SEC Filing | United Community Banks, Inc.

View:

Download DOC

Download PDF

Download XLS

UNITED COMMUNITY BANKS INC

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the Quarterly Period Ended June 30, 2004

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

For the Transition Period from ___________ to ___________

Commission file number 0-21656

UNITED COMMUNITY BANKS, INC.

(Exact name of registrant as specified in its charter)


Georgia		58-180-7304

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


63 Highway 515 Blairsville, Georgia		30512

Address of Principal Executive Offices		(Zip Code)

(706 ) 781-2265

(Telephone Number)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YES x NO o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).

YES x NO o

Common stock, par value $1 per share: 36,246,392 shares
outstanding as of June 30, 2004

INTRODUCTORY NOTE

All financial statements and per share amounts included in this Quarterly Report on Form 10-Q have been restated to reflect the three-for-two split of United’s common stock effective on April 28, 2004.

INDEX


PART I — Financial Information
Item 1. Financial Statements
Consolidated Statement of Income (unaudited) for the Three and Six Months Ended June 30, 2004 and 2003			2
Consolidated Balance Sheet at June 30, 2004 (unaudited), December 31, 2003 (audited) and June 30, 2003 (unaudited)			3
Consolidated Statement of Changes in Stockholders’ Equity (unaudited) for the Six Months Ended June 30, 2004 and 2003			4
Consolidated Statement of Cash Flows (unaudited) for the Six Months Ended June 30, 2004 and 2003			5
Notes to Consolidated Financial Statements			6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			9
Item 3. Quantitative and Qualitative Disclosures About Market Risk			26
Item 4. Controls and Procedures			26
PART II — Other Information
Item 1. Legal Proceedings			26
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities			26
Item 3. Defaults Upon Senior Securities			26
Item 4. Submission of Matters to a Vote of Security Holders			26
Item 5. Other Information			27
Item 6. Exhibits and Reports on Form 8-K			27
EX-31.1 SECTION 302 CERTIFICATION OF THE PRESIDENT/CEO
EX-31.2 SECTION 302 CERTIFICATION OF THE VICE PRESIDENT/CFO
EX-32 SECTION 906 CERTIFICATION OF THE PRES/CEO & VP/CFO

Part I – Financial Information

Item 1 – Financial Statements

UNITED COMMUNITY BANKS, INC.

Consolidated Statement of Income

For the Three and Six Months Ended June 30, 2004 and 2003


	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2004		2003			2004			2003
(in thousands, except per share data)	(Unaudited)		(Unaudited)			(Unaudited)			(Unaudited)
Interest revenue:
Loans, including fees	$	49,326	$	45,732		$	96,748		$	86,838
Federal funds sold and deposits in banks		66		99			177			167
Investment securities:
Taxable		6,339		6,099			12,408			12,065
Tax exempt		545		739			1,111			1,470

Total interest revenue		56,276		52,669			110,444			100,540

Interest expense:
Deposits:
Demand		1,920		2,163			3,714			4,391
Savings		93		115			176			205
Time		9,773		10,781			19,070			20,889
Federal funds purchased		499		146			770			233
Other borrowings		5,147		5,262			10,474			10,338

Total interest expense		17,432		18,467			34,204			36,056

Net interest revenue		38,844		34,202			76,240			64,484
Provision for loan losses		1,800		1,500			3,600			3,000

Net interest revenue after provision for loan losses		37,044		32,702			72,640			61,484

Fee revenue:
Service charges and fees		5,312		4,687			10,335			8,261
Mortgage loan and other related fees		1,585		3,335			2,865			5,647
Consulting fees		1,402		1,154			2,529			2,274
Brokerage fees		515		448			1,223			868
Securities losses, net		—		(3	)		(4	)		(3	)
Other		833		695			1,977			1,646

Total fee revenue		9,647		10,316			18,925			18,693

Total revenue		46,691		43,018			91,565			80,177

Operating expenses:
Salaries and employee benefits		18,662		17,571			36,788			32,675
Occupancy		2,273		2,194			4,555			4,296
Communications and equipment		2,677		2,104			5,224			4,004
Postage, printing and supplies		1,068		1,172			2,210			2,117
Professional fees		795		1,076			1,632			1,971
Advertising and public relations		991		967			1,755			1,673
Amortization of intangibles		395		328			766			413
Merger-related charges		464		668			464			1,508
Other		2,502		2,287			4,609			4,467

Total operating expenses		29,827		28,367			58,003			53,124

Income before income taxes		16,864		14,651			33,562			27,053
Income taxes		5,815		5,182			11,575			9,520

Net income	$	11,049	$	9,469		$	21,987		$	17,533

Net income available to common stockholders	$	11,048	$	9,441		$	21,970		$	17,488

Earnings per common share:
Basic	$	.31	$	.28		$	.62		$	.53
Diluted		.30		.27			.60			.51
Weighted average common shares outstanding (in thousands):
Basic		35,633		34,280			35,477			33,060
Diluted		36,827		35,387			36,655			34,166

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

UNITED COMMUNITY BANKS, INC.

Consolidated Balance Sheet
For the period ended


	June 30,			December 31,			June 30,
	2004			2003			2003
($ in thousands)	(Unaudited)			(Audited)			(Unaudited)
ASSETS
Cash and due from banks	$	147,793		$	91,819		$	94,542
Interest-bearing deposits in banks		39,186			68,374			41,632

Cash and cash equivalents		186,979			160,193			136,174
Securities available for sale		739,667			659,891			660,625
Mortgage loans held for sale		18,610			10,756			38,536
Loans, net of unearned income		3,338,309			3,015,997			2,861,481
Less — allowance for loan losses		42,558			38,655			37,353

Loans, net		3,295,751			2,977,342			2,824,128
Premises and equipment, net		92,497			87,439			82,356
Interest receivable		23,150			20,962			22,564
Intangible assets		87,657			72,182			65,835
Other assets		81,135			80,069			75,711

Total assets	$	4,525,446		$	4,068,834		$	3,905,929

LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Deposits:
Demand	$	479,439		$	412,309		$	397,043
Interest-bearing demand		935,489			846,022			790,518
Savings		160,550			140,619			134,223
Time		1,764,370			1,458,499			1,549,142

Total deposits		3,339,848			2,857,449			2,870,926
Federal funds purchased and repurchase agreements		181,439			102,849			51,990
Federal Home Loan Bank advances		535,343			635,420			585,725
Other borrowings		113,877			152,596			87,871
Accrued expenses and other liabilities		24,481			21,147			23,917

Total liabilities		4,194,988			3,769,461			3,620,429

Stockholders’ equity:
Preferred stock, $1 par value; $10 stated value; 10,000,000 shares authorized; 48,300, 55,900 and 65,500 shares issued and outstanding		483			559			655
Common stock, $1 par value; 100,000,000 shares authorized; 36,620,754, 35,706,573 and 35,706,573 shares issued		36,621			35,707			35,707
Capital surplus		116,129			95,951			97,002
Retained earnings		184,572			166,887			149,843
Treasury stock; 374,362, 417,525 and 739,581 shares, at cost		(6,393	)		(7,120	)		(11,394	)
Accumulated other comprehensive (loss) income		(954	)		7,389			13,687

Total stockholders’ equity		330,458			299,373			285,500

Total liabilities and stockholders’ equity	$	4,525,446		$	4,068,834		$	3,905,929

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

UNITED COMMUNITY BANKS, INC.

Consolidated Statement of Changes in Stockholders’ Equity

For the Six Months Ended June 30,


															Accumulated
															Other
	Preferred			Common		Capital			Retained			Treasury			Comprehensive
(in thousands)	Stock			Stock		Surplus			Earnings			Stock			Income (Loss)			Total
Balance, December 31, 2002	$	1,726		$	32,709	$	51,592		$	135,709		$	(11,432	)	$	11,275		$	221,579
Comprehensive income:
Net income										17,533									17,533
Other comprehensive income:
Unrealized holding gains on available for sale securities, net of deferred tax expense and reclassification adjustment																1,646			1,646
Unrealized gains on derivative financial instruments qualifying as cash flow hedges, net of deferred tax expense																766			766

Comprehensive income										17,533						2,412			19,945
Retirement of preferred stock (107,100 shares)		(1,071	)																(1,071	)
Cash dividends declared ($.10 per share)										(3,347	)								(3,347	)
Common stock issued for acquisitions (2,997,687 shares)					2,998		46,893												49,891
Exercise of stock options (350,210 shares)							(1,507	)					4,401						2,894
Tax benefit from options exercised							24												24
Acquisition of treasury stock (275,813 shares)													(4,363	)					(4,363	)
Dividends declared on preferred stock ($.30 per share)										(52	)								(52	)

Balance, June 30, 2003	$	655		$	35,707	$	97,002		$	149,843		$	(11,394	)	$	13,687		$	285,500

Balance, December 31, 2003	$	559		$	35,707	$	95,951		$	166,887		$	(7,120	)	$	7,389		$	299,373
Comprehensive income:
Net income										21,987									21,987
Other comprehensive loss:
Unrealized holding losses on available for sale securities, net of deferred tax benefit and reclassification adjustment																(6,057	)		(6,057	)
Unrealized losses on derivative financial instruments qualifying as cash flow hedges, net of deferred tax benefit																(2,286	)		(2,286	)

Comprehensive income										21,987						(8,343	)		13,644
Redemption of preferred stock (7,600 shares)		(76	)																(76	)
Cash dividends declared ($.12 per share)										(4,293	)								(4,293	)
Redemption of fractional shares (446 shares)																			—
Common stock issued for acquisitions (914,627 shares)					914		20,586												21,500
Exercise of stock options (43,163 shares)							(232	)					727						495
Amortization of restricted stock awards							16												16
Tax benefit from options exercised							(192	)											(192	)
Dividends declared on preferred stock ($.30 per share)										(9	)								(9	)

Balance, June 30, 2004	$	483		$	36,621	$	116,129		$	184,572		$	(6,393	)	$	(954	)	$	330,458

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

UNITED COMMUNITY BANKS, INC.

