SEC Filing | United Community Banks, Inc.

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Form 10-Q

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, 2011


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 001-39095

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.)

125 Highway 515 East
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 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 þ 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 þ	Non-accelerated filer o	Smaller Reporting Company o
		(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). YES o NO þ

Common stock, par value $1 per share 41,568,707 shares voting and 15,914,209 shares non-voting outstanding as of July 31, 2011

INDEX


PART I — Financial Information

Item 1. Financial Statements

Consolidated Statement of Operations (unaudited) for the Three and Six Months Ended June 30, 2011 and 2010			2

Consolidated Balance Sheet at June 30, 2011 (unaudited), December 31, 2010 (audited) and June 30, 2010 (unaudited)			3

Consolidated Statement of Changes in Shareholders’ Equity (unaudited) for the Six Months Ended June 30, 2011 and 2010			4

Consolidated Statement of Cash Flows (unaudited) for the Six Months Ended June 30, 2011 and 2010			5

Notes to Consolidated Financial Statements			6

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			28

Item 3. Quantitative and Qualitative Disclosures About Market Risk			54

Item 4. Controls and Procedures			54

PART II — Other Information

Item 1. Legal Proceedings			54

Item 1A. Risk Factors			54

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			55

Item 3. Defaults Upon Senior Securities			55

Item 4. (Removed and Reserved)			55

Item 5. Other Information			55

Item 6. Exhibits			56

Exhibit 3.1
Exhibit 31.1
Exhibit 31.2
Exhibit 32
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

Part I — Financial Information


Item 1		— Financial Statements

UNITED COMMUNITY BANKS, INC.

Consolidated Statement of Operations (Unaudited)


	Three Months Ended						Six Months Ended
	June 30,						June 30,
(in thousands, except per share data)	2011			2010			2011			2010
Interest revenue:
Loans, including fees	$	60,958		$	70,611		$	122,065		$	142,826
Investment securities, including tax exempt of $251, $295, $510 and $606		14,792			15,829			28,396			32,032
Federal funds sold, commercial paper and deposits in banks		752			759			1,571			1,697

Total interest revenue		76,502			87,199			152,032			176,555

Interest expense:
Deposits:
NOW		1,036			1,745			2,360			3,599
Money market		1,499			1,829			3,527			3,586
Savings		64			83			141			167
Time		10,995			17,718			22,727			37,916

Total deposit interest expense		13,594			21,375			28,755			45,268
Federal funds purchased, repurchase agreements and other short-term borrowings		1,074			1,056			2,116			2,094
Federal Home Loan Bank advances		570			974			1,160			1,951
Long-term debt		2,747			2,667			5,527			5,329

Total interest expense		17,985			26,072			37,558			54,642

Net interest revenue		58,517			61,127			114,474			121,913
Provision for loan losses		11,000			61,500			201,000			136,500

Net interest revenue after provision for loan losses		47,517			(373	)		(86,526	)		(14,587	)

Fee revenue:
Service charges and fees		7,608			7,993			14,328			15,440
Mortgage loan and other related fees		952			1,601			2,446			3,080
Brokerage fees		691			586			1,368			1,153
Securities gains, net		783			—			838			61
Loss from prepayment of debt		(791	)		—			(791	)		—
Other		4,662			1,399			7,554			3,511

Total fee revenue		13,905			11,579			25,743			23,245

Total revenue		61,422			11,206			(60,783	)		8,658

Operating expenses:
Salaries and employee benefits		26,436			23,590			51,360			47,950
Communications and equipment		3,378			3,511			6,722			6,784
Occupancy		3,805			3,836			7,879			7,650
Advertising and public relations		1,317			1,352			2,295			2,395
Postage, printing and supplies		1,085			765			2,203			1,990
Professional fees		2,350			2,178			5,680			4,121
Foreclosed property		1,891			14,540			66,790			25,353
FDIC assessments and other regulatory charges		3,644			3,566			9,057			7,192
Amortization of intangibles		760			794			1,522			1,596
Other		4,062			4,176			10,491			8,097
Loss on sale of nonperforming assets		—			45,349			—			45,349

Total operating expenses		48,728			103,657			163,999			158,477

Income (loss) from continuing operations before income taxes		12,694			(92,451	)		(224,782	)		(149,819	)
Income tax expense (benefit)		5,077			(32,919	)		(89,913	)		(55,829	)

Net income (loss) from continuing operations		7,617			(59,532	)		(134,869	)		(93,990	)
Loss from discontinued operations, net of income taxes		—			—			—			(101	)
Gain from sale of subsidiary, net of income taxes and selling costs		—			—			—			1,266

Net income (loss)		7,617			(59,532	)		(134,869	)		(92,825	)
Preferred stock dividends and discount accretion		3,016			2,577			5,794			5,149

Net income (loss) available to common shareholders	$	4,601		$	(62,109	)	$	(140,663	)	$	(97,974	)


Earnings (loss) from continuing operations per common share — Basic	$	.18		$	(3.29	)	$	(6.40	)	$	(5.25	)
Earnings (loss) from continuing operations per common share — Diluted		.08			(3.29	)		(6.40	)		(5.25	)
Earnings (loss) per common share — Basic		.18			(3.29	)		(6.40	)		(5.19	)
Earnings (loss) per common share — Diluted		.08			(3.29	)		(6.40	)		(5.19	)
Weighted average common shares outstanding — Basic		25,427			18,905			21,965			18,891
Weighted average common shares outstanding — Diluted		57,543			18,905			21,965			18,891

See accompanying 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)	2011			2010			2010
	(unaudited)			(audited)			(unaudited)
ASSETS
Cash and due from banks	$	163,331		$	95,994		$	115,088
Interest-bearing deposits in banks		41,863			111,901			105,183
Federal funds sold, commercial paper and short-term investments		174,996			441,562			148,227

Cash and cash equivalents		380,190			649,457			368,498
Securities available for sale		1,816,613			1,224,417			1,165,776
Securities held to maturity (fair value $379,231, 267,988 and $327,497)		371,578			265,807			322,148
Mortgage loans held for sale		19,406			35,908			22,705
Loans, net of unearned income		4,163,447			4,604,126			4,873,030
Less allowance for loan losses		127,638			174,695			174,111

Loans, net		4,035,809			4,429,431			4,698,919
Assets covered by loss sharing agreements with the FDIC		95,726			131,887			156,611
Premises and equipment, net		178,208			178,239			180,125
Accrued interest receivable		21,291			24,299			29,650
Goodwill and other intangible assets		9,922			11,446			223,600
Foreclosed property		47,584			142,208			123,910
Net deferred tax asset		261,268			166,937			111,485
Other assets		172,074			183,160			249,057

Total assets	$	7,409,669		$	7,443,196		$	7,652,484

LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Deposits:
Demand	$	899,017		$	793,414		$	779,934
NOW		1,306,109			1,424,781			1,326,861
Money market		989,600			891,252			756,370
Savings		197,927			183,894			185,176
Time:
Less than $100,000		1,508,444			1,496,700			1,575,211
Greater than $100,000		981,154			1,002,359			1,093,975
Brokered		300,964			676,772			611,985

Total deposits		6,183,215			6,469,172			6,329,512
Federal funds purchased, repurchase agreements, and other short-term borrowings		103,666			101,067			104,127
Federal Home Loan Bank advances		40,625			55,125			104,138
Long-term debt		150,186			150,146			150,106
Unsettled securities purchases		35,634			—			20,941
Accrued expenses and other liabilities		36,368			32,171			39,243

Total liabilities		6,549,694			6,807,681			6,748,067

Shareholders’ equity:
Preferred stock, $1 par value; 10,000,000 shares authorized;
Series A; $10 stated value; 21,700 shares issued and outstanding		217			217			217
Series B; $1,000 stated value; 180,000 shares issued and outstanding		176,392			175,711			175,050
Series D; $1,000 stated value; 16,613 shares issued and outstanding		16,613			—			—
Common stock, $1 par value; 100,000,000 shares authorized; 41,554,874, 18,937,001 and 18,856,185 shares issued and outstanding		41,555			18,937			18,856
Common stock, non-voting, $1 par value; 30,000,000 shares authorized; 15,914,209 shares issued and outstanding		15,914			—			—
Common stock issuable; 83,575, 67,287 and 56,954 shares		3,574			3,894			3,898
Capital surplus		1,051,607			741,244			739,261
Accumulated deficit		(476,230	)		(335,567	)		(77,590	)
Accumulated other comprehensive income		30,333			31,079			44,725

Total shareholders’ equity		859,975			635,515			904,417

Total liabilities and shareholders’ equity	$	7,409,669		$	7,443,196		$	7,652,484

See accompanying notes to consolidated financial statements.

UNITED COMMUNITY BANKS, INC.

Consolidated Statement of Changes in Shareholders’ Equity (Unaudited)

For the Six Months Ended June 30,


																								(Accumulated			Accumulated
	Preferred Stock															Non-Voting		Common						Deficit)			Other
	Series		Series		Series		Series			Series			Common			Common		Stock			Capital			Retained			Comprehensive
(in thousands, except share and per share data)	A		B		D		F			G			Stock			Stock		Issuable			Surplus			Earnings			Income			Total

Balance, December 31, 2009	$	217	$	174,408	$	—	$	—		$	—		$	18,809		$	—	$	3,597		$	697,271		$	20,384		$	47,635		$	962,321
Comprehensive income:
Net loss																									(92,825	)					(92,825	)
Other comprehensive loss:
Unrealized holding gains on available for sale securities, net of deferred tax expense and reclassification adjustment																												2,750			2,750
Unrealized losses on derivative financial instruments qualifying as cash flow hedges, net of deferred tax benefit																												(5,660	)		(5,660	)

Comprehensive loss																									(92,825	)		(2,910	)		(95,735	)
Issuance of equity instruments in private equity transaction																						39,813									39,813
Common stock issued to dividend Reinvestment plan and employee benefit plans (41,818 shares)														42								898									940
Amortization of stock option and restricted stock																						1,428									1,428
Vesting of restricted stock (2,112 shares issued, 8,304 shares deferred)														2					607			(609	)								—
Deferred compensation plan, net, including dividend equivalents																			162												162
Shares issued from deferred compensation plan (3,134 shares)														3					(468	)		460									(5	)
Dividends on Series A preferred stock																									(7	)					(7	)
Dividends on Series B preferred stock				642																					(5,142	)					(4,500	)

Balance, June 30, 2010	$	217	$	175,050	$	—	$	—		$	—		$	18,856		$	—	$	3,898		$	739,261		$	(77,590	)	$	44,725		$	904,417


Balance, December 31, 2010	$	217	$	175,711	$	—	$	—		$	—		$	18,937		$	—	$	3,894		$	741,244		$	(335,567	)	$	31,079		$	635,515
Comprehensive loss:
Net loss																									(134,869	)					(134,869	)
Other comprehensive loss:
Unrealized holding gains on available for sale securities, net of deferred tax expense and reclassification adjustment																												5,133			5,133
Unrealized losses on derivative financial instruments qualifying as cash flow hedges, net of deferred tax benefit																												(5,879	)		(5,879	)

Comprehensive loss																									(134,869	)		(746	)		(135,615	)
Penalty received on incomplete private equity transaction, net of tax expense																						2,375									2,375
Preferred for common equity exchange related to tax benefits preservation plan (1,551,126 common shares)						16,613								(1,551	)							(15,062	)								—
Conversion of Series F and Series G Preferred Stock (20,618,090 voting and 15,914,209 non-voting common shares)								(195,872	)		(151,185	)		20,618			15,914					310,525									—
Common stock issued to dividend reinvestment plan and employee benefit plans (78,584 shares)														79								665									744
Common and preferred stock issued (3,467,699 common shares)								195,872			151,185			3,468								11,035									361,560
Amortization of stock options and restricted stock awards																						758									758
Vesting of restricted stock (1,417 shares issued, 6,382 shares deferred)														1					54			(55	)								—
Deferred compensation plan, net, including dividend equivalents																			127												127
Shares issued from deferred compensation plan (3,209 shares)														3					(501	)		498									—
Tax on option exercise and restricted stock vesting																						(376	)								(376	)
Dividends on Series A preferred stock																									(7	)					(7	)
Dividends on Series B preferred stock				681																					(5,200	)					(4,519	)
Dividends on Series D preferred stock																									(587	)					(587	)

Balance, June 30, 2011	$	217	$	176,392	$	16,613	$	—		$	—		$	41,555		$	15,914	$	3,574		$	1,051,607		$	(476,230	)	$	30,333		$	859,975

Comprehensive income (loss) for the second quarters of 2011 and 2010 was $10,454,000 and $(60,133,000), respectively.

See accompanying notes to consolidated financial statements.

UNITED COMMUNITY BANKS, INC.

Consolidated Statement of Cash Flows (Unaudited)


	Six Months Ended
	June 30,
(in thousands)	2011			2010
Operating activities:
Net loss	$	(134,869	)	$	(92,825	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation, amortization and accretion		9,374			7,747
Provision for loan losses		201,000			136,500
Stock based compensation		758			1,428
Securities gains, net		(838	)		(61	)
Losses and write downs on sales of other real estate owned		60,505			19,289
Gain from sale of subsidiary		—			(2,110	)
Loss on sale of nonperforming assets		—			45,349
Loss on prepayment of borrowings		791			—
Changes in assets and liabilities:
Other assets and accrued interest receivable		(49,255	)		(55,249	)
Accrued expenses and other liabilities		1,078			(6,888	)
Mortgage loans held for sale		16,502			7,521

Net cash provided by operating activities		105,046			60,701


Investing activities:
Investment securities held to maturity:
Proceeds from maturities and calls		34,742			12,059
Purchases		(141,862	)		(19,617	)
Investment securities available for sale:
Proceeds from sales		106,603			40,817
Proceeds from maturities and calls		220,018			432,436
Purchases		(875,250	)		(398,877	)
Net decrease in loans		64,778			50,600
Proceeds from loan sales		99,298			22,331
Proceeds from sales of premises and equipment		534			39
Purchases of premises and equipment		(5,276	)		(3,601	)
Net cash received from sale of subsidiary		—			290
Net cash received from sale of nonperforming assets		—			20,618
Proceeds from sale of other real estate		60,310			80,898

Net cash (used in) provided by investing activities		(436,105	)		237,993


Financing activities:
Net change in deposits		(285,957	)		(295,729	)
Net change in federal funds purchased, repurchase agreements, and other short-term borrowings		2,599			2,738
Repayments of FHLB advances		(15,291	)		(10,000	)
Proceeds from issuance of common stock for dividend reinvestment and employee benefit plans		744			935
Proceeds from issuance of common and preferred stock, net of offering costs		361,560			—
Proceeds from penalty on incomplete private equity transaction		3,250			—
Cash dividends on preferred stock		(5,113	)		(4,507	)

Net cash provided by (used in) financing activities		61,792			(306,563	)


Net change in cash and cash equivalents		(269,267	)		(7,869	)

Cash and cash equivalents at beginning of period		649,457			376,367


Cash and cash equivalents at end of period	$	380,190		$	368,498


Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest	$	36,703		$	60,083
Income taxes		1,527			819
Unsettled securities purchases		35,634			20,941

See accompanying 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 (“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 2010 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.

