United Community Banks, Inc.
UNITED COMMUNITY BANKS INC (Form: 10-K, Received: 02/27/2009 10:14:01)


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-K
 
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the Fiscal Year Ended December 31, 2008
 
Commission File Number 0-21656
 
UNITED COMMUNITY BANKS, INC.
(Exact name of registrant as specified in its charter)
 
 
Georgia
   
58-1807304
 
(State or other jurisdiction of incorporation)
(I.R.S. Employer Identification No.)
   
 
63 Highway 515, Blairsville, Georgia
   
30512
 
(Address of principal executive offices)
(Zip Code)
 
Registrant’s telephone number, including area code: (706) 781-2265
 
Securities registered pursuant to Section 12(b) of the Act: None
 
Name of exchange on which registered: Nasdaq Global Select
 
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $1.00 par value
 
          Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes o No x
 
          Indicate by check mark if the registrant is not required to file reports pursuant to Sections 13 or 15(d) of the Act.
Yes  o No x
 
          Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.         Yes  x No  o
 
          Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.                   o
 
          Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (check one):
 
 
Large accelerated filer  o
Accelerated filer x
 
 
Non-accelerated filer  o
Smaller Reporting Company  o
 
 
          Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).                                                Yes  o No x
 
          State the aggregate market value of the voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter: $341,840,253 based on shares held by non-affiliates at $8.53 per share, the closing stock price on the Nasdaq stock market on June 30, 2008).
 
          As of January 31, 2009, 52,974,326 shares of common stock were issued and outstanding, including presently exercisable options to acquire 2,017,841 shares, presently exercisable warrants to acquire 2,797,456 shares, and 130,782 shares issuable under United Community Banks, Inc.’s deferred compensation plan.
 
DOCUMENTS INCORPORATED BY REFERENCE
 
          Portions of the registrant’s Proxy Statement for the Annual Meeting of Shareholders to be held on April 29, 2009 are incorporated herein into Part III by reference.
 
 
INDEX
 
PART I
   
       
 
Item 1.
Business
3
 
Item 1A.
Risk Factors
12
 
Item 1B.
Unresolved Staff Comments
14
 
Item 2.
Properties
14
 
Item 3.
Legal Proceedings
15
 
Item 4.
Submission of Matters to a Vote of Security Holders
15
       
PART II
   
       
 
Item 5.
Market for United’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
15
 
Item 6.
Selected Financial Data
17
 
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
19
 
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
38
 
Item 8.
Financial Statements and Supplementary Data
41
 
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
75
 
Item 9A.
Controls and Procedures
75
 
Item 9B.
Other Information
75
       
PART III
   
       
 
Item 10.
Directors, Executive Officers and Corporate Governance
75
 
Item 11.
Executive Compensation
75
 
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
75
 
Item 13.
Certain Relationships and Related Transactions, and Director Independence
76
 
Item 14.
Principal Accounting Fees and Services
76
       
PART IV
   
       
 
Item 15.
Exhibits, Financial Statement Schedules
76
       
SIGNATURES
 
80
 
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PART I
 
ITEM 1.
BUSINESS.
 
United Community Banks, Inc. (“United”), a bank holding company registered under the Bank Holding Company Act of 1956, 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, Blairsville, Georgia, now known as United Community Bank, Blairsville, Georgia (the “Bank”).
 
Since the early 1990’s, United has actively expanded its market coverage through organic growth complemented by selective acquisitions, primarily of banks whose managements share United’s community banking and customer service philosophies. Although those acquisitions have directly contributed to United’s growth over the last ten years, their contribution has primarily been to provide United access to new markets with attractive growth potential. Organic growth in assets includes growth through existing offices as well as growth at de novo locations and post-acquisition growth at acquired banking offices. Organic growth will continue to be the principal focus of United’s balanced growth strategy to extend its reach in both new and existing markets.
 
To emphasize its commitment to community banking, United conducts substantially all of its operations through a community-focused operating model of 27 separate “community banks”, which as of December 31, 2008, operated at 107 locations in north Georgia, the Atlanta MSA, the Gainesville MSA, coastal Georgia, western North Carolina and east Tennessee. The community banks offer a full range of retail and corporate banking services, including checking, savings, and time deposit accounts, secured and unsecured loans, wire transfers, brokerage services, and other financial services, and are led by local bank presidents (referred to herein as the “Presidents”) and management with significant experience in, and ties to, their communities. Each of the community bank Presidents has authority, alone or with other local officers, to make most credit decisions.
 
In June 2007, United completed the acquisition of Gwinnett Commercial Group, Inc. and its wholly-owned subsidiary First Bank of the South. The acquisition of Gwinnett Commercial Group added assets and deposits of $809 million and $568 million, respectively, and five banking offices in the Atlanta MSA.
 
In December 2006, United completed the acquisition of Southern Bancorp, Inc. a Georgia bank holding company and its wholly-owned subsidiary Southern National Bank. Southern National Bank had two banking offices the Atlanta MSA. In September 2006, United acquired two branch locations in western North Carolina. Both transactions collectively added $430 million in assets and $360 million in deposits.
 
The Bank, through its full-service retail mortgage lending division, United Community Mortgage Services (“UCMS”), is approved as a seller/servicer for Federal National Mortgage Association (“Fannie Mae”) and Federal Home Loan Mortgage Corporation (“Freddie Mac”) and provides fixed and adjustable-rate home mortgages. During 2008, the Bank originated $374 million of residential mortgage loans throughout Georgia, North Carolina and Tennessee for the purchase of homes and to refinance existing mortgage debt. Substantially all of these mortgages were sold into the secondary market with no recourse to the Bank other than for breach of warranties.
 
Acquired in 2000, Brintech, Inc. (“Brintech”), a subsidiary of the Bank, is a consulting firm for the financial services industry. Brintech provides consulting, advisory, and implementation services in the areas of strategic planning, profitability improvement, technology, efficiency, security, risk management, network, Internet banking, marketing, core processing, and telecommunications.
 
The Bank owns an insurance agency, United Community Insurance Services, Inc. (“UCIS”), known as United Community Advisory Services that is a subsidiary of the Bank.
 
United provides retail brokerage services through an affiliation with a third party broker/dealer.
 
Forward-Looking Statements
 
This Form 10-K contains forward-looking statements regarding United, including, without limitation, statements relating to United’s expectations with respect to revenue, credit losses, levels of nonperforming assets, expenses, earnings and other measures of financial performance. Words such as “may”, “could”, “would”, “should”, “believes”, “expects”, “anticipates”, “estimates”, “intends”, “plans”, “targets” or similar expressions are intended to identify forward-looking statements. These forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties that are subject to change based on various factors (many of which are beyond United’s control). The following factors, among others, could cause United’s financial performance to differ materially from the expectations expressed in such forward-looking statements:
   
the condition of the banking system and financial markets;
our limited ability to raise capital or maintain liquidity;
our ability to pay dividends;
our past operating results may not be indicative of future operating results;
our business is subject to the success of the local economies in which we operate;
 
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our concentration of construction and land development loans is subject to unique risks that could adversely affect our earnings; 
we may face risks with respect to future expansion and acquisitions or mergers;
changes in prevailing interest rates may negatively affect our net income and the value of our assets; 
if our allowance for loan losses is not sufficient to cover actual loan losses, earnings would decrease;
competition from financial institutions and other financial service providers may adversely affect our profitability;
we may be subject to losses due to fraudulent and negligent conduct of our loan customers, third party service providers or employees;
business increases, productivity gains and other investments are lower than expected or do not occur as quickly as anticipated;
competitive pressures among financial services companies increase significantly;
the success of our business strategy;
the strength of the United States economy in general;
changes in trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System;
inflation or market conditions fluctuate;
conditions in the stock market, the public debt market and other capital markets deteriorate;
financial services laws and regulations change;
technology changes and United fails to adapt to those changes;
consumer spending and saving habits change;
unanticipated regulatory or judicial proceedings occur; and
United is unsuccessful at managing the risks involved in the foregoing.
 
Additional information with respect to factors that may cause actual results to differ materially from those contemplated by such forward-looking statements may also be included in other reports that United files with the Securities and Exchange Commission. United cautions that the foregoing list of factors is not exclusive and not to place undue reliance on forward-looking statements. United does not intend to update any forward-looking statement, whether written or oral, relating to the matters discussed in this Form 10-K.
 
Monetary Policy and Economic Conditions
 
United’s profitability depends to a substantial extent on the difference between interest revenue received from loans, investments, and other earning assets, and the interest paid on deposits and other liabilities. These rates are highly sensitive to many factors that are beyond the control of United, including national and international economic conditions and the monetary policies of various governmental and regulatory authorities, particularly the Federal Reserve. The instruments of monetary policy employed by the Federal Reserve include open market operations in U.S. government securities, changes in the discount rate on bank borrowings and changes in reserve requirements against bank deposits.
 
Competition
 
The market for banking and bank-related services is highly competitive. United actively competes its market areas, which include north Georgia, the Atlanta MSA, the Gainesville MSA, coastal Georgia, western North Carolina and east Tennessee, with other providers of deposit and credit services. These competitors include other commercial banks, savings banks, savings and loan associations, credit unions, mortgage companies, and brokerage firms.
         
The following table displays the respective percentage of total bank and thrift deposits in each county where the Bank has operations. The table also indicates the ranking by deposit size in each county. All information in the table was obtained from the Federal Deposit Insurance Corporation Summary of Deposits as of June 30, 2008. The following information only shows market share in deposit gathering, which may not be indicative of market presence in other areas.
 
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Share of Local Deposit Markets by County - Banks and Savings Institutions
 
   
Market
Share
   
Rank in
Market
     
Market
Share
   
Rank in
Market
     
Market
Share
   
Rank in
Market
 
                                         
Atlanta Region
           
North Georgia
         
Coastal Georgia
       
Bartow
    7 %     7  
Chattooga
    41 %     1  
Chatham
    2 %     11  
Carroll
    3       9  
Fannin
    52       1  
Glynn
    16       3  
Cherokee
    4       9  
Floyd
    13       4  
Ware
    10       4  
Cobb
    4       8  
Gilmer
    14       2                    
Coweta
    1       12  
Habersham
    14       3  
North Carolina
               
Dawson
    33       1  
Jackson
    3       10  
Avery
    14       4  
DeKalb
    1       16  
Lumpkin
    32       1  
Cherokee
    42       1  
Douglas
    2       10  
Rabun
    11       5  
Clay
    53       1  
Fayette
    2       12  
Towns
    29       2  
Graham
    77       1  
Forsyth
    2       13  
Union
    88       1  
Haywood
    11       5  
Fulton
    1       17  
White
    40       1  
Henderson
    3       11  
Gwinnett
    4       7                    
Jackson
    24       2  
Hall
    12       4  
Tennessee
               
Macon
    9       4  
Henry
    3       10  
Blount
    3       9  
Mitchell
    28       2  
Newton
    4       7  
Bradley
    5       7  
Swain
    28       2  
Paulding
    2       11  
Knox
    1       14  
Transylvania
    14       3  
Pickens
    3       7  
Loudon
    19       2  
Watauga
    2       11  
Rockdale
    11       5  
McMinn
    3       8  
Yancey
    13       4  
Walton
    1       11  
Monroe
    3       8                    
                 
Roane
    11       3                    
 
Loans
 
The Bank makes both secured and unsecured loans to individuals, firms, and corporations. Secured loans include first and second real estate mortgage loans and commercial loans secured by non-real estate assets. The Bank also makes direct installment loans to consumers on both a secured and unsecured basis. At December 31, 2008, commercial (commercial and industrial), commercial (secured by real estate), commercial construction, residential construction, residential mortgage and consumer installment loans represented approximately 7%, 28%, 9%, 26%, 27% and 3%, respectively, of United’s total loan portfolio.
 