Consolidated Statement of Cash Flows

For the Six Months Ended June 30,


	2004			2003
(in thousands)	(Unaudited)			(Unaudited)
Operating activities:
Net income	$	21,987		$	17,533
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization and accretion		7,651			6,846
Provision for loan losses		3,600			3,000
Loss on sale of securities available for sale		4			3
Gain on sale of other assets		(125	)		—
Changes in assets and liabilities:
Other assets and accrued interest receivable		(8,072	)		(7,507	)
Accrued expenses and other liabilities		7,155			8,334
Mortgage loans held for sale		(7,854	)		(10,041	)

Net cash provided by operating activities		24,346			18,168

Investing activities (net of purchase adjustments):
Proceeds from sales of securities available for sale		55,939			28,327
Proceeds from maturities and calls of securities available for sale		141,286			116,274
Purchases of securities available for sale		(254,123	)		(204,424	)
Net increase in loans		(231,444	)		(171,403	)
Proceeds from sales of premises and equipment		1,216			65
Purchases of premises and equipment		(8,816	)		(6,297	)
Net cash received from acquisitions		5,439			28,828
Cash deposits for life insurance contracts		(104	)		(20	)
Proceeds from sale of other real estate		1,222			435

Net cash used by investing activities		(289,385	)		(208,215	)

Financing activities (net of purchase adjustments):
Net change in deposits		306,452			93,720
Net change in federal funds purchased and repurchase agreements		137,993			30,745
Proceeds from other borrowings		1,155			13,191
Repayments of other borrowings		(45,029	)		(2,031	)
Proceeds from FHLB advances		675,100			532,600
Repayments of FHLB advances		(780,350	)		(442,859	)
Proceeds from exercise of stock options		495			2,894
Retirement of preferred stock		(76	)		(1,071	)
Purchase of treasury stock		—			(4,363	)
Cash dividends on common stock		(3,906	)		(2,898	)
Cash dividends on preferred stock		(9	)		(52	)

Net cash provided by financing activities		291,825			219,876

Net change in cash and cash equivalents		26,786			29,829
Cash and cash equivalents at beginning of period		160,193			106,345

Cash and cash equivalents at end of period	$	186,979		$	136,174

Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest	$	33,411		$	34,897
Income taxes		13,098			8,395

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

United Community Banks, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

Note 1 — Accounting Policies

The accounting and financial reporting policies of United Community Banks, Inc. (“United”) and its subsidiaries conform to accounting principles generally accepted in the United States of America and general banking industry practices. The accompanying interim consolidated financial statements have not been audited. All material intercompany balances and transactions have been eliminated. A more detailed description of United’s accounting policies is included in the 2003 annual report filed on Form 10-K.

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

Note 2 — Stock Split

On April 28, 2004, United had a three-for-two split of its common stock. All financial statements and per share amounts included in the financial statements and accompanying notes have been restated to reflect the change in the number of shares outstanding as of the beginning of the earliest period presented.

Note 3 — Stock-Based Compensation

United’s stock-based compensation plans are accounted for based on the intrinsic value method set forth in Accounting Principles Board (APB) Opinion 25, Accounting for Stock Issued to Employees, and related interpretations. Compensation expense for employee stock options is not recognized if the exercise price of the option equals or exceeds the fair value of the stock on the date of grant. Compensation expense for restricted share awards is ratably recognized over the period of service, usually the restricted period, based on the fair value of the stock on the date of grant. Had compensation costs been determined based upon the fair value of the options at the grant dates consistent with the method of SFAS No. 123, United’s net income and earnings per common share would have reflected the pro forma amounts below (in thousands, except per share data):


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2004		2003		2004		2003
Net income available to common shareholders:
As reported	$	11,048	$	9,441	$	21,970	$	17,488
Pro forma		10,845		9,311		21,613		17,284
Basic earnings per common share:
As reported		.31		.28		.62		.53
Pro forma		.30		.27		.61		.52
Diluted earnings per common share:
As reported		.30		.27		.60		.51
Pro forma		.30		.26		.59		.51

The weighted average fair value of options granted in the second quarter of 2004 and 2003 was $5.94 and $3.43, respectively. The weighted average fair value of options granted in the first six months of 2004 and 2003 was $5.91 and $3.43, respectively. The fair value of each option granted was estimated on the date of grant using the Black-Scholes model with the following weighted average assumptions: dividend yield of 1%; a risk free interest rate ranging from 3.61% to 4.57% in 2004 and 3.48% in 2003; expected volatility of 15%; and, an expected life of 7 years. Since United’s stock trading history dates back only to March of 2002, when United listed on Nasdaq, the Nasdaq Bank Index was used to determine volatility. The fair value of each option granted prior to 2002 was estimated on the date of grant using the minimum value method with the following weighted average assumptions: dividend yield of 1%; a risk free interest rate of 5%; and, an expected life of 7 years. Compensation expense, included in the proforma results, was determined based on the fair value of the options at the time of grant, multiplied by the number of options granted, which was then amortized, net of tax, over the vesting period.

Note 4 — Earnings Per Share

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

(in thousands, except per share data)


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2004		2003		2004		2003
Basic earnings per share:
Weighted average shares outstanding		35,633		34,280		35,477		33,060
Net income available to common shareholders	$	11,048	$	9,441	$	21,970	$	17,488

Basic earnings per share	$	.31	$	.28	$	.62	$	.53

Diluted earnings per share:
Weighted average shares outstanding		35,633		34,280		35,477		33,060
Net effect of the assumed exercise of stock options based on the treasury stock method using average market price for the period		822		687		806		686
Effect of conversion of subordinated debt		372		420		372		420

Total weighted average shares and common stock equivalents outstanding		36,827		35,387		36,655		34,166

Net income available to common shareholders	$	11,048	$	9,441	$	21,970	$	17,488
Income effect of conversion of subordinated debt, net of tax		21		24		42		49

Net income, adjusted for effect of conversion of subordinated debt, net of tax	$	11,069	$	9,465	$	22,012	$	17,537

Diluted earnings per share	$	.30	$	.27	$	.60	$	.51

Note 5 — Mergers and Acquisitions

On June 1, 2004, United acquired all of the outstanding common shares of Fairbanco Holding Company, Inc., a thrift holding company headquartered in Fairburn, Georgia. Fairbanco’s results of operations are included in consolidated financial results from the acquisition date. Fairbanco Holding Company was the parent company of 1st Community Bank, with 5 banking offices serving Atlanta’s southern metropolitan area.

The aggregate purchase price was $23.6 million including $2.7 million of cash and 914,627 shares of United’s common stock valued at $20.9 million. The value of the common shares issued of $22.91 was determined based on the average market price of United’s common shares over the two-day period before and after the terms of the acquisition were agreed to and announced.

The following table summarizes the estimated fair values of assets acquired and liabilities assumed at the date of acquisition in 2004.


	Fairbanco
	Holding
	Company
	(June 1)
Assets:
Cash and cash equivalents	$	66,956
Investment securities		30,485
Loans, net		92,383
Premises and equipment		1,255
Core deposit intangible		2,820
Goodwill		12,836
Other assets		5,870

Total assets	$	212,605

Liabilities:
Deposits	$	175,947
Other borrowed funds		10,390
Other liabilities		2,657

Total liabilities assumed		188,994

Net assets acquired	$	23,611

Core deposit intangibles are being amortized over a period of 10 years. Goodwill will not be amortized or deductible for tax purposes but will be subject to impairment tests at least annually.

In connection with the acquisition of Fairbanco Holding Company, United incurred charges of $464,000 during the second quarter. The charges are included in operating expenses in the Consolidated Statement of Income. The table below provides a summary of the merger charges showing the amounts paid during the period and the amounts remaining accrued at June 30, 2004.


	Expensed in		Utilized in
	Six months ended		Six months ended		Balance at
	June 30, 2004		June 30, 2004		June 30, 2004
Professional fees	$	325	$	175	$	150
Other conversion costs		139		96		43

	$	464	$	271	$	193

On August 3, 2004, United announced a definitive agreement to acquire Eagle National Bank with assets of $64 million headquartered in Stockbridge, Georgia. The transaction is valued at approximately $12.5 million and is expected to close during the fourth quarter of 2004. United will exchange 414,528 shares of its stock and approximately $2.4 million in cash for all of the outstanding shares of Eagle. The acquisition of Eagle National Bank will greatly enhance United’s presence in the southside of the metro Atlanta market.

Note 6 — Reclassification

Certain amounts for the comparative periods of 2003 have been reclassified to conform to the 2004 presentation.

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

Forward-Looking Statements

This Form 10-Q, contains forward-looking statements regarding United Community Banks, Inc., 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: (1) business increases, productivity gains and investments are lower than expected or do not occur as quickly as anticipated; (2) competitive pressures among financial services companies increase significantly; (3) the strength of the United States economy in general and/or the strength of the local economies of the states in which United conducts operations changes; (4) trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System, change; (5) inflation, interest rates and/or market conditions fluctuate; (6) conditions in the stock market, the public debt market and other capital markets deteriorate; (7) United fails to develop competitive new products and services and/or new and existing customers do not accept these products and services; (8) financial services laws and regulations change; (9) technology changes and United fails to adapt to those changes; (10) consumer spending and saving habits change; (11) unanticipated regulatory or judicial proceedings occur; and (12) United is unsuccessful at managing the risks involved in its business. 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 undue reliance should not be placed on forward-looking statements. United does not intend to update any forward-looking statement, whether written or oral, relating to the matters discussed in this Form 10-Q.

Overview

United is a bank holding company registered under the Bank Holding Company Act of 1956, and was incorporated under the laws of the state of Georgia in 1987 and commenced operations in 1988. At June 30, 2004, United had total consolidated assets of $4.5 billion, total loans of $3.3 billion, total deposits of $3.3 billion and stockholders’ equity of $330 million.

