UNITED COMMUNITY BANKS, INC.
Table of Contents

 
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
     
þ   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2006
OR
     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from                      to                     
Commission file number 0-21656
UNITED COMMUNITY BANKS, INC.
(Exact name of registrant as specified in its charter)
     
Georgia   58-1807304
     
(State of Incorporation)   (I.R.S. Employer Identification No.)
     
63 Highway 515
Blairsville, Georgia
  30512
     
Address of Principal
Executive Offices
  (Zip Code)
(706 ) 781-2265
 
(Telephone Number)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
YES þ NO o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (check one):
Large accelerated filer þ                Accelerated filer o                Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
YES o NO þ
Common stock, par value $1 per share: 40,178,533 shares
outstanding as of June 30, 2006
 
 

 


 

INDEX
         
       
 
       
       
 
       
    2  
 
       
    3  
 
       
    4  
 
       
    5  
 
       
    6  
 
       
    9  
 
       
    25  
 
       
    25  
 
       
       
 
       
    26  
    26  
    26  
    26  
    26  
    27  
    27  
 EX-10.1 AMENDMENT NO.2 TO KEY EMPLOYEE STOCK OPTION PLAN
 EX-31.1 SECTION 302 CERTIFICATION OF CEO
 EX-31.2 SECTION 302 CERTIFICATION OF CFO
 EX-32 SECTION 906 CERTIFICATION OF CEO/CFO

1


Table of Contents

Part I — Financial Information
Item 1 — Financial Statements
UNITED COMMUNITY BANKS, INC.
Consolidated Statement of Income (unaudited)
                                 
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
(in thousands, except per share data)   2006     2005     2006     2005  
 
Interest revenue:
                               
Loans, including fees
  $ 99,080     $ 69,446     $ 189,445     $ 132,913  
Investment securities:
                               
Taxable
    11,521       10,190       22,839       19,204  
Tax exempt
    509       528       1,023       1,053  
Federal funds sold and deposits in banks
    162       150       320       409  
 
                       
Total interest revenue
    111,272       80,314       213,627       153,579  
 
                       
 
                               
Interest expense:
                               
Deposits:
                               
Demand
    8,956       4,379       16,143       7,906  
Savings
    226       174       454       342  
Time
    29,599       15,019       54,985       28,027  
 
                       
Total deposit interest expense
    38,781       19,572       71,582       36,275  
Federal funds purchased, repurchase agreements, & other short-term borrowings
    2,078       1,185       3,560       2,072  
Federal Home Loan Bank advances
    6,380       6,565       13,009       12,222  
Long-term debt
    2,168       2,128       4,321       4,248  
 
                       
Total interest expense
    49,407       29,450       92,472       54,817  
 
                       
Net interest revenue
    61,865       50,864       121,155       98,762  
Provision for loan losses
    3,700       2,800       7,200       5,200  
 
                       
Net interest revenue after provision for loan losses
    58,165       48,064       113,955       93,562  
 
                       
 
                               
Fee revenue:
                               
Service charges and fees
    6,828       6,280       13,181       11,894  
Mortgage loan and other related fees
    1,708       1,742       3,221       3,225  
Consulting fees
    1,572       1,685       3,156       3,167  
Brokerage fees
    796       768       1,646       1,210  
Securities losses, net
          (2 )     (3 )     (2 )
Other
    1,072       1,706       2,533       2,885  
 
                       
Total fee revenue
    11,976       12,179       23,734       22,379  
 
                       
Total revenue
    70,141       60,243       137,689       115,941  
 
                       
 
                               
Operating expenses:
                               
Salaries and employee benefits
    28,307       25,274       55,950       47,509  
Communications and equipment
    3,731       3,115       7,107       6,097  
Occupancy
    2,916       2,718       5,848       5,386  
Advertising and public relations
    1,948       1,699       3,836       3,062  
Postage, printing and supplies
    1,289       1,369       2,805       2,720  
Professional fees
    1,069       1,071       2,230       2,109  
Amortization of intangibles
    503       503       1,006       1,006  
Other
    3,720       3,059       6,923       5,698  
 
                       
Total operating expenses
    43,483       38,808       85,705       73,587  
 
                       
Income before income taxes
    26,658       21,435       51,984       42,354  
Income taxes
    9,729       7,662       19,016       15,140  
 
                       
Net income
  $ 16,929     $ 13,773     $ 32,968     $ 27,214  
 
                       
 
                               
Net income available to common stockholders
  $ 16,924     $ 13,767     $ 32,958     $ 27,201  
 
                       
 
                               
Earnings per common share:
                               
Basic
  $ .42     $ .36     $ .82     $ .71  
Diluted
    .41       .35       .80       .69  
Dividends per common share:
    .08       .07       .16       .14  
Weighted average common shares outstanding:
                               
Basic
    40,156       38,270       40,122       38,234  
Diluted
    41,328       39,436       41,259       39,412  
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2


Table of Contents

UNITED COMMUNITY BANKS, INC.
Consolidated Balance Sheet
                         
    June 30,     December 31,     June 30,  
(in thousands, except share and per share data)   2006     2005     2005  
    (unaudited)     (audited)     (unaudited)  
ASSETS
                       
 
                       
Cash and due from banks
  $ 159,954     $ 121,963     $ 117,478  
Interest-bearing deposits in banks
    21,948       20,607       17,451  
 
                 
Cash and cash equivalents
    181,902       142,570       134,929  
 
                       
Securities available for sale
    974,524       990,687       990,500  
Mortgage loans held for sale
    24,000       22,335       34,095  
Loans, net of unearned income
    4,810,277       4,398,286       4,072,811  
Less allowance for loan losses
    58,508       53,595       49,873  
 
                 
Loans, net
    4,751,769       4,344,691       4,022,938  
 
                       
Premises and equipment, net
    124,018       112,887       105,469  
Accrued interest receivable
    44,187       37,197       31,909  
Goodwill and other intangible assets
    117,646       118,651       119,617  
Other assets
    113,090       96,738       100,785  
 
                 
Total assets
  $ 6,331,136     $ 5,865,756     $ 5,540,242  
 
                 
 
                       
LIABILITIES AND SHAREHOLDERS’ EQUITY
                       
Liabilities:
                       
Deposits:
                       
Demand
  $ 662,463     $ 602,525     $ 590,306  
Interest-bearing demand
    1,305,479       1,264,947       1,141,115  
Savings
    173,985       175,453       177,822  
Time:
                       
Less than $100,000
    1,388,009       1,218,277       1,041,680  
Greater than $100,000
    1,106,359       895,466       696,941  
Brokered
    340,355       320,932       311,362  
 
                 
Total deposits
    4,976,650       4,477,600       3,959,226  
 
                       
Federal funds purchased, repurchase agreements, & other short-term borrowings
    249,552       122,881       219,218  
Federal Home Loan Bank advances
    458,587       635,616       800,316  
Long-term debt
    111,869       111,869       111,869  
Accrued expenses and other liabilities
    38,181       45,104       33,619  
 
                 
Total liabilities
    5,834,839       5,393,070       5,124,248  
 
                 
 
                       
Shareholders’ equity:
                       
Preferred stock, $1 par value; $10 stated value; 10,000,000 shares authorized; 32,200, 32,200 and 37,200 shares issued and outstanding
    322       322       372  
Common stock, $1 par value; 100,000,000 shares authorized; 40,178,533, 40,019,853 and 38,407,874 shares issued
    40,179       40,020       38,408  
Common stock issuable; 19,712 and 9,948 shares as of June 30, 2006 and December 31, 2005, respectively
    544       271        
Capital surplus
    197,235       193,355       154,480  
Retained earnings
    277,086       250,563       226,546  
Treasury stock; 124,665 shares as of June 30, 2005, at cost
                (2,517 )
Accumulated other comprehensive loss
    (19,069 )     (11,845 )     (1,295 )
 
