UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the Quarterly Period Ended June 30, 2007

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

For the Transition Period from                      to                     

UNITED COMMUNITY BANKS, INC.

 

Georgia		58-1807304
(State of Incorporation)		(I.R.S. Employer Identification No.)

63 Highway 515 Blairsville, Georgia		30512
Address of Principal Executive Offices		(Zip Code)

(706 ) 781-2265
(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 þ     NO o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (check one):

Large accelerated filer þ      Accelerated filer o      Non-accelerated filer o

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

YES þ     NO o

Common stock, par value $1 per share: 48,781,351 shares
outstanding as of June 30, 2007

 

 

INDEX

PART I — Financial Information
Item 1. Financial Statements.
Consolidated Statement of Income (unaudited) for the Three and Six Months Ended June 30, 2007 and 2006			2
Consolidated Balance Sheet at June 30, 2007 (unaudited), December 31, 2006 (audited) and June 30, 2006 (unaudited)			3
Consolidated Statement of Changes in Shareholders’ Equity (unaudited) for the Six Months Ended June 30, 2007 and 2006			4
Consolidated Statement of Cash Flows (unaudited) for the Six Months Ended June 30, 2007 and 2006			5
Notes to Consolidated Financial Statements			6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.			11
Item 3. Quantitative and Qualitative Disclosures About Market Risk.			28
Item 4. Controls and Procedures.			28
PART II — Other Information
Item 1. Legal Proceedings.			29
Item 1A. Risk Factors.			29
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.			29
Item 3. Defaults Upon Senior Securities.			29
Item 4. Submission of Matters to a Vote of Security Holders.			29
Item 5. Other Information.			29
Item 6. Exhibits.			30
EX-31.1 SECTION 302 CERTIFICATION OF THE CEO
EX-31.2 SECTION 302 CERTIFICATION OF THE CFO
EX-32 SECTION 906 CERTIFICATIONS OF THE CEO/CFO

Part I — Financial Information

Item 1 — Financial Statements

UNITED COMMUNITY BANKS, INC.
Consolidated Statement of Income (unaudited)

		Three Months Ended								Six Months Ended
		June 30,								June 30,
(in thousands, except per share data)		2007				2006				2007				2006
Interest revenue:
Loans, including fees		$	119,799			$	95,242			$	233,872			$	181,848
Investment securities:
Taxable			15,476				11,521				29,444				22,839
Tax exempt			438				509				885				1,023
Federal funds sold and deposits in banks			80				162				138				320
Total interest revenue			135,793				107,434				264,339				206,030
Interest expense:
Deposits:
NOW			11,470				7,342				22,097				13,329
Money market			3,540				1,614				6,080				2,814
Savings			374				226				683				454
Time			41,979				29,599				83,604				54,985
Total deposit interest expense			57,363				38,781				112,464				71,582
Federal funds purchased, repurchase agreements, & other short-term borrowings			3,671				2,078				5,488				3,560
Federal Home Loan Bank advances			5,035				6,380				9,836				13,009
Long-term debt			2,201				2,168				4,405				4,321
Total interest expense			68,270				49,407				132,193				92,472
Net interest revenue			67,523				58,027				132,146				113,558
Provision for loan losses			18,700				3,700				22,400				7,200
Net interest revenue after provision for loan losses			48,823				54,327				109,746				106,358
Fee revenue:
Service charges and fees			7,975				6,828				15,228				13,181
Mortgage loan and other related fees			2,476				1,708				4,699				3,221
Consulting fees			2,241				1,572				3,988				3,156
Brokerage fees			1,192				796				2,136				1,646
Securities gains (losses), net			1,386				—				1,593				(3	)
Losses on prepayment of borrowings			(1,164	)			(290	)			(1,164	)			(290	)
Other			2,448				1,362				4,456				2,823
Total fee revenue			16,554				11,976				30,936				23,734
Total revenue			65,377				66,303				140,682				130,092
Operating expenses:
Salaries and employee benefits			30,022				24,469				58,339				48,353
Communications and equipment			3,845				3,731				7,657				7,107
Occupancy			3,316				2,916				6,507				5,848
Advertising and public relations			2,098				1,948				4,114				3,836
Postage, printing and supplies			1,680				1,289				3,340				2,805
Professional fees			2,010				1,069				3,489				2,230
Amortization of intangibles			633				503				1,197				1,006
Other			4,098				3,720				7,900				6,923
Total operating expenses			47,702				39,645				92,543				78,108
Income before income taxes			17,675				26,658				48,139				51,984
Income taxes			5,764				9,729				16,883				19,016
Net income		$	11,911			$	16,929			$	31,256			$	32,968
Net income available to common shareholders		$	11,906			$	16,924			$	31,246			$	32,958
Earnings per common share:
Basic		$	.26			$	.42			$	.71			$	.82
Diluted			.26				.41				.70				.80
Dividends per common share			.09				.08				.18				.16
Weighted average common shares outstanding:
Basic			44,949				40,156				43,980				40,122
Diluted			45,761				41,328				44,842				41,259