United’s activities are primarily conducted by its wholly-owned banking subsidiaries (which are collectively referred to as the “Banks” in this discussion) and Brintech, Inc., a consulting firm providing professional services to the financial services industry.

This discussion reflects the three-for-two stock split effective on April 28, 2004 to shareholders of record on April 14, 2004.

Recent Mergers and Acquisitions

On March 31, 2003, United completed its acquisition of First Central Bancshares, a community bank holding company headquartered in Lenoir City, Tennessee, and its wholly-owned Tennessee bank subsidiary, First Central Bank. On that date, First Central Bank had assets of $196 million, including purchase accounting related intangibles. United exchanged 1,231,740 shares of its common stock valued at $20.6 million and approximately $9 million in cash for all of the outstanding shares. First Central Bank’s name was changed to United Community Bank Tennessee.

On May 1, 2003, United completed its acquisition of First Georgia Holding, a community bank holding company headquartered in Brunswick, Georgia, and its wholly-owned Georgia bank subsidiary, First Georgia Bank. At closing, First Georgia Bank had assets of $304 million, including purchase accounting related intangibles. United exchanged 1,765,947 shares of its common stock valued at $29.3 million and approximately $12.8 million in cash for all of the outstanding shares. First Georgia Bank was merged into United’s Georgia bank subsidiary.

During the fourth quarter of 2003, United acquired three branches in Avery, Mitchell and Graham counties in western North Carolina. The three branches had aggregate deposits and loans of $72 million and $11 million, respectively. These branches complemented United’s existing western North Carolina markets and were a natural extension of the existing franchise. United paid a premium for each branch of between 7% and 11% of average deposits.

On June 1, 2004, United completed its acquisition of Fairbanco Holding Company, a thrift holding company headquartered in Fairburn, Georgia, and its wholly-owned Georgia subsidiary, 1st Community Bank. On that date, 1st Community Bank had assets of $213 million, including purchase accounting related intangibles. United exchanged 914,627 shares of its common stock valued at $20.9 million and approximately $2.7 million in cash for all of the outstanding shares. 1^st Community Bank was merged into United’s Georgia bank subsidiary.

Critical Accounting Policies

The accounting and reporting policies of United Community Banks and its subsidiaries are in accordance with accounting principles generally accepted in the United States and conform to general practices within the banking industry. The more critical accounting and reporting policies include United’s accounting for loans and the allowance for loan losses. In particular, United’s accounting policies relating to the allowance for loan losses involve the use of estimates and require significant judgments to be made by management. Different assumptions in the application of these policies could result in material changes in United’s consolidated financial position or consolidated results of operations. See “Asset Quality and Risk Elements” herein for a complete discussion of United’s accounting methodologies related to the allowance.

Table 1 – Financial Highlights

UNITED COMMUNITY BANKS, INC.
Selected Financial Information
For the Three and Six Months Ended June 30, 2004


	2004						2003									Second			For the Six
																Quarter			Months Ended						YTD
(in thousands, except per share	Second			First			Fourth			Third			Second			2004-2003									2004-2003
data; taxable equivalent)	Quarter			Quarter			Quarter			Quarter			Quarter			Change			2004			2003			Change
	(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)						(Unaudited)			(Unaudited)
INCOME SUMMARY
Interest revenue	$	56,680		$	54,587		$	53,943		$	53,731		$	53,261					$	111,267		$	101,664
Interest expense		17,432			16,772			17,098			17,446			18,467						34,204			36,056

Net interest revenue		39,248			37,815			36,845			36,285			34,794			13	%		77,063			65,608			17	%
Provision for loan losses		1,800			1,800			1,800			1,500			1,500						3,600			3,000
Fee revenue		9,647			9,278			9,090			10,401			10,316			(6	)		18,925			18,693			1

Total revenue		47,095			45,293			44,135			45,186			43,610			8			92,388			81,301			14
Operating expenses ⁽¹⁾		29,363			28,176			27,572			28,712			27,699			6			57,539			51,616			11

Income before taxes		17,732			17,117			16,563			16,474			15,911			11			34,849			29,685			17
Income taxes		6,379			6,179			5,959			6,110			6,014						12,558			11,178

Net operating income		11,353			10,938			10,604			10,364			9,897			15			22,291			18,507			20
Merger-related charges, net of tax		304			—			383			—			428						304			974

Net income	$	11,049		$	10,938		$	10,221		$	10,364		$	9,469			17		$	21,987		$	17,533			25

OPERATING PERFORMANCE⁽¹⁾
Earnings per common share:
Basic	$	.32		$	.31		$	.30		$	.29		$	.29			10		$	.63		$	.56			13
Diluted		.31			.30			.29			.29			.28			11			.61			.54			13
Return on tangible equity ⁽³⁾		19.70	%		19.87	%		19.72	%		19.94	%		19.54	%					19.79	%		18.69	%
Return on assets		1.07			1.08			1.06			1.06			1.06						1.07			1.06
Efficiency ratio		60.05			59.83			59.81			61.34			61.40						59.94			61.23
Dividend payout ratio		18.75			19.35			16.67			17.24			17.24						19.05			17.86
GAAP PERFORMANCE
Per common share:
Basic earnings	$	.31		$	.31		$	.29		$	.29		$	.28			11		$	.62		$	.53			17
Diluted earnings		.30			.30			.28			.29			.27			11			.60			.51			18
Cash dividends declared		.06			.06			.05			.05			.05			20			.12			.10			20
Book value		9.10			8.80			8.47			8.20			8.15			12			9.10			8.15			12
Tangible book value ⁽³⁾		6.77			6.86			6.52			6.44			6.37			6			6.77			6.37			6
Key performance ratios:
Return on equity ⁽²⁾		14.40	%		14.87	%		14.19	%		14.90	%		14.76	%					14.63	%		15.09	%
Return on assets		1.04			1.08			1.02			1.06			1.01						1.06			1.01
Net interest margin		3.95			3.99			3.96			3.97			3.99						3.97			4.02
Dividend payout ratio		19.35			19.35			17.24			17.24			17.86						19.35			18.87
Equity to assets		7.30			7.46			7.41			7.35			7.19						7.38			7.03
Tangible equity to assets ⁽³⁾		5.74			5.88			5.82			5.85			6.03						5.81			6.23
ASSET QUALITY
Allowance for loan losses	$	42,558		$	39,820		$	38,655		$	37,773		$	37,353					$	42,558		$	37,353
Non-performing assets		8,812			7,251			7,589			7,998			8,232						8,812			8,232
Net charge-offs		789			635			918			1,080			1,069						1,424			2,099
Allowance for loan losses to loans		1.27	%		1.27	%		1.28	%		1.29	%		1.31	%					1.27	%		1.31	%
Non-performing assets to total assets		.19			.18			.19			.20			.21						.19			.21
Net charge-offs to average loans		.10			.08			.12			.15			.16						.09			.16
AVERAGE BALANCES
Loans	$	3,235,262		$	3,095,875		$	2,959,626		$	2,881,375		$	2,742,952			18		$	3,165,569		$	2,583,632			23
Investment securities		715,586			652,867			699,059			664,523			689,384			4			684,226			652,389			5
Earning assets		3,991,797			3,808,877			3,695,197			3,629,819			3,497,851			14			3,900,337			3,286,461			19
Total assets		4,274,442			4,084,883			3,961,384			3,888,141			3,756,689			14			4,179,664			3,514,432			19
Deposits		3,178,776			2,955,726			2,843,600			2,826,900			2,829,986			12			3,067,251			2,649,397			16
Stockholders’ equity		311,942			304,926			293,464			285,790			269,972			16			308,434			246,914			25
Common shares outstanding:
Basic		35,633			35,319			35,260			35,112			34,280						35,477			33,060
Diluted		36,827			36,482			36,391			36,185			35,387						36,655			34,166
AT PERIOD END
Loans	$	3,338,309		$	3,147,303		$	3,015,997		$	2,918,412		$	2,861,481			17		$	3,338,309		$	2,861,481			17
Investment securities		739,667			617,787			659,891			634,421			660,625			12			739,667			660,625			12
Earning assets		4,172,049			3,851,968			3,796,332			3,676,018			3,642,545			15			4,172,049			3,642,545			15
Total assets		4,525,446			4,118,188			4,068,834			3,942,139			3,905,929			16			4,525,446			3,905,929			16
Deposits		3,339,848			3,074,193			2,857,449			2,790,331			2,870,926			16			3,339,848			2,870,926			16
Stockholders’ equity		330,458			311,247			299,373			289,713			285,500			16			330,458			285,500			16
Common shares outstanding		36,246			35,331			35,289			35,232			34,967						36,246			34,967

(1)

Excludes pre-tax merger-related charges totaling $464,000 or $.01 per diluted common share in the second quarter of 2004, and $580,000 or $.01 per diluted common share, $668,000 or $.01 per diluted common share and $840,000 or $.01 per diluted common share recorded in the fourth, second and first quarters, respectively, of 2003.

(2)

Net income available to common stockholders, which excluded preferred stock dividends, divided by average realized common equity which excludes accumulated other comprehensive income.

(3)

Excludes effect of acquisition related intangibles and associated amortization.

Merger-Related Charges

During the second quarter of 2004, first quarter of 2003 and second quarter of 2003, United recorded merger-related charges of $464,000, $840,000 and $668,000, respectively, for termination of equipment leases, professional fees and other systems conversion costs in connection with the acquisitions of 1st Community Bank, First Central Bank and First Georgia Bank, respectively. The charges are included in operating expense in the Consolidated Statement of Income. These charges have been excluded from the presentation of operating earnings as management believes that excluding merger-related charges as a financial measure provides useful information to investors because it better demonstrates United’s financial performance from its ongoing business operations. A more detailed description of these charges is in footnote 5 to the consolidated financial statements in this Form 10-Q and footnote 3 to the consolidated financial statements included in Form 10-K for the year ended December 31, 2003.