Foreclosed property is initially recorded at fair value, less estimated costs to sell. If the fair value, less estimated costs 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 the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification Topic 360, Subtopic 20, Real Estate Sales (“ASC 360-20”).

Note 2 — Accounting Standards Updates

In May 2011, the FASB issued Accounting Standards Update No. 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS (“ASU No. 2011-04”). ASU No. 2011-04 primarily represents clarification to existing guidance. It does change the concepts of the valuation premise and highest and best use, stating that they are only relevant for nonfinancial assets. The guidance also changes the application of premiums and discounts and includes new disclosures. ASU No. 2011-04 is effective for United in the first quarter of 2012. Although evaluation of the impact is not complete, it is not expected to have a material impact on United’s results of operations, financial position, or disclosures.

In June 2011, the FASB issued Accounting Standards Update No. 2011-05, Presentation of Comprehensive Income (“ASU No. 2011-05”). ASU No. 2011-05 requires entities to present net income and other comprehensive income in either a single continuous statement or in two separate, but consecutive statements of net income and other comprehensive income. The option to present items of other comprehensive income in the statement of changes in equity is eliminated. The guidance is effective for United for the first quarter of 2012, and will not have a material impact on United’s results of operations or financial position. It will result in a change of disclosure, as United currently presents other comprehensive income in the statement of changes in shareholders’ equity. United will apply these disclosure changes retrospectively as required by the standard.

Note 3 — Mergers and Acquisitions

On June 19, 2009, United Community Bank (“UCB” or the “Bank”) 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. 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 1-4 Family loans is ten years, while the term for loss sharing on all other loans is five years.

Under the loss sharing agreement, the portion of the losses expected to be indemnified by FDIC is considered an indemnification asset in accordance with ASC 805 Business Combinations. The indemnification asset, referred to as “estimated loss reimbursement from the FDIC” is included in the balance of Assets covered by loss sharing agreements with the FDIC on the Consolidated Balance Sheet. The indemnification asset was recognized at fair value, which was estimated at the acquisition date based on the terms of the loss sharing agreement. The indemnification asset is expected to be collected over a four-year average life. No valuation allowance was required.

Loans, foreclosed property and the estimated FDIC reimbursement resulting from the loss sharing agreements with the FDIC are reported as “assets covered by loss sharing agreements with the FDIC” in the consolidated balance sheet.

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

The table below shows the components of covered assets at June 30, 2011 (in thousands).


	Purchased		Other
	Impaired		Purchased
(in thousands)	Loans		Loans		Other		Total

Commercial (secured by real estate)	$	—	$	43,179	$	—	$	43,179
Commercial (commercial and industrial)		—		3,133		—		3,133
Construction and land development		1,729		13,505		—		15,234
Residential mortgage		186		8,913		—		9,099
Installment		6		188		—		194

Total covered loans		1,921		68,918		—		70,839
Covered forclosed property		—		—		8,270		8,270
Estimated loss reimbursement from the FDIC		—		—		16,617		16,617

Total covered assets	$	1,921	$	68,918	$	24,887	$	95,726

Note 4 — Securities

During the second quarter of 2010, securities available for sale with a fair value of $315 million were transferred to held to maturity. The securities were transferred at their fair value on the date of transfer. The unrealized gain of $7.1 million on the transferred securities on the date of transfer is being amortized into interest revenue as an adjustment to the yield on those securities over the remaining life of the transferred securities. Securities are classified as held to maturity when management has the positive intent and ability to hold them until maturity. Securities held to maturity are carried at amortized cost.

The amortized cost, gross unrealized gains and losses and fair value of securities held to maturity at June 30, 2011, December 31, 2010 and June 30, 2010 are as follows (in thousands).


			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
As of June 30, 2011
U.S. Government agencies	$	5,000	$	—	$	—	$	5,000
State and political subdivisions		49,122		1,823		292		50,653
Mortgage-backed securities⁽¹⁾		317,456		6,184		62		323,578

Total	$	371,578	$	8,007	$	354	$	379,231


As of December 31, 2010
U.S. Government agencies	$	11,939	$	79	$	—	$	12,018
State and political subdivisions		47,007		416		1,005		46,418
Mortgage-backed securities⁽¹⁾		206,861		2,700		9		209,552

Total	$	265,807	$	3,195	$	1,014	$	267,988


As of June 30, 2010
U.S. Government agencies	$	70,284	$	1,076	$	—	$	71,360
State and political subdivisions		26,246		252		7		26,491
Mortgage-backed securities⁽¹⁾		225,618		4,046		18		229,646

Total	$	322,148	$	5,374	$	25	$	327,497


⁽¹⁾		All are residential type mortgage-backed securities

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

The cost basis, unrealized gains and losses, and fair value of securities available for sale at June 30, 2011, December 31, 2010 and June 30, 2010 are presented below (in thousands).


			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
As of June 30, 2011
U.S. Government agencies	$	77,930	$	61	$	514	$	77,477
State and political subdivisions		25,569		1,207		4		26,772
Mortgage-backed securities⁽¹⁾		1,556,910		35,991		283		1,592,618
Other		121,473		100		1,827		119,746

Total	$	1,781,882	$	37,359	$	2,628	$	1,816,613


As of December 31, 2010
U.S. Government agencies	$	99,969	$	67	$	1,556	$	98,480
State and political subdivisions		27,600		878		36		28,442
Mortgage-backed securities⁽¹⁾		963,475		29,204		1,671		991,008
Other		107,811		192		1,516		106,487

Total	$	1,198,855	$	30,341	$	4,779	$	1,224,417


As of June 30, 2010
U.S. Government agencies	$	216,759	$	936	$	—	$	217,695
State and political subdivisions		32,998		1,001		14		33,985
Mortgage-backed securities⁽¹⁾		864,141		37,730		1,103		900,768
Other		13,160		168		—		13,328

Total	$	1,127,058	$	39,835	$	1,117	$	1,165,776


⁽¹⁾		All are residential type mortgage-backed securities

The following table summarizes held to maturity securities in an unrealized loss position as of June 30, 2011, December 31, 2010 and June 30, 2010 (in thousands).


	Less than 12 Months				12 Months or More				Total
			Unrealized				Unrealized				Unrealized
	Fair Value		Loss		Fair Value		Loss		Fair Value		Loss
As of June 30, 2011
State and political subdivisions	$	10,160	$	292	$	—	$	—	$	10,160	$	292
Mortgage-backed securities		25,160		60		1,937		2		27,097		62

Total unrealized loss position	$	35,320	$	352	$	1,937	$	2	$	37,257	$	354


As of December 31, 2010
State and political subdivisions	$	28,949	$	1,005	$	—	$	—	$	28,949	$	1,005
Mortgage-backed securities		1,951		9		—		—		1,951		9

Total unrealized loss position	$	30,900	$	1,014	$	—	$	—	$	30,900	$	1,014


As of June 30, 2010
State and political subdivisions	$	1,145	$	7	$	—	$	—	$	1,145	$	7
Mortgage-backed securities		1,963		18		—		—		1,963		18

Total unrealized loss position	$	3,108	$	25	$	—	$	—	$	3,108	$	25

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

The following table summarizes available for sale securities in an unrealized loss position as of June 30, 2011, December 31, 2010 and June 30, 2010 (in thousands).


	Less than 12 Months				12 Months or More				Total
			Unrealized				Unrealized				Unrealized
	Fair Value		Loss		Fair Value		Loss		Fair Value		Loss
As of June 30, 2011
U.S. Government agencies	$	54,482	$	514	$	—	$	—	$	54,482	$	514
State and political subdivisions		301		—		10		4		311		4
Mortgage-backed securities		169,907		283		—		—		169,907		283
Other		97,145		1,827		—		—		97,145		1,827

Total unrealized loss position	$	321,835	$	2,624	$	10	$	4	$	321,845	$	2,628


As of December 31, 2010
U.S. Government agencies	$	68,412	$	1,556	$	—	$	—	$	68,412	$	1,556
State and political subdivisions		1,082		30		12		6		1,094		36
Mortgage-backed securities		59,505		1,630		2,799		41		62,304		1,671
Other		69,985		1,516		—		—		69,985		1,516

Total unrealized loss position	$	198,984	$	4,732	$	2,811	$	47	$	201,795	$	4,779


As of June 30, 2010
State and political subdivisions	$	300	$	2	$	401	$	12	$	701	$	14
Mortgage-backed securities		19,499		456		25,639		647		45,138		1,103

Total unrealized loss position	$	19,799	$	458	$	26,040	$	659	$	45,839	$	1,117

At June 30, 2011, there were 28 available for sale securities and 13 held to maturity securities that were in an unrealized loss position. United does not intend to sell nor believes it will be required to sell securities in an unrealized loss position prior to the recovery of their amortized cost basis. Unrealized losses at June 30, 2011 were primarily attributable to changes in interest rates.

Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to the length of time and the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, among other factors. In analyzing an issuer’s financial condition, management considers whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, and industry analyst’s reports. During the six months ended June 30, 2010, United recorded impairment losses of $950,000 on investments in financial institutions that showed evidence of other-than-temporary impairment. No impairment losses were identified in the first six months of 2011.

Realized gains and losses are derived using the specific identification method for determining the cost of securities sold. The following table summarizes securities sales activity for the three and six month periods ended June 30, 2011 and 2010 (in thousands).


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2011		2010		2011		2010

Proceeds from sales	$	55,363	$	—	$	106,603	$	40,817


Gross gains on sales	$	838	$	—	$	1,169	$	1,260
Gross losses on sales		55		—		331		249
Impairment losses		—		—		—		950


Net gains on sales of securities	$	783	$	—	$	838	$	61


Income tax expense attributable to sales	$	305	$	—	$	326	$	24

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Securities with a carrying value of $2.11 billion, $1.43 billion, and $1.12 billion were pledged to secure public deposits, FHLB advances and other secured borrowings at June 30, 2011, December 31, 2010 and June 30, 2010.

The amortized cost and fair value of held to maturity and available for sale securities at June 30, 2011, by contractual maturity, are presented in the following table (in thousands).


	Available for Sale				Held to Maturity
	Amortized Cost		Fair Value		Amortized Cost		Fair Value

U.S. Government agencies:
5 to 10 years	$	64,350	$	64,034	$	—	$	—
More than 10 years		13,580		13,443		5,000		5,000

		77,930		77,477		5,000		5,000


State and political subdivisions:
Within 1 year		4,715		4,781		—		—
1 to 5 years		14,682		15,485		2,025		2,078
5 to 10 years		5,324		5,627		21,273		22,336
More than 10 years		848		879		25,824		26,239

		25,569		26,772		49,122		50,653


Other:
1 to 5 years		18,475		17,962		—		—
5 to 10 years		99,546		99,033		—		—
More than 10 years		3,452		2,751		—		—

		121,473		119,746		—		—


Total securities other than mortgage-backed securities:
Within 1 year		4,715		4,781		—		—
1 to 5 years		33,157		33,447		2,025		2,078
5 to 10 years		169,220		168,694		21,273		22,336
More than 10 years		17,880		17,073		30,824		31,239

Mortgage-backed securities		1,556,910		1,592,618		317,456		323,578


	$	1,781,882	$	1,816,613	$	371,578	$	379,231

Expected maturities may differ from contractual maturities because issuers and borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 5 — Loans and Allowance for Loan Losses

Major classifications of loans as of June 30, 2011, December 31, 2010 and June 30, 2010, are summarized as follows (in thousands).


	June 30,		December 31,		June 30,
	2011		2010		2010
Commercial (secured by real estate)	$	1,741,754	$	1,761,424	$	1,780,142
Commercial construction		195,190		296,582		342,140
Commercial (commercial and industrial)		428,058		441,518		441,097

Total commercial		2,365,002		2,499,524		2,563,379
Residential construction		501,909		695,166		819,930
Residential mortgage		1,177,226		1,278,780		1,355,582
Consumer installment		119,310		130,656		134,139

Total loans		4,163,447		4,604,126		4,873,030
Less allowance for loan losses		127,638		174,695		174,111

Loans, net	$	4,035,809	$	4,429,431	$	4,698,919

The Bank makes loans and extensions of credit to individuals and a variety of firms and corporations located primarily in counties in north Georgia, the Atlanta, Georgia MSA, the Gainesville, Georgia MSA, coastal Georgia, western North Carolina and east Tennessee. Although the Bank has a diversified loan portfolio, a substantial portion of the loan portfolio is collateralized by improved and unimproved real estate and is dependent upon the real estate market.

Changes in the allowance for loan losses for the three and six months ended June 30, 2011 and 2010 are summarized as follows (in thousands).


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2011		2010		2011		2010
Balance beginning of period	$	133,121	$	173,934	$	174,695	$	155,602
Provision for loan losses		11,000		61,500		201,000		136,500
Charge-offs:
Commercial (secured by real estate)		3,433		9,791		52,140		12,727
Commercial construction		980		1,460		50,695		3,671
Commercial (commercial and industrial)		604		1,764		4,966		6,318
Residential construction		6,769		41,781		99,024		85,971
Residential mortgage		4,667		6,752		41,343		11,392
Consumer installment		883		1,417		1,979		2,546

Total loans charged-off		17,336		62,965		250,147		122,625

Recoveries:
Commercial (secured by real estate)		174		34		274		1,006
Commercial construction		111		—		111		5
Commercial (commercial and industrial)		81		897		403		1,341
Residential construction		140		266		257		1,356
Residential mortgage		78		235		371		324
Consumer installment		269		210		674		602

Total recoveries		853		1,642		2,090		4,634

Net charge-offs		16,483		61,323		248,057		117,991


Balance end of period	$	127,638	$	174,111	$	127,638	$	174,111

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

At June 30, 2011, December 31, 2010 and June 30, 2010, loans with a carrying value of $991 million, $1.02 billion and $1.50 billion were pledged as collateral to secure FHLB advances and other contingent funding sources.

The following table presents the balance and activity in the allowance for loan losses by portfolio segment and the recorded investment in loans by portfolio segment based on impairment method as of June 30, 2011, December 31, 2010 and June 30, 2010 (in thousands).


