SEC Filing | United Community Banks, Inc.

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e10vq

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 September 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 001-35095

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 (Do not check if a smaller reporting company)		Smaller Reporting Company o

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

YES o NO þ

Common stock, par value $1 per share 41,611,596 shares voting and 15,914,209 shares non-voting outstanding as of October 31, 2011

INDEX



PART I — Financial Information

Item 1. Financial Statements

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

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

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

Consolidated Statement of Cash Flows (unaudited) for the Nine Months Ended September 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			29

Item 3. Quantitative and Qualitative Disclosures About Market Risk			57

Item 4. Controls and Procedures			57

PART II — Other Information

Item 1. Legal Proceedings			57

Item 1A. Risk Factors			57

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			58

Item 3. Defaults Upon Senior Securities			58

Item 4. (Removed and Reserved)			58

Item 5. Other Information			58

Item 6. Exhibits			59

EX-31.1
EX-31.2
EX-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						Nine Months Ended
	September 30,						September 30,
(in thousands, except per share data)	2011			2010			2011			2010
Interest revenue:
Loans, including fees	$	59,294		$	68,419		$	181,359		$	211,245
Investment securities, including tax exempt of $244, $279, $754 and $886		14,568			14,711			42,964			46,743
Federal funds sold, commercial paper and deposits in banks		261			719			1,832			2,416

Total interest revenue		74,123			83,849			226,155			260,404


Interest expense:
Deposits:
NOW		831			1,705			3,191			5,304
Money market		1,129			1,930			4,656			5,516
Savings		52			83			193			250
Time		9,086			16,099			31,813			54,015

Total deposit interest expense		11,098			19,817			39,853			65,085
Federal funds purchased, repurchase agreements and other short-term borrowings		1,081			1,068			3,197			3,162
Federal Home Loan Bank advances		441			796			1,601			2,747
Long-term debt		2,642			2,665			8,169			7,994

Total interest expense		15,262			24,346			52,820			78,988

Net interest revenue		58,861			59,503			173,335			181,416
Provision for loan losses		36,000			50,500			237,000			187,000

Net interest revenue after provision for loan losses		22,861			9,003			(63,665	)		(5,584	)


Fee revenue:
Service charges and fees		7,534			7,648			21,862			23,088
Mortgage loan and other related fees		1,148			2,071			3,594			5,151
Brokerage fees		836			731			2,204			1,884
Securities gains, net		—			2,491			838			2,552
Loss from prepayment of debt		—			(2,233	)		(791	)		(2,233	)
Other		1,980			2,153			9,534			5,664

Total fee revenue		11,498			12,861			37,241			36,106

Total revenue		34,359			21,864			(26,424	)		30,522


Operating expenses:
Salaries and employee benefits		25,262			24,891			76,622			72,841
Communications and equipment		3,284			3,620			10,006			10,404
Occupancy		3,794			3,720			11,673			11,370
Advertising and public relations		1,052			1,128			3,347			3,523
Postage, printing and supplies		1,036			1,019			3,239			3,009
Professional fees		2,051			2,117			7,731			6,238
Foreclosed property		2,813			19,752			69,603			45,105
FDIC assessments and other regulatory charges		2,603			3,256			11,660			10,448
Amortization of intangibles		748			793			2,270			2,389
Other		3,877			4,610			14,368			12,707
Goodwill impairment		—			210,590			—			210,590
Loss on sale of nonperforming assets		—			—			—			45,349

Total operating expenses		46,520			275,496			210,519			433,973

Loss from continuing operations before income taxes		(12,161	)		(253,632	)		(236,943	)		(403,451	)
Income tax benefit		(5,959	)		(17,217	)		(95,872	)		(73,046	)

Net loss from continuing operations		(6,202	)		(236,415	)		(141,071	)		(330,405	)
Loss from discontinued operations, net of income taxes		—			—			—			(101	)
Gain from sale of subsidiary, net of income taxes and selling costs		—			—			—			1,266

Net loss		(6,202	)		(236,415	)		(141,071	)		(329,240	)
Preferred stock dividends and discount accretion		3,019			2,581			8,813			7,730

Net loss available to common shareholders	$	(9,221	)	$	(238,996	)	$	(149,884	)	$	(336,970	)


Loss from continuing operations per common share — Basic	$	(.16	)	$	(12.62	)	$	(4.41	)	$	(17.89	)
Loss from continuing operations per common share — Diluted		(.16	)		(12.62	)		(4.41	)		(17.89	)
Loss per common share — Basic		(.16	)		(12.62	)		(4.41	)		(17.82	)
Loss per common share — Diluted		(.16	)		(12.62	)		(4.41	)		(17.82	)
Weighted average common shares outstanding — Basic		57,599			18,936			33,973			18,905
Weighted average common shares outstanding — Diluted		57,599			18,936			33,973			18,905

See accompanying notes to consolidated financial statements.

UNITED COMMUNITY BANKS, INC.

Consolidated Balance Sheet


	September 30,			December 31,			September 30,
(in thousands, except share and per share data)	2011			2010			2010
	(unaudited)			(audited)			(unaudited)
ASSETS
Cash and due from banks	$	57,780		$	95,994		$	104,033
Interest-bearing deposits in banks		241,440			111,901			64,408
Federal funds sold, commercial paper and short-term investments		—			441,562			108,579

Cash and cash equivalents		299,220			649,457			277,020
Securities available for sale		1,769,083			1,224,417			1,053,518
Securities held to maturity (fair value $369,020, $267,988 and $263,012)		353,739			265,807			256,694
Mortgage loans held for sale		22,050			35,908			20,630
Loans, net of unearned income		4,109,875			4,604,126			4,759,504
Less allowance for loan losses		146,092			174,695			174,613

Loans, net		3,963,783			4,429,431			4,584,891
Assets covered by loss sharing agreements with the FDIC		83,623			131,887			144,581
Premises and equipment, net		176,839			178,239			178,842
Accrued interest receivable		19,744			24,299			24,672
Goodwill and other intangible assets		9,175			11,446			12,217
Foreclosed property		44,263			142,208			129,964
Net deferred tax asset		264,275			166,937			146,831
Other assets		153,329			183,160			183,189

Total assets	$	7,159,123		$	7,443,196		$	7,013,049

LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Deposits:
Demand	$	966,452		$	793,414		$	783,251
NOW		1,299,512			1,424,781			1,338,371
Money market		1,030,370			891,252			804,644
Savings		200,231			183,894			186,617
Time:
Less than $100,000		1,393,559			1,496,700			1,498,379
Greater than $100,000		905,183			1,002,359			1,033,132
Brokered		209,998			676,772			354,243

Total deposits		6,005,305			6,469,172			5,998,637
Federal funds purchased, repurchase agreements, and other short-term borrowings		102,883			101,067			103,780
Federal Home Loan Bank advances		40,625			55,125			55,125
Long-term debt		120,206			150,146			150,126
Unsettled securities purchases		10,585			—			—
Accrued expenses and other liabilities		31,302			32,171			42,906

Total liabilities		6,310,906			6,807,681			6,350,574

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		176,739			175,711			175,378
Series D; $1,000 stated value; 16,613 shares issued and outstanding		16,613			—			—
Common stock, $1 par value; 100,000,000 shares authorized; 41,595,692, 18,937,001 and 18,886,660 shares issued and outstanding		41,596			18,937			18,887
Common stock, non-voting, $1 par value; 30,000,000 shares authorized; 15,914,209 shares issued and outstanding		15,914			—			—
Common stock issuable; 88,501, 67,287 and 61,119 shares		3,590			3,894			3,961
Capital surplus		1,052,690			741,244			740,151
Accumulated deficit		(485,451	)		(335,567	)		(316,587	)
Accumulated other comprehensive income		26,309			31,079			40,468

Total shareholders’ equity		848,217			635,515			662,475

Total liabilities and shareholders’ equity	$	7,159,123		$	7,443,196		$	7,013,049

See accompanying notes to consolidated financial statements.

UNITED COMMUNITY BANKS, INC.