The table below presents a reconciliation of United’s operating earnings for the second and fourth quarters of 2003 and the second quarter of 2004 to earnings using accounting principles generally accepted in the United States (GAAP). There were no merger-related charges in the third quarter of 2003, or the first quarter of 2004.

Table 2 — Operating Earnings to GAAP Earnings Reconciliation
For the Three and Six Months Ended
(in thousands)


	2004			2003						For the Six Months Ended
	Second			Fourth			Second
	Quarter			Quarter			Quarter			2004			2003
Merger charges included in expenses	$	464		$	580		$	668		$	464		$	1,508
Income tax effect of charges		160			197			240			160			534

After-tax effect of merger-related charges	$	304		$	383		$	428		$	304		$	974

Net Income Reconciliation
Operating net income	$	11,353		$	10,604		$	9,897		$	22,291		$	18,507
After-tax effect of merger-related charges		(304	)		(383	)		(428	)		(304	)		(974	)

Net income (GAAP)	$	11,049		$	10,221		$	9,469		$	21,987		$	17,533

Basic Earnings Per Share Reconciliation
Basic operating earnings per share	$	.32		$	.30		$	.29		$	.63		$	.56
Per share effect of merger-related charges		(.01	)		(.01	)		(.01	)		(.01	)		(.03	)

Basic earnings per share (GAAP)	$	.31		$	.29		$	.28		$	.62		$	.53

Diluted Earnings Per Share Reconciliation
Diluted operating earnings per share	$	.31		$	.29		$	.28		$	.61		$	.54
Per share effect of merger-related charges		(.01	)		(.01	)		(.01	)		(.01	)		(.03	)

Diluted earnings per share (GAAP)	$	.30		$	.28		$	.27		$	.60		$	.51

Results of Operations

Net operating income was $11.4 million for the three months ended June 30, 2004, an increase of $1.5 million, or 15%, from the same period in 2003. Diluted operating earnings per share were $.31 for the three months ended June 30, 2004, compared with $.28 for the same period in 2003, an increase of 11%. Operating return on tangible equity for the second quarter of 2004 was 19.70%, compared with 19.54% for the second quarter of 2003. Operating return on assets for the three months ended June 30, 2004 was 1.07%, compared with 1.06% for the three months ended June 30, 2003.

Year-to-date as of June 30, net operating income was $22.3 million compared to $18.5 million for the first six months of 2003, an increase of 20%. Diluted operating earnings per share were $.61 for the six months ended June 30, 2004, compared with $.54 for the same period in 2003, an increase of 13%. Operating return on tangible equity for the first six months of 2004 was 19.79%, compared with 18.69% for the first six months of 2003. Operating return on assets for the six months ended June 30, 2004 was 1.07%, compared with 1.06% for the six months ended June 30, 2003.

Net Interest Revenue (Taxable Equivalent)

Net interest revenue (the difference between the interest earned on assets and the interest paid on deposits and borrowed funds) is the single largest component of total revenue. United actively manages this revenue source to provide an optimal level of revenue while balancing interest rate, credit and liquidity risks. Net interest revenue for the three months ended June 30, 2004 was $39.2 million, up 13%, over last year. Year-to-date, net interest revenue was $77.1 million, up 17% over the same period in 2003. The main driver of this increase was loan growth. Average loans increased $492 million, or 18%, from the second quarter of last year and year-to-date average loans were up $582 million, or 23% over the first six months of 2003. This loan growth was due to the acquisitions of 1st Community Bank, First Georgia Bank and three North Carolina branches, which added $96 million to the second quarter 2004 average loan balances, and continued high loan demand across all of United’s markets due to the current low rate environment. The quarter-end loan balances increased $477 million since June 30, 2003. Of this increase, $155 million was in the north Georgia markets, $90 million in western North Carolina, $184 million in the metro Atlanta market, $33 million in east Tennessee, and $15 million in the coastal Georgia markets.

Average interest-earning assets for the second quarter and first six months of 2004 increased $494 million, or 14%, and $614 million, or 19%, respectively, over the same periods in 2003. The increase reflects the acquisitions, loan growth, as well as growth in the investment securities portfolio due to increased leveraging. The majority of the increase in interest-earning assets was funded by interest-bearing sources resulting in increases in average interest-bearing liabilities for the quarter and year-to-date of approximately $397 million and $505 million, respectively, as compared to the same periods in 2003.

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

For the three months ended June 30, 2004 and 2003, net interest spread was 3.70% and 3.71%, respectively, while net interest margin was 3.95% and 3.99%, respectively. For the first six months of 2004 and 2003, net interest spread was 3.71% and 3.73%, respectively, while net interest margin was 3.97% and 4.02%, respectively. The net interest spread and the net interest margin were held at a relatively consistent level over the last seven quarters by managing liability mix and pricing to offset the continued decline in loan and securities yields, a result of the low rate environment. Specifically, most of the loan growth over the last year has been prime-based, adjusted daily, which has accounted for most of the decline in loan yields. At June 30, 2004, United had approximately $1.6 billion in loans indexed to the daily Prime Rate published in the Wall Street Journal compared with $1.1 billion a year ago. At June 30, 2004 and 2003, United had receive-fixed swap contracts with a total notional value of $512 million and $330 million, respectively, that were accounted for as cash flow hedges of prime-based loans. The swap contracts added $1.3 million to loan interest revenue in both the second quarters of 2004 and 2003. This resulted in an increase in the average loan yield of 16 basis points and 19 basis points, respectively, for the second quarters of 2004 and 2003. The effect of declining loan and securities yields was somewhat offset by a slight positive shift in the mix of earning assets. For the second quarter of 2004, loans comprised approximately 81% of interest-earning assets compared with 78% for the second quarter of 2003.

The average yield on interest-earning assets for the second quarter of 2004 was 5.71%, compared with 6.11% in the second quarter of 2003. Year-to-date average yield on interest-earning assets was 5.73%, compared to 6.23% for the first six months of 2003. The main driver of this decrease was loan yields, which were down 56 basis points for the quarter and 62 basis points for the year-to-date, as well as yields on taxable securities, which were down 11 basis points comparing second quarter 2004 to the same period in 2003 and down 20 basis points comparing the first six months of 2004 to the first six months of 2003. The shift toward floating rate loans and the 25 basis point reduction in the Prime Rate on June 25, 2003 contributed to the decline in the average loan yield. On June 30, 2004, the Federal Reserve increased the targeted federal funds rate by 25 basis points. This was immediately reflected in the prime rate being increased to 4.25%. Because the rate increase occurred so late in the quarter, it had no material impact on results.

The average cost of interest-bearing liabilities for the second quarter was 2.01%, a decrease of 39 basis points from the same period in 2003. The average cost of interest-bearing liabilities for the first six months of 2004 was 2.02%, a decrease of 48 basis points from the first six months of 2003. The decrease was due to lower rates paid on most sources of funding. United lowered deposit pricing across all of its products reflecting rate reductions initiated by the Federal Reserve in June 2003. Additionally, United continued to experience strong loan growth over the last twelve months that outpaced the growth in core deposits. United increased its reliance on lower cost funding sources such as FHLB advances and brokered time deposits instead of retail certificates of deposit.

The following table shows the relationship between interest revenue and expense and the average balances of interest-earning assets and interest-bearing liabilities for the three months ended June 30, 2004 and 2003.

Table 3 - Average Consolidated Balance Sheets and Net Interest Analysis
For the Three Months Ended June 30,
(In thousands, taxable equivalent)


	2004								2003
	Average					Avg.			Average					Avg.
	Balance			Interest		Rate			Balance			Interest		Rate
Assets:
Interest-earning assets:
Loans, net of unearned income ⁽¹⁾⁽²⁾	$	3,235,262		$	49,221		6.12	%	$	2,742,952		$	45,652		6.68	%
Taxable securities ⁽³⁾		667,027			6,339		3.80			623,585			6,099		3.91
Tax-exempt securities ⁽¹⁾		48,559			897		7.39			65,799			1,216		7.39
Federal funds sold and other interest-earning assets		40,949			223		2.18			65,515			294		1.80

Total interest-earning assets		3,991,797			56,680		5.71			3,497,851			53,261		6.11

Non-interest-earning assets:
Allowance for loan losses		(41,418	)							(36,284	)
Cash and due from banks		89,759								76,380
Premises and equipment		89,126								79,750
Other assets		145,178								138,992

Total assets	$	4,274,442							$	3,756,689

Liabilities and Stockholders’ Equity:
Interest-bearing liabilities:
Interest-bearing deposits:
Transaction accounts	$	892,809		$	1,920		.86		$	789,891		$	2,163		1.10
Savings deposits		153,061			93		.24			127,076			115		.36
Certificates of deposit		1,677,161			9,773		2.34			1,555,247			10,781		2.78

Total interest-bearing deposits		2,723,031			11,786		1.74			2,472,214			13,059		2.12

Federal funds purchased		132,259			499		1.52			45,895			146		1.28
Federal Home Loan Bank advances		517,744			3,196		2.48			492,619			3,756		3.06
Long-term debt and other borrowings		110,421			1,951		7.11			75,678			1,506		7.98

Total borrowed funds		760,424			5,646		2.99			614,192			5,408		3.53

Total interest-bearing liabilities		3,483,455			17,432		2.01			3,086,406			18,467		2.40

Non-interest-bearing liabilities:
Non-interest-bearing deposits		455,745								357,772
Other liabilities		23,300								42,539

Total liabilities		3,962,500								3,486,717

Stockholders’ equity		311,942								269,972

Total liabilities and stockholders’ equity	$	4,274,442							$	3,756,689

Net interest revenue				$	39,248							$	34,794

Net interest-rate spread							3.70	%							3.71	%

Net interest margin ⁽⁴⁾							3.95	%							3.99	%

(1)

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

(2)

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

(3)

Securities available for sale are shown at amortized cost. Pretax unrealized gains of $3.3 million in 2004 and $14.6 million in 2003 are included in other assets for purposes of this presentation.