Specific risk elements associated with the Bank’s lending categories include, but are not limited to:
 
Loan Type
Risk Elements
   
Commercial (commercial and industrial)
Industry concentrations; inability to monitor the condition of collateral (inventory, accounts receivable and other non-real estate assets); increased competition; use of specialized or obsolete equipment as collateral; insufficient cash flow from operations to service debt payments; declines in general economic conditions.
   
Commercial (secured by real estate)
Loan portfolio concentrations; declines in general economic conditions and occupancy rates; business failure and lack of a suitable alternative use for property; environmental contamination.
   
Commercial construction
Loan portfolio concentrations; inadequate long-term financing arrangements; cost overruns, changes in market demand for property.
   
Residential construction
Loan portfolio concentrations; inadequate long-term financing arrangements; cost overruns, changes in market demand for property.
   
Residential mortgage
Loan portfolio concentrations; changes in general economic conditions or in the local economy; loss of borrower’s employment; insufficient collateral value due to decline in property value.
   
Consumer installment
Loss of borrower’s employment; changes in local economy; the inability to monitor collateral (vehicles and boats).
 
5

 
Lending Policy
 
The Bank makes loans primarily to persons or businesses that reside, work, own property, or operate in its primary market areas. Unsecured loans are generally made only to persons who qualify for such credit based on net worth and liquidity. Secured loans are made to persons who are well established and have net worth, collateral, and cash flow to support the loan. Exceptions to the Bank’s policies are permitted on a case-by-case basis. Major policy exceptions require the approving officer to document the reason for the exception. Loans exceeding the lending officer’s credit limit must be approved through the credit approval process involving Regional Credit Managers. All loans to borrowers whose aggregate lending relationship exceeds $15 million must be reported quarterly to the Bank’s Board of Directors for ratification.
 
United’s Credit Administration department provides each lending officer with written guidelines for lending activities as approved by the Bank’s Board of Directors. Limited lending authority is delegated to lending officers by Credit Administration as authorized by the Bank’s Board of Directors. Loans in excess of individual officer credit authority must be approved by a senior officer with sufficient approval authority delegated by Credit Administration as authorized by the Bank’s Board of Directors. Loans to borrowers whose total aggregate loans exceed $15 million require the additional approval of two Bank directors.
 
Regional Credit Managers
 
United utilizes its Regional Credit Managers to provide credit administration support to the Bank as needed. The Regional Credit Managers have joint lending approval authority with the community bank Presidents within varying limits set by Credit Administration based on characteristics of each market. The Regional Credit Managers also provide credit underwriting support as needed by the community banks they serve.
 
Loan Review and Non-performing Assets
 
The Loan Review Department of United reviews, or engages an independent third party to review, the Bank’s loan portfolio on an ongoing basis to identify any weaknesses in the portfolio and to assess the general quality of credit underwriting. The results of such reviews are presented to Executive Management, the community bank Presidents, Credit Administration management and the Audit Committee of the Board of Directors. If an individual loan or credit relationship has a material weakness identified during the review process, the risk rating of the loan, or generally all loans comprising that credit relationship, will be downgraded to the classification that most closely matches the current risk level. The review process also provides for the upgrade of loans that show improvement since the last review. Since each loan in a credit relationship may have a different credit structure, collateral, and other secondary source of repayment, different loans in a relationship can be assigned different risk ratings. Under United’s 10-tier loan grading system, grades 1 through 6 are considered “pass” (acceptable) credit risk, grade 7 is a “watch” rating, and grades 8 through 10 are “adversely classified” credits that require management’s attention. Both the pass and adversely classified ratings, and the entire 10-grade rating scale, provide for a higher numeric rating for increased risk. For example, a risk rating of 1 is the least risky of all credits and would be typical of a loan that is 100% secured by a deposit at the Bank. Risk ratings of 2 through 6 in the pass category each have incrementally more risk. The four watch list credit ratings and rating definitions are:
 
 
7 (Watch)
Weaknesses exist that could cause future impairment, including the deterioration of financial ratios, past-due status and questionable management capabilities. Collateral values generally afford adequate coverage, but may not be immediately marketable.
     
 
8 (Substandard)
Specific and well-defined weaknesses that may include poor liquidity and deterioration of financial ratios. Loan may be past-due and related deposit accounts experiencing overdrafts. Immediate corrective action is necessary.
     
 
9 (Doubtful)
Specific weaknesses characterized as Substandard that are severe enough to make collection in full unlikely. No reliable secondary source of full repayment.
     
 
10 (Loss)
Same characteristics as Doubtful, however, probability of loss is certain. Loans classified as such are generally charged-off.
 
In addition, Credit Administration, with supervision and input from Accounting, prepares a quarterly analysis to determine the adequacy of the Allowance for Loan Losses (“ALL”) for the Bank and United. The ALL analysis starts with total loans and subtracting loans fully secured by deposit accounts at the Bank, which effectively have no risk of loss. Next, all loans with an adversely classified rating are subtracted, including loans considered impaired. The remaining loan balance for each major loan category is then multiplied by its respective loss factor that is derived from the average historical loss rate for the preceding two year period, adjusted to reflect current economic conditions, which provides a required minimum ALL for pass credits. Loss factors for these loans are determined based on historical loss experience by type of loan. Loans that are considered impaired are evaluated separately and are assigned specific reserves as necessary.
 
6

 
Asset/Liability Committee
 
United’s asset/liability committee (“ALCO”) is composed of executive officers and the Treasurer of United. ALCO is charged with managing the assets and liabilities of United and the Bank. ALCO’s primary role is to balance asset growth and income generation with the prudent management of interest rate risk, market risk and liquidity risk and with the need to maintain appropriate levels of capital. ALCO directs the Bank’s overall balance sheet strategy, including the acquisition and investment of funds. At regular meetings, the committee reviews the interest rate sensitivity and liquidity positions, including stress scenarios, the net interest margin, the investment portfolio, the funding mix and other variables, such as regulatory changes, monetary policy adjustments and the overall state of the economy. A more comprehensive discussion of United’s Asset/Liability Management and interest rate risk is contained in Management’s Discussion and Analysis (Part II, Item 7) and Quantitative and Qualitative Disclosures About Market Risk (Part II, Item 7A) sections of this report.
 
Investment Policy
 
United’s investment portfolio policy is to balance income generation with liquidity, interest rate sensitivity, pledging and regulatory needs. The Chief Financial Officer and the Treasurer of United administer the policy, and it is reviewed from time to time by United’s ALCO and the Board of Directors. Portfolio activity, composition, and performance are reviewed and approved periodically by United’s Board of Directors or a committee thereof.
 
Employees
 
As of December 31, 2008, United and its subsidiaries had 1,919 full-time equivalent employees. Neither United nor any of its subsidiaries are a party to any collective bargaining agreement and management believes that employee relations are good.
 
Available Information
 
United’s Internet website address is ucbi.com. United makes available free of charge through its website Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, and amendments to those reports, as soon as reasonably practicable after they are filed with, or furnished to, the Securities & Exchange Commission.
 
Supervision and Regulation
 
The following is an explanation of the supervision and regulation of United and the Bank as financial institutions. This explanation does not purport to describe state, federal or Nasdaq Stock Market supervision and regulation of general business corporations or Nasdaq listed companies.
 
General. United is a registered bank holding company subject to regulation by the Board of Governors of the Federal Reserve System (the “Federal Reserve”) under the Bank Holding Company Act of 1956, as amended (the “BHC Act”). United is required to file annual and quarterly financial information with the Federal Reserve and is subject to periodic examination by the Federal Reserve.
 
The BHC Act requires every bank holding company to obtain the Federal Reserve’s prior approval before (1) it may acquire direct or indirect ownership or control of more than 5% of the voting shares of any bank that it does not already control; (2) it or any of its non-bank subsidiaries may acquire all or substantially all of the assets of a bank; and (3) it may merge or consolidate with any other bank holding company. In addition, a bank holding company is generally prohibited from engaging in, or acquiring, direct or indirect control of the voting shares of any company engaged in non-banking activities. This prohibition does not apply to activities listed in the BHC Act or found by the Federal Reserve, by order or regulation, to be closely related to banking or managing or controlling banks as to be a proper incident thereto. Some of the activities that the Federal Reserve has determined by regulation or order to be closely related to banking are:
 
making or servicing loans and certain types of leases;
performing certain data processing services;
acting as fiduciary or investment or financial advisor;
providing brokerage services;
underwriting bank eligible securities;
underwriting debt and equity securities on a limited basis through separately capitalized subsidiaries; and
making investments in corporations or projects designed primarily to promote community welfare.
 
7

 
Although the activities of bank holding companies have traditionally been limited to the business of banking and activities closely related or incidental to banking (as discussed above), the Gramm-Leach-Bliley Act (the “GLB Act”) relaxed the previous limitations and permitted bank holding companies to engage in a broader range of financial activities. Specifically, bank holding companies may elect to become financial holding companies which may affiliate with securities firms and insurance companies and engage in other activities that are financial in nature. Among the activities that are deemed “financial in nature” include:
 
lending, exchanging, transferring, investing for others or safeguarding money or securities;
insuring, guaranteeing, or indemnifying against loss, harm, damage, illness, disability, or death, or providing and issuing annuities, and acting as principal, agent, or broker with respect thereto;
providing financial, investment, or economic advisory services, including advising an investment company;
issuing or selling instruments representing interests in pools of assets permissible for a bank to hold directly; and
underwriting, dealing in or making a market in securities.
 
A bank holding company may become a financial holding company under this statute only if each of its subsidiary banks is well-capitalized, is well managed and has at least a satisfactory rating under the Community Reinvestment Act. A bank holding company that falls out of compliance with such requirement may be required to cease engaging in certain activities. Any bank holding company that does not elect to become a financial holding company remains subject to the bank holding company restrictions of the BHC Act.
 
Under this legislation, the Federal Reserve Board serves as the primary “umbrella” regulator of financial holding companies with supervisory authority over each parent company and limited authority over its subsidiaries. The primary regulator of each subsidiary of a financial holding company will depend on the type of activity conducted by the subsidiary. For example, broker-dealer subsidiaries will be regulated largely by securities regulators and insurance subsidiaries will be regulated largely by insurance authorities.
 
United has no current plans to register as a financial holding company.
 