                 
Total shareholders’ equity
    496,297       472,686       415,994  
 
                       
 
                 
Total liabilities and shareholders’ equity
  $ 6,331,136     $ 5,865,756     $ 5,540,242  
 
                 
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

3


Table of Contents

UNITED COMMUNITY BANKS, INC.
Consolidated Statement of Changes in Shareholders’ Equity (unaudited)
For the Six Months Ended June 30,
                                                                 
                                                    Accumulated        
                    Common                             Other        
    Preferred     Common     Stock     Capital     Retained     Treasury     Comprehensive        
(in thousands, except share and per share data)   Stock     Stock     Issuable     Surplus     Earnings     Stock     Income (Loss)     Total  
 
Balance, December 31, 2004
  $ 448     $ 38,408     $     $ 155,076     $ 204,709     $ (4,413 )   $ 2,860     $ 397,088  
 
                                                               
Comprehensive income:
                                                               
Net income
                                    27,214                       27,214  
Other comprehensive loss:
                                                               
Unrealized holding losses on available for sale securities, net of deferred tax benefit and reclassification adjustment
                                                    (2,435 )     (2,435 )
Unrealized losses on derivative financial instruments qualifying as cash flow hedges, net of deferred tax benefit
                                                    (1,720 )     (1,720 )
 
                                                               
 
                                                         
Comprehensive income
                                    27,214               (4,155 )     23,059  
Retirement of preferred stock (7,600 shares)
    (76 )                                                     (76 )
Cash dividends declared on common stock ($.14 per share)
                                    (5,364 )                     (5,364 )
Exercise of stock options (111,619 shares)
                            (711 )             1,832               1,121  
Amortization of restricted stock
                            180                               180  
Vesting of restricted stock (4,062 shares)
                            (65 )             64               (1 )
Dividends declared on preferred stock ($.30 per share)
                                    (13 )                     (13 )
 
                                               
 
                                                               
Balance, June 30, 2005
  $ 372     $ 38,408     $     $ 154,480     $ 226,546     $ (2,517 )   $ (1,295 )   $ 415,994  
 
                                               
 
                                                               
Balance, December 31, 2005
  $ 322     $ 40,020     $ 271     $ 193,355     $ 250,563     $     $ (11,845 )   $ 472,686  
 
                                                               
Comprehensive income:
                                                               
Net income
                                    32,968                       32,968  
Other comprehensive income (loss):
                                                               
Unrealized holding losses on available for sale securities, net of deferred tax benefit and reclassification adjustment
                                                    (7,238 )     (7,238 )
Unrealized gains on derivative financial instruments qualifying as cash flow hedges, net of deferred tax expense
                                                    14       14  
 
                                                               
 
                                                         
Comprehensive income
                                    32,968               (7,224 )     25,744  
Cash dividends declared on common stock ($.16 per share)
                                    (6,435 )                     (6,435 )
Exercise of stock options (57,020 shares)
            58               450                               508  
Common stock issued to Dividend Reinvestment Plan and employee benefit plans (79,178 shares)
            79               2,116                               2,195  
Amortization of stock options and restricted stock
                            1,336                               1,336  
Vesting of restricted stock (22,482 shares)
            22               (22 )                              
Deferred compensation plan, net, including dividend equivalents
                    273                                       273  
Dividends declared on preferred stock ($.30 per share)
                                    (10 )                     (10 )
 
                                               
 
                                                               
Balance, June 30, 2006
  $ 322     $ 40,179     $ 544       197,235     $ 277,086     $     $ (19,069 )   $ 496,297  
 
                                               
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

4


Table of Contents

UNITED COMMUNITY BANKS, INC.
Consolidated Statement of Cash Flows (unaudited)
                 
    Six Months Ended  
    June 30,  
(in thousands)   2006     2005  
 
Operating activities:
               
Net income
  $ 32,968     $ 27,214  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation, amortization and accretion
    8,398       7,785  
Provision for loan losses
    7,200       5,200  
Stock based compensation
    1,336       180  
Loss on sale of securities available for sale
    3       2  
Gain on sale of other assets
    (184 )     (556 )
Changes in assets and liabilities:
               
Other assets and accrued interest receivable
    (18,531 )     (13,936 )
Accrued expenses and other liabilities
    (7,046 )     3,342  
Mortgage loans held for sale
    (1,665 )     2,999  
 
           
Net cash provided by operating activities
    22,479       32,230  
 
           
 
               
Investing activities:
               
Proceeds from sales of securities available for sale
    7,649       1,307  
Proceeds from maturities and calls of securities available for sale
    58,992       117,778  
Purchases of securities available for sale
    (63,251 )     (226,551 )
Net increase in loans
    (417,495 )     (342,800 )
Proceeds from sales of premises and equipment
    1,289       2,756  
Purchases of premises and equipment
    (17,079 )     (8,508 )
Proceeds from sale of other real estate
    1,359       710  
 
           
Net cash used by investing activities
    (428,536 )     (455,308 )
 
           
 
               
Financing activities:
               
Net change in deposits
    499,050       278,710  
Net change in federal funds purchased, repurchase agreements, and other short-term borrowings
    126,671       86,287  
Proceeds from FHLB advances
          438,600  
Repayments of FHLB advances
    (177,000 )     (376,100 )
Proceeds from exercise of stock options
    508       1,121  
Proceeds from issuance of common stock for dividend reinvestment and employee benefit plans
    2,195        
Retirement of preferred stock
          (76 )
Cash dividends on common stock
    (6,025 )     (5,362 )
Cash dividends on preferred stock
    (10 )     (13 )
 
           
Net cash provided by financing activities
    445,389       423,167  
 
           
 
               
Net change in cash and cash equivalents
    39,332       89  
 
               
Cash and cash equivalents at beginning of period
    142,570       134,840  
 
           
 
               
Cash and cash equivalents at end of period
  $ 181,902     $ 134,929  
 
           
 
               
Supplemental disclosures of cash flow information:
               
Cash paid during the period for:
               
Interest
  $ 90,118     $ 52,899  
Income taxes
    21,552       15,369  
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

5


Table of Contents

United Community Banks, Inc.
Notes to Consolidated Financial Statements
Note 1 — Accounting Policies
     The accounting and financial reporting policies of United Community Banks, Inc. (“United”) and its subsidiaries conform to accounting principles generally accepted in the United States of America and general banking industry practices. The accompanying interim consolidated financial statements have not been audited. All material intercompany balances and transactions have been eliminated. A more detailed description of United’s accounting policies is included in the 2005 annual report filed on Form 10-K.
     In management’s opinion, all accounting adjustments necessary to accurately reflect the financial position and results of operations on the accompanying financial statements have been made. These adjustments are normal and recurring accruals considered necessary for a fair and accurate presentation. The results for interim periods are not necessarily indicative of results for the full year or any other interim periods.
Note 2 — Stock-Based Compensation
     United has applied the modified prospective method with the adoption of Statement of Financial Accounting Standards (SFAS) 123(R), effective January 1, 2006. Consequently, the financial statements for prior interim periods and fiscal years do not reflect any adjustments. The following table shows pro forma net income available to common shareholders and basic and diluted earnings per share as if United had adopted the fair value method of recognizing option expense for all periods presented (dollars in thousands, except per share data).
                                 