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

UNITED COMMUNITY BANKS, INC.
Consolidated Balance Sheet

		June 30,				December 31,				June 30,
(in thousands, except share and per share data)		2007				2006				2006
		(unaudited)				(audited)				(unaudited)
ASSETS
Cash and due from banks		$	171,095			$	158,348			$	159,954
Interest-bearing deposits in banks			23,146				12,936				21,948
Cash and cash equivalents			194,241				171,284				181,902
Securities available for sale			1,213,659				1,107,153				974,524
Mortgage loans held for sale			30,615				35,325				24,000
Loans, net of unearned income			5,999,093				5,376,538				4,810,277
Less allowance for loan losses			92,471				66,566				58,508
Loans, net			5,906,622				5,309,972				4,751,769
Premises and equipment, net			171,327				139,716				124,018
Accrued interest receivable			64,538				58,291				44,187
Goodwill and other intangible assets			326,467				167,058				117,646
Other assets			180,198				112,450				113,090
Total assets		$	8,087,667			$	7,101,249			$	6,331,136
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Deposits:
Demand		$	773,435			$	659,892			$	662,463
NOW			1,447,789				1,307,654				1,106,988
Money market			504,730				255,862				198,491
Savings			207,468				175,631				173,985
Time:
Less than $100,000			1,651,486				1,650,906				1,388,009
Greater than $100,000			1,428,841				1,397,245				1,106,359
Brokered			347,520				325,696				340,355
Total deposits			6,361,269				5,772,886				4,976,650
Federal funds purchased, repurchase agreements, and other short-term borrowings			238,429				65,884				249,552
Federal Home Loan Bank advances			499,060				489,084				458,587
Long-term debt			113,151				113,151				111,869
Accrued expenses and other liabilities			47,027				43,477				38,181
Total liabilities			7,258,936				6,484,482				5,834,839
Shareholders’ equity:
Preferred stock, $1 par value; $10 stated value; 10,000,000 shares authorized; 32,200, 32,200 and 32,200 shares issued and outstanding			322				322				322
Common stock, $1 par value; 100,000,000 shares authorized; 48,781,351, 42,890,863 and 40,178,533 shares issued and outstanding			48,781				42,891				40,179
Common stock issuable; 60,761, 29,821 and 19,712 shares			1,816				862				544
Capital surplus			461,226				270,383				197,235
Retained earnings			329,229				306,261				277,086
Accumulated other comprehensive loss			(12,643	)			(3,952	)			(19,069	)
Total shareholders’ equity			828,731				616,767				496,297
Total liabilities and shareholders’ equity		$	8,087,667			$	7,101,249			$	6,331,136

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

UNITED COMMUNITY BANKS, INC.
Consolidated Statement of Changes in Shareholders’ Equity (unaudited)
For the Six Months Ended June 30,

