Edgar Filing: UNITED COMMUNITY BANKS INC

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller reporting company

10-Q/A

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q/A

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

For the Quarterly Period Ended March 31, 2011

¨	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 x NO ¨

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 ¨ NO ¨

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.

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

YES ¨ NO x

Common stock, par value $1 per share 20,913,712 shares outstanding as of April 30, 2011

Explanatory Note

This Amendment to the Form 10-Q (this “Amendment”) of United Community Banks, Inc. (“United”) amends and restates United’s Form 10-Q for the quarter ended March 31, 2011 that was originally filed with the Securities and Exchange Commission on May 4, 2011 (collectively with Amendment, this “Form 10-Q”).

This Amendment is filed to reflect United’s establishment of a full deferred tax asset valuation allowance as of December 31, 2010 and the effects thereof on certain related disclosures contained in this Form 10-Q, including (i) United’s previously reported income tax expense, other comprehensive income in shareholders’ equity and net loss for the first quarter of 2011 and full year 2010, tangible book value, tangible equity and tangible common equity to asset ratios, and regulatory capital ratios as of March 31, 2011 and December 31, 2010, and (ii) United’s disclosure in Item 4—Controls and Procedures.

On June 17, 2011, United completed a 1-for-5 reverse stock split, whereby each 5 shares of United’s common stock were reclassified into one share of common stock, and each 5 shares of United’s non-voting common stock were reclassified into one share of non-voting common stock. All share and per share amounts for all periods presented in this Form 10-Q have been adjusted to reflect the reverse stock split as though it had occurred prior to the earliest period presented.

Unless otherwise indicated, this Amendment does not reflect events occurring after May 4, 2011.

INDEX



PART I - Financial Information

Item 1. Financial Statements.

Consolidated Statement of Operations (unaudited) for the Three Months Ended March 31, 2011 and 2010			3

Consolidated Balance Sheet at March 31, 2011 (unaudited), December 31, 2010 (audited) and March 31, 2010 (unaudited)			4

Consolidated Statement of Changes in Shareholders’ Equity (unaudited) for the Three Months Ended March 31, 2011 and 2010			5

Consolidated Statement of Cash Flows (unaudited) for the Three Months Ended March 31, 2011 and 2010			6

Notes to Consolidated Financial Statements			7

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			29

Item 3. Quantitative and Qualitative Disclosures About Market Risk			55

Item 4. Controls and Procedures			55

PART II - Other Information

Item 1. Legal Proceedings			55
Item 1A. Risk Factors			55
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			55
Item 3. Defaults Upon Senior Securities			55
Item 4. (Removed and Reserved)			55
Item 5. Other Information			55
Item 6. Exhibits			55

Part I – Financial Information

Item 1 – Financial Statements

UNITED COMMUNITY BANKS, INC.

Consolidated Statement of Operations (Unaudited)

		September 30,			September 30,
	Three Months Ended
	March 31,
	(As restated)
*(in thousands, except per share data)*	2011			2010
Interest revenue:
Loans, including fees	$	61,107		$	72,215
Investment securities, including tax exempt of $259 and $311		13,604			16,203
Federal funds sold, commercial paper and deposits in banks		819			938

Total interest revenue		75,530			89,356

Interest expense:
Deposits:
NOW		1,324			1,854
Money market		2,028			1,757
Savings		77			84
Time		11,732			20,198

Total deposit interest expense		15,161			23,893
Federal funds purchased, repurchase agreements and other short-term borrowings		1,042			1,038
Federal Home Loan Bank advances		590			977
Long-term debt		2,780			2,662

Total interest expense		19,573			28,570
Net interest revenue		55,957			60,786

Provision for loan losses		190,000			75,000

Net interest expense after provision for loan losses		(134,043	)		(14,214	)

Fee revenue:
Service charges and fees		6,720			7,447
Mortgage loan and other related fees		1,494			1,479
Brokerage fees		677			567
Securities gains, net		55			61
Other		2,892			2,112

Total fee revenue		11,838			11,666

Total revenue		(122,205	)		(2,548	)

Operating expenses:
Salaries and employee benefits		24,924			24,360
Communications and equipment		3,344			3,273
Occupancy		4,074			3,814
Advertising and public relations		978			1,043
Postage, printing and supplies		1,118			1,225
Professional fees		3,330			1,943
Foreclosed property		64,899			10,813
FDIC assessments and other regulatory charges		5,413			3,626
Amortization of intangibles		762			802
Other		6,429			3,921

Total operating expenses		115,271			54,820

Loss from continuing operations before income taxes		(237,476	)		(57,368	)
Income tax benefit		(140	)		(22,910	)

Net loss from continuing operations		(237,336	)		(34,458	)
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		(237,336	)		(33,293	)
Preferred stock dividends and discount accretion		2,778			2,572

Net loss available to common shareholders	$	(240,114	)	$	(35,865	)

Loss from continuing operations per common share—Basic / Diluted	$	(13.00	)	$	(1.96	)
Loss per common share—Basic / Diluted		(13.00	)		(1.90	)
Weighted average common shares outstanding—Basic / Diluted		18,466			18,878

See accompanying notes to consolidated financial statements.

UNITED COMMUNITY BANKS, INC.

Consolidated Balance Sheet

		September 30,			September 30,			September 30,
	(As restated)			(As restated)
	March 31,			December 31,			March 31,
*(in thousands, except share and per share data)*	2011			2010			2010
	*(unaudited)*			*(audited)*			*(unaudited)*
ASSETS
Cash and due from banks	$	153,891		$	95,994		$	105,613
Interest-bearing deposits in banks		465,656			111,901			99,893
Federal funds sold, commercial paper and short-term investments		470,087			441,562			183,049

Cash and cash equivalents		1,089,634			649,457			388,555
Securities available for sale		1,638,494			1,224,417			1,526,589
Securities held to maturity (fair value $248,361 and $267,988)		245,430			265,807			—
Loans held for sale		80,629			—			—
Mortgage loans held for sale		25,364			35,908			21,998
Loans, net of unearned income		4,194,372			4,604,126			4,992,045
Less allowance for loan losses		133,121			174,695			173,934

Loans, net		4,061,251			4,429,431			4,818,111
Assets covered by loss sharing agreements with the FDIC		125,789			131,887			169,287
Premises and equipment, net		179,143			178,239			181,217
Accrued interest receivable		21,687			24,299			30,492
Goodwill and other intangible assets		10,684			11,446			224,394
Foreclosed property		54,378			142,208			136,275
Net deferred tax asset		—			—			92,986
Other assets		177,005			183,160			247,114

Total assets	$	7,709,488		$	7,276,259		$	7,837,018

LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Deposits:
Demand	$	864,708		$	793,414		$	740,727
NOW		1,320,136			1,424,781			1,344,973
Money market		967,938			891,252			729,283
Savings		193,591			183,894			186,699
Time:
Less than$100,000		1,576,505			1,496,700			1,643,059
Greater than$100,000		990,289			1,002,359			1,132,034
Brokered		684,581			676,772			710,813

Total deposits		6,597,748			6,469,172			6,487,588
Federal funds purchased, repurchase agreements, and other short-term borrowings		102,107			101,067			102,480
Federal Home Loan Bank advances		55,125			55,125			114,303
Long-term debt		150,166			150,146			150,086
Unsettled securities purchases		177,532			—			17,588
Accrued expenses and other liabilities		40,766			32,171			39,078

Total liabilities		7,123,444			6,807,681			6,911,123

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		176,049			175,711			174,727
Series D; $1,000 stated value; 16,613 shares issued and outstanding		16,613			—			—
Series F; $1,000 stated value; 195,872 shares issued and outstanding		195,872			—			—
Series G; $1,000 stated value; 151,185 shares issued and outstanding		151,185			—			—
Common stock, $1 par value; 200,000,000 shares authorized;
20,903,111, 18,937,001 and 18,835,171 shares issued and outstanding		20,903			18,937			18,835
Common stock issuable; 79,428, 67,287 and 52,400 shares		3,681			3,894			4,127
Capital surplus		738,963			741,244			698,144
Accumulated deficit		(732,390	)		(492,276	)		(15,481	)
Accumulated other comprehensive income		14,951			20,851			45,326

Total shareholders’ equity		586,044			468,578			925,895

Total liabilities and shareholders’ equity	$	7,709,488		$	7,276,259		$	7,837,018

See accompanying notes to consolidated financial statements.

UNITED COMMUNITY BANKS, INC.

Consolidated Statement of Changes in Shareholders’ Equity (Unaudited)

For the Three Months Ended March 31,

		September 30,		September 30,		September 30,		September 30,		September 30,		September 30,			September 30,			September 30,			September 30,			September 30,			September 30,
																				(Accumulated			Accumulated
	Preferred Stock													Common						Deficit)			Other
*(in thousands, except share and per share data)*	Series A		Series B		Series D		Series F		Series G		Common Stock			Stock Issuable			Capital Surplus			Retained Earnings			Comprehensive 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																					(33,293	)					(33,293	)
Other comprehensive income (loss):
Unrealized holding gains on available for sale securities, net of deferred tax expense and reclassification adjustment																								783			783
Unrealized losses on derivative financial instruments qualifying as cash flow hedges, net of deferred tax benefit																								(3,092	)		(3,092	)

Comprehensive loss																					(33,293	)		(2,309	)		(35,602	)
Common stock issued to dividend
Reinvestment plan and employee benefit plans (25,004 shares)												25						486									511
Amortization of stock option and restricted stock																		832									832
Vesting of restricted stock (2,489 shares issued, 3,232 shares deferred)												1			444			(445	)								—
Deferred compensation plan, net, including dividend equivalents															86												86
Dividends on Series A preferred stock																					(3	)					(3	)
Dividends on Series B preferred stock				319																	(2,569	)					(2,250	)

Balance, March 31, 2010	$	217	$	174,727	$	—	$	—	$	—	$	18,835		$	4,127		$	698,144		$	(15,481	)	$	45,326		$	925,895

Balance, December 31, 2010 (As restated)	$	217	$	175,711	$	—	$	—	$	—	$	18,937		$	3,894		$	741,244		$	(492,276	)	$	20,851			468,578
Comprehensive loss (As restated):
Net loss (As restated)																					(237,336	)					(237,336	)
Other comprehensive loss:
Unrealized holding losses on available for sale securities, net of reclassification adjustment																								(1,677	)		(1,677	)
Unrealized losses on derivative financial instruments qualifying as cash flow hedges																								(4,223	)		(4,223	)

Comprehensive loss (As restated)																					(237,336	)		(5,900	)		(243,236	)
Preferred for common equity exchange related to tax benefits preservation plan (1,551,126 common shares)						16,613						(1,551	)					(15,062	)								—
Common stock issued to dividend reinvestment plan and employee benefit plans (46,019 shares)												46						329									375
Common and preferred stock issued (3,467,699 common shares)								195,872		151,185		3,468						12,004									362,529
Amortization of stock options and restricted stock awards																		549									549
Vesting of restricted stock (1,419 shares issued, 6,382 shares deferred)												1			54			(55	)								—
Deferred compensation plan, net, including dividend equivalents															65												65
Shares issued from deferred compensation plan (2,099 shares)												2			(332	)		330									—
Tax on option exercise and restricted stock vesting																		(376	)								(376	)
Dividends on Series A preferred stock																					(3	)					(3	)
Dividends on Series B preferred stock				338																	(2,602	)					(2,264	)
Dividends on Series D preferred stock																					(173	)					(173	)

Balance, March 31, 2011 (As restated)	$	217	$	176,049	$	16,613	$	195,872	$	151,185	$	20,903		$	3,681		$	738,963		$	(732,390	)	$	14,951		$	586,044

See accompanying notes to consolidated financial statements.

UNITED COMMUNITY BANKS, INC.

Consolidated Statement of Cash Flows (Unaudited)

		September 30,			September 30,
	Three Months Ended
	March 31,
	(As restated)
*(in thousands)*	2011			2010
Operating activities:
Net loss	$	(237,336	)	$	(33,293	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation, amortization and accretion		4,743			3,814
Provision for loan losses		190,000			75,000
Stock based compensation		549			832
Securities gains, net		(55	)		(61	)
Losses and write downs on sales of other real estate owned		60,605			8,097
Gain from sale of subsidiary		—			(2,110	)
Changes in assets and liabilities:
Other assets and accrued interest receivable		4,529			(11,557	)
Accrued expenses and other liabilities		6,518			(4,956	)
Mortgage loans held for sale		10,544			8,228

Net cash provided by operating activities		40,097			43,994

Investing activities:
Investment securities held to maturity:
Proceeds from maturities and calls		21,116			—
Purchases		(1,500	)		—
Investment securities available for sale:
Proceeds from sales		51,240			40,817
Proceeds from maturities and calls		116,175			200,578
Purchases		(405,979	)		(219,354	)
Net decrease in loans		93,949			65,889
Proceeds from sales of premises and equipment		160			8
Purchases of premises and equipment		(3,604	)		(2,024	)
Net cash received from sale of subsidiary		—			290
Proceeds from sale of other real estate		36,003			21,692

Net cash (used in) provided by investing activities		(92,440	)		107,896

Financing activities:
Net change in deposits		128,576			(139,051	)
Net change in federal funds purchased, repurchase agreements, and other short-term borrowings		1,040			1,091
Proceeds from issuance of common stock for dividend reinvestment and employee benefit plans		375			511
Proceeds from issuance of common and preferred stock, net of offering costs		362,529			—
Cash dividends on preferred stock		—			(2,253	)

Net cash provided by (used in) financing activities		492,520			(139,702	)

Net change in cash and cash equivalents		440,177			12,188
Cash and cash equivalents at beginning of period		649,457			376,367

Cash and cash equivalents at end of period	$	1,089,634		$	388,555

Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest	$	17,936		$	33,283
Income taxes		1,287			767
Unsettled securities purchases		177,532			17,588

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.

Note 2 – Restatement of Consolidated Financial Statements

Subsequent to filing United’s quarterly report on Form 10-Q, for the period ended March 31, 2011, United determined that a full valuation allowance on its deferred tax asset should be recognized as of December 31, 2010. Management decided to establish a valuation allowance against the net deferred tax asset after reconsidering the positive and negative evidence regarding the ultimate realization of the net deferred tax asset. Realization of the net deferred tax asset is dependent upon United’s ability to generate future taxable income. Management has concluded that the objective and verifiable negative evidence represented by United’s recent losses outweighs the more subjective positive evidence. As a result of this conclusion, United has established a full valuation allowance against its deferred tax asset.

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Accordingly, the March 31, 2011 consolidated financial statements have been restated to account for this determination. The effect of this change in the consolidated financial statements was as follows (in thousands except per share amounts).

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.

		September 30,			September 30,			September 30,
	Three Months Ended March 31, 2011
	As Reported			Adjustment			As Restated
Consolidated Statement of Operations

Income tax benefit	$	(94,990	)	$	94,850		$	(140	)
Net loss from continuing operations		(142,486	)		(94,850	)		(237,336	)
Net loss		(142,486	)		(94,850	)		(237,336	)
Net loss available to common shareholders		(145,264	)		(94,850	)		(240,114	)
Loss from continuing operations per common share—basic *		(7.87	)		(5.13	)		(13.00	)
Loss from continuing operations per common share—diluted *		(7.87	)		(5.13	)		(13.00	)
Loss per common share—basic *		(7.87	)		(5.13	)		(13.00	)
Loss per common share—diluted *		(7.87	)		(5.13	)		(13.00	)

Consolidated Statement of Changes in Shareholders’ Equity

Net loss	$	(142,486	)	$	(94,850	)	$	(237,336	)
Unrealized holding losses on available for sale securities		(1,003	)		(674	)		(1,677	)
Unrealized losses on derivative financial instrument qualifying as cash flow hedges		(2,580	)		(1,643	)		(4,223	)
Comprehensive loss		(146,069	)		(97,167	)		(243,236	)

Consolidated Statement of Cash Flows

Operating activities:
Net loss	$	(142,486	)	$	(94,850	)	$	(237,336	)
Net change in other assets and accrued interest receivable		(90,321	)		94,850			4,529

		September 30,			September 30,			September 30,
	As of March 31, 2011
	As Reported			Adjustment			As Restated
Consolidated Balance Sheet

Net deferred tax asset	$	266,367		$	(266,367	)	$	—
Other assets		174,742			2,263			177,005
Total assets		7,973,592			(264,104	)		7,709,488
Accumulated deficit		(480,831	)		(251,559	)		(732,390	)
Accumulated other comprehensive income		27,496			(12,545	)		14,951
Total shareholders’ equity		850,148			(264,104	)		586,044
Total liabilities and shareholders’ equity		7,973,592			(264,104	)		7,709,488

		September 30,			September 30,			September 30,
	As of December 31, 2010
	As Reported			Adjustment			As Restated
Consolidated Balance Sheet

Net deferred tax asset	$	166,937		$	(166,937	)	$	—
Total assets		7,443,196			(166,937	)		7,276,259
(Accumulated deficit) retained earnings		(335,567	)		(156,709	)		(492,276	)
Accumulated other comprehensive income		31,079			(10,228	)		20,851
Total shareholders’ equity		635,515			(166,937	)		468,578
Total liabilities and shareholders’ equity		7,443,196			(166,937	)		7,276,259

*	As reported amounts have been adjusted to reflect subsequent 1 for 5 reverse stock split effective June 17, 2011.

Note 3 – Accounting Standards Updates

In April 2011, the FASB issued Accounting Standards Update No. 2011-02, A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring (“ASU No. 2011-02”). ASU No. 2011-02 requires a creditor to separately conclude that 1.) the restructuring constitutes a concession and 2.) the debtor is experiencing financial difficulties in order for a modification to be considered a troubled debt restructuring (“TDR”). The guidance was issued to provide clarification and to address diversity in practice in identifying TDR’s. It is effective for United in the third quarter of 2011 and will be applied retrospectively to the beginning of the year. Although evaluation of the impact is not complete, it is not expected to have a material impact on United’s results of operations, financial position, or disclosures.

