stock dividend. Share and per share data
      for all periods presented have been retroactively restated to reflect the
      additional shares outstanding resulting from the stock split.

      In 1995, United's Board of Directors amended the Articles of Incorporation
      to authorize 10,000,000 shares of preferred stock, $1 par value. At
      December 31, 1996 and 1995, there were no preferred shares issued or
      outstanding.

      In 1995, the Board of Directors adopted the Key Employee Stock Option
      Plan. Under this plan, options can be granted for up to 150,000 shares of
      United's common stock. During 1996 and 1995, options for 42,000 and 50,000
      shares were granted which are exercisable at $18 and $10 per share,
      respectively, the fair market value at the date of grant. At December 31,
      1996, 58,000 shares were available for grant under this plan. No options
      were exercised in 1996 or 1995.

      SFAS No. 123, "Accounting for Stock-Based Compensation," became effective
      for the Company January 1, 1996. This statement encourages, but does not
      require, entities to compute the fair value of options at the date of
      grant and to recognize such costs as compensation expense immediately if
      there is no vesting period or ratably over the vesting period of the
      options. The Company has chosen not to adopt the cost recognition
      principles of this statement and, therefore, no compensation expense has
      been recognized in 1996 or 1995 related to the stock option plan. Had
      compensation cost been determined based upon the fair value of the options
      at the grant dates consistent with the method of the new statement, the
      Company's proforma net earnings and net earnings per share would have been
      reduced to $8,157,000 and $1.30, respectively, at December 31, 1996, as
      compared to $8,201,000 and $1.31 as reported in the statement of earnings.
      Proforma net earnings and net earnings per share at December 31, 1995
      would have been reduced to $5,957,000 and $1.02, respectively, as compared
      to $6,051,000 and $1.04, respectively, reported in the statement of
      earnings.

      The fair value of each option granted is estimated on the date of grant
      using the minimum value method with the following weighted average
      assumptions used for grants in 1996 and 1995, respectively: dividend yield
      of 1%, risk free interest rates of 6% and 5%, and an expected life of 10
      years.

                                     A-38

<PAGE>
 
                 UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

(14)   STOCKHOLDERS' EQUITY, CONTINUED

       A summary of activity in the Company's stock option plan as of December
       31, 1996 and 1995, and changes during the years then ended, are presented
       below:


<TABLE>
<CAPTION>
                                                                    Weighted    
                                                                    Average     
                                                        Option     Option Price 
                                                        Shares      Per Share   
                                                        ------     ------------ 
            <S>                                         <C>        <C>       
            Options outstanding at December 31, 1994      -             -       
            
            Options granted in 1995                     50,000        $10.00    
                                                        ------        ------    
                                                                                
            Options outstanding at December 31, 1995    50,000        $10.00    
            Options granted in 1996                     42,000        $18.00    
                                                        ------        ------    
                                                                                
            Options outstanding at December 31, 1996    92,000        $13.65    
                                                        ======        ====== 
</TABLE>


       Options on 58,400 and 50,000 shares were exercisable at December 31, 1996
       and 1995, respectively. The weighted average grant-date fair value of
       options granted in 1996 and 1995 was $8.30 and $3.05, respectively. Such
       options have a weighted average remaining contractual life of
       approximately 9 years.

(15)   SUPPLEMENTAL FINANCIAL DATA

       Components of other operating expenses in excess of 1% of total interest
       and other noninterest income for the years ended December 31, 1996, 1995
       and 1994 are as follows:


<TABLE>
<CAPTION>
                                                1996     1995   1994  
                                               -------  ------  ----- 
                                               (dollars in thousands) 
<S>                                            <C>      <C>     <C>   
Stationery and supplies                        $ 1,057     439    410 
Advertising                                        670     627    379  
</TABLE>


(16)   UNITED COMMUNITY BANKS, INC. (PARENT COMPANY ONLY) FINANCIAL INFORMATION

                                Balance Sheets

                          December 31, 1996 and 1995


<TABLE>
<CAPTION>
                                                     1996          1995
                                                     ----          ----
                                                  (dollars in thousands)
                                          
                                    Assets
                                    ------

<S>                                                <C>         <C>  
Cash                                               $   1,502         200       
Investment in subsidiaries                            60,352      51,761       
Other assets                                           4,558       4,735       
                                                      ------      ------       
                                                                               
                                                   $  66,412      56,696       
                                                      ======      ======       
                                                                               
                   Liabilities and Stockholders' Equity    
                   ------------------------------------          