    Three Months Ended   Six Months Ended
    June 30,   June 30,
    2006   2005   2006   2005
Net income available to common shareholders:
                               
As reported
  $ 16,924     $ 13,767     $ 32,958     $ 27,201  
Pro forma
    16,924       13,360       32,958       26,454  
 
                               
Basic earnings per common share:
                               
As reported
    .42       .36       .82       .71  
Pro forma
    .42       .35       .82       .69  
 
                               
Diluted earnings per common share:
                               
As reported
    .41       .35       .80       .69  
Pro forma
    .41       .34       .80       .67  
     United has an equity compensation plan that allows for grants of incentive stock options, nonqualified stock options, restricted stock (also referred to as “nonvested stock”), restricted stock units, stock awards, performance share awards or stock appreciation rights. Options granted under the plan have an exercise price equal to the fair market value of the underlying stock at the date of grant. The number of awards available for grant is adjusted with the change in the number of shares outstanding in accordance with the terms of the plan. 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 grants provide for accelerated vesting if there is a change in control (as defined in the plan). As of June 30, 2006, approximately 697,000 awards could be granted under the plan. Through June 30, 2006, only incentive stock options, nonqualified stock options and restricted stock had been granted under the plan. The following table shows option activity for the first six months of 2006.
                                 
                    Weighted-        
                    Average     Aggregate  
            Weighted-     Remaining     Intrinisic  
            Average Exercise     Contractual     Value  
Options   Shares     Price     Term     ($000)  
Outstanding at December 31, 2005
    2,220,340     $ 16.36                  
Granted
    461,150       28.83                  
Exercised
    (63,030 )     10.87                  
Forfeited
    (18,725 )     23.54                  
Expired
    (500 )     28.66                  
 
                             
Outstanding at June 30, 2006
    2,599,235     $ 18.65       6.8     $ 30,651  
 
                       
 
                               
Exercisable at June 30, 2006
    1,549,603     $ 14.37       5.4     $ 24,910  
 
                       

6


Table of Contents

     The weighted average fair value of options granted in the first six months of 2006 and 2005 was $8.63 and $5.69, respectively. The fair value of each option granted was estimated on the date of grant using the Black-Scholes model. The key assumptions used to determine the fair value of options are presented in the table below.
                 
    Six Months Ended
    June 30,
    2006   2005
Expected volatility
    22 %     20 %
Expected dividend yield
  1.1% to 1.2%   1.1% to 1.3%
Expected life (in years)
    6.25       6.25  
Risk-free rate
  4.3% to 5.1%   3.8% to 4.4%
     United’s stock trading history began in March of 2002 when United listed on the Nasdaq Global Market. For the first six months of 2006 and 2005, expected volatility was determined using United’s historical monthly volatility over the period beginning in March of 2002 through the end of the last completed year. Compensation expense relating to options of $873,000, net of deferred tax benefit of $111,000, was included in earnings for the first six months of 2006. In 2005, compensation expense relating to options of $747,000, net of deferred tax benefit of $72,000, was not included in earnings but has been included in the pro forma results in this note for comparative purposes. The amount of compensation expense for both periods was determined based on the fair value of the options at the time of grant, multiplied by the number of options granted that were expected to vest, which was then amortized, net of any applicable tax benefit, over the vesting period. The forfeiture rate for options is estimated to be approximately 3% per year. The total intrinsic value of options exercised during the six months ended June 30, 2006 was $1.1 million.
     The table below presents the activity in restricted stock for the first six months of 2006.
                 
            Weighted-  
            Average Grant-  
Restricted Stock   Shares     Date Fair Value  
Outstanding at December 31, 2005
    70,512     $ 23.22  
Granted
    30,625       28.75  
Vested
    (22,482 )     23.00  
 
             
Outstanding at June 30, 2006
    78,655     $ 25.44  
 
           
     For the six months ended June 30, 2006 and 2005, additional compensation expense of $352,000 and $180,000, respectively, was recognized related to restricted stock. The total intrinsic value of the restricted stock was $2.4 million at June 30, 2006.
     As of June 30, 2006, there was $7.9 million of unrecognized compensation cost related to nonvested stock options and restricted stock 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 shares vested during the six months ended June 30, 2006, was $2.3 million.
Note 3 — Common Stock Issued / Common Stock Issuable
     In August 2005 United established a Dividend Reinvestment and Share Purchase Plan (DRIP). Under the plan, shareholders of record can voluntarily reinvest all or a portion of their cash dividends into shares of United’s common stock, as well as purchase additional stock through the plan for cash. United’s 401(k) retirement plan regularly purchases shares of United’s common stock directly from United. In addition, United started an Employee Stock Purchase Program (ESPP) on January 1, 2006. Under this plan, eligible employees have the opportunity to purchase shares of common stock at a 5% discount, with no commission charges. For the first six months of 2006, United issued 79,178 shares of common stock and increased capital by $2.2 million through both of these plans.
     In the fourth quarter of 2005, United began offering its common stock as an investment option in its deferred compensation plan. The common stock component is accounted for as an equity instrument and is reflected in the consolidated financial statements as common stock issuable. At June 30, 2006, 19,712 shares were issuable under the deferred compensation plan.

7


Table of Contents

Note 4 — Earnings Per Share
     The following table sets forth the computation of basic and diluted earnings per share for the three and six months ended June 30.
(in thousands, except per share data)
                                 
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
    2006     2005     2006     2005  
Basic earnings per share:
                               
Weighted average shares outstanding
    40,156       38,270       40,122       38,234  
 
                               
Net income available to common shareholders
  $ 16,924     $ 13,767     $ 32,958     $ 27,201  
 
                       
Basic earnings per share
  $ .42     $ .36     $ .82     $ .71  
 
                       
 
                               
Diluted earnings per share:
                               
Weighted average shares outstanding
    40,156       38,270       40,122       38,234  
Net effect of the assumed exercise of stock options based on the treasury stock method using average market price for the period
    800       794       765       806  
Effect of conversion of subordinated debt
    372       372       372       372  
 
                       
Total weighted average shares and common stock equivalents outstanding
    41,328       39,436       41,259       39,412  
 
                       
 
                               
Net income available to common shareholders
  $ 16,924     $ 13,767     $ 32,958     $ 27,201  
Income effect of conversion of subordinated debt, net of tax
    41       32       79       60  
 
                       
Net income, adjusted for effect of conversion of subordinated debt, net of tax
  $ 16,965     $ 13,799     $ 33,037     $ 27,261  
 
                       
 
                               
Diluted earnings per share
  $ .41     $ .35     $ .80     $ .69  
 
                       
Note 5 — Mergers and Acquisitions
     At June 30, 2006, accrued merger costs of $1.3 million remained unpaid relating to acquisitions closed in 2004 and 2003. Severance and related costs include change in control payments for which payment had been deferred. Professional fees include remaining legal fees related to the two business combinations completed during the fourth quarter of 2004. Contract termination costs include amounts claimed by service providers as a result of early termination of service contracts related to the acquisitions. The unpaid balance at June 30, 2006 relates to one contract termination charge that is in dispute. A summary of the activities related to accrued merger costs is shown below (in thousands):
Activity with accrued merger cost
For the Six Months Ended June 30, 2006
                         
    Beginning             Ending  
    Balance     Amounts Paid     Balance  
Severance and related costs
  $ 336     $ (17 )   $ 319  
Professional fees
    81       (21 )     60  
Contract termination costs
    816             816  
Other merger-related expenses
    85       (4 )     81  
 
                 
Totals
  $ 1,318     $ (42 )   $ 1,276  
 
                 
Note 6 — Reclassification
     Certain amounts for the comparative periods of 2005 have been reclassified to conform to the 2006 presentation.