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

In April 2011, the FASB issued Accounting Standards Update No. 2011-03, Reconsideration of Effective Control in Repurchase Agreements (“ASU No. 2011-03”). ASU No. 2011-03 removes from the assessment of effective control the criterion related to the transferor’s ability to repurchase or redeem financial assets on substantially the agreed terms, even in the event of default by the transferee. In addition, this guidance also eliminates the requirement to demonstrate that a transferor possesses adequate collateral to fund substantially all the cost of purchasing replacement financial assets. It is effective for United for the first quarter of 2012, and is not expected to have a material impact on United’s results of operations, financial position, or disclosures.

Note 4 – Mergers and Acquisitions

On June 19, 2009, United Community Bank (“UCB” or the “Bank”) purchased substantially all the assets and assumed substantially all the liabilities of Southern Community Bank (“SCB”) from the Federal Deposit Insurance Corporation (“FDIC”), as Receiver of SCB. UCB and the FDIC entered loss sharing agreements regarding future losses incurred on loans and foreclosed loan collateral existing at June 19, 2009. Under the terms of the loss sharing agreements, the FDIC will absorb 80 percent of losses and share 80 percent of loss recoveries on the first $109 million of losses and, absorb 95 percent of losses and share in 95 percent of loss recoveries on losses exceeding $109 million. The term for loss sharing on 1-4 Family loans is ten years, while the term for loss sharing on all other loans is five years.

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

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

The table below shows the components of covered assets at March 31, 2011 (in thousands).

		September 30,		September 30,		September 30,		September 30,
	Purchased		Other
	Impaired		Purchased
*(in thousands)*	Loans		Loans		Other		Total

Commercial (secured by real estate)	$	—	$	35,129	$	—	$	35,129
Commercial (commercial and industrial)		—		3,478		—		3,478
Construction and land development		1,644		13,335		—		14,979
Residential mortgage		145		9,322		—		9,467
Installment		7		229		—		236

Total covered loans		1,796		61,493		—		63,289
Covered forclosed property		—		—		30,833		30,833
Estimated loss reimbursement from the FDIC		—		—		31,667		31,667

Total covered assets	$	1,796	$	61,493	$	62,500	$	125,789

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 5 – Securities

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

The amortized cost, gross unrealized gains and losses and fair value of securities held to maturity at March 31, 2011 and December 31, 2010, are as follows (in thousands). There were no securities classified as held to maturity at March 31, 2010.

		September 30,		September 30,		September 30,		September 30,
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
As of March 31, 2011
U.S. Government agencies	$	4,989	$	12	$	—	$	5,001
State and political subdivisions		48,497		616		731		48,382
Mortgage-backed securities ⁽¹⁾		191,944		3,041		7		194,978

Total	$	245,430	$	3,669	$	738	$	248,361

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

⁽¹⁾	All are residential type mortgage-backed securities

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

		September 30,		September 30,		September 30,		September 30,
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
As of March 31, 2011
U.S. Government agencies	$	94,966	$	16	$	1,204	$	93,778
State and political subdivisions		26,870		983		20		27,833
Mortgage-backed securities ⁽¹⁾		1,388,702		27,617		1,474		1,414,845
Other		103,408		150		1,520		102,038

Total	$	1,613,946	$	28,766	$	4,218	$	1,638,494

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

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

As of March 31, 2010
U.S. Government agencies	$	306,916	$	553	$	891	$	306,578
State and political subdivisions		63,175		1,450		81		64,544
Mortgage-backed securities ⁽¹⁾		1,101,456		41,754		1,031		1,142,179
Other		13,006		290		8		13,288

Total	$	1,484,553	$	44,047	$	2,011	$	1,526,589

⁽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 March 31, 2011 and December 31, 2010 (in thousands).

		September 30,		September 30,		September 30,		September 30,		September 30,		September 30,
	Less than 12 Months				12 Months or More				Total
			Unrealized				Unrealized				Unrealized
	Fair Value		Loss		Fair Value		Loss		Fair Value		Loss
As of March 31, 2011
State and political subdivisions	$	21,313	$	731	$	—	$	—	$	21,313	$	731
Mortgage-backed securities		1,942		7		—		—		1,942		7

Total unrealized loss position	$	23,255	$	738	$	—	$	—	$	23,255	$	738

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

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

		September 30,		September 30,		September 30,		September 30,		September 30,		September 30,
	Less than 12 Months				12 Months or More				Total
			Unrealized				Unrealized				Unrealized
	Fair Value		Loss		Fair Value		Loss		Fair Value		Loss
As of March 31, 2011
U.S. Government agencies	$	73,763	$	1,204	$	—	$	—	$	73,763	$	1,204
State and political subdivisions		1,098		15		11		5		1,109		20
Mortgage-backed securities		292,379		1,474		—		—		292,379		1,474
Other		79,386		1,520		—		—		79,386		1,520

Total unrealized loss position	$	446,626	$	4,213	$	11	$	5	$	446,637	$	4,218

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

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

As of March 31, 2010
U.S. Government agencies	$	138,233	$	891	$	—	$	—	$	138,233	$	891
State and political subdivisions		2,035		15		3,191		66		5,226		81
Mortgage-backed securities		20,382		151		34,358		880		54,740		1,031
Other		—		—		500		8		500		8

Total unrealized loss position	$	160,650	$	1,057	$	38,049	$	954	$	198,699	$	2,011

At March 31, 2011, there were 38 available for sale securities and 26 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 March 31, 2011 were primarily attributable to changes in interest rates.

Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to the length of time and the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, among other factors. In analyzing an issuer’s financial condition, management considers whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, and industry analyst’s reports. During the first quarter of 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 quarter of 2011.

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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-month periods ended March 31, 2011 and 2010 (in thousands).

		September 30,			September 30,
	Three Months Ended
	March 31,
	2011			2010
Proceeds from sales	$	51,240		$	40,817

Gross gains on sales	$	331		$	1,260
Gross losses on sales		(276	)		(249	)
Impairment losses		—			(950	)

Net gains on sales of securities	$	55		$	61

Income tax expense attributable to sales	$	21		$	24

Securities with a carrying value of $1.83 billion, $1.43 billion, and $1.48 billion were pledged to secure public deposits, FHLB advances and other secured borrowings at March 31, 2011, December 31, 2010 and March 31, 2010.

The amortized cost and fair value of held to maturity and available for sale securities at March 31, 2011, by contractual maturity, are presented in the following table (in thousands).

		September 30,		September 30,		September 30,		September 30,
	Available for Sale				Held to Maturity
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
U.S. Government agencies:
5 to 10 years	$	81,387	$	80,729	$	—	$	—
More than 10 years		13,579		13,049		—		—

		94,966		93,778		—		—


State and political subdivisions:
Within 1 year		5,265		5,344		—		—
1 to 5 years		13,946		14,523		—		—
5 to 10 years		6,311		6,595		4,989		5,001
More than 10 years		1,348		1,371		—		—

		26,870		27,833		4,989		5,001


Other:
1 to 5 years		9,906		9,785		1,002		990
5 to 10 years		90,050		89,501		22,040		22,269
More than 10 years		3,452		2,752		25,455		25,123

		103,408		102,038		48,497		48,382


Total securities other than mortgage-backed securities:
Within 1 year		5,265		5,344		—		—
1 to 5 years		23,852		24,308		1,002		990
5 to 10 years		177,748		176,825		27,029		27,270
More than 10 years		18,379		17,172		25,455		25,123

Mortgage-backed securities		1,388,702		1,414,845		191,944		194,978


	$	1,613,946	$	1,638,494	$	245,430	$	248,361

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 6 – Loans and Allowance for Loan Losses

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

		September 30,		September 30,		September 30,
	March 31, 2011		December 31, 2010		March 31, 2010
Commercial (secured by real estate)	$	1,692,154	$	1,761,424	$	1,765,204
Commercial construction		213,177		296,582		357,188
Commercial (commercial and industrial)		431,473		441,518		380,331

Total commercial		2,336,804		2,499,524		2,502,723
Residential construction		549,618		695,166		960,372
Residential mortgage		1,186,531		1,278,780		1,390,270
Consumer installment		121,419		130,656		138,680

Total loans		4,194,372		4,604,126		4,992,045
Less allowance for loan losses		133,121		174,695		173,934

Loans, net	$	4,061,251	$	4,429,431	$	4,818,111

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 months ended March 31, 2011 and 2010 are summarized as follows (in thousands).

		September 30,		September 30,
	Three Months Ended March 31,
	2011		2010
Balance beginning of period	$	174,695	$	155,602
Provision for loan losses		190,000		75,000
Charge-offs:
Commercial (secured by real estate)		48,707		2,936
Commercial construction		49,715		2,211
Commercial (commercial and industrial)		4,362		4,554
Residential construction		92,255		44,190
Residential mortgage		36,676		4,640
Consumer installment		1,096		1,129

Total loans charged-off		232,811		59,660

Recoveries:
Commercial (secured by real estate)		100		972
Commercial construction		—		5
Commercial (commercial and industrial)		322		444
Residential construction		117		1,090
Residential mortgage		293		89
Consumer installment		405		392

Total recoveries		1,237		2,992

Net charge-offs		231,574		56,668

Balance end of period	$	133,121	$	173,934

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

At March 31, 2011, December 31, 2010 and March 31, 2010, loans with a carrying value of $857 million, $1.02 billion and $1.56 billion were pledged as collateral to secure FHLB advances and other contingent funding sources.

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

		000000			000000			000000			000000			000000			000000			000000			000000
Three Months Ended March 31, 2011	Commercial (Secured by Real Estate)			Commercial Construction			Commercial (Commercial and Industrial)			Residential Construction			Residential Mortgage			Consumer Installment			Unallocated			Total
Allowance for loan losses:
Beginning balance	$	31,191		$	6,780		$	7,580		$	92,571		$	22,305		$	3,030		$	11,238		$	174,695
Charge-offs		(46,101	)		(24,158	)		(4,363	)		(119,874	)		(37,220	)		(1,095	)		—			(232,811	)
Recoveries		100			—			322			117			293			405			—			1,237
Provision		35,069			23,359			4,048			89,706			39,751			216			(2,149	)		190,000

Ending balance	$	20,259		$	5,981		$	7,587		$	62,520		$	25,129		$	2,556		$	9,089		$	133,121

Ending allowance attributable to loans:
Individually evaluated for impairment	$	—		$	—		$	—		$	—		$	—		$	—		$	—		$	—
Collectively evaluated for impairment		20,259			5,981			7,587			62,520			25,129			2,556			9,089			133,121

Total ending allowance balance	$	20,259		$	5,981		$	7,587		$	62,520		$	25,129		$	2,556		$	9,089		$	133,121

Loans:
Individually evaluated for impairment	$	17,154		$	3,624		$	—		$	22,667		$	5,157		$	—		$	—		$	48,602
Collectively evaluated for impairment		1,675,000			209,553			431,473			526,951			1,181,374			121,419			—			4,145,770

Total loans	$	1,692,154		$	213,177		$	431,473		$	549,618		$	1,186,531		$	121,419		$	—		$	4,194,372


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


Three Months Ended March 31, 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		(2,936	)		(2,211	)		(4,554	)		(44,190	)		(4,640	)		(1,129	)		—			(59,660	)
Recoveries		972			5			444			1,090			89			392			—			2,992
Provision		4,564			4,772			3,898			53,349			6,642			1,086			689			75,000

Ending balance	$	21,808		$	8,427		$	6,680		$	103,834		$	19,357		$	2,894		$	10,934		$	173,934

Ending allowance attributable to loans:
Individually evaluated for impairment	$	1,272		$	627		$	—		$	4,398		$	529		$	6		$	—		$	6,832
Collectively evaluated for impairment		20,536			7,800			6,680			99,436			18,828			2,888			10,934			167,102

Total ending allowance balance	$	21,808		$	8,427		$	6,680		$	103,834		$	19,357		$	2,894		$	10,934		$	173,934

Loans:
Individually evaluated for impairment	$	38,519		$	22,268		$	—		$	131,249		$	22,056		$	941		$	—		$	215,033
Collectively evaluated for impairment		1,726,685			334,920			380,331			829,123			1,368,214			137,739			—			4,777,012

Total loans	$	1,765,204		$	357,188		$	380,331		$	960,372		$	1,390,270		$	138,680		$	—		$	4,992,045

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

In the first quarter 2011, following the completion of a transaction to raise $380 million in new capital, United’s Board of Directors adopted an 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.

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Individually evaluated impaired loans at March 31, 2011, December 31, 2010 and March 31, 2010 were as follows (in thousands).

		September 30,		September 30,		September 30,
	March 31, 2011		December 31, 2010		March 31, 2010
Period-end loans with no allocated allowance for loan losses	$	48,602	$	115,338	$	158,559
Period-end loans with allocated allowance for loan losses		—		7,638		56,474

Total	$	48,602	$	122,976	$	215,033

Amount of allowance for loan losses allocated	$	—	$	1,049	$	6,832

The average balances of impaired loans and income recognized on impaired loans while they were considered impaired is presented below for the three months ended March 31, 2011 and March 31, 2010 (in thousands).

		September 30,		September 30,
	Three Months Ended March 31,
	2011		2010
Average balance of individually evaluated impaired loans during period	$	95,163	$	210,854
Interest income recognized during impairment		—		—
Cash-basis interest income recognized		—		—

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

		000000		000000		000000		000000		000000		000000		000000		000000		000000
	March 31, 2011						December 31, 2010						March 31, 2010
	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated		Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated		Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
With no related allowance recorded:
Commercial (secured by real estate)	$	27,811	$	17,154	$	—	$	60,238	$	39,588	$	—	$	42,498	$	34,589	$	—
Commercial construction		4,360		3,624		—		33,898		20,311		—		21,855		16,018		—
Commercial (commercial and industrial)		—		—		—		10,115		5,874		—		—		—		—

Total commercial		32,171		20,778		—		104,251		65,773		—		64,353		50,607		—
Residential construction		49,205		22,667		—		59,502		34,597		—		167,166		89,863		—
Residential mortgage		8,801		5,157		—		21,528		14,968		—		24,261		18,089		—
Consumer installment		—		—		—		—		—		—		—		—		—

Total with no related allowance recorded		90,177		48,602		—		185,281		115,338		—		255,780		158,559		—

With an allowance recorded:
Commercial (secured by real estate)		—		—		—		2,230		2,230		268		4,228		3,930		1,272
Commercial construction		—		—		—		—		—		—		8,372		6,250		627
Commercial (commercial and industrial)		—		—		—		—		—		—		—		—		—

Total commercial		—		—		—		2,230		2,230		268		12,600		10,180		1,899
Residential construction		—		—		—		14,480		4,908		644		53,971		41,386		4,398
Residential mortgage		—		—		—		500		500		137		5,488		3,967		529
Consumer installment		—		—		—		—		—		—		1,111		941		6

Total with an allowance recorded		—		—		—		17,210		7,638		1,049		73,170		56,474		6,832

Total	$	90,177	$	48,602	$	—	$	202,491	$	122,976	$	1,049	$	328,950	$	215,033	$	6,832

There were no loans more than 90 days past due and still accruing interest at March 31, 2011, December 31, 2010 or March 31, 2010. Nonaccrual loans at March 31, 2011, December 31, 2010 and March 31, 2010 were $83.8 million, $179 million and $281 million, respectively. Nonaccrual loans include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually evaluated impaired loans with larger balances.

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

The following table presents the recorded investment in nonaccrual loans by loan class as of March 31, 2011, December 31, 2010 and March 31, 2010 (in thousands).

		September 30,			September 30,			September 30,
	Nonaccrual Loans
	March 31, 2011			December 31, 2010			March 31, 2010
Commercial (secured by real estate)	$	20,648		$	44,927		$	45,918
Commercial construction		3,701			21,374			23,556
Commercial (commercial and industrial)		2,198			5,611			3,610

Total commercial		26,547			71,912			73,084
Residential construction		32,038			54,505			147,326
Residential mortgage		23,711			51,083			57,920
Consumer installment		1,473			1,594			2,472

Total	$	83,769		$	179,094		$	280,802

Balance as a percentage of unpaid principal		57.3	%		62.2	%		71.6	%

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

		September 30,		September 30,		September 30,		September 30,		September 30,		September 30,
	30 - 59 Days Past Due		60 - 89 Days Past Due		Greater Than 90 Days Past Due		Total Past Due		Loans Not Past Due		Total
As of March 31, 2011
Commercial (secured by real estate)	$	11,522	$	9,244	$	9,659	$	30,425	$	1,661,729	$	1,692,154
Commercial construction		5,458		1,880		1,237		8,575		204,602		213,177
Commercial (commercial and industrial)		1,485		854		876		3,215		428,258		431,473

Total commercial		18,465		11,978		11,772		42,215		2,294,589		2,336,804
Residential construction		13,349		9,514		13,405		36,268		513,350		549,618
Residential mortgage		16,439		6,658		10,789		33,886		1,152,645		1,186,531
Consumer installment		1,705		346		573		2,624		118,795		121,419

Total loans	$	49,958	$	28,496	$	36,539	$	114,993	$	4,079,379	$	4,194,372


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 March 31, 2010
Commercial (secured by real estate)	$	21,315	$	16,281	$	36,334	$	73,930	$	1,691,274	$	1,765,204
Commercial construction		1,666		7,524		14,876		24,066		333,122		357,188
Commercial (commercial and industrial)		3,327		2,005		1,680		7,012		373,319		380,331

Total commercial		26,308		25,810		52,890		105,008		2,397,715		2,502,723
Residential construction		26,354		22,284		102,193		150,831		809,541		960,372
Residential mortgage		33,570		17,181		47,936		98,687		1,291,583		1,390,270
Consumer installment		1,941		1,213		1,093		4,247		134,433		138,680

Total loans	$	88,173	$	66,488	$	204,112	$	358,773	$	4,633,272	$	4,992,045

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

There were no specific reserves established for loans considered to be troubled debt restructurings at March 31, 2011. As of December 31, 2010, $173,000 of specific reserves were allocated to customers whose loan terms have been modified in troubled debt restructurings. United has committed to lend additional amounts totaling up to $519,000 and $1.17 million as of March 31, 2011 and December 31, 2010, respectively, to customers with outstanding loans that are classified as troubled debt restructurings.