(4)

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

Table 3 - Average Consolidated Balance Sheets and Net Interest Analysis (continued)
For the Six Months Ended June 30,
(In thousands, taxable equivalent)


	2004								2003
	Average					Avg.			Average					Avg.
	Balance			Interest		Rate			Balance			Interest		Rate
Assets:
Interest-earning assets:
Loans, net of unearned income ⁽¹⁾⁽²⁾	$	3,165,569		$	96,602		6.14	%	$	2,583,632		$	86,656		6.76	%
Taxable securities ⁽³⁾		634,589			12,408		3.91			587,335			12,065		4.11
Tax-exempt securities ⁽¹⁾		49,637			1,828		7.37			65,054			2,419		7.44
Federal funds sold and other interest-earning assets		50,542			429		1.70			50,440			524		2.08

Total interest-earning assets		3,900,337			111,267		5.73			3,286,461			101,664		6.23

Non-interest-earning assets:
Allowance for loan losses		(40,434	)							(33,760	)
Cash and due from banks		83,968								71,510
Premises and equipment		88,029								75,386
Other assets		147,764								114,835

Total assets	$	4,179,664							$	3,514,432

Liabilities and Stockholders’ Equity:
Interest-bearing liabilities:
Interest-bearing deposits:
Transaction accounts	$	876,072		$	3,714		.85		$	759,431		$	4,391		1.17
Savings deposits		147,530			176		.24			115,912			205		.36
Certificates of deposit		1,609,089			19,070		2.38			1,446,696			20,889		2.91

Total interest-bearing deposits		2,632,691			22,960		1.75			2,322,039			25,485		2.21

Federal funds purchased		138,148			770		1.12			35,167			233		1.34
Federal Home Loan Bank advances		531,783			6,368		2.41			467,736			7,330		3.16
Long-term debt and other borrowings		109,574			4,106		7.54			82,085			3,008		7.39

Total borrowed funds		779,505			11,244		2.90			584,988			10,571		3.64

Total interest-bearing liabilities		3,412,196			34,204		2.02			2,907,027			36,056		2.50

Non-interest-bearing liabilities:
Non-interest-bearing deposits		434,563								327,357
Other liabilities		24,471								33,134

Total liabilities		3,871,230								3,267,518

Stockholders’ equity		308,434								246,914

Total liabilities and stockholders’ equity	$	4,179,664							$	3,514,432

Net interest revenue				$	77,063							$	65,608

Net interest-rate spread							3.71	%							3.73	%

Net interest margin ⁽⁴⁾							3.97	%							4.02	%

(1)

(2)

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

(3)

Securities available for sale are shown at amortized cost. Pretax unrealized gains of $7.2 million in 2004 and $14.3 million in 2003 are included in other assets for purposes of this presentation.

(4)

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

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

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


	Three Months Ended June 30, 2004									Six Months Ended June 30, 2004
	Compared to 2003									Compared to 2003
	Increase (decrease)									Increase (decrease)
	due to changes in									due to changes in
	Volume			Rate			Total			Volume			Rate			Total
Interest-earning assets:
Loans	$	7,718		$	(4,149	)	$	3,569		$	18,262		$	(8,316	)	$	9,946
Taxable securities		416			(176	)		240			1,668			(1,325	)		343
Tax-exempt securities		(318	)		(1	)		(319	)		(568	)		(23	)		(591	)
Federal funds sold and other interest-earning assets		(125	)		54			(71	)		3			(98	)		(95	)

Total interest-earning assets		7,691			(4,272	)		3,419			19,365			(9,762	)		9,603

Interest-bearing liabilities:
Transaction accounts		259			(502	)		(243	)		609			(1,286	)		(677	)
Savings deposits		21			(43	)		(22	)		48			(77	)		(29	)
Certificates of deposit		801			(1,809	)		(1,008	)		2,183			(4,002	)		(1,819	)

Total interest-bearing deposits		1,081			(2,354	)		(1,273	)		2,840			(5,365	)		(2,525	)
Federal funds purchased		321			32			353			580			(43	)		537
Federal Home Loan Bank advances		184			(744	)		(560	)		917			(1,879	)		(962	)
Long-term debt and other borrowings		629			(184	)		445			1,029			69			1,098

Total borrowed funds		1,134			(896	)		238			2,526			(1,853	)		673

Total interest-bearing liabilities		2,215			(3,250	)		(1,035	)		5,366			(7,218	)		(1,852	)

Increase in net interest revenue	$	5,476		$	(1,022	)	$	4,454		$	13,999		$	(2,544	)	$	11,455

Provision for Loan Losses

The provision for loan losses was $1.8 million for the second quarter of 2004, compared with $1.5 million for the same period in 2003. Provision for the first six months of 2004 was $3.6 million, compared with $3.0 million for the first six months of 2003. Net loan charge-offs as a percentage of average outstanding loans for the three months ended June 30, 2004 were .10%, as compared with .16% for the second quarter of 2003. Year-to-date, net loan charge-offs as a percentage of average outstanding loans was .09%, compared to ..16% for the first six months of 2003. The historic level of charge-offs for the prior two years was 15 basis points and is more reflective of management’s expectation for the balance of 2004.

The provision for loan losses is based on management’s evaluation of losses inherent in the loan portfolio and the corresponding analysis of the allowance for loan losses. Additional discussion on loan quality and the allowance for loan losses is included in the Asset Quality section of this report.

Fee Revenue

Fee revenue for the second quarter and first six months of 2004, totaled $9.6 million and $18.9 million, respectively, compared with $10.3 million and $18.7 million, for the same periods in 2003. Fee revenue for the first quarter of 2004 was approximately 20% of total revenue, compared with 24% for the second quarter of 2003. Year-to-date, fee revenue as a percentage of total revenue was 20%, compared with 23% for the first six months of 2003. United is focused on increasing fee revenue through new products and services. The following table presents the components of fee revenue for the second quarter and first six months of 2004 and 2003.

Table 5 — Fee Revenue
For the Three and Six Months Ended June 30,
(in thousands, taxable equivalent)


	Three Months Ended								Six Months Ended
	June 30,								June 30,
	2004		2003			Change			2004			2003			Change
Service charges and fees	$	5,312	$	4,687			13	%	$	10,335		$	8,261			25	%
Mortgage loan and related fees		1,585		3,335			(52	)		2,865			5,647			(49	)
Consulting fees		1,402		1,154			21			2,529			2,274			11
Brokerage fees		515		448			15			1,223			868			41
Securities (losses) gains, net		—		(3	)					(4	)		(3	)
Other		833		695			20			1,977			1,646			20

Total	$	9,647	$	10,316			(6	)	$	18,925		$	18,693			1

Earnings for acquired companies are included in consolidated results beginning on their respective acquisition dates. Therefore, comparability between current and prior periods is affected by acquisitions completed over the last 18 months. However, due to timing and the relative sizes of those acquired companies, comparisons between the second quarters of 2004 and 2003 are not significantly influenced by acquisitions. The impact that acquisitions have had on comparisons between the first six months of 2004 and 2003 would mostly have occurred in the first quarter and has been described in management’s discussion and analysis in the first quarter 2004 Form 10-Q. In the following discussion, the impact of acquisitions is discussed only to the extent necessary to understand comparability between periods.

Service charges on deposit accounts of $5.3 million, were up $625,000, or 13%, over the second quarter of 2003. Year-to-date service charges were up $2.1 million, or 25%, over the same period in 2003. The increase in service charges and fees was primarily due to an increase in the number of accounts and transaction activity, resulting from successful internal efforts to increase core deposits and acquisitions.

Mortgage loan and related fees of $1.6 million for the quarter and $2.9 million for the first six months of 2004, were down $1.8 million, or 52%, and $2.8 million, or 49%, respectively, from the same periods in 2003. Mortgage loan originations of $71 million for the second quarter 2004 were up $16 million from the first quarter of the year, but down $48 million from the second quarter of 2003, as mortgage rates rose from their historically low levels. Substantially all of these originated residential mortgages were sold into the secondary market, including the right to service these loans.

Consulting fees for the second quarter and first six months of 2004 of $1.4 million and $2.5 million were up $248,000 and $255,000, respectively, from the same periods in 2003. This increase was due to the addition of two new services offered and growth in general consulting revenue.

Brokerage fees of $515,000 were up $67,000, or 15% from the second quarter of 2003. For the first six months of 2004, brokerage fees of $1.2 million were up $355,000, or 41% over the same period in 2003. This increase was due to a focus on generating new business and renewed customer interest in equity securities resulting from improvements in stock market performance.

Operating Expenses

For the three and six months ended June 30, 2004, total operating expenses, excluding merger-related charges, were $29.4 million and $57.5 million compared with $27.7 million and $51.6 million for the same periods in 2003. The following table presents the components of operating expenses for the three and six months ended June 30, 2004 and 2003.

Table 6 — Operating Expenses
For the Three and Six Months Ended June 30,
(in thousands)


	Three Months Ended							Six Months Ended
	June 30,							June 30,
	2004		2003		Change			2004		2003		Change
Salaries and employee benefits	$	18,662	$	17,571		6	%	$	36,788	$	32,675		13	%
Occupancy		2,273		2,194		4			4,555		4,296		6
Communications and equipment		2,677		2,104		27			5,224		4,004		30
Postage, printing and supplies		1,068		1,172		(9	)		2,210		2,117		4
Professional fees		795		1,076		(26	)		1,632		1,971		(17	)
Advertising and public relations		991		967		2			1,755		1,673		5
Amortization of intangibles		395		328		20			766		413		85
Other		2,502		2,287		9			4,609		4,467		3

		29,363		27,699		6			57,539		51,616		11
Merger-related charges		464		668					464		1,508

Total	$	29,827	$	28,367		5		$	58,003	$	53,124		9

Salaries and benefits for the second quarter of 2004 totaled $18.7 million, an increase of 6% over the same period in 2003. Year-to-date salaries and benefits of $36.8 million were $4.1 million, or 13% greater than the first six months of 2003. Acquisitions accounted for approximately $800,000 of the second quarter increase, with the remainder due to normal merit increases which were partially offset by lower incentive compensation related to the decline in mortgage refinancing activities.