8


Table of Contents

Note 7 — Recent Accounting Pronouncements
Accounting for Uncertainty in Income Taxes
     In June 2006, the Financial Accounting Standards Board (“FASB”) issued Financial Interpretation No. 48 (“FIN 48”) Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in the financial statements and prescribes a recognition threshold and measurement attribute for a tax position taken or expected to be taken in a tax return. This interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. This interpretation will be effective for United beginning in January of 2007. United is in the process of assessing the impact of this interpretation on its financial position and results of operations.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
     This Form 10-Q contains forward-looking statements regarding United Community Banks, Inc. (“United”), including, without limitation, statements relating to United’s expectations with respect to revenue, credit losses, levels of nonperforming assets, expenses, earnings and other measures of financial performance. Words such as “may”, “could”, “would”, “should”, “believes”, “expects”, “anticipates”, “estimates”, “intends”, “plans”, “targets” or similar expressions are intended to identify forward-looking statements. These forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties that are subject to change based on various factors (many of which are beyond United’s control). The following factors, among others, could cause United’s financial performance to differ materially from the expectations expressed in such forward-looking statements:
    our recent operating results may not be indicative of future operating results;
 
    our corporate culture has contributed to our success and, if we cannot maintain this culture as we grow, we could lose the productivity fostered by our culture, which could harm our business;
 
    we may face risks with respect to future expansion and acquisitions or mergers;
 
    changes in prevailing interest rates may negatively affect our net income and the value of our assets;
 
    our construction and land development loans are subject to unique risks that could adversely affect our earnings;
 
    if our allowance for loan losses is not sufficient to cover actual loan losses, our earnings would decrease;
 
    competition from financial institutions and other financial service providers may adversely affect our profitability;
 
    business increases, productivity gains and other investments are lower than expected or do not occur as quickly as anticipated;
 
    competitive pressures among financial services companies increase significantly;
 
    the strength of the United States economy in general and/or the strength of the local economies of the states in which United conducts operations changes;
 
    trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System, change;
 
    inflation or market conditions fluctuate;
 
    conditions in the stock market, the public debt market and other capital markets deteriorate;
 
    financial services laws and regulations change;
 
    technology changes and United fails to adapt to those changes;
 
    consumer spending and saving habits change;
 
    unanticipated regulatory or judicial proceedings occur; and
 
    United is unsuccessful at managing the risks involved in the foregoing.
     Additional information with respect to factors that may cause actual results to differ materially from those contemplated by such forward-looking statements may also be included in other reports that United files with the Securities and Exchange Commission. United cautions that the foregoing list of factors is not exclusive and not to place undue reliance on forward-looking statements. United does not intend to update any forward-looking statement, whether written or oral, relating to the matters discussed in this Form 10-Q.

9


Table of Contents

Overview
     United is a bank holding company registered with the Federal Reserve under the Bank Holding Company Act of 1956 that was incorporated under the laws of the state of Georgia in 1987 and commenced operations in 1988. At June 30, 2006, United had total consolidated assets of $6.3 billion, total loans of $4.8 billion, total deposits of $5.0 billion and stockholders’ equity of $496 million.
     United’s activities are primarily conducted by its two wholly-owned Georgia and North Carolina banking subsidiaries (which are collectively referred to as the “Banks” in this discussion) and Brintech, Inc., a consulting firm providing professional services to the financial services industry. Effective April 1, 2006, United merged its Tennessee banking subsidiary into its Georgia banking subsidiary.
Critical Accounting Policies
     The accounting and reporting policies of United Community Banks and its subsidiaries are in accordance with accounting principles generally accepted in the United States and conform to general practices within the banking industry. The more critical accounting and reporting policies include United’s accounting for the allowance for loan losses. In particular, United’s accounting policies relating to the allowance for loan losses involve the use of estimates and require significant judgment to be made by management. Different assumptions in the application of these policies could result in material changes in United’s consolidated financial position or consolidated results of operations. See “Asset Quality and Risk Elements” herein for additional discussion of United’s accounting methodologies related to the allowance.
Results of Operations
     Net income was $16.9 million for the second quarter of 2006, an increase of $3.2 million, or 23%, from the same period in 2005. Diluted earnings per share was $.41 for the second quarter of 2006, compared with $.35 for the second quarter of 2005, an increase of 17%. Return on tangible equity for the second quarter was 17.68% for 2006, compared with 19.21% for 2005. Return on assets for the second quarter was 1.10% for 2006, compared with 1.03% for 2005.
     Year-to-date through June 30, net income was $33.0 million compared to $27.2 million for the first six months of 2005, an increase of 21%. Diluted earnings per share was $.80 for the six months ended June 30, 2006, compared with $.69 for the same period in 2005, an increase of 16%. Return on tangible equity for the first six months of 2006 was 17.67% compared to 19.52% for the first six months of 2005. The decrease in return on tangible equity reflects the $40.5 million in equity added by United’s fourth quarter stock offer. Return on assets for the six months ended June 30, 2006 was 1.10% compared to 1.04% for the six months ended June 30, 2005.

10


Table of Contents

Table 1 — Financial Highlights
Selected Financial Information
                                                                         
                                            Second              
    2006     2005     Quarter     For the Six     YTD  
(in thousands, except per share   Second     First     Fourth     Third     Second     2006-2005     Months Ended     2006-2005  
data; taxable equivalent)   Quarter     Quarter     Quarter     Quarter     Quarter     Change     2006     2005     Change  
INCOME SUMMARY
                                                                       
Interest revenue
  $ 111,728     $ 102,797     $ 95,465     $ 89,003     $ 80,701             $ 214,525     $ 154,350          
Interest expense
    49,407       43,065       38,576       34,033       29,450               92,472       54,817          
 
                                                     
Net interest revenue
    62,321       59,732       56,889       54,970       51,251       22 %     122,053       99,533       23 %
Provision for loan losses
    3,700       3,500       3,500       3,400       2,800               7,200       5,200          
Fee revenue
    11,976       11,758       11,373       12,396       12,179       (2 )     23,734       22,379       6  
 
                                                     
Total revenue
    70,597       67,990       64,762       63,966       60,630       16       138,587       116,712       19  
Operating expenses
    43,483       42,222       40,520       41,294       38,808       12       85,705       73,587       16  
 
                                                     
Income before taxes
    27,114       25,768       24,242       22,672       21,822       24       52,882       43,125       23  
Income taxes
    10,185       9,729       9,012       8,374       8,049               19,914       15,911          
 
                                                     
Net income
  $ 16,929     $ 16,039     $ 15,230     $ 14,298     $ 13,773       23     $ 32,968     $ 27,214       21  
 
                                                     
 
                                                                       
PERFORMANCE MEASURES
                                                                       
Per common share:
                                                                       
Basic earnings
  $ .42     $ .40     $ .39     $ .37     $ .36       17     $ .82     $ .71       15  
Diluted earnings
    .41       .39       .38       .36       .35       17       .80       .69       16  
Cash dividends declared
    .08       .08       .07       .07       .07       14       .16       .14       14  
Book value
    12.34       12.09       11.80       11.04       10.86       14       12.34       10.86       14  
Tangible book value (2)
    9.50       9.25       8.94       8.05       7.85       21       9.50       7.85       21  
Key performance ratios:
                                                                       
Return on tangible equity (1)(2)(3)
    17.68 %     17.66 %     18.20 %     18.90 %     19.21 %             17.67 %     19.52 %        
Return on equity (1)(3)
    13.41       13.25       13.30       13.42       13.46               13.33       13.57          
Return on assets (3)
    1.10       1.09       1.05       1.01       1.03               1.10       1.04          
Net interest margin (3)
    4.34       4.33       4.20       4.17       4.12               4.34       4.09          
Efficiency ratio
    58.53       59.06       58.80       61.16       61.18               58.79       60.36          
Dividend payout ratio
    19.05       20.00       17.95       18.92       19.44               19.51       19.72          
Equity to assets
    7.95       8.04       7.69       7.46       7.65               7.99       7.68          
Tangible equity to assets (2)
    6.22       6.24       5.82       5.53       5.62               6.23       5.60          
 