							Commercial
	Commercial						(Commercial
	(Secured by			Commercial			and			Residential			Residential			Consumer
	Real Estate)			Construction			Industrial)			Construction			Mortgage			Installment			Unallocated			Total
Six Months Ended June 30, 2011
Allowance for loan losses:
Beginning balance	$	31,191		$	6,780		$	7,580		$	92,571		$	22,305		$	3,030		$	11,238		$	174,695
Charge-offs		(52,140	)		(50,695	)		(4,966	)		(99,024	)		(41,343	)		(1,979	)		—			(250,147	)
Recoveries		274			111			403			257			371			674			—			2,090
Provision		42,671			51,256			4,016			55,249			49,063			498			(1,753	)		201,000

Ending balance	$	21,996		$	7,452		$	7,033		$	49,053		$	30,396		$	2,223		$	9,485		$	127,638

Ending allowance attributable to loans:
Individually evaluated for impairment	$	78		$	450		$	—		$	—		$	639		$	—		$	—		$	1,167
Collectively evaluated for impairment		21,918			7,002			7,033			49,053			29,757			2,223			9,485			126,471

Total ending allowance balance	$	21,996		$	7,452		$	7,033		$	49,053		$	30,396		$	2,223		$	9,485		$	127,638

Loans:
Individually evaluated for impairment	$	14,780		$	1,015		$	—		$	12,611		$	7,247		$	—		$	—		$	35,653
Collectively evaluated for impairment		1,726,974			194,175			428,058			489,298			1,169,979			119,310			—			4,127,794

Total loans	$	1,741,754		$	195,190		$	428,058		$	501,909		$	1,177,226		$	119,310		$	—		$	4,163,447


December 31, 2010
Allowance for loan losses:
Ending allowance attributable to loans:
Individually evaluated for impairment	$	268		$	—		$	—		$	644		$	137		$	—		$	—		$	1,049
Collectively evaluated for impairment		30,923			6,780			7,580			91,927			22,168			3,030			11,238			173,646

Total ending allowance balance	$	31,191		$	6,780		$	7,580		$	92,571		$	22,305		$	3,030		$	11,238		$	174,695

Loans:
Individually evaluated for impairment	$	41,818		$	20,311		$	5,874		$	39,505		$	15,468		$	—		$	—		$	122,976
Collectively evaluated for impairment		1,719,606			276,271			435,644			655,661			1,263,312			130,656			—			4,481,150

Total loans	$	1,761,424		$	296,582		$	441,518		$	695,166		$	1,278,780		$	130,656		$	—		$	4,604,126


Six Months Ended June 30, 2010
Allowance for loan losses:
Beginning balance	$	19,208		$	5,861		$	6,892		$	93,585		$	17,266		$	2,545		$	10,245		$	155,602
Charge-offs		(12,727	)		(3,671	)		(6,318	)		(85,971	)		(11,392	)		(2,546	)		—			(122,625	)
Recoveries		1,006			5			1,341			1,356			324			602			—			4,634
Provision		11,726			6,209			7,365			95,794			13,005			2,171			230			136,500

Ending balance	$	19,213		$	8,404		$	9,280		$	104,764		$	19,203		$	2,772		$	10,475		$	174,111

Ending allowance attributable to loans:
Individually evaluated for impairment	$	—		$	203		$	30		$	685		$	222		$	—		$	—		$	1,140
Collectively evaluated for impairment		19,213			8,201			9,250			104,079			18,981			2,772			10,475			172,971

Total ending allowance balance	$	19,213		$	8,404		$	9,280		$	104,764		$	19,203		$	2,772		$	10,475		$	174,111

Loans:
Individually evaluated for impairment	$	48,018		$	16,917		$	7,909		$	65,622		$	24,106		$	—		$	—		$	162,572
Collectively evaluated for impairment		1,732,124			325,223			433,188			754,308			1,331,476			134,139			—			4,710,458

Total loans	$	1,780,142		$	342,140		$	441,097		$	819,930		$	1,355,582		$	134,139		$	—		$	4,873,030

United reviews all loans that are on nonaccrual with a balance of $500,000 or greater for impairment. A loan is considered impaired when, based on current events and circumstances, it is probable that all amounts due, according to the contractual terms of the loan, will not be collected. Impaired loans are measured based on the present value of expected future cash flows, discounted at the loan’s effective interest rate, at the loan’s observable market price, or the fair value of the collateral if the loan is collateral dependent. Interest payments received on impaired loans are applied as a reduction of the outstanding principal balance.

In the first quarter 2011, United’s Board of Directors adopted an accelerated problem asset disposition plan which included the bulk sale of $267 million in classified loans. Those loans were classified as held for sale at the end of the first quarter and were written down to the expected proceeds from the sale. The charge-offs on the loans transferred to held for sale in anticipation of the bulk loan sale which closed on April 18, 2011, increased first quarter 2011 loan charge-offs by $186 million. The actual loss on the bulk loan sale at closing was less than the amount charged-off in the first quarter, resulting in a $7.27 million reduction of second quarter 2011 charge-offs.

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

The recorded investments in individually evaluated impaired loans at June 30, 2011, December 31, 2010 and June 30, 2010 were as follows (in thousands).


	June 30,		December 31,		June 30,
	2011		2010		2010

Period-end loans with no allocated allowance for loan losses	$	32,791	$	115,338	$	150,083
Period-end loans with allocated allowance for loan losses		2,862		7,638		12,489

Total	$	35,653	$	122,976	$	162,572


Amount of allowance for loan losses allocated	$	1,167	$	1,049	$	1,140

The average balances of impaired loans and income recognized on impaired loans while they were considered impaired is presented below for the three and six months ended June 30, 2011 and 2010 (in thousands).


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2011		2010		2011		2010

Average balance of individually evaluated impaired loans during period	$	42,099	$	171,469	$	68,631	$	191,161
Interest income recognized during impairment		—		—		—		—
Cash-basis interest income recognized		—		—		—		—

The following table presents loans individually evaluated for impairment by class of loans as of June 30, 2011, December 31, 2010 and June 30, 2010 (in thousands).


	June 30, 2011						December 31, 2010						June 30, 2010
					Allowance						Allowance						Allowance
	Unpaid				for Loan		Unpaid				for Loan		Unpaid				for Loan
	Principal		Recorded		Losses		Principal		Recorded		Losses		Principal		Recorded		Losses
	Balance		Investment		Allocated		Balance		Investment		Allocated		Balance		Investment		Allocated
With no related allowance recorded:
Commercial (secured by real estate)	$	19,653	$	13,572	$	—	$	60,238	$	39,588	$	—	$	63,663	$	48,018	$	—
Commercial construction		—		—		—		33,898		20,311		—		21,563		11,810		—
Commercial (commercial and industrial)		—		—		—		10,115		5,874		—		9,212		7,172		—

Total commercial		19,653		13,572		—		104,251		65,773		—		94,438		67,000		—
Residential construction		27,441		12,611		—		59,502		34,597		—		128,082		62,595		—
Residential mortgage		10,006		6,608		—		21,528		14,968		—		28,026		20,488		—
Consumer installment		—		—		—		—		—		—		—		—		—

Total with no related allowance recorded		57,100		32,791		—		185,281		115,338		—		250,546		150,083		—


With an allowance recorded:
Commercial (secured by real estate)		1,398		1,208		78		2,230		2,230		268		—		—		—
Commercial construction		1,441		1,015		450		—		—		—		5,146		5,107		203
Commercial (commercial and industrial)		—		—		—		—		—		—		737		737		30

Total commercial		2,839		2,223		528		2,230		2,230		268		5,883		5,844		233
Residential construction		—		—		—		14,480		4,908		644		3,197		3,027		685
Residential mortgage		639		639		639		500		500		137		3,618		3,618		222
Consumer installment		—		—		—		—		—		—		—				—

Total with an allowance recorded		3,478		2,862		1,167		17,210		7,638		1,049		12,698		12,489		1,140

Total	$	60,578	$	35,653	$	1,167	$	202,491	$	122,976	$	1,049	$	263,244	$	162,572	$	1,140

There were no loans more than 90 days past due and still accruing interest at June 30, 2011, December 31, 2010 or June 30, 2010. Nonaccrual loans at June 30, 2011, December 31, 2010 and June 30, 2010 were $71.1 million, $179 million and $224 million, respectively. Nonaccrual loans include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually evaluated impaired loans with larger balances.

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

The following table presents the recorded investment (unpaid principal less amounts charged-off) in nonaccrual loans by loan class as of June 30, 2011, December 31, 2010 and June 30, 2010 (in thousands).


	Nonaccrual Loans
	June 30,			December 31,			June 30,
	2011			2010			2010

Commercial (secured by real estate)	$	17,764		$	44,927		$	56,013
Commercial construction		2,782			21,374			17,872
Commercial (commercial and industrial)		1,998			5,611			7,245

Total commercial		22,544			71,912			81,130
Residential construction		22,643			54,505			88,375
Residential mortgage		24,809			51,083			53,175
Consumer installment		1,069			1,594			1,655

Total	$	71,065		$	179,094		$	224,335


Balance as a percentage of unpaid principal		64.5	%		67.2	%		69.4	%

The following table presents the aging of the recorded investment in past due loans as of June 30, 2011, December 31, 2010 and June 30, 2010 by class of loans (in thousands).


					Greater
					Than 90
	30 - 59 Days		60 - 89 Days		Days Past		Total Past		Loans Not
As of June 30, 2011	Past Due		Past Due		Due		Due		Past Due		Total

Commercial (secured by real estate)	$	6,990	$	2,001	$	11,605	$	20,596	$	1,721,158	$	1,741,754
Commercial construction		930		651		1,985		3,566		191,624		195,190
Commercial (commercial and industrial)		1,496		624		809		2,929		425,129		428,058

Total commercial		9,416		3,276		14,399		27,091		2,337,911		2,365,002
Residential construction		2,942		2,242		15,774		20,958		480,951		501,909
Residential mortgage		13,788		3,594		12,678		30,060		1,147,166		1,177,226
Consumer installment		1,234		353		273		1,860		117,450		119,310

Total loans	$	27,380	$	9,465	$	43,124	$	79,969	$	4,083,478	$	4,163,447


As of December 31, 2010
Commercial (secured by real estate)	$	10,697	$	3,672	$	19,457	$	33,826	$	1,727,598	$	1,761,424
Commercial construction		4,616		2,917		9,189		16,722		279,860		296,582
Commercial (commercial and industrial)		2,016		2,620		3,092		7,728		433,790		441,518

Total commercial		17,329		9,209		31,738		58,276		2,441,248		2,499,524
Residential construction		13,599		5,158		34,673		53,430		641,736		695,166
Residential mortgage		24,375		7,780		38,209		70,364		1,208,416		1,278,780
Consumer installment		2,104		462		808		3,374		127,282		130,656

Total loans	$	57,407	$	22,609	$	105,428	$	185,444	$	4,418,682	$	4,604,126


As of June 30, 2010
Commercial (secured by real estate)	$	18,192	$	8,636	$	36,010	$	62,838	$	1,717,304	$	1,780,142
Commercial construction		10,563		1,307		10,451		22,321		319,819		342,140
Commercial (commercial and industrial)		4,175		1,668		3,775		9,618		431,479		441,097

Total commercial		32,930		11,611		50,236		94,777		2,468,602		2,563,379
Residential construction		33,499		10,224		48,302		92,025		727,905		819,930
Residential mortgage		28,905		7,707		40,271		76,883		1,278,699		1,355,582
Consumer installment		2,776		618		754		4,148		129,991		134,139

Total loans	$	98,110	$	30,160	$	139,563	$	267,833	$	4,605,197	$	4,873,030

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

There were no specific reserves established for loans considered to be troubled debt restructurings at June 30, 2011 and June 30, 2010. As of December 31, 2010, $173,000 of specific reserves were allocated to customers whose loan terms have been modified in troubled debt restructurings. United committed to lend additional amounts totaling up to $396,000, $1.17 million, and $1.19 million as of June 30, 2011 and December 31, 2010, and June 30, 2010 respectively, to customers with outstanding loans that are classified as troubled debt restructurings.

The following table presents additional information on troubled debt restructurings including the number of loan contracts restructured and the pre and post modification recorded investment. Also included in the table are the number of contracts and the recorded investment for those trouble debt restructurings that have subsequently defaulted (dollars in thousands).


			Pre-		Post-		Troubled Debt
			Modification		Modification		Restructurings That Have
			Outstanding		Outstanding		Subsequently Defaulted
	Number of		Recorded		Recorded		Number of		Recorded
	Contracts		Investment		Investment		Contracts		Investment
As of June 30, 2011

Commercial (secured by real estate)		31	$	24,946	$	21,998		4	$	1,580
Commercial construction		5		9,477		9,477		—		—
Commercial (commercial and industrial)		5		156		156		—		—

Total commercial		41		34,579		31,631		4		1,580
Residential construction		46		11,741		10,718		4		763
Residential mortgage		29		3,937		3,784		2		155
Consumer installment		6		111		111		—		—

Total loans		122	$	50,368	$	46,244		10	$	2,498


As of December 31, 2010

Commercial (secured by real estate)		41	$	40,649	$	36,759		3	$	1,402
Commercial construction		16		37,980		37,067		2		1,083
Commercial (commercial and industrial)		7		645		364		1		7

Total commercial		64		79,274		74,190		6		2,492
Residential construction		63		22,012		20,782		11		2,028
Residential mortgage		43		6,574		6,285		4		324
Consumer installment		7		124		124		—		—

Total loans		177	$	107,984	$	101,381		21	$	4,844


As of June 30, 2010

Commercial (secured by real estate)		44	$	34,629	$	32,986		1	$	103
Commercial construction		8		18,437		18,402		—		—
Commercial (commercial and industrial)		7		265		265		—		—

Total commercial		59		53,331		51,653		1		103
Residential construction		44		20,234		18,758		7		1,478
Residential mortgage		33		6,980		6,518		2		639
Consumer installment		5		987		987		—

Total loans		141	$	81,532	$	77,916		10	$	2,220

Risk Ratings

United categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, current economic trends, among other factors. United analyzes loans individually by classifying the loans as to credit risk. This analysis is performed on a continuous basis. United uses the following definitions for its risk ratings:

Watch. Weakness exists that could cause future impairment, including the deterioration of financial ratios, past due status and questionable management capabilities. Collateral values generally afford adequate coverage, but may not be immediately marketable.

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Substandard. Specific and well-defined weaknesses exist that may include poor liquidity and deterioration of financial ratios. The loan may be past due and related deposit accounts experiencing overdrafts. Immediate corrective action is necessary.

Doubtful. Specific weaknesses characterized as Substandard that are severe enough to make collection in full unlikely. There is no reliable secondary source of full repayment.

Loss. Loans categorized as Loss have the same characteristics as Doubtful however probability of loss is certain. Loans classified as Loss are generally charged-off.

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans. Loans listed as not rated are generally deposit account overdrafts that have not been assigned a grade.

As of June 30, 2011, December 31, 2010 and June 30, 2010, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows (in thousands).