Other liabilities                                  $      58         360      
Long-term debt                                        10,453      11,309       
Convertible subordinated debentures                    3,500       1,000       
Stockholders' equity                                  52,401      44,027       
                                                      ------      ------       
                                                                               
                                                   $  66,412      56,696       
                                                      ======      ======        
</TABLE>


                                     A-39


<PAGE>
 
                 UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


(16)   UNITED COMMUNITY BANKS, INC. (PARENT COMPANY ONLY) FINANCIAL INFORMATION,
       CONTINUED

                            Statements of Earnings

             For the Years Ended December 31, 1996, 1995 and 1994


<TABLE>
<CAPTION>
                                                                          1996         1995       1994      
                                                                         ------        -----     ------  
                                                                             (dollars in thousands)      
     <S>                                                                    <C>          <C>         <C>     
     Income:                                                                                                 
       Dividends from subsidiaries                                       $   4,875       1,510       1,770   
       Other                                                                    82         163         174   
                                                                             -----       -----       -----   
                                                                                                             
               Total income                                                  4,957       1,673       1,944   
                                                                             -----       -----       -----   
                                                                                                             
     Expenses:                                                                                               
       Interest on long-term debt and subordinated debentures                  882         910         729   
       Other                                                                 1,248         410         209   
                                                                             -----       -----       -----   
                                                                                                             
               Total expense                                                 2,130       1,320         938   
                                                                             -----       -----       -----   
                                                                                                             
     Earnings before income tax benefit and equity in undistributed                                          
       earnings of subsidiaries                                              2,827         353       1,006   
     Income tax benefit                                                        732         346         228   
                                                                             -----       -----       -----   
                                                                                                             
     Earnings before equity in undistributed earnings of subsidiaries        3,559         699       1,234   
                                                                                                             
     Equity in undistributed earnings of subsidiaries                        4,642       5,352       3,966   
                                                                             -----       -----       -----   
                                                                                                             
               Net earnings                                              $   8,201       6,051       5,200   
                                                                             =====       =====       =====    
</TABLE>


                                     A-40

<PAGE>
 
                 UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


(16)   UNITED COMMUNITY BANKS, INC. (PARENT COMPANY ONLY) FINANCIAL INFORMATION,
       CONTINUED

                           Statements of Cash Flows

             For the Years Ended December 31, 1996, 1995 and 1994


<TABLE>
<CAPTION>
                                                                      1996            1995         1994      
                                                                     -------         -------     -------     
                                                                             (dollars in thousands)          
       <S>                                                         <C>               <C>         <C>         
       Cash flows from operating activities:                                                                 
         Net earnings                                              $   8,201          6,051       5,200      
         Adjustments to reconcile net earnings to net cash                                                   
           provided by operating activities:                                                                 
             Equity in undistributed earnings of subsidiaries         (4,642)        (5,352)     (3,966)     
             Amortization and accretion                                  203            185         184      
             Change in:                                                                                      
                Other assets                                             (26)          (203)         97      
                Accrued interest payable                                 (39)            39          81      
                Other liabilities                                       (263)           (18)       (270)     
                                                                       ------          ------     ------     
                                                                                                             
                    Net cash provided by operating activities          3,434            702       1,326      
                                                                       ------          ------     ------     
                                                                                                             
       Cash flows from investing activities:                                                                 
         Purchase of exchangeable payable in kind debenture               -             -        (2,846)     
         Cash paid in lieu of fractional shares                           -             (10)        -        
         Capital contribution to subsidiaries                         (4,275)        (4,500)       (200)     
                                                                      ------         -------     -------     
                                                                                                             
                 Net cash used in investing activities                (4,275)        (4,510)     (3,046)     
                                                                      -------        -------     -------     
       Cash flows from financing activities:                                                                 
         Proceeds from convertible subordinated debenture sale         3,500            -           -        
         Proceeds from long-term debt                                    -            2,539       2,800      
         Repayments of long-term debt                                   (856)          (630)       (800)     
         Proceeds from sale of common stock                               -           2,434         -        
         Dividends paid                                                 (501)          (418)       (223)     
                                                                      ------          ------      ------     
                                                                                                             
                 Net cash provided by financing activities             2,143          3,925       1,777      
                                                                      ------          ------      ------     
                                                                                                             
       Net change in cash                                              1,302            117          57      
                                                                                                             
       Cash at beginning of year                                         200             83          26      
                                                                      ------           ------     ------     
                                                                                                             
       Cash at end of year                                        $    1,502            200          83      
                                                                      ======           ======     ======      
</TABLE>