                                                                       
ASSET QUALITY
                                                                       
Allowance for loan losses
  $ 58,508     $ 55,850     $ 53,595     $ 51,888     $ 49,873             $ 58,508     $ 49,873          
Non-performing assets
    8,805       8,367       12,995       13,565       13,495               8,805       13,495          
Net charge-offs
    1,042       1,245       1,793       1,385       1,380               2,287       2,523          
Allowance for loan losses to loans
    1.22 %     1.22 %     1.22 %     1.22 %     1.22 %             1.22 %     1.22 %        
Non-performing assets to total assets
    .14       .14       .22       .24       .24               .14       .24          
Net charge-offs to average loans (3)
    .09       .11       .16       .13       .14               .10       .13          
 
                                                                       
AVERAGE BALANCES
                                                                       
Loans
  $ 4,690,196     $ 4,505,494     $ 4,328,613     $ 4,169,170     $ 3,942,077       19     $ 4,598,355     $ 3,870,177       19  
Investment securities
    1,039,707       1,038,683       1,004,966       1,008,687       996,096       4       1,039,198       971,283       7  
Earning assets
    5,758,697       5,574,712       5,383,096       5,239,195       4,986,339       15       5,667,213       4,903,610       16  
Total assets
    6,159,152       5,960,801       5,769,632       5,608,158       5,338,398       15       6,060,526       5,251,913       15  
Deposits
    4,842,389       4,613,810       4,354,275       4,078,437       3,853,884       26       4,728,731       3,786,276       25  
Stockholders’ equity
    489,821       478,960       443,746       418,459       408,352       20       484,420       403,286       20  
Common shares outstanding:
                                                                       
Basic
    40,156       40,088       39,084       38,345       38,270               40,122       38,234          
Diluted
    41,328       41,190       40,379       39,670       39,436               41,259       39,412          
 
                                                                       
AT PERIOD END
                                                                       
Loans
  $ 4,810,277     $ 4,584,155     $ 4,398,286     $ 4,254,051     $ 4,072,811       18     $ 4,810,277     $ 4,072,811       18  
Investment securities
    974,524       983,846       990,687       945,922       990,500       (2 )     974,524       990,500       (2 )
Earning assets
    5,862,614       5,633,381       5,470,718       5,302,532       5,161,067       14       5,862,614       5,161,067       14  
Total assets
    6,331,136       6,070,596       5,865,756       5,709,666       5,540,242       14       6,331,136       5,540,242       14  
Deposits
    4,976,650       4,748,438       4,477,600       4,196,369       3,959,226       26       4,976,650       3,959,226       26  
Stockholders’ equity
    496,297       485,414       472,686       424,000       415,994       19       496,297       415,994       19  
Common shares outstanding
    40,179       40,119       40,020       38,383       38,283               40,179       38,283          
 
(1)   Net income available to common stockholders, which excludes preferred stock dividends, divided by average realized common equity, which excludes accumulated other comprehensive income (loss).
 
(2)   Excludes effect of acquisition related intangibles and associated amortization.
 
(3)   Annualized.

11


Table of Contents

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 an optimal level of revenue while balancing interest rate, credit and liquidity risks. Net interest revenue for the second quarter 2006 was $62.3 million, up 22% over last year. Year-to-date net interest revenue of $122.1 million increased 23% as compared to the first six months of 2005. The increase for the second quarter of 2006 was driven by strong loan growth funded by customer deposit growth and a 22 basis point widening of the net interest margin to 4.34%. Average loans for the second quarter increased $748 million, or 19%, from the second quarter of 2005, and year to date average loans increased $728 million, or 19% from the first six months of 2005. This loan growth was due to the continued high loan demand across all markets and the generation of loans at de novo offices. Period end loan balances for the second quarter of 2006 increased $737 million as compared with June 30, 2005. Of this increase, $463 million was in the North Georgia markets (which includes $216 million in Gainesville / Hall County related to the de novo expansion in May 2005), $67 million in western North Carolina, $159 million in the metro Atlanta market, $18 million in east Tennessee, and $30 million in the coastal Georgia markets.
     Average interest-earning assets for the second quarter and first six months of 2006 increased $772.4 million, or 15%, and $763.6 million, or 16%, respectively, over the same periods in 2005. These increases reflect strong organic loan growth, as well as a modest increase in the average investment securities portfolio. The majority of the increase in interest-earning assets was funded by interest-bearing sources resulting in increases in average interest-bearing liabilities for the second quarter and year-to-date of approximately $643.7 million and $626.4 million, respectively, as compared with the same periods in 2005.
     The banking industry uses two ratios to measure relative profitability of net interest revenue. The net interest rate 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 impact of non-interest-bearing sources of funds and gives a direct perspective on the effect of market interest rate movements. The net interest margin is defined as net interest revenue as a percent of average total interest-earning assets and takes into account the positive impact of investing non interest-bearing deposits and capital.
     For the three months ended June 30, 2006 and 2005, the net interest spread was 3.80% and 3.76%, respectively, while the net interest margin was 4.34% and 4.12%, respectively. For the first six months of 2006 and 2005, the net interest spread was 3.82% and 3.75%, respectively, while the net interest margin was 4.34% and 4.09%, respectively. Since June of 2004, the Federal Reserve has increased the federal funds rate 17 times for a total of 425 basis points. This had a positive impact on net interest revenue and net interest margin due to United’s slightly asset sensitive balance sheet. The widening of the spread was primarily attributed to United’s ability to reprice deposits slower and less substantially than loans in response to the rise in short-term interest rates. Also contributing to the improvement in the net interest spread was a significant increase in deposits. United was able to remain competitive in deposit pricing but still gather deposits below wholesale borrowing rates. The shift from relatively higher-priced wholesale funding sources to lower cost deposits favorably impacted both the net interest spread and net interest margin.
     The increases in the prime and federal funds rates, which effect variable rate assets and liabilities, along with the loan growth mentioned above were the two primary reasons for the increases in the net interest margin and net interest revenue. Most of the loan growth added over the last three years has been prime-based, adjusted daily. At June 30, 2006, United had approximately $2.8 billion in loans indexed to the daily Prime Rate published in the Wall Street Journal compared with $2.3 billion a year ago. At June 30, 2006 and 2005, United had receive-fixed swap contracts with a total notional value of $314 million and $538 million, respectively, that were used to reduce United’s exposure to changes in interest rates that were accounted for as cash flow hedges of prime-based loans. The use of swap contracts is more fully explained in the Interest Rate Sensitivity Management section of this report beginning on page 21.
     The average yield on interest-earning assets for the second quarter was 7.78%, compared with 6.49% in the second quarter of 2005. Year-to-date average yield on interest-earning assets was 7.63%, compared with 6.34% for the first six months of 2005. Loan yields for the second quarter and the first six months of 2006 were up 143 and 141 basis points, respectively, as compared to the same periods of 2005, due to the higher aggregate balance of prime-based, adjusted daily loans and the increases in the prime lending rate.
     The average cost of interest-bearing liabilities for the second quarter was 3.98%, an increase of 125 basis points from the second quarter of 2005. Year-to-date average cost of interest-bearing liabilities was 3.81%, an increase of 122 basis points from the first six months of 2005. The increase reflects the impact of rising rates on United’s floating rate sources of funding and increased deposit pricing in selected products and markets. The impact of these increases on the overall cost of funds was partially offset by the changing liability mix out of wholesale borrowings to lower cost deposits.