Communication and equipment costs of $2.7 million for the second quarter and $5.2 million for the first six months of 2004 were up $573,000, or 27%, and $1.2 million, or 30%, respectively, over the same periods in 2003, primarily due to acquisitions and further investment in technology equipment to support business growth and enhance operating efficiencies.

The increases of $67,000 for the quarter and $353,000 for the first six months of 2004 in intangible amortization reflect the increase in amortization of core deposit intangibles that were recorded in connection with recent acquisitions.

The efficiency ratio measures total operating expenses, excluding merger-related charges, as a percentage of total revenue, excluding the provision for loan losses and net securities gains or losses. Based on operating income, which excludes merger-related charges, United’s efficiency ratio for the second quarter was 60.05% compared with 61.40% for the second quarter of 2003. Year-to-date, the efficiency ratio was 59.94% compared with 61.23% for the first six months of 2003.

Income Taxes

Income taxes, excluding taxable equivalent adjustments, were $5.8 million and the effective tax rate for the second quarter was 34.5%, as compared with $5.2 million and an effective tax rate of 35.4% for the second quarter of 2003. For the first six months of 2004, income taxes were $11.6 million, with an effective tax rate of 34.5%, compared to $9.5 million, with an effective tax rate of 35.2%, for the same period in 2003. The effective tax rates were lower than the statutory tax rate primarily due to interest revenue on certain investment securities and loans that are exempt from income taxes and due to tax credits. The decrease in the effective tax rate for 2004 is due to an increase in tax credits related to affordable housing investments made over the last twelve months. Additional information regarding income taxes can be found in Note 13 to the Consolidated Financial Statements filed with United’s 2003 Form 10-K.

Balance Sheet Review

Total assets at June 30, 2004 were $4.525 billion, 11% higher than the $4.069 billion at December 31, 2003 and 16% higher than the $3.906 billion at June 30, 2003. Average total assets for the second quarter of 2004 were $4.274 billion, up $518 million from average assets in the second quarter of 2003. Year-to-date, average total assets of $4.179 billion were up 19% compared to $3.514 billion for the same period in 2003.

Loans

The following table presents a summary of United’s loan portfolio.

Table 7 — Loans Outstanding
(in thousands)


	June 30,			December 31,			June 30,
	2004			2003			2003
Commercial (commercial and industrial)	$	183,941		$	190,189		$	185,413
Commercial (secured by real estate)		853,956			776,591			714,213

Total commercial		1,037,897			966,780			899,626
Construction (secured by real estate)		1,106,359			927,087			839,193
Residential mortgage		1,050,561			981,961			975,392
Installment		143,492			140,169			147,270

Total loans	$	3,338,309		$	3,015,997		$	2,861,481

As a percentage of total loans:
Commercial (commercial and industrial)		6	%		6	%		7	%
Commercial (secured by real estate)		26			26			25

Total commercial		32			32			32
Construction (secured by real estate)		33			31			29
Residential mortgage		31			32			34
Installment		4			5			5

Total		100	%		100	%		100	%

At June 30, 2004, total loans were $3.338 billion, an increase of $477 million, or 17%, from June 2003 and an increase of $322 million, or 11%, from December 31, 2003. The acquisitions of 1st Community Bank, which closed on June 1, 2004, and the three North Carolina branches added $90 million in balances to the loan portfolio. Average total loans for the second quarter and year-to-date 2004 were $3.235 billion and $3.166 billion, respectively, increases of $492 million, or 18%, and $582 million, or 23%, over the same periods in 2003. Over the past year, United has experienced strong loan growth in all markets, with particular strength in loans secured by real estate, both residential and non-residential. Substantially all loans are to customers located in Georgia, North Carolina and Tennessee, the immediate market areas of the Banks. This includes customers who have a seasonal residence in the Banks’ market areas. Approximately $267 million of the increase from a year ago occurred in construction and land development loans. Growth has also been strong in residential real estate loans and commercial loans secured by real estate which grew $75 million and $140 million, respectively from June 30, 2003.

Asset Quality and Risk Elements

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

The provision for loan losses charged to earnings is based upon management’s judgment of the amount necessary to maintain the allowance at a level adequate to absorb probable losses. The amount each period is dependent upon many factors including growth and changes in the composition of the loan portfolio, net charge-offs, delinquencies, management’s assessment of loan portfolio quality, the value of collateral, and economic factors and trends. The evaluation of these factors is performed by the credit administration department through an analysis of the adequacy of the allowance for loan losses.

Reviews of non-performing loans, past due loans and larger credits, designed to identify potential charges to the allowance for loan losses, as well as determine the adequacy of the allowance, are conducted on a regular basis during the year. These reviews are performed by the responsible lending officers, as well as a separate loan review department, and consider such factors as the financial strength of borrowers, the value of the applicable collateral, past loan loss experience, anticipated loan losses, growth in the loan portfolio, prevailing economic conditions and other factors. United also uses external loan review sources as necessary to support the activities of the loan review department and to ensure the independence of the loan review process.

The following table presents a summary of changes in the allowance for loan losses for the three and six months ended June 30, 2004 and 2003.

Table 8 — Summary of Loan Loss Experience
For the Three and Six Months Ended June 30, 2004 and 2003
(in thousands)


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2004			2003			2004			2003
Balance beginning of period	$	39,820		$	33,022		$	38,655		$	30,914
Allowance from acquisitions		1,727			3,900			1,727			5,538
Loans charged-off		(1,008	)		(1,497	)		(2,028	)		(2,654	)
Recoveries		219			428			604			555

Net charge-offs		(789	)		(1,069	)		(1,424	)		(2,099	)
Provision for loan losses		1,800			1,500			3,600			3,000

Balance end of period	$	42,558		$	37,353		$	42,558		$	37,353

Total loans:
At period end	$	3,338,309		$	2,861,481		$	3,338,309		$	2,861,481
Average		3,235,262			2,742,952			3,165,569			2,583,632
As a percentage of average loans (annualized):
Net charge-offs		.10	%		.16	%		.09	%		.16	%
Provision for loan losses		.22			.22			.23			.23
Allowance as a percentage of period end loans		1.27			1.31			1.27			1.31
Allowance as a percentage of non-performing loans		593			473			593			473

Management believes that the allowance for loan losses at June 30, 2004 is adequate to absorb losses inherent in the loan portfolio. This assessment involves uncertainty and judgment; therefore, the adequacy of the allowance for loan losses cannot be determined with precision and may be subject to change in future periods. In addition, bank regulatory authorities, as part of their periodic examination of the Banks, may require adjustments to the provision for loan losses in future periods if, in their opinion, the results of their review warrant such additions.

Non-performing Assets

The table below summarizes United’s non-performing assets.

Table 9 — Non-Performing Assets
(in thousands)


	June 30,			December 31,			June 30,
	2004			2003			2003
Non-accrual loans	$	7,169		$	6,627		$	7,887
Loans past due 90 days or more and still accruing		3			—			7

Total non-performing loans		7,172			6,627			7,894
Other real estate owned		1,640			962			338

Total non-performing assets	$	8,812		$	7,589		$	8,232

Non-performing loans as a percentage of total loans		.21	%		.22	%		.28	%
Non-performing assets as a percentage of total assets		.19			.19			.21

Non-performing loans, which include non-accrual loans and accruing loans past due over 90 days, totaled $7.2 million at June 30, 2004, compared with $6.6 million at December 31, 2003 and $7.9 million at June 30, 2003. At June 30, 2004, the ratio of non-performing loans to total loans was .21%, compared with .22% at December 31, 2003 and .28% at June 30, 2003. Non-performing assets, which include non-performing loans and foreclosed real estate, totaled $8.8 million at June 30, 2004, compared with $7.6 million at December 31, 2003 and $8.2 million at June 30, 2003.

United’s policy is to place loans on non-accrual status when, in the opinion of management, the principal and interest on a loan is not likely to be repaid in accordance with the loan terms or when the loan becomes 90 days past due and is not well secured and in the process of collection. When a loan is placed on non-accrual status, interest previously accrued, but not collected, is reversed against current interest revenue. Depending on management’s evaluation of the borrower and loan collateral, interest revenue on a non-accrual loan may be recognized on a cash basis as payments are received. There were no commitments to lend additional funds to customers whose loans were on non-accrual status at June 30, 2004.

At June 30, 2004 and 2003, there were $1.1 million and $2.2 million, respectively, of loans classified as impaired under the definition outlined in SFAS No. 114. Specific reserves allocated to these impaired loans totaled $281,000 at June 30, 2004, and $641,000 at June 30, 2003. The average recorded investment in impaired loans for the quarters ended June 30, 2004 and 2003, was $125,000 and $2.3 million, respectively. Year-to-date average recorded investment in impaired loans for 2004 and 2003 was $546,000 and $2.6 million, respectively. Interest revenue recognized on loans while they were impaired for the second quarter and first six months of 2004 was $12,000 and $15,000, respectively, compared with $6,000 and $10,000 for the same periods in 2003.

Investment Securities

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

Total average investment securities for the quarter increased 4% from second quarter of 2003, and year-to-date increased 5% over the first six months of 2003, as the investment portfolio was used to help stabilize the interest rate sensitivity and increase net interest revenue.

The investment securities portfolio consists of U.S. Government and agency securities, municipal securities and U.S. Government sponsored agency mortgage-backed securities. Mortgage-backed securities rely on the underlying pools of mortgage loans to provide a cash flow of principal and interest. The actual maturities of these securities will differ from the contractual maturities because the loans underlying the security may prepay. Decreases in interest rates will generally cause an acceleration of prepayment levels. In a declining interest rate environment, United generally will not be able to reinvest the proceeds from these prepayments in assets that have comparable yields.