							Doubtful /
	Pass		Watch		Substandard		Loss		Not Rated		Total
As of June 30, 2011

Commercial (secured by real estate)	$	1,508,284	$	98,175	$	135,295	$	—	$	—	$	1,741,754
Commercial construction		143,609		17,452		34,129		—		—		195,190
Commercial (commercial and industrial)		404,704		3,682		18,647		—		1,025		428,058

Total commercial		2,056,597		119,309		188,071		—		1,025		2,365,002
Residential construction		353,769		51,223		96,917		—		—		501,909
Residential mortgage		1,046,255		35,775		95,196		—		—		1,177,226
Consumer installment		114,718		608		3,984		—		—		119,310

Total loans	$	3,571,339	$	206,915	$	384,168	$	—	$	1,025	$	4,163,447


As of December 31, 2010

Commercial (secured by real estate)	$	1,476,974	$	82,762	$	201,688	$	—	$	—	$	1,761,424
Commercial construction		174,049		10,413		112,120		—		—		296,582
Commercial (commercial and industrial)		402,969		15,153		22,379		—		1,017		441,518

Total commercial		2,053,992		108,328		336,187		—		1,017		2,499,524
Residential construction		398,926		82,973		213,267		—		—		695,166
Residential mortgage		1,103,487		38,378		136,915		—		—		1,278,780
Consumer installment		125,134		650		4,872		—		—		130,656

Total loans	$	3,681,539	$	230,329	$	691,241	$	—	$	1,017	$	4,604,126


As of June 30, 2010

Commercial (secured by real estate)	$	1,500,246	$	83,078	$	196,818	$	—	$	—	$	1,780,142
Commercial construction		210,471		35,360		96,309		—		—		342,140
Commercial (commercial and industrial)		402,795		7,858		29,285		—		1,159		441,097

Total commercial		2,113,512		126,296		322,412		—		1,159		2,563,379
Residential construction		485,047		97,208		237,675		—		—		819,930
Residential mortgage		1,173,580		49,337		132,665		—		—		1,355,582
Consumer installment		127,717		410		6,008		4		—		134,139

Total loans	$	3,899,856	$	273,251	$	698,760	$	4	$	1,159	$	4,873,030

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 6 — Foreclosed Property

Major classifications of foreclosed properties at June 30, 2011, December 31, 2010 and June 30, 2010 are summarized as follows (in thousands).


	June 30,			December 31,			June 30,
	2011			2010			2010

Commercial (secured by real estate)	$	11,944		$	25,893		$	14,390
Commercial construction		6,764			17,808			11,699

Total commercial		18,708			43,701			26,089
Residential construction		47,916			91,385			80,327
Residential mortgage		11,346			23,687			26,066

Total foreclosed property		77,970			158,773			132,482
Less valuation allowance		30,386			16,565			8,572

Foreclosed property, net	$	47,584		$	142,208		$	123,910


Balance as a percentage of original loan unpaid principal		32.6	%		64.4	%		71.9	%

Activity in the valuation allowance for foreclosed property is presented in the following table (in thousands).


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2011			2010			2011			2010

Balance at beginning of year	$	53,023		$	9,992		$	16,565		$	7,433
Additions charged to expense		3,118			6,094			51,703			10,673
Direct write downs		(25,755	)		(7,514	)		(37,882	)		(9,534	)

Balance at end of period	$	30,386		$	8,572		$	30,386		$	8,572

Expenses related to foreclosed assets include (in thousands).


	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2011			2010		2011		2010

Net (gain) loss on sales	$	(3,218	)	$	5,098	$	8,802	$	8,616
Provision for unrealized losses		3,118			6,094		51,703		10,673
Operating expenses, net of rental income		1,991			3,348		6,285		6,064

Total foreclosed property expense	$	1,891		$	14,540	$	66,790	$	25,353

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 7 — Earnings Per Share

United is required to report on the face of the statement of operations, earnings (loss) per common share with and without the dilutive effects of potential common stock issuances from instruments such as options, convertible securities and warrants. Basic earnings per common share is based on the weighted average number of common shares outstanding during the period while the effects of potential common shares outstanding during the period are included in diluted earnings per common share. During the three and six months ended June 30, 2011 and 2010, United accrued dividends on preferred stock, including accretion of discounts, as shown in the following table (in thousands).


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2011		2010		2011		2010

Series A — 6% fixed	$	4	$	4	$	7	$	7
Series B — 5% fixed until December 6, 2013, 9% thereafter		2,598		2,573		5,200		5,142
Series D — LIBOR plus 9.6875%, resets quarterly		414		—		587		—

Total preferred stock dividends	$	3,016	$	2,577	$	5,794	$	5,149

All preferred stock dividends are payable quarterly.

Series B preferred stock was issued at a discount. Dividend amounts shown include discount accretion for each period.

There is no dilution from potentially dilutive securities for the six months ended June 30, 2011 and the three and six months ended June 30, 2010, due to the antidilutive effect of the net loss for those periods.

The following table sets forth the computation of basic and diluted loss per share for the three and six months ended June 30, 2011 and 2010 (in thousands, except per share data).


	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2011		2010			2011			2010

Net loss available to common shareholders	$	4,601	$	(62,109	)	$	(140,663	)	$	(97,974	)


Weighted average shares outstanding:
Basic		25,427		18,905			21,965			18,891
Effect of dilutive securities
Convertible securities		32,116		—			—			—
Stock options		—		—			—			—
Warrants		—		—			—			—

Diluted		57,543		18,905			21,965			18,891


Loss per common share:
Basic	$	.18	$	(3.29	)	$	(6.40	)	$	(5.19	)

Diluted	$	.08	$	(3.29	)	$	(6.40	)	$	(5.19	)

At June 30, 2011, United had a number of potentially dilutive securities outstanding including a warrant to purchase 219,909 common shares at $61.40 per share issued to the U.S. Treasury in connection with the issuance of United’s Series B preferred stock; 129,670 shares issuable upon exercise of warrants attached to trust preferred securities with an exercise price of $100 per share; 606,112 shares issuable upon exercise of stock options granted to employees with a weighted average exercise price of $96.11; 390,947 shares issuable upon completion of vesting of restricted stock awards; 1,411,765 shares issuable upon exercise of warrants exercisable at $21.25 per share granted to Fletcher International in connection with a 2010 asset purchase and sale agreement; 2,476,191 shares issuable upon conversion of preferred stock if Fletcher International exercises its option to purchase $65 million in convertible preferred stock, convertible at $26.25 per share; 1,162,791 shares issuable upon exercise of warrants, exercisable at $30.10 per share to be granted to Fletcher International upon exercise of its option to acquire preferred stock; and 1,551,126 shares issuable upon exercise of warrants owned by Elm Ridge Off Shore Fund and Elm Ridge Value Fund, exercisable at $12.50 per share.

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 8 — Derivatives and Hedging Activities

Risk Management Objective of Using Derivatives

United is exposed to certain risks arising from both its business operations and economic conditions. United principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. United manages interest rate risk primarily by managing the amount, sources, and duration of its investment securities portfolio and debt funding and through the use of derivative financial instruments. Specifically, United enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. United’s derivative financial instruments are used to manage differences in the amount, timing, and duration of United’s known or expected cash receipts and its known or expected cash payments principally related to United’s loans and wholesale borrowings.

The table below presents the fair value of United’s derivative financial instruments as well as their classification on the consolidated balance sheet as of June 30, 2011, December 31, 2010 and June 30, 2010.

Derivatives designated as hedging instruments under ASC 815 Hedge Accounting (in thousands).

Fair Value

Interest Rate

Balance Sheet

June 30,

December 31,

June 30,

Products

Location

2011

2010

Asset derivatives

Other assets

—

1,167

As of June 30, 2011, December 31, 2010 and June 30, 2010, United did not have any derivatives in a net liability position.

Cash Flow Hedges of Interest Rate Risk

United’s objectives in using interest rate derivatives are to add stability to net interest revenue and to manage its exposure to interest rate movements. To accomplish this objective, United primarily uses interest rate swaps as part of its interest rate risk management strategy. For United’s variable-rate loans, interest rate swaps designated as cash flow hedges involve the receipt of fixed-rate amounts from a counterparty in exchange for United making variable-rate payments over the life of the agreements without exchange of the underlying notional amount. Interest rate floors designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty if interest rates fall below the strike rate on the contract in exchange for an up front premium. United had no active derivative contracts outstanding at June 30, 2011 or December 31, 2010 that were designated as cash flow hedges of interest rate risk.

The effective portion of changes in the fair value of derivatives designated, and that qualify as cash flow hedges is recorded in accumulated other comprehensive income and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. During 2010, such derivatives were used to hedge the variable cash flows associated with existing prime-based, variable-rate loans. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. During the three and six months ended June 30, 2011, $2.81 million and $4.11 million, respectively, in hedge ineffectiveness was recognized in other fee revenue. During the three and six months ended June 30, 2010, $120,000 and $642,000, respectively, in hedge ineffectiveness was recognized in other fee revenue.

Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest revenue as interest payments are received on United’s prime-based, variable-rate loans. At June 30, 2011, the amount included in other comprehensive income represents deferred gains from terminated cash flow hedges where the forecasted hedging transaction is expected to remain effective over the remaining unexpired term of the original contract. Such gains are being deferred and recognized over the remaining life of the contract on a straight line basis. During the three and six months ended June 30, 2011, United accelerated the reclassification of $2.81 million and $4.11 million, respectively, in gains from terminated positions as a result of forecasted transactions becoming probable not to occur. During the next twelve months, United estimates that an additional $7.24 million of the deferred gains on terminated cash flow hedging positions will be reclassified as an increase to interest revenue.

Fair Value Hedges of Interest Rate Risk

United is exposed to changes in the fair value of certain of its fixed rate obligations due to changes in LIBOR, a benchmark interest rate. United uses interest rate swaps to manage its exposure to changes in fair value on these instruments attributable to changes in the benchmark interest rate. Interest rate swaps designated as fair value hedges involve the receipt of fixed-rate amounts from a counterparty in exchange for United making variable rate payments over the life of the agreements without the exchange of the underlying notional amount. As of June 30, 2011 and December 31, 2010, United had no active derivatives designated as fair value hedges of interest rate risk.

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

For derivatives designated and that qualify as fair value hedges, the gain or loss on the derivative as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in earnings. United includes the gain or loss on the hedged items in the same line item as the offsetting loss or gain on the related derivatives. During the three and six months ended June 30, 2011 and 2010, United recognized net gains of $119,000 and $207,000, respectively, related to ineffectiveness of the fair value hedging relationships. United also recognized a net reduction of interest expense of $1.38 million for the three months ended June 30, 2010 related to United’s fair value hedges, which includes net settlements on the derivatives. For the six months ended June 30, 2010, United recognized a net reduction of interest expense of $3.16 million, related to United’s fair value hedges. There were no active fair value hedges during the first six months of 2011.

Tabular Disclosure of the Effect of Derivative Instruments on the Income Statement

The tables below present the effect of United’s derivative financial instruments on the consolidated statement of operations for the three and six months ended June 30, 2011 and 2010.

Derivatives in Fair Value Hedging Relationships (in thousands).


Location of Gain (Loss)	Amount of Gain (Loss) Recognized in					Amount of Gain (Loss) Recognized in
Recognized in Income	Income on Derivative					Income on Hedged Item
on Derivative	2011		2010			2011		2010

Three Months Ended June 30,
Other fee revenue	$	—	$	(1,397	)	$	—	$	1,516


Six Months Ended June 30,
Other fee revenue	$	—	$	(2,592	)	$	—	$	2,799

Derivatives in Cash Flow Hedging Relationships (in thousands).


	Amount of Gain (Loss)
	Recognized in Other
	Comprehensive Income on				Gain (Loss) Reclassified from Accumulated Other
	Derivative (Effective Portion)				Comprehensive Income into Income (Effective Portion)
	2011		2010		Location	2011		2010

Three Months Ended June 30,
					Interest revenue	$	2,589	$	4,922
					Other income		2,809		120

Interest rate products	$	—	$	840	Total	$	5,398	$	5,042


Six Months Ended June 30,
					Interest revenue	$	5,512	$	10,934
					Other income		4,112		643

Interest rate products	$	—	$	2,314	Total	$	9,624	$	11,577

Credit-risk-related Contingent Features

United manages its credit exposure on derivatives transactions by entering into a bi-lateral credit support agreement with each counterparty. The credit support agreements require collateralization of exposures beyond specified minimum threshold amounts. The details of these agreements, including the minimum thresholds, vary by counterparty. At June 30, 2011, United had no active derivative positions and therefore no credit support agreements remained in effect.

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 9 — 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, 2011, 336,700 additional awards could be granted under the plan, subject to shareholder approval of a 400,000 increase in shares available under the plan. Through June 30, 2011, incentive stock options, nonqualified stock options, restricted stock awards and units and base salary stock grants had been granted under the plan.

The following table shows stock option activity for the first six months of 2011.


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

Outstanding at December 31, 2010		678,313		$	92.99
Forfeited		(6,527	)		42.59
Expired		(65,674	)		69.26

Outstanding at June 30, 2011		606,112			96.11		4.4	$	—


Exercisable at June 30, 2011		548,453			100.77		4.0		—

No options were granted during the first six months of 2011. The fair value of each option is 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 SEC in Staff Accounting Bulletin (“SAB”) 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,
	2011	2010

Expected volatility	NA		55.00	%
Expected dividend yield	NA		0.00	%
Expected life (in years)	NA		6.14
Risk-free rate	NA		3.19	%

For 2010, expected volatility was determined using United’s historical monthly volatility for over a period of 25 quarters ending December 31, 2009. Compensation expense relating to stock options of $465,000 and $1.1 million was included in earnings for the six months ended June 30, 2011 and 2010, respectively. Deferred tax benefits of $181,000 and $430,000, respectively, were included in the determination of income tax benefit for the six month periods ended June 30, 2011 and 2010. 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 are expected to vest, which was then amortized over the vesting period. The forfeiture rate for options is estimated to be approximately 3% per year. No options were exercised during the first six months of 2011 or 2010.

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

The table below presents the activity in restricted stock awards for the first six months of 2011.


				Weighted-
				Average Grant-
Restricted Stock	Shares			Date Fair Value

Outstanding at December 31, 2010		23,214		$	59.67
Granted		375,532			10.25
Vested		(7,799	)		51.86

Outstanding at June 30, 2011		390,947			12.35

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, 2011 and 2010, compensation expense of $293,000 and $325,000, respectively, was recognized related to restricted stock awards. The total intrinsic value of the restricted stock was $4.12 million at June 30, 2011.

As of June 30, 2011, there was $5.18 million of unrecognized compensation cost related to non-vested stock options and restricted stock awards granted under the plan. That cost is expected to be recognized over a weighted-average period of 2.51 years. The aggregate grant date fair value of options and restricted stock awards that vested during the six months ended June 30, 2011, was $1.99 million.

Note 10 — Common and Preferred Stock Issued / Common Stock Issuable

United sponsors a Dividend Reinvestment and Share Purchase Plan (“DRIP”) that allows participants who already own United’s common stock to purchase additional shares directly from the company. The DRIP also allows participants to automatically reinvest their quarterly dividends in additional shares of common stock without a commission. 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, 2011 and 2010, United issued 78,584 and 41,818 shares, respectively, and increased capital by $744,000 and $940,000, respectively, through these programs. The DRIP program has been suspended until 2012 when United expects to regain its S-3 filing status.

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, 2011 and 2010, 83,575 and 56,954 shares, respectively, were issuable under the deferred compensation plan.

On February 22, 2011, United entered into a share exchange agreement (the “Share Exchange Agreement”) with Elm Ridge Offshore Master Fund, Ltd. and Elm Ridge Value Partners, L.P. (collectively referred to as “Elm Ridge Parties”). Under the Share Exchange Agreement, the Elm Ridge Parties agreed to transfer to the Company 1,551,126 shares of the Company’s common stock in exchange for 16,613 shares of the Company’s cumulative perpetual preferred stock, Series D, and warrants to purchase 1,551,126 common shares with an exercise price of $12.50 per share that expires on August 22, 2013. This exchange transaction did not result in a net increase or decrease to total shareholder’s equity for the six months ended June 30, 2011.