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

		September 30,		September 30,		September 30,		September 30,		September 30,
			Pre- Modification Outstanding		Post- Modification Outstanding		Troubled Debt Restructurings That Have Subsequently Defaulted
	Number of Contracts		Recorded Investment		Recorded Investment		Number of Contracts		Recorded Investment
As of March 31, 2011
Commercial (secured by real estate)		29	$	25,094	$	22,211		3	$	1,799
Commercial construction		6		9,622		9,622		—		—
Commercial (commercial and industrial)		5		155		155		—		—

Total commercial		40		34,871		31,988		3		1,799
Residential construction		54		14,582		13,759		4		972
Residential mortgage		32		4,013		3,882		3		278
Consumer installment		7		122		117		—		—

Total loans		133	$	53,588	$	49,746		10	$	3,049


As of December 31, 2010
Commercial (secured by real estate)		41	$	40,649	$	36,759		3	$	1,402
Commercial construction		16		37,980		37,067		2		1,083
Commercial (commercial and industrial)		7		645		364		1		7

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

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


As of March 31, 2010
Commercial (secured by real estate)		36	$	30,367	$	30,264		1	$	747
Commercial construction		8		19,793		18,008		1		311
Commercial (commercial and industrial)		5		248		248		—		—

Total commercial		49		50,408		48,520		2		1,058
Residential construction		31		16,439		14,955		6		1,259
Residential mortgage		25		5,911		5,860		1		3
Consumer installment		6		1,331		1,331		—		—

Total loans		111	$	74,089	$	70,666		9	$	2,320

Risk Ratings

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

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

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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

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

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

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans. Loans listed as not rated are generally new loans that have not yet been assigned a grade or loan payments that have not yet been posted to the loan accounting system.

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

		September 30,		September 30,		September 30,		September 30,		September 30,			September 30,
	Pass		Watch		Substandard		Doubtful / Loss		Not Rated			Total
As of March 31, 2011
Commercial (secured by real estate)	$	1,466,583	$	82,715	$	140,299	$	—	$	2,557		$	1,692,154
Commercial construction		166,780		8,205		38,586		—		(394	)		213,177
Commercial (commercial and industrial)		410,133		6,824		18,608		—		(4,092	)		431,473

Total commercial		2,043,496		97,744		197,493		—		(1,929	)		2,336,804
Residential construction		377,590		60,463		112,572		—		(1,007	)		549,618
Residential mortgage		1,052,604		40,779		92,843		—		305			1,186,531
Consumer installment		114,401		626		3,829		—		2,563			121,419

Total loans	$	3,588,091	$	199,612	$	406,737	$	—	$	(68	)	$	4,194,372


As of December 31, 2010
Commercial (secured by real estate)	$	1,475,992	$	82,762	$	201,688	$	—	$	982		$	1,761,424
Commercial construction		174,049		10,413		112,120		—		—			296,582
Commercial (commercial and industrial)		403,986		15,153		22,379		—		—			441,518

Total commercial		2,054,027		108,328		336,187		—		982			2,499,524
Residential construction		398,926		82,973		213,267		—		—			695,166
Residential mortgage		1,101,645		38,378		136,915		—		1,842			1,278,780
Consumer installment		122,056		650		4,872		—		3,078			130,656

Total loans	$	3,676,654	$	230,329	$	691,241	$	—	$	5,902		$	4,604,126


As of March 31, 2010
Commercial (secured by real estate)	$	1,492,357	$	74,964	$	196,711	$	—	$	1,172		$	1,765,204
Commercial construction		245,795		11,833		98,862		—		698			357,188
Commercial (commercial and industrial)		331,798		6,711		39,671		70		2,081			380,331

Total commercial		2,069,950		93,508		335,244		70		3,951			2,502,723
Residential construction		542,627		114,747		300,882		238		1,878			960,372
Residential mortgage		1,203,330		45,996		138,720		136		2,088			1,390,270
Consumer installment		134,194		333		6,388		8		(2,243	)		138,680

Total loans	$	3,950,101	$	254,584	$	781,234	$	452	$	5,674		$	4,992,045

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 7 – Foreclosed Property

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

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

Commercial (secured by real estate)	$	15,500		$	25,893		$	22,694
Commercial construction		11,568			17,808			14,435

Total commercial		27,068			43,701			37,129
Residential construction		67,406			91,385			82,095
Residential mortgage		12,927			23,687			27,043

Total foreclosed property		107,401			158,773			146,267
Less valuation allowance		53,023			16,565			9,992

Foreclosed property, net	$	54,378		$	142,208		$	136,275


Balance as a percentage of original loan unpaid principal		30.3	%		64.4	%		65.9	%

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

		September 30,			September 30,
	Three Months Ended
	March 31,
	2011			2010

Balance at beginning of year	$	16,565		$	7,433
Additions charged to expense		48,585			4,579
Direct write downs		(12,127	)		(2,020	)

Balance at end of year	$	53,023		$	9,992

Expenses related to foreclosed assets include (in thousands).

		September 30,		September 30,
	Three Months Ended
	March 31,
	2011		2010

Net loss on sales	$	12,020	$	3,518
Provision for unrealized losses		48,585		4,579
Operating expenses, net of rental income		4,294		2,716

Total foreclosed property expense	$	64,899	$	10,813

Note 8 – Earnings Per Share

United is required to report on the face of the statement of operations, 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 months ended March 31, 2011 and 2010, United accrued dividends on Series A preferred stock totaling $3,000. In the first quarter of 2011 and 2010, United accrued dividends of $2.60 million and $2.57 million on Series B preferred stock. Additionally, in the first quarter of 2011, United accrued $173,000 of dividends on Series D preferred stock. The preferred stock dividends were subtracted from net loss in order to arrive at net loss available to common shareholders. There is no dilution from potentially dilutive securities for the three months ended March 31, 2011 and 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 months ended March 31, 2011 and 2010 (in thousands, except per share data).

		September 30,			September 30,
	Three Months Ended
	March 31,
	(As restated)
	2011			2010

Net loss available to common shareholders	$	(240,114	)	$	(35,865	)


Weighted average shares outstanding:
Basic		18,466			18,878
Effect of dilutive securities
Stock options		—			—
Warrants		—			—

Diluted		18,466			18,878


Loss per common share:
Basic	$	(13.00	)	$	(1.90	)

Diluted	$	(13.00	)	$	(1.90	)

At March 31, 2011, United had a number of potentially dilutive securities outstanding including 36,532,301 shares issuable upon the expected conversion of Series F and Series G preferred stock. Such securities are mandatorily convertible to common stock upon shareholder approval. United is requesting shareholder approval at its annual shareholders’ meeting on June 16, 2011. Other potentially dilutive securities include 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 $100.00 per share; 665,309 shares issuable upon exercise of stock options granted to employees with a weighted average exercise price of $93.55; 15,415 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 the 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. Additionally, there were 9,600,000 shares potentially issuable under the indemnification provisions of United’s first quarter private equity transaction if a change of ownership is deemed to have occurred under Section 382 of the Internal Revenue Code. Management does not believe there was an ownership change prior to, or in connection with, the private equity transaction completed in the first quarter. Therefore management does not expect the indemnity shares to be issued. A final determination on whether a change of ownership occurred and whether the indemnity shares will be issued as a result, is expected to be completed by June 30, 2011.

Note 9 – 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.

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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

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

September 30,

Fair Value

Interest Rate

Balance Sheet

March 31,

December 31,

March 31,

Products

Location

2011

2010

Asset derivatives

Other assets

—

6,113

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

Cash Flow Hedges of Interest Rate Risk

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

The effective portion of changes in the fair value of derivatives designated, and that qualify as cash flow hedges is recorded in accumulated other comprehensive income and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. During 2010, such derivatives were used to hedge the variable cash flows associated with existing prime-based, variable-rate loans. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. During the three months ended March 31, 2011 and 2010, $1.30 million and $522,000, 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 March 31, 2011, the amount included in other comprehensive income represents deferred gains from terminated cash flow hedges where the forecasted hedging transaction is expected to remain effective over the remaining unexpired term of the original contract. Such gains are being deferred and recognized over the remaining life of the contract on a straight line basis. During the three months ended March 31, 2011, United accelerated the reclassification of $1.30 million in gains from terminated positions as a result of forecasted transactions becoming probable not to occur. During the next twelve months, United estimates that an additional $10.2 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 March 31, 2011 and December 31, 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 months ended March 31, 2010, United recognized net gains of $88,000 related to ineffectiveness of the fair value hedging relationships. United also recognized a net reduction of interest expense of $1.39 million for the three months ended March 31, 2010 related to United’s fair value hedges, which includes net settlements on the derivatives. There were no active fair value hedges during the first quarter of 2011.

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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 months ended March 31, 2011 and 2010.

Derivatives in Fair Value Hedging Relationships (in thousands).

September 30,

Location of Gain (Loss)

Amount of Gain (Loss) Recognized in

Recognized in Income

on Derivative

Income on Derivative

Income on Hedged Item

2011

2010

2011

2010

Other fee revenue

—

(1,195

)

—

1,283

Derivatives in Cash Flow Hedging Relationships (in thousands).

		September 30,		September 30,	September 30,		September 30,		September 30,
	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

					Interest revenue	$	2,923	$	6,012
					Other income		1,303		522

Interest rate products	$	—	$	1,475	Total	$	4,226	$	6,534

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 March 31, 2011, United had no active derivative positions and therefore no credit support agreements remained in effect.

Note 10 – 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 March 31, 2011, approximately 255,200 additional awards could be granted under the plan. Through March 31, 2011, only incentive stock options, nonqualified stock options and restricted stock awards and units had been granted under the plan.

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

		September 30,			September 30,		September 30,		September 30,
						Weighted-
						Average		Aggregate
				Weighted-		Remaining		Intrinisic
				Average Exercise		Contractual		Value
Options	Shares			Price		Term (Years)		($000)

Outstanding at December 31, 2010		678,313		$	92.99
Expired		(13,007	)		64.90

Outstanding at March 31, 2011		665,306			93.55		4.5	$	—


Exercisable at March 31, 2011		536,256			99.05		3.8		—

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

No options were granted during the first three months of 2011. The fair value of each option is estimated on the date of grant using the Black-Scholes model. Because United’s option plan has not been in place long enough to gather sufficient information about exercise patterns to establish an expected life, United uses the formula provided by the SEC in 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.

		September 30,		September 30,
	Three Months Ended
	March 31,
	2011		2010

Expected volatility		NA		55.00	%
Expected dividend yield		NA		0.00	%
Expected life (in years)		NA		6.25
Risk-free rate		NA		3.12	%

For 2010, expected volatility was determined using United’s historical monthly volatility for over a period of 25 quarters ending December 31, 2009. Compensation expense relating to stock options of $441,000 and $662,000, was included in earnings for the three months ended March 31, 2011 and 2010, respectively. Deferred tax benefits of $172,000 and $266,000, respectively, were included in the determination of income tax benefit for the three-month periods ended March 31, 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 three months of 2011 or 2010.

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

		September 30,			September 30,
				Weighted-
				Average Grant-
Restricted Stock	Shares			Date Fair Value

Outstanding at December 31, 2010		23,214		$	59.67
Vested		(7,801	)		51.88

Outstanding at March 31, 2011		15,413			63.63

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 three months ended March 31, 2011 and 2010, compensation expense of $107,000 and $170,000, respectively, was recognized related to restricted stock awards. The total intrinsic value of the restricted stock was $180,000 at March 31, 2011.

As of March 31, 2011, there was $1.73 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 1.6 years. The aggregate grant date fair value of options and restricted stock awards that vested during the three months ended March 31, 2011, was $423,000.

Note 11 – 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

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(“ESPP”) that allows eligible employees to purchase shares of common stock at a 5% discount, with no commission charges. For the three months ended March 31, 2011 and 2010, United issued 46,019 and 25,004 shares, respectively, and increased capital by $375,000 and $511,000, respectively, through these programs. The DRIP program has been suspended until 2012 when United expects to regain its S-3 filing status.

United offers its common stock as an investment option in its deferred compensation plan. The common stock component of the deferred compensation plan is accounted for as an equity instrument and is reflected in the consolidated financial statements as common stock issuable. At March 31, 2011 and 2010, 79,428 and 52,400 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 quarter ended March 31, 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, the Series F Preferred Stock will be mandatorily convertible into 20,618,101 shares of voting common stock and the Series G Preferred Stock will be mandatorily convertible into 15,914,199 shares of non-voting common stock. This private placement transaction resulted in an increase to shareholders’ equity of $363 million, net of $17.5 million in issuance costs. Upon the conversion of the convertible preferred sock, Corsair will own approximately 22.5% of United’s pro forma outstanding common stock. The Additional Investors will own approximately 47.2% of United’s pro forma outstanding common stock.

Note 12 – Reclassifications

Certain 2010 amounts have been reclassified to conform to the 2011 presentation.

Note 13 – 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 14 – 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. 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. 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

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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 has not purchased all of the Series C Convertible Preferred Stock by May 31, 2011, it must 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. In addition, 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.

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).

	000000	000000		000000
		Fair Value	Fair
	Valuation Approach	Heirarchy	Value
Warrants Issued / Assets Transferred to Fletcher at Fair Value:
Warrant to purchase $30 million in common stock at $21.25 per share	Black-Scholes	Level 3	$	17,577
Option to purchase convertible preferred stock and warrant	Monte-Carlo Simulation	Level 3		22,236

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

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

Total nonperforming assets transferred				103,089

Total value of assets and equity instruments transferred				142,902


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

Total value of cash and notes receivable received				98,558


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

Loss recognized on Fletcher transaction			$	45,349

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

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

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

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

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 15 – 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 March 31, 2011, December 31, 2010 and March 31, 2010, aggregated by the level in the fair value hierarchy within which those measurements fall (in thousands).

		September 30,		September 30,		September 30,		September 30,
March 31, 2011	Level 1		Level 2		Level 3		Total
Assets
Securities available for sale:
U.S. Government agencies	$	—	$	93,778	$	—	$	93,778
State and political subdivisions		—		27,833		—		27,833
Mortgage-backed securities		—		1,410,411		4,434		1,414,845
Other		—		101,688		350		102,038
Deferred compensation plan assets		3,107		—		—		3,107

Total	$	3,107	$	1,633,710	$	4,784	$	1,641,601


Liabilities
Deferred compensation plan liability	$	3,107	$	—	$	—	$	3,107

Total liabilities	$	3,107	$	—	$	—	$	3,107

		September 30,		September 30,		September 30,		September 30,
December 31, 2010	Level 1		Level 2		Level 3		Total
Assets
Securities available for sale:
U.S. Government agencies	$	—	$	98,480	$	—	$	98,480
State and political subdivisions		—		28,442		—		28,442
Mortgage-backed securities		—		986,074		4,934		991,008
Other		—		106,137		350		106,487
Deferred compensation plan assets		3,252		—		—		3,252

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


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

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

		September 30,		September 30,		September 30,		September 30,
March 31, 2010	Level 1		Level 2		Level 3		Total
Assets
Securities available for sale:
U.S. Government agencies	$	—	$	296,578	$	10,000	$	306,578
State and political subdivisions		—		64,544		—		64,544
Mortgage-backed securities		—		1,115,153		27,026		1,142,179
Other		—		12,238		1,050		13,288
Deferred compensation plan assets		3,420		—		—		3,420
Derivative financial instruments		—		6,113		—		6,113

Total	$	3,420	$	1,494,626	$	38,076	$	1,536,122


Liabilities
Deferred compensation plan liability	$	3,420	$	—	$	—	$	3,420

Total liabilities	$	3,420	$	—	$	—	$	3,420

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).

		September 30,
	Securities Available for Sale
Balance at December 31, 2010	$	5,284
Amounts included in earnings		(8	)
Purchases, sales, issuances, settlements, maturities, paydowns, net		(492	)


Balance at March 31, 2011	$	4,784

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

		September 30,		September 30,		September 30,		September 30,
	Level 1		Level 2		Level 3		Total
March 31, 2011
Assets
Loans	$	—	$	—	$	34,241	$	34,241
Loans held for sale		—		—		80,629		80,629
Foreclosed properties		—		—		53,102		53,102

Total	$	—	$	—	$	167,972	$	167,972

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

Total	$	—	$	—	$	191,976	$	191,976

March 31, 2010
Assets
Loans	$	—	$	—	$	175,166	$	175,166
Foreclosed properties		—		—		93,060		93,060

Total	$	—	$	—	$	268,226	$	268,226

Assets and Liabilities Not Measured at Fair Value

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

The short maturity of United’s assets and liabilities results in having a significant number of financial instruments whose fair value equals or closely approximates carrying value. Such financial instruments are reported in the following balance sheet captions: cash and cash equivalents, mortgage loans held for sale, federal funds purchased, repurchase agreements and other short-term borrowings. The fair value of securities available for sale equals the balance sheet value. As of March 31, 2010 the fair value of interest rate contracts used for balance sheet management was an asset of approximately $6.11 million. United did not have any active derivative contracts outstanding at March 31, 2011 or December 31, 2010.