12


Table of Contents

     The following table shows the relationship between interest revenue and expense and the average balances of interest-earning assets and interest-bearing liabilities for the three months ended June 30, 2006 and 2005.
Table 2 — Average Consolidated Balance Sheets and Net Interest Analysis
For the Three Months Ended June 30,
                                                 
    2006     2005  
    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)
  $ 4,690,196     $ 98,965       8.46 %   $ 3,942,077     $ 69,130       7.03 %
Taxable securities (3)
    991,701       11,521       4.65       946,543       10,190       4.31  
Tax-exempt securities (1) (3)
    48,006       837       6.98       49,553       869       7.01  
Federal funds sold and other interest-earning assets
    28,794       405       5.63       48,166       512       4.25  
 
                                       
 
                                               
Total interest-earning assets
    5,758,697       111,728       7.78       4,986,339       80,701       6.49  
 
                                       
Non-interest-earning assets:
                                               
Allowance for loan losses
    (57,654 )                     (49,576 )                
Cash and due from banks
    129,389                       94,488                  
Premises and equipment
    120,870                       103,439                  
Other assets (3)
    207,850                       203,708                  
 
                                           
Total assets
  $ 6,159,152                     $ 5,338,398                  
 
                                           
 
                                               
Liabilities and Stockholders’ Equity:
                                               
Interest-bearing liabilities:
                                               
Interest-bearing deposits:
                                               
Transaction accounts
  $ 1,282,798       8,956       2.80     $ 1,109,861       4,379       1.58  
Savings deposits
    174,533       226       .52       176,624       174       .40  
Time deposits less than $100,000
    1,344,861       14,066       4.20       1,025,236       7,307       2.86  
Time deposits greater than $100,000
    1,061,249       12,147       4.59       661,214       5,515       3.35  
Brokered deposits
    327,962       3,386       4.14       311,933       2,197       2.83  
 
                                       
Total interest-bearing deposits
    4,191,403       38,781       3.71       3,284,868       19,572       2.39  
 
                                       
 
                                               
Federal funds purchased & other borrowings
    165,563       2,078       5.03       149,438       1,185       3.18  
Federal Home Loan Bank advances
    506,531       6,380       5.05       785,523       6,565       3.35  
Long-term debt
    111,869       2,168       7.77       111,868       2,128       7.63  
 
                                       
Total borrowed funds
    783,963       10,626       5.44       1,046,829       9,878       3.78  
 
                                       
 
                                               
Total interest-bearing liabilities
    4,975,366       49,407       3.98       4,331,697       29,450       2.73  
 
                                           
Non-interest-bearing liabilities:
                                               
Non-interest-bearing deposits
    650,986                       569,016                  
Other liabilities
    42,979                       29,333                  
 
                                           
Total liabilities
    5,669,331                       4,930,046                  
Stockholders’ equity
    489,821                       408,352                  
 
                                           
Total liabilities and stockholders’ equity
  $ 6,159,152                     $ 5,338,398                  
 
                                           
 
                                               
Net interest revenue
          $ 62,321                     $ 51,251          
 
                                           
Net interest-rate spread
                    3.80 %                     3.76 %
 
                                           
 
                                               
Net interest margin (4)
                    4.34 %                     4.12 %
 
                                           
 
(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 tax rate and the federal tax adjusted state tax rate.
 
(2)   Included in the average balance of loans outstanding are loans where the accrual of interest has been discontinued.
 
(3)   Securities available for sale are shown at amortized cost. Pretax unrealized losses of $21.6 million and $782,000 in 2006 and 2005, respectively, 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.

13


Table of Contents

     The following table shows the relationship between interest revenue and expense and the average balances of interest-earning assets and interest-bearing liabilities for the six months ended June 30, 2006 and 2005.
Table 2 — Average Consolidated Balance Sheets and Net Interest Analysis
For the Six Months Ended June 30,
                                                 
    2006     2005  
    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)
  $ 4,598,355     $ 189,219       8.30 %   $ 3,870,177     $ 132,266       6.89 %
Taxable securities (3)
    990,698       22,839       4.61       921,564       19,204       4.17  
Tax-exempt securities (1) (3)
    48,500       1,683       6.94       49,719       1,733       6.97  
Federal funds sold and other interest-earning assets
    29,660       784       5.29       62,150       1,147       3.69  
 
                                       
 
                                               
Total interest-earning assets
    5,667,213       214,525       7.63       4,903,610       154,350       6.34  
 
                                       
Non-interest-earning assets:
                                               
Allowance for loan losses
    (56,247 )                     (48,869 )                
Cash and due from banks
    125,957                       93,446                  
Premises and equipment
    118,245                       102,927                  
Other assets (3)
    205,358                       200,799                  
 
                                           
Total assets
  $ 6,060,526                     $ 5,251,913                  
 
                                           
 
                                               
Liabilities and Stockholders’ Equity:
                                               
Interest-bearing liabilities:
                                               
Interest-bearing deposits:
                                               
Transaction accounts
  $ 1,264,373     $ 16,143       2.57     $ 1,092,181     $ 7,906       1.46  
Savings deposits
    175,161       454       .52       175,033       342       .39  
Time deposits less than $100,000
    1,307,676       26,101       4.03       1,010,395       13,769       2.75  
Time deposits greater than $100,000
    1,020,682       22,556       4.46       626,918       9,884       3.18  
Brokered deposits
    321,562       6,328       3.97       329,396       4,374       2.68  
 
                                       
Total interest-bearing deposits
    4,089,454       71,582       3.53       3,233,923       36,275       2.26  
 
                                       
 
                                               
Federal funds purchased & other borrowings
    147,185       3,560       4.88       144,533       2,072       2.89  
Federal Home Loan Bank advances
    546,405       13,009       4.80       778,160       12,222       3.17  
Long-term debt
    111,868       4,321       7.79       111,868       4,248       7.66  
 
                                       
Total borrowed funds
    805,458       20,890       5.23       1,034,561       18,542       3.61  
 
                                       
 
                                               
Total interest-bearing liabilities
    4,894,912       92,472       3.81       4,268,484       54,817       2.59  
 
                                           
Non-interest-bearing liabilities:
                                               
Non-interest-bearing deposits
    639,276                       552,354                  
Other liabilities
    41,918                       27,789                  
 
                                           
Total liabilities
    5,576,106                       4,848,627                  
Stockholders’ equity
    484,420                       403,286                  
 
                                           
Total liabilities and stockholders’ equity
  $ 6,060,526                     $ 5,251,913                  
 
                                           
 
                                               
Net interest revenue
          $ 122,053                     $ 99,533          
 
                                           
Net interest-rate spread
                    3.82 %                     3.75 %
 
                                           
 
                                               
Net interest margin (4)
                    4.34 %                     4.09 %
 
                                           
 
(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 tax rate and the federal tax adjusted state tax rate.
 
(2)   Included in the average balance of loans outstanding are loans where the accrual of interest has been discontinued.
 
(3)   Securities available for sale are shown at amortized cost. Pretax unrealized losses of $17.9 million in 2006 and pretax unrealized gains of $1.1 million in 2005 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.

14


Table of Contents

      The following table shows the relative impact on net interest revenue for changes in the average outstanding balances (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)
                                                 
    Three Months Ended June 30, 2006     Six Months Ended June 30, 2006  
    Compared to 2005     Compared to 2005  
    Increase (decrease)     Increase (decrease)  
    due to changes in     due to changes in  
    Volume     Rate     Total     Volume     Rate     Total  
Interest-earning assets:
                                               
Loans
  $ 14,407     $ 15,428     $ 29,835     $ 27,322     $ 29,631     $ 56,953  
Taxable securities
    501       830       1,331       1,504       2,131       3,635  
Tax-exempt securities
    (28 )     (4 )     (32 )     (43 )     (7 )     (50 )
Federal funds sold and other interest-earning assets
    (243 )     136       (107 )     (1,284 )     921       (363 )
 
                                   
Total interest-earning assets
    14,637       16,390       31,027       27,499       32,676       60,175  
 
                                   
 
                                               
Interest-bearing liabilities:
                                               
Transaction accounts
    771       3,806       4,577       1,409       6,828       8,237  
Savings deposits
    (2 )     54       52             112       112  
Time deposits less than $100,000
    2,704       4,055       6,759       4,781       7,551       12,332  
Time deposits greater than $100,000
    4,106       2,526       6,632       7,729       4,943       12,672  
Brokered deposits
    118       1,071       1,189       (106 )     2,060       1,954  
 