Deposits

Total deposits at June 30, 2004 were $3.340 billion, an increase of $469 million from June 30, 2003, approximately half of which came from the acquisitions of 1st Community Bank on June 1, 2004 and the three North Carolina branches in late 2003. Total non-interest-bearing demand deposit accounts increased $82 million and interest-bearing demand and savings accounts increased $171 million. Total time deposits as of June 30, 2004 were $1.764 billion, an increase of $215 million from the second quarter of 2003. Of the increase in time deposits, $129 million were brokered.

Time deposits of $100,000 and greater totaled $455 million at June 30, 2004, compared with $426 million at June 30, 2003. United utilizes “brokered” time deposits, issued in certificates of less than $100,000, as an alternative source of cost-effective funding. Brokered time deposits outstanding at June 30, 2004 and June 30, 2003 were $422 million and $293 million, respectively.

Wholesale Funding

At June 30, 2004, each of the Banks were shareholders in the Federal Home Loan Bank. Through this affiliation, secured advances totaling $535 million were outstanding at rates competitive with time deposits of like maturities. United anticipates continued utilization of this short and long term source of funds. FHLB advances outstanding at June 30, 2004 had both fixed and floating interest rates ranging from .13% to 7.81%. Additional information regarding FHLB advances, including scheduled maturities, is provided in Note 10 to the consolidated financial statements included in United’s 2003 Form 10-K.

Interest Rate Sensitivity Management

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

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

One of the tools management utilizes to estimate the sensitivity of net interest revenue to changes in interest rates is an interest rate simulation model. Such estimates are based upon a number of assumptions for various scenarios, including the level of balance sheet growth, deposit repricing characteristics and the rate of prepayments. The simulation model measures the potential change in net interest revenue over a twelve-month period under six interest rate scenarios. The first scenario assumes rates remain flat (“flat rate scenario”) over the next twelve months and is the scenario that all others are compared to in order to measure the change in net interest revenue. The second scenario is a most likely scenario that projects the most likely change in rates over the next twelve months based on the slope of the yield curve. United runs ramp scenarios that assume gradual increases and decreases of 200 basis points each over the next twelve months. United’s policy for net interest revenue simulation is limited to a change from the flat rate scenario of less than 10% for the up or down 200 basis point ramp scenarios over twelve months. At June 30, 2004, United’s simulation model indicated that a 200 basis point increase in rates over the next twelve months would cause an approximate 3% increase in net interest revenue and a 200 basis point decrease in rates over the next twelve months would cause an approximate 6% decrease in net interest revenue.

In order to manage its interest rate sensitivity, United uses off-balance sheet contracts that are considered derivative financial instruments. Derivative financial instruments can be a cost and capital effective means of modifying the repricing characteristics of on-balance sheet assets and liabilities. At June 30, 2004, United was a party to interest rate swap contracts under which it pays a variable rate and receives a fixed rate.

The following table presents the interest rate swap contracts outstanding at June 30, 2004.

Table 10 — Interest Rate Swap Contracts
As of June 30, 2004
(in thousands)


	Notional		Rate			Rate			Fair
Type/Maturity	Amount		Received			Paid ⁽¹⁾			Value
Cash Flow Contracts
October 27, 2004	$	100,000		4.24	%		4.00	%	$	(140	)
December 23, 2004		50,000		4.37			4.00			(110	)
December 27, 2004		100,000		4.39			4.00			(210	)
October 24, 2005		44,000		5.57			4.00			65
December 4, 2006		15,000		5.85			4.00			(150	)
December 17, 2006		30,000		5.99			4.00			(205	)
April 19, 2007		15,000		5.85			4.00			(235	)
May 13, 2007		25,000		6.47			4.00			8
May 14, 2007		15,000		6.47			4.00			3
May 14, 2007		10,000		6.47			4.00			5
October 23, 2007		108,000		6.08			4.00			(240	)

Total Cash Flow Contracts	$	512,000		5.20	%		4.00	%	$	(1,209	)

(1) Based on prime rate at June 30, 2004. On July 1, 2004, the prime rate rose to 4.25%

All of United’s derivative financial instruments are classified as cash flow hedges. The change in fair value of cash flow hedges is recognized in other comprehensive income. Cash flow hedges consist of interest rate swap contracts that are designated as hedges of daily repricing prime based loans. Under these contracts, United receives a fixed interest rate and pays a floating rate based on the Prime Rate as posted in the Wall Street Journal.

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

Liquidity Management

The objective of liquidity management is to ensure that sufficient funding is available, at reasonable cost, to meet the ongoing operational cash needs and to take advantage of revenue producing opportunities as they arise. While the desired level of liquidity will vary depending upon a variety of factors, it is the primary goal of United to maintain a sufficient level of liquidity in all expected economic environments. Liquidity is defined as the ability to convert assets into cash or cash equivalents without significant loss and to raise additional funds by increasing liabilities. Liquidity management involves maintaining United’s ability to meet the daily cash flow requirements of the Banks’ customers, both depositors and borrowers.

The primary objectives of asset/liability management are to provide for adequate liquidity in order to meet the needs of customers and to maintain an optimal balance between interest-sensitive assets and interest-sensitive liabilities, so that United can also meet the investment requirements of its shareholders as market interest rates change. Daily monitoring of the sources and uses of funds is necessary to maintain a position that meets both requirements.

The asset portion of the balance sheet provides liquidity primarily through loan principal repayments and the maturities and sales of securities. Mortgage loans held for sale totaled $18.6 million at June 30, 2004, and typically turn over every 45 days as the closed loans are sold to investors in the secondary market. Other short-term investments such as federal funds sold are additional sources of liquidity.

The liability section of the balance sheet provides liquidity through interest-bearing and noninterest-bearing deposit accounts. Federal funds purchased, FHLB advances and securities sold under agreements to repurchase are additional sources of

liquidity and represent United’s incremental borrowing capacity. These sources of liquidity are generally short-term in nature and are used as necessary to fund asset growth and meet other short-term liquidity needs.

United has available lines of credit at its holding company with other financial institutions totaling $85 million. At June 30, 2004, United had sufficient qualifying collateral to increase FHLB advances by $330 million. United’s internal policy limits brokered deposits to 20% of total deposits, excluding the brokered deposits. At June 30, 2004, United had the capacity to increase brokered deposits by $161 million and still remain within this limit. In addition to these wholesale sources, United has the ability to attract retail deposits at any time by competing more aggressively on pricing.

As disclosed in United’s Consolidated Statement of Cash Flows, net cash provided by operating activities was $24.3 million for the six months ended June 30, 2004. The major contributors in this category were net income of $22.0 million, depreciation, amortization and accretion of $7.7 million and an increase in accrued expenses and other liabilities of $7.2 million, partially offset by a decrease in other assets of $8.1 million and an increase in mortgage loans held for sale of $7.9 million. Net cash used by investing activities of $289.4 million consisted primarily of a net increase in loans totaling $231.4 million and $254.1 million used to purchase investment securities, partially offset by proceeds from sales, maturities and calls of investment securities of $197.2 million. Net cash provided by financing activities consisted primarily of a net increase in deposits of $306.5 million, and a net increase in federal funds purchased and repurchase agreements of $138.0 million, partially offset by a net decrease in FHLB advances of $105.3 million and a $43.9 million net decrease in other borrowings. In the opinion of management, the liquidity position at June 30, 2004 is sufficient to meet its expected cash flow requirements.

Capital Resources and Dividends

Stockholders’ equity at June 30, 2004 was $330.5 million, an increase of $45.0 million from June 30, 2003. Accumulated other comprehensive income (loss) is not included in the calculation of regulatory capital adequacy ratios. Excluding the change in the accumulated other comprehensive income, stockholders’ equity increased $59.6 million, or 22%, from June 30, 2003, of which $21.0 million was the result of shares exchanged for the acquisition of 1st Community Bank. Dividends of $2.2 million, or $.06 per share, were declared on common stock during the second quarter of 2004, an increase of 20% from the amount declared in 2003. On an operating basis, the dividend payout ratios for the second quarters of 2004 and 2003 were 19% and 17%, respectively, while for the first six months of 2004 and 2003, the dividend payout ratios were 19% and 18%, respectively. United has historically retained the majority of its earnings in order to provide a cost effective source of capital for continued growth and expansion. However, in recognition that cash dividends are an important component of shareholder value, management has instituted a dividend program that provides for increased cash dividends when earnings and capital levels permit.

United’s Board of Directors has authorized the repurchase of up to 2,250,000 shares of the Company’s common stock through December 31, 2004. Through June 30, 2004, a total of 1,311,000 shares have been purchased under this program at an average cost of $14.78. No shares were purchased during the first six months of 2004.

United trades on the NASDAQ National Market under the symbol UCBI. The closing price for the period ended June 30, 2004 was $25.18. Below is a quarterly schedule of high and low stock prices for 2004 and 2003.

Table 11 — Stock Price Information


	2004				2003
	High		Low		High		Low
First quarter	$	24.62	$	21.37	$	18.00	$	14.67
Second quarter		25.36		21.89		18.00		15.37
Third quarter						20.02		16.34
Fourth quarter						23.93		18.51

The following table presents the quarterly cash dividends declared in 2004 and 2003 and the respective payout ratios as a percentage of basic operating earnings per share, which excludes merger-related charges.

Table 12 — Dividend Payout Information (based on operating earnings)


	2004					2003
	Dividend		Payout %			Dividend		Payout %
First quarter	$	.06		19		$	.05		19	⁽¹⁾
Second quarter		.06		19	⁽¹⁾		.05		17	⁽¹⁾
Third quarter							.05		17
Fourth quarter							.05		17	⁽¹⁾

(1)

Dividend payout ratios for the second quarter of 2004, and the first, second and fourth quarters of 2003 were 19%, 20%, 18% and 17%, respectively, when calculated using GAAP earnings per share.