United must also register with the Georgia Department of Banking and Finance (“DBF”) and file periodic information with the DBF. As part of such registration, the DBF requires information with respect to the financial condition, operations, management and intercompany relationship of United and the Bank and related matters. The DBF may also require such other information as is necessary to keep itself informed concerning compliance with Georgia law and the regulations and orders issued thereunder by the DBF, and the DBF may examine United and the Bank. Although the Bank operates branches in North Carolina and Tennessee, neither the North Carolina Banking Commission (“NCBC”), nor the Tennessee Department of Financial Institutions (“TDFI”) examines or directly regulates out-of-state holding companies.
 
United is an “affiliate” of the Bank under the Federal Reserve Act, which imposes certain restrictions on (1) loans by the Bank to United, (2) investments in the stock or securities of United by the Bank, (3) the Bank taking the stock or securities of an “affiliate” as collateral for loans by the Bank to a borrower, and (4) the purchase of assets from United by the Bank. Further, a bank holding company and its subsidiaries are prohibited from engaging in certain tie-in arrangements in connection with any extension of credit, lease or sale of property or furnishing of services.
 
The Bank and each of its subsidiaries are regularly examined by the Federal Deposit Insurance Corporation (the “FDIC”). The Bank, as a state banking association organized under Georgia law, is subject to the supervision of, and is regularly examined by, the DBF. The Bank’s North Carolina branches are subject to examination by the NCBC. The Bank’s Tennessee branches are subject to examination by the TDFI. Both the FDIC and the DBF must grant prior approval of any merger, consolidation or other corporation reorganization involving the Bank.
 
Payment of Dividends . United is a legal entity separate and distinct from the Bank. Most of the revenue of United results from dividends paid to it by the Bank. There are statutory and regulatory requirements applicable to the payment of dividends by the Bank, as well as by United to its shareholders.
 
Under the regulations of the DBF, dividends may not be declared out of the retained earnings of a state bank without first obtaining the written permission of the DBF, unless such bank meets all the following requirements:
 
 
(a)
total classified assets as of the most recent examination of the bank do not exceed 80% of equity capital (as defined by regulation);
 
(b)
the aggregate amount of dividends declared or anticipated to be declared in the calendar year does not exceed 50% of the net profits after taxes but before dividends for the previous calendar year; and
 
(c)
the ratio of equity capital to adjusted assets is not less than 6%.
 
On December 5, 2008, United entered into a Letter Agreement and Securities Purchase Agreement (the “Purchase Agreement”) with the U.S. Treasury Department (“Treasury”) under the TARP Capital Purchase Program discussed below, pursuant to which United sold (i) 180,000 shares of United’s Fixed Rate Cumulative Perpetual Preferred Stock, Series B (the “Series B Preferred Stock”) and (ii) a warrant (the “Warrant”) to purchase 2,149,106 shares of United’s common stock for an aggregate purchase price of $180 million in cash. Pursuant to the terms of the Purchase Agreement, the ability of United to declare or pay dividends or distributions on its common stock is subject to restrictions, including a restriction against increasing dividends from the last quarterly cash dividend per share ($.09) declared on the common stock prior to December 5, 2008, as adjusted for subsequent stock dividends and other similar actions. In addition, as long as Series B Preferred Stock is outstanding, dividend payments are prohibited until all accrued and unpaid dividends are paid on such preferred stock, subject to certain limited exceptions. This restriction will terminate on December 5, 2011, or earlier, if the Series B Preferred Stock has been redeemed in whole or Treasury has transferred all of the Series B Preferred Stock to third parties.
 
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The payment of dividends by United and the Bank may also be affected or limited by other factors, such as the requirement to maintain adequate capital above regulatory guidelines. In addition, if, in the opinion of the applicable regulatory authority, a bank under its jurisdiction is engaged in or is about to engage in an unsafe or unsound practice (which, depending upon the financial condition of the bank, could include the payment of dividends), such authority may require, after notice and hearing, that such bank cease and desist from such practice. The FDIC has issued a policy statement providing that insured banks should generally only pay dividends out of current operating earnings. In addition to the formal statutes and regulations, regulatory authorities consider the adequacy of the Bank’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. At January 1, 2009, the Bank will not have the ability to pay cash dividends in 2009 due to the net loss for 2008. For 2008, United declared cash dividends to common stockholders totaling $8.5 million, or $.18 per common share and stock dividends equal to $.18 per common share.
 
Capital Adequacy. The Federal Reserve and the FDIC have implemented substantially identical risk-based rules for assessing bank and bank holding company capital adequacy. These regulations establish minimum capital standards in relation to assets and off-balance sheet exposures as adjusted for credit risk. Banks and bank holding companies are required to have (1) a minimum level of Total Capital (as defined) to risk-weighted assets of eight percent (8%); and (2) a minimum Tier I Capital (as defined) to risk-weighted assets of four percent (4%). In addition, the Federal Reserve and the FDIC have established a minimum three percent (3%) leverage ratio of Tier I Capital to quarterly average total assets for the most highly-rated banks and bank holding companies. “Tier I Capital” generally consists of common equity excluding unrecognized gains and losses on available for sale securities and derivatives accounted for as cash flow hedges, plus minority interests in equity accounts of consolidated subsidiaries and certain perpetual preferred stock less certain intangibles. The Federal Reserve and the FDIC will require a bank holding company and a bank, respectively, to maintain a leverage ratio greater than four percent (4%) if either is experiencing or anticipating significant growth or is operating with less than well-diversified risks in the opinion of the Federal Reserve. The Federal Reserve and the FDIC use the leverage ratio in tandem with the risk-based ratio to assess the capital adequacy of banks and bank holding companies. The FDIC, the Office of the Comptroller of the Currency (the “OCC”) and the Federal Reserve consider interest rate risk in the overall determination of a bank’s capital ratio, requiring banks with greater interest rate risk to maintain adequate capital for the risk.
 
In addition, Section 38 of the Federal Deposit Insurance Act implemented the prompt corrective action provisions that Congress enacted as a part of the Federal Deposit Insurance Corporation Improvement Act of 1991 (the “1991 Act”). The “prompt corrective action” provisions set forth five regulatory zones in which all banks are placed largely based on their capital positions. Regulators are permitted to take increasingly harsh action as a bank’s financial condition declines. Regulators are also empowered to place in receivership or require the sale of a bank to another depository institution when a bank’s capital leverage ratio reaches 2%. Better capitalized institutions are generally subject to less onerous regulation and supervision than banks with lesser amounts of capital.
 
The FDIC has adopted regulations implementing the prompt corrective action provisions of the 1991 Act, which place financial institutions in the following five categories based upon capitalization ratios: (1) a “well-capitalized” institution has a Total risk-based capital ratio of at least 10%, a Tier I risk-based ratio of at least 6% and a leverage ratio of at least 5%; (2) an “adequately capitalized” institution has a Total risk-based capital ratio of at least 8%, a Tier I risk-based ratio of at least 4% and a leverage ratio of at least 4%; (3) an “undercapitalized” institution has a Total risk-based capital ratio of under 8%, a Tier I risk-based ratio of under 4% or a leverage ratio of under 4%; (4) a “significantly undercapitalized” institution has a Total risk-based capital ratio of under 6%, a Tier I risk-based ratio of under 3% or a leverage ratio of under 3%; and (5) a “critically undercapitalized” institution has a leverage ratio of 2% or less. Institutions in any of the three undercapitalized categories would be prohibited from declaring dividends or making capital distributions. The FDIC regulations also establish procedures for “downgrading” an institution to a lower capital category based on supervisory factors other than capital.
 
To continue to conduct its business as currently conducted, United and the Bank will need to maintain capital well above the minimum levels. As of December 31, 2008 and 2007, the most recent notifications from the FDIC categorize the Bank as “well-capitalized” under current regulations.
 
Troubled Asset Relief Program. On October 3, 2008, the Emergency Economic Stabilization Act of 2008 (“EESA”) was enacted establishing the Troubled Asset Relief Program (“TARP”). On October 14, 2008, Treasury announced its intention to inject capital into U.S. financial institutions under the TARP Capital Purchase Program (“CPP”) and since has injected capital into many financial institutions, including United. On December 5, 2008, United entered into the Purchase Agreement with Treasury under the CPP pursuant to which United sold 180,000 shares of Series B Preferred Stock and the Warrant for an aggregate purchase price of $180 million in cash. In the Purchase Agreement, United is subject to restrictions on its ability to pay dividends on its common stock and make certain repurchases of equity securities, including its common stock, without Treasury’s consent. In addition, United agreed that, until such time as Treasury ceases to own any securities of United acquired pursuant to the Purchase Agreement, United will take all necessary actions to ensure that its benefit plans with respect to its senior executive officers comply with Section 111(b) of EESA as implemented by any guidance or regulation under the EESA and has agreed to not adopt any benefit plans with respect to, or which covers, its senior executive officers that do not comply with the EESA, and the applicable executives have consented to the foregoing. Finally, the Purchase Agreement provides that Treasury may unilaterally amend any provision of the Purchase Agreement to the extent required to comply with any changes in applicable federal law.
 
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The Special Inspector General for the Troubled Asset Relief Program (“SIGTARP”), was established pursuant to Section 121 of EESA, and has the duty, among other things, to conduct, supervise, and coordinate audits and investigations of the purchase, management and sale of assets by the Treasury under TARP and the CPP, including the shares of non-voting preferred shares purchased from United.
 
American Recovery and Reinvestment Act of 2009. On February 17, 2009, the American Recovery and Reinvestment Act of 2009 (“ARRA”) was enacted. The ARRA, commonly known as the economic stimulus or economic recovery package, includes a wide variety of programs intended to stimulate the economy and provide for extensive infrastructure, energy, health, and education needs. In addition, ARRA imposes certain new executive compensation and corporate expenditure limits on all current and future TARP recipients, including United, until the institution has repaid Treasury, which is now permitted under ARRA without penalty and without the need to raise new capital, subject to Treasury’s consultation with the recipient’s appropriate regulatory agency. The executive compensation standards are more stringent than those currently in effect under the CPP or those previously proposed by Treasury, but it is not yet clear how these executive compensation standards will relate to the similar standards announced by Treasury in its guidelines on February 4, 2009, or whether the standards will be considered effective immediately or only after implementing regulations are issued by Treasury. The new standards include (but are not limited to) (i) prohibitions on bonuses, retention awards and other incentive compensation, other than restricted stock grants which do not fully vest during the TARP period up to one-third of an employee’s total annual compensation, (ii) prohibitions on golden parachute payments for departure from a company, (iii) an expanded clawback of bonuses, retention awards, and incentive compensation if payment is based on materially inaccurate statements of earnings, revenues, gains or other criteria, (iv) prohibitions on compensation plans that encourage manipulation of reported earnings, (v) retroactive review of bonuses, retention awards and other compensation previously provided by TARP recipients if found by Treasury to be inconsistent with the purposes of TARP or otherwise contrary to public interest, (vi) required establishment of a company-wide policy regarding “excessive or luxury expenditures”, and (vii) inclusion in a participant’s proxy statements for annual shareholder meetings of a nonbinding “say on pay” shareholder vote on the compensation of executives.
 