During the first quarter of 2011, United entered into investment agreements (the “Investment Agreements”) with Corsair Georgia, L.P. (“Corsair”) and a group of institutional investors (the “Additional Investors”). United issued 3,467,699 of the Company’s common stock for $9.50 per share, 195,872 shares of mandatorily convertible cumulative non-voting perpetual preferred stock, Series F (the “Series F Preferred Stock”), and 151,185 shares of mandatorily convertible cumulative non-voting perpetual preferred stock, Series G (the “Series G Preferred Stock”). Under the terms of the Investment Agreements and following receipt of required shareholder approvals which were received on June 16, 2011, at United’s annual shareholders’ meeting, the Series F Preferred Stock converted into 20,618,090 shares of voting common stock and the Series G Preferred Stock converted into 15,914,209 shares of non-voting common stock. This private placement transaction resulted in an increase to shareholders’ equity of $362 million, net of $18.4 million in issuance costs. Following conversion of the convertible preferred stock, Corsair owned approximately 22.5% of United’s total outstanding common stock. The Additional Investors owned approximately 47.2% of United’s outstanding common stock.

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 11 — Reclassifications and Reverse Stock Split

Certain 2010 amounts have been reclassified to conform to the 2011 presentation. On June 17, 2011, United completed a 1-for-5 reverse stock split, whereby each 5 shares of United’s common stock was reclassified into one share of common stock, and each 5 shares of United’s non-voting common stock was reclassified into one share of non-voting common stock. All share and per share amounts for all periods presented have been adjusted to reflect the reverse split as though it had occurred prior to the earliest period presented.

Note 12 — Discontinued Operations

On March 31, 2010, United completed the sale of its consulting subsidiary, Brintech, Inc. (“Brintech”). The sales price was $2.9 million with United covering certain costs related to the sale transaction resulting in a net, pre-tax gain of $2.1 million. As a result of the sale, Brintech is presented in the consolidated financial statements as a discontinued operation with all revenue and expenses related to the sold operations deconsolidated from the consolidated statement of operations for all periods presented. The net results of operations from Brintech are reported on a separate line on the consolidated statement of operations titled “Loss from discontinued operations, net of income taxes.” The gain from the sale, net of income taxes and selling costs, is presented on a separate line titled “Gain from sale of subsidiary, net of income taxes and selling costs.”

Note 13 — Transaction with Fletcher International

On April 1, 2010, United entered into a securities purchase agreement with Fletcher International, Ltd. and the Bank entered into an asset purchase and sale agreement with Fletcher International, Inc. and certain affiliates thereof. Under the terms of the agreements, the Bank sold $103 million in nonperforming commercial and residential mortgage loans and foreclosed properties to Fletcher’s affiliates with a nominal aggregate sales price equal to the Bank’s carrying amount. The nonperforming assets sale transaction closed on April 30, 2010. The consideration for the sale consisted of $20.6 million in cash and a loan for $82.4 million. Fletcher formed six affiliated LLCs to purchase the nonperforming assets from United. A separate loan was made to each of the affiliated LLCs with the assets of each LLC cross pledged as collateral to each of the six loans. The loans each have a five year term with principal and interest payments required according to a 20-year amortization table. Interest accrues at a fixed rate of 3.5%. Additional principal payments are required prior to the release of properties serving as collateral for the loans as those properties are sold. The loans have paid according to their contractual terms since their inception.

As part of the agreement, Fletcher received a warrant to acquire 1,411,765 shares of United’s common stock at a price of $21.25 per share. The warrant has a nine year term and expires on May 26, 2019. To date, the warrant has not been exercised. In accordance with the terms of the securities purchase agreement, Fletcher has the right during the next two years to purchase up to $65 million in United’s Series C Convertible Preferred Stock. The Series C Convertible Preferred Stock pays a dividend equal to the lesser of 8% or LIBOR plus 4%. The Series C Convertible Preferred Stock is convertible by Fletcher into common stock at $26.25 per share (2,476,191 shares). If Fletcher had not purchased all of the Series C Convertible Preferred Stock by May 31, 2011, it was required to pay United 5% of the commitment amount not purchased by such date, and it must pay United an additional 5% of the commitment amount not purchased by May 31, 2012. Fletcher has paid United $3.25 million as it had not purchased the Series C Convertible Preferred Stock as of May 31, 2011. The payment was recorded directly in shareholders’ equity, net of applicable income tax effects. Fletcher will receive an additional warrant to purchase $35 million in common stock at $30.10 per share (1,162,791 shares) when it purchases the last $35 million of Series C Convertible Preferred Stock. All of the warrants settle on a cashless exercise basis and the net shares to be delivered upon cashless exercise will be less than what would have been issuable if the warrant had been exercised for cash.

All of the components of the transaction, including all equity instruments issued under the securities purchase agreement and the notes receivable received as consideration from the sale of nonperforming assets were recorded at fair value. Because the value of the equity instruments and assets exchanged in the transaction exceeded the value of the cash and notes receivable received, United recorded a loss of $45.3 million on the transaction with Fletcher in the second quarter of 2010.

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

The table below presents a summary of the assets and equity instruments transferred and received at their respective fair values ($ in thousands, except per share amounts).


		Fair Value	Fair
	Valuation Approach	Heirarchy	Value
Warrants Issued / Assets Transferred to Fletcher at Fair Value:
Warrant to purchase $30 million in common stock at $21.25 per share	Black-Scholes	Level 3	$	17,577
Option to purchase convertible preferred stock and warrant	Monte-Carlo Simulation	Level 3		22,236

Fair value of equity instruments recognized in capital surplus				39,813

Foreclosed properties transferred under Asset Purchase Agreement	Appraised Value	Level 2		33,434
Nonperforming loans transferred under Asset Purchase Agreement	Collateral Appraised Value	Level 2		69,655

Total nonperforming assets transferred				103,089
Total value of assets and equity instruments transferred				142,902


Less — Cash and Notes Receivable Received in Exchange at Fair Value:
Cash down payment received from asset sale	NA	NA		20,618
Notes receivable (par value $82,471, net of $4,531 discount)	Discounted Cash Flows	Level 3		77,940

Total value of cash and notes receivable received				98,558


Fair value of assets and equity instruments transferred in excess of cash and notes received				44,344
Transaction fees				1,005

Loss recognized on Fletcher transaction			$	45,349

The $17.6 million value of the warrant to purchase $30 million in common stock was determined as of April 1, 2010, the date the terms were agreed to. The following modeling assumptions were used: dividend yield — 0%; risk-free interest rate — 3.89%; current stock price — $23.85; term — 9 years; and volatility — 33%. Although most of the modeling assumptions were based on observable data, because of the subjectivity involved in estimating expected volatility, the valuation is considered Level 3.

The $22.2 million value of the option to purchase convertible preferred stock and warrant was determined by an independent valuation firm using a Monte Carlo Simulation method appropriate for valuing complex securities with derivatives. The model uses 50,000 simulations of daily stock price paths using geometric Brownian motion and incorporates in a unified way all conversion, exercise and contingency conditions. Because of the significant assumptions involved in the valuation process, not all of which were based on observable data, the valuation is considered to be Level 3.

The $103 million of nonperforming assets sold were transferred at United’s carrying amount which had previously been written down to appraised value. Because the appraisals were based on sales of similar assets (observable data), the valuation is considered to be Level 2.

The $82.5 million of notes receivable were recorded at their estimated fair value of $77.9 million, net of a $4.5 million interest discount, which was determined based on discounted expected cash flows over the term at a rate commensurate with the credit risk inherent in the notes. The contractual rate on the notes is fixed at 3.5% for five years. The discount rate used for purposes of determining the fair value of the notes was 5.48% based on the terms, structure and risk profile of the notes. Note prepayments were estimated based on the expected marketing time for the underlying collateral since the notes require that principal be reduced as the underlying assets are sold. The valuation is considered Level 3 due to estimated prepayments which have a significant impact on the value and are not based on observable data.

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 14 — Assets and Liabilities Measured at Fair Value

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The table below presents United’s assets and liabilities measured at fair value on a recurring basis as of June 30, 2011, December 31, 2010 and June, 2010, aggregated by the level in the fair value hierarchy within which those measurements fall (in thousands).


June 30, 2011	Level 1		Level 2		Level 3		Total
Assets
Securities available for sale:
U.S. Government agencies	$	—	$	77,477	$	—	$	77,477
State and political subdivisions		—		26,772		—		26,772
Mortgage-backed securities		—		1,588,489		4,129		1,592,618
Other		—		119,396		350		119,746
Deferred compensation plan assets		3,025		—		—		3,025

Total	$	3,025	$	1,812,134	$	4,479	$	1,819,638


Liabilities
Deferred compensation plan liability	$	3,025	$	—	$	—	$	3,025

Total liabilities	$	3,025	$	—	$	—	$	3,025


December 31, 2010	Level 1		Level 2		Level 3		Total
Assets
Securities available for sale:
U.S. Government agencies	$	—	$	98,480	$	—	$	98,480
State and political subdivisions		—		28,442		—		28,442
Mortgage-backed securities		—		986,074		4,934		991,008
Other		—		106,137		350		106,487
Deferred compensation plan assets		3,252		—		—		3,252

Total	$	3,252	$	1,219,133	$	5,284	$	1,227,669


Liabilities
Deferred compensation plan liability	$	3,252	$	—	$	—	$	3,252

Total liabilities	$	3,252	$	—	$	—	$	3,252


June 30, 2010	Level 1		Level 2		Level 3		Total
Assets
Securities available for sale:
U.S. Government agencies	$	—	$	179,172	$	38,523	$	217,695
State and political subdivisions		—		33,985		—		33,985
Mortgage-backed securities		—		884,514		16,254		900,768
Other		—		12,278		1,050		13,328
Deferred compensation plan assets		2,701		—		—		2,701
Derivative financial instruments		—		1,167		—		1,167


Total	$	2,701	$	1,111,116	$	55,827	$	1,169,644


Liabilities
Deferred compensation plan liability	$	2,701	$	—	$	—	$	2,701

Total liabilities	$	2,701	$	—	$	—	$	2,701

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

The following table shows a reconciliation of the beginning and ending balances for assets measured at fair value on a recurring basis using significant unobservable inputs that are classified as Level 3 values (in thousands).


	Securities
	Available for Sale
Balance at December 31, 2010	$	5,284
Amounts included in earnings		(13	)
Paydowns		(792	)


Balance at June 30, 2011	$	4,479

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

United may be required, from time to time, to measure certain assets at fair value on a nonrecurring basis. These include assets that are measured at the lower of cost or market that were recognized at fair value below cost at the end of the period. The table below presents United’s assets and liabilities measured at fair value on a nonrecurring basis as of June 30, 2011, December 31, 2010 and June 30, 2010, aggregated by the level in the fair value hierarchy within which those measurements fall (in thousands).


	Level 1		Level 2		Level 3		Total
June 30, 2011
Assets
Loans	$	—	$	—	$	27,810	$	27,810
Foreclosed properties		—		—		41,922		41,922


Total	$	—	$	—	$	69,732	$	69,732


December 31, 2010
Assets
Loans	$	—	$	—	$	106,904	$	106,904
Foreclosed properties		—		—		85,072		85,072


Total	$	—	$	—	$	191,976	$	191,976


June 30, 2010
Assets
Loans	$	—	$	—	$	140,807	$	140,807
Foreclosed properties		—		—		70,686		70,686


Total	$	—	$	—	$	211,493	$	211,493

Assets and Liabilities Not Measured at Fair Value

For financial instruments that have quoted market prices, those quotes are used to determine fair value. Financial instruments that have no defined maturity, have a remaining maturity of 180 days or less, or reprice frequently to a market rate, are assumed to have a fair value that approximates reported book value, after taking into consideration any applicable credit risk. If no market quotes are available, financial instruments are valued by discounting the expected cash flows using an estimated current market interest rate for the financial instrument. For off-balance sheet derivative instruments, fair value is estimated as the amount that United would receive or pay to terminate the contracts at the reporting date, taking into account the current unrealized gains or losses on open contracts.

The short maturity of United’s assets and liabilities results in having a significant number of financial instruments whose fair value equals or closely approximates carrying value. Such financial instruments are reported in the following balance sheet captions: cash and cash equivalents, mortgage loans held for sale, federal funds purchased, repurchase agreements and other short-term borrowings. The fair value of securities available for sale equals the balance sheet value. As of June 30, 2010 the fair value of interest rate contracts used for balance sheet management was an asset of approximately $1.17 million. United did not have any active derivative contracts outstanding at June 30, 2011 or December 31, 2010.

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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

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

Off-balance sheet instruments (commitments to extend credit and standby letters of credit) are generally short-term and at variable rates. Therefore, both the carrying amount and the estimated fair value associated with these instruments are immaterial.

The carrying amount and fair values for other financial instruments that are not measured at fair value in United’s balance sheet at June 30, 2011, December 31, 2010, and June 30, 2010 are as follows (in thousands).


	June 30, 2011				December 31, 2010				June 30, 2010
	Carrying				Carrying				Carrying
	Amount		Fair Value		Amount		Fair Value		Amount		Fair Value
Assets:
Securities held to maturity	$	371,578	$	379,231	$	265,807	$	267,988	$	322,148	$	327,497
Loans, net		4,035,809		3,889,669		4,429,431		4,196,142		4,698,919		4,407,376

Liabilities:
Deposits		6,183,215		6,174,117		6,469,172		6,481,867		6,329,512		6,350,449
Federal Home Loan Bank advances		40,625		43,763		55,125		59,498		104,138		110,964
Long-term debt		150,186		140,771		150,146		93,536		150,106		122,949

Note 15 — Bulk Sale of Loans

On April 18, 2011, United completed the bulk sale of $80.6 million of loans that were reported as held for sale at March 31, 2011. The proceeds from the bulk sale were $87.9 million which resulted in a reduction of charge-offs in the second quarter of 2011.


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 within the meaning of Section 27A of the Securities Act of 1933, as amended, (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended, (the “Exchange Act”), about United and its subsidiaries. These forward-looking statements are intended to be covered by the safe harbor for forward-looking statements provided by the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not statements of historical fact, and can be identified by the use of forward-looking terminology such as “believes”, “expects”, “may”, “will”, “could”, “should”, “projects”, “plans”, “goal”, “targets”, “potential”, “estimates”, “pro forma”, “seeks”, “intends”, or “anticipates” or the negative thereof or comparable terminology. Forward-looking statements include discussions of strategy, financial projections, guidance and estimates (including their underlying assumptions), statements regarding plans, objectives, expectations or consequences of various transactions, and statements about the future performance, operations, products and services of United and its subsidiaries. We caution our shareholders and other readers not to place undue reliance on such statements.