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

		Six Months Ended
		June 30,
(in thousands)		2007				2006
Operating activities, net of effect of business combinations:
Net income		$	31,256			$	32,968
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization and accretion			6,728				7,408
Provision for loan losses			22,400				7,200
Stock based compensation			1,630				1,336
(Gain) loss on sale of securities available for sale			(1,593	)			3
Gain on sale of other assets			(210	)			(184	)
Loss on prepayment of borrowings			1,164				290
Changes in assets and liabilities:
Other assets and accrued interest receivable			(5,732	)			(18,026	)
Accrued expenses and other liabilities			(13,319	)			(7,046	)
Mortgage loans held for sale			4,710				(1,665	)
Net cash provided by operating activities			47,034				22,284
Investing activities, net of effect of business combinations:
Proceeds from sales of securities available for sale			44,150				7,649
Proceeds from maturities and calls of securities available for sale			187,556				58,992
Purchases of securities available for sale			(300,857	)			(62,766	)
Net increase in loans			(113,609	)			(417,495	)
Purchase of Bank Owned Life Insurance (BOLI)			(50,000	)			—
Proceeds from sales of premises and equipment			662				1,289
Purchases of premises and equipment			(20,357	)			(17,079	)
Net cash paid for acquisitions			(4,346	)			—
Proceeds from sale of other real estate			7,799				1,359
Net cash used by investing activities			(249,002	)			(428,051	)
Financing activities, net of effect of business combinations:
Net change in deposits			20,538				499,050
Net change in federal funds purchased, repurchase agreements, and other short-term borrowings			209,200				126,671
Proceeds from FHLB advances			750,000				224,710
Repayments of FHLB advances			(751,164	)			(402,000	)
Proceeds from exercise of stock options			800				508
Proceeds from issuance of common stock for dividend reinvestment and employee benefit plans			2,881				2,195
Cash dividends on common stock			(7,320	)			(6,025	)
Cash dividends on preferred stock			(10	)			(10	)
Net cash provided by financing activities			224,925				445,099
Net change in cash and cash equivalents			22,957				39,332
Cash and cash equivalents at beginning of period			171,284				142,570
Cash and cash equivalents at end of period		$	194,241			$	181,902

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

United Community Banks, Inc.

Notes to Consolidated Financial Statements

Note 1 — Accounting Policies

     The accounting and financial reporting policies of United Community Banks, Inc. (“United”) and its subsidiaries conform to accounting principles generally accepted in the United States of America and general banking industry practices. The accompanying interim consolidated financial statements have not been audited. All material intercompany balances and transactions have been eliminated. A more detailed description of United’s accounting policies is included in the 2006 annual report filed on Form 10-K.

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

Note 2 — Stock-Based Compensation

     United has an equity compensation plan that allows for grants of incentive stock options, nonqualified stock options, restricted stock awards (also referred to as “nonvested stock” awards), stock awards, performance share awards or stock appreciation rights. Options granted under the plan can have an exercise price no less than the fair market value of the underlying stock at the date of grant. The general terms of the plan include a vesting period (usually four years) with an exercisable period not to exceed ten years. Certain option and restricted stock awards provide for accelerated vesting if there is a change in control (as defined in the plan). As of June 30, 2007, approximately 1,863,000 additional awards could be granted under the plan. Through June 30, 2007, only incentive stock options, nonqualified stock options and restricted stock awards and units had been granted under the plan.

The following table shows stock option activity for the first six months of 2007.

										Weighted-
										Average
						Weighted-				Remaining				Aggregate
						Average Exercise				Contractual				Intrinisic
Options		Shares				Price				Term (Years)				Value ($000)
Outstanding at December 31, 2006			2,549,823			$	19.05
Granted			595,700				30.70
Exercised			(78,228	)			10.24
Forfeited			(28,775	)			26.38
Expired			(1,250	)			28.02
Outstanding at June 30, 2007			3,037,270			$	21.49				6.7			$	17,720
Exercisable at June 30, 2007			1,792,627			$	16.66				5.2			$	16,883

     The weighted average fair value of stock options granted in the second quarter of 2007 and 2006 was $8.30 and $8.63, respectively. The fair value of each option granted was estimated on the date of grant using the Black-Scholes model. The key assumptions used to determine the fair value of stock options are presented in the table below.

		Six Months Ended
		June 30,
		2007				2006
Expected volatility				20	%		22	%
Expected dividend yield		1.1% to 1.2			%	1.1% to 1.2		%
Expected life (in years)				6.25 to 6.50			6.25
Risk-free rate		4.6% to 4.9			%	4.3% to 5.1		%

     United’s stock trading history began in March of 2002 when United listed on the Nasdaq National Market. For 2007 and 2006, expected volatility was determined using United’s historical monthly volatility over the period beginning in March of 2002 through the end of the last completed year. Compensation expense for stock options was $1,013,000 and $873,000 for the six months ended June 30, 2007 and 2006, respectively, which was net of deferred tax benefits of $293,000 and $111,000, respectively. The amount of compensation expense for both periods was determined based on the fair value of the options at the time of grant, multiplied by the number of options granted that were expected to vest, which was then amortized, net of any applicable tax benefit, over the vesting period. The forfeiture rate for options is estimated to be approximately 3% per year. The total intrinsic value of options exercised during the first six months of 2007 and 2006 was $1,761,000 and $1,108,000, respectively.

     The table below presents the activity in restricted stock for the first six months of 2007.

						Weighted-
						Average Grant-
Restricted Stock		Shares				Date Fair Value
Outstanding at December 31, 2006			78,440			$	25.85
Granted			48,400				30.96
Vested			(33,060	)			24.35
Outstanding at June 30, 2007			93,780			$	29.02

     Compensation expense for restricted stock is based on the fair value of United’s common stock on the date of grant. The value of restricted stock grants that are expected to vest is amortized into expense over the vesting period. For the six months ended June 30, 2007 and 2006, compensation expense of $324,000 and $352,000, respectively, was recognized related to restricted stock awards. The total intrinsic value of the restricted stock was $2,428,000 at June 30, 2007.

     As of June 30, 2007, there was $10,626,000 of unrecognized compensation cost related to nonvested stock options and restricted stock awards granted under the plan. That cost is amortized into expense over the vesting period, which is usually 48 months and is expected to be recognized over a weighted-average period of 1.7 years. The aggregate grant date fair value of options and restricted stock awards that vested during the six months ended June 30, 2007, was $3,171,000.

Note 3 — Common Stock Issued / Common Stock Issuable

     United provides a Dividend Reinvestment and Share Purchase Plan (DRIP) to its shareholders. Under the plan, shareholders of record can voluntarily reinvest all or a portion of their cash dividends into shares of United’s common stock, as well as purchase additional stock through the plan for cash. United’s 401(k) retirement plan regularly purchases shares of United’s common stock directly from United. In addition, United has an Employee Stock Purchase Program (ESPP) that allows eligible employees to purchase shares of common stock at a 5% discount, with no commission charges. For the six months ended June 30, 2007 and June 30, 2006, United issued 90,002 shares and 79,178 shares, respectively, and increased capital by $2.9 million and $2.2 million, respectively, through these programs.

     United offers its common stock as an investment option in its deferred compensation plan. The common stock component of the deferred compensation plan is accounted for as an equity instrument and is reflected in the consolidated financial statements as common stock issuable. At June 30, 2007 and June 30, 2006, 60,761 shares and 19,712 shares, respectively, were issuable under the deferred compensation plan.

Note 4 — Earnings Per Share

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

(in thousands, except per share data)

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2007				2006				2007				2006
Basic earnings per share:
Weighted average shares outstanding			44,949				40,156				43,980				40,122
Net income available to common shareholders		$	11,906			$	16,924			$	31,246			$	32,958
Basic earnings per share		$	.26			$	.42			$	.71			$	.82
Diluted earnings per share:
Weighted average shares outstanding			44,949				40,156				43,980				40,122
Net effect of the assumed exercise of stock options based on the treasury stock method using average market price for the period			760				781				819				749
Common stock issuable under deferred compensation plan			52				19				43				16
Effect of conversion of subordinated debt			—				372				—				372
Total weighted average shares and common stock equivalents outstanding			45,761				41,328				44,842				41,259
Net income available to common shareholders		$	11,906			$	16,924			$	31,246			$	32,958
Income effect of conversion of subordinated debt, net of tax			—				41				—				79
Net income, adjusted for effect of conversion of subordinated debt, net of tax		$	11,906			$	16,965			$	31,246			$	33,037
Diluted earnings per share		$	.26			$	.41			$	.70			$	.80

Note 5 — Mergers and Acquisitions

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

     The following table summarizes the estimated fair values of assets acquired and liabilities assumed on the acquisition date (in thousands):

		Gwinnett
		Commercial
		Group
Assets acquired:
Cash and cash equivalents		$	16,472
Federal funds sold			36,655
Investment securities			48,157
Loans, net			526,629
Premises and equipment			16,690
Core deposit intangible			6,874
Goodwill			154,076
Other assets			3,425
Total assets acquired			808,978
Liabilities assumed:
Deposits			567,845
Other borrowed funds			10,000
Other liabilities			8,274
Total liabilities assumed			586,119
Net assets acquired		$	222,859

     The financial information below presents the pro forma earnings of United assuming that the results of operations of Gwinnett and Southern Bancorp, Inc., acquired on December 1, 2006, were included in consolidated earnings as of the beginning of the earliest reported period (in thousands):

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2007				2006				2007				2006
Total revenue		$	69,221			$	77,553			$	151,930			$	151,078
Net income			13,016				21,054				35,514				40,357
Diluted earnings per share			.26				.43				.72				.82

     At June 30, 2007, accrued merger costs of $3,223,000 remained unpaid relating to acquisitions closed in 2007, 2006 and 2004. The severance and related costs include change in control payments for which payment had been deferred, the majority of which will be paid in January of 2008. Professional fees include legal fees, investment banker fees, and fees for other professional services related to the business combinations. Contract termination costs include amounts claimed by service providers as a result of early termination of service contracts related to the acquisitions. During the first quarter, the one contract termination charge that was in dispute was resolved, and goodwill was reduced accordingly. A reconciliation of the activities in 2007 related to accrued merger costs is below (in thousands):

Activity with accrued merger cost
For the Six Months Ended June 30, 2007

										Amounts
		Beginning				Purchase				Charged to				Amounts				Ending
		Balance				Adjustments				Earnings				Paid				Balance
Severance and related costs		$	577			$	2,261			$	—			$	(328	)		$	2,510
Professional fees			47				705				—				(39	)			713
Contract termination costs			804				(785	)			—				(19	)			—
Totals		$	1,428			$	2,181			$	—			$	(386	)		$	3,223

Note 6 — Reclassification

     Certain amounts for the comparative periods of 2006 have been reclassified to conform to the 2007 presentation.

Note 7 — Recent Accounting Pronouncements

     In February 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 159 (SFAS No. 159), The Fair Value for Financial Assets and Financial Liabilities—including an amendment of FASB Statement No. 115. This statement permits entities to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. This statement is expected to expand the use of fair value measurement, which is consistent with the FASB’s long-term measurement objective for accounting for financial instruments. This statement is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. Early adoption is permitted as of the beginning of a fiscal year that begins on or before November 15, 2007, provided the entity also elects to apply SFAS No. 157, Fair Value Measurements. United expects to adopt this standard beginning January 1, 2008. The financial statement impact is being evaluated; however, it is not expected to be material to United’s financial position, results of operations or disclosures.

     United adopted Financial Interpretation No. (“FIN”) 48, Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109, on January 1, 2007. The adoption of FIN 48 had no affect on United’s financial statements. The amount of unrecognized tax benefits as of January 1, 2007 totaled $2.0 million. All of this amount would increase income from continuing operations, and thus impact United’s effective tax rate, if ultimately recognized into income. Unrecognized state income tax benefits are reported net of their related deferred federal income tax benefit.

     It is United’s policy to recognize interest and penalties accrued relative to unrecognized tax benefits in their respective federal or state income taxes accounts. As of January 1, 2007, $403,000 in interest and penalties had been accrued.

     United and its subsidiaries file a consolidated U.S. federal income tax return, as well as filing various returns in the states where its banking offices are located. The Company’s filed income tax returns are no longer subject to examination by taxing authorities for years before 2003.

Note 8 — Special Fraud Related Loan Loss Provision

     The second quarter 2007 provision for loan losses included a special $15 million provision for fraud related loan losses in two real estate developments located near Spruce Pine, North Carolina. During the second quarter of 2007, the North Carolina Attorney General obtained a receiver to take custody the developers’ assets citing possible fraud on the part of the developers. United has loans outstanding to 83 individual borrowers that total $23.6 million secured by undeveloped lots in these developments. United was one of twelve banks that had loaned money to borrowers to finance the purchase of lots. The loans were made to appropriately qualified borrowers in accordance with United’s standard underwriting procedures. At the time the loans were made, we were not aware that most of the borrowers were simultaneously obtaining loans for additional lots at other banks and thereby taking on debt possibly beyond their repayment ability. We were also unaware that the borrowers’ down payments were not paid in cash as indicated on the closing statements but were financed by a second mortgage from the developer and that the developer agreed to service the borrowers’ debts. We have also subsequently learned that the appraisals relied upon in the underwriting process had been inflated by using comparable sales that were not at arms length to persons related to the developer and that many of the lots were subdivided into parcels that are too small to be used for their intended purpose. Based on our findings and our internal estimate of expected losses, we recorded a $15 million special provision for loan losses. We are working with the receiver, the other banks involved, the borrowers and our insurance carrier in order to minimize our losses. None of the loans have been charged off, but all were placed on non-accrual status as of June 30, 2007 and included in nonperforming assets.