UNITED COMMUNITY BANKS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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

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

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

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

		September 30,		September 30,		September 30,		September 30,		September 30,		September 30,
	March 31, 2011				December 31, 2010				March 31, 2010
	Carrying Amount		Fair Value		Carrying Amount		Fair Value		Carrying Amount		Fair Value
Assets:
Securities held to maturity	$	245,430	$	248,361	$	265,807	$	267,988	$	—	$	—
Loans, net		4,061,251		3,933,549		4,429,431		4,196,142		4,818,111		4,477,941

Liabilities:
Deposits		6,597,748		6,588,398		6,469,172		6,481,867		6,487,588		6,513,488
Federal Home Loan Bank advances		55,125		58,965		55,125		59,498		114,303		120,422
Long-term debt		150,166		124,603		150,146		93,536		150,086		119,400

Note 16 – Subsequent Event

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 $86.5 million which will result in an allowance for loan loss recovery 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:

•

the condition of the banking system and financial markets;

•

our ability to become profitable;

•

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;

•

our ability to fully realize our deferred tax asset balances;

•

competition from financial institutions and other financial service providers;

•

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

•

risks with respect to future expansion and acquisitions;

•

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

•

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

•

the failure of other financial institutions;

•

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

•

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

All written or oral forward-looking statements attributable to us or any person acting on our behalf made after the date of this prospectus supplement are expressly qualified in their entirety by the risk factors and cautionary statements set forth in our Annual Report on Form 10-K for the year ended December 31, 2010.

Overview

The following discussion is intended to provide insight into the results of operations and financial condition of United Community Bank, Inc. (“United”) and its subsidiaries and should be read in conjunction with the consolidated financial statements and accompanying notes.

United is a bank holding company registered with the Federal Reserve under the Bank Holding Company Act of 1956 that was incorporated under the laws of the state of Georgia in 1987 and commenced operations in 1988. At March 31, 2011, United had total consolidated assets of $7.71 billion, total loans of $4.19 billion, excluding the loans acquired from Southern Community Bank (“SCB”) that are covered by loss sharing agreements and therefore have a different risk profile and loans that were classified as held for sale that have been written down to the expected proceeds from sales based on indicative bids. United also had total deposits of $6.60 billion and stockholders’ equity of $586 million.

United’s activities are primarily conducted by its wholly owned Georgia banking subsidiary (the “Bank”). The Bank operations are conducted under a community bank model that operates 27 “community banks” with local bank presidents and boards in north Georgia, the Atlanta-Sandy Springs-Marietta, Georgia metropolitan statistical area (the “Atlanta MSA”), the Gainesville, Georgia metropolitan statistical area (the “Gainesville MSA”), coastal Georgia, western North Carolina, and east Tennessee. On March 31, 2010, United sold Brintech, Inc., (“Brintech”) a consulting services firm for the financial services industry, resulting in a pre-tax gain of $2.1 million, net of selling costs. The income statements for all periods presented reflect Brintech as a discontinued operation with revenue, expenses and income taxes related to Brintech removed from revenue, expenses, income taxes and loss from continuing operations. The balance sheet and cash flow statement have not been adjusted to reflect Brintech as a discontinued operation as Brintech’s assets and contribution to cash flows were not material.

Operating loss from continuing operations and operating loss from continuing operations per diluted share are non-GAAP performance measures. United’s management believes that operating performance is useful in analyzing United’s financial performance trends since it excludes items that are non-recurring in nature and therefore most of the discussion in this section will refer to operating performance measures. A reconciliation of these operating performance measures to GAAP performance measures is included in the table on page 36.

United reported a net operating loss from continuing operations of $237 million for the first quarter of 2011. This compared to a net operating loss from continuing operations of $34.5 million for the first quarter of 2010. Diluted operating loss from continuing operations per common share was $13.00 for the first quarter of 2011, compared to a diluted operating loss from continuing operations per common share of $1.96 for the first quarter of 2010. The first quarter of 2011 operating loss reflects the Board of Director’s decision to adopt the Problem Asset Disposition Plan described below under “Recent Developments” to quickly dispose of problem assets following United’s successful Private Placement described below under “Recent Developments.”

United’s operating provision for loan losses was $190 million for the three months ended March 31, 2011, compared to $75.0 million for the same period in 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 the Bulk Loan Sale described below under “Recent Developments.” Net charge-offs for the first quarter of 2011 were $232 million, of which $186 million related to the transfer of loans to the held for sale classification and $26.1 million of charge-offs for other first quarter bulk loan sales and foreclosure write downs for accelerated disposition in accordance with the Problem Asset Disposition Plan. As of March 31, 2011, United’s allowance for loan losses of $133 million, or 3.17% of loans, compared to $174 million, or 3.48% of loans, at March 31, 2010. Nonperforming assets of $138 million, which excludes assets of SCB that are covered by loss sharing agreements with the FDIC, decreased to 1.79% of total assets at March 31, 2011, compared to 4.42% as of December 31, 2010 and 5.32% as of March 31, 2010. The decrease in this ratio was due to the execution of the Problem Asset Disposition Plan and a general improving trend in credit quality indicators.

Taxable equivalent net interest revenue was $56.4 million for the first quarter of 2011, compared to $61.3 million for the same period of 2010. The decrease in net interest revenue was primarily the result of lower levels of loans. Average loans for the quarter declined $574 million from the first quarter of 2010. Net interest margin decreased from 3.49% for the three months ended March 31, 2010 to 3.30% for the same period in 2011. Interest reversals on performing loans that were moved to held for sale accounted for 11 basis points of the 19 basis points decrease. Over the past year, United has maintained above normal levels of liquidity. The level of excess liquidity peaked in the first quarter of 2011 and lowered the margin by approximately 49 basis points. Excess liquidity in the first quarter of 2010 lowered the margin by approximately 18 basis points.

Operating fee revenue increased $172,000, or 1%, from the first quarter of 2010. The increase was primarily attributable to the acceleration of deferred gains related to the ineffectiveness of terminated cash flow hedges. This helped to offset a decline in service charges and fees, which were down $727,000, due to regulatory changes requiring customer consent prior to utilizing United’s overdraft services.

For the first quarter of 2011, operating expenses of $115 million were up $60.5 million from the first 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 described below under “Recent Developments.” Foreclosed property costs were up $54.1 million from the first quarter of 2010. Professional fees were $1.39 million higher in the first quarter of 2011 compared to the same period last year, primarily due to fees related to the Private Placement and Bulk Loan Sale. In addition, FDIC assessments and other regulatory charges increased $1.79 million, or 49%, from the prior year as a result of a higher assessment rate and a higher level of insured deposits.

Recent Developments

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 11 to the consolidated financial statements for further details of the share exchange agreement.

During the first quarter of 2011, United announced its plans to sell $380 million of common stock in a private placement to a group of investors (the “Private Placement”). United entered into investment agreements (the “Investment Agreements”) with Corsair Georgia, L.P. and a group of institutional investors (collectively, the “Investors”) and closed the Private Placement on March 30, 2011. Pursuant to the Private Placement, the Investors purchased and United issued 3,467,699 of the Company’s existing common stock for $9.50 per share, $196 million of mandatorily convertible cumulative non-voting perpetual preferred stock, Series F (the “Series F Preferred Stock”), and $151 million of mandatorily convertible cumulative non-voting perpetual preferred stock, Series G (the “Series G Preferred Stock”). Under the terms of the Private Placement Agreement and following receipt of required shareholder approvals, the Series F Preferred Stock will be mandatorily convertible into 20,618,101 shares of voting common stock and the Series G Preferred Stock will be mandatorily convertible into 15,914,199 shares of non-voting common stock. Following such conversion at $9.50 per common share, the Investors will own an aggregate of 24,085,801 shares of common stock and 15,914,199 shares of non-voting common stock, or 69.7% of the Company’s pro forma outstanding common stock. The Private Placement resulted in an increase to shareholders’ equity of $363 million.

Also during the first quarter of 2011, the Board of Directors approved 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”). The substandard and nonperforming loans were sold for an aggregate purchase price of approximately $86.5 million by the Bank in a bulk transaction (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”). United plans to sell substantially all of the foreclosed properties in the second and third quarters of 2011.

Critical Accounting Policies

The accounting and reporting policies of United are in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and conform to general practices within the banking industry. The more critical accounting and reporting policies include United’s accounting for the allowance for loan losses, fair value measurements, and income taxes. In particular, United’s accounting policies related to allowance for loan losses, fair value measurements and income taxes involve the use of estimates and require significant judgment to be made by management. Different assumptions in the application of these policies could result in material changes in United’s consolidated financial position or consolidated results of operations. See “Asset Quality and Risk Elements” herein for additional discussion of United’s accounting methodologies related to the allowance for loan losses.

GAAP Reconciliation and Explanation

This Form 10-Q contains non-GAAP financial measures, which are performance measures determined by methods other than in accordance with GAAP. Such non-GAAP financial measures include, among others the following: operating provision for loan losses, operating fee revenue, operating revenue, operating expense, operating (loss) income from continuing operations, operating (loss) income, operating earnings (loss) from continuing operations per share, operating earnings (loss) per share, operating earnings (loss) from continuing operations per diluted share and operating earnings (loss) per diluted share. Management uses these non-GAAP financial measures because it believes they are useful for evaluating our operations and performance over periods of time, as well as in managing and evaluating our business and in discussions about our operations and performance. Management believes these non-GAAP financial measures provide users of our financial information with a meaningful measure for assessing our financial results and credit trends, as well as comparison to financial results for prior periods. These non-GAAP financial measures should not be considered as a substitute for operating results determined in accordance with GAAP and may not be comparable to other similarly titled financial measures used by other companies. A reconciliation of these operating performance measures to GAAP performance measures is included in on the table on page 36.

Discontinued Operations

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

Transaction with Fletcher International

Description of Transaction

On April 1, 2010, the Bank entered into an asset purchase and sale agreement (the “Asset Purchase Agreement”) with Fletcher International Inc. (“Fletcher Inc.”) and five affiliated limited liability companies (“LLCs”) formed by 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 accrue interest at a fixed rate of 3.5% and mature in five years. Principal and interest payments will be made quarterly based on a 30-year amortization schedule. Fletcher Inc. also contributed cash and securities to the LLCs equal to 17.5% of the purchase price to pre-fund the estimated carrying costs of the assets for approximately three years. 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.

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. has not purchased all of the Convertible Preferred Stock by May 26, 2011, it must pay United 5% of the commitment amount not purchased by that date, and it must also pay United an additional 5% of any commitment amount not purchased by May 26, 2012.

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.

The Securities Purchase Agreement provides that United shall not effect any conversion or redemption of the Convertible Preferred Stock, and Fletcher Ltd. shall not have the right to convert or redeem any portion of the Convertible Preferred Stock, into common stock to the extent such conversion or redemption would result in aggregate issuances to Fletcher Ltd. in excess of 9.75% of the number of shares of common stock that would be outstanding after giving effect to such conversion or redemption. In the event that United cannot effect a conversion or redemption of the Convertible Preferred Stock into common stock due to this limit, the conversion or redemption shall be effected into an equal number of shares of 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 $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 May 26, 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).

	September 30,		September 30,		September 30,
		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

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⁾

⁽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

		00000			00000			00000			00000			00000			00000

	2011			2010												First
	(As restated)			(As restated)												Quarter
*(in thousands, except per share*	First			Fourth			Third			Second			First			2011-2010
*data; taxable equivalent)*	Quarter			Quarter			Quarter			Quarter			Quarter			Change
INCOME SUMMARY
Interest revenue	$	75,965		$	81,215		$	84,360		$	87,699		$	89,849
Interest expense		19,573			21,083			24,346			26,072			28,570

Net interest revenue		56,392			60,132			60,014			61,627			61,279			(8	)%
Operating provision for loan losses ⁽¹⁾		190,000			47,750			50,500			61,500			75,000
Operating fee revenue ⁽²⁾		11,838			12,442			12,861			11,579			11,666			1

Total operating revenue⁽¹⁾⁽²⁾		(121,770	)		24,824			22,375			11,706			(2,055	)
Operating expenses ⁽³⁾		115,271			64,918			64,906			58,308			54,820			110
Loss on sale of nonperforming assets		—			—			—			45,349			—

Operating loss from continuing operations before taxes		(237,041	)		(40,094	)		(42,531	)		(91,951	)		(56,875	)
Operating income tax expense (benefit)		295			144,760			(16,706	)		(32,419	)		(22,417	)

Net operating loss from continuing operations ^(1)(2)(3)		(237,336	)		(184,854	)		(25,825	)		(59,532	)		(34,458	)
Noncash goodwill impairment charges		—			—			(210,590	)		—			—
Partial reversal of fraud loss provision		—			11,750			—			—			—
Loss from discontinued operations		—			—			—			—			(101	)
Gain from sale of subsidiary, net of income taxes and selling costs		—			—			—			—			1,266

Net loss		(237,336	)		(173,104	)		(236,415	)		(59,532	)		(33,293	)
Preferred dividends and discount accretion		2,778			2,586			2,581			2,577			2,572

Net loss available to common shareholders	$	(240,114	)	$	(175,690	)	$	(238,996	)	$	(62,109	)	$	(35,865	)

PERFORMANCE MEASURES
Per common share:
Diluted operating loss from continuing operations ^(1)(2)(3)	$	(13.00	)	$	(9.87	)	$	(1.50	)	$	(3.29	)	$	(1.96	)
Diluted loss from continuing operations		(13.00	)		(9.25	)		(12.62	)		(3.29	)		(1.96	)
Diluted loss		(13.00	)		(9.25	)		(12.62	)		(3.29	)		(1.90	)
Book value		2.20			15.40			25.70			38.55			39.76			(94	)
Tangible book value ⁽⁵⁾		1.69			14.80			25.26			26.96			28.12			(94	)
Key performance ratios:
Return on equity ⁽⁴⁾⁽⁶⁾		(526.54	)%		(196.10	)%		(148.04	)%		(35.89	)%		(20.10	)%
Return on assets ⁽⁶⁾		(13.04	)		(9.47	)		(12.47	)		(3.10	)		(1.70	)
Net interest margin ⁽⁶⁾		3.30			3.58			3.57			3.60			3.49
Operating efficiency ratio from continuing operations ⁽²⁾⁽³⁾		169.08			89.45			89.38			141.60			75.22
Equity to assets		6.15			7.80			11.37			11.84			11.90
Tangible equity to assets ⁽⁵⁾		6.01			7.64			9.19			9.26			9.39
Tangible common equity to assets ⁽⁵⁾		2.70			5.22			6.78			6.91			7.13
Tangible common equity to risk-weighted assets ⁽⁵⁾		0.75			5.64			9.60			9.97			10.03
ASSET QUALITY *
Non-performing loans	$	83,769		$	179,094		$	217,766		$	224,335		$	280,802
Foreclosed properties		54,378			142,208			129,964			123,910			136,275

Total non-performing assets (NPAs)		138,147			321,302			347,730			348,245			417,077
Allowance for loan losses		133,121			174,695			174,613			174,111			173,934
Operating net charge-offs ⁽¹⁾		231,574			47,668			49,998			61,323			56,668
Allowance for loan losses to loans		3.17	%		3.79	%		3.67	%		3.57	%		3.48	%
Operating net charge-offs to average loans ⁽¹⁾⁽⁶⁾		20.71			4.03			4.12			4.98			4.51
NPAs to loans and foreclosed properties		3.25			6.77			7.11			6.97			8.13
NPAs to total assets		1.79			4.42			4.96			4.55			5.32
AVERAGE BALANCES ($ in millions)
Loans	$	4,599		$	4,768		$	4,896		$	5,011		$	5,173			(11	)
Investment securities		1,625			1,354			1,411			1,532			1,518			7
Earning assets		6,902			6,680			6,676			6,854			7,085			(3	)
Total assets		7,379			7,254			7,522			7,704			7,946			(7	)
Deposits		6,560			6,294			6,257			6,375			6,570			—
Shareholders’ equity		454			566			855			912			945			(52	)
Common shares—basic (thousands)		18,466			18,984			18,936			18,905			18,878
Common shares—diluted (thousands)		18,466			18,984			18,936			18,905			18,878
AT PERIOD END ($ in millions)
Loans *	$	4,194		$	4,604		$	4,760		$	4,873		$	4,992			(16	)
Investment securities		1,884			1,490			1,310			1,488			1,527			23
Total assets		7,709			7,276			7,013			7,652			7,837			(2	)
Deposits		6,598			6,469			5,999			6,330			6,488			2
Shareholders’ equity		586			469			662			904			926			(37	)
Common shares outstanding (thousands)		20,903			18,937			18,887			18,856			18,835

⁽¹⁾

Excludes the partial reversal of a previously established provision for fraud-related loan losses of $11.8 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

		September 30,			September 30,			September 30,			September 30,			September 30,
	2011			2010
	(As restated)			(As restated)
*(in thousands, except per share*	First			Fourth			Third			Second			First
*data; taxable equivalent)*	Quarter			Quarter			Quarter			Quarter			Quarter
Interest revenue reconciliation
Interest revenue—taxable equivalent	$	75,965		$	81,215		$	84,360		$	87,699		$	89,849
Taxable equivalent adjustment		(435	)		(497	)		(511	)		(500	)		(493	)

Interest revenue (GAAP)	$	75,530		$	80,718		$	83,849		$	87,199		$	89,356

Net interest revenue reconciliation
Net interest revenue—taxable equivalent	$	56,392		$	60,132		$	60,014		$	61,627		$	61,279
Taxable equivalent adjustment		(435	)		(497	)		(511	)		(500	)		(493	)

Net interest revenue (GAAP)	$	55,957		$	59,635		$	59,503		$	61,127		$	60,786

Provision for loan losses reconciliation
Operating provision for loan losses	$	190,000		$	47,750		$	50,500		$	61,500		$	75,000
Partial reversal of special fraud-related provision for loan loss		—			(11,750	)		—			—			—

Provision for loan losses (GAAP)	$	190,000		$	36,000		$	50,500		$	61,500		$	75,000

Total revenue reconciliation
Total operating revenue	$	(121,770	)	$	24,824		$	22,375		$	11,706		$	(2,055	)
Taxable equivalent adjustment		(435	)		(497	)		(511	)		(500	)		(493	)
Partial reversal of special fraud-related provision for loan loss		—			11,750			—			—			—

Total revenue (GAAP)	$	(122,205	)	$	36,077		$	21,864		$	11,206		$	(2,548	)

Expense reconciliation
Operating expense	$	115,271		$	64,918		$	64,906		$	103,657		$	54,820
Noncash goodwill impairment charge		—			—			210,590			—			—