Consolidated Statement of Changes in Shareholders’ Equity (Unaudited)

For the Nine Months Ended September 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																									(329,240	)					(329,240	)
Other comprehensive income (loss):
Unrealized holding gains on available for sale securities, net of deferred tax expense and reclassification adjustment																												739			739
Unrealized losses on derivative financial instruments qualifying as cash flow hedges, net of deferred tax benefit																												(7,906	)		(7,906	)

Comprehensive loss																									(329,240	)		(7,167	)		(336,407	)
Issuance of equity instruments in private equity transaction																						39,813									39,813
Common stock issued to dividend reinvestment plan and employee benefit plans (72,281 shares)														73								1,326									1,399
Amortization of stock option and restricted stock																						1,887									1,887
Vesting of restricted stock (2,112 shares issued, 8,304 shares deferred)														2					607			(609	)								—
Deferred compensation plan, net, including dividend equivalents																			227												227
Shares issued from deferred compensation plan (3,145 shares)														3					(470	)		463									(4	)
Dividends on Series A preferred stock																									(11	)					(11	)
Dividends on Series B preferred stock				970																					(7,720	)					(6,750	)

Balance, September 30, 2010	$	217	$	175,378	$	—	$	—		$	—		$	18,887		$	—	$	3,961		$	740,151		$	(316,587	)	$	40,468		$	662,475


Balance, December 31, 2010	$	217	$	175,711	$	—	$	—		$	—		$	18,937		$	—	$	3,894		$	741,244		$	(335,567	)	$	31,079		$	635,515
Comprehensive loss:
Net loss																									(141,071	)					(141,071	)
Other comprehensive loss:
Unrealized holding gains on available for sale securities, net of deferred tax expense and reclassification adjustment																												2,910			2,910
Unrealized losses on derivative financial instruments qualifying as cash flow hedges, net of deferred tax benefit																												(7,680	)		(7,680	)

Comprehensive loss																									(141,071	)		(4,770	)		(145,841	)
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 (20,618,156 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 (113,787 shares)														114								987									1,101
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																						1,485									1,485
Vesting of restricted stock (6,709 shares issued, 6,382 shares deferred)														7					54			(61	)								—
Deferred compensation plan, net, including dividend equivalents																			183												183
Shares issued from deferred compensation plan (3,466 shares)														3					(541	)		538									—
Tax on option exercise and restricted stock vesting																						(376	)								(376	)
Dividends on Series A preferred stock																									(10	)					(10	)
Dividends on Series B preferred stock				1,028																					(7,798	)					(6,770	)
Dividends on Series D preferred stock																									(1,005	)					(1,005	)

Balance, September 30, 2011	$	217	$	176,739	$	16,613	$	—		$	—		$	41,596		$	15,914	$	3,590		$	1,052,690		$	(485,451	)	$	26,309		$	848,217

Comprehensive loss for the third quarters of 2011 and 2010 was $10.2 million and $241 million, respectively.

See accompanying notes to consolidated financial statements.

UNITED COMMUNITY BANKS, INC.

Consolidated Statement of Cash Flows (Unaudited)


	Nine Months Ended
	September 30,
(in thousands)	2011			2010
Operating activities:
Net loss	$	(141,071	)	$	(329,240	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation, amortization and accretion		14,670			11,961
Provision for loan losses		237,000			187,000
Goodwill impairment charge		—			210,590
Stock based compensation		1,485			1,887
Securities gains, net		(838	)		(2,552	)
Losses and write downs on sales of other real estate owned		61,473			33,477
Gain from sale of subsidiary		—			(2,110	)
Loss on sale of nonperforming assets		—			45,349
Loss on prepayment of borrowings		791			2,233
Changes in assets and liabilities:
Other assets and accrued interest receivable		(35,735	)		(17,528	)
Accrued expenses and other liabilities		(2,739	)		(1,949	)
Mortgage loans held for sale		13,858			9,596

Net cash provided by operating activities		148,894			148,714


Investing activities:
Investment securities held to maturity:
Proceeds from maturities and calls		52,520			81,384
Purchases		(142,777	)		(24,128	)
Investment securities available for sale:
Proceeds from sales		106,603			75,528
Proceeds from maturities and calls		363,333			634,305
Purchases		(1,000,378	)		(544,793	)
Net decrease in loans		106,341			65,570
Proceeds from loan sales		99,298			24,723
Proceeds from sales of premises and equipment		636			81
Purchases of premises and equipment		(6,442	)		(5,057	)
Net cash received from sale of subsidiary		—			2,842
Net cash received from sale of nonperforming assets		—			20,618
Proceeds from sale of other real estate		70,951			110,459

Net cash (used in) provided by investing activities		(349,915	)		441,532


Financing activities:
Net change in deposits		(463,867	)		(625,437	)
Net change in federal funds purchased, repurchase agreements, and other short-term borrowings		1,816			2,391
Repayments of Federal Home Loan Bank advances		(15,291	)		(61,181	)
Repayments of long-term debt		(30,000	)		—
Proceeds from issuance of common stock for dividend reinvestment and employee benefit plans		1,101			1,395
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		(7,785	)		(6,761	)

Net cash used in financing activities		(149,216	)		(689,593	)


Net change in cash and cash equivalents		(350,237	)		(99,347	)

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


Cash and cash equivalents at end of period	$	299,220		$	277,020


Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest	$	55,580		$	89,359
Income taxes		179			(37,194	)

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 July 2011, the FASB issued Accounting Standards Update No. 2011-06, Fees Paid to the Federal Government by Health Insurers (“ASU No. 2011-06”). ASU No. 2011-06 states that the liability for the annual fee for health insurers mandated by the Patient protection and Affordable Care Act as amended by the Health Care and Education Reconciliation Act, should be estimated and recorded in full once the entity provides qualifying health insurance. Along with the fee liability, a corresponding deferred cost should be recorded and amortized into expense, typically using a straight-line method. ASU No. 2011-06 is effective for calendar years beginning after December 31, 2013, and does not apply to United.

In July 2011, the FASB issued Accounting Standards Update No. 2011-07, Presentation and Disclosure of Patient Service Revenue, Provision for Bad Debts, and the Allowance for Doubtful Accounts for Certain Health Care Entities (“ASU No. 2011-07”). ASU No. 2011-07 requires certain health care entities to change the presentation of their statement of operations by reclassifying the provision for bad debts associated with patient service revenue from an operating expense to a deduction from patient service revenue. Also, these entities are required to provide enhanced disclosure about their policies on recognizing revenue and assessing bad debts. The guidance is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2012, and does not apply to United.

In September 2011, the FASB issued Accounting Standards Update No. 2011-08, Testing Goodwill for Impairment (“ASU No. 2011-08”). ASU No. 2011-08 allows an entity first to assess qualitatively whether it is necessary to perform step one of the two-step annual goodwill impairment test. An entity is required to perform step one only if the entity concludes that it is more likely than not that a reporting unit’s fair value is less than its carrying amount (that is, a likelihood of more than 50 percent). This amends the existing guidance, which required entities to perform step one of the test, at least annually, by calculating and comparing the fair value of a reporting unit to its carrying amount. The revised standard is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. However, an entity can choose to early adopt the revised standard even if its annual test date is before September 15, 2011 (the date on which the revised standard was issued), provided that the entity has not yet issued its financial statements for the period that includes its annual test date. Since United has no goodwill balance, ASU No. 2011-08 will not currently have an impact on the Company’s financial position, results of operation, or disclosures.

In September 2011, the FASB issued Accounting Standards Update No. 2011-09, Disclosures about an Employer’s Participation in a Multiemployer Plan (“ASU No. 2011-09”). ASU No. 2011-09 is intended to provide more information about an employer’s financial obligations to a multiemployer pension plan and, therefore help financial statement users better understand the financial health of all significant plans in which the employer participates. It is effective for public entities for fiscal years ending after December 15, 2011, with a one year deferral for non-public entities. United does not participate in a multiemployer plan, so this revised standard does not apply to the Company.

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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 the 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.

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


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

Commercial (secured by real estate)	$	—	$	34,546	$	—	$	34,546
Commercial (commercial and industrial)		—		2,485		—		2,485
Construction and land development		1,771		10,282		—		12,053
Residential mortgage		186		8,376		—		8,562
Installment		6		181		—		187

Total covered loans		1,963		55,870		—		57,833
Covered foreclosed property		—		—		11,488		11,488
Estimated loss reimbursement from the FDIC		—		—		14,302		14,302

Total covered assets	$	1,963	$	55,870	$	25,790	$	83,623

Note 4 — Securities

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 nine month periods ended September 30, 2011 and 2010 (in thousands).


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2011		2010		2011		2010
Proceeds from sales	$	—	$	34,711	$	106,603	$	75,528

Gross gains on sales	$	—	$	2,491	$	1,169	$	3,751
Gross losses on sales		—		—		331		249
Impairment losses		—		—		—		950

Net gains on sales of securities	$	—	$	2,491	$	838	$	2,552

Income tax expense attributable to sales	$	—	$	969	$	326	$	993

Substantially all securities with a carrying value of $1.89 billion, $1.43 billion, and $1.26 billion were pledged to secure public deposits, FHLB advances and other secured borrowings at September 30, 2011, December 31, 2010 and September 30, 2010, respectively.

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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 September 30, 2011, December 31, 2010 and September 30, 2010 are as follows (in thousands).