                                   
Total interest-bearing deposits
    7,697       11,512       19,209       13,813       21,494       35,307  
 
                                   
Federal funds purchased & other borrowings
    140       753       893       39       1,449       1,488  
Federal Home Loan Bank advances
    (2,819 )     2,634       (185 )     (4,327 )     5,114       787  
Long-term debt
          40       40             73       73  
 
                                   
Total borrowed funds
    (2,679 )     3,427       748       (4,288 )     6,636       2,348  
 
                                   
Total interest-bearing liabilities
    5,018       14,939       19,957       9,525       28,130       37,655  
 
                                   
 
                                               
Increase in net interest revenue
  $ 9,619     $ 1,451     $ 11,070     $ 17,974     $ 4,546     $ 22,520  
 
                                   
Provision for Loan Losses
     The provision for loan losses was $3.7 million for the second quarter of 2006, compared with $2.8 million for the same period in 2005. Year-to-date provision for loan losses of $7.2 million was $2.0 million, or 38% higher than the first six months of 2005. Net loan charge-offs as an annualized percentage of average outstanding loans for the three months ended June 30, 2006 were .09%, as compared with .14% for the second quarter of 2005. Year-to-date, net charge-offs as a percentage of average outstanding loans were .10%, compared to .13% for the first six months of 2005. Net loan charge-offs remained in line with management’s expectation and within the Company’s historical loss range as a percentage of average outstanding loans.
     The provision for loan losses is based on management’s evaluation of losses inherent in the loan portfolio and the corresponding analysis of the allowance for loan losses at quarter-end. Although United’s credit quality indicators such as the relative level of nonperforming assets and net charge-offs showed improvement in the second quarter, other factors considered in management’s evaluation of the adequacy of the allowance for loan losses support the higher provision for loan losses. The primary factors affecting the increase in the provision for loan losses include an increasing level of construction and land development loans, the increasing size of individual credit exposures and the effect of rising interest rates on United’s substantially floating rate loan portfolio. Management believes that the second quarter credit quality indicators are volatile while at the lower end of historic levels and nonperforming assets and net charge-offs will return to a range in line with United’s experience over the last few years. Additional discussion on loan quality and the allowance for loan losses is included in the Asset Quality section of this report.

15


Table of Contents

Fee Revenue
     Fee revenue for the second quarter of 2006 totaled $12.0 million, a decrease of $203,000, or 2%, from the second quarter of 2005, due primarily to $530,000 in gains from the sale of two banking offices during the second quarter of 2005 and $280,000 in charges for the early prepayment of Federal Home Loan Bank advances in the second quarter of 2006, recorded as a charge to “other” fee revenue. Excluding these non-recurring items, fee revenue was up approximately 5% for the quarter. Year-to-date fee revenue was $23.7 million, an increase of $1.4 million, or 6%, from the first six months of 2005. Fee revenue accounted for approximately 17% of total revenue for the second quarter of 2006, compared with 20% for the second quarter of 2005. Year-to-date fee revenue also accounted for approximately 17% of total revenue, compared with 19% for the first six months of 2005. The decrease in fee revenue as a percentage of total revenue reflects the strong growth in net interest revenue from a year ago. United continues to focus on increasing fee revenue through new products and services. The following table presents the components of fee revenue for the second quarter and first six months of 2006 and 2005.
Table 4 — Fee Revenue
For the Three and Six Months Ended June 30,
(dollars in thousands, taxable equivalent)
                                                 
    Three Months Ended             Six Months Ended        
    June 30,             June 30,        
    2006     2005     Change     2006     2005     Change  
Service charges and fees
  $ 6,828     $ 6,280       9 %   $ 13,181     $ 11,894       11 %
Mortgage loan and related fees
    1,708       1,742       (2 )     3,221       3,225        
Consulting fees
    1,572       1,685       (7 )     3,156       3,167        
Brokerage fees
    796       768       4       1,646       1,210       36  
Securities losses, net
          (2 )             (3 )     (2 )        
Other
    1,072       1,706       (37 )     2,533       2,885       (12 )
 
                                   
Total
  $ 11,976     $ 12,179       (2 )   $ 23,734     $ 22,379       6  
 
                                   
     Service charges and fees for the second quarter of 2006 increased $548,000, or 9%, from 2005. Year-to-date service charges increased $1.3 million, or 11%, over the same period in 2005. This increase was primarily due to growth in transactions and new accounts resulting from core deposit programs, growth in overdraft products, and the cross-selling of other products and services. Electronic banking revenue was $1.4 million for the second quarter of 2006, an increase of 32% from 2005. This increase is the result of higher debit card usage fees, a larger customer base, and a tendency for customers to migrate towards the convenience of electronic forms of banking.
     Mortgage loans and related fees of $1.7 million for the second quarter and $3.2 million for the first six months of 2006 were essentially unchanged from the same periods of 2005. Mortgage loan originations of $92 million for the second quarter of 2006 were down $6 million, or 6%, from 2005. Year-to-date mortgage loan originations of $169 million were down $9 million, or 5%, from the first six months of 2005. These reductions were reflective of a less favorable rate environment in the second quarter and first six months of 2006. The decreases in the amount of originations were partially offset by improved pricing. Substantially all originated residential mortgages were sold into the secondary market, including the right to service these loans.
     Consulting fees of $1.6 million for the second quarter were down $113,000, or 7%, from the second quarter of 2005. This decrease was primarily due to lower fees in advisory services and network services. Year-to-date consulting fees of $3.2 million were essentially unchanged from the first six months of 2005.
     Brokerage fees of $796,000 for the second quarter were up $28,000, or 4%, from the first three months of 2005. Year-to-date brokerage fees were up $436,000, or 36%, from the first six months of 2005 due to strong market activity.
     Other fee revenue of $1.1 million for the second quarter was down $634,000, or 37%, from the second quarter of 2005. Year-to-date other fee revenue of $2.5 million was down $352,000, or 12%, from the first six months of 2005. This decrease was primarily the result of gains of $530,000 on the sale of two banking offices in the second quarter of 2005 and $280,000 in charges for the prepayment of Federal Home Loan Bank advances.

16


Table of Contents

Operating Expenses
     Operating expenses for the second quarter of 2006 totaled $43.5 million, an increase of $4.7 million, or 12%, from the second quarter of 2005. Year-to-date operating expenses of $85.7 million increased $12.1 million, or 16%, from the first six months of 2005. The following table presents the components of operating expenses for the three and six months ended June 30, 2006 and 2005.
Table 5 — Operating Expenses
For the Three and Six Months Ended June 30,
(dollars in thousands)
                                                 
    Three Months Ended             Six Months Ended        
    June 30,             June 30,        
    2006     2005     Change     2006     2005     Change  
Salaries and employee benefits
  $ 28,307     $ 25,274       12 %   $ 55,950     $ 47,509       18 %
Communications and equipment
    3,731       3,115       20       7,107       6,097       17  
Occupancy
    2,916       2,718       7       5,848       5,386       9  
Advertising and public relations
    1,948       1,699       15       3,836       3,062       25  
Postage, printing and supplies
    1,289       1,369       (6 )     2,805       2,720       3  
Professional fees
    1,069       1,071             2,230       2,109       6  
Amortization of intangibles
    503       503             1,006       1,006        
Other
    3,720       3,059       22       6,923       5,698       21  
 