Our businesses and operations are and will be subject to a variety of risks, uncertainties and other factors. Consequently, actual results and experience may materially differ from those contained in any forward-looking statements. Such risks, uncertainties and other factors that could cause actual results and experience to differ from those projected include, but are not limited to, the risk factors set forth in our Annual Report on Form 10-K for the year ended December 31, 2010, as well as the following:

•

our ability to maintain profitability;

•

our ability to fully realize our deferred tax asset balances, including net operating loss carryforwards;

•

the condition of the banking system and financial markets;

•

the results of our most recent internal credit stress test may not accurately predict the impact on our financial condition if the economy was to continue to deteriorate;

•

our ability to raise capital as may be necessary;

•

our ability to maintain liquidity or access other sources of funding;

•

changes in the cost and availability of funding;

•

the success of the local economies in which we operate;

•

our concentrations of residential and commercial construction and development loans and commercial real estate loans are subject to unique risks that could adversely affect our earnings;

•

changes in prevailing interest rates may negatively affect our net income and the value of our assets;

•

the accounting and reporting policies of United;

•

if our allowance for loan losses is not sufficient to cover actual loan losses;

•

we may be subject to losses due to fraudulent and negligent conduct of our loan customers, third party service providers or employees;

•

competition from financial institutions and other financial service providers;

•

the United States Department of Treasury may change the terms of our Series B Preferred Stock;

•

risks with respect to future expansion and acquisitions;

•

conditions in the stock market, the public debt market and other capital markets deteriorate;

•

the impact of the Dodd-Frank Act and related regulations and other changes in financial services laws and regulations;

•

the failure of other financial institutions;

•

a special assessment that may be imposed by the Federal Deposit Insurance Corporation (“FDIC”) on all FDIC-insured institutions in the future, similar to the assessment in 2009 that decreased our earnings; and

•

regulatory or judicial proceedings, board resolutions, informal memorandums of understanding or formal enforcement actions imposed by regulators that occur, or any such proceedings or enforcement actions that is more severe than we anticipate.

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 results of operations and financial condition of United Community Bank, Inc. (“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, 2011 United had total consolidated assets of $7.41 billion, total loans of $4.16 billion, excluding the loans acquired from Southern Community Bank (“SCB”) that are covered by loss sharing agreements and therefore have a different risk profile. United also had total deposits of $6.18 billion and stockholders’ equity of $860 million.

United’s activities are primarily conducted by its wholly owned Georgia banking subsidiary (the “Bank”). The Bank operations are conducted under a community bank model that operates 27 “community banks” with local bank presidents and boards in north Georgia, the Atlanta-Sandy Springs-Marietta, Georgia metropolitan statistical area (the “Atlanta MSA”), the Gainesville, Georgia metropolitan statistical area (the “Gainesville MSA”), coastal Georgia, western North Carolina, and east Tennessee.

On March 31, 2010, United sold Brintech, Inc., (“Brintech”) a consulting services firm for the financial services industry, resulting in a pre-tax gain of $2.1 million, net of selling costs. The income statements for all periods presented reflect Brintech as a discontinued operation with revenue, expenses and income taxes related to Brintech removed from revenue, expenses, income taxes and loss from continuing operations. The balance sheet and cash flow statement have not been adjusted to reflect Brintech as a discontinued operation as Brintech’s assets and contribution to cash flows were not material.

On June 17, 2011, United completed a 1-for-5 reverse stock split, whereby each 5 shares of United’s common stock was reclassified into one share of common stock, and each 5 shares of United’s non-voting common stock was reclassified into one share of non-voting common stock. All prior periods presented have been adjusted to reflect the reclassification.

Operating income (loss) from continuing operations and operating income (loss) from continuing operations per diluted share are non-GAAP performance measures. United’s management believes that operating performance is useful in analyzing United’s financial performance trends since it excludes items that are non-recurring in nature and therefore most of the discussion in this section will refer to operating performance measures. A reconciliation of these operating performance measures to GAAP performance measures is included in the table on page 35.

United reported net operating income from continuing operations of $7.62 million for the second quarter of 2011. This compared to a net operating loss from continuing operations of $59.5 million for the second quarter of 2010. Diluted operating income from continuing operations per common share was $.08 for the second quarter of 2011, compared to a diluted operating loss from continuing operations per common share of $3.29 for the second quarter of 2010. The loss on sale of nonperforming assets to Fletcher added approximately $1.59 per share to the diluted operating loss from continuing operations for the second quarter of 2010.

For the six months ended June 30, 2011, United reported a net operating loss from continuing operations of $135 million. This compared to a net operating loss from continuing operations of $94.0 million for the first six months of 2010, which included the $30.0 million after-tax loss from the Fletcher transaction. Net loss for the six months ended June 30, 2010, which includes discontinued operations, totaled $92.8 million. Diluted operating loss from continuing operations per common share was $6.40 for the six months ended June 30, 2011, compared with diluted operating loss from continuing operations per common share of $5.25 for the same period in 2010.

United’s operating provision for loan losses was $11.0 million for the three months ended June 30, 2011, compared to $61.5 million for the same period in 2010. Net charge-offs for the second quarter of 2011 were $16.5 million, compared to $61.3 million for the second quarter of 2010. For the six months ended June 30, 2011, United’s operating provision for loan losses was $201 million, compared to $137 million for the same period of 2010. Net charge-offs for the first six months of 2011 were $248 million, compared to $118 million for the first six months of 2010. During the first quarter of 2011, performing substandard loans with a pre-charge down carrying amount of $166 million and nonperforming loans with a pre-charge down carrying amount of $101 million were collectively written down to the expected sales proceeds of $80.6 million, in conjunction with a bulk transaction (the “Bulk Loan Sale”). United recognized net charge-offs of $186 million related to the transfer of loans to the held for sale classification in the first quarter. The Bulk Loan Sale was completed on April 18, 2011. Proceeds from the sale were greater than originally estimated, resulting in a reduction of second quarter charge-offs of $7.27 million. As of June 30, 2011, United’s allowance for loan losses was $128 million, or 3.07% of loans, compared to $174 million, or 3.57% of loans, at June 30, 2010. Nonperforming assets of $119 million, which excludes assets of SCB that are covered by loss sharing agreements with the FDIC, decreased to 1.60% of total assets at June 30, 2011, compared to 4.32% as of December 31, 2010 and 4.55% as of June 30, 2010. The decrease in this ratio was due to the execution of a plan to sell approximately $293 million in substandard and nonperforming loans, and to accelerate the disposition of approximately $142 million in foreclosed properties (the “Problem Asset Disposition Plan”) as well as a general improving trend in credit quality indicators.

Taxable equivalent net interest revenue was $58.9 million for the second quarter of 2011, compared to $61.6 million for the same period of 2010. The decrease in net interest revenue was primarily the result of a 19 basis point decrease in the net interest margin offset by a $69.3 million increase in average interest earning assets. Average loans for the quarter declined $745 million from the second quarter of 2010. Net interest margin decreased from 3.60% for the three months ended June 30, 2010 to 3.41% for the same period in 2011. For the six months ended June 30, 2011, taxable equivalent net interest revenue was $115 million, compared to $123 million for the same period of 2010. Net interest margin decreased from 3.55% for the six months ended June 30, 2010 to 3.36% for the same period in 2011. Interest reversals on performing loans that were moved to held for sale accounted for 6 basis points of the 19 basis points decrease. Over the past year, United has maintained above normal levels of liquidity. The level of excess liquidity peaked in the first six months of 2011 and lowered the margin by approximately 49 basis points in the first quarter and 76 basis points in the second quarter. In order to reduce the amount of excess liquidity, United has called its callable brokered deposits and does not plan to replace any maturing brokered deposits. Additionally, United has lowered rates on retail certificates of deposit and other deposit products which is expected to result in some balance attrition.

Operating fee revenue increased $2.33 million, or 20%, and $2.50 million, or 11% from the second quarter and first six months of 2010, respectively. The increase was primarily attributable to the acceleration of deferred gains related to the ineffectiveness of terminated cash flow hedges. This helped to offset a decline in service charges and fees, which were down $385,000 and $1.11 million, respectively, for the three and six month periods, due to regulatory changes.

For the second quarter of 2011, operating expenses of $48.7 million were down $54.9 million from the second quarter of 2010. The loss on sale of nonperforming assets in 2010 represented $45.3 million of the decrease. Lower foreclosed property costs accounted for $12.6 million of the decrease. For the six months ended June 30, 2011, operating expenses of $164 million were up $5.52 million from the same period of 2010. The increase was primarily due to an increase in foreclosed property costs, in anticipation of the Bulk Loan Sale and other accelerated asset dispositions. Foreclosed property costs were up $41.4 million from the first six months of 2010.

Recent Developments

On June 16, 2011 shareholders approved the conversion of $195.9 million of Series F and $151.2 million of Series G Mandatorily Convertible Perpetual Preferred Stock into 20,618,090 shares of United’s common stock and 15,914,209 shares of United’s non-voting common stock, respectively. The conversion occurred as of the close of business on June 20, 2011 pursuant to the March 30, 2011 private placement agreements with a group of institutional investors.

On February 22, 2011, the Company entered into a share exchange agreement with Elm Ridge Offshore Master Fund, Ltd. and Elm Ridge Value Partners, L.P. (collectively, the “Elm Ridge Parties”). Under the share exchange agreement, the Elm Ridge Parties agreed to transfer to the Company 1,551,126 shares of the Company’s common stock in exchange for 16,613 shares of the Company’s cumulative perpetual preferred stock, Series D and warrants to purchase 1,551,126 common shares. See Note 10 to the consolidated financial statements for further details of the share exchange agreement.

Also during the first quarter of 2011, the Board of Directors approved the Problem Asset Disposition Plan. Accordingly, substandard and nonperforming loans were sold by the Bank for an aggregate purchase price of approximately $87.9 million in the Bulk Loan Sale on April 18, 2011 pursuant to an asset purchase and sale agreement (the “Asset Purchase Agreement”) entered into by the Bank, CF Southeast LLC (“CF Southeast”) and CF Southeast Trust 2011-1 (“CF Trust” and together with CF Southeast, the “Purchasers”).

Critical Accounting Policies

The accounting and reporting policies of United are in accordance with accounting principles generally accepted in the United States of America (“GAAP”) 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, fair value measurements, and income taxes. In particular, United’s accounting policies related to allowance for loan losses, fair value measurements and income taxes 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 for loan losses.

GAAP Reconciliation and Explanation

This Form 10-Q contains non-GAAP financial measures, which are performance measures determined by methods other than in accordance with GAAP. Such non-GAAP financial measures include, among others the following: operating provision for loan losses, operating fee revenue, operating revenue, operating expense, operating (loss) income from continuing operations, operating (loss) income, operating earnings (loss) from continuing operations per share, operating earnings (loss) per share, operating earnings (loss) from continuing operations per diluted share and operating earnings (loss) per diluted share. Management uses these non-GAAP financial measures because it believes they are useful for evaluating our operations and performance over periods of time, as well as in managing and evaluating our business and in discussions about our operations and performance. Management believes these non-GAAP financial measures provide users of our financial information with a meaningful measure for assessing our financial results and credit trends, as well as comparison to financial results for prior periods. These non-GAAP financial measures should not be considered as a substitute for operating results determined in accordance with GAAP and may not be comparable to other similarly titled financial measures used by other companies. A reconciliation of these operating performance measures to GAAP performance measures is included in on the table on page 35.

Discontinued Operations

Effective March 31, 2010, United sold its Brintech subsidiary. As a result, the operations of Brintech are being accounted for as a discontinued operation. All revenue, including the gain from the sale, expenses and income taxes relating to Brintech have been deconsolidated from the consolidated statement of operations and are presented on one line titled “Loss from discontinued operations” for all periods presented. Because Brintech’s assets, liabilities and cash flows were not material to the consolidated balance sheet and statement of cash flows, no such adjustments have been made to those financial statements.

Transaction with Fletcher International

Description of Transaction

On April 1, 2010, the Bank entered into an asset purchase and sale agreement (the “Asset Purchase Agreement”) with Fletcher International Inc. (“Fletcher Inc.”) and five separate limited liability companies (“LLCs”) affiliates of Fletcher Inc. for the purpose of acquiring nonperforming assets under the Asset Purchase Agreement. United has no ownership interest in the LLCs. The asset sale transaction was completed on April 30, 2010 with the Bank transferring nonperforming commercial and residential construction loans and foreclosed properties having a carrying value of $103 million in exchange for cash of $20.6 million and notes receivable for $82.5 million.

The loans made to the LLCs in connection with their respective purchases are the same for all six loans. The loans have an initial term of five years and principal and interest payments are based on a 20-year amortization schedule. The assets in the LLCs are all cross-pledged as collateral on all six loans. Correspondingly, prepayments on the loans are required as properties are sold in order for the collateral to be released upon sale. The interest rate during the loan term is fixed at 3.50% for all loans and, accordingly, each loan was recorded at a discount as the interest rate was considered below market. At the time the LLCs were formed, they were capitalized with sufficient cash to make the required 20% down payment on the purchase and 17.5% of the purchase price in cash and securities to cover the first three years of required cash flows. According to the terms of the agreements, at least one year of estimated cash flow requirements must be held in cash. These funds are held in escrow as additional collateral on the loans and cannot be removed by Fletcher Inc. without United’s consent. The securities that can be held by the LLCs are marketable equity securities and funds managed by Fletcher affiliates. Carrying costs include debt service payments, servicing fees and other direct costs associated with holding and managing the underlying properties. Cash flow from expected sales of underlying assets (loans/foreclosed real estate) is expected to provide sufficient cash flow to service the loans beyond the first three years and through the remainder of the loan terms. While recent news articles and other sources have questioned the financial health of Fletcher and its affiliates, the loans to the LCCs have performed according to their contractual terms since inception and there have been no delinquencies to date. As a result, even though these loans represent our largest loan relationship, we consider these loans performing and have not established specific reserves related to them. Should our assessment of this loan relationship change, we would then take appropriate action.

Also on April 1, 2010, United and Fletcher International Ltd (“Fletcher Ltd”, together with Fletcher Inc. and their affiliates, “Fletcher”), entered into a securities purchase agreement (the “Securities Purchase Agreement”) pursuant to which Fletcher Ltd. agreed to purchase from United, and United agreed to issue and sell to Fletcher Ltd., 65,000 shares of United’s Series C convertible preferred stock, par value $1.00 per share (the “Convertible Preferred Stock”), at a purchase price of $1,000 per share, for an aggregate purchase price of $65 million. The Convertible Preferred Stock will bear interest at an annual rate equal to the lesser of 8% or LIBOR + 4%. If all conditions precedent to Fletcher Ltd.’s obligations to purchase the Convertible Preferred Stock have been satisfied and Fletcher Ltd. had not purchased all of the Convertible Preferred Stock by May 31, 2011, it was required to pay United 5% of the commitment amount not purchased by such date, and it must pay United an additional 5% of any commitment amount not purchased by May 31, 2012. Fletcher has paid United $3.25 million as it had not purchased the Series C Convertible Preferred Stock as of May 31, 2011. As such penalty payment is associated with Fletcher’s option to purchase preferred stock and is therefore considered an equity transaction, it was recorded as an increase to capital surplus in shareholders’ equity.