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

The following table shows United’s capital ratios, as calculated under regulatory guidelines, at June 30, 2004 and 2003.

Table 13 — Capital Ratios
(in thousands)


	2004						2003
	Actual			Regulatory			Actual			Regulatory
	Amount			Minimum			Amount			Minimum
Tier I Leverage:
Amount	$	287,907		$	125,698		$	245,789		$	110,840
Ratio		6.87	%		3.00	%		6.65	%		3.00	%
Tier I Risk Based:
Amount	$	287,907		$	136,936		$	245,789		$	116,882
Ratio		8.41	%		4.00	%		8.41	%		4.00	%
Total Risk Based:
Amount	$	399,601		$	273,873		$	332,185		$	233,765
Ratio		11.67	%		8.00	%		11.37	%		8.00	%

United’s Tier I capital, which excludes other comprehensive income, consists of stockholders’ equity and qualifying capital securities less goodwill and deposit-based intangibles, totaled $288 million at June 30, 2004. Tier II capital components include supplemental capital items such as a qualifying allowance for loan losses and qualifying subordinated debt. Tier I capital plus Tier II capital components is referred to as Total Risk-based capital and was $400 million at June 30, 2004. The capital ratios, as calculated under the guidelines, were 8.41% and 11.67% for Tier I and Total Risk-based capital, respectively, at June 30, 2004.

A minimum leverage ratio is required in addition to the risk-based capital standards and is defined as Tier I capital divided by average assets adjusted for goodwill and deposit-based intangibles. Although a minimum leverage ratio of 3% is required for the highest-rated bank holding companies which are not undertaking significant expansion programs, the Federal Reserve Board requires a bank holding company to maintain a leverage ratio greater than 3% if it is experiencing or anticipating significant growth or is operating with less than well-diversified risks in the opinion of the Federal Reserve Board. The Federal Reserve Board uses the leverage and risk-based capital ratios to assess capital adequacy of banks and bank holding companies. United’s leverage ratios at June 30, 2004 and 2003 were 6.87% and 6.65%, respectively.

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

Impact of Inflation and Changing Prices

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

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

Item 3. Quantitative and Qualitative Disclosure About Market Risk

There have been no material changes in United’s quantitative and qualitative disclosures about market risk as of June 30, 2004 from that presented in the Annual Report on Form 10-K for the year ended December 31, 2003. The interest rate sensitivity position at June 30, 2004 is included in management’s discussion and analysis on page 22 of this report.

Item 4. Controls and Procedures

United’s management, including the Chief Executive Officer and Chief Financial Officer, supervised and participated in an evaluation of the company’s disclosure controls and procedures as of June 30, 2004. Based on, and as of the date of, that evaluation, United’s Chief Executive Officer and Chief Financial Officer have concluded that the disclosure controls and procedures were effective in accumulating and communicating information to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures of that information under the Securities and Exchange Commission’s rules and forms and that the disclosure controls and procedures are designed to ensure that the information required to be disclosed in reports that are filed or submitted by United under the Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

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

Part II. Other Information

Item 1. Legal Proceedings

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

Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities – None

Item 3. Defaults upon Senior Securities – None

Item 4. Submission of Matters to a Vote of Securities Holders

United held its annual meeting of shareholders on April 28, 2004.

At the annual meeting, the shareholders elected Jimmy C. Tallent, Robert L. Head, Jr., W. C. Nelson, Jr., A. William Bennett, Robert H. Blalock, Guy W. Freeman, Thomas C. Gilliland, Charles E. Hill, Hoyt O. Holloway, Clarence W. Mason, Sr., and Tim Wallis as directors to serve until the next annual meeting and until their successors are elected and qualified. The elections were approved by the votes set forth in the following table.


Election of Directors	Shares Voted in Favor		Shares Withheld
Jimmy C. Tallent		17,494,870		151,478
Robert L. Head, Jr.		16,477,775		1,168,573
W. C. Nelson, Jr.		17,153,863		492,485
A. William Bennett		17,135,258		511,090
Robert H. Blalock		17,214,412		431,936
Guy W. Freeman		17,495,103		151,245
Thomas C. Gilliland		17,495,228		151,120
Charles E. Hill		17,213,367		432,981
Hoyt O. Holloway		17,153,563		492,785
Clarence W. Mason, Sr.		17,213,651		432,697
Tim Wallis		16,479,031		1,167,317

Shareholders also voted on an amendment to the restated articles of incorporation to increase the number of authorized common shares from 50,000,000 to 100,000,000, as well as an amendment to the 2000 Key Employee Stock Option plan. The amendments were approved by the votes set forth in the following table.


Amendment	Shares Voted in Favor		Shares Withheld
Restated Articles of Incorporation		17,052,529		570,109
Amendment to 2000 Key Employee Stock Option plan		13,885,643		974,919

Item 5. Other Information – None

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits


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

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

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

(b) Reports on Form 8-K

A current report on Form 8-K dated April 20, 2004, was filed with the Securities and Exchange Commission under item 12 “Results of Operations and Financial Condition” of such form, furnishing materials for the first quarter 2004 earnings announcement conducted by Jimmy C. Tallent, President and Chief Executive Officer and Rex S. Schuette, Executive Vice President and Chief Financial Officer of United Community Banks, Inc. on April 20, 2004.

Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.


		UNITED COMMUNITY BANKS, INC.

		*/s/ Jimmy C. Tallent*

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

		*/s/ Rex S. Schuette*

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

		*/s/ Alan H. Kumler*

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

		Date: August 6, 2004



                                  EXHIBIT 31.1

I, Jimmy C. Tallent, President and Chief Executive Officer of United Community
Banks, Inc. (the "registrant"), certify that:

1. I have reviewed this quarterly report on Form 10-Q of the registrant;

2. Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;

4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

      a) Designed such disclosure controls and procedures, or caused such
      disclosure controls and procedures to be designed under our supervision,
      to ensure that material information relating to the registrant, including
      its consolidated subsidiaries, is made known to us by others within those
      entities, particularly during the period in which this report is being
      prepared;

      b) Evaluated the effectiveness of the registrant's disclosure controls and
      procedures and presented in this report our conclusions about the
      effectiveness of the disclosure controls and procedures, as of the end of
      the period covered by this report based on such evaluation; and

      c) Disclosed in this report any change in the registrant's internal
      control over financial reporting that occurred during the registrant's
      most recent fiscal quarter that has materially affected, or is reasonably
      likely to materially affect, the registrant's internal control over
      financial reporting; and

5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation of control over financial reporting, to the registrant's
auditors and the audit committee of the registrant's board of directors:

      a) All significant deficiencies and material weaknesses in the design or
      operation of internal control over financial reporting which are
      reasonably likely to adversely affect the registrant's ability to record,
      process, summarize and report financial information; and

      b) Any fraud, whether or not material, that involves management or other
      employees who have a significant role in the registrant's internal control
      over financial reporting.

                                       By: /S/ JIMMY C.TALLENT
                                           -------------------------------------
                                           Jimmy C. Tallent
                                           President and Chief Executive Officer

                                       Date: August 6, 2004



                                  EXHIBIT 31.2

I, Rex S. Schuette, Executive Vice President and Chief Financial Officer of
United Community Banks, Inc. (the "registrant"), certify that:

1. I have reviewed this quarterly report on Form 10-Q of the registrant;

2. Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;

4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

      a) Designed such disclosure controls and procedures, or caused such
      disclosure controls and procedures to be designed under our supervision,
      to ensure that material information relating to the registrant, including
      its consolidated subsidiaries, is made known to us by others within those
      entities, particularly during the period in which this report is being
      prepared;

      b) Evaluated the effectiveness of the registrant's disclosure controls and
      procedures and presented in this report our conclusions about the
      effectiveness of the disclosure controls and procedures, as of the end of
      the period covered by this report based on such evaluation; and

      c) Disclosed in this report any change in the registrant's internal
      control over financial reporting that occurred during the registrant's
      most recent fiscal quarter that has materially affected, or is reasonably
      likely to materially affect, the registrant's internal control over
      financial reporting; and

5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation of control over financial reporting, to the registrant's
auditors and the audit committee of the registrant's board of directors:

      a) All significant deficiencies and material weaknesses in the design or
      operation of internal control over financial reporting which are
      reasonably likely to adversely affect the registrant's ability to record,
      process, summarize and report financial information; and

      b) Any fraud, whether or not material, that involves management or other
      employees who have a significant role in the registrant's internal control
      over financial reporting.

                                       By: /S/ REX S. SCHUETTE
                                           -------------------------------------
                                           Rex S. Schuette
                                           Executive Vice President and Chief
                                           Financial Officer

                                       Date: August 6, 2004




                                   EXHIBIT 32

                            CERTIFICATION PURSUANT TO
                             18 U.S.C. SECTION 1350,
                             AS ADOPTED PURSUANT TO

                  SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of United Community Banks, Inc.
("United") on Form 10-Q for the period ending June 30, 2004 filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, Jimmy
C. Tallent, President and Chief Executive Officer of United, and I, Rex S.
Schuette, Executive Vice President and Chief Financial Officer of United,
certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002, that:

      (1)   The Report fully complies with the requirements of section 13(a) or
            15(d) of the Securities Exchange Act of 1934; and

      (2)   The information contained in the Report fairly presents, in all
            material respects, the financial condition and result of operations
            of United.

                                       By: /S/ JIMMY C. TALLENT
                                           -------------------------------------
                                           Jimmy C. Tallent
                                           President and Chief Executive Officer

                                       By: /S/ REX S. SCHUETTE
                                           -------------------------------------
                                           Rex S. Schuette
                                           Executive Vice President and
                                           Chief Financial Officer

                                       Date:  August 6, 2004

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents