SEC Filing | United Community Banks, Inc.

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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, 2009

OR

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

For the Transition Period from ___________ to ___________

Commission file number 0-21656


	UNITED COMMUNITY BANKS, INC.
	(Exact name of registrant as specified in its charter)

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

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

	(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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Date File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

YES o NO o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer o		Accelerated filer x

Non-accelerated filer o (Do not check if a smaller reporting company)		Smaller Reporting Company o

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

YES o NO x

Common stock, par value $1 per share: 48,966,262 shares
outstanding as of July 31, 2009

INDEX


PART I - Financial Information

	Item 1.	Financial Statements.

	Consolidated Statement of Income (unaudited) for the Three and Six Months Ended June 30, 2009 and 2008		2


	Consolidated Balance Sheet at June 30, 2009 (unaudited), December 31, 2008 (audited) and June 30, 2008 (unaudited)		3


	Consolidated Statement of Changes in Shareholders’ Equity (unaudited) for the Six Months Ended June 30, 2009 and 2008		4


	Consolidated Statement of Cash Flows (unaudited) for the Six Months Ended June 30, 2009 and 2008		5


	Notes to Consolidated Financial Statements		6

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.	18

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk.	39

	Item 4.	Controls and Procedures.	39


PART II - Other Information

	Item 1.	Legal Proceedings.	39
	Item 1A.	Risk Factors.	40
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	40
	Item 3.	Defaults Upon Senior Securities.	40
	Item 4.	Submission of Matters to a Vote of Security Holders.	40
	Item 5.	Other Information.	41
	Item 6.	Exhibits.	41

Part I – Financial Information

Item 1 – Financial Statements


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

	Three Months Ended June 30,					Six Months Ended June 30,
(in thousands, except per share data)	2009			2008		2009			2008

Interest revenue:
Loans, including fees	$	81,691		$	97,051	$	163,571		$	206,317
Investment securities, including tax exempt of $309, $398, $628 and $792		20,485			19,277		41,237			38,299
Federal funds sold, commercial paper and deposits in banks		98			50		540			272
Total interest revenue		102,274			116,378		205,348			244,888

Interest expense:
Deposits:
NOW		2,843			7,216		6,180			15,803
Money market		2,269			2,310		4,506			5,223
Savings		121			180		248			407
Time		32,064			38,828		68,117			77,712
Total deposit interest expense		37,297			48,534		79,051			99,145
Federal funds purchased, repurchase agreements and other short-term borrowings		595			1,820		1,148			6,138
Federal Home Loan Bank advances		1,203			2,818		2,277			8,563
Long-term debt		2,760			2,059		5,529			4,139
Total interest expense		41,855			55,231		88,005			117,985
Net interest revenue		60,419			61,147		117,343			126,903
Provision for loan losses		60,000			15,500		125,000			23,000
Net interest revenue after provision for loan losses		419			45,647		(7,657	)		103,903

Fee revenue:
Service charges and fees		7,557			7,957		14,591			15,770
Mortgage loan and other related fees		2,825			2,202		5,476			4,165
Consulting fees		1,745			2,252		2,766			4,059
Brokerage fees		497			814		1,186			1,907
Securities (losses) gains, net		(711	)		357		(408	)		357
Gain from acquisition		11,390			—		11,390			—
Other		1,137			1,523		2,285			3,044
Total fee revenue		24,440			15,105		37,286			29,302
Total revenue		24,859			60,752		29,629			133,205

Operating expenses:
Salaries and employee benefits		28,058			28,753		56,897			57,507
Communications and equipment		3,645			3,852		7,374			7,684
Occupancy		3,853			3,704		7,660			7,420
Advertising and public relations		1,191			2,009		2,300			3,360
Postage, printing and supplies		1,294			1,448		2,476			3,040
Professional fees		2,806			1,679		5,099			3,600
Foreclosed property		5,737			2,852		10,056			3,763
FDIC assessments and other regulatory charges		6,810			1,265		9,492			2,531
Amortization of intangibles		739			745		1,478			1,512
Other		1,215			3,454		5,085			6,873
Goodwill impairment		—			—		70,000			—
Severance costs		—			—		2,898			—
Total operating expenses		55,348			49,761		180,815			97,290
(Loss) income before income taxes		(30,489	)		10,991		(151,186	)		35,915
Income tax (benefit) expense		(14,488	)		3,898		(31,412	)		12,744
Net (loss) income		(16,001	)		7,093		(119,774	)		23,171
Preferred stock dividends, including discount accretion		2,559			4		5,113			8
Net (loss) income available to common shareholders	$	(18,560	)	$	7,089	$	(124,887	)	$	23,163

Basic (loss) earnings per common share	$	(.38	)	$	.15	$	(2.57	)	$	.49
Diluted (loss) earnings per common share		(.38	)		.15		(2.57	)		.49
Cash dividends per common share		—			.09		—			.18
Stock dividends per common share (new shares issued per shares held)	1 for 130				—	2 for 130				—
Weighted average common shares outstanding - Basic		48,794			47,158		48,560			47,105
Weighted average common shares outstanding - Diluted		48,794			47,249		48,560			47,260

See notes to Consolidated Financial Statements

UNITED COMMUNITY BANKS, INC.

Consolidated Balance Sheet


(in thousands, except share and per share data)	June 30, 2009		December 31, 2008			June 30, 2008
	(unaudited)		(audited)			(unaudited)
ASSETS

Cash and due from banks	$	110,943	$	116,395		$	176,240
Interest-bearing deposits in banks		70,474		8,417			12,455
Federal funds sold, commercial paper and short-term investments		—		368,609			—
Cash and cash equivalents		181,417		493,421			188,695

Securities available for sale		1,816,787		1,617,187			1,430,588
Mortgage loans held for sale		42,185		20,334			27,094
Loans, net of unearned income		5,513,087		5,704,861			5,933,141
Less allowance for loan losses		145,678		122,271			91,035
Loans, net		5,367,409		5,582,590			5,842,106

Covered assets		230,125		—			—
Premises and equipment, net		178,983		179,160			181,395
Accrued interest receivable		41,405		46,088			50,399
Goodwill and other intangible assets		251,821		321,798			323,296
Other assets		292,914		260,187			220,478
Total assets	$	8,403,046	$	8,520,765		$	8,264,051

LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Deposits:
Demand	$	714,630	$	654,036		$	696,575
NOW		1,273,368		1,543,385			1,541,609
Money market		573,463		466,750			418,935
Savings		180,368		170,275			187,088
Time:
Less than $100,000		1,992,056		1,953,235			1,747,763
Greater than $100,000		1,351,527		1,422,974			1,573,078
Brokered		763,348		792,969			531,408
Total deposits		6,848,760		7,003,624			6,696,456

Federal funds purchased, repurchase agreements, and other short-term borrowings		252,493		108,411			288,650
Federal Home Loan Bank advances		283,292		235,321			285,807
Long-term debt		150,026		150,986			107,996
Accrued expenses and other liabilities		13,203		33,041			47,252
Total liabilities		7,547,774		7,531,383			7,426,161

Shareholders’ equity:
Preferred stock, $1 par value; 10,000,000 shares authorized;
Series A; $10 stated value; 21,700, 25,800 and 25,800 shares issued and outstanding		217		258			258
Series B; $1,000 stated value; 180,000 shares issued and outstanding		173,785		173,180			—
Common stock, $1 par value; 100,000,000 shares authorized;48,933,383, 48,809,301 and 48,809,301 shares issued		48,933		48,809			48,809
Common stock issuable; 182,041, 129,304 and 105,579 shares		3,383		2,908			2,696
Capital surplus		450,514		460,708			462,939
Retained earnings		136,624		265,405			362,089
Treasury stock; 799,892 and 1,713,310 shares, at cost		—		(16,465	)		(39,222	)
Accumulated other comprehensive income		41,816		54,579			321
Total shareholders’ equity		855,272		989,382			837,890
Total liabilities and shareholders’ equity	$	8,403,046	$	8,520,765		$	8,264,051

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, 2009

(in thousands, except share and per share data)	Series A Preferred Stock			Series B Preferred Stock		Common Stock		Common Stock Issuable			Capital Surplus			Retained Earnings			Treasury Stock			Accumulated Other Comprehensive Income (Loss)			Total
Balance, December 31, 2007	$	258		$	—	$	48,809	$	2,100		$	462,881		$	347,391		$	(43,798	)	$	14,261		$	831,902
Comprehensive income:
Net income															23,171									23,171
Other comprehensive income:
Unrealized holding losses on available for sale securities, net of deferred tax benefit and reclassification adjustment																					(15,203	)		(15,203	)
Unrealized gains on derivative financial instruments qualifying as cash flow hedges, net of deferred tax expense																					1,263			1,263
Comprehensive income															23,171						(13,940	)		9,231
Cash dividends declared on common stock ($.18 per share)															(8,465	)								(8,465	)
Exercise of stock options (62,860 shares)												(717	)					1,529						812
Common stock issued to dividend reinvestment plan and employee benefit plans (113,047 shares)												(1,024	)					2,648						1,624
Amortization of stock option and restricted stock awards												1,944												1,944
Vesting of restricted stock (15,159 shares issued, 8,700 shares deferred)									264			(626	)					362						—
Deferred compensation plan, net, including dividend equivalents									374															374
Shares issued from deferred compensation plan (1,545 shares)									(42	)		5						37						—
Tax benefit from options exercised												476												476
Dividends on Series A preferred stock ($.30 per share)															(8	)								(8	)
Balance, June 30, 2008	$	258		$	—	$	48,809	$	2,696		$	462,939		$	362,089		$	(39,222	)	$	321		$	837,890
Balance, December 31, 2008	$	258		$	173,180	$	48,809	$	2,908		$	460,708		$	265,405		$	(16,465	)	$	54,579		$	989,382
Comprehensive income:
Net loss															(119,774	)								(119,774	)
Other comprehensive loss:
Unrealized holding gains on available for sale securities, net of deferred tax expense and reclassification adjustment																					1,582			1,582
Unrealized losses on derivative financial instruments qualifying as cash flow hedges, net of deferred tax benefit																					(14,345	)		(14,345	)
Comprehensive loss															(119,774	)					(12,763	)		(132,537	)
Retirement of Series A preferred stock (4,100 shares)		(41	)																					(41	)
Stock dividends declared on common stock (737,530 shares)							108					(8,893	)		(3,894	)		12,649						(30	)
Exercise of stock options (437 shares)												(6	)					8						2
Common stock issued to dividend reinvestment plan and employee benefit plans (167,873 shares)							14					(2,474	)					3,434						974
Amortization of stock options and restricted stock awards												1,846												1,846
Vesting of restricted stock (12,447 shares issued, 16,162 shares deferred)							2		416			(658	)					240						—
Deferred compensation plan, net, including dividend equivalents									214															214
Shares issued from deferred compensation plan (5,687 shares)									(155	)		21						134						—
Tax on option exercise and restricted stock vesting												(30	)											(30	)
Dividends on Series A preferred stock ($.30 per share)															(8	)								(8	)
Dividends on Series B preferred stock (5%)					605										(5,105	)								(4,500	)
Balance, June 30, 2009	$	217		$	173,785	$	48,933	$	3,383		$	450,514		$	136,624		$	—		$	41,816		$	855,272

Comprehensive loss for the second quarter of 2009 and 2008 was $32,735,000 and $31,569,000, respectively.

See notes to Consolidated Financial Statements

UNITED COMMUNITY BANKS, INC.

Consolidated Statement of Cash Flows (Unaudited)

	Six Months Ended June 30,
(in thousands)	2009			2008
Operating activities:
Net (loss) income	$	(119,774	)	$	23,171
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depreciation, amortization and accretion		7,215			7,211
Provision for loan losses		125,000			23,000
Goodwill impairment charge		70,000			—
Stock-based compensation		1,846			1,944
Loss (gain) on sale of securities available for sale		408			(357	)
(Gain) loss on sale of other assets and other real estate owned		(601	)		578
Write downs of other real estate owned		(4,889	)		(11	)
Gain from acquisition		(11,390	)		—
Changes in assets and liabilities:
Other assets and accrued interest receivable		(10,943	)		(14,651	)
Accrued expenses and other liabilities		50,868			25,309
Mortgage loans held for sale		(21,851	)		910
Net cash provided by operating activities		85,889			67,104

Investing activities:
Proceeds from sales of securities available for sale		15,017			79,735
Proceeds from maturities and calls of securities available for sale		399,401			344,597
Purchases of securities available for sale		(584,100	)		(511,626	)
Net increase in loans		(12,617	)		(65,062	)
Proceeds from sales of premises and equipment		547			323
Purchases of premises and equipment		(6,237	)		(7,291	)
Net cash received from acquisitions		63,618			—
Proceeds from sale of other real estate		56,060			30,636
Net cash used by investing activities		(68,311	)		(128,688	)

Financing activities:
Net change in deposits		(462,921	)		620,505
Net change in federal funds purchased, repurchase agreements, and other short-term borrowings		141,412			(349,812	)
Proceeds from FHLB advances		130,000			400,000
Repayments of FHLB advances		(135,000	)		(634,000	)
Proceeds from exercise of stock options		2			812
Proceeds from issuance of common stock for dividend reinvestment and employee benefit plans		974			1,624
Retirement of preferred stock		(41	)		—
Cash dividends on common stock		—			(8,465	)
Cash dividends on preferred stock		(4,008	)		(8	)
Net cash (used) provided by financing activities		(329,582	)		30,656

Net change in cash and cash equivalents		(312,004	)		(30,928	)

Cash and cash equivalents at beginning of period		493,421			219,623

Cash and cash equivalents at end of period	$	181,417		$	188,695
Supplemental disclosures of cash flow information:
Cash paid (received) during the period for:
Interest	$	91,865		$	120,314
Income taxes		(23,850	)		20,098

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 (“GAAP”) 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 2008 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.

Statement of Financial Accounting Standards No. 161, Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133 (“SFAS 161”), amends and expands the disclosure requirements of Financial Accounting Standards Board (“FASB”) Statement No. 133, Accounting for Derivative Instruments and Hedging Activities (“SFAS 133”) with the intent to provide users of financial statements with an enhanced understanding of: (1) how and why an entity uses derivative instruments, (2) how derivative instruments and related hedged items are accounted for under SFAS 133 and its related interpretations, and (3) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. SFAS 161 requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about the fair value of and gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative instruments.

As required by SFAS 133, United records all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether United has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Derivatives may also be designated as hedges of the foreign currency exposure of a net investment in a foreign operation. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge. United may enter into derivative contracts that are intended to economically hedge certain of its risks, even though hedge accounting does not apply or United elects not to apply hedge accounting under SFAS 133.

Foreclosed property is initially recorded at fair value, less cost to sell. If the fair value, less cost to sell at the time of foreclosure, is less than the loan balance, the deficiency is charged against the allowance for loan losses. If the fair value, less cost to sell, of the foreclosed property decreases during the holding period, a valuation allowance is established with a charge to operating expenses. When the foreclosed property is sold, a gain or loss is recognized on the sale for the difference between the sales proceeds and the carrying amount of the property. Financed sales of foreclosed property are accounted for in accordance with Statement of Financial Accounting Standards No. 66, Accounting for Sales of Real Estate (“SFAS 66”).

Note 2 – Federally Assisted Acquisition of Southern Community Bank

On June 19, 2009, United Community Bank (“UCB”) purchased substantially all the assets and assumed substantially all the liabilities of Southern Community Bank (“SCB”) from the Federal Deposit Insurance Corporation (“FDIC”), as Receiver of SCB. SCB operated five commercial banking branches on the south side of Atlanta in Fayetteville, Peachtree City, Locust Grove and Newnan, Georgia. The FDIC took SCB under receivership upon SCB’s closure by the Georgia Department of Banking and Finance at the close of business June 19, 2009. UCB submitted a bid for the acquisition of SCB with the FDIC on June 16, 2009. The transaction resulted in a cash payment of $31 million from the FDIC to UCB. Further, UCB and the FDIC entered loss sharing agreements regarding future losses incurred on loans and foreclosed loan collateral existing at June 19, 2009. Under the terms of the loss sharing agreements, the FDIC will absorb 80 percent of losses and share 80 percent of loss recoveries on the first $109 million of losses and, absorb 95 percent of losses and share in 95 percent of loss recoveries on losses exceeding $109 million. The term for loss sharing on residential real estate loans is ten years, while the term for loss sharing on all other loans is five years.

The SCB acquisition was accounted for under the purchase method of accounting in accordance with the FASB’s Statement of Financial Accounting Standards No. 141(R) Business Combinations (“SFAS 141(R)”). The statement of net assets acquired as of June 19, 2009 and the resulting gain from acquisition are presented in the following table.

Statement of net assets acquired (at estimated fair values)


(in thousands)	Southern Community Bank

Assets acquired:
Cash and due from banks	$	63,618
Securities available for sale		80,148

Loans		110,023
Foreclosed property		25,913
Estimated loss reimbursement from the FDIC		94,550
Covered assets		230,486
Core deposit intangible		1,500
Accrued interest receivable and other assets		2,434
Total assets acquired		378,186

Liabilities assumed:
Deposits		309,437
Federal Home Loan Bank advances		53,416
Accrued interest payable and other liabilities		3,943
Total liabilities assumed		366,796
Net assets acquired / gain from acquisition	$	11,390

The purchased assets and assumed liabilities were recorded at their respective acquisition date fair values, and identifiable intangible assets were recorded at fair value. Fair values are preliminary and subject to refinement for up to one year after the closing date of a merger as information relative to closing date fair values become available. A gain totaling $11.4 million resulted from the acquisition and is included as a component of fee revenue on the consolidated statement of income. The amount of the gain is equal to the amount by which the fair value of assets purchased exceeded the fair value of liabilities assumed. The results of operations of SCB for the period of June 19, 2009 to June 30, 2009 are included in the consolidated financial statements. SCB’s results of operations prior to the acquisition are not included in United’s consolidated statement of income.

United made significant estimates and exercised significant judgment in accounting for the acquisition of SCB. Management engaged an independent third party to assist in determining the value of SCB’s loans. United also recorded an identifiable intangible asset representing the value of the core deposit customer base of SCB. In determining the value of the identifiable intangible asset, United estimated average lives of depository accounts, future interest rate levels, the cost of servicing various depository products, and other significant items. Management used quoted market prices and observable data to determine the fair value of investment securities. The fair values of FHLB advances, certificates of deposit and other borrowings which were purchased and assumed from SCB were determined based on discounted cash flows at current rates for similar instruments.

Purchased loans acquired in a business combination are recorded at estimated fair value on their purchase date. The carryover of the related allowance for loan losses is prohibited. Purchased loans are accounted for under American Institute of Certified Public Accountants Statement of Position 03-3, Accounting for Certain Loans or Debt Securities Acquired in a Transfer (“SOP 03-3”), when the loans have evidence of credit deterioration since origination and it is probable at the date of acquisition that United will not collect all contractually required principal and interest payments. Evidence of credit quality deterioration as of the purchase date may include statistics such as past due and nonaccrual status. Generally, acquired loans that meet United’s definition of nonaccrual status fall within the scope of SOP 03-3. The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition is referred to as the non-accretable difference which is deducted from the carrying amount of loans. Subsequent decreases to the expected cash flows will generally result in a provision for loan losses. Subsequent increases in cash flows result in a reversal of the provision for loan losses to the extent of prior charges or a reversal of the non-accretable difference with a positive impact on interest revenue. Further, any excess of cash flows expected at acquisition over the estimated fair value is referred to as the accretable yield and is recognized into interest revenue over the remaining life of the loan when there is reasonable expectation about the amount and timing of such cash flows.

Loans, foreclosed property and the estimated FDIC reimbursement resulting from the loss share agreements with the FDIC are reported as “covered assets” in the consolidated balance sheet. The table below shows the components of covered assets at June 30, 2009.


(in thousands)	SOP 03-3 Loans		Non SOP 03-3 Loans		Other		Total

Covered loans	$	23,513	$	86,339	$	—	$	109,852
Covered foreclosed property		—		—		25,723		25,723
Estimated loss reimbursement from the FDIC		—		—		94,550		94,550
Total covered assets	$	23,513	$	86,339	$	120,273	$	230,125

Covered loans are initially recorded at fair value at the acquisition date. Subsequent decreases in the amount expected to be collected results in a provision for loan losses and an increase in the estimated FDIC reimbursement, with any estimated net loss impacting earnings. Covered foreclosed property is initially recorded at its estimated fair value.

On the acquisition date, the preliminary estimate of the contractually required payments receivable for all SOP 03-3 loans acquired was $70.8 million, the cash flows expected to be collected were $24.5 million including interest, and the estimated fair value of the loans was $23.6 million. These amounts were determined based upon the estimated remaining life of the underlying loans, which include the effects of estimated prepayments. At June 30, 2009, a majority of these loans were valued based on the liquidation value of the underlying collateral, because the expected cash flows are primarily based on the liquidation of the underlying collateral and the timing and amount of the cash flows could not be reasonably estimated. Because of the short time period between the closing of the transaction and June 30, 2009, certain amounts related to the SOP 03-3 loans are preliminary estimates and adjustments in future quarters may occur.

Note 3 – 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, 2009, approximately 954,000 additional awards could be granted under the plan. Through June 30, 2009, 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 2009.


Options	Shares			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (Years)		Aggregate Intrinisic Value ($000)

Outstanding at December 31, 2008		3,350,701		$	19.99
Stock dividend adjustment		51,266			—
Granted		352,950			6.35
Exercised		(437	)		5.96
Forfeited		(43,069	)		22.35
Expired		(27,198	)		13.24
Outstanding at June 30, 2009		3,684,213			18.43		6.1	$	—

Exercisable at June 30, 2009		2,464,201			19.26		4.8		—

The weighted average fair value of stock options granted in the second quarter of 2009 and 2008 was $2.88 and $2.93, respectively. The fair value of each option granted was estimated on the date of grant using the Black-Scholes model. Because United’s option plan has not been in place long enough to gather sufficient information about exercise patterns to establish an expected life, United uses the formula provided by the Securities and Exchange Commission in Staff Accounting Bulletin No. 107 to determine the expected life of options.

The weighted average assumptions used to determine the fair value of stock options are presented in the table below.

	Six Months Ended June 30,
	2009			2008

Expected volatility		40.68	%		23.42	%
Expected dividend yield		0.00	%		2.61	%
Expected life (in years)		6.25			6.25
Risk-free rate		3.35	%		3.43	%

United’s stock trading history began in March of 2002 when United listed on the Nasdaq National Market. For 2009 expected volatility was determined using United’s historical monthly volatility for the seventy five months ended December 31, 2008. Seventy five months was chosen to correspond to the expected life of 6.25 years. For 2008, expected volatility was determined using United’s historical monthly volatility over the period beginning in March of 2002 through the end of 2007. Compensation expense for stock options was $1.4 million and $1.5 million for the six months ended June 30, 2009 and 2008, respectively. Deferred tax benefits of $498,000 and $445,000, respectively, were included in the determination of income tax (benefit) expense for the six-month periods ended June 30, 2009 and 2008. 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 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 six months ended June 30, 2009 and 2008 was $840 and $277,000.

The table below presents the activity in restricted stock awards for the first six months of 2009.


Restricted Stock	Shares			Weighted- Average Grant- Date Fair Value

Outstanding at December 31, 2008		89,498		$	24.17
Stock dividend adjustment		1,876			—
Granted		106,000			7.07
Vested		(28,609	)		25.08
Outstanding at June 30, 2009		168,765			13.01

Compensation expense for restricted stock is based on the fair value of restricted stock awards at the time of grant, which is equal to the value of United’s common stock on the date of grant. The value of restricted stock grants that are expected to vest is amortized into expense over the vesting period. For the six months ended June 30, 2009 and 2008, compensation expense of $433,000 and $441,000, respectively, was recognized related to restricted stock awards. The total intrinsic value of the restricted stock was $1.0 million at June 30, 2009.

As of June 30, 2009, there was $6.9 million of unrecognized compensation cost related to nonvested stock options and restricted stock awards granted under the plan. That cost is expected to be recognized over a weighted-average period of 1.4 years. The aggregate grant date fair value of options and restricted stock awards that vested during the six months ended June 30, 2009, was $3.5 million.

Note 4 – Common Stock Issued / Common Stock Issuable

United provides a Dividend Reinvestment and Share Purchase Plan (“DRIP”) to its shareholders. Under the DRIP, shareholders of record can voluntarily reinvest all or a portion of their cash dividends into shares of United’s common stock, as well as purchase additional stock through the plan with cash. United’s 401(k) retirement plan regularly purchases shares of United’s common stock directly from United. In addition, United has an Employee Stock Purchase Program (“ESPP”) that allows eligible employees to purchase shares of common stock at a 5% discount, with no commission charges. For the six months ended June 30, 2009 and 2008, United issued 167,873 and 113,047 shares, respectively, and increased capital by $974,000 and $1.6 million, respectively, through these programs.

United offers its common stock as an investment option in its deferred compensation plan. The common stock component of the deferred compensation plan is accounted for as an equity instrument and is reflected in the consolidated financial statements as common stock issuable. At June 30, 2009 and 2008 182,041 and 105,579 shares, respectively, were issuable under the deferred compensation plan.

Note 5 – Securities Available for Sale

The cost basis, unrealized gains and losses, and fair value of securities available for sale at June 30, 2009, December 31, 2008 and June 30, 2008 are presented below (in thousands):


As of June 30, 2009	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value

U.S. Treasuries	$	39,979	$	—	$	4	$	39,975
U.S. Government agencies		209,662		1,015		3,364		207,313
State and political subdivisions		55,194		619		310		55,503
Mortgage-backed securities		1,462,695		32,318		9,916		1,485,097
Other		28,645		311		57		28,899

Total	$	1,796,175	$	34,263	$	13,651	$	1,816,787

As of December 31, 2008

U.S. Government agencies	$	166,263	$	2,122	$	—	$	168,385
State and political subdivisions		43,649		469		378		43,740
Mortgage-backed securities		1,363,513		26,356		10,713		1,379,156
Other		26,080		79		253		25,906

Total	$	1,599,505	$	29,026	$	11,344	$	1,617,187
As of June 30, 2008

U.S. Government agencies	$	190,934	$	568	$	1,998	$	189,504
State and political subdivisions		40,067		558