Temporary Liquidity Guarantee Program. On November 21, 2008, the Board of Directors of the FDIC adopted a final rule relating to the Temporary Liquidity Guarantee Program (“TLG Program”). The TLG Program was announced by the FDIC on October 14, 2008, preceded by the determination of systemic risk by Treasury, as an initiative to counter the system-wide crisis in the nation’s financial sector. Under the TLG Program the FDIC will (i) guarantee, through the earlier of maturity or June 30, 2012, certain newly issued senior unsecured debt issued by participating institutions and (ii) provide full FDIC deposit insurance coverage for non-interest bearing transaction deposit accounts, Negotiable Order of Withdrawal accounts paying less than 0.5% interest per annum and Interest on Lawyers Trust Accounts held at participating FDIC-insured institutions through December 31, 2009. Coverage under the TLG Program was available for the first 30 days without charge. The fee assessment for coverage of senior unsecured debt ranges from 50 basis points to 100 basis points per annum, depending on the initial maturity of the debt. The fee assessment for deposit insurance coverage is 10 basis points per quarter on amounts in covered accounts exceeding $250,000. United elected to participate in both guarantee programs.
 
Commercial Real Estate. In December 2006, the federal banking agencies, including the FDIC, issued a final guidance on concentrations in commercial real estate lending, noting that recent increases in banks’ commercial real estate concentrations could create safety and soundness concerns in the event of a significant economic downturn. The guidance mandates certain minimal risk management practices and categorizes banks with defined levels of such concentrations as banks requiring elevated examiner scrutiny. The Bank has concentrations in commercial real estate loans in excess of those defined levels. Although management believes that United’s credit processes and procedures meet the risk management standards dictated by this guidance, regulatory outcomes could effectively limit increases in the real estate concentrations in the Bank’s loan portfolio and require additional credit administration and management costs associated with those portfolios.
 
Loans. Inter-agency guidelines adopted by federal bank regulators mandate that financial institutions establish real estate lending policies with maximum allowable real estate loan-to-value limits, subject to an allowable amount of non-conforming loans as a percentage of capital. The Bank adopted the federal guidelines in 2001.
 
Transactions with Affiliates. Under federal law, all transactions between and among a state nonmember bank and its affiliates, which include holding companies, are subject to Sections 23A and 23B of the Federal Reserve Act and Regulation W promulgated thereunder. Generally, these requirements limit these transactions to a percentage of the bank’s capital and require all of them to be on terms at least as favorable to the bank as transactions with non-affiliates. In addition, a bank may not lend to any affiliate engaged in non-banking activities not permissible for a bank holding company or acquire shares of any affiliate that is not a subsidiary. The FDIC is authorized to impose additional restrictions on transactions with affiliates if necessary to protect the safety and soundness of a bank. The regulations also set forth various reporting requirements relating to transactions with affiliates.
 
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Financial Privacy. In accordance with the GLB Act, federal banking regulators adopted rules that limit the ability of banks and other financial institutions to disclose non-public information about consumers to nonaffiliated third parties. These limitations require disclosure of privacy policies to consumers and, in some circumstances, allow consumers to prevent disclosure of certain personal information to a nonaffiliated third party. The privacy provisions of the GLB Act affect how consumer information is transmitted through diversified financial companies and conveyed to outside vendors.
 
Anti-Money Laundering Initiatives and the USA Patriot Act. A major focus of governmental policy on financial institutions in recent years has been aimed at combating terrorist financing. This has generally been accomplished by amending existing anti-money laundering laws and regulations. The USA Patriot Act of 2001 (the “USA Patriot Act”) has imposed significant new compliance and due diligence obligations, creating new crimes and penalties. The United States Treasury Department has issued a number of implementing regulations which apply to various requirements of the USA Patriot Act to United and the Bank. These regulations impose obligations on financial institutions to maintain appropriate policies, procedures and controls to detect, prevent and report money laundering and terrorist financing and to verify the identity of their customers. Failure of a financial institution to maintain and implement adequate programs to combat terrorist financing, or to comply with all of the relevant laws or regulations, could have serious legal and reputational consequences for the institution.
 
Future Legislation. Various legislation affecting financial institutions and the financial industry is from time to time introduced in Congress. Such legislation may change banking statutes and the operating environment of United and its subsidiaries in substantial and unpredictable ways, and could increase or decrease the cost of doing business, limit or expand permissible activities or affect the competitive balance depending upon whether any of this potential legislation will be enacted, and if enacted, the effect that it or any implementing regulations, would have on the financial condition or results of operations of United or any of its subsidiaries. With the recent enactments of EESA and ARRA, the nature and extent of future legislative and regulatory changes affecting financial institutions is very unpredictable at this time.
 
Executive Officers of United
 
Senior executives of United are elected by the Board of Directors annually and serve at the pleasure of the Board of Directors.
 
The senior executive officers of United, and their ages, positions with United, past five year employment history and terms of office as of February 1, 2009, are as follows:
 
Name (age)
 
Position with United
 
Officer of United Since
         
Jimmy C. Tallent (56)
 
President, Chief Executive Officer and Director
 
1988
         
Guy W. Freeman (72)
 
Executive Vice President, Chief Operating Officer and Director
 
1995
         
Rex S. Schuette (59)
 
Executive Vice President and Chief Financial Officer
 
2001
         
David Shearrow (49)
 
Executive Vice President and Chief Risk Officer since April 2007; prior to joining United, he served as Executive Vice President and Senior Credit Officer of SunTrust Banks
 
2007
         
Craig Metz (53)
 
Executive Vice President of Marketing
 
2002
         
Bill M. Gilbert (56)
 
Senior Vice President of Retail Banking
 
2003
         
Glenn S. White (57)
 
President of the Atlanta Region since 2008; previously, he was the President of United Community Bank - Gwinnett since 2007; prior to joining United, he served as Chief Executive Officer of Gwinnett Commercial Group, Inc.
 
2008
 
None of the above officers are related and there are no arrangements or understandings between them and any other person pursuant to which any of them was elected as an officer, other than arrangements or understandings with directors or officers of United acting solely in their capacities as such.
 
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ITEM 1A.
RISK FACTORS.
 
An investment in United’s common stock involves risk. Investors should carefully consider the risks described below and all other information contained in this Annual Report on Form 10-K and the documents incorporated by reference before deciding to purchase common stock. It is possible that risks and uncertainties not listed below may arise or become material in the future and affect United’s business.
 
Our business may be adversely affected by conditions in the financial markets and economic conditions generally and there can be no assurance that recent efforts to address difficult market and economic conditions will be effective.
 
Since mid-2007, and particularly during the second half of 2008, the financial markets and economic conditions generally were materially and adversely affected by significant declines in the values of nearly all asset classes and by a serious lack of liquidity. This was initially triggered by declines in home prices and the values of subprime mortgages, but spread to all residential construction, particularly in metro Atlanta, and residential mortgages as property prices declined rapidly and affected nearly all asset classes. The effect of the market and economic downturn also spread to other areas of the credit markets and in the availability of liquidity. The magnitude of these declines led to a crisis of confidence in the financial sector as a result of concerns about the capital base and viability of certain financial institutions. During this period, interbank lending and commercial paper borrowing fell sharply, precipitating a credit freeze for both institutional and individual borrowers. Unemployment has also increased significantly.
 
The recently enacted Emergency Economic Stabilization Act of 2008 and American Recovery and Reinvestment Act of 2009 were signed into law in response to the financial crisis affecting the banking system, financial markets and economic conditions generally. Pursuant to the EESA, Treasury has the authority under the Troubled Asset Relief Program to purchase up to $700 billion of mortgages, mortgage-backed securities and certain other financial instruments from financial institutions for the purpose of stabilizing and providing liquidity to the U.S. financial markets. Treasury announced the Capital Purchase Program under TARP pursuant to which it has purchased and will continue to purchase senior preferred stock in participating financial institutions. The ARRA includes a wide variety of programs intended to stimulate the economy and provide for extensive infrastructure, energy, health, and education needs. In addition, ARRA imposes certain new executive compensation and corporate expenditure limits on all current and future TARP recipients until the institution has repaid Treasury, which is now permitted under ARRA without penalty and without the need to raise new capital, subject to Treasury’s consultation with the recipient’s appropriate regulatory agency.
 
The EESA followed, and has been followed by, numerous actions by the U.S. Congress, Federal Reserve Board, Treasury, the FDIC, the SEC and others to address the current crisis, including most recently the ARRA. These measures include homeowner relief that encourages loan restructuring and modification; the establishment of significant liquidity and credit facilities for financial institutions and investment banks; the lowering of the federal funds rate; emergency action against short selling practices; a temporary guaranty program for money market funds; the establishment of a commercial paper funding facility to provide back-stop liquidity to commercial paper issuers; and coordinated international efforts to address illiquidity and other weaknesses in the banking sector. There can be no assurance, however, as to the actual impact that EESA, including TARP and the CPP, the ARRA, and the other initiatives described above will have on the banking system and financial markets or on us. The failure of these programs to help stabilize the banking system and financial markets and a continuation or worsening of current economic conditions could materially and adversely affect our business, financial condition, results of operations, access to credit or the trading price of our common stock.
 
United’s ability to raise capital could be limited and could affect its liquidity and could be dilutive to existing shareholders.
 
Current conditions in the capital markets are such that traditional sources of capital may not be available to United on reasonable terms if it needed to raise capital. In such case, there is no guarantee that United will be able to borrow funds or successfully raise additional capital at all or on terms that are favorable or otherwise not dilutive to existing shareholders.
 
Liquidity is essential to our businesses and we rely on external sources to finance a significant portion of our operations.
 
Liquidity is essential to our businesses. Our liquidity could be substantially affected in a negative fashion by an inability to raise funding in the long-term or short-term debt capital markets or the equity capital markets or an inability to access the secured lending markets. Factors that we cannot control, such as disruption of the financial markets or negative views about the financial services industry generally, could impair our ability to raise funding. In addition, our ability to raise funding could be impaired if lenders develop a negative perception of our long-term or short-term financial prospects. Such negative perceptions could be developed if we are downgraded or put on (or remain on) negative watch by the rating agencies, we suffer a decline in the level of our business activity or regulatory authorities take significant action against us, among other reasons. If we are unable to raise funding using the methods described above, we would likely need to finance or liquidate unencumbered assets to meet maturing liabilities. We may be unable to sell some of our assets, or we may have to sell assets at a discount from market value, either of which could adversely affect our results of operations and financial condition.
 
Future dividend payments and common stock repurchases are restricted by the terms of Treasury’s equity investment in us.
 
Under the terms of the CPP, until the earlier of December 5, 2011 or the date on which the Series B Preferred Stock has been redeemed in whole or Treasury has transferred all of the Series B Preferred Stock to third parties, we are prohibited from increasing dividends on our common stock from the last quarterly cash dividend per share ($.09) declared on the common stock prior to December 5, 2008, as adjusted for subsequent stock dividends and other similar actions, and from making certain repurchases of equity securities, including our common stock, without Treasury’s consent. Furthermore, as long as the Series B Preferred Stock is outstanding, dividend payments and repurchases or redemptions relating to certain equity securities, including our common stock, are prohibited until all accrued and unpaid dividends are paid on such preferred stock, subject to certain limited exceptions.
 