Operating expense (GAAP)	$	115,271		$	64,918		$	275,496		$	103,657		$	54,820

Loss from continuing operations before taxes reconciliation
Operating loss from continuing operations before taxes	$	(237,041	)	$	(40,094	)	$	(42,531	)	$	(91,951	)	$	(56,875	)
Taxable equivalent adjustment		(435	)		(497	)		(511	)		(500	)		(493	)
Noncash goodwill impairment charge		—			—			(210,590	)		—			—
Partial reversal of special fraud-related provision for loan loss		—			11,750			—			—			—

Loss from continuing operations before taxes (GAAP)	$	(237,476	)	$	(28,841	)	$	(253,632	)	$	(92,451	)	$	(57,368	)

Income tax expense (benefit) reconciliation
Operating income tax expense (benefit)	$	295		$	140,189		$	(16,706	)	$	(32,419	)	$	(22,417	)
Taxable equivalent adjustment		(435	)		(497	)		(511	)		(500	)		(493	)
Partial reversal of special fraud-related provision for loan loss		—			4,571			—			—			—

Income tax expense (benefit) (GAAP)	$	(140	)	$	144,263		$	(17,217	)	$	(32,919	)	$	(22,910	)

Diluted loss from continuing operations per common share reconciliation
Diluted operating loss from continuing operations per common share	$	(13.00	)	$	(9.87	)	$	(1.50	)	$	(3.29	)	$	(1.96	)
Noncash goodwill impairment charge		—			—			(11.12	)		—			—
Partial reversal of special fraud-related provision for loan loss		—			.62			—			—			—

Diluted loss from continuing operations per common share (GAAP)	$	(13.00	)	$	(9.25	)	$	(12.62	)	$	(3.29	)	$	(1.96	)

Book value per common share reconciliation
Tangible book value per common share	$	1.69		$	14.80		$	25.26		$	26.96		$	28.12
Effect of goodwill and other intangibles		.51			.60			.44			11.59			11.64

Book value per common share (GAAP)	$	2.20		$	15.40		$	25.70		$	38.55		$	39.76

Efficiency ratio from continuing operations reconciliation
Operating efficiency ratio from continuing operations		169.08	%		89.45	%		89.38	%		141.60	%		75.22	%
Noncash goodwill impairment charge		—			—			290.00			—			—

Efficiency ratio from continuing operations (GAAP)		169.08	%		89.45	%		379.38	%		141.60	%		75.22	%

Average equity to assets reconciliation
Tangible common equity to assets		2.70	%		5.22	%		6.78	%		6.91	%		7.13	%
Effect of preferred equity		3.31			2.42			2.41			2.35			2.26

Tangible equity to assets		6.01			7.64			9.19			9.26			9.39
Effect of goodwill and other intangibles		.14			.16			2.18			2.58			2.51

Equity to assets (GAAP)		6.15	%		7.80	%		11.37	%		11.84	%		11.90	%

Actual tangible common equity to risk-weighted assets reconciliation
Tangible common equity to risk-weighted assets		.75	%		5.64	%		9.60	%		9.97	%		10.03	%
Effect of other comprehensive income		(.32	)		(.42	)		(.81	)		(.87	)		(.85	)
Effect of deferred tax limitation		—			—			(2.94	)		(2.47	)		(1.75	)
Effect of trust preferred		1.13			1.06			1.06			1.03			1.00
Effect of preferred equity		5.87			3.53			3.51			3.41			3.29

Tier I capital ratio (Regulatory)		7.43	%		9.81	%		10.42	%		11.07	%		11.72	%

Net charge-offs reconciliation
Operating net charge-offs	$	231,574		$	47,668		$	49,998		$	61,323		$	56,668
Subsequent partial recovery of fraud-related charge-off		—			(11,750	)		—			—			—

Net charge-offs (GAAP)	$	231,574		$	35,918		$	49,998		$	61,323		$	56,668

Net charge-offs to average loans reconciliation
Operating net charge-offs to average loans		20.71	%		4.03	%		4.12	%		4.98	%		4.51	%
Subsequent partial recovery of fraud-related charge-off		—			(1.00	)		—			—			—

Net charge-offs to average loans (GAAP)		20.71	%		3.03	%		4.12	%		4.98	%		4.51	%

Results of Operations

United reported a net operating loss from continuing operations of $237 million for the first quarter of 2011. This compared to a net operating loss from continuing operations of $34.5 million for the same period in 2010. For the first quarter of 2011, diluted operating loss from continuing operations per share was $13.00. This compared to diluted operating loss from continuing operations per share of $1.96 for the first quarter of 2010. The first quarter of 2011 operating loss reflects the Board of Director’s decision to adopt the Problem Asset Disposition Plan to quickly dispose of problem assets following United’s successful Private Placement at the end of the first quarter.

Net Interest Revenue (Taxable Equivalent)

Net interest revenue (the difference between the interest earned on assets and the interest paid on deposits and borrowed funds) is the single largest component of total revenue. United actively manages this revenue source to provide optimal levels of revenue while balancing interest rate, credit and liquidity risks. Taxable equivalent net interest revenue for the three months ended March 31, 2011 was $56.4 million, down $4.89 million, or 8%, from the first quarter of 2010. The decrease in net interest revenue for the first quarter of 2011 compared to the first quarter of 2010 was mostly due to lower average loan balances, although the reversal of $2.01 million of interest on performing substandard loans reclassified as held for sale in anticipation of the second quarter Bulk Loan Sale also contributed to the decrease. United continues its intense focus on loan and deposit pricing, in an effort to maintain a steady level of net interest revenue, despite continuing attrition in the loan portfolio.

Average loans decreased $574 million, or 11%, from the first quarter of last year. The decrease in the loan portfolio was a result of the continued slowdown in the housing market as well as the Bulk Loan Sale completed in April 2011. Loan charge-offs, foreclosure activity and management’s efforts to rebalance the loan portfolio by reducing the concentration of residential construction loans have all contributed to declining loan balances. While loan balances have declined, United continues to make new loans. During the first quarter of 2011, United funded $52.6 million in new loans, primarily commercial and small business loans in north Georgia and the Atlanta MSA.

Average interest-earning assets for the first quarter of 2011 decreased $183 million, or 3%, from the same period in 2010. The decrease of $574 million in average loans was partially offset by increases of $107 million in the investment securities portfolio and $283 million in other interest-earning assets. Loan demand has been weak due to the poor economy and management’s efforts to reduce United’s exposure to residential construction loans. The increase in the securities portfolio and other interest-earning assets was due to purchases of floating rate mortgage-backed securities and short-term commercial paper in an effort to temporarily invest excess liquidity, including the proceeds from the new capital raised at the end of the first quarter of 2011. Average interest-bearing liabilities decreased $193 million, or 3%, from the first quarter of 2010 due to the rolling off of higher-cost certificates of deposit as funding needs decreased. The average yield on interest earning assets for the three months ended March 31, 2011, was 4.45%, down 68 basis points from 5.13% for the same period of 2010. Interest reversals on performing loans classified as held for sale as part of the Bulk Loan Sale accounted for approximately 11 basis points of the decrease. Another significant contributing factor to the decrease in the yield on interest earning assets was the 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. In light of the weak economic environment, United maintained above normal levels of liquidity by entering into brokered deposit arrangements and temporarily investing the proceeds in short-term commercial paper and floating rate mortgage-backed securities at a slightly negative spread.

The average cost of interest-bearing liabilities for the first quarter of 2011 was 1.32% compared to 1.86% for the same period of 2010, reflecting the effect of falling rates on United’s floating rate liabilities and United’s ability to reduce deposit pricing. Also contributing to the overall lower rate on interest-bearing liabilities was a shift in the mix of deposits away from more expensive time deposits toward lower-rate transaction deposits. United’s shrinking balance sheet also permitted the reduction of more expensive wholesale borrowings.

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

For the three months ended March 31, 2011 and 2010, the net interest spread was 3.13% and 3.27%, respectively, while the net interest margin was 3.30% and 3.49%, respectively. The decline in net interest margin for the quarter reflects interest reversals on performing loans that were transferred to the held for sale category. This transfer accounted for 11 basis points of the quarter over quarter decrease of 19 basis points. In addition, the above normal levels of liquidity lowered the net interest margin by approximately 49 basis points in the first quarter of 2011, compared to 18 basis points for the first quarter of 2010.

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 March 31, 2011 and 2010.

Table 2 - Average Consolidated Balance Sheets and Net Interest Analysis

For the Three Months Ended March 31,

		September 30,			September 30,		September 30,			September 30,			September 30,		September 30,
	2011								2010
	(As Restated)
	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⁾	$	4,598,860		$	61,070		5.39	%	$	5,172,847		$	72,219		5.66	%
Taxable securities ⁽³⁾		1,599,481			13,345		3.34			1,487,646			15,892		4.27
Tax-exempt securities ⁽¹⁾⁽³⁾		25,827			424		6.57			30,050			509		6.78
Federal funds sold and other interest-earning assets		677,453			1,126		.66			394,348			1,229		1.25

Total interest-earning assets		6,901,621			75,965		4.45			7,084,891			89,849		5.13

Non-interest-earning assets:
Allowance for loan losses		(169,113	)							(187,288	)
Cash and due from banks		134,341								104,545
Premises and equipment		179,353								181,927
Other assets ⁽³⁾		332,827								762,228

Total assets	$	7,379,029							$	7,946,303


Liabilities and Shareholders’ Equity:
Interest-bearing liabilities:
Interest-bearing deposits:
NOW	$	1,373,142			1,324		.39		$	1,361,696			1,854		.55
Money market		928,542			2,028		.89			723,470			1,757		.98
Savings		187,423			77		.17			180,448			84		.19
Time less than $100,000		1,540,342			5,451		1.44			1,692,652			8,891		2.13
Time greater than $100,000		990,881			4,151		1.70			1,155,776			6,770		2.38
Brokered		698,288			2,130		1.24			736,999			4,537		2.50

Total interest-bearing deposits		5,718,618			15,161		1.08			5,851,041			23,893		1.66

Federal funds purchased and other borrowings		101,097			1,042		4.18			102,058			1,038		4.12
Federal Home Loan Bank advances		55,125			590		4.34			114,388			977		3.46
Long-term debt		150,157			2,780		7.51			150,078			2,662		7.19

Total borrowed funds		306,379			4,412		5.84			366,524			4,677		5.18

Total interest-bearing liabilities		6,024,997			19,573		1.32			6,217,565			28,570		1.86

Non-interest-bearing liabilities:
Non-interest-bearing deposits		841,351								718,975
Other liabilities		58,634								64,337

Total liabilities		6,924,982								7,000,877
Shareholders’ equity		454,047								945,426

Total liabilities and shareholders’ equity	$	7,379,029							$	7,946,303

Net interest revenue				$	56,392							$	61,279

Net interest-rate spread							3.13	%							3.27	%


Net interest margin ⁽⁴⁾							3.30	%							3.49	%

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

(2)	Included in the average balance of loans outstanding are loans where the accrual of interest has been discontinued and loans that are held for sale.

(3)	Securities available for sale are shown at amortized cost. Pretax unrealized gains of $27.2 million in 2011 and $43.2 million in 2010 are included in other assets for purposes of this presentation.

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

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

Table 3 - Change in Interest Revenue and Expense on a Taxable Equivalent Basis

(in thousands)

		September 30,			September 30,			September 30,
	Three Months Ended March 31, 2011
	Compared to 2010
	Increase (decrease)
	Due to Changes in
	Volume			Rate			Total
Interest-earning assets:
Loans	$	(7,742	)	$	(3,407	)	$	(11,149	)
Taxable securities		1,128			(3,675	)		(2,547	)
Tax-exempt securities		(70	)		(15	)		(85	)
Federal funds sold and other interest-earning assets		633			(736	)		(103	)

Total interest-earning assets		(6,051	)		(7,833	)		(13,884	)


Interest-bearing liabilities:
NOW accounts		16			(546	)		(530	)
Money market accounts		461			(190	)		271
Savings deposits		3			(10	)		(7	)
Time deposits less than $100,000		(744	)		(2,696	)		(3,440	)
Time deposits greater than $100,000		(874	)		(1,745	)		(2,619	)
Brokered deposits		(227	)		(2,180	)		(2,407	)

Total interest-bearing deposits		(1,365	)		(7,367	)		(8,732	)

Federal funds purchased & other borrowings		(10	)		14			4
Federal Home Loan Bank advances		(592	)		205			(387	)
Long-term debt		1			117			118

Total borrowed funds		(601	)		336			(265	)

Total interest-bearing liabilities		(1,966	)		(7,031	)		(8,997	)


Decrease in net interest revenue	$	(4,085	)	$	(802	)	$	(4,887	)

Provision for Loan Losses

The provision for loan losses is based on management’s evaluation of losses inherent in the loan portfolio and corresponding analysis of the allowance for loan losses at quarter-end. The provision for loan losses was $190 million for the first quarter of 2011, compared to $75.0 million for the same period in 2010. The amount of provision recorded in the first quarter was the amount required such that the total allowance for loan losses reflected the appropriate balance, in the estimation of management, and was sufficient to cover inherent losses in the loan portfolio. The increase in the provision for loan losses compared to a year ago was primarily due to increased charge-offs recorded in conjunction with the Problem Asset Disposition Plan and transfer of loans to the held for sale category in anticipation of the Bulk Loan Sale. For the three months ended March 31, 2011, net loan charge-offs as an annualized percentage of average outstanding loans were 20.71%, compared to 4.51% for the same periods in 2010. When charge-offs specifically related to loans transferred to the held for sale classification are excluded, the charge-off rate for the first quarter of 2011 was 4.08%.

As the residential construction and housing markets have struggled, it has been difficult for many builders and developers to obtain cash flow from selling lots and houses needed to service debt. This deterioration of the residential construction and housing market was the primary factor that resulted in higher credit losses and increases in non-performing assets over the last three years. Although a majority of the charge-offs have been within the residential construction and development portion of the portfolio, credit quality deterioration has migrated to other loan categories as unemployment levels have remained high throughout United’s markets. Additional discussion on credit quality and the allowance for loan losses is included in the Asset Quality and Risk Elements section of this report on page 44.

Fee Revenue

Operating fee revenue for the three months ended March 31, 2011 was $11.8 million, a decrease of $172,000, or 1%, from the same period of 2010. Fee revenue from continuing operations excludes consulting fees earned by United’s Brintech subsidiary which was sold on March 31, 2010. All periods are presented on a continuing operations basis.

The following table presents the components of fee revenue for the first quarters of 2011 and 2010.

Table 4 - Fee Revenue

(dollars in thousands)

		September 30,		September 30,		September 30,
	Three Months Ended
	March 31,
	2011		2010		Change

Service charges and fees	$	6,720	$	7,447		(10	)%
Mortgage loan and related fees		1,494		1,479		1
Brokerage fees		677		567		19
Securities gains, net		55		61
Other		2,892		2,112		37

Total fee revenue	$	11,838	$	11,666		1

Service charges and fees of $6.72 million were down $727,000, or 10%, from the first quarter of 2010. The decrease was primarily due to lower overdraft fees resulting from decreased utilization of our courtesy overdraft services with the recent changes to Regulation E requiring customers to opt in to such services.

Mortgage loans and related fees for the first quarter of 2011 were up $15,000, or 1%, from the same period in 2010. In the first quarter of 2011, United closed 481 loans totaling $74.5 million compared with 412 loans totaling $64.7 million in the first quarter of 2010.

United incurred net securities gains of $55,000 and $61,000, respectively, for the three months ended March 31, 2011 and 2010. The first quarter of 2010 net gain included $950,000 in impairment charges on trust preferred securities of a bank whose financial condition had deteriorated. The impairment charge was more than offset by realized gains from securities sales.

For the three months ended March 31, 2011, other fee revenue increased $780,000, or 37%, from the same period in 2010. This increase was due to the ineffectiveness of United’s cash flow and fair value hedges. In the first quarter of 2011, United recognized $1.30 million in income from hedge ineffectiveness compared with $610,000 in income from hedge ineffectiveness in the first quarter of 2010. Most of the hedge ineffectiveness in 2010 and all of the hedge ineffectiveness in 2011 relates to terminated cash flow hedges where the gains realized on the terminated positions are being deferred over the original term of the derivative instrument. The ineffectiveness, which is caused by a decrease in qualifying prime-based loans, results in the accelerated recognition of the deferred gains.

Operating Expenses

The following table presents the components of operating expenses for the three months ended March 31, 2011 and 2010. The table is presented to reflect Brintech as a discontinued operation, and accordingly, operating expenses associated with Brintech have been excluded from the table for all periods presented.

Table 5 - Operating Expenses

(dollars in thousands)

		September 30,		September 30,		September 30,
	Three Months Ended
	March 31,
	2011		2010		Change

Salaries and employee benefits	$	24,924	$	24,360		2	%
Communications and equipment		3,344		3,273		2
Occupancy		4,074		3,814		7
Advertising and public relations		978		1,043		(6	)
Postage, printing and supplies		1,118		1,225		(9	)
Professional fees		3,330		1,943		71
FDIC assessments and other regulatory charges		5,413		3,626		49
Amortization of intangibles		762		802		(5	)
Other		6,429		3,921		64

Total operating expenses excluding foreclosed property expenses		50,372		44,007		14
Foreclosed property expense		64,899		10,813		500

Total operating expenses	$	115,271	$	54,820		110

Operating expenses for the first quarter of 2011 totaled $115 million, up $60.5 million, or 110%, from the first quarter of 2010 mostly reflecting an increase in foreclosed property losses incurred in connection with United’s classified asset disposition plans. Excluding foreclosed property costs, total operating expenses were $50.4 million, up $6.37 million, or 14%, from a year ago.

Salaries and employee benefits for the first quarter of 2011 were $24.9 million, up $564,000, or 2%, from the same period of 2010. The increase was primarily due to higher group medical insurance costs and a lower level of deferred direct loan origination costs. Headcount totaled 1,815 at March 31, 2011, compared to 1,814 at March 31, 2010.