			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
As of September 30, 2011
U.S. Government agencies	$	5,000	$	17	$	—	$	5,017
State and political subdivisions		50,185		3,721		22		53,884
Mortgage-backed securities⁽¹⁾		298,554		11,871		306		310,119

Total	$	353,739	$	15,609	$	328	$	369,020


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 September 30, 2010
U.S. Government agencies	$	6,961	$	124	$	—	$	7,085
State and political subdivisions		30,752		1,271		—		32,023
Mortgage-backed securities⁽¹⁾		218,981		4,929		6		223,904

Total	$	256,694	$	6,324	$	6	$	263,012


⁽¹⁾		All are residential type mortgage-backed securities

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


			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
As of September 30, 2011
U.S. Government agencies	$	33,597	$	109	$	—	$	33,706
State and political subdivisions		25,435		1,400		4		26,831
Mortgage-backed securities⁽¹⁾		1,556,639		39,177		416		1,595,400
Corporate securities		119,066		—		8,424		110,642
Other		2,504		—		—		2,504

Total	$	1,737,241	$	40,686	$	8,844	$	1,769,083


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
Corporate securities		105,359		192		1,516		104,035
Other		2,452		—		—		2,452

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


As of September 30, 2010
U.S. Government agencies	$	127,989	$	714	$	—	$	128,703
State and political subdivisions		29,209		1,434		6		30,637
Mortgage-backed securities⁽¹⁾		762,322		35,060		61		797,321
Corporate securities		95,480		61		1,136		94,405
Other		2,452		—		—		2,452

Total	$	1,017,452	$	37,269	$	1,203	$	1,053,518


⁽¹⁾		All are residential type mortgage-backed securities

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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


	Less than 12 Months				12 Months or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Loss		Value		Loss		Value		Loss
As of September 30, 2011
State and political subdivisions	$	354	$	22	$	—	$	—	$	354	$	22
Mortgage-backed securities		9,828		306		—		—		9,828		306

Total unrealized loss position	$	10,182	$	328	$	—	$	—	$	10,182	$	328


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 September 30, 2010
Mortgage-backed securities	$	1,964	$	6	$	—	$	—	$	1,964	$	6

Total unrealized loss position	$	1,964	$	6	$	—	$	—	$	1,964	$	6

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


	Less than 12 Months				12 Months or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Loss		Value		Loss		Value		Loss
As of September 30, 2011
State and political subdivisions		—		—		10		4		10		4
Mortgage-backed securities		255,896		416		—		—		255,896		416
Corporate securities		44,251		3,765		66,341		4,659		110,592		8,424

Total unrealized loss position	$	300,147	$	4,181	$	66,351	$	4,663	$	366,498	$	8,844


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
Corporate securities		69,985		1,516		—		—		69,985		1,516
Other		—		—		—		—		—		—

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


As of September 30, 2010
State and political subdivisions	$	—	$	—	$	12	$	6	$	12	$	6
Mortgage-backed securities		5,055		1		10,730		60		15,785		61
Corporate securities		59,864		1,136		—		—		59,864		1,136

Total unrealized loss position	$	64,919	$	1,137	$	10,742	$	66	$	75,661	$	1,203

At September 30, 2011, there were 32 available for sale securities and 2 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 September 30, 2011 were primarily attributable to changes in interest rates.

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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 nine months ended September 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 nine months of 2011.

The amortized cost and fair value of held to maturity and available for sale securities at September 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	$	25,000	$	25,047	$	—	$	—
More than 10 years		8,597		8,659		5,000		5,017

		33,597		33,706		5,000		5,017


State and political subdivisions:
Within 1 year		4,357		4,398		—		—
1 to 5 years		14,291		15,198		4,821		5,081
5 to 10 years		5,939		6,344		19,483		21,132
More than 10 years		848		891		25,881		27,671

		25,435		26,831		50,185		53,884


Corporate securities:
1 to 5 years		18,549		16,848		—		—
5 to 10 years		99,517		93,494		—		—
More than 10 years		1,000		300		—		—

		119,066		110,642		—		—


Other:
More than 10 years		2,504		2,504		—		—

		2,504		2,504		—		—


Total securities other than mortgage-backed securities:
Within 1 year		4,357		4,398		—		—
1 to 5 years		32,840		32,046		4,821		5,081
5 to 10 years		130,456		124,885		19,483		21,132
More than 10 years		12,949		12,354		30,881		32,688

Mortgage-backed securities		1,556,639		1,595,400		298,554		310,119


	$	1,737,241	$	1,769,083	$	353,739	$	369,020

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 September 30, 2011, December 31, 2010 and September 30, 2010, are summarized as follows (in thousands).


	September 30,		December 31,		September 30,
	2011		2010		2010
Commercial (secured by real estate)	$	1,771,101	$	1,761,424	$	1,781,271
Commercial construction		168,531		296,582		309,519
Commercial (commercial and industrial)		429,043		441,518		456,368

Total commercial		2,368,675		2,499,524		2,547,158
Residential construction		474,552		695,166		763,424
Residential mortgage		1,149,678		1,278,780		1,315,994
Consumer installment		116,970		130,656		132,928

Total loans		4,109,875		4,604,126		4,759,504
Less allowance for loan losses		146,092		174,695		174,613

Loans, net	$	3,963,783	$	4,429,431	$	4,584,891

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 nine months ended September 30, 2011 and 2010 are summarized as follows (in thousands).


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2011		2010		2011		2010
Balance beginning of period	$	127,638	$	174,111	$	174,695	$	155,602
Provision for loan losses		36,000		50,500		237,000		187,000
Charge-offs:
Commercial (secured by real estate)		2,270		14,343		54,410		27,070
Commercial construction		1,705		1,989		52,400		5,660
Commercial (commercial and industrial)		866		1,458		5,832		7,776
Residential construction		7,668		25,661		106,692		111,632
Residential mortgage		6,399		8,043		47,742		19,435
Consumer installment		970		1,162		2,949		3,708

Total loans charged-off		19,878		52,656		270,025		175,281

Recoveries:
Commercial (secured by real estate)		78		131		352		1,137
Commercial construction		80		17		191		22
Commercial (commercial and industrial)		446		251		849		1,592
Residential construction		1,287		1,727		1,544		3,083
Residential mortgage		289		348		660		672
Consumer installment		152		184		826		786

Total recoveries		2,332		2,658		4,422		7,292

Net charge-offs		17,546		49,998		265,603		167,989

Balance end of period	$	146,092	$	174,613	$	146,092	$	174,613

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

At September 30, 2011, December 31, 2010 and September 30, 2010, loans with a carrying value of $1.37 billion, $1.02 billion and $1.10 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 the impairment method as of September 30, 2011, December 31, 2010 and September 30, 2010 (in thousands).


							Commercial
	Commercial						(Commercial
	(Secured by			Commercial			and			Residential			Residential			Consumer
	Real Estate)			Construction			Industrial)			Construction			Mortgage			Installment			Unallocated			Total
Nine Months Ended September 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		(54,410	)		(52,400	)		(5,832	)		(106,692	)		(47,742	)		(2,949	)		—			(270,025	)
Recoveries		352			191			849			1,544			660			826			—			4,422
Provision		48,344			54,133			20,174			57,842			53,786			1,296			1,425			237,000

Ending balance	$	25,477		$	8,704		$	22,771		$	45,265		$	29,009		$	2,203		$	12,663		$	146,092

Ending allowance attributable to loans:
Individually evaluated for impairment	$	4,070		$	4,038		$	17,067		$	7,267		$	1,062		$	37		$	—		$	33,541
Collectively evaluated for impairment		21,407			4,666			5,704			37,998			27,947			2,166			12,663			112,551

Total ending allowance balance	$	25,477		$	8,704		$	22,771		$	45,265		$	29,009		$	2,203		$	12,663		$	146,092

Loans:
Individually evaluated for impairment	$	54,126		$	23,844		$	52,433		$	44,189		$	8,043		$	95		$	—		$	182,730
Collectively evaluated for impairment		1,716,975			144,687			376,610			430,363			1,141,635			116,875			—			3,927,145

Total loans	$	1,771,101		$	168,531		$	429,043		$	474,552		$	1,149,678		$	116,970		$	—		$	4,109,875


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


Nine Months Ended September 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		(27,070	)		(5,660	)		(7,776	)		(111,632	)		(19,435	)		(3,708	)		—			(175,281	)
Recoveries		1,137			22			1,592			3,083			672			786			—			7,292
Provision		30,412			7,764			7,667			116,913			21,394			3,409			(559	)		187,000

Ending balance	$	23,687		$	7,987		$	8,375		$	101,949		$	19,897		$	3,032		$	9,686		$	174,613

Ending allowance attributable to loans:
Individually evaluated for impairment	$	15		$	578		$	—		$	653		$	20		$	—		$	—		$	1,266
Collectively evaluated for impairment		23,672			7,409			8,375			101,296			19,877			3,032			9,686			173,347

Total ending allowance balance	$	23,687		$	7,987		$	8,375		$	101,949		$	19,897		$	3,032		$	9,686		$	174,613

Loans:
Individually evaluated for impairment	$	47,880		$	15,156		$	8,182		$	60,691		$	25,067		$	—		$	—		$	156,976
Collectively evaluated for impairment		1,733,391			294,363			448,186			702,733			1,290,927			132,928			—			4,602,528

Total loans	$	1,781,271		$	309,519		$	456,368		$	763,424		$	1,315,994		$	132,928		$	—		$	4,759,504

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. All troubled debt restructurings are considered impaired regardless of accrual status. 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 nonaccrual loans are applied as a reduction of the outstanding principal balance. Impairment amounts calculated for nonaccrual collateral-dependent loans $500,000 and greater are recorded quarterly. Specific reserves are recorded in the allowance for loan losses for impairment amounts calculated on nonaccrual, non-collateral-dependent loans $500,000 and greater, and all accruing troubled debt restructured loans.