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The limitations on executive compensation imposed through our participation in the Capital Purchase Program may restrict our ability to attract, retain and motivate key employees, which could adversely affect our operations.
 
As part of our participation in the CPP, we agreed to be bound by certain executive compensation restrictions, including limitations on severance payments and the clawback of any bonus and incentive compensation that were based on materially inaccurate financial statements or any other materially inaccurate performance metric criteria. Subsequent to the issuance of the preferred stock, the ARRA was enacted, which provides more stringent limitations on severance pay and the payment of bonuses. To the extent that any of these compensation restrictions do not permit us to provide a comprehensive compensation package to our key employees that is competitive in our market area, we have difficulty in attracting, retaining and motivating our key employees, which could have an adverse effect on our results of operations.
 
The terms governing the issuance of the preferred stock to Treasury may be changed, the effect of which may have an adverse effect on our operations.
 
The terms of the Purchase Agreement in which we entered into with Treasury provides that Treasury may unilaterally amend any provision of the Purchase Agreement to the extent required to comply with any changes in applicable federal law that may occur in the future. We have no assurances that changes in the terms of the transaction will not occur in the future. Such changes may place restrictions on our business or results of operation, which may adversely affect the market price of our common stock.
 
Past operating results may not be indicative of future operating results.
 
United may not be able to sustain its growth. Various factors, such as increased size, economic conditions, regulatory and legislative considerations, competition and the ability to find and retain people that can make United’s community-focused operating model successful, may impede its ability to expand its market presence. If United experiences a significant decrease in its growth rate, its results of operations and financial condition may be adversely affected.
 
United’s business is subject to the success of the local economies and real estate markets in which it operates.
 
United’s success significantly depends on the growth in population, income levels, loans and deposits and on the continued stability in real estate values in its markets. If the communities in which it operates do not grow or if prevailing economic conditions locally or nationally are unfavorable, United’s business may be adversely affected. Adverse economic conditions in United’s specific market areas, specifically decreases in real estate property values due to the nature of United’s loan portfolio, approximately 90% of which is secured by real estate, could reduce United’s growth rate, affect the ability of customers to repay their loans and generally affect United’s financial condition and results of operations. United is less able than a larger institution to spread the risks of unfavorable local economic conditions across a large number of more diverse economies.
 
United’s concentration of residential construction loans is subject to unique risks that could adversely affect earnings.
 
United’s residential construction loan portfolio was $1.5 billion at December 31, 2008, comprising 26% of total loans. Residential construction loans are often riskier than home equity loans or residential mortgage loans to individuals. In the event of a general economic slowdown like the one we are currently experiencing, these loans represent higher risk due to slower sales and reduced cash flow that could affect the borrowers’ ability to repay on a timely basis.
 
United may face risks with respect to future expansion and acquisitions.
 
United regularly engages in de novo branch expansion. Also, when a business opportunity becomes available in the right market with the right management team, United may seek to acquire other financial institutions or parts of those institutions. These involve a number of risks, including:
 
the potential inaccuracy of the estimates and judgments used to evaluate credit, operations, management and market risks with respect to an acquired branch or institution, a new branch office or a new market;
the time and costs of evaluating new markets, hiring or retaining experienced local management and opening new offices and the time lags between these activities and the generation of sufficient assets and deposits to support the costs of the expansion;
the incurrence and possible impairment of goodwill associated with an acquisition and possible adverse effects on results of operations; and
the risk of loss of key employees and customers of an acquired branch or institution.
 
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Changes in prevailing interest rates may negatively affect net income and the value of United’s assets.
 
Changes in prevailing interest rates may negatively affect the level of net interest revenue, the primary component of net income. In a period of changing interest rates, interest expense may increase at different rates than the interest earned on assets. Accordingly, changes in interest rates could decrease net interest revenue. At December 31, 2008, our simulation model indicated that a 200 basis point increase in rates over the next twelve months would cause an approximate 3.8% increase in net interest revenue and a 25 basis point decrease in rates over the next twelve months would cause an approximate 2.2% decrease in net interest revenue. United used 25 basis points in the down rate scenario since the targeted Federal Funds rate was at 25 basis points and therefore short-term rates could not move down more than 25 basis points.
 
Changes in the level of interest rates may also negatively affect the value of United’s assets and its ability to realize gains or avoid losses from the sale of those assets, all of which ultimately affect earnings. In addition, an increase in interest rates may decrease the demand for loans.
 
If United’s allowance for loan losses is not sufficient to cover actual loan losses, earnings would decrease.
 
United’s loan customers may not repay their loans according to their terms and the collateral securing the payment of these loans may be insufficient to assure repayment. United may experience significant loan losses which would have a material adverse effect on operating results. Management makes various assumptions and judgments about the collectibility of the loan portfolio, including the creditworthiness of borrowers and the value of the real estate and other assets serving as collateral for the repayment of loans. United maintains an allowance for loan losses in an attempt to cover any loan losses inherent in the portfolio. In determining the size of the allowance, management relies on an analysis of the loan portfolio based on historical loss experience, volume and types of loans, trends in classification, volume and real estate values, trends in delinquencies and non-accruals, national and local economic conditions and other pertinent information. If those assumptions are incorrect, the allowance may not be sufficient to cover future loan losses and adjustments may be necessary to allow for different economic conditions or adverse developments in the loan portfolio.
 
United may be subject to losses due to fraudulent and negligent conduct of our loan customers, third party service providers and employees.
 
When we make loans to individuals or entities, we rely upon information supplied by borrowers and other third parties, including information contained in the applicant’s loan application, property appraisal reports, title information and the borrower’s net worth, liquidity and cash flow information. While we attempt to verify information provided through available sources, we cannot be certain all such information is correct or complete. Our reliance on incorrect or incomplete information could have a material adverse effect on our profitability or financial condition.
 
Competition from financial institutions and other financial service providers may adversely affect United’s profitability.
 
The banking business is highly competitive and United experiences competition in each of its markets from many other financial institutions. United competes with commercial banks, credit unions, savings and loan associations, mortgage banking firms, securities brokerage firms, insurance companies, money market funds and other mutual funds, as well as community, super-regional, national and international financial institutions that operate offices in its market areas and elsewhere. United competes with these institutions both in attracting deposits and in making loans. Many of United’s competitors are well-established, larger financial institutions that are able to operate profitably with a narrower net interest margin and have a more diverse revenue base. United may face a competitive disadvantage as a result of its smaller size, more limited geographic diversification and inability to spread costs across broader markets. Although United competes by concentrating marketing efforts in primary markets with local advertisements, personal contacts and greater flexibility and responsiveness in working with local customers, there can be no assurance that this strategy will continue to be successful.
 
ITEM 1B.
UNRESOLVED STAFF COMMENTS.
 
There are no unresolved comments from the Securities and Exchange Commission staff regarding United’s periodic or current reports under the Exchange Act.
 
ITEM 2.
PROPERTIES.
 
The executive offices of United are located at 63 Highway 515, Blairsville, Georgia.   United owns this property.   The Bank conducts business from facilities primarily owned by the Bank, all of which are in a good state of repair and appropriately designed for use as banking facilities. The Bank, Brintech and UCIS provide services or perform operational functions at 124 locations, of which 103 are owned and 21 are leased under operating leases. Note 7 to United’s Consolidated Financial Statements includes additional information regarding amounts invested in premises and equipment.
 
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ITEM 3.
LEGAL PROCEEDINGS.
 
In the ordinary course of operations, United and the Bank are defendants in various legal proceedings incidental to its business. In the opinion of management, there is no pending or threatened proceeding in which an adverse decision will result in a material adverse change in the consolidated financial condition or results of operations of United. No material proceedings terminated in the fourth quarter of 2008.
 
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
 
No matters were submitted to a vote of the security holders of United during the fourth quarter of 2008.
 
PART II
 
ITEM 5.
MARKET FOR UNITED’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
 
Stock. United’s common stock trades on the Nasdaq Global Select Market under the symbol “UCBI”. The closing price for the period ended December 31, 2008 was $13.58. Below is a schedule of high, low and closing stock prices and average daily volume for all quarters in 2008 and 2007.
 
Stock Price Information
 
    2008     2007  
   
High
   
Low
   
Close
   
Avg Daily
Volume
   
High
   
Low
   
Close
   
Avg Daily
Volume
 
                                                                 
First quarter
  $ 20.80     $ 13.38     $ 16.98       441,659     $ 34.98     $ 30.81     $ 32.79       232,269  
Second quarter
    18.51       8.51       8.53       464,566       33.03       25.80       25.89       266,682  
Third quarter
    19.05       7.58       13.26       359,971       27.50       22.16       24.52       346,596  
Fourth quarter
    15.82       9.25       13.58       319,534       25.73       15.13       15.80       421,910  
 
At January 31, 2009, there were approximately 6,538 record shareholders and 15,100 beneficial shareholders of United’s common stock.
 
Dividends. United declared cash dividends of $.18, $.36 and $.32 per common share in 2008, 2007 and 2006, respectively. Also, United declared stock dividends of 1 new share for every 130 shares owned in the third and fourth quarters of 2008. Federal and state laws and regulations impose restrictions on the ability of United and the Bank to pay dividends. In addition, pursuant to the terms of the Purchase Agreement entered into with Treasury under the CPP, the ability of United to declare or pay dividends or distributions its common stock is subject to restrictions, including a restriction against increasing dividends from the last quarterly cash dividend per share ($.09) declared on the common stock prior to December 5, 2008, as adjusted for subsequent stock dividends and other similar actions. In addition, as long as Series B Preferred Stock is outstanding, dividend payments are prohibited until all accrued and unpaid dividends are paid on such preferred stock, subject to certain limited exceptions. This restriction will terminate on December 5, 2011, or earlier, if the Series B Preferred Stock has been redeemed in whole or Treasury has transferred all of the Series B Preferred Stock to third parties. Additional information regarding this item is included in Note 16 to the Consolidated Financial Statements, under the heading of “Supervision and Regulation” in Part I of this report and in “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Capital Resources and Dividends.”
 
Share Repurchases. United had in place a board approved repurchase authorization for up to 3,000,000 shares of United’s common stock, which expired in 2008. During, 2007, 2,000,000 shares had been purchased under the authorization. No additional shares were purchased in 2008.
 
United’s Amended and Restated 2000 Key Employee Stock Option Plan allows option holders to exercise stock options by delivering previously acquired shares having a fair market value equal to the exercise price provided that the shares delivered must have been held by the option holder for at least six months. During 2008, 2007 and 2006, optionees delivered 33,759, 1,755 and 17,576 shares, respectively, to exercise stock options.
 
Sales of Unregistered Securities. On October 31, 2008, United formed United Community Statutory Trust II and United Community Statutory Trust III for the purpose of issuing Trust Preferred Securities in private placement offerings. United Community Statutory Trust II issued $11,767,000 of 9% fixed rate Trust Preferred Securities and United Community Statutory Trust II issued $1.2 million of variable rate Trust Preferred Securities that pay interest at a rate of prime plus 3%. The Trust Preferred Securities issued by both trusts mature on October 31, 2038 and are callable at par anytime after October 31, 2013. The Trust Preferred Securities were issued with warrants that make them convertible into United Community Banks, Inc.’s common stock at the conversion price of $20 per share. The warrants may be exercised anytime prior to October 31, 2013, on which date the unexercised warrants expire. The Trust Preferred Securities qualify as Tier I Capital under applicable Risk-Based Capital guidelines.
 