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

Forward-Looking Statements

     This Form 10-Q contains forward-looking statements regarding United Community Banks, Inc. (“United”), including, without limitation, statements relating to United’s expectations with respect to revenue, credit losses, levels of nonperforming assets, expenses, earnings and other measures of financial performance. Words such as “may”, “could”, “would”, “should”, “believes”, “expects”, “anticipates”, “estimates”, “intends”, “plans”, “targets” or similar expressions are intended to identify forward-looking statements. These forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties that are subject to change based on various factors (many of which are beyond United’s control). The following factors, among others, could cause United’s financial performance to differ materially from the expectations expressed in such forward-looking statements:

	•		our recent operating results may not be indicative of future operating results;
	•		our business is subject to the success of the local economies in which we operate;
	•		we may face risks with respect to future expansion and acquisitions or mergers;
	•		changes in prevailing interest rates may negatively affect our net income and the value of our assets;
	•		our concentration of construction and land development loans is subject to unique risks that could adversely affect our earnings;
	•		if our allowance for loan losses is not sufficient to cover actual loan losses, our earnings would decrease;
	•		competition from financial institutions and other financial service providers may adversely affect our profitability;
	•		business increases, productivity gains and other investments are lower than expected or do not occur as quickly as anticipated;
	•		competitive pressures among financial services companies increase significantly;
	•		the 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;
	•		trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System, change;
	•		inflation or market conditions fluctuate;
	•		conditions in the stock market, the public debt market and other capital markets deteriorate;
	•		financial services laws and regulations change;
	•		technology changes and United fails to adapt to those changes;
	•		consumer spending and saving habits change;
	•		unanticipated regulatory or judicial proceedings occur; and
	•		United is unsuccessful at managing the risks involved in the foregoing.

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

Overview

     The following discussion is intended to provide insight into the financial condition and results of operations of United and its subsidiaries and should be read in conjunction with the consolidated financial statements and accompanying notes.

     United is a bank holding company registered with the Federal Reserve under the Bank Holding Company Act of 1956 that was incorporated under the laws of the state of Georgia in 1987 and commenced operations in 1988. At June 30, 2007, United had total consolidated assets of $8.1 billion, total loans of $6.0 billion, total deposits of $6.4 billion and stockholders’ equity of $828.7 million.

     United’s activities are primarily conducted by its wholly owned Georgia and North Carolina 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.

     Reported earnings of $11.9 million during the quarter ended June 30, 2007 included a special $15.0 million provision for fraud related loan losses involving two halted real estate developments near Spruce Pine, North Carolina. The after-tax impact of this provision was $9.2 million, or $.20 per diluted share. Because management believes these losses are an isolated and non-recurring event we will highlight operating earnings information, which excludes the special provision to provide a better understanding of our ongoing earnings and credit trends.

     Net operating income was $21.1 million during the second quarter of 2007, an increase of 24% from the $16.9 million earned during the second quarter of 2006. Diluted operating earnings per common share was $.46 for the second quarter of 2007, compared to $.41 for the second quarter of 2006, an increase of 12%. Operating return on tangible equity for the second quarter of 2007 was 17.54%, compared to 17.68% for the second quarter of 2006. Operating return on assets for the second quarter of 2007 was 1.12% as compared to 1.10% for the second quarter of 2006.

     For the first six months of 2007, net operating income was $40.4 million compared to $33.0 million for the same period in 2006, an increase of 23%. Diluted operating earnings per share was $.90 for the six months ended June 30, 2007, compared with $.80 for 2006, an increase of 13%. Operating return on tangible equity for the first six months of 2007 was 17.36% compared to 17.67% for 2006. Operating return on assets for the six months of 2007 was 1.12% compared to 1.10% for 2006.

     Operating earnings were driven by strong revenue growth over the past twelve months. During the first half of 2007, United saw a slow down in loan growth, particularly construction loans for acquisition and development projects. During 2007, competitive pressures drove pricing on certificates of deposit above rates for similar structured wholesale borrowings leading to a shift in funding toward lower priced wholesale borrowed funds.