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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.

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


	September 30,		December 31,		September 30,
	2011		2010		2010

Period-end loans with no allocated allowance for loan losses	$	66,636	$	115,338	$	149,865
Period-end loans with allocated allowance for loan losses		116,094		7,638		7,111

Total	$	182,730	$	122,976	$	156,976


Amount of allowance for loan losses allocated	$	33,541	$	1,049	$	1,266

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


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2011		2010		2011		2010

Average balance of individually evaluated impaired loans during period	$	109,164	$	159,271	$	81,031	$	180,531
Interest income recognized during impairment		797		—		797		—
Cash-basis interest income recognized		630		—		630		—

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


	September 30, 2011						December 31, 2010						September 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)	$	45,242	$	38,242	$	—	$	60,238	$	39,588	$	—	$	64,951	$	46,179	$	—
Commercial construction		6,803		6,309		—		33,898		20,311		—		27,876		13,041		—
Commercial (commercial and industrial)		48		48		—		10,115		5,874		—		12,078		8,182		—

Total commercial		52,093		44,599		—		104,251		65,773		—		104,905		67,402		—
Residential construction		31,646		16,421		—		59,502		34,597		—		97,152		57,907		—
Residential mortgage		7,745		5,588		—		21,528		14,968		—		33,413		24,556		—
Consumer installment		28		28		—		—		—		—		—		—		—

Total with no related allowance recorded		91,512		66,636		—		185,281		115,338		—		235,470		149,865		—


With an allowance recorded:
Commercial (secured by real estate)		16,173		15,884		4,070		2,230		2,230		268		2,283		1,701		15
Commercial construction		17,850		17,535		4,038		—		—		—		2,115		2,115		578
Commercial (commercial and industrial)		54,259		52,385		17,067		—		—		—		—		—		—

Total commercial		88,282		85,804		25,175		2,230		2,230		268		4,398		3,816		593
Residential construction		28,428		27,768		7,267		14,480		4,908		644		4,500		2,784		653
Residential mortgage		2,455		2,455		1,062		500		500		137		511		511		20
Consumer installment		67		67		37		—		—		—		—		—		—

Total with an allowance recorded		119,232		116,094		33,541		17,210		7,638		1,049		9,409		7,111		1,266

Total	$	210,744	$	182,730	$	33,541	$	202,491	$	122,976	$	1,049	$	244,879	$	156,976	$	1,266

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

There were no loans more than 90 days past due and still accruing interest at September 30, 2011, December 31, 2010 or September 30, 2010. Nonaccrual loans at September 30, 2011, December 31, 2010 and September 30, 2010 were $144 million, $179 million and $218 million, respectively. Nonaccrual loans include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually evaluated impaired loans with larger balances.

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


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

Commercial (secured by real estate)	$	21,998		$	44,927		$	53,646
Commercial construction		11,370			21,374			17,279
Commercial (commercial and industrial)		53,009			5,611			7,670

Total commercial		86,377			71,912			78,595
Residential construction		34,472			54,505			79,321
Residential mortgage		22,671			51,083			58,107
Consumer installment		964			1,594			1,743

Total	$	144,484		$	179,094		$	217,766


Balance as a percentage of unpaid principal		77.8%	⁽¹⁾		67.2	%		70.0	%


⁽¹⁾		Excluding single loan relationship with $25 million special allowance classified as nonaccrual in the third quarter, the ratio is 62.2%.

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


					Greater
					Than 90
	30 - 59 Days		60 - 89 Days		Days Past		Total Past		Loans Not
	Past Due		Past Due		Due		Due		Past Due		Total
As of September 30, 2011
Commercial (secured by real estate)	$	4,587	$	4,730	$	10,594	$	19,911	$	1,751,190	$	1,771,101
Commercial construction		149		173		2,107		2,429		166,102		168,531
Commercial (commercial and industrial)		1,141		1,507		691		3,339		425,704		429,043

Total commercial		5,877		6,410		13,392		25,679		2,342,996		2,368,675
Residential construction		2,685		2,403		14,546		19,634		454,918		474,552
Residential mortgage		13,979		3,308		12,471		29,758		1,119,920		1,149,678
Consumer installment		1,531		404		291		2,226		114,744		116,970

Total loans	$	24,072	$	12,525	$	40,700	$	77,297	$	4,032,578	$	4,109,875


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 September 30, 2010
Commercial (secured by real estate)	$	11,121	$	7,870	$	34,918	$	53,909	$	1,727,362	$	1,781,271
Commercial construction		3,399		2,009		9,310		14,718		294,801		309,519
Commercial (commercial and industrial)		1,941		1,166		4,824		7,931		448,437		456,368

Total commercial		16,461		11,045		49,052		76,558		2,470,600		2,547,158
Residential construction		13,025		25,330		46,626		84,981		678,443		763,424
Residential mortgage		24,911		9,262		40,155		74,328		1,241,666		1,315,994
Consumer installment		1,785		614		861		3,260		129,668		132,928

Total loans	$	56,182	$	46,251	$	136,694	$	239,127	$	4,520,377	$	4,759,504

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

As of September 30, 2011 and December 31, 2010, $7.75 million and $173,000 of specific reserves were allocated to customers whose loan terms have been modified in troubled debt restructurings. There were no specific reserves established for loans considered to be troubled debt restructurings at September 30, 2010. United committed to lend additional amounts totaling up to $1.06 million, $1.17 million, and $256,000 as of September 30, 2011 and December 31, 2010, and September 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. (dollars in thousands).


			Pre-		Post-
			Modification		Modification
			Outstanding		Outstanding
	Number of		Recorded		Recorded
	Contracts		Investment		Investment
As of September 30, 2011
Commercial (secured by real estate)		31	$	41,177	$	38,177
Commercial construction		7		14,123		14,123
Commercial (commercial and industrial)		7		304		304

Total commercial		45		55,604		52,604
Residential construction		46		21,369		20,374
Residential mortgage		16		2,792		2,635
Consumer installment		3		95		95

Total loans		110	$	79,860	$	75,708


As of December 31, 2010
Commercial (secured by real estate)		41	$	40,649	$	36,759
Commercial construction		16		37,980		37,067
Commercial (commercial and industrial)		7		645		364

Total commercial		64		79,274		74,190
Residential construction		63		22,012		20,782
Residential mortgage		43		6,574		6,285
Consumer installment		7		124		124

Total loans		177	$	107,984	$	101,381


As of September 30, 2010
Commercial (secured by real estate)		40	$	31,142	$	27,145
Commercial construction		10		11,499		10,587
Commercial (commercial and industrial)		7		193		193

Total commercial		57		42,834		37,925
Residential construction		57		22,640		20,954
Residential mortgage		38		7,016		6,492
Consumer installment		5		944		944

Total loans		157	$	73,434	$	66,315

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

The following table presents the number of contracts and the recorded investment for those trouble debt restructurings that have subsequently defaulted which we define as 90 days or more past due (dollars in thousands).


	Troubled Debt Restructurings That Have Subsequently Defaulted
	Three Months Ended				Nine Months Ended
	September 30, 2011				September 30, 2011
	Number of		Recorded		Number of		Recorded
	Contracts		Investment		Contracts		Investment

Commercial (secured by real estate)		—	$	—		3	$	1,337
Commercial construction		—		—		—		—
Commercial (commercial and industrial)		—		—		1		44

Total commercial		—		—		4		1,381
Residential construction		4		679		7		1,242
Residential mortgage		1		56		2		402
Consumer installment		—		—		1		28

Total loans		5	$	735		14	$	3,053

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 industry and 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. Loans in this category are presently protected from apparent loss; however weaknesses exist that could cause future impairment, including the deterioration of financial ratios, past due status and questionable management capabilities. These loans require more than the ordinary amount of supervision. Collateral values generally afford adequate coverage, but may not be immediately marketable.

Substandard. These loans are inadequately protected by the current net worth and paying capacity of the obligor or by the collateral pledged. 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. There is the distinct possibility that the Company will sustain some loss if deficiencies are not corrected. Immediate corrective action is necessary.

Doubtful. Specific weaknesses characterized as Substandard that are severe enough to make collection in full highly questionable and improbable. 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 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.