15

 
On December 5, 2008, United participated in Treasury’s CPP by issuing 180,000 shares of Series B Preferred Stock and the Warrant to purchase 2,149,106 shares of United Community Banks, Inc.’s common stock at a price of $12.56 per share for an aggregate purchase price of $180 million. The Series B Preferred Stock qualifies as Tier I capital under risk-based capital guidelines and will pay cumulative dividends at a rate of 5% per annum for the first five years and 9% per annum thereafter. The Series B Preferred Stock may be redeemed after December 5, 2011 at the stated amount of $1,000 per share plus any accrued and unpaid dividends. Prior to December 5, 2011, the Series B Preferred Stock may be redeemed only with proceeds from the sale of qualifying equity securities. The Series B Preferred Stock is non-voting except for class voting rights on matters that would adversely affect the rights of the holders of the Series B Preferred Stock.
 
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 five-year period commencing December 31, 2003 and ending on December 31, 2008.
 
FIVE YEAR CUMULATIVE TOTAL RETURNS*
COMPARISON OF UNITED COMMUNITY BANKS, INC.,
NASDAQ STOCK MARKET (U.S.) INDEX
AND NASDAQ BANK INDEX
As of December 31,
 
(LINE GRAPH)
 
* Assumes $100 invested on December 31, 2003 in United’s common stock and above noted indexes. Total return includes reinvestment of dividends and values of stock and indexes as of December 31 of each year.
 
   
Cumulative Total Return
 
    2003     2004     2005     2006     2007     2008  
United Community Banks, Inc.
  $ 100     $ 124     $ 124     $ 152     $ 75     $ 66  
Nasdaq Stock Market (U.S.) Index
  100       109       111       122       132       64  
Nasdaq Bank Index
    100       114       112       125       99       73  
 
16


   
ITEM 6. SELECTED FINANCIAL DATA.
 
UNITED COMMUNITY BANKS, INC.
 
Selected Financial Information
 
For the Years Ended December 31,
 
(in thousands, except per share data;
taxable equivalent)
 
2008
   
2007
   
2006
   
2005
   
2004
   
2003
 
INCOME SUMMARY
                                   
Net interest revenue
  $ 238,704     $ 274,483     $ 237,880     $ 196,799     $ 152,998     $ 128,089  
Provision for loan losses
    184,000       37,600       14,600       12,100       7,600       6,300  
Fee revenue
    53,141       62,651       49,095       46,148       39,539       38,184  
Total revenue
    107,845       299,534       272,375       230,847       184,937       159,973  
Operating expenses (1)
    206,699       190,061       162,070       140,808       110,974       97,251  
        (Loss) income before taxes
    (98,854 )     109,473       110,305       90,039       73,963       62,722  
Income taxes
    (35,404 )     40,482       41,490       33,297       26,807       23,247  
Net operating (loss) income
    (63,450 )     68,991       68,815       56,742       47,156       39,475  
Fraud loss provision, net of tax
          10,998                          
Merger-related charges, net of tax
                            565       1,357  
Net (loss) income
    (63,450 )     57,993       68,815       56,742       46,591       38,118  
Preferred stock dividends
    724       18       19       23       9       66  
Net (loss) income available to common shareholders
  $ (64,174 )   $ 57,975     $ 68,796     $ 56,719     $ 46,582     $ 38,052  
OPERATING PERFORMANCE (1)
                                               
Earnings (loss) per common share:
                                               
Basic
  $ (1.35 )   $ 1.50     $ 1.70     $ 1.47     $ 1.31     $ 1.15  
Diluted
    (1.35 )     1.48       1.66       1.43       1.27       1.12  
Return on tangible equity (2)(3)
    (12.37 )%     14.23 %     17.52 %     18.99 %     19.74 %     19.24 %
Return on assets
    (.76 )     .89       1.09       1.04       1.07       1.06  
Efficiency ratio
    70.49       56.53       56.35       57.77       57.65       58.39  
                                                 
GAAP PERFORMANCE
                                               
Per common share:
                                               
Basic earnings (loss)
  $ (1.35 )   $ 1.26     $ 1.70     $ 1.47     $ 1.29     $ 1.11  
Diluted earnings (loss)
    (1.35 )     1.24       1.66       1.43       1.25       1.08  
Cash dividends declared (rounded)
    .18       .36       .32       .28       .24       .20  
Stock dividends declared
    .18                                
Book value
    16.95       17.73       14.37       11.80       10.39       8.47  
Tangible book value (3)
    10.39       10.94       10.57       8.94       7.34       6.52  
                                                 
Key performance ratios:
                                               
Return on equity (2)
    (7.82 )%     7.79 %     13.28 %     13.46 %     14.39 %     14.79 %
Return on assets
    (.76 )     .75       1.09       1.04       1.05       1.02  
Net interest margin
    3.18       3.88       4.05       3.85       3.71       3.68  
Equity to assets
    10.25       9.61       8.06       7.63       7.45       7.21  
Tangible equity to assets (3)
    6.69       6.63       6.32       5.64       5.78       6.02  
Tangible common equity to assets (3)
    6.59       6.63       6.32       5.64       5.78       6.03  
                                                 
ASSET QUALITY
                                               
Allowance for loan losses
  $ 122,271     $ 89,423     $ 66,566     $ 53,595     $ 47,196     $ 38,655  
Net charge-offs (1)
    151,152       21,834       5,524       5,701       3,617       4,097  
Non-performing loans (NPLs)
    190,723       28,219       12,458       11,997       8,031       6,627  
Foreclosed properties
    59,768       18,039       1,196       998       694       962  
Total non-performing assets (NPAs)
    250,491       46,258       13,654       12,995       8,725       7,589  
Allowance for loan losses to loans (1)
    2.14 %     1.51 %     1.24 %     1.22 %     1.26 %     1.28 %
Net charge-offs to average loans (1)
    2.57       .38       .12       .14       .11       .15  
NPAs to loans and foreclosed properties
    4.35       .78       .25       .30       .23       .25  
NPAs to total assets
    2.94       .56       .19       .22       .17       .19  
                                                 
AVERAGE BALANCES
                                               
Loans
  $ 5,890,889     $ 5,734,608     $ 4,800,981     $ 4,061,091     $ 3,322,916     $ 2,753,451  
Investment securities
    1,489,036       1,277,935       1,041,897       989,201       734,577       667,211  
Earning assets
    7,504,186       7,070,900       5,877,483       5,109,053       4,119,327       3,476,030  
Total assets
    8,299,330       7,730,530       6,287,148       5,472,200       4,416,835       3,721,284  
Deposits
    6,524,457       6,028,625       5,017,435       4,003,084       3,247,612       2,743,087  
Shareholders’ equity
    850,426       742,771       506,946       417,309       329,225       268,446  
Common shares - Basic
    47,369       45,948       40,413       38,477       36,071       34,132  
Common shares - Diluted
    47,369       46,593       41,575       39,721       37,273       35,252  
                                                 
AT YEAR END
                                               
Loans
  $ 5,704,861     $ 5,929,263     $ 5,376,538     $ 4,398,286     $ 3,734,905     $ 3,015,997  
Investment securities
    1,617,187       1,356,846       1,107,153       990,687       879,978       659,891  
Total assets
    8,520,765       8,207,302       7,101,249       5,865,756       5,087,702       4,068,834  
Deposits
    7,003,624       6,075,951       5,772,886       4,477,600       3,680,516       2,857,449  
Shareholders’ equity
    989,382       831,902       616,767       472,686       397,088       299,373  
Common shares outstanding
    48,009       46,903       42,891       40,020       38,168       35,289  
 
(1) Excludes pre-tax provision for fraud-related loan losses and related charge-offs of $18 million, or $.24 per diluted common share, recorded in 2007 and pre-tax merger-related charges totaling $.9 million, or $.02 per diluted common share, recorded in 2004 and $2.1 million, or $.04 per diluted common share, recorded in 2003. (2) Net income available to common stockholders, which excludes preferred stock dividends, divided by average realized common equity which excludes accumulated other comprehensive income (loss). (3) Excludes effect of acquisition related intangibles and associated amortization.
 
17


UNITED COMMUNITY BANKS, INC.
Selected Financial Information (continued)

   
2008
   
2007
 
(in thousands, except per share
data; taxable equivalent)
 
Fourth
Quarter
   
Third
Quarter
   
Second
Quarter
   
First
Quarter
   
Fourth
Quarter
   
Third
Quarter
   
Second
Quarter
   
First
Quarter
 
INCOME SUMMARY
                                               
Net interest revenue
  $ 51,873     $ 58,791     $ 61,753     $ 66,287     $ 69,730     $ 71,681     $ 67,967     $ 65,105  
Provision for loan losses (1)
    85,000       76,000       15,500       7,500       26,500       3,700       3,700       3,700  
Fee revenue
    10,718       13,121       15,105       14,197       16,100       15,615       16,554       14,382  
Total revenue
    (22,409 )     (4,088 )     61,358       72,984       59,330       83,596       80,821       75,787  
Operating expenses
    52,439       56,970       49,761       47,529       49,336       48,182       47,702       44,841  
        Income before taxes
    (74,848 )     (61,058 )     11,597       25,455       9,994       35,414       33,119       30,946  
Income taxes
    (28,101 )     (21,184 )     4,504       9,377       3,960       12,878       12,043       11,601  
Net operating (loss) income
    (46,747 )     (39,874 )     7,093       16,078       6,034       22,536       21,076       19,345  
Fraud loss provision, net of tax (1)
                            1,833             9,165        
  Net (loss) income
    (46,747 )     (39,874 )     7,093       16,078       4,201       22,536       11,911       19,345  
Preferred stock dividends
    712       4       4       4       4       4       5       5  
Net (loss) income available to common shareholders
  $ (47,459 )   $ (39,878 )   $ 7,089     $ 16,074     $ 4,197     $ 22,532     $ 11,906     $ 19,340  
                                                                 
OPERATING PERFORMANCE (1)
                                                               
Earnings (loss) per common share:
                                                               
Basic
  $ (.99 )   $ (.84 )   $ .15     $ .34     $ .13     $ .47     $ .47     $ .45  
Diluted
    (.99 )     (.84 )     .15       .34       .13       .46       .46       .44  
Return on tangible equity (2)(3)(4)
  NM %   NM %     5.86 %     13.16 %     5.06 %     17.54 %     17.52 %     17.18 %
Return on assets (4)
 
NM
   
NM
      .34       .78       .29       1.11       1.12       1.11  
GAAP PERFORMANCE MEASURES
                                                               
Per common share:
                                                               
Basic earnings (loss)
  $ (.99 )   $ (.84 )   $ .15     $ .34     $ .09     $ .47     $ .26     $ .45  
Diluted earnings (loss)
    (.99 )     (.84 )     .15       .34       .09       .46       .26       .44  
Cash dividends declared
                .09       .09       .09       .09       .09       .09  
Stock dividends declared
    .09       .09                                      
Book value
    16.95       17.12       17.75       18.50       17.73       17.53       16.98       14.83  
Tangible book value (3)
    10.39       10.48       11.03       11.76       10.94       10.82       10.44       11.06  
Key performance ratios:
                                                               