     Although both net charge offs and nonperforming assets increased from a year ago and last quarter, credit quality remains solid with net charge offs as a percentage of average loans of 15 basis points remaining low by historical measures. Nonperforming assets as a percentage of total assets rose to 54 basis points from 14 basis points a year ago and 20 basis points at the end of the first quarter. Included in nonperforming assets are $23.6 million in loans in the halted real estate developments near Spruce Pine, North Carolina. Excluding the Spruce Pine lot loans, the ratio of nonperforming assets to total assets of 25 basis points is more in line with our long-term trend of 20-35 basis points.

     Fee revenue rose a strong 38% reflecting increases in every category compared to the second quarter of 2006. For the first six months of 2007, fee revenue increased 30% versus 2006. Operating expenses were up 20% from the second quarter of 2006 and up 18% for the first six months of 2007 as compared with the same period a year ago. The increase in operating expenses reflects the added operating expenses of recently acquired banks and the significant de novo expansion activity over the last 18 months.

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 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 judgment to be made by management. Different assumptions in the application of these policies could result in material changes in United’s consolidated financial position or consolidated results of operations. See “Asset Quality and Risk Elements” herein for additional discussion of United’s accounting methodologies related to the allowance.

Non-GAAP Earnings Measures

     The presentation of United’s financial results herein highlight net operating income, which is a measure of performance determined by methods other than in accordance with accounting principles generally accepted in the United States, or GAAP. Management included non-GAAP net operating income because it believes it is useful for evaluating United’s operations and performance over periods of time, and uses net operating income in managing and evaluating United’s business and intends to use it in discussions about United’s operations and performance.

     Net operating income excludes the pre-tax effect of the special $15 million fraud related provision for loan losses recorded in the second quarter of 2007 involving lot loans near Spruce Pine, North Carolina because management feels that the circumstances leading to the taking of the special provision were isolated, non-recurring events and do not reflect overall trends in the Registrant’s earnings. Management believes this non-GAAP net operating income provides users of the Registrant’s financial information with a meaningful measure for assessing the Registrant’s financial results and credit trends and comparing financial results to prior periods.

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

Table 1 — Operating Earnings to GAAP Earnings Reconciliation
(in thousands, except per share data)

		Second				Six Months Ended
		Quarter				June 30,
		2007				2007
Special provision for fraud related loan losses		$	15,000			$	15,000
Income tax effect of special provision			5,835				5,835
After-tax effect of special provision		$	9,165			$	9,165
Net Income Reconciliation
Operating net income		$	21,076			$	40,421
After-tax effect of special provision			(9,165	)			(9,165	)
Net income (GAAP)		$	11,911			$	31,256
Basic Earnings Per Share Reconciliation
Basic operating earnings per share		$	.47			$	.92
Per share effect of special provision			(.21	)			(.21	)
Basic earnings per share (GAAP)		$	.26			$	.71
Diluted Earnings Per Share Reconciliation
Diluted operating earnings per share		$	.46			$	.90
Per share effect of special provision			(.20	)			(.20	)
Diluted earnings per share (GAAP)		$	.26			$	.70