The Convertible Preferred Stock is redeemable by Fletcher Ltd. at any time into common stock or non-voting Common Stock Equivalent Junior Preferred Stock (“Junior Preferred Stock”) of United, at an equivalent price of $26.25 per share of common stock (equal to 2,476,190 shares of common stock), subject to certain adjustments. After May 26, 2015, if the closing stock price for United’s common stock is above $60.20, United has the right to require conversion and it is United’s intent to convert all of the then outstanding Convertible Preferred Stock into an equivalent amount of common stock or Junior Preferred Stock.

Concurrently with the payment of the $10 million deposit under the Asset Purchase Agreement by Fletcher, United granted a warrant to Fletcher to purchase Junior Preferred Stock. The warrant was initially equal to $15 million and was increased to $30 million upon the completion of the asset sale pursuant to the Asset Purchase Agreement. An additional $35 million warrant will be issued on a dollar for dollar basis by the aggregate dollar amount of the Convertible Preferred Stock purchased under the Securities Purchase Agreement in excess of $30 million. The $30 million warrant price is equivalent to $21.25 per common share (cash exercise equal to 1,411,765 shares of common stock). The warrant has a nine year term and expires on May 26, 2019. To date, the warrant has not been exercised. The $35 million warrant price is equivalent to $30.10 per common share (cash exercise equal to 1,162,791 shares of common stock). The warrants may only be exercised by net share settlement (cashless exercise) and are exercisable for nine years from April 1, 2010, subject to limited extension upon certain events specified in the warrant agreement. All of the warrants settle on a cashless basis and the net shares to be issued to Fletcher Ltd. upon exercise of the warrants will be less than the total shares that would have been issuable if the warrants had been exercised for cash payments.

Also, as part of the transaction, United and Fletcher entered into a servicing agreement whereby United will act as servicer of the nonperforming assets for Fletcher in exchange for a servicing fee of 20 basis points. Because the servicing arrangement is considered a normal servicing arrangement and the fee is appropriate for the services provided, United did not recognize a servicing asset or liability related to the servicing agreement.

Accounting Treatment

Although the Asset Purchase Agreement and the Securities Purchase Agreement are two separate agreements, they were accounted for as part of one transaction because they were entered into simultaneously and the Securities Purchase Agreement was dependent upon the sale of nonperforming assets. United evaluated this transaction to determine whether the transfer should be accounted for as a sale or a secured borrowing and whether the Fletcher LLCs should be consolidated with United. When evaluating whether the transfer should be accounted for as a sale, United primarily evaluated whether control had been surrendered, the rights of Fletcher to exchange and pledge the assets, and whether United retains effective control, which included evaluating any continuing involvement in the assets. Based on the evaluation, the transfer of assets under the Asset Purchase Agreement meets the definition as a sale under current accounting standards and was accounted for as such. United further evaluated whether the Fletcher LLCs should be consolidated which included evaluating whether United has a controlling financial interest and is therefore the primary beneficiary. This evaluation principally included determining whether United directs the activities that have the most significant impact on the LLCs economic performance and whether United has an obligation to absorb losses or the right to receive benefits that could be significant to the LLCs. Based on that evaluation, the LLCs have not been included as part of the consolidated group of subsidiaries in United’s consolidated financial statements.

In addition to evaluating the accounting for the transfer of assets, United considered whether the warrant and the option to purchase convertible preferred stock with an additional warrant should be accounted for as liabilities or equity instruments. In making this evaluation, United considered whether Fletcher or any subsequent holders of the instruments could require settlement of the instruments in cash or other assets rather than common or preferred stock. Because the transaction was structured so that the warrants and option to purchase convertible preferred stock and the additional warrant can only be settled through the issuance of common or preferred stock, United concluded that the warrant and option to purchase convertible preferred stock with an additional warrant should be accounted for as equity instruments.

All of the components of the transaction, including all equity instruments issued under the Securities Purchase Agreement and the notes receivable received as consideration from the sale of nonperforming assets were recorded at fair value. Because the value of the equity instruments and assets exchanged in the transaction exceeded the value of the cash and notes receivable received, United recorded a loss of $45.3 million on the transaction with Fletcher.

The table below presents a summary of the assets and equity instruments transferred and received at their respective fair values ($ in thousands, except per share amounts).


		Fair Value	Fair
	Valuation Approach	Heirarchy	Value
Warrants Issued / Assets Transferred to Fletcher at Fair Value:
Warrant to purchase $30 million in common stock at $21.25 per share	Black-Scholes	Level 3	$	17,577	⁽¹⁾
Option to purchase convertible preferred stock and warrant	Monte-Carlo Simulation	Level 3		22,236	⁽²⁾

Fair value of equity instruments recognized in capital surplus				39,813

Foreclosed properties transferred under Asset Purchase Agreement	Appraised Value	Level 2		33,434	⁽³⁾
Nonperforming loans transferred under Asset Purchase Agreement	Collateral Appraised Value	Level 2		69,655	⁽³⁾

Total nonperforming assets transferred				103,089

Total value of assets and equity instruments transferred				142,902


Cash and Notes Receivable Received in Exchange at Fair Value:
Cash down payment received from asset sale	NA	NA		20,618
Notes receivable (par value $82,471, net of $4,531 discount)	Discounted Cash Flows	Level 3		77,940	⁽⁴⁾

Total value of cash and notes receivable received				98,558


Fair value of assets and equity instruments transferred in excess of cash and notes received				44,344
Transaction fees				1,005

Loss recognized on Fletcher transaction				45,349

Tax benefit				(15,367	)

After tax loss			$	29,982


Notes

⁽¹⁾		The $17.6 million value of the $30 million warrant was determined as of April 1, 2010, the date the terms were agreed to and signed. The following modeling assumptions were used: dividend yield — 0%; risk-free interest rate — 3.89%; current stock price — $23.85; term — 9 years; and volatility — 33%. Although most of the modeling assumptions were based on observable data, because of the subjectivity involved in estimating expected volatility, the valuation is considered Level 3.

⁽²⁾		The $22.2 million value of the option to purchase convertible preferred stock and warrant was determined by an independent valuation firm using a Monte Carlo Simulation method appropriate for valuing complex securities with derivatives. The model uses 50,000 simulations of daily stock price paths using geometric Brownian motion and incorporates in a unified way all conversion, exercise and contingency conditions. Because of the significant assumptions involved in the valuation process, not all of which were based on observable data, the valuation is considered to be Level 3.

⁽³⁾		The $103 million of nonperforming assets sold were transferred at United’s carrying value which had been written down to appraised value. Because the appraisals were based on sales of similar assets (observable data), the valuation is considered to be Level 2.

⁽⁴⁾		The $82.5 million of notes receivable were recorded at their estimated fair value of $77.9 million, net of a $4.5 million interest discount, which was determined based on discounted expected cash flows over the term at a rate commensurate with the credit risk inherent in the notes. The contractual rate on the notes is fixed at 3.5% for five years. The discount rate used for purposes of determining the fair value of the notes was 5.48% based on the terms, structure and risk profile of the notes. Note prepayments were estimated based on the expected marketing times for the underlying collateral since the notes require that principal be reduced as the underlying assets are sold. The valuation is considered Level 3 due to estimated prepayments which have a significant impact on the value and are not based on observable data.

Table 1 — Financial Highlights
Selected Financial Information


																Second
	2011						2010									Quarter			For the Six						YTD
(in thousands, except per share	Second			First			Fourth			Third			Second			2011-2010			Months Ended						2011-2010
data; taxable equivalent)	Quarter			Quarter			Quarter			Quarter			Quarter			Change			2011			2010			Change
INCOME SUMMARY
Interest revenue	$	76,931		$	75,965		$	81,215		$	84,360		$	87,699					$	152,896		$	177,548
Interest expense		17,985			19,573			21,083			24,346			26,072						37,558			54,642

Net interest revenue		58,946			56,392			60,132			60,014			61,627			(4	)%		115,338			122,906			(6	)%
Operating provision for loan losses ⁽¹⁾		11,000			190,000			47,750			50,500			61,500						201,000			136,500
Fee revenue⁽²⁾		13,905			11,838			12,442			12,861			11,579			20			25,743			23,245			11

Total operating revenue ⁽¹⁾⁽²⁾		61,851			(121,770	)		24,824			22,375			11,706						(59,919	)		9,651
Operating expenses⁽³⁾		48,728			115,271			64,918			64,906			58,308			(16	)		163,999			113,128			45
Loss on sale of nonperforming assets		—			—			—			—			45,349						—			45,349

Operating income (loss) from continuing operations before income taxes		13,123			(237,041	)		(40,094	)		(42,531	)		(91,951	)					(223,918	)		(148,826	)
Operating income tax expense (benefit)		5,506			(94,555	)		(16,520	)		(16,706	)		(32,419	)					(89,049	)		(54,836	)

Net operating income (loss) from continuing operations^(1)(2)(3)		7,617			(142,486	)		(23,574	)		(25,825	)		(59,532	)					(134,869	)		(93,990	)
Noncash goodwill impairment charges		—			—			—			(210,590	)		—						—			—
Partial reversal of fraud loss provision, net of income tax		—			—			7,179			—			—						—			—
Loss from discontinued operations, net of income tax		—			—			—			—			—						—			(101	)
Gain from sale of subsidiary, net income tax		—			—			—			—			—						—			1,266

Net income (loss)		7,617			(142,486	)		(16,395	)		(236,415	)		(59,532	)					(134,869	)		(92,825	)
Preferred dividends and discount accretion		3,016			2,778			2,586			2,581			2,577						5,794			5,149

Net income (loss) available to common shareholders	$	4,601		$	(145,264	)	$	(18,981	)	$	(238,996	)	$	(62,109	)				$	(140,663	)	$	(97,974	)


PERFORMANCE MEASURES
Per common share:
Diluted operating income (loss) from continuing operations^(1)(2)(3)	$	.08		$	(7.87	)	$	(1.38	)	$	(1.50	)	$	(3.29	)				$	(6.40	)	$	(5.25	)
Diluted income (loss) from continuing operations		.08			(7.87	)		(1.00	)		(12.62	)		(3.29	)					(6.40	)		(5.25	)
Diluted income (loss)		.08			(7.87	)		(1.00	)		(12.62	)		(3.29	)					(6.40	)		(5.19	)
Book value		11.59			14.78			24.18			25.70			38.55			(70	)		11.59			38.55			(70	)
Tangible book value⁽⁵⁾		11.47			14.44			23.78			25.26			26.95			(57	)		11.47			26.95			(57	)

Key performance ratios:
Return on equity⁽⁴⁾⁽⁶⁾		5.34	%		(147.11	)%		(17.16	)%		(148.04	)%		(35.89	)%					(76.07	)%		(27.87	)%
Return on assets⁽⁶⁾		.40			(7.61	)		(.89	)		(12.47	)		(3.10	)					(3.57	)		(2.39	)
Net interest margin⁽⁶⁾		3.41			3.30			3.58			3.57			3.60						3.36			3.55
Operating efficiency ratio from continuing operations⁽²⁾⁽³⁾		66.88			169.08			89.45			89.38			141.60						116.28			108.48
Equity to assets		11.21			8.82			8.85			11.37			11.84						10.02			11.87
Tangible equity to assets⁽⁵⁾		11.13			8.73			8.75			9.19			9.26						9.94			9.32
Tangible common equity to assets⁽⁵⁾		4.79			5.51			6.35			6.78			6.91						5.15			7.02
Tangible common equity to risk-weighted assets⁽⁵⁾		14.26			6.40			9.05			9.60			9.97						14.26			9.97

ASSET QUALITY *
Non-performing loans	$	71,065		$	83,769		$	179,094		$	217,766		$	224,335					$	71,065		$	224,335
Foreclosed properties		47,584			54,378			142,208			129,964			123,910						47,584			123,910

Total non-performing assets (NPAs)		118,649			138,147			321,302			347,730			348,245						118,649			348,245
Allowance for loan losses		127,638			133,121			174,695			174,613			174,111						127,638			174,111
Operating net charge-offs ⁽¹⁾		16,483			231,574			47,668			49,998			61,323						248,057			117,991
Allowance for loan losses to loans		3.07	%		3.17	%		3.79	%		3.67	%		3.57	%					3.07	%		3.57	%
Operating net charge-offs to average loans⁽¹⁾⁽⁶⁾		1.58			20.71			4.03			4.12			4.98						11.46			4.75
NPAs to loans and foreclosed properties		2.82			3.25			6.77			7.11			6.97						2.82			6.97
NPAs to total assets		1.60			1.73			4.32			4.96			4.55						1.60			4.55

AVERAGE BALANCES ($ in millions)
Loans	$	4,266		$	4,599		$	4,768		$	4,896		$	5,011			(15	)	$	4,432		$	5,091			(13	)
Investment securities		2,074			1,625			1,354			1,411			1,532			35			1,851			1,525			21
Earning assets		6,924			6,902			6,680			6,676			6,854			1			6,913			6,969			(1	)
Total assets		7,624			7,595			7,338			7,522			7,704			(1	)		7,609			7,825			(3	)
Deposits		6,372			6,560			6,294			6,257			6,375			—			6,465			6,472			—
Shareholders’ equity		854			670			649			855			912			(6	)		763			929			(18	)
Common shares — basic (thousands)		25,427			18,466			18,984			18,936			18,905						21,965			18,891
Common shares — diluted (thousands)		57,543			18,466			18,984			18,936			18,905						21,965			18,891

AT PERIOD END ($ in millions)
Loans *	$	4,163		$	4,194		$	4,604		$	4,760		$	4,873			(15	)	$	4,163		$	4,873			(15	)
Investment securities		2,188			1,884			1,490			1,310			1,488			47			2,188			1,488			47
Total assets		7,410			7,974			7,443			7,013			7,652			(3	)		7,410			7,652			(3	)
Deposits		6,183			6,598			6,469			5,999			6,330			(2	)		6,183			6,330			(2	)
Shareholders’ equity		860			850			636			662			904			(5	)		860			904			(5	)
Common shares outstanding (thousands)		57,469			20,903			18,937			18,887			18,856						57,469			18,856


⁽¹⁾		Excludes the partial reversal of a previously established provision for fraud-related loan losses of $11.8 million, net of tax expense of $4.6 million in the fourth quarter of 2010. Operating charge-offs also exclude the $11.8 million related partial recovery of the previously charged off amount.

⁽²⁾		Excludes revenue generated by discontinued operations in the first quarter of 2010.

⁽³⁾		Excludes the goodwill impairment charge of $211 million in the third quarter of 2010 and expenses relating to discontinued operations in the first quarter of 2010.

⁽⁴⁾		Net loss available to common shareholders, which is net of preferred stock dividends, divided by average realized common equity, which excludes accumulated other comprehensive income (loss).

⁽⁵⁾		Excludes effect of acquisition related intangibles and associated amortization.

⁽⁶⁾		Annualized.

*		Excludes loans and foreclosed properties covered by loss sharing agreements with the FDIC.