Return on equity (2)(4)
  NM %   NM %     3.41 %     7.85 %     2.01 %     10.66 %     7.05 %     12.47 %
Return on assets (4)
 
NM
   
NM
      .34       .78       .20       1.11       .64       1.11  
Net interest margin (4)
    2.70       3.17       3.32       3.55       3.73       3.89       3.94       3.99  
Efficiency ratio
    81.34       79.35       65.05       59.05       57.67       55.34       56.59       56.56  
Equity to assets
    10.08       10.28       10.33       10.30       10.20       10.32       8.94       8.80  
Tangible equity to assets (3)
    6.59       6.65       6.77       6.73       6.58       6.65       6.65       6.66  
Tangible common equity to assets (3)
  6.23       6.65       6.77       6.73       6.58       6.65       6.65       6.66  
ASSET QUALITY
                                                               
Allowance for loan losses
  $ 122,271     $ 111,299     $ 91,035     $ 89,848     $ 89,423     $ 90,935     $ 92,471     $ 68,804  
Net charge-offs (1)
    74,028       55,736       14,313       7,075       13,012       5,236       2,124       1,462  
Non-performing loans (NPLs)
    190,723       139,266       123,786       67,728       28,219       46,783       30,849       12,319  
Foreclosed properties
    59,768       38,438       28,378       22,136       18,039       16,554       12,752       1,971  
Total non-performing assets (NPAs)
    250,491       177,704       152,164       89,864       46,258       63,337       43,601       14,290  
Allowance for loan losses to loans (1)
2.14 %     1.91 %     1.53 %     1.51 %     1.51 %     1.53 %     1.54 %     1.27 %
Net charge-offs to average loans (1)(4)
5.09       3.77       .97       .48       .87       .35       .15       .11  
NPAs to loans and foreclosed properties
    4.35       3.03       2.55       1.50       .78       1.06       .73       .26  
NPAs to total assets
    2.94       2.20       1.84       1.07       .56       .77       .54       .20  
AVERAGE BALANCES
                                                               
Loans
  $ 5,784,139     $ 5,889,168     $ 5,933,143     $ 5,958,296     $ 5,940,230     $ 5,966,933     $ 5,619,950     $ 5,402,860  
Investment securities
    1,508,808       1,454,740       1,507,240       1,485,515       1,404,796       1,308,192       1,242,448       1,153,208  
Earning assets
    7,662,536       7,384,287       7,478,018       7,491,480       7,424,992       7,332,492       5,915,134       6,599,035  
Total assets
    8,449,097       8,146,880       8,295,748       8,305,621       8,210,120       8,083,739       7,519,392       7,092,710  
Deposits
    6,982,229       6,597,339       6,461,361       6,051,069       6,151,476       6,246,319       5,945,633       5,764,426  
Stockholders’ equity
    851,956       837,487       856,727       855,659       837,195       834,094       672,348       624,100  
Common Shares - Basic
    47,844       47,417       47,158       47,052       47,273       48,412       45,001       43,034  
Common Shares - Diluted
    47,844       47,417       47,249       47,272       47,652       48,977       45,761       43,912  
AT PERIOD END
                                                               
Loans
  $ 5,704,861     $ 5,829,937     $ 5,933,141     $ 5,967,839     $ 5,929,263     $ 5,952,749     $ 5,999,093     $ 5,402,198  
Investment securities
    1,617,187       1,400,827       1,430,588       1,508,402       1,356,846       1,296,826       1,213,659       1,150,424  
Total assets
    8,520,765       8,072,543       8,264,051       8,386,255       8,207,302       8,180,600       8,087,667       7,186,602  
Deposits
    7,003,624       6,689,335       6,696,456       6,175,769       6,075,951       6,154,308       6,361,269       5,841,687  
Stockholders’ equity
    989,382       816,880       837,890       871,452       831,902       833,761       828,731       638,456  
Common shares outstanding
    48,009       47,596       47,096       47,004       46,903       47,542       48,781       43,038  
 
(1) Excludes effect of special $15 million fraud related provision for loan losses recorded in the second quarter of 2007, an additional $3 million provision in the fourth quarter of 2007, and $18 million of related loan charge-offs recorded in the fourth quarter of 2007 which were all related to a failed real estate development and are considered non-recurring. (2) Net income available to common shareholders, which excludes preferred stock dividends, divided by average realized common equity which excludes accumulated other comprehensive income (loss). (3) Excludes effect of acquisition related intangibles and associated amortization. (4) Annualized. NM - Not meaningful.
 
18

 
   
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
 
Overview
 
The following discussion is intended to provide insight into the financial condition and results of operations of United and its subsidiaries and should be read in conjunction with the consolidated financial statements and accompanying notes.
 
Since mid-2007, and particularly during the second half of 2008, the financial markets and economic conditions generally were materially and adversely affected by significant declines in the values of nearly all asset classes and by a serious lack of liquidity. This was initially triggered by declines in home prices and the values of subprime mortgages, but spread to all residential construction, particularly in metro Atlanta, and residential mortgages as property prices declined rapidly and to nearly all asset classes. The effect of the market and economic downturn also spread to other areas of the credit markets and in the availability of liquidity. The magnitude of these declines led to a crisis of confidence in the financial sector as a result of concerns about the capital base and viability of certain financial institutions. During this period, interbank lending and commercial paper borrowing fell sharply, precipitating a credit freeze for both institutional and individual borrowers. Unemployment has also increased significantly. By the third quarter of 2008 conditions had deteriorated to the point of failure or near failure of several large financial institutions and the failure of Fannie Mae and Freddie Mac, two government sponsored enterprises or GSEs.
 
These events created serious concerns about the safety and soundness of the entire financial services industry. The recently enacted Emergency Economic Stabilization Act of 2008 was signed into law in response to the financial crisis affecting the banking system, financial markets and economic conditions generally. Pursuant to EESA, Treasury has the authority under the Troubled Asset Relief Program to purchase up to $700 billion of mortgages, mortgage-backed securities and certain other financial instruments from financial institutions for the purpose of stabilizing and providing liquidity to the U.S. financial markets. Treasury announced the Capital Purchase Program under TARP pursuant to which it has purchased and will continue to purchase senior preferred stock in participating financial institutions. The EESA followed, and has been followed by, numerous actions by the Board of Governors of the Federal Reserve System, the U.S. Congress, Treasury, the Federal Deposit Insurance Corporation, the SEC and others to address the current crisis, including most recently the American Recovery and Reinvestment Act of 2009.
 
United’s markets have been severely disrupted by the weak housing market which resulted in the buildup of surplus housing and finished lot inventory, particularly within the Atlanta MSA, which has put considerable stress on the residential construction portion of United’s loan portfolio. As a result, United reported its first ever net loss of $63.5 million in 2008, compared to net income of $58.0 million in 2007. The loss per common share was $1.35 for 2008, compared with diluted earnings per share of $1.24 for 2007. The decrease in earnings from 2007 reflected higher credit losses and net interest margin compression caused by the effect of declining interest rates on United’s asset-sensitive balance sheet along with increased competition for customer deposits, our efforts to strengthen liquidity, and the cost to carry a higher level of non-performing assets.
 
United’s approach to managing through the challenging economic cycle has been to aggressively deal with its credit problems and dispose of troubled assets quickly, taking losses as necessary. As a result, United’s provision for loan losses was $184 million in 2008 compared with $55.6 million in 2007. Net charge-offs for 2008 were $151.2 million in 2008 compared with $39.8 million in 2007. At the end of 2008, United’s allowance for loan losses of $122.3 million was 2.14% of loans compared with $89.4 million or 1.51% of loans at the end of 2007 and total non-performing assets were $250.5 million compared with $46.3 million at the end of 2007.
 
Taxable equivalent net interest revenue was $238.7 million for 2008, down $35.8 million from 2007. Most of the decrease in net interest revenue was the result of the 70 basis point decrease in the net interest margin described above which decreased from 3.88% in 2007 to 3.18% in 2008.
 
United also has taken action to ensure sufficient liquidity. A significant portion of the margin compression resulted from management’s efforts to strengthen liquidity in response to supply shortages in interbank borrowings and aggressive demand for customer deposits. United built liquidity through a second quarter CD promotion and by gathering brokered deposits and paying down overnight borrowings in the second half of 2008. Adding time deposits produced a stable source of funds and made investment securities collateral available to secure wholesale borrowings as a source of contingent liquidity. Early in the fourth quarter, the U.S. Government’s efforts to stabilize the financial services industry began to take effect, eliminating much of the liquidity concern as funds became increasingly available through interbank borrowings.
 
The weak economic conditions of 2008 were reflected in other components of United’s earnings. Total fee revenue of $53.1 million was down $9.5 million from 2007. Mortgage fees declined with lower demand for housing. Consulting fees were down as banks, searching for ways to control expenses, postponed or deferred consulting engagements. Poor conditions in the financial markets also led to a drop in brokerage fees. United responded to the drop in revenue by controlling expenses. Although 2008 operating expenses of $206.7 million were up $16.6 million from 2007, higher foreclosed property expense and FDIC insurance expense accounted for $14.1 million and $3.2 million, respectively, of the increase.
 
The composition of United’s balance sheet at December 31, 2008 reflects the changing economic conditions. At the end of 2008, United held $369 million in commercial paper as short-term investments as part of its emphasis on building liquidity. Loans at December 31, 2008 were $5.7 billion, down $224 million from the end of 2007, due to United’s efforts to reduce exposure to residential construction loans. At $1.5 billion, residential construction loans at December 31, 2008 represented 26% of outstanding loans, down from 31% at the end of 2007, a decrease of $350 million. Deposits were up $928 million to $7.0 billion due to efforts to build liquidity. At the end of the year, total equity capital was $989 million, up $157 million from December 31, 2008 reflecting the sale of $180 million in senior preferred securities to the U.S. Treasury under its Capital Purchase Program. The additional capital leaves all of United’s regulatory capital ratios significantly above well capitalized levels.
 
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Critical Accounting Policies
 
The accounting and reporting policies of United and its subsidiaries are in accordance with accounting principles generally accepted in the United States and conform to general practices within the banking industry. Application of these principles requires management to make estimates or judgments that affect the amounts reported in the financial statements and the accompanying notes. These estimates are based on information available as of the date of the financial statements; accordingly, as this information changes, the financial statements could reflect different estimates or judgments. Certain policies inherently have a greater reliance on the use of estimates, and as such have a greater possibility of producing results that could be materially different than originally reported.
 
Estimates or judgments are necessary when assets and liabilities are required to be recorded at fair value, when a decline in the value of an asset not carried on the financial statements at fair value warrants an impairment write-down or valuation reserve to be established, or when an asset or liability needs to be recorded contingent upon future events. Carrying assets and liabilities at fair value results in more financial statement volatility. The fair values and the information used to record the valuation adjustments for certain assets and liabilities are based either on quoted market prices or are provided by other third-party sources, when available. When third-party information is not available, valuation adjustments are estimated in good faith by management primarily through the use of internal cash flow modeling techniques.
 