Occupancy expense of $4.07 million for the first quarter of 2011 was up $260,000, or 7%, compared to the first quarter of 2010. The increase was due to higher costs for electricity, real estate taxes and insurance for premises and equipment.

Postage, printing and supplies expense for the first quarter of 2011 totaled $1.12 million, down $107,000, or 9%, from the same period of 2010. United continued its efforts to encourage customers to accept electronic statements and controlled courier expense through the use of remote capture technology.

Professional fees for the first quarter of 2011 of $3.33 million were up $1.39 million, or 71%, from the same period in 2010, primarily due to $1.00 million of costs associated with the Private Placement and Bulk Loan Sale.

Foreclosed property expense of $64.9 million for the first quarter of 2011 was up $54.1 million from the first quarter of 2010, reflecting higher write downs on foreclosed properties to expedite sales under the Problem Asset Disposition Plan. Such write downs for the first quarter of 2011 were $48.6 million compared to $4.58 million a year ago. Losses realized on sales of foreclosed properties were also up in the first quarter of 2011, totaling $12.0 million compared with $3.52 million a year ago. This expense category also includes legal fees, property taxes, marketing costs, utility services, maintenance and repair charges, that totaled $4.29 million for the first quarter of 2011 compared with $2.72 million a year ago.

FDIC assessments and other regulatory charges of $5.41 million for the first quarter of 2011, increased $1.79 million from the first quarter of 2010. The increase was due to an increase in United’s assessment rate as well as an increase in insured deposits.

Other expense of $6.43 million for the first quarter of 2011 increased $2.51 million from the first quarter of 2010. The increase was primarily due to $2.60 million of property taxes and other loan collateral costs incurred to prepare loans for the Bulk Loan Sale.

Income Taxes

Income tax benefit for the first quarter of 2011 was $140,000 as compared with income tax benefit of $22.9 million for the first quarter of 2010, representing an effective tax rate of approximately .06% and 40% for each period, respectively. The effective tax rates were different from the statutory tax rates primarily due to interest revenue on certain investment securities and loans that are exempt from income taxes, tax exempt fee revenue, tax credits received on affordable housing investments, and the change in valuation allowance on deferred tax assets as discussed below.

As a result of the Private Placement and the Problem Asset Disposition Plan which includes the Bulk Loan Sale, United expects to accelerate its return to profitability. The change from a pre-tax loss to pre-tax earnings will affect the effective tax rate going forward. Because in aggregate, United’s permanent tax differences are generally in United’s favor, they tend to reduce the effective tax rate below the blended statutory rate of 38.9% when United has pre-tax earnings and they increase the effective tax rate above the blended statutory rate when United has a pre-tax loss. The effective tax rates can be volatile as earnings or losses approach a break-even point since United would report a tax benefit even if it were to break even as a result of the permanent tax differences. Therefore some volatility in the effective tax rate is expected as United moves from a loss position to positive earnings.

At March 31, 2011, United had no net deferred tax assets, net of a valuation allowance of $269 million. Accounting Standards Codification Topic 740, Income Taxes, requires that companies assess whether a valuation allowance should be established against their deferred tax assets based on the consideration of all available evidence using a “more likely than not” standard. Management considers both positive and negative evidence and analyzes changes in near-term market conditions as well as other factors which may impact future operating results. In making such judgments, significant weight is given to evidence that can be objectively verified. The deferred tax assets are analyzed quarterly for changes affecting realizability. Based on the weighting of the evidence, management has determined that the objective negative evidence represented by recent losses outweighs the more subjective positive evidence. As a result, management has established a full valuation allowance against its net deferred tax assets.

As of February 22, 2011, United adopted a tax benefits preservation plan designed to protect its ability to utilize its substantial tax assets. Those tax assets include net operating losses that it could utilize in certain circumstances to offset taxable income and reduce its federal income tax liability and the future tax benefits from potential net unrealized built in losses. United’s ability to use its tax benefits would be substantially limited if it were to experience an ownership change as defined under Section 382. In general, an ownership change would occur if United’s “5-percent shareholders,” as defined under Section 382, collectively increase their ownership in United by more than 50% over a rolling three-year period. The tax benefits preservation plan is designed to reduce the likelihood that United will experience an ownership change by discouraging any person or group from becoming a beneficial owner of 4.99% or more of United’s common stock then outstanding.

In connection with the tax benefits preservation plan, on February 22, 2011, United entered into a share exchange agreement with the Elm Ridge Parties to transfer to the Company 1,551,126 shares of United’s common stock, in exchange for 16,613 shares of the Company’s series D preferred shares and warrants to purchase 1,551,126 shares of common stock. Prior to entering into the share exchange agreement, collectively, the Elm Ridge Parties were United’s largest shareholder. By exchanging the Elm Ridge Parties’ common stock for the Series D Preferred Shares and warrants, United eliminated its only “5-percent shareholder” and, as a result, obtained further protection against an ownership change under Section 382.

Additional information regarding income taxes can be found in Note 16 to the consolidated financial statements filed with United’s 2010 Form 10-K.

Balance Sheet Review

Total assets at March 31, 2011, December 31, 2010 and March 31, 2010 were $7.71 billion, $7.28 billion and $7.84 billion, respectively. Average total assets for the first quarter of 2011 were $7.38 billion, down from $7.95 billion in the first quarter of 2010.

Loans

The following table presents a summary of the loan portfolio.

Table 6 - Loans Outstanding (excludes loans covered by loss share agreement)

(dollars in thousands)

		September 30,			September 30,			September 30,
	March 31,			December 31,			March 31,
	2011			2010			2010
By Loan Type
Commercial (secured by real estate)	$	1,692,154		$	1,761,424		$	1,765,204
Commercial construction		213,177			296,582			357,188
Commercial (commercial and industrial)		431,473			441,518			380,331

Total commercial		2,336,804			2,499,524			2,502,723
Residential construction		549,618			695,166			960,372
Residential mortgage		1,186,531			1,278,780			1,390,270
Installment		121,419			130,656			138,680

Total loans	$	4,194,372		$	4,604,126		$	4,992,045


As a percentage of total loans:
Commercial (secured by real estate)		41	%		38	%		35	%
Commercial construction		5			6			7
Commercial (commercial and industrial)		10			10			8

Total commercial		56			54			50
Residential construction		13			15			19
Residential mortgage		28			28			28
Installment		3			3			3

Total		100	%		100	%		100	%


By Geographic Location
Atlanta MSA	$	1,179,362		$	1,310,222		$	1,404,247
Gainesville MSA		281,591			312,049			372,064
North Georgia		1,531,279			1,688,586			1,813,774
Western North Carolina		639,897			701,798			755,674
Coastal Georgia		312,090			335,020			388,245
East Tennessee		250,153			256,451			258,041

Total loans	$	4,194,372		$	4,604,126		$	4,992,045

Substantially all of United’s loans are to customers (including customers who have a seasonal residence in United’s market areas) located in the immediate market areas of its community banks in Georgia, North Carolina, and Tennessee, and more than 85% of the loans are secured by real estate. At March 31, 2011, total loans, excluding loans acquired from SCB that are covered by loss sharing agreements with the FDIC and loans classified as held for sale, were $4.19 billion, a decrease of $798 million, or 16%, from March 31, 2010. The rate of loan growth began to decline in the first quarter of 2007 and the balances have continued to decline. The decrease in the loan portfolio began with deterioration in the residential construction and housing markets. This deterioration resulted in part in an oversupply of lot inventory, houses and land within United’s markets, which further slowed construction activities and acquisition and development projects. The resulting recession that began in the housing market led to high rates of unemployment that resulted in stress in the other segments of United’s loan portfolio. Despite the weak economy and lack of loan demand, United has continued to pursue lending opportunities which resulted in $52.6 million in new loans that were funded in the first quarter of 2011.

Asset Quality and Risk Elements

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

United classifies performing loans as “substandard” when there is a well-defined weakness or weaknesses that jeopardize the repayment by the borrower and there is a distinct possibility that United could sustain some loss if the deficiency is not corrected. The table below presents performing substandard loans for the last five quarters.

Table 7 - Performing Substandard Loans

(dollars in thousands)

		September 30,		September 30,		September 30,		September 30,		September 30,
	March 31,		December 31,		September 30,		June 30,		March 31,
	2011		2010		2010		2010		2010
By Category
Commercial (sec. by RE)	$	119,651	$	156,765	$	157,245	$	140,805	$	151,573
Commercial construction		34,887		90,745		102,592		78,436		75,304
Commercial & industrial		16,425		16,767		22,251		22,052		35,474

Total commercial		170,963		264,277		282,088		241,293		262,351
Residential construction		80,534		158,770		177,381		149,305		153,799
Residential mortgage		69,119		86,143		86,239		79,484		80,812
Installment		2,352		2,957		4,218		4,364		3,922

Total	$	322,968	$	512,147	$	549,926	$	474,446	$	500,884


By Market
Atlanta MSA	$	100,200	$	185,327	$	214,676	$	183,612	$	191,009
Gainesville MSA		17,417		33,962		27,097		22,602		27,879
North Georgia		148,228		212,992		229,845		199,498		222,037
North Carolina		27,280		42,335		37,085		34,742		25,749
East Tennessee		6,739		8,308		8,882		8,663		7,105
Coastal Georgia		23,104		29,223		32,341		25,329		27,105

Total loans	$	322,968	$	512,147	$	549,926	$	474,446	$	500,884

At March 31, 2011, performing substandard loans totaled $323 million and decreased $189 million from the prior quarter-end, and decreased $178 million from a year ago. Most of the decrease occurred in United’s Atlanta and north Georgia markets and was primarily the result of the reclassification of loans to held for sale in anticipation of our Bulk Loan Sale which was completed on April 18, 2011. The overall trend in performing substandard loans had been declining which was expected to continue absent the loan sale transaction. Residential construction and commercial construction loans showed the most significant decreases as they represented more than 60% of the pre-charge down carrying amount of the aggregate loans included in the loan sale.

Reviews of substandard performing and non-performing loans, past due loans and larger credits, are conducted on a regular basis with management each quarter and are designed to identify risk migration and potential charges to the allowance for loan losses. These reviews are performed by the responsible lending officers and the loan review department and also consider such factors as the financial strength of borrowers, the value of the applicable collateral, past loan loss experience, anticipated loan losses, changes in risk profile, prevailing economic conditions and other factors. United also uses external loan review in addition to United’s internal loan review to ensure the independence of the loan review process.

The following table presents a summary of the changes in the allowance for loan losses for the three months ended March 31, 2011 and 2010.

Table 8 - Allowance for Loan Losses

(in thousands)

		September 30,		September 30,		September 30,		September 30,		September 30,		September 30,			September 30,
	Three Months Ended March 31,
	2011													2010
	Asset Disposition Plan								Other
	Bulk Loan Sale ⁽¹⁾				Other Bulk		Foreclosure		Charge-Offs
	Accruing		Nonaccrual		Loan Sales ⁽²⁾		Charge-Offs ⁽³⁾		Recoveries		Total			Total
Balance beginning of period											$	174,695		$	155,602
Provision for loan losses												190,000			75,000
Charge-offs:
Commercial (secured by real estate)	$	29,451	$	11,091	$	3,318	$	1,905	$	2,942		48,707			2,936
Commercial construction		32,530		15,328		292		419		1,146		49,715			2,211
Commercial (commercial and industrial)		365		2,303		859		—		835		4,362			4,554
Residential construction		43,018		23,459		3,325		11,693		10,760		92,255			44,190
Residential mortgage		13,917		14,263		1,676		1,538		5,282		36,676			4,640
Installment		86		168		30		24		788		1,096			1,129

Total loans charged-off		119,367		66,612		9,500		15,579		21,753		232,811			59,660

Recoveries:
Commercial (secured by real estate)		—		—		—		—		100		100			972
Commercial construction		—		—		—		—		—		—			5
Commercial (commercial and industrial)		—		—		—		—		322		322			444
Residential construction		—		—		—		—		117		117			1,090
Residential mortgage		—		—		—		—		293		293			89
Installment		—		—		—		—		405		405			392

Total recoveries		—		—		—		—		1,237		1,237			2,992

Net charge-offs	$	119,367	$	66,612	$	9,500	$	15,579	$	20,516		231,574			56,668

Balance end of period											$	133,121		$	173,934

Total loans: *
At period-end											$	4,194,372		$	4,992,045
Average												4,534,294			5,091,474
Allowance as a percentage of period-end loans												3.17	%		3.48	%
As a percentage of average loans:
Net charge-offs												20.71			4.51
Provision for loan losses												16.99			5.97
Allowance as a percentage of non-performing loans
As reported												159			62
Excluding impaired loans with no allocated reserve												379			142

*	Excludes loans covered by loss sharing agreements with the FDIC

(1)	Charge-offs totaling $186 million were recognized on the bulk loan sale in the first quarter of 2011. The loans were transferred to the loans held for sale category in anticipation of the second quarter bulk loan sale that was completed on April 18, 2011.

(2)	Losses on smaller bulk sale transactions completed during the first quarter of 2011.

(3)

Loan charge-offs recognized in the first quarter of 2011 related to loans transferred to foreclosed properties. Such charge-offs were elevated in the first quarter as a result of the asset disposition plan, which called for aggressive write downs to expedite sales in the second and third quarters of 2011.

The provision for loan losses charged to earnings was based upon management’s judgment of the amount necessary to maintain the allowance at a level appropriate to absorb losses inherent in the loan portfolio at the balance sheet date. The amount each quarter is dependent upon many factors, including growth and changes in the composition of the loan portfolio, net charge-offs, delinquencies, management’s assessment of loan portfolio quality, the value of collateral, and other macro-economic factors and trends. The evaluation of these factors is performed quarterly by management through an analysis of the appropriateness of the allowance for loan losses. The decreases in the provision and the stabilization of the level of the allowance for loan losses compared to the previous periods reflects stabilizing trends in substandard loans, leading to an expectation that charge-off levels will continue to decline.

At March 31, 2011, the allowance for loan losses was $133 million, or 3.17% of loans, compared with $175 million, or 3.79% of loans, at December 31, 2010 and $174 million, or 3.48% of loans, at March 31, 2010. The decrease in the allowance for loan losses is consistent with the decrease in classified loans resulting from the execution of the Problem Asset Disposition Plan, including the Bulk Loan Sale which reduced the amount of loss remaining in the loan portfolio.

Management believes that the allowance for loan losses at March 31, 2011 reflects the losses inherent in the loan portfolio. This assessment involves uncertainty and judgment; therefore, the adequacy of the allowance for loan losses cannot be determined with precision and may be subject to change in future periods. In addition, bank regulatory authorities, as part of their periodic examination of the Bank, may require adjustments to the provision for loan losses in future periods if, in their opinion, the results of their review warrant such additions. See the “Critical Accounting Policies” section in United’s Annual Report on Form 10-K for additional information on the allowance for loan losses.

Nonperforming Assets

The table below summarizes non-performing assets, excluding SCB’s assets covered by the loss-sharing agreement with the FDIC. Those assets have been excluded from non-performing assets, as the loss-sharing agreement with the FDIC and purchase price adjustments to reflect credit losses effectively eliminate the likelihood of recognizing any losses on the covered assets.

Table 9 - Nonperforming Assets

(dollars in thousands)

		September 30,			September 30,			September 30,
	(As restated)			(As restated)
	March 31,			December 31,			March 31,
	2011			2010			2010
Nonperforming loans*	$	83,769		$	179,094		$	280,802
Foreclosed properties (OREO)		54,378			142,208			136,275

Total nonperforming assets	$	138,147		$	321,302		$	417,077


Nonperforming loans as a percentage of total loans		2.00	%		3.89	%		5.62	%
Nonperforming assets as a percentage of total loans and OREO		3.25			6.77			8.13
Nonperforming assets as a percentage of total assets		1.79			4.42			5.32

*	There were no loans 90 days or more past due that were still accruing at period end.

At March 31, 2011, nonperforming loans were $83.8 million, compared to $179 million at December 31, 2010 and $281 million at March 31, 2010. The ratio of non-performing loans to total loans decreased from December 31, 2010 and March 31, 2010 due the reclassification of nonperforming loans having a pre-charge down carrying amount of $101 million to held for sale in anticipation of the Bulk Loan Sale in April 2011. Non-performing assets, which include non-performing loans and foreclosed real estate, totaled $138 million at March 31, 2011, compared with $321 million at December 31, 2010 and $417 million at March 31, 2010. In the first quarter of 2011, write-downs totaling $48.6 million were recorded in conjunction with the Problem Asset Disposition Plan to expedite sales. In addition, United sold $56.5 million of foreclosed properties. Both of these events helped lower the balance of foreclosed properties by 60% compared to March 31, 2010.

Table 10 - Bulk Loan Sale Summary ⁽¹⁾

		00000		00000		00000		00000		00000		00000		00000		00000		00000
	Performing Loans						Nonperforming Loans						Total Loans
					Loans						Loans						Loans
	Carrying		Charge-		Held for		Carrying		Charge-		Held for		Carrying		Charge-		Held for
*(in thousands)*	Amount ⁽²⁾		Offs ⁽³⁾		Sale ⁽⁴⁾		Amount ⁽²)		Offs ⁽³⁾		Sale ⁽⁴⁾		Amount ⁽²)		Offs ⁽³⁾		Sale ⁽⁴⁾
BY CATEGORY
Commercial (sec. by RE)	$	40,902	$	29,451	$	11,451	$	17,202	$	11,091	$	6,111	$	58,104	$	40,542	$	17,562
Commercial construction		45,490		32,530		12,960		22,440		15,328		7,112		67,930		47,858		20,072
Commercial & industrial		504		365		139		3,398		2,303		1,095		3,902		2,668		1,234

Total commercial		86,896		62,346		24,550		43,040		28,722		14,318		129,936		91,068		38,868
Residential construction		59,747		43,018		16,729		35,509		23,459		12,050		95,256		66,477		28,779
Residential mortgage		19,342		13,917		5,425		21,717		14,263		7,454		41,059		28,180		12,879
Consumer / installment		120		86		34		237		168		69		357		254		103

Total	$	166,105	$	119,367	$	46,738	$	100,503	$	66,612	$	33,891	$	266,608	$	185,979	$	80,629

BY MARKET
Atlanta MSA	$	51,647	$	37,186	$	14,461	$	13,755	$	8,545	$	5,210	$	65,402	$	45,731	$	19,671
Gainesville MSA		4,949		3,563		1,386		3,695		2,442		1,253		8,644		6,005		2,639
North Georgia		80,831		57,969		22,862		70,901		47,699		23,202		151,732		105,668		46,064
Western North Carolina		15,468		11,138		4,330		7,228		4,743		2,485		22,696		15,881		6,815
Coastal Georgia		9,493		6,835		2,658		3,528		2,180		1,348		13,021		9,015		4,006
East Tennessee		3,717		2,676		1,041		1,396		1,003		393		5,113		3,679		1,434

Total	$	166,105	$	119,367	$	46,738	$	100,503	$	66,612	$	33,891	$	266,608	$	185,979	$	80,629

⁽¹⁾	This schedule presents a summary of classified loans included in the bulk loan sale transaction that closed on April 18, 2011.