(17)   FAIR VALUE OF FINANCIAL INSTRUMENTS

       SFAS No. 107, "Disclosures about Fair Value of Financial Instruments,"
       requires disclosure of fair value information about financial
       instruments, whether or not recognized on the face of the balance sheet,
       for which it is practicable to estimate that value. The assumptions used
       in the estimation of the fair value of United's financial instruments are
       detailed below. Where quoted prices are not available, fair values are
       based on estimates using discounted cash flows and other valuation
       techniques. The use of discounted cash flows can be significantly
       affected by the assumptions used, including the discount rate and
       estimates of future cash flows. The following disclosures should not be
       considered a surrogate of the liquidation value of United or its Bank
       Subsidiaries, but rather a good-faith estimate of the increase or
       decrease in value of financial instruments held by United since purchase,
       origination or issuance.

                                     A-41

<PAGE>


 
                 UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


(17)   FAIR VALUE OF FINANCIAL INSTRUMENTS, CONTINUED

       Cash and Cash Equivalents
       -------------------------

       For cash, due from banks, federal funds sold, the carrying amount is a
       reasonable estimate of fair value.

       Securities Held to Maturity and Securities Available for Sale
       -------------------------------------------------------------

       Fair values for investment securities are based on quoted market prices.

       Loans and Mortgage Loans Held for Sale
       --------------------------------------
       The fair value of fixed rate loans is estimated by discounting the future
       cash flows using the current rates at which similar loans would be made
       to borrowers with similar credit ratings. For variable rate loans, the
       carrying amount is a reasonable estimate of fair value.

       Deposits
       --------

       The fair value of demand deposits, savings accounts and certain money
       market deposits is the amount payable on demand at the reporting date.
       The fair value of fixed maturity certificates of deposit is estimated by
       discounting the future cash flows using the rates currently offered for
       deposits of similar remaining maturities.

       FHLB Advances
       -------------

       The fair value of United's fixed rate borrowings are estimated using
       discounted cash flows, based on United's current incremental borrowing
       rates for similar types of borrowing arrangements.

       Long-Term Debt and Convertible Subordinated Debentures
       ------------------------------------------------------

       Long-term debt and convertible subordinated debentures are made using
       variable rates, thus, the carrying amount is a reasonable estimate of
       fair value.

       Commitments to Extend Credit, Standby Letters of Credit and Financial
       ---------------------------------------------------------------------
       Guarantees Written
       ------------------

       Because commitments to extend credit and standby letters of credit are
       made using variable rates, the contract value is a reasonable estimate of
       fair value.

       Interest Rate Swaps and Interest Rate Floors
       --------------------------------------------

       The fair value of interest rate swaps and interest rate floors is
       obtained from dealer quotes. These values represent the estimated amount
       United would receive to terminate the contracts or agreements, taking
       into account current interest rates and, when appropriate, the current
       creditworthiness of the counterparties.

       Limitations
       -----------

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

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

                                     A-42


<PAGE>
 
                 UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


(17)   FAIR VALUE OF FINANCIAL INSTRUMENTS, CONTINUED

       The carrying amount and estimated fair value of United's financial
       instruments at December 31, 1996 and 1995 are as follows: 


<TABLE>
<CAPTION>
                                                  December 31, 1996     December 31, 1995   
                                                 --------------------  -------------------- 
                                                 Carrying  Estimated   Carrying  Estimated  
                                                  Amount   Fair Value   Amount   Fair Value 
                                                 --------  ----------  --------  ---------- 
                                                          (dollars in thousands)            
       <S>                                    <C>          <C>         <C>       <C>        
       Assets:                                                                              
         Cash and cash equivalents            $    50,592      50,592    31,988      31,988 
         Securities held to maturity               72,022      72,335    78,821      79,650 
         Securities available for sale             74,864      74,864    65,046      65,046 
         Mortgage loans held for sale               6,727       6,727    12,048      12,048 
         Loans, net                               584,671     586,887   437,547     437,053 
                                                                                            
       Liabilities:                                                                         
         Deposits                                 720,726     725,128   590,656     596,307 
         FHLB advances                             35,074      34,863     9,001       8,771 
         Long-term debt                            10,453      10,453    11,309      11,309 
         Convertible subordinated debenture         3,500       3,500     1,000         946 
                                                                                            
       Unrecognized financial instruments                                                   
         Commitments to extend credit              60,064      60,064    47,173      47,173 
         Standby letters of credit                  1,721       1,721     1,760       1,760 
         Swap agreements                               17          97         -           - 
         Floors purchased                              33          21         -           -  
</TABLE>