The most significant accounting policies for United are presented in Note 1 to the consolidated financial statements. These policies, along with the disclosures presented in the other financial statement notes and in this financial review, provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined. Management views critical accounting policies to be those that are highly dependent on subjective or complex judgments, estimates and assumptions, and where changes in those estimates and assumptions could have a significant effect on the financial statements. Management considers the accounting policies related to the allowance for loan losses, intangible assets and income taxes to be critical accounting policies.
 
Allowance for Loan Losses
 
The allowance for loan losses represents management’s estimate of probable credit losses inherent in the loan portfolio. Estimating the amount of the allowance for loan losses requires significant judgment and the use of estimates related to the amount and timing of expected future cash flows on impaired loans, estimated losses on non-impaired loans based on historical loss experience, management’s evaluation of the current loan portfolio, and consideration of current economic trends and conditions. The loan portfolio also represents the largest asset type on the consolidated balance sheet. Loan losses are charged against the allowance, while recoveries of amounts previously charged off are credited to the allowance. A provision for loan losses is charged to operations based on management’s periodic evaluation of the factors previously mentioned, as well as other pertinent factors.
 
The allowance for loan losses consists of an allocated component and an unallocated component. The components of the allowance for loan losses represent an estimate pursuant to either Statement of Financial Accounting Standards (SFAS) No. 5, Accounting for Contingencies, or SFAS 114, Accounting by Creditors for Impairment of a Loan. The allocated component of the allowance for loan losses reflects expected losses resulting from analyses developed through specific credit allocations for individual loans and historical loss experience for each loan category. The specific credit allocations are based on regular analyses of all non –accrual loans over $500,000, which are considered impaired loans. These analyses involve judgment in estimating the amount of loss associated with specific loans, including estimating the amount and timing of future cash flows and collateral values. The historical loss element is determined using the average of actual losses incurred over the prior two years for each type of loan. The historical loss experience is adjusted for known changes in economic conditions and credit quality trends such as changes in the amount of past due and nonperforming loans. The resulting loss allocation factors are applied to the balance of each type of loan after removing the balance of impaired loans and other specifically allocated loans from each category. The loss allocation factors are updated annually. The allocated component of the allowance for loan losses also includes consideration of concentrations of credit and changes in portfolio mix.
 
The unallocated portion of the allowance reflects management’s estimate of probable inherent but undetectable losses within the portfolio due to uncertainties in economic conditions, delays in obtaining information, including unfavorable information about a borrower’s financial condition, the difficulty in identifying triggering events that correlate to subsequent loss rates, and risk factors that have not yet manifested themselves in loss allocation factors. In addition, the unallocated allowance includes a component that accounts for the inherent imprecision in loan loss estimation based on historical loss experience as a result of United’s growth through acquisitions, which have expanded the geographic footprint in which it operates, and changed its portfolio mix in recent years. Also, loss data representing a complete economic cycle is not available for all sectors. Uncertainty surrounding the strength and timing of economic cycles also affects estimates of loss. The historical losses used in developing loss allocation factors may not be representative of actual unrealized losses inherent in the portfolio.
 
There are many factors affecting the allowance for loan losses; some are quantitative while others require qualitative judgment. Although management believes its processes for determining the allowance adequately consider all the potential factors that could potentially result in credit losses, the process includes subjective elements and may be susceptible to significant change. To the extent actual outcomes differ from management estimates, additional provision for loan losses could be required that could adversely affect earnings or financial position in future periods.
 
Additional information on United’s loan portfolio and allowance for loan losses can be found in the sections of Management’s Discussion and Analysis titled “Asset Quality and Risk Elements” and “Nonperforming Assets” and in the sections of Part I, Item 1 titled “Lending Policy” and “Loan Review and Non-performing Assets”. Note 1 to the Consolidated Financial Statements includes additional information on United’s accounting policies related to the allowance for loan losses.
 
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Intangible Assets
 
United’s intangible assets consist principally of goodwill, representing the excess of cost over the fair value of net assets of acquired businesses, and core deposit intangibles. United’s goodwill is tested for impairment annually, or more often if events or circumstances indicate impairment may exist. Adverse changes in the economic environment, declining operations of acquired business units, or other factors could result in a decline of the implied fair value of goodwill. If the implied fair value is less than the carrying amount, a loss would be recognized to reduce the carrying amount of goodwill. These changes or factors, if they occur, could be material to United’s operating results for any particular reporting period; the potential effect cannot be reasonably estimated.
 
Other identifiable intangible assets, primarily core deposit intangibles, are reviewed at least annually for events or circumstances which could affect the recoverability of the intangible asset, such as loss of core deposits, increased competition or adverse changes in the economy. To the extent an “other identifiable intangible asset” is deemed unrecoverable, an impairment loss would be recorded to reduce the carrying amount of the intangible assets. These events or circumstances, if they occur, could be material to United’s operating results for any particular reporting period; the potential effect cannot be reasonably estimated.
 
Income Tax Accounting
 
Income tax liabilities or assets are established for the amount of taxes payable or refundable for the current year. Deferred tax liabilities and assets are also established for the future tax consequences of events that have been recognized in the financial statements or tax returns. A deferred tax liability or asset is recognized for the estimated future tax effects attributable to temporary differences and deductions that can be carried forward (used) in future years. The valuation of current and deferred tax liabilities and assets is considered critical as it requires management to make estimates based on provisions of the enacted tax laws. The assessment of tax assets and liabilities involves the use of estimates, assumptions, interpretations, and judgments concerning certain accounting pronouncements and federal and state tax codes. There can be no assurance that future events, such as court decisions or positions of federal and state taxing authorities, will not differ from management’s current assessment, the impact of which could be significant to the consolidated results of operations and reported earnings. United believes its tax assets and liabilities are properly recorded for the respective periods in the consolidated financial statements.
 
Mergers and Acquisitions
 
As part of its balanced growth strategy, United selectively engages in evaluation of strategic partnerships. Mergers and acquisitions present opportunities to enter new markets with an established presence and a capable management team already in place. United employs certain criteria to ensure that any merger or acquisition candidate meets strategic growth and earnings objectives that will build future franchise value for shareholders. Additionally, the criteria include ensuring that management of a potential partner shares United’s community banking philosophy of premium service quality and operates in attractive markets with excellent opportunities for further organic growth. As part of this strategy, United completed one bank merger in 2007 and one bank merger and two branch acquisitions in 2006. United will continue to evaluate potential transactions as they are presented.
 
On June 1, 2007, United completed the acquisition of Gwinnett Commercial Group, Inc. (“Gwinnett”), a bank holding company headquartered in Lawrenceville, Georgia, and its wholly-owned subsidiary First Bank of the South. On June 1, 2007, Gwinnett had assets totaling $809 million, including purchase accounting related intangibles. United exchanged 5,691,948 shares of its common stock valued at $191.4 million and $31.5 million in cash for all of the outstanding shares. First Bank of the South was merged into the Bank and operates as a separate community bank, United Community Bank – Gwinnett.
 
On December 1, 2006, United completed the acquisition of Southern Bancorp, Inc. (“Southern”), a bank holding company headquartered in Marietta, Georgia, and its wholly owned subsidiary Southern National Bank. On December 1, 2006, Southern had assets totaling $416 million, including purchase accounting related intangibles. United exchanged 2,180,118 shares of its common stock valued at $67.8 million for all of the outstanding shares. Southern National Bank was merged into the Bank. The Cobb County office is now included within United Community Bank – Metro, and the Cherokee County office operates as a separate community bank, United Community Bank – Cherokee.
 
On September 22, 2006, United completed the acquisition of two western North Carolina banking offices in Sylva and Bryson City. These offices were acquired from another financial institution, and had $8 million in loans and $38 million in deposits on the date they were acquired. United paid a premium for these branches of approximately 8% of deposits. Both of these offices are located in markets where United had a presence and were natural extensions of its existing franchise.
 
Operating Results
 
Much of the discussion contained in this report is presented on an operating basis. The presentation of operating earnings excludes an $18 million fraud loss provision recorded in 2007 and merger-related charges in 2003 and 2004 that are considered non-recurring. The presentation of operating earnings is therefore not consistent with generally accepted accounting principles (“GAAP”).
 
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In June 2007, the North Carolina Attorney General appointed a receiver to take custody of the assets of the developers of two failed real estate developments near Spruce Pine, North Carolina, citing possible fraud on the part of the developers. United had loans to 83 individual borrowers totaling $23.6 million secured by undeveloped lots in these developments. United was one of twelve banks that had loaned money to borrowers to finance the purchase of lots. The loans were made to appropriately qualified borrowers in accordance with our standard underwriting procedures. At the time the loans were made, we were not aware that most of the borrowers were simultaneously obtaining loans for additional lots at other banks and thereby taking on debt possibly beyond their repayment ability. We were also unaware that the borrowers’ down payments were not paid in cash as indicated on the closing documents, but were financed by the developer and that the developer agreed to service the borrowers’ debts. We also subsequently learned that the appraisals relied upon in the underwriting process had been inflated by using comparable sales that were not at arm’s length to persons related to the developer and that many of the lots were subdivided into parcels that are too small to be used for their intended purpose. United recognized a provision for fraud-related loan losses of $18 million in 2007 related to these loans and charged-off an equal amount of loans. The special provision reduced net income by $11 million and reduced diluted earnings per share by $.24 in 2007.
 
Merger-related charges in 2007 and 2006 related to the acquisitions of Gwinnett, Southern and the two North Carolina branches were insignificant and are therefore not shown separately. Pre-tax merger-related charges of $.9 million and $2.1 million were incurred in 2004 and 2003, respectively. These charges decreased net income by $.6 million and $1.4 million and diluted earnings per share by $.02 and $.04, respectively, for 2004 and 2003.
 
Management includes non-GAAP net operating income because it believes it is useful for evaluating United’s operations and performance over periods of time, as well as in managing and evaluating United’s business and in discussions about United’s operations and performance. Net operating income excludes the pre-tax effect of the special $18 million fraud-related provision for loan losses in 2007 and the merger-related charges in 2003 and 2004 because management believes that the circumstances leading to the provision and such charges were isolated, non-recurring events and do not reflect overall trends in United’s earnings and financial performance. Management believes this non-GAAP net operating income provides users of United’s financial information with a meaningful measure for assessing United’s financial results and credit trends, as well as comparison to financial results for prior periods.
 
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The following is a reconciliation of net operating income to GAAP net income. There were no charges incurred in 2008, 2006, or 2005 that were excluded from the presentation of operating earnings.
 
Table 1 - Operating Earnings to GAAP Earnings Reconciliation
 
Presented Only For Periods Where Non-GAAP Earnings Measures Are Shown
 
(in thousands, except per share data)
 
   
2007
                   
   
Fourth
   
Third
   
Second
   
Years Ended December 31,
 
   
Quarter
   
Quarter
   
Quarter
   
2007
   
2004
   
2003
 
Special provision for fraud related loan losses
  $ 3,000     $     $ 15,000     $ 18,000     $     $