⁽²⁾	This column represents the book value, or carrying amount, of the loans prior to charge offs to mark loans to expected proceeds from sale.

⁽³⁾

This column represents the charge-offs required to adjust the loan balances to the expected proceeds from the sale based on indicative bids received from prospective buyers, including principal payments received or committed advances made after the cutoff date through March 31, 2011 that are part of the settlement.

⁽⁴⁾	This column represents the expected proceeds from the bulk sale based on indicative bids received from prospective buyers and equals the balance shown on the consolidated balance sheet as loans held for sale.

United’s policy is to place loans on non-accrual status when, in the opinion of management, the principal and interest on a loan is not likely to be repaid in accordance with the loan terms or when the loan becomes 90 days past due and is not well secured and in the process of collection. When a loan is classified on non-accrual status, interest previously accrued but not collected is reversed against current interest revenue. Principal and interest payments received on a non-accrual loan are applied to reduce outstanding principal.

The following table summarizes non-performing assets by category and market. As with Tables 6, 7 and 9, assets covered by the loss-sharing agreement with the FDIC, related to the acquisition of SCB, are excluded from this table.

Table 11 - Nonperforming Assets by Quarter ⁽¹⁾

(in thousands)

		00000			00000			00000			00000			00000			00000			00000			00000			00000
	March 31, 2011									December 31, 2010									March 31, 2010
	Nonaccrual			Foreclosed			Total			Nonaccrual			Foreclosed			Total			Nonaccrual			Foreclosed			Total
	Loans			Properties			NPAs			Loans			Properties			NPAs			Loans			Properties			NPAs
BY CATEGORY
Commercial (sec. by RE)	$	20,648		$	7,886		$	28,534		$	44,927		$	23,659		$	68,586		$	45,918		$	21,597		$	67,515
Commercial construction		3,701			11,568			15,269			21,374			17,808			39,182			23,556			14,285			37,841
Commercial & industrial		2,198			—			2,198			5,611			—			5,611			3,610			—			3,610

Total commercial		26,547			19,454			46,001			71,912			41,467			113,379			73,084			35,882			108,966
Residential construction		32,038			25,807			57,845			54,505			78,231			132,736			147,326			74,220			221,546
Residential mortgage		23,711			9,117			32,828			51,083			22,510			73,593			57,920			26,173			84,093
Consumer / installment		1,473			—			1,473			1,594			—			1,594			2,472			—			2,472

Total NPAs	$	83,769		$	54,378		$	138,147		$	179,094		$	142,208		$	321,302		$	280,802		$	136,275		$	417,077

Balance as a % of Unpaid Principal		57.3	%		30.3	%		42.4	%		67.2	%		64.4	%		65.9	%		71.6	%		67.5	%		70.2	%
BY MARKET
Atlanta MSA	$	21,501		$	16,913		$	38,414		$	48,289		$	41,154		$	89,443		$	81,914		$	36,951		$	118,865
Gainesville MSA		4,332			2,157			6,489			5,171			9,273			14,444			17,058			3,192			20,250
North Georgia		30,214			23,094			53,308			83,551			66,211			149,762			109,280			63,128			172,408
Western North Carolina		18,849			7,802			26,651			25,832			11,553			37,385			31,353			8,588			39,941
Coastal Georgia		5,847			3,781			9,628			11,145			11,901			23,046			33,438			21,871			55,309
East Tennessee		3,026			631			3,657			5,106			2,116			7,222			7,759			2,545			10,304

Total NPAs	$	83,769		$	54,378		$	138,147		$	179,094		$	142,208		$	321,302		$	280,802		$	136,275		$	417,077

(1)	Excludes non-performing loans and foreclosed properties covered by the loss-sharing agreement with the FDIC, related to the acquisition of SCB.

In April 2011, United sold nonperforming loans in the Bulk Loan Sale with a pre-write down carrying amount of $101 million and performing substandard loans with a pre-write down carrying amount of $166 million. In anticipation of that sale, United recorded charge-offs of $186 million and transferred these loans to the held for sale category at March 31, 2011. Nonperforming assets in the residential construction category were $57.8 million at March 31, 2011, compared with $222 million at March 31, 2010, a decrease of $164 million, or 74%. Commercial nonperforming assets decreased from $109 million at March 31, 2010 to $46.0 million at March 31, 2011. Residential mortgage non-performing assets of $32.8 million decreased $51.3 million from March 31, 2010. While United experienced a reduction in nonperforming assets across all markets, the execution of the Problem Asset Disposition Plan, including the Bulk Loan Sale and the write down of foreclosed properties contributed to a decline in the North Georgia market and Atlanta MSA, where nonperforming asset levels had been particularly elevated.

At March 31, 2011, December 31, 2010, and March 31, 2010 United had $49.7 million, $101 million and $70.7, respectively, in loans with terms that have been modified in a troubled debt restructuring (“TDR”). Included therein were $6.4 million, $17.3 million and $6.08 million of TDRs that were not performing in accordance with their modified terms and were included in nonperforming loans. The remaining TDRs with an aggregate balance of $43.3 million, $84.1 million and $64.6 million, respectively, were performing according to their modified terms and are therefore not considered to be nonperforming assets.

At March 31, 2011, December 31, 2010, and March 31, 2010, there were $48.6 million, $123 million and $215 million, respectively, of loans classified as impaired under the Accounting Standards Codification. Included in impaired loans at March 31, 2011, December 31, 2010 and March 31, 2010, was $48.6 million, $115 million and $159 million, respectively, that did not require specific reserves or had previously been charged down to net realizable value. The balance of impaired loans at December 31, 2010 and March 31, 2010, of $7.64 million and $56.5 million, respectively had specific reserves that totaled $1.05 million and $6.83 million. At March 31, 2011 there were no impaired loans with specific reserves. The average recorded investment in impaired loans for the quarters ended March 31, 2011 and 2010 was $95.2 million and $211 million, respectively. There was no interest revenue recognized on loans while they were impaired for the first three months of 2011 or 2010. United’s policy is to discontinue the recognition of interest revenue for loans classified as impaired under the Financial Accounting Standards Board’s Accounting Standards Codification (“ASC”) Topic 310-10-35, Receivables, when a loan meets the criteria for nonaccrual status.

The table below summarizes activity in non-performing assets by quarter. Assets covered by loss sharing agreements with the FDIC, related to the acquisition of SCB, are not included in this table.

Table 12 - Activity in Nonperforming Assets by Quarter

(in thousands)

		00000			00000			00000			00000			00000			00000			00000			00000			00000
	First Quarter 2011 ⁽¹⁾⁽²⁾									Fourth Quarter 2010 ⁽¹⁾									First Quarter 2010 ⁽¹⁾
	Nonaccrual			Foreclosed			Total			Nonaccrual			Foreclosed			Total			Nonaccrual			Foreclosed			Total
	Loans			Properties			NPAs			Loans			Properties			NPAs			Loans			Properties			NPAs
Beginning Balance	$	179,094		$	142,208		$	321,302		$	217,766		$	129,964		$	347,730		$	264,092		$	120,770		$	384,862
Loans placed on non-accrual		54,730			—			54,730			81,023			—			81,023			139,030			—			139,030
Payments received		(3,550	)		—			(3,550	)		(7,250	)		—			(7,250	)		(5,733	)		—			(5,733	)
Loan charge-offs		(43,969	)		—			(43,969	)		(47,913	)		—			(47,913	)		(58,897	)		—			(58,897	)
Foreclosures		(17,052	)		17,052			—			(61,432	)		61,432			—			(49,233	)		49,233			—
Capitalized costs		—			270			270			—			170			170			—			320			320
Note / property sales		(11,400	)		(44,547	)		(55,947	)		(3,100	)		(33,509	)		(36,609	)		(8,457	)		(25,951	)		(34,408	)
Loans trans to held for sale		(74,084	)		—			(74,084	)		—			—			—			—			—			—
Write downs		—			(48,585	)		(48,585	)		—			(8,031	)		(8,031	)		—			(4,579	)		(4,579	)
Net gains (losses) on sales		—			(12,020	)		(12,020	)		—			(7,818	)		(7,818	)		—			(3,518	)		(3,518	)

Ending Balance	$	83,769		$	54,378		$	138,147		$	179,094		$	142,208		$	321,302		$	280,802		$	136,275		$	417,077

⁽¹⁾	Excludes non-performing loans and foreclosed properties covered by the loss-sharing agreement with the FDIC, related to the acquisition of SCB.

⁽²⁾

The NPA activity shown for the first quarter of 2011 is presented with all activity related to loans transferred to the held for sale classification on one line as if those loans were transferred to held for sale at the beginning of the period. During the first quarter of 2011, $27.1 million in loans transferred to held for sale were placed on nonaccrual, $1.1 million in payments were received on nonaccrual loans transferred to held for sale and $66.6 million in charge-offs were recorded on nonaccrual loans transferred to held for sale to mark them down to the expected proceeds from the sale.

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 estimated costs to sell, of the foreclosed property decreases during the holding period, a valuation allowance is established with a charge to foreclosed property costs. 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 ASC 360-20, Real Estate Sales. For the first quarters of 2011 and 2010, United transferred $17.1 million and $49.2 million, respectively, of loans into foreclosed property. During the same periods, proceeds from sales of OREO were $44.5 million and $26.0 million, respectively, which includes $8.54 million and $4.26 million of sales that were financed by United, respectively. During the first quarter of 2011, United recorded $48.6 million in write-downs on foreclosed property in order to expedite sales in the second and third quarter.

Investment Securities

The composition of the investment securities portfolio reflects United’s investment strategy of maintaining an appropriate level of liquidity while providing a relatively stable source of revenue. The investment securities portfolio also provides a balance to interest rate risk and credit risk in other categories of the balance sheet while providing a vehicle for the investment of available funds, furnishing liquidity, and supplying securities to pledge as required collateral for certain deposits. Total investment securities at March 31, 2011 increased $357 million from a year ago. The increase in the securities portfolio was a result of a buildup of liquidity resulting partially from strong core deposit growth with little loan demand to invest the proceeds. In addition, United has intentionally sought to maintain above normal amounts of liquidity due to the uncertain economy. United invested the proceeds from deposits in short-term commercial paper and floating rate mortgage-backed securities. United chose floating rate securities because they have less market risk in the event rates begin to rise.

During the second quarter of 2010, United transferred securities available for sale with a fair value of $315 million to held to maturity. The transferred securities were those that United has the ability and positive intent to hold until maturity. Generally, the transferred securities had longer durations and were more susceptible to market price volatility due to changes in interest rates. At March 31, 2011, United had securities held to maturity with a carrying value of $245 million and securities available for sale totaling $1.64 billion. At March 31, 2011, December 31, 2010, and March 31, 2010, the securities portfolio represented approximately 24%, 20%, and 19% of total assets, respectively.

The investment securities portfolio primarily consists of U.S. Government sponsored agency mortgage-backed securities, non-agency mortgage-backed securities, U.S. Government agency securities, corporate bonds, and municipal securities. Mortgage-backed securities rely on the underlying pools of mortgage loans to provide a cash flow of principal and interest. The actual maturities of these securities will differ from contractual maturities because loans underlying the securities can prepay. Decreases in interest rates will generally cause an acceleration of prepayment levels. In a declining interest rate environment, United may not be able to reinvest the proceeds from these prepayments in assets that have comparable yields. In a rising rate environment, the opposite occurs. Prepayments tend to slow and the weighted average life extends. This is referred to as extension risk which can lead to lower levels of liquidity due to the delay of cash receipts and can result in the holding of a below market yielding asset for a longer period of time.

Goodwill and Other Intangible Assets

Goodwill represents the premium paid for acquired companies above the fair value of the assets acquired and liabilities assumed, including separately identifiable intangible assets. As a result of the significant drop in United’s stock price during the third quarter of 2010, United conducted an interim goodwill impairment test to determine if the stock price decline might indicate goodwill was impaired. United’s third quarter interim 2010 impairment test indicated that goodwill was in fact impaired and United recorded a charge to earnings for the entire remaining balance of $211 million. In performing the interim impairment test, United engaged the services of a national third party valuation expert who employed commonly used valuation techniques including an earnings approach that considered discounted future expected cash earnings and three market approaches.

Other intangible assets, primarily core deposit intangibles representing the value of United’s acquired deposit base, are amortizing intangible assets that are required to be tested for impairment only when events or circumstances indicate that impairment may exist. There were no events or circumstances that led management to believe that any impairment exists in United’s other intangible assets.

Deposits

United initiated several programs in early 2009 to improve core earnings by growing customer transaction deposit accounts and lowering overall pricing on deposit accounts to improve its net interest margin and increase net interest revenue. The programs were very successful in increasing core transaction deposit accounts and reducing more costly time deposit balances as United’s funding needs decreased due to lower loan demand. United has continued to pursue customer transaction deposits by stressing its high customer satisfaction scores.

Total deposits as of March 31, 2011 were $6.60 billion, an increase of $110 million, or 2%, from March 31, 2010. Total non-interest-bearing demand deposit accounts of $865 million increased $124 million, or 17%, due to the success of core deposit programs. Also impacted by the programs were NOW, money market and savings accounts of $2.48 billion which increased $221 million, or 10%, from March 31, 2010.

Total time deposits, excluding brokered deposits, as of March 31, 2011 were $2.57 billion, down $208 million from March 31, 2010. Time deposits less than $100,000 totaled $1.58 billion, a decrease of $66.6 million, or 4%, from a year ago. Time deposits of $100,000 and greater totaled $990 million as of March 31, 2011, a decrease of $142 million, or 13%, from March 31, 2010. United continued to offer low rates on certificates of deposit, allowing balances to decline as United’s funding needs declined due to weak loan demand.

Wholesale Funding

The Bank is a shareholder in the Federal Home Loan Bank (“FHLB”) of Atlanta. Through this affiliation, FHLB secured advances totaled $55.1 million and $114 million as of March 31, 2011 and 2010, respectively. United anticipates continued use of this short- and long-term source of funds. FHLB advances outstanding at March 31, 2011 had fixed interest rates ranging up to 4.49%. During the third quarter of 2010, United prepaid approximately $50 million of fixed-rate advances and incurred prepayment charges of $2.23 million. Additional information regarding FHLB advances is provided in Note 12 to the consolidated financial statements included in United’s 2010 Form 10-K.

At March 31, 2011 and 2010, United had $102 million in repurchase agreements and other short-term borrowings outstanding, United takes advantage of these additional sources of liquidity when rates are favorable compared to other forms of short-term borrowings, such as FHLB advances and brokered deposits.

Interest Rate Sensitivity Management

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

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

One of the tools management uses to estimate the sensitivity of net interest revenue to changes in interest rates is an asset/liability simulation model. Resulting estimates are based upon a number of assumptions for each scenario, including the level of balance sheet growth, loan and deposit repricing characteristics and the rate of prepayments. The ALCO regularly reviews the assumptions for accuracy based on historical data and future expectations, however, actual net interest revenue may differ from model results. The primary objective of the simulation model is to measure the potential change in net interest revenue over time using multiple interest rate scenarios. The base scenario assumes rates remain flat and is the scenario to which all others are compared in order to measure the change in net interest revenue. Policy limits are based on gradually rising and falling rate scenarios, which are compared to this base scenario. Another commonly analyzed scenario is a most-likely scenario that projects the expected change in rates based on the slope of the yield curve. Other scenarios analyzed may include rate shocks, narrowing or widening spreads, and yield curve steepening or flattening. While policy scenarios focus on a twelve month time frame, longer time horizons are also modeled.

United’s policy is based on the 12-month impact on net interest revenue of interest rate ramps that increase 200 basis points and decrease 200 basis points from the base scenario. In the ramp scenarios, rates change 25 basis points per month over the initial eight months. The policy limits the change in net interest revenue over the next 12 months to a 10% decrease in either scenario. The policy ramp and base scenarios assume a static balance sheet. Historically low rates on March 31, 2011 and 2010 made use of the down 200 basis points scenario problematic. At March 31, 2011 United’s simulation model indicated that a 200 basis point increase in rates would cause an approximate 3.39% increase in net interest revenue over the next twelve months, and a 25 basis point decrease would cause an approximate .09% increase in net interest revenue over the next twelve months. The increase of 3.39% in net interest revenue for a 200 basis point ramp up of interest rates was impacted by the significant amount of excess liquidity at March 31, 2011. If excess liquidity were reduced to a normal level, the 3.39% increase would be reduced to an increase of .11% which is consistent with our policy to manage our interest rate risk closer to a neutral position. At March 31, 2010, United’s simulation model indicated that a 200 basis point increase in rates would cause an approximate .65% increase in net interest revenue and a 25 basis point decrease in rates over the next twelve months would cause an approximate .77% increase in net interest revenue.