Table 2 — Financial Highlights
Selected Financial Information

																						Second
		2007								2006												Quarter				For the Six								YTD
(in thousands, except per share		Second				First				Fourth				Third				Second				2007-2006				Months Ended								2007-2006
data; taxable equivalent)		Quarter				Quarter				Quarter				Quarter				Quarter				Change				2007				2006				Change
INCOME SUMMARY
Interest revenue		$	136,237			$	129,028			$	123,463			$	116,304			$	107,890							$	265,265			$	206,928
Interest expense			68,270				63,923				60,912				55,431				49,407								132,193				92,472
Net interest revenue			67,967				65,105				62,551				60,873				58,483				16	%			133,072				114,456				16	%
Provision for loan losses(1)			3,700				3,700				3,700				3,700				3,700								7,400				7,200
Fee revenue			16,554				14,382				13,215				12,146				11,976				38				30,936				23,734				30
Total operating revenue			80,821				75,787				72,066				69,319				66,759				21				156,608				130,990				20
Operating expenses			47,702				44,841				42,521				41,441				39,645				20				92,543				78,108				18
Income before taxes			33,119				30,946				29,545				27,878				27,114				22				64,065				52,882				21
Income taxes			12,043				11,601				11,111				10,465				10,185								23,644				19,914
Net operating income			21,076				19,345				18,434				17,413				16,929				24				40,421				32,968				23
Fraud loss provision, net of tax(1)			9,165				—				—				—				—								9,165				—
Net income		$	11,911			$	19,345			$	18,434			$	17,413			$	16,929				(30	)		$	31,256			$	32,968				(5	)
OPERATING PERFORMANCE(1)
Earnings per common share:
Basic		$	.47			$	.45			$	.45			$	.43			$	.42				12			$	.92			$	.82				12
Diluted			.46				.44				.44				.42				.41				12				.90				.80				13
Return on tangible equity (2)(3)(4)			17.54	%			17.18	%			17.49	%			17.29	%			17.68	%							17.36	%			17.67	%
Return on assets (4)			1.12				1.11				1.10				1.09				1.10								1.12				1.10
Dividend payout ratio			19.15				20.00				17.78				18.60				19.05								19.57				19.51
GAAP PERFORMANCE MEASURES
Per common share:
Basic earnings		$	.26			$	.45			$	.45			$	.43			$	.42				(38	)		$	.71			$	.82				(13	)
Diluted earnings			.26				.44				.44				.42				.41				(37	)			.70				.80				(13	)
Cash dividends declared			.09				.09				.08				.08				.08				13				.18				.16				13
Book value			16.98				14.83				14.37				13.07				12.34				38				16.98				12.34				38
Tangible book value (3)			10.44				11.06				10.57				10.16				9.50				10				10.44				9.50				10
Key performance ratios:
Return on equity (2)(4)			7.05				12.48				13.26				13.22				13.41								9.64				13.33
Return on assets (4)			.64				1.11				1.10				1.09				1.10								.86				1.10
Net interest margin (4)			3.94				3.99				3.99				4.07				4.07								3.96				4.07
Efficiency ratio			56.59				56.56				55.93				56.46				56.04								56.57				56.40
Dividend payout ratio			34.62				20.00				17.78				18.60				19.05								25.35				19.51
Equity to assets			8.94				8.80				8.21				8.04				7.95								8.87				7.99
Tangible equity to assets (3)			6.65				6.66				6.46				6.35				6.22								6.65				6.23
ASSET QUALITY(5)
Allowance for loan losses		$	92,471			$	68,804			$	66,566			$	60,901			$	58,508							$	92,471			$	58,508
Non-performing assets			43,601				14,290				13,654				9,347				8,805								43,601				8,805
Net charge-offs			2,124				1,462				1,930				1,307				1,042								3,586				2,287
Allowance for loan losses to loans			1.54	%			1.27	%			1.24	%			1.23	%			1.22	%							1.54	%			1.22	%
Non-performing assets to total assets			.54				.20				.19				.14				.14								.54				.14
Net charge-offs to average loans (4)			.15				.11				.15				.11				.09								.13				.10
AVERAGE BALANCES
Loans		$	5,619,950			$	5,402,860			$	5,134,721			$	4,865,886			$	4,690,196				20			$	5,512,005			$	4,598,355				20
Investment securities			1,242,448				1,153,208				1,059,125				1,029,981				1,039,707				19				1,198,075				1,039,198				15
Earning assets			6,915,134				6,599,035				6,225,943				5,942,710				5,758,697				20				6,757,959				5,667,213				19
Total assets			7,519,392				7,092,710				6,669,950				6,350,205				6,159,152				22				7,307,231				6,060,526				21
Deposits			5,945,633				5,764,426				5,517,696				5,085,168				4,842,389				23				5,855,530				4,728,730				24
Shareholders’ equity			672,348				624,100				547,419				510,791				489,821				37				648,358				484,420				34
Common shares — basic			44,949				43,000				41,096				40,223				40,156								43,980				40,122
Common shares — diluted			45,761				43,912				42,311				41,460				41,328								44,842				41,259
AT PERIOD END
Loans		$	5,999,093			$	5,402,198			$	5,376,538			$	4,965,365			$	4,810,277				25			$	5,999,093			$	4,810,277				25
Investment securities			1,213,659				1,150,424				1,107,153				980,273				974,524				25				1,213,659				974,524				25
Total assets			8,087,667				7,186,602				7,101,249				6,455,290				6,331,136				28				8,087,667				6,331,136				28
Deposits			6,361,269				5,841,687				5,772,886				5,309,219				4,976,650				28				6,361,269				4,976,650				28
Shareholders’ equity			828,731				638,456				616,767				526,734				496,297				67				828,731				496,297				67
Common shares outstanding			48,781				43,038				42,891				40,269				40,179								48,781				40,179