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

As of September 30, 2011, December 31, 2010 and September 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 September 30, 2011
Commercial (secured by real estate)	$	1,520,604	$	94,147	$	156,350	$	—	$	—	$	1,771,101
Commercial construction		115,021		15,611		37,899		—		—		168,531
Commercial (commercial and industrial)		337,796		6,986		83,381		—		880		429,043

Total commercial		1,973,421		116,744		277,630		—		880		2,368,675
Residential construction		320,567		43,340		110,645		—		—		474,552
Residential mortgage		1,012,423		37,892		99,363		—		—		1,149,678
Consumer installment		112,457		847		3,666		—		—		116,970

Total loans	$	3,418,868	$	198,823	$	491,304	$	—	$	880	$	4,109,875


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 September 30, 2010
Commercial (secured by real estate)	$	1,487,855	$	82,530	$	210,886	$	—	$	—	$	1,781,271
Commercial construction		176,933		12,715		119,871		—		—		309,519
Commercial (commercial and industrial)		375,433		49,954		29,921		—		1,060		456,368

Total commercial		2,040,221		145,199		360,678		—		1,060		2,547,158
Residential construction		418,571		88,156		256,697		—		—		763,424
Residential mortgage		1,125,651		45,993		144,350		—		—		1,315,994
Consumer installment		126,102		878		5,948		—		—		132,928

Total loans	$	3,710,545	$	280,226	$	767,673	$	—	$	1,060	$	4,759,504

Note 6 — Foreclosed Property

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


	September 30,			December 31,			September 30,
	2011			2010			2010

Commercial real estate	$	11,873		$	25,893		$	16,557
Commercial construction		5,862			17,808			15,679

Total commercial		17,735			43,701			32,236
Residential construction		42,295			91,385			82,538
Residential mortgage		9,397			23,687			27,482

Total foreclosed property		69,427			158,773			142,256
Less valuation allowance		25,164			16,565			12,292

Foreclosed property, net	$	44,263		$	142,208		$	129,964


Balance as a percentage of original loan unpaid principal		33.4	%		64.4	%		65.9	%

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2011			2010			2011			2010

Balance at beginning of year	$	30,386		$	8,572		$	16,565		$	7,433
Additions charged to expense		1,772			7,051			53,475			17,724
Direct write downs		(6,994	)		(3,331	)		(44,876	)		(12,865	)

Balance at end of period	$	25,164		$	12,292		$	25,164		$	12,292

Expenses related to foreclosed assets include (in thousands).


	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2011			2010		2011		2010

Net (gain) loss on sales	$	(804	)	$	7,137	$	7,998	$	15,753
Provision for unrealized losses		1,772			7,051		53,475		17,724
Operating expenses, net of rental income		1,845			5,564		8,130		11,628

Total foreclosed property expense	$	2,813		$	19,752	$	69,603	$	45,105

Note 7 — Earnings Per Share

United is required to report on the face of the consolidated 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 nine months ended September 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				Nine Months Ended
	September 30,				September 30,
	2011		2010		2011		2010

Series A - 6% fixed	$	3	$	3	$	10	$	10
Series B - 5% fixed until December 6, 2013, 9% thereafter		2,598		2,578		7,798		7,720
Series D - LIBOR plus 9.6875%, resets quarterly		418		—		1,005		—

Total preferred stock dividends	$	3,019	$	2,581	$	8,813	$	7,730

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 three and nine months ended September 30, 2011 and the three and nine months ended September 30, 2010, due to the antidilutive effect of the net loss for those periods.

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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


	Three Months Ended						Nine Months Ended
	September 30,						Sepbember 30,
	2011			2010			2011			2010

Net loss available to common shareholders	$	(9,221	)	$	(238,996	)	$	(149,884	)	$	(336,970	)


Weighted average shares outstanding:
Basic		57,599			18,936			33,973			18,905
Effect of dilutive securities
Convertible securities		—			—			—			—
Stock options		—			—			—			—
Warrants		—			—			—			—

Diluted		57,599			18,936			33,973			18,905


Loss per common share:
Basic	$	(.16	)	$	(12.62	)	$	(4.41	)	$	(17.82	)

Diluted	$	(.16	)	$	(12.62	)	$	(4.41	)	$	(17.82	)

At September 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; 585,829 shares issuable upon exercise of stock options granted to employees with a weighted average exercise price of $94.33; 404,644 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.

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.

As of September 30, 2011, December 31, 2010 and September 30, 2010 United had no active derivative instruments outstanding.

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 September 30, 2011, December 31, 2010 or September 30, 2010 that were designated as cash flow hedges of interest rate risk however, United had unrecognized gains from terminated derivative contracts that are being amortized, straight line, over the original instruments’ remaining contractual terms.

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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. Such derivatives were originally 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 nine months ended September 30, 2011, $575,000 and $4.69 million, respectively, in hedge ineffectiveness was recognized in other fee revenue. During the three and nine months ended September 30, 2010, $327,000 and $970,000, 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 September 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 next twelve months, United estimates that an additional $5.33 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 September 30, 2011, December 31, 2010 and September 30, 2010, United had no active derivatives designated as fair value hedges of interest rate risk.

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 nine months ended September 30, 2010, United recognized net gains of $9,000 and $215,000, respectively, related to ineffectiveness of the fair value hedging relationships. There were no active fair value hedges during the first nine 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 nine months ended September 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 September 30,
Other fee revenue	$	—	$	(1,167	)	$	—	$	1,176


Nine Months Ended September 30,
Other fee revenue	$	—	$	(3,760	)	$	—	$	3,975

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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 September 30,
					Interest revenue	$	2,373	$	3,349
					Other income		575		327

Interest rate products	$	—	$	—	Total	$	2,948	$	3,676


Nine Months Ended September 30,
					Interest revenue	$	7,885	$	14,283
					Other income		4,687		970

Interest rate products	$	—	$	2,314	Total	$	12,572	$	15,253

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 September 30, 2011, United had no active derivative positions and therefore no credit support agreements remained in effect.

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 September 30, 2011, 328,505 additional awards could be granted under the plan, subject to shareholder approval of a 612,488 increase in shares available under the plan. Through September 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 nine 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
Granted		10,000			11.20
Forfeited		(6,527	)		42.59
Expired		(95,957	)		79.75

Outstanding at September 30, 2011		585,829			94.33		4.4	$	—


Exercisable at September 30, 2011		518,815			100.63		4.0		—

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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.


	Nine Months Ended
	September 30,
	2011			2010

Expected volatility		33.00	%		52.36	%
Expected dividend yield		0.00	%		0.00	%
Expected life (in years)		5.00			6.15
Risk-free rate		2.05	%		3.10	%

Compensation expense relating to stock options of $651,000 and $1.55 million was included in earnings for the nine months ended September 30, 2011 and 2010, respectively. Deferred tax benefits of $253,000 and $603,000, respectively, were included in the determination of income tax benefit for the nine month periods ended September 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 nine months of 2011 or 2010.

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


				Weighted-
				Average Grant-
Restricted Stock	Shares			Date Fair Value

Outstanding at December 31, 2010		23,214		$	59.67
Granted		394,519			10.26
Vested		(13,089	)		34.53

Outstanding at September 30, 2011		404,644			12.31

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 nine months ended September 30, 2011 and 2010, compensation expense of $779,000 and $360,000, respectively, was recognized related to restricted stock awards. The total intrinsic value of the restricted stock was $3.44 million at September 30, 2011.

As of September 30, 2011, there was $4.70 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 2.4 years. The aggregate grant date fair value of options and restricted stock awards that vested during the nine months ended September 30, 2011, was $2.05 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 nine months ended September 30, 2011 and 2010, United issued 113,787 and 72,281 shares, respectively, and increased capital by $1.10 million and $1.40 million, respectively, through these programs. The DRIP program has been suspended until 2012 when United expects to regain its S-3 filing status.

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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 September 30, 2011 and 2010, 88,501 and 61,119 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 nine months ended September 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 20,618,156 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 total outstanding common stock.

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.

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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 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.

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.

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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 September 30, 2011, December 31, 2010 and September 30, 2010, aggregated by the level in the fair value hierarchy within which those measurements fall (in thousands).


September 30, 2011	Level 1		Level 2		Level 3		Total
Assets
Securities available for sale:
U.S. Government agencies	$	—	$	33,706	$	—	$	33,706
State and political subdivisions		—		26,831		—		26,831
Mortgage-backed securities		—		1,591,604		3,796		1,595,400
Corporate securities		—		110,292		350		110,642
Other		—		2,504		—		2,504
Deferred compensation plan assets		2,659		—		—		2,659

Total	$	2,659	$	1,764,937	$	4,146	$	1,771,742


Liabilities
Deferred compensation plan liability	$	2,659	$	—	$	—	$	2,659

Total liabilities	$	2,659	$	—	$	—	$	2,659


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
Corporate securities		—		103,685		350		104,035
Other		—		2,452		—		2,452
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


September 30, 2010	Level 1		Level 2		Level 3		Total
Assets
Securities available for sale:
U.S. Government agencies	$	—	$	98,708	$	29,995	$	128,703
State and political subdivisions		—		30,637		—		30,637
Mortgage-backed securities		—		791,946		5,375		797,321
Corporate securities		—		64,055		30,350		94,405
Other		—		2,452		—		2,452
Deferred compensation plan assets		2,973		—		—		2,973

Total	$	2,973	$	987,798	$	65,720	$	1,056,491


Liabilities
Deferred compensation plan liability	$	2,973	$	—	$	—	$	2,973

Total liabilities	$	2,973	$	—	$	—	$	2,973

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		(18	)
Paydowns		(1,120	)


Balance at September 30, 2011	$	4,146

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 September 30, 2011, December 31, 2010 and September 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
September 30, 2011
Assets
Loans	$	—	$	—	$	140,577	$	140,577
Foreclosed properties		—		—		38,823		38,823


Total	$	—	$	—	$	179,400	$	179,400


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


Total	$	—	$	—	$	191,976	$	191,976


September 30, 2010
Assets
Loans	$	—	$	—	$	121,257	$	121,257
Foreclosed properties		—		—		81,436		81,436


Total	$	—	$	—	$	202,693	$	202,693

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. United did not have any active derivative contracts outstanding at September 30, 2011, December 31, 2010 or September 30, 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 on a recurring basis in United’s balance sheet at September 30, 2011, December 31, 2010, and September 30, 2010 are as follows (in thousands).