Interest rate sensitivity is a function of the repricing characteristics of the portfolio of assets and liabilities. These repricing characteristics are the time frames within which the interest-earning assets and interest-bearing liabilities are subject to change in interest rates either at replacement, repricing or maturity during the life of the instruments. Interest rate sensitivity management focuses on the maturity structure of assets and liabilities and their repricing characteristics during periods of changes in market interest rates. Effective interest rate sensitivity management seeks to ensure that both assets and liabilities respond to changes in interest rates within an acceptable timeframe, thereby minimizing the effect of interest rate changes on net interest revenue.

United may have some discretion in the extent and timing of deposit repricing depending upon the competitive pressures in the markets in which it operates. Changes in the mix of earning assets or supporting liabilities can either increase or decrease the net interest margin without affecting interest rate sensitivity. The interest rate spread between an asset and its supporting liability can vary significantly even when the timing of repricing for both the asset and the liability remains the same, due to the two instruments repricing according to different indices.

Varying interest rate environments can create unexpected changes in prepayment levels of assets and liabilities that are not reflected in an interest rate sensitivity gap analysis. These prepayments may have significant effect on the net interest margin. Because of these limitations, an interest sensitivity gap analysis alone generally does not provide an accurate assessment of exposure to changes in interest rates.

In order to manage its interest rate sensitivity, United periodically enters into off-balance sheet contracts that are considered derivative financial instruments. Derivative financial instruments can be a cost-effective and capital-effective means of modifying the repricing characteristics of on-balance sheet assets and liabilities. These contracts generally consist of interest rate swaps under which United pays a variable rate and receives a fixed rate and interest rate floor contracts where United pays a premium up front to a counterparty to the right to be compensated if a specified rate index falls below a pre-determined floor rate.

United’s derivative financial instruments are classified as either cash flow or fair value hedges. The change in fair value of cash flow hedges is recognized in other comprehensive income. Fair value hedges recognize currently in earnings both the effect of the change in the fair value of the derivative financial instrument and the offsetting effect of the change in fair value of the hedged asset or liability associated with the particular risk of that asset or liability being hedged. At March 31, 2011, United did not have any active derivative contracts outstanding.

From time to time, United will terminate swap or floor positions when conditions change and the position is no longer necessary to manage United’s overall sensitivity to changes in interest rates. In those situations where the terminated swap or floor was in an effective hedging relationship at the time of termination and the hedging relationship is expected to remain effective throughout the original term of the swap or floor, the resulting gain or loss is amortized over the remaining life of the original contract. For swap contracts, the gain or loss is amortized over the remaining original contract term using the straight line method of amortization. For floor contracts, the gain or loss is amortized over the remaining original contract term based on the original floorlet schedule. At March 31, 2011, United had $15.5 million in gains from terminated derivative positions included in other comprehensive income that will be amortized into earnings over their remaining original contract terms. Approximately $10.2 million is expected to be reclassified into interest revenue over the next twelve months.

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

Liquidity Management

The objective of liquidity management is to ensure that sufficient funding is available, at reasonable cost, to meet the ongoing operational cash needs and to take advantage of revenue producing opportunities as they arise. While the desired level of liquidity will vary depending upon a variety of factors, it is the primary goal of United to maintain a sufficient level of liquidity in all expected economic environments. Liquidity is defined as the ability to convert assets into cash or cash equivalents without significant loss and to raise additional funds by increasing liabilities. Liquidity management involves maintaining United’s ability to meet the daily cash flow requirements of the Bank’s customers, both depositors and borrowers. In addition, because United is a separate entity and apart from the Bank, it must provide for its own liquidity. United is responsible for the payment of dividends declared for its common and preferred shareholders, and interest and principal on any outstanding debt or trust preferred securities.

Two key objectives of asset/liability management are to provide for adequate liquidity in order to meet the needs of customers and to maintain an optimal balance between interest-sensitive assets and interest-sensitive liabilities to optimize net interest revenue. Daily monitoring of the sources and uses of funds is necessary to maintain a position that meets both requirements.

The asset portion of the balance sheet provides liquidity primarily through loan principal repayments and the maturities and sales of securities, as well as the ability to use these as collateral for borrowings on a secured basis. We also maintain excess funds in short-term interest-bearing assets that provide additional liquidity. Mortgage loans held for sale totaled $25.4 million at March 31, 2011, and typically turn over every 45 days as the closed loans are sold to investors in the secondary market. In addition, at March 31, 2011 United held $1.2 billion in excess liquidity including $470 million in short-term commercial paper, $440 million in balances in excess of reserve requirements at the Federal Reserve Bank and $300 million in floating rate mortgage-backed securities.

The liability section of the balance sheet provides liquidity through interest-bearing and noninterest-bearing deposit accounts. Federal funds purchased, Federal Reserve short-term borrowings, FHLB advances and securities sold under agreements to repurchase are additional sources of liquidity and represent United’s incremental borrowing capacity. These sources of liquidity are generally short-term in nature and are used as necessary to fund asset growth and meet other short-term liquidity needs.

Substantially all of the parent company’s liquidity is obtained from subsidiary service fees and dividends from the Bank, which is limited by applicable law.

At March 31, 2011, United had sufficient qualifying collateral to increase FHLB advances by $979 million and Federal Reserve discount window capacity of $149 million. United’s internal policy limits brokered deposits to 25% of total assets. At March 31, 2011, United had the capacity to increase brokered deposits by $1.24 billion, subject to certain regulatory approvals, and still remain within this limit. In addition to these wholesale sources, United has the ability to attract retail deposits at any time by competing more aggressively on pricing.

As disclosed in United’s consolidated statement of cash flows, net cash provided by operating activities was $40.1 million for the three months ended March 31, 2011. The net loss of $237 million for the three month period included non-cash expenses for the provision for loan losses of $190 million and losses and write downs on foreclosed property of $60.6 million. Net cash used in investing activities of $92.4 million consisted primarily of purchases of securities of $407 million and purchases of premises and equipment of $3.60 million, that were offset by proceeds from sales of securities of $51.2 million, maturities and calls of investment securities of $137 million, net proceeds from sales of other real estate and notes of $47.4 million, and a net decrease in loans of $93.9 million. Net cash provided by financing activities of $493 million consisted primarily of a net increase of $129 million in deposits and the proceeds from $363 million in newly issued common and preferred stock. In the opinion of management, United had a significant excess liquidity position at March 31, 2011, which was sufficient to meet its expected cash flow requirements.

Capital Resources and Dividends

Shareholders’ equity at March 31, 2011 was $586 million, an increase of $117 million from December 31, 2010. Accumulated other comprehensive income, which includes unrealized gains and losses on securities available for sale and the unrealized gains and losses on derivatives qualifying as cash flow hedges, is excluded in the calculation of regulatory capital adequacy ratios. Excluding the change in the accumulated other comprehensive income, shareholders’ equity increased $123 million from December 31, 2010.

During the first quarter of 2011, United closed the Private Placement. Pursuant to the Private Placement, the Investors purchased and United issued $3.29 million of the Company’s existing common stock, consisting of 3,467,699 shares, for $9.50 per share and issued $347 million in preferred stock consisting of 195,872 shares of Series F Preferred Stock, and 151,185 shares of Series G Preferred Stock. Under the terms of the Private Placement Agreement and following receipt of required shareholder approvals, the Series F Preferred Stock will be mandatorily convertible into 20,618,101 shares of voting common stock and the Series G Preferred Stock will be mandatorily convertible into 15,914,199 shares of non-voting common stock. Following such conversion, the Investors will own an aggregate of 24,085,801 shares of common stock and 15,914,199 shares of non-voting common stock. The Private Placement resulted in an increase to shareholders’ equity of $363 million.

On February 22, 2011, the Company entered into the Share Exchange Agreement with 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 Series D Preferred Shares and warrants to purchase 1,551,126 common shares.

United accrued $2.3 million in dividends on Series A and Series B preferred stock in the first quarter of 2011 as well as $173,000 in dividends on Series D preferred stock. United recognizes that cash dividends are an important component of shareholder value, and therefore, intends to provide for cash dividends when earnings, capital levels and other factors permit.

The Board Resolution provides that United may not incur additional indebtedness, pay cash dividends, make payments on our trust preferred securities or repurchase outstanding stock without prior approval of the Federal Reserve. We were not given permission to pay interest on our trust preferred securities and dividends on our preferred stock during the first quarter of 2011. As a result of such deferrals, United may not pay dividends on any of common or preferred stock or trust preferred securities until all accrued and unpaid amounts under the deferred securities have been paid. Effective April 15, 2011, United received approval from the Federal Reserve for payment of currently payable and previously deferred dividends and interest on its preferred stock and trust preferred securities.

The Bank is currently subject to a memorandum of understanding (“MOU”) which requires, among other things, that the Bank maintain its Tier 1 leverage ratio at not less than 8% and its total risk-based capital ratio at not less than 10% during the life of the MOU. Additionally, the MOU requires that, prior to declaring or paying any cash dividends to United, the Bank must obtain the written consent of its regulators.

United’s common stock trades on the Nasdaq Global Select Market under the symbol “UCBI”. Below is a quarterly schedule of high, low and closing stock prices and average daily volume for 2011 and 2010.

Table 13—Stock Price Information

		September 30,		September 30,		September 30,		September 30,		September 30,		September 30,		September 30,		September 30,
	2011								2010
							Avg Daily								Avg Daily
	High		Low		Close		Volume		High		Low		Close		Volume

First quarter	$	11.85	$	5.95	$	11.65		227,321	$	25.00	$	16.05	$	22.05		176,585
Second quarter										31.00		19.30		19.75		169,997
Third quarter										20.50		10.20		11.20		162,032
Fourth quarter										13.00		5.50		9.75		216,916

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

Under the risk-based capital guidelines, assets and credit equivalent amounts of derivatives and off-balance sheet items are assigned to one of several broad risk categories according to the obligor, or, if relevant, the guarantor or the nature of the collateral. The aggregate dollar amount in each risk category is then multiplied by the risk weight associated with the category. The resulting weighted values from each of the risk categories are added together, and generally this sum is the company’s total risk weighted assets. Risk-weighted assets for purposes of United’s capital ratios are calculated under these guidelines.

A minimum leverage ratio is required in addition to the risk-based capital standards and is defined as Tier I capital divided by average assets adjusted for goodwill and deposit-based intangibles. Although a minimum leverage ratio of 3% is required, the Federal Reserve Board requires a bank holding company to maintain a leverage ratio greater than 3% if it is experiencing or anticipating significant growth or is operating with less than well-diversified risks in the opinion of the Federal Reserve Board. The Federal Reserve Board uses the leverage and risk-based capital ratios to assess capital adequacy of banks and bank holding companies.

The following table shows United’s capital ratios, as calculated under regulatory guidelines, at March 31, 2011, December 31, 2010 and March 31, 2010.

Table 14—Capital Ratios

(dollars in thousands)

		00000			00000			00000			00000			00000			00000			00000			00000			00000
	Regulatory						United Community Banks, Inc.
	Guidelines						(Consolidated)												United Community Bank
							(As restated)						(As restated)						(As restated)			(As restated)
				Well			March 31, 2011						December 31,			March 31,			March 31,			December 31,			March 31,
	Minimum			Capitalized			Pro Forma ⁽¹⁾			Actual			2010			2010			2011			2010			2010
Risk-based ratios:
Tier I capital		4.0	%		6.0	%		13.03	%		7.43	%		9.81	%		11.72	%		12.71	%		10.85	%		12.52	%
Total capital		8.0			10.0			15.53			14.85			12.25			14.45			14.49			12.61			14.37
Leverage ratio		3.0			5.0			8.33			4.75			6.76			8.15			8.12			7.45			8.65
Tier I capital							$	613,428		$	349,734		$	489,279		$	622,287		$	597,963		$	540,183		$	664,163
Total capital								731,307			699,468			611,098			767,099			681,671			627,829			761,777

(1)	Pro forma ratios and capital amounts assume conversion of Series F and Series G preferred stock to common stock as of period-end. Conversion is mandatory following shareholder approval of the transaction which is expected at United’s annual sharehol

United’s Tier I capital excludes other comprehensive income, and consists of stockholders’ equity and qualifying capital securities, less goodwill and deposit-based intangibles. Tier II capital components include supplemental capital items such as a qualifying allowance for loan losses and qualifying subordinated debt. Tier I capital plus Tier II capital components is referred to as Total Risk-Based capital.

Effect of Inflation and Changing Prices

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

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

Item 3.

Quantitative and Qualitative Disclosure About Market Risk

There have been no material changes in United’s quantitative and qualitative disclosures about market risk as of March 31, 2011 from that presented in the Annual Report on Form 10-K for the year ended December 31, 2010. The interest rate sensitivity position at March 31, 2011 is included in management’s discussion and analysis on page 51 of this report.

Item 4.

Controls and Procedures

United’s management, including the Chief Executive Officer and Chief Financial Officer, supervised and participated in an evaluation of the Company’s disclosure controls and procedures as of March 31, 2011. Based on, and as of the date of that evaluation, United’s Chief Executive Officer and Chief Financial Officer initially concluded that the disclosure controls and procedures were effective in accumulating and communicating information to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures of that information under the Securities and Exchange Commission’s rules and forms and that the disclosure controls and procedures are designed to ensure that the information required to be disclosed in reports that are filed or submitted by United under the Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

Because of management’s subsequent decision to establish a full deferred tax asset valuation allowance as of December 31, 2010, and the resulting restatement of United’s consolidated financial statements described in more detail elsewhere in this Amendment, management has re-evaluated the effectiveness of United’s disclosure controls and procedures as of March 31, 2011. As a result of such re-evaluation, management, including the Chief Executive Officer and Chief Financial Officer, has determined that the restatement indicates there was a material weakness in United’s internal control over financial reporting as of March 31, 2011 and that United’s disclosure controls and procedures were not effective as of such date.

Specifically, management has determined that its application of ASC 740, Accounting for Income Taxes, was incorrect and that United did not have adequate controls in place to enable management to sufficiently analyze, evaluate and validate the positive and negative evidence supporting the valuation of our deferred tax assets. This deficiency, which resulted in the misstatement in United’s consolidated financial statements as of December 31, 2010, was a material weakness in United’s internal control over financial reporting as of December 31, 2010 and as of March 31, 2011. As a result, to address the above deficiency, management is currently evaluating specific additional procedures designed to increase the level of analysis, evaluation and validation of United’s valuation of deferred tax assets. No changes were made to United’s internal control over financial reporting during the first quarter of 2011 that materially affected, or are reasonably likely to materially affect, United’s internal control over financial reporting.

Part II.

Other Information

Item 1.

Legal Proceedings

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

Item 1A.

Risk Factors

There have been no material changes from the risk factors previously disclosed in United’s Form 10-K for the year ended December 31, 2010.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds – None

Item 3.

Defaults upon Senior Securities – None

Item 4.

(Removed and Reserved)

Item 5.

Other Information – None

Item 6.

Exhibits



3.1		Restated Articles of Incorporation of United Community Banks, Inc., as amended (incorporated herein by reference to Exhibit 3.1 to United Community Banks, Inc.’s Quarterly Report on Form 10-Q filed with the Commission on May 4, 2011.)

3.2		Amended and Restated Bylaws of United Community Banks, Inc., dated September 12, 1997, as amended (incorporated herein by reference to Exhibit 3.2 to United Community Banks, Inc.’s Quarterly Report on Form 10-Q filed with the Commission on May 4, 2011.)

4.1		See Exhibits 3.1 and 3.2 for provisions of the Restated Articles of Incorporation, as amended, and Amended and Restated Bylaws, as amended, which define the rights of security holders.



4.2		Tax Benefits Preservation Plan, dated as of February 22, 2011, by and between United Community Banks, Inc. and Illinois Stock Transfer Company, which includes the Company’s Articles of Amendment to its Restated Articles of Incorporation, setting forth the rights, restrictions, privileges and preferences of the Junior Participating Preferred Stock, Series E, as Exhibit A and Form of Right Certificate as Exhibit B (incorporated herein by reference to Exhibit 4.1 to United Community Banks, Inc.’s Current Report on Form 8-K, filed with the Commission on February 24, 2011.)

4.3		Form of Summary of Rights for Tax Benefits Preservation Plan, dated as of February 22, 2011, by and between United Community Banks, Inc. and Illinois Stock Transfer Company (incorporated herein by reference to Exhibit 4.2 to United Community Banks, Inc.’s Current Report on Form 8-K, filed with the Commission on February 24, 2011.)

4.4		Form of Warrant to Purchase Shares of Common Stock issued on February 22, 2011 (incorporated herein by reference to Exhibit 4.3 to United Community Banks, Inc.’s Current Report on Form 8-K, filed with the Commission on February 24, 2011.)

4.5		Amendment to Tax Benefits Preservation Plan, dated as of March 29, 2011, by and between United Community Banks, Inc. and Illinois Stock Transfer Company (incorporated herein by reference to Exhibit 4.1 to United Community Banks, Inc.’s Current Report on Form 8-K, filed with the Commission on March 31, 2011.)

10.1		Investment Agreement, dated as of March 16, 2011, between United Community Banks, Inc. and Corsair Georgia, L.P. (incorporated herein by reference to Exhibit 10.1 to United Community Banks, Inc.’s Current Report on Form 8-K, filed with the Commission on March 17, 2011.)

10.2		Form of Subscription Agreement, dated as of March 16, 2011, between United Community Banks, Inc. and each Additional Investor. (incorporated herein by reference to Exhibit 10.2 to United Community Banks, Inc.’s Current Report on Form 8-K, filed with the Commission on March 17, 2011.)

10.3		Asset Purchase and Sale Agreement dated April 18, 2011, among United Community Bank, CF Southeast, LLC and CF Southeast Trust 2011-1 (incorporated herein by reference to Exhibit 10.3 to United Community Banks, Inc.’s Form 10-Q filed with the Commission on May 4, 2011).

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

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

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

Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Amendment No. 1 to the Report to be signed on its behalf by the undersigned thereunto duly authorized.


UNITED COMMUNITY BANKS, INC.

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

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

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

		Date: February 9, 2012