Table 1 Continued — Operating Earnings to GAAP Earnings Reconciliation
Selected Financial Information


	2011						2010
(in thousands, except per share	Second			First			Fourth			Third			Second			For the Six Months Ended
data; taxable equivalent)	Quarter			Quarter			Quarter			Quarter			Quarter			2011			2010

Interest revenue reconciliation
Interest revenue — taxable equivalent	$	76,931		$	75,965		$	81,215		$	84,360		$	87,699		$	152,896		$	177,548
Taxable equivalent adjustment		(429	)		(435	)		(497	)		(511	)		(500	)		(864	)		(993	)

Interest revenue (GAAP)	$	76,502		$	75,530		$	80,718		$	83,849		$	87,199		$	152,032		$	176,555


Net interest revenue reconciliation
Net interest revenue — taxable equivalent	$	58,946		$	56,392		$	60,132		$	60,014		$	61,627		$	115,338		$	122,906
Taxable equivalent adjustment		(429	)		(435	)		(497	)		(511	)		(500	)		(864	)		(993	)

Net interest revenue (GAAP)	$	58,517		$	55,957		$	59,635		$	59,503		$	61,127		$	114,474		$	121,913


Provision for loan losses reconciliation
Operating provision for loan losses	$	11,000		$	190,000		$	47,750		$	50,500		$	61,500		$	201,000		$	136,500
Partial reversal of special fraud-related provision for loan loss		—			—			(11,750	)		—			—			—			—

Provision for loan losses (GAAP)	$	11,000		$	190,000		$	36,000		$	50,500		$	61,500		$	201,000		$	136,500


Total revenue reconciliation
Total operating revenue	$	61,851		$	(121,770	)	$	24,824		$	22,375		$	11,706		$	(59,919	)	$	9,651
Taxable equivalent adjustment		(429	)		(435	)		(497	)		(511	)		(500	)		(864	)		(993	)
Partial reversal of special fraud-related provision for loan loss		—			—			11,750			—			—			—			—

Total revenue (GAAP)	$	61,422		$	(122,205	)	$	36,077		$	21,864		$	11,206		$	(60,783	)	$	8,658


Expense reconciliation
Operating expense	$	48,728		$	115,271		$	64,918		$	64,906		$	103,657		$	163,999		$	158,477
Noncash goodwill impairment charge		—			—			—			210,590			—			—			—

Operating expense (GAAP)	$	48,728		$	115,271		$	64,918		$	275,496		$	103,657		$	163,999		$	158,477


Income (loss) from continuing operations before taxes reconciliation
Operating income (loss) from continuing operations before taxes	$	13,123		$	(237,041	)	$	(40,094	)	$	(42,531	)	$	(91,951	)	$	(223,918	)	$	(148,826	)
Taxable equivalent adjustment		(429	)		(435	)		(497	)		(511	)		(500	)		(864	)		(993	)
Noncash goodwill impairment charge		—			—			—			(210,590	)		—			—			—
Partial reversal of special fraud-related provision for loan loss		—			—			11,750			—			—			—			—

Income (loss) from continuing operations before taxes (GAAP)	$	12,694		$	(237,476	)	$	(28,841	)	$	(253,632	)	$	(92,451	)	$	(224,782	)	$	(149,819	)


Income tax expense (benefit) reconciliation
Operating income tax expense (benefit)	$	5,506		$	(94,555	)	$	(16,520	)	$	(16,706	)	$	(32,419	)	$	(89,049	)	$	(54,836	)
Taxable equivalent adjustment		(429	)		(435	)		(497	)		(511	)		(500	)		(864	)		(993	)
Partial reversal of special fraud-related provision for loan loss		—			—			4,571			—			—			—			—

Income tax expense (benefit) (GAAP)	$	5,077		$	(94,990	)	$	(12,446	)	$	(17,217	)	$	(32,919	)	$	(89,913	)	$	(55,829	)


Diluted earnings (loss) from continuing operations per common share reconciliation
Diluted operating earnings (loss) from continuing operations per common share	$	.08		$	(7.87	)	$	(1.38	)	$	(1.50	)	$	(3.29	)	$	(6.40	)	$	(5.25	)
Noncash goodwill impairment charge		—			—			—			(11.12	)		—			—			—
Partial reversal of special fraud-related provision for loan loss		—			—			.38			—			—			—			—

Diluted earnings (loss) from continuing operations per common share (GAAP)	$	.08		$	(7.87	)	$	(1.00	)	$	(12.62	)	$	(3.29	)	$	(6.40	)	$	(5.25	)


Book value per common share reconciliation
Tangible book value per common share	$	11.47		$	14.44		$	23.78		$	25.26		$	26.95		$	11.47		$	26.95
Effect of goodwill and other intangibles		.12			.34			.40			.44			11.60			.12			11.60

Book value per common share (GAAP)	$	11.59		$	14.78		$	24.18		$	25.70		$	38.55		$	11.59		$	38.55


Efficiency ratio from continuing operations reconciliation
Operating efficiency ratio from continuing operations		66.88	%		169.08	%		89.45	%		89.38	%		141.60	%		116.28	%		108.48	%
Noncash goodwill impairment charge		—			—			—			290.00			—			—			—

Efficiency ratio from continuing operations (GAAP)		66.88	%		169.08	%		89.45	%		379.38	%		141.60	%		116.28	%		108.48	%


Average equity to assets reconciliation
Tangible common equity to assets		4.79	%		5.51	%		6.35	%		6.78	%		6.91	%		5.15	%		7.02	%
Effect of preferred equity		6.34			3.22			2.40			2.41			2.35			4.79			2.30

Tangible equity to assets		11.13			8.73			8.75			9.19			9.26			9.94			9.32
Effect of goodwill and other intangibles		.08			.09			.10			2.18			2.58			.08			2.55

Equity to assets (GAAP)		11.21	%		8.82	%		8.85	%		11.37	%		11.84	%		10.02	%		11.87	%


Actual tangible common equity to risk-weighted assets reconciliation
Tangible common equity to risk-weighted assets		14.26	%		6.40	%		9.05	%		9.60	%		9.97	%		14.26	%		9.97	%
Effect of other comprehensive income		(.65	)		(.58	)		(.62	)		(.81	)		(.87	)		(.65	)		(.87	)
Effect of deferred tax limitation		(5.04	)		(5.10	)		(3.34	)		(2.94	)		(2.47	)		(5.04	)		(2.47	)
Effect of trust preferred		1.14			1.12			1.06			1.06			1.03			1.14			1.03
Effect of preferred equity		4.17			5.97			3.52			3.51			3.41			4.17			3.41

Tier I capital ratio (Regulatory)		13.88	%		7.81	%		9.67	%		10.42	%		11.07	%		13.88	%		11.07	%


Net charge-offs reconciliation
Operating net charge-offs	$	16,483		$	231,574		$	47,668		$	49,998		$	61,323		$	248,057		$	117,991
Subsequent partial recovery of fraud-related charge-off		—			—			(11,750	)		—			—			—			—

Net charge-offs (GAAP)	$	16,483		$	231,574		$	35,918		$	49,998		$	61,323		$	248,057		$	117,991


Net charge-offs to average loans reconciliation
Operating net charge-offs to average loans		1.58	%		20.71	%		4.03	%		4.12	%		4.98	%		11.46	%		4.75	%
Subsequent partial recovery of fraud-related charge-off		—			—			(1.00	)		—			—			—			—

Net charge-offs to average loans (GAAP)		1.58	%		20.71	%		3.03	%		4.12	%		4.98	%		11.46	%		4.75	%

Results of Operations

United reported net operating income from continuing operations of $7.62 million for the second quarter of 2011. This compared to a net operating loss from continuing operations of $59.5 million for the same period in 2010, which included an after-tax loss of $30.0 million resulting from the sale of nonperforming assets to a private equity firm. For the second quarter of 2011, diluted operating income from continuing operations per share was $.08. This compared to diluted operating loss from continuing operations per share of $3.29 for the second quarter of 2010, which included $1.59 in loss per share related to the sale of nonperforming assets. For the six months ended June 30, 2011, United reported a net operating loss from continuing operations of $135 million compared to a net operating loss from continuing operations of $94.0 million for the same period in 2010. The operating loss for the six months ended June 30, 2011 reflects the Board of Director’s decision in the first quarter to adopt the Problem Asset Disposition Plan to quickly dispose of problem assets following United’s successful Private Placement at the end of the first quarter.

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 optimal levels of revenue while balancing interest rate, credit and liquidity risks. Taxable equivalent net interest revenue for the three months ended June 30, 2011 was $58.9 million, down $2.68 million, or 4%, from the second quarter of 2010. The decrease in net interest revenue for the second quarter of 2011 compared to the second quarter of 2010 was mostly due to lower average loan balances. United continues its intense focus on loan and deposit pricing, in an effort to maintain a steady level of net interest revenue.

Average loans decreased $745 million, or 15%, from the second quarter of last year. The decrease in the loan portfolio was a result of the weak economy as well as the Bulk Loan Sale completed in April 2011. Loan charge-offs, foreclosure activity and management’s efforts to rebalance the loan portfolio by reducing the concentration of residential construction loans have all contributed to declining loan balances. While loan balances have declined, United continues to make new loans. During the second quarter of 2011, United funded $105 million in new loans, primarily commercial and small business loans in north Georgia, the Atlanta MSA and coastal Georgia.

Average interest-earning assets for the second quarter of 2011 increased $69.3 million, or 1%, from the same period in 2010. The decrease of $745 million in average loans was offset by increases of $542 million in the investment securities portfolio and $272 million in other interest-earning assets which is mostly made up of short-term commercial paper. Loan demand has been weak due to the poor economy and management’s efforts to reduce United’s exposure to residential construction loans. The increase in the securities portfolio and other interest-earning assets was due to purchases of floating rate mortgage-backed securities and short-term commercial paper in an effort to temporarily invest excess liquidity, including the proceeds from the new capital raised at the end of the first quarter of 2011. Average interest-bearing liabilities decreased $183 million, or 3%, from the second quarter of 2010 due to the rolling off of higher-cost brokered deposits and certificates of deposit as funding needs decreased. The average yield on interest earning assets for the three months ended June, 2011, was 4.45%, down 68 basis points from 5.13% for the same period of 2010. A significant contributing factor to the decrease in the yield on interest earning assets was due to the build-up of excess liquidity resulting in a shift in earning asset mix from loans, which generally yield a higher rate than other asset classes, to temporary investments which have relatively low yields. The change in mix more than offset an 8 basis point increase in the average loan yield from the second quarter of 2010. In light of the weak economic environment, United maintained above normal levels of liquidity by entering into brokered deposit arrangements and temporarily investing the proceeds in short-term commercial paper and floating rate mortgage-backed securities at a slightly negative spread. Following the first quarter capital transaction, management has sought to reduce liquidity levels and will continue to do so.

The average cost of interest-bearing liabilities for the second quarter of 2011 was 1.24% compared to 1.75% for the same period of 2010, reflecting the effect of falling rates on United’s floating rate liabilities and United’s ability to reduce deposit pricing. Also contributing to the overall lower rate on interest-bearing liabilities was a shift in the mix of deposits away from more expensive time deposits toward lower-rate transaction deposits. United’s shrinking balance sheet also permitted the reduction of more expensive wholesale borrowings.

The banking industry uses two ratios to measure relative profitability of net interest revenue. The net interest 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 effect of non-interest-bearing deposits and gives a direct perspective on the effect of market interest rate movements. The net interest margin is an indication of the profitability of a company’s investments, and is defined as net interest revenue as a percent of average total interest-earning assets, which includes the positive effect of funding a portion of interest-earning assets with customers’ non-interest bearing deposits and stockholders’ equity.

For the three months ended June 30, 2011 and 2010, the net interest spread was 3.21% and 3.38%, respectively, while the net interest margin was 3.41% and 3.60%, respectively. The reduction in average loan balances and build-up of excess liquidity negatively impacted the margin.

For the first six months of 2011, net interest revenue was $115 million, a decrease of $7.57 million, or 6%, from the first six months of 2010. Average earning assets decreased $56.3 million, or 1%, during the first six months of 2011 compared to the same period a year earlier. The yield on earning assets decreased 68 basis points from 5.13% for the six months ended June 30, 2010 to 4.45% for the six months ended June 30, 2011 due to declining average loan balances, an increase in excess liquidity invested in short-term low rate assets, and interest reversals on performing loans classified as held for sale as part of the Bulk Loan Sale. The transfer reduced net interest margin by 6 basis points in the first six months of 2011. The cost of interest bearing liabilities over the same period decreased 53 basis points. The combined effect of the lower yield on interest-earning assets, partially offset by the lower cost of interest-bearing liabilities resulted in the net interest margin decreasing 19 basis points from the six months ended June 30, 2010 to the six months ended June 30, 2011.

The following table shows the relationship between interest revenue and expense, and the average amounts of interest-earning assets and interest-bearing liabilities for the three months ended June 30, 2011 and 2010.

Table 2 — Average Consolidated Balance Sheets and Net Interest Analysis
For the Three Months Ended June 30,


	2011									2010
	Average						Avg.			Average					Avg.
(dollars in thousands, taxable equivalent)	Balance				Interest		Rate			Balance			Interest		Rate
Assets:
Interest-earning assets:
Loans, net of unearned income⁽¹⁾⁽²⁾	$	4,266,211			$	60,958		5.73	%	$	5,010,937		$	70,640		5.65	%
Taxable securities⁽³⁾		2,048,683				14,541		2.84			1,503,162			15,534		4.13
Tax-exempt securities⁽¹⁾⁽³⁾		25,044				411		6.56			28,920			482		6.67
Federal funds sold and other interest-earning assets		583,832				1,021		.70			311,475			1,043		1.34


Total interest-earning assets		6,923,770				76,931		4.45			6,854,494			87,699		5.13

Non-interest-earning assets:
Allowance for loan losses		(139,744	)								(193,998	)
Cash and due from banks		119,801									100,931
Premises and equipment		178,949									181,064
Other assets⁽³⁾		540,943									761,803

Total assets	$	7,623,719								$	7,704,294


Liabilities and Shareholders’ Equity:
Interest-bearing liabilities:
Interest-bearing deposits:
NOW	$	1,310,441				1,036		.32		$	1,325,099			1,745		.53
Money market		979,432				1,499		.61			746,039			1,829		.98
Savings		195,946				64		.13			186,628			83		.18
Time less than $100,000		1,541,909				4,990		1.30			1,605,308			7,887		1.97
Time greater than $100,000		988,810				3,873		1.57			1,110,010			6,102		2.20
Brokered		473,161				2,132		1.81			642,954			3,729		2.33

Total interest-bearing deposits		5,489,699				13,594		.99			5,616,038			21,375		1.53


Federal funds purchased and other borrowings		103,156				1,074		4.18			104,637			1,056		4.05
Federal Home Loan Bank advances		52,735				570		4.34			107,948			974		3.62
Long-term debt		150,178				2,747		7.34			150,097			2,667		7.13

Total borrowed funds		306,069				4,391		5.75			362,682			4,697		5.19


Total interest-bearing liabilities		5,795,768				17,985		1.24			5,978,720			26,072		1.75

Non-interest-bearing liabilities:
Non-interest-bearing deposits		882,151		</

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