	September 30, 2011				December 31, 2010				September 30, 2010
	Carrying				Carrying				Carrying
	Amount		Fair Value		Amount		Fair Value		Amount		Fair Value
Assets:
Securities held to maturity	$	353,739	$	369,020	$	265,807	$	267,988	$	256,694	$	263,012
Loans, net		3,963,783		3,787,214		4,429,431		4,196,142		4,584,891		4,272,201

Liabilities:
Deposits		6,005,305		5,998,994		6,469,172		6,481,867		5,998,637		6,003,543
Federal Home Loan Bank advances		40,625		43,685		55,125		59,498		55,125		60,215
Long-term debt		120,206		114,673		150,146		93,536		150,126		124,964

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, 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 Banks, 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 September 30, 2011 United had total consolidated assets of $7.16 billion, total loans of $4.11 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 $6.01 billion and stockholders’ equity of $848 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.

Operating income (loss) from continuing operations and operating income (loss) from continuing operations per diluted share are non-GAAP (accounting principles generally accepted in the United States of America (“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 36.

United reported a net loss from continuing operations of $6.20 million for the third quarter of 2011. This compared to a net operating loss from continuing operations of $25.8 million for the third quarter of 2010. The 2010 net operating loss from continuing operations excluded goodwill impairment charges of $211 million. The loss for the third quarter of 2011 was due to the classification of United’s largest lending relationship which resulted in the recording of a $25.0 million provision for loan losses. Diluted operating loss from continuing operations per common share was $.16 for the third quarter of 2011, compared to a diluted operating loss from continuing operations per common share of $1.50 for the third quarter of 2010. The noncash goodwill impairment charges added $11.12 per share to the diluted operating loss from continuing operations for the third quarter of 2010 bringing the total net loss per share from continuing operations for the third quarter of 2010 to $12.62.

For the nine months ended September 30, 2011, United reported a net operating loss from continuing operations of $141 million, which primarily reflects the credit losses taken in the first quarter associated with the Problem Asset Disposition Plan. This compared to a net operating loss from continuing operations of $120 million for the first nine months of 2010, which included the $30.0 million after-tax loss from the Fletcher transaction and excluded the $211 million goodwill impairment charge. Net loss for the nine months ended September 30, 2010, which includes discontinued operations and goodwill impairment, totaled $329 million. Diluted operating loss from continuing operations per common share was $4.41 for the nine months ended September 30, 2011, compared with diluted operating loss from continuing operations per common share of $6.75 for the same period in 2010. The diluted operating loss per share from continuing operations for the first nine months of 2010 excluded $11.14 per share in loss related to the third quarter 2010 goodwill impairment charge bringing the total net loss from continuing operations per share for the first nine months of 2010 to $17.89.

United’s operating provision for loan losses was $36.0 million for the three months ended September 30, 2011, compared to $50.5 million for the same period in 2010. The third quarter 2011 loan loss provision included a $25.0 million loan loss allocation established for United’s largest lending relationship. Net charge-offs for the third quarter of 2011 were $17.5 million, compared to $50.0 million for the third quarter of 2010. For the nine months ended September 30, 2011, United’s operating provision for loan losses was $237 million, compared to $187 million for the same period of 2010. Net charge-offs for the first nine months of 2011 were $266 million, compared to $168 million for the first nine 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 September 30, 2011, United’s allowance for loan losses was $146 million, or 3.55% of loans, compared to $175 million, or 3.67% of loans, at September 30, 2010. Nonperforming assets of $189 million, which excludes assets of Southern Community Bank (“SCB”) that are covered by loss sharing agreements with the FDIC, decreased to 2.64% of total assets at September 30, 2011, compared to 4.32% as of December 31, 2010 and 4.96% as of September 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. During the third quarter of 2011, United classified its largest lending relationship of $76.6 million, which caused nonperforming assets to increase from 1.60% of total assets at June 30, 2011.

Taxable equivalent net interest revenue was $59.3 million for the third quarter of 2011, compared to $60.0 million for the same period of 2010. The decrease in net interest revenue was primarily the result of a decrease in average loan balances and a 2 basis point decrease in the net interest margin. Average loans for the quarter declined $702 million from the third quarter of 2010. The impact of the decrease in average loan balances was substantially offset by lower deposit rates. Net interest margin decreased from 3.57% for the three months ended September 30, 2010 to 3.55% for the same period in 2011. For the nine months ended September 30, 2011, taxable equivalent net interest revenue was $175 million, compared to $183 million for the same period of 2010. Net interest margin decreased from 3.56% for the nine months ended September 30, 2010 to 3.42% for the same period in 2011. Interest reversals on performing loans that were moved to held for sale during the first quarter 2011 accounted for 4 basis points of the 14 basis points decrease. Over the past year, United has maintained above normal levels of liquidity. The level of excess liquidity peaked in 2011 and lowered the margin by approximately 49 basis points in the first quarter, 76 basis points in the second quarter and 67 basis points in the third quarter. In order to reduce the amount of excess liquidity, United has called its callable 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 decreased $1.36 million, or 11%, from the third quarter of 2010 and increased $1.14 million, or 3%, from the first nine months of 2010. The quarterly decrease was due to a decline in overdraft fees, which were down $886,000 for the three months ended September 30, 2011, due to regulatory changes. The year-to-date increase was primarily attributable to the acceleration of deferred gains related to the ineffectiveness of terminated cash flow hedges, especially during the second quarter of 2011.

For the third quarter of 2011, operating expenses of $46.5 million were down $18.4 million from the third quarter of 2010. This comparison excludes the $211 million goodwill impairment charge in the third quarter of 2010. Lower foreclosed property costs accounted for $16.9 million of the decrease. For the nine months ended September 30, 2011, operating expenses of $211 million were up $32.5 million from the same period of 2010. This comparison excludes the $45.3 million loss on the sale of nonperforming assets in the second quarter of 2010 and the $211 million goodwill impairment charge in the third quarter 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 $24.5 million from the first nine 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 20,618,156 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 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.

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 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 36.

Discontinued Operations

Effective March 31, 2010, United sold its Brintech, Inc. (“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 for another five to six quarters. 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. However, during the third quarter of 2011, United determined that the ultimate repayment of the $76.6 million loan relationship through the sale of the underlying collateral is unlikely due to the lack of sales activity and further decline in real estate values. As a result, United recorded a loan loss provision of $25.0 million for the three months ended September 30, 2011. The Company plans to obtain updated appraisals for the underlying collateral associated with this relationship during the fourth quarter of 2011.

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


																Third
	2011									2010						Quarter			For the Nine						YTD
(in thousands, except per share	Third			Second			First			Fourth			Third			2011-2010			Months Ended						2011-2010
data; taxable equivalent)	Quarter			Quarter			Quarter			Quarter			Quarter			Change			2011			2010			Change
INCOME SUMMARY
Interest revenue	$	74,543		$	76,931		$	75,965		$	81,215		$	84,360					$	227,439		$	261,908
Interest expense		15,262			17,985			19,573			21,083			24,346						52,820			78,988

Net interest revenue		59,281			58,946			56,392			60,132			60,014			(1	)%		174,619			182,920			(5	)%
Operating provision for loan losses ⁽¹⁾		36,000			11,000			190,000			47,750			50,500						237,000			187,000
Fee revenue⁽²⁾		11,498			13,905			11,838			12,442			12,861			(11	)		37,241			36,106			3

Total operating revenue ⁽¹⁾⁽²⁾		34,779			61,851			(121,770	)		24,824			22,375						(25,140	)		32,026
Operating expenses⁽³⁾		46,520			48,728			115,271			64,918			64,906			(28	)		210,519			178,034			18
Loss on sale of nonperforming assets		—			—			—			—			—						—			45,349

Operating (loss) income from continuing operations before income taxes		(11,741	)		13,123			(237,041	)		(40,094	)		(42,531	)		(72	)		(235,659	)		(191,357	)		23
Operating income tax (benefit) expense		(5,539	)		5,506			(94,555	)		(16,520	)		(16,706	)					(94,588	)		(71,542	)