                                     A-43

<PAGE>
 

                              AMENDMENT NO. 1 TO
                         UNITED COMMUNITY BANKS, INC.
                        KEY EMPLOYEE STOCK OPTION PLAN

        WHEREAS, on April 4, 1994, United Community Banks, Inc. (the "Company") 
adopted the Key Employee Stock Option Plan (the "Plan"); and

        WHEREAS, the Board of Directors of the Company and the shareholders 
believe that the Plan is an important component of United's compensation package
because its secures for its shareholders the advantages associated with employee
stock ownership; and

        WHEREAS, the Board of Directors and the shareholders desire to amend the
Plan to increase the maximum number of shares of common stock, par value $1.00 
per share, authorized for issuance with respect to options granted under the 
Plan:

         NOW, THEREFORE, Section 1.2(a) of the Plan is hereby amended by
substituting the following in lieu of the verbage in Section 1.2(a) of the Plan:

               "The maximum number of shares of Common Stock with respect to
        which Options may be granted under the Plan shall not exceed 300,000
        shares of Common Stock, subject to possible adjustments in accordance
        with Section 3.1."

        The other terms of the Plan shall remain in full force and effect.

        Dated this      day of                 , 1997.
                   ----        ----------------

                                        UNITED COMMUNITY BANKS, INC.


                                        By: /s/ Jimmy C. Tallent
                                        ----------------------------
                                            Jimmy C. Tallent
                                            President




<PAGE>
 
                                 COMMON STOCK
                        OF UNITED COMMUNITY BANKS, INC.

                    THIS PROXY IS SOLICITED BY THE BOARD OF
            DIRECTORS FOR THE 1997 ANNUAL MEETING OF SHAREHOLDERS.

            This undersigned hereby appoints Jimmy C. Tallent or Robert L. Head,
Jr. the proxy of the undersigned to vote the Common Stock of the undersigned at
the Annual Meeting of Shareholders of UNITED COMMUNITY BANKS, INC. to be held on
April 17, 1997, and any adjournment thereof.


1.    [_]   FOR all nominees for director listed below (except as indicated to 
            the contrary):

Jimmy C. Tallent; James A. Brackett, Jr.; Billy M. Decker; Thomas C. Gilliland;
Robert L. Head, Jr.; Charles E. Hill; Hoyt O. Holloway; P. Deral Horne; 
Clarence W. Mason, Sr.; W. C. Nelson, Jr.; Charles E. Parks

(Instruction:  To withhold authority to vote for any individual nominee, write 
that nominee's name on the space provided below)

- --------------------------------------------------------------------------------

      [_]  WITHHOLD AUTHORITY to vote for all nominees listed above.

2.    [_]  FOR the proposal to amend the Key Individual Stock Option Plan to 
           increase the number of shares authorized under the Plan (the 
           "Amendment").

      [_]  AGAINST the Amendment

      [_]  ABSTAIN with respect to the Amendment

3.   In accordance with their best judgment with respect to any other matters 
     that may properly come before the meeting.


THE BOARD OF DIRECTORS FAVORS A VOTE "FOR" THE ELECTION AS DIRECTORS OF THE
PERSONS NAMED IN THE PROXY AND FOR THE AMENDMENT DESCRIBED IN THE ACCOMPANYING
PROXY STATEMENT AND UNLESS INSTRUCTIONS TO THE CONTRARY ARE INDICATED IN THE
SPACE PROVIDED, THIS PROXY WILL BE SO VOTED.




                    ------------------------------------------------------------
                    Please sign this Proxy exactly as name appears on the Proxy.


                    Note:  When signing as an attorney, trustee, administrator  
                    or guardian, please give your title as such.  In the case 
                    of joint tenants, each joint owner must sign.



                    Date:_______________________________________________________


<PAGE>
THE BOARD OF DIRECTORS FAVORS A VOTE "FOR" THE ELECTION AS DIRECTORS OF THE 
PERSONS NAMED IN THE PROXY AND FOR THE AMENDMENT DESCRIBED IN THE ACCOMPANYING 
PROXY STATEMENT AND UNLESS INSTRUCTIONS TO THE CONTRARY ARE INDICATED IN THE 
SPACE PROVIDED, THIS PROXY WILL BE SO VOTED.

                                        
                                        ----------------------------------------
                                        Please sign the Proxy exactly as name 
                                        appears on the Proxy.


                                        Note: When signing as an attorney,
                                        trustee, administrator or guardian,
                                        please give your title as such. In the
                                        case of joint tenants, each joint owner
                                        must sign.


                                        Date:
                                             -----------------------------------