Net operating (loss) income from continuing operations^(1)(2)(3)		(6,202	)		7,617			(142,486	)		(23,574	)		(25,825	)		(76	)		(141,071	)		(119,815	)		18
Noncash goodwill impairment charges		—			—			—			—			(210,590	)					—			(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 (loss) income		(6,202	)		7,617			(142,486	)		(16,395	)		(236,415	)		(97	)		(141,071	)		(329,240	)		(57	)
Preferred dividends and discount accretion		3,019			3,016			2,778			2,586			2,581						8,813			7,730

Net (loss) income available to common shareholders	$	(9,221	)	$	4,601		$	(145,264	)	$	(18,981	)	$	(238,996	)				$	(149,884	)	$	(336,970	)


PERFORMANCE MEASURES
Per common share:
Diluted operating (loss) income from continuing operations^(1)(2)(3)	$	(.16	)	$	.08		$	(7.87	)	$	(1.38	)	$	(1.50	)		(89	)	$	(4.41	)	$	(6.75	)		(35	)
Diluted (loss) income from continuing operations		(.16	)		.08			(7.87	)		(1.00	)		(12.62	)		(99	)		(4.41	)		(17.89	)		(75	)
Diluted (loss) income		(.16	)		.08			(7.87	)		(1.00	)		(12.62	)		(99	)		(4.41	)		(17.82	)		(75	)
Book value		11.37			11.59			14.78			24.18			25.70			(56	)		11.37			25.70			(56	)
Tangible book value⁽⁵⁾		11.26			11.47			14.44			23.78			25.26			(55	)		11.26			25.26			(55	)

Key performance ratios:
Return on equity⁽⁴⁾⁽⁶⁾		(5.72	)%		5.34	%		(147.11	)%		(17.16	)%		(148.04	)%					(43.31	)%		(65.69	)%
Return on assets⁽⁶⁾		(.34	)		.40			(7.61	)		(.89	)		(12.47	)					(2.52	)		(5.70	)
Net interest margin⁽⁶⁾		3.55			3.41			3.30			3.58			3.57						3.42			3.56
Operating efficiency ratio from continuing operations⁽²⁾⁽³⁾		65.73			66.88			169.08			89.45			89.38						99.39			102.14
Equity to assets		11.83			11.21			8.82			8.85			11.37						10.61			11.70
Tangible equity to assets⁽⁵⁾		11.76			11.13			8.73			8.75			9.19						10.53			9.28
Tangible common equity to assets⁽⁵⁾		9.09			4.79			5.51			6.35			6.78						6.44			6.94
Tangible common equity to risk-weighted assets⁽⁵⁾		14.41			14.26			6.40			9.05			9.60						14.41			9.60

ASSET QUALITY *
Non-performing loans	$	144,484		$	71,065		$	83,769		$	179,094		$	217,766					$	144,484		$	217,766
Foreclosed properties		44,263			47,584			54,378			142,208			129,964						44,263			129,964

Total non-performing assets (NPAs)		188,747			118,649			138,147			321,302			347,730						188,747			347,730
Allowance for loan losses		146,092			127,638			133,121			174,695			174,613						146,092			174,613
Operating net charge-offs ⁽¹⁾		17,546			16,483			231,574			47,668			49,998						265,603			167,989
Allowance for loan losses to loans		3.55	%		3.07	%		3.17	%		3.79	%		3.67	%					3.55	%		3.67	%
Operating net charge-offs to average loans⁽¹⁾⁽⁶⁾		1.68			1.58			20.71			4.03			4.12						8.28			4.54
NPAs to loans and foreclosed properties		4.54			2.82			3.25			6.77			7.11						4.54			7.11
NPAs to total assets		2.64			1.60			1.73			4.32			4.96						2.64			4.96

AVERAGE BALANCES ($ in millions)
Loans	$	4,194		$	4,266		$	4,599		$	4,768		$	4,896			(14	)	$	4,352		$	5,026			(13	)
Investment securities		2,150			2,074			1,625			1,354			1,411			52			1,952			1,487			31
Earning assets		6,630			6,924			6,902			6,680			6,676			(1	)		6,817			6,870			(1	)
Total assets		7,261			7,624			7,595			7,338			7,522			(3	)		7,492			7,723			(3	)
Deposits		6,061			6,372			6,560			6,294			6,257			(3	)		6,329			6,399			(1	)
Shareholders’ equity		859			854			670			649			855			—			795			904			(12	)
Common shares — basic (thousands)		57,599			25,427			18,466			18,984			18,936						33,973			18,905
Common shares — diluted (thousands)		57,599			57,543			18,466			18,984			18,936						33,973			18,905

AT PERIOD END ($ in millions)
Loans *	$	4,110		$	4,163		$	4,194		$	4,604		$	4,760			(14	)	$	4,110		$	4,760			(14	)
Investment securities		2,123			2,188			1,884			1,490			1,310			62			2,123			1,310			62
Total assets		7,159			7,410			7,974			7,443			7,013			2			7,159			7,013			2
Deposits		6,005			6,183			6,598			6,469			5,999			—			6,005			5,999			—
Shareholders’ equity		848			860			850			636			662			28			848			662			28
Common shares outstanding (thousands)		57,510			57,469			20,903			18,937			18,887						57,510			18,887


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

Interest revenue reconciliation
Interest revenue — taxable equivalent	$	74,543		$	76,931		$	75,965		$	81,215		$	84,360		$	227,439		$	261,908
Taxable equivalent adjustment		(420	)		(429	)		(435	)		(497	)		(511	)		(1,284	)		(1,504	)

Interest revenue (GAAP)	$	74,123		$	76,502		$	75,530		$	80,718		$	83,849		$	226,155		$	260,404


Net interest revenue reconciliation
Net interest revenue — taxable equivalent	$	59,281		$	58,946		$	56,392		$	60,132		$	60,014		$	174,619		$	182,920
Taxable equivalent adjustment		(420	)		(429	)		(435	)		(497	)		(511	)		(1,284	)		(1,504	)

Net interest revenue (GAAP)	$	58,861		$	58,517		$	55,957		$	59,635		$	59,503		$	173,335		$	181,416


Provision for loan losses reconciliation
Operating provision for loan losses	$	36,000		$	11,000		$	190,000		$	47,750		$	50,500		$	237,000		$	187,000
Partial reversal of special fraud-related provision for loan loss		—			—			—			(11,750	)		—			—			—

Provision for loan losses (GAAP)	$	36,000		$	11,000		$	190,000		$	36,000		$	50,500		$	237,000		$	187,000


Total revenue reconciliation
Total operating revenue	$	34,779		$	61,851		$	(121,770	)	$	24,824		$	22,375		$	(25,140	)	$	32,026
Taxable equivalent adjustment		(420	)		(429	)		(435	)		(497	)		(511	)		(1,284	)		(1,504	)
Partial reversal of special fraud-related provision for loan loss		—			—			—			11,750			—			—			—

Total revenue (GAAP)	$	34,359		$	61,422		$	(122,205	)	$	36,077		$	21,864		$	(26,424	)	$	30,522


Expense reconciliation
Operating expense	$	46,520		$	48,728		$	115,271		$	64,918		$	64,906		$	210,519		$	223,383
Noncash goodwill impairment charge		—			—			—			—			210,590			—			210,590

Operating expense (GAAP)	$	46,520		$	48,728		$	115,271		$	64,918		$	275,496		$	210,519		$	433,973


(Loss) income from continuing operations before taxes reconciliation
Operating (loss) income from continuing operations before taxes	$	(11,741	)	$	13,123		$	(237,041	)	$	(40,094	)	$	(42,531	)	$	(235,659	)	$	(191,357	)
Taxable equivalent adjustment		(420	)		(429	)		(435	)		(497	)		(511	)		(1,284	)		(1,504	)
Noncash goodwill impairment charge		—			—			—			—			(210,590	)		—			(210,590	)
Partial reversal of special fraud-related provision for loan loss		—			—			—			11,750			—			—			—

(Loss) income from continuing operations before taxes (GAAP)	$	(12,161	)	$	12,694		$	(237,476	)	$	(28,841	)	$	(253,632	)	$	(236,943	)	$	(403,451	)


Income tax (benefit) expense reconciliation
Operating income tax (benefit) expense	$	(5,539	)	$	5,506		$	(94,555	)	$	(16,520	)	$	(16,706	)	$	(94,588	)	$	(71,542	)
Taxable equivalent adjustment		(420	)		(429	)		(435	)		(497	)		(511	)		(1,284	)		(1,504	)
Partial reversal of special fraud-related provision for loan loss		—			—			—			4,571			—			—			—

Income tax (benefit) expense (GAAP)	$	(5,959	)	$	5,077		$	(94,990	)	$	(12,446	)	$	(17,217	)	$	(95,872	)	$	(73,046	)


Diluted (loss) earnings from continuing operations per common share reconciliation
Diluted operating (loss) earnings from continuing operations per common share	$	(.16	)	$	.08		$	(7.87	)	$	(1.38	)	$	(1.50	)	$	(4.41	)	$	(6.75	)
Noncash goodwill impairment charge		—			—			—			—			(11.12	)		—			(11.14	)
Partial reversal of special fraud-related provision for loan loss		—			—			—			.38			—			—			—

Diluted (loss) earnings from continuing operations per common share (GAAP)	$	(.16	)	$	.08		$	(7.87	)	$	(1.00	)	$	(12.62	)	$	(4.41	)	$	(17.89	)


Book value per common share reconciliation
Tangible book value per common share	$	11.26		$	11.47		$	14.44		$	23.78		$	25.26		$	11.26		$	25.26
Effect of goodwill and other intangibles		.11			.12			.34			.40			.44			.11			.44

Book value per common share (GAAP)	$	11.37		$	11.59		$	14.78		$	24.18		$	25.70		$	11.37		$	25.70


Efficiency ratio from continuing operations reconciliation
Operating efficiency ratio from continuing operations		65.73	%		66.88	%		169.08	%		89.45	%		89.38	%		99.39	%		102.14	%
Noncash goodwill impairment charge		—			—			—			—			290.00			—			96.29

Efficiency ratio from continuing operations (GAAP)		65.73	%		66.88	%		169.08	%		89.45	%		379.38	%		99.39	%		198.43	%


Average equity to assets reconciliation
Tangible common equity to assets		9.09	%		4.79	%		5.51	%		6.35	%		6.78	%		6.44	%		6.94	%
Effect of preferred equity		2.67			6.34			3.22			2.40			2.41			4.09			2.34

Tangible equity to assets		11.76			11.13			8.73			8.75			9.19			10.53			9.28
Effect of goodwill and other intangibles		.07			.08			.09			.10			2.18			.08			2.42

Equity to assets (GAAP)		11.83	%		11.21	%		8.82	%		8.85	%		11.37	%		10.61	%		11.70	%


Actual tangible common equity to risk-weighted assets reconciliation
Tangible common equity to risk-weighted assets		14.41	%		14.26	%		6.40	%		9.05	%		9.60	%		14.41	%		9.60	%
Effect of other comprehensive income		(.58	)		(.65	)		(.58	)		(.62	)		(.81	)		(.58	)		(.81	)
Effect of deferred tax limitation		(5.34	)		(5.04	)		(5.10	)		(3.34	)		(2.94	)		(5.34	)		(2.94	)
Effect of trust preferred		1.18			1.14			1.12			1.06			1.06			1.18			1.06
Effect of preferred equity		4.30			4.17			5.97			3.52			3.51			4.30			3.51

Tier I capital ratio (Regulatory)		13.97	%		13.88	%		7.81	%		9.67	%		10.42	%		13.97	%		10.42	%


Net charge-offs reconciliation
Operating net charge-offs	$	17,546		$	16,483		$	231,574		$	47,668		$	49,998		$	265,603		$	167,989
Subsequent partial recovery of fraud-related charge-off		—			—			—			(11,750	)		—			—			—

Net charge-offs (GAAP)	$	17,546		$	16,483		$	231,574		$	35,918		$	49,998		$	265,603		$	167,989


Net charge-offs to average loans reconciliation
Operating net charge-offs to average loans		1.68	%		1.58	%		20.71	%		4.03	%		4.12	%		8.28	%		4.54	%
Subsequent partial recovery of fraud-related charge-off		—			—			—			(1.00	)		—			—			—

Net charge-offs to average loans (GAAP)		1.68	%		1.58	%		20.71	%		3.03	%		4.12	%		8.28	%		4.54	%

Results of Operations

United reported a net operating loss from continuing operations of $6.20 million for the third quarter of 2011. This compared to a net operating loss from continuing operations of $25.8 million for the same period in 2010, which excluded a goodwill impairment charge of $211 million. Including the goodwill impairment charge, the net loss for the third quarter of 2010 was $236 million. The loss for the third quarter of 2011 was due to the classification of United’s largest lending relationship which resulted in the recording of a $25.0 million provision for loan losses. For the third quarter of 2011, diluted operating loss from continuing operations per share was $.16. This compared to diluted operating loss from continuing operations per share of $1.50 for the third quarter of 2010, which excluded $11.12 in loss per share related to goodwill impairment bringing the total loss from continuing operations per share to $12.62. For the nine months ended September 30, 2011, United reported a net operating loss from continuing operations of $141 million compared to a net operating loss from continuing operations of $120 million for the same period in 2010, which excludes the $211 million charge for goodwill impairment in 2010. The operating loss for the nine months ended September 30, 2011 reflects the Board of Directors’ 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. Diluted operating loss from continuing operations per common share was $4.41 for the nine months ended September 30, 2011, compared with diluted operating loss from continuing operations per common share of $6.75 for the same period in 2010. The diluted operating loss per share from continuing operations for the first nine months of 2010 excluded $11.14 in loss per share related to the third quarter 2010 goodwill impairment charge bringing the total loss from continuing operations per share to $17.89. See schedule on page 36 for a reconciliation of operating performance measures to the most closely related performance measures calculated in accordance with GAAP.

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 September 30, 2011 was $59.3 million, down $733,000, or 1%, from the third quarter of 2010. The decrease in net interest revenue for the third quarter of 2011 compared to the third quarter of 2010 was mostly due to lower average loan balances which was substantially offset by lower rates on deposits and a more favorable deposit mix. 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 $702 million, or 14%, from the third quarter of last year. The decrease in the loan portfolio was primarily the result of weak loan demand 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 also contributed to declining loan balances. While loan balances have declined, United continues to make new loans. During the third quarter of 2011, United funded $87.8 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 third quarter of 2011 decreased $45.8 thousand, or 1%, from the same period in 2010. Average loans decreased $702 million from the third quarter of 2010, however this decrease was offset by a $739 million increase in average investment securities. The increase in the securities portfolio was due to purchases of floating rate mortgage-backed securities 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 $387 million, or 7%, from the third 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 September 30, 2011, was 4.47%, down 55 basis points from 5.02% 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 a 7 basis point increase in the average loan yield from the third quarter of 2010. In light of the weak economic environment, in late 2010, United sought to maintain above normal levels of liquidity by entering into brokered deposit arrangements and temporarily investing the proceeds in floating rate mortgage-backed securities at a slightly negative spread. Liquidity levels increased further as a result of the first quarter capital transaction. Following the capital transaction, management has sought to reduce liquidity levels and will continue to do so.

The average cost of interest-bearing liabilities for the third quarter of 2011 was 1.12% compared to 1.66% for the same period of 2010, reflecting 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 September 30, 2011 and 2010, the net interest spread was 3.35% and 3.36%, respectively, while the net interest margin was 3.55% and 3.57%, respectively. The reduction in average loan balances negatively impacted the margin.

For the first nine months of 2011, net interest revenue was $175 million, a decrease of $8.30 million, or 5%, from the first nine months of 2010. Average earning assets decreased $52.8 million, or 1%, during the first nine months of 2011 compared to the same period a year earlier. The yield on earning assets decreased 63 basis points from 5.09% for the nine months ended September 30, 2010 to 4.46% for the nine months ended September 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 4 basis points in the first nine 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 14 basis points from the nine months ended September 30, 2010 to the nine months ended September 30, 2011. The buildup of excess liquidity also contributed to the decrease in the net interest margin.

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 September 30, 2011 and 2010.

Table 2 — Average Consolidated Balance Sheets and Net Interest Analysis
For the Three Months Ended September 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⁾	$	4,193,951		$	59,394		5.62	%	$	4,896,471		$	68,540		5.55	%
Taxable securities ⁽³⁾		2,125,154			14,324		2.70			1,384,682			14,431		4.17
Tax-exempt securities ⁽¹⁾⁽³⁾		24,675			399		6.47			26,481			459		6.93
Federal funds sold and other interest-earning assets		286,194			426		.60			368,108			930		1.01


Total interest-earning assets		6,629,974			74,543		4.47			6,675,742			84,360		5.02

Non-interest-earning assets:
Allowance for loan losses		(128,654	)							(194,300	)
Cash and due from banks		53,500								107,825
Premises and equipment		177,798								179,839
Other assets ⁽³⁾		528,461								752,780

Total assets	$	7,261,079							$	7,521,886


Liabilities and Shareholders’ Equity:
Interest-bearing liabilities:
Interest-bearing deposits:
NOW	$	1,258,929			831		.26		$	1,318,779			1,705		.51
Money market		1,024,559			1,129		.44			781,903			1,930		.98
Savings		199,793			52		.10			186,123			83		.18
Time less than $100,000		1,448,024			4,539		1.24			1,541,772			7,190		1.85
Time greater than $100,000		940,864			3,456		1.46			1,065,789			5,506		2.05
Brokered		260,423			1,091		1.66			573,606			3,403		2.35

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