                                   
Total
  $ 43,483     $ 38,808       12     $ 85,705     $ 73,587       16  
 
                                   
     Salaries and employee benefits for the second quarter of 2006 totaled $28.3 million, an increase of $3.0 million, or 12%, over the second quarter of 2005. Year-to-date salaries and employee benefits of $56 million was up $8.4 million, or 18%, from the first six months of 2005. At June 30, 2006, total staff was 1,773, an increase of 114 employees from the second quarter of 2005. De novo expansion accounted for nearly 60% of this increase as United added 8 new offices in the past twelve months of which 3 were opened in the first half of 2006. The remainder of these increases was due to the additional staff required to support United’s business growth, expensing of stock options, and higher insurance and other health-care related expenses.
     Communication and equipment expense for the second quarter of 2006 was up $616,000, or 20%, from the second quarter of 2005, and up $1.1 million, or 17%, for the first six months of 2006 as compared to the same period of 2005. This increase was the result of additional banking offices and further investments and upgrades in technology equipment to support business growth.
     Occupancy expense for the second quarter of 2006 was up $198,000, or 7%, from the second quarter of 2005. Year-to-date occupancy expense increased $462,000, or 9%, from the first six months of 2005. The majority of this increase was the result of higher facilities costs and maintenance expenses resulting from additional banking offices added through de novo expansion.
     Advertising and public relations expense for the second quarter of 2006 was up $249,000, or 15%, from the second quarter of 2005. Year-to-date advertising and public relations expense increased $774,000, or 25%, from the first six months of 2005. These increases reflect the program costs associated with several initiatives to raise core deposits and marketing campaigns to generate brand awareness in new markets added by de novo expansion.
     The changes in postage, printing and supplies expense and professional fees expense for the quarter and the six months were due to timing of services provided, the growing number of offices, and higher costs to support business growth.
     Other expense for the second quarter of 2006 increased by $661,000, or 22%, from 2005. Year-to-date other expense increased $1.2 million, or 21%, from the first six months of 2005. These increases were due primarily to write-downs on foreclosed real estate properties and higher costs to support de novo expansion and business growth within United’s markets.
     The efficiency ratio measures total operating expenses as a percentage of total revenue, excluding the provision for loan losses and net securities gains or losses. United’s efficiency ratio for the second quarter was 58.53% compared with 61.18% for the second quarter of 2005. Year-to-date, the efficiency ratio was 58.79% compared with 60.36% for the first six months of 2005. The decrease is primarily the result of the increase in net interest revenue, offset by the cost of additional de novo locations. United’s efficiency ratio remained within management’s long-term efficiency goal of 58% — 60%.

17


Table of Contents

Income Taxes
     Income tax expense was $9.7 million for the second quarter of 2006, as compared with $7.7 million for the second quarter of 2005, representing a 36.50% and 35.75% effective tax rate, respectively. The effective tax rates were lower than the statutory tax rates primarily due to interest revenue on certain investment securities and loans that are exempt from income taxes and tax credits received on affordable housing investments. The effective tax rate has increased as tax-exempt interest revenue on securities and loans has declined as a percentage of pre-tax earnings, and due to the expensing of stock options, which includes incentive stock options that are not deductible for tax purposes. Additional information regarding income taxes can be found in Note 14 to the consolidated financial statements filed with United’s 2005 Form 10-K.
Balance Sheet Review
     Total assets at June 30, 2006 were $6.3 billion, 8% higher than the $5.9 billion at December 31, 2005 and 14% higher than the $5.5 billion at June 30, 2005. Average total assets for the second quarter of 2006 were $6.2 billion, up $821 million, or 15%, from average assets in the second quarter of 2005.
Loans
     The following table presents a summary of the loan portfolio.
Table 6 — Loans Outstanding
(dollars in thousands)
                         
    June 30,     December 31,     June 30,  
    2006     2005     2005  
Commercial (commercial and industrial)
  $ 255,546     $ 236,882     $ 222,452  
Commercial (secured by real estate)
    1,129,973       1,055,191       1,016,700  
 
                 
Total commercial
    1,385,519       1,292,073       1,239,152  
Construction and land development
    1,994,860       1,738,990       1,480,664  
Residential mortgage
    1,261,107       1,205,685       1,194,724  
Installment
    168,791       161,538       158,271  
 
                 
Total loans
  $ 4,810,277     $ 4,398,286     $ 4,072,811  
 
                 
 
                       
As a percentage of total loans:
                       
Commercial (commercial and industrial)
    5 %     5 %     6 %
Commercial (secured by real estate)
    24       24       25  
 
                 
Total commercial
    29       29       31  
Construction and land development
    41       40       36  
Residential mortgage
    26       27       29  
Installment
    4       4       4  
 
                 
Total
    100 %     100 %     100 %
 
                 
     At June 30, 2006, total loans were $4.8 billion, an increase of $737 million, or 18% from June 30, 2005 and an increase of $412 million, or 9%, from December 31, 2005. United continues to experience strong loan growth in all markets, with particular strength in construction and land development loans. Substantially all loans are to customers located in the immediate market areas of the banks in Georgia, North Carolina, and Tennessee. Approximately $514 million or 70% of the increase in loans from the second quarter of 2005 occurred in construction and land development loans.

18


Table of Contents

Asset Quality and Risk Elements
     United manages asset quality and controls credit risk through close 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 the consistent application of these policies and procedures at all of the 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.
     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 adequate to absorb probable losses at quarter-end. The amount each period 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 economic factors and trends. The evaluation of these factors is performed quarterly by management through an analysis of the adequacy of the allowance for loan losses.
     Reviews of non-performing loans, past due loans and larger credits, designed to identify potential charges to the allowance for loan losses, as well as determine the adequacy of the allowance, are conducted on a regular basis during the quarter. These reviews are performed by the responsible lending officers, as well as a separate loan review department, and consider such factors as the financial strength of borrowers, the value of the applicable collateral, past loan loss experience, anticipated loan losses, growth in the loan portfolio, prevailing economic conditions and other factors. United also uses external loan review to supplement the activities of the loan review department and 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 and six-month periods ended June 30, 2006 and 2005.
Table 7 — Summary of Loan Loss Experience
(dollars in thousands)
                                 
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
    2006     2005     2006     2005  
Balance beginning of period
  $ 55,850     $ 48,453     $ 53,595     $ 47,196  
Loans charged-off
    (1,530 )     (1,706 )     (3,413 )     (3,109 )
Recoveries
    488       326       1,126       586  
 
                       
Net charge-offs
    (1,042 )     (1,380 )     (2,287 )     (2,523 )
Provision for loan losses
    3,700       2,800       7,200       5,200  
 
                       
Balance end of period
  $ 58,508     $ 49,873     $ 58,508     $ 49,873  
 
                       
 
                               
Total loans:
                               
At period end
  $ 4,810,277     $ 4,072,811     $ 4,810,277     $ 4,072,811  
Average
    4,690,196       3,942,077       4,598,355       3,870,177  
As a percentage of average loans (annualized):
                               
Net charge-offs
    .09 %     .14 %     .10 %     .13 %
Provision for loan losses
    .32       .28       .31       .27  
Allowance as a percentage of period end loans
    1.22       1.22       1.22       1.22  
Allowance as a percentage of non-performing loans
    898       435       898       435  
     Management believes that the allowance for loan losses at June 30, 2006 is adequate to absorb 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 Banks, may require adjustments to the provision for loan losses in future periods if, in their opinion, the results of their review warrant such additions.

19


Table of Contents

Non-performing Assets
     The table below summarizes non-performing assets.
Table 8 — Non-Performing Assets
(dollars in thousands)
                         
    June 30,     December 31,     June 30,  
    2006     2005     2005  
Non-accrual loans
  $ 6,518     $ 11,997     $ 11,465  
Loans past due 90 days or more and still accruing
                 
 
                 
Total non-performing loans
    6,518       11,997       11,465  
Other real estate owned
    2,287       998       2,030  
 
                 
Total non-performing assets
  $ 8,805     $ 12,995     $ 13,495  
 
                 
 
                       
Non-performing loans as a percentage of total loans
    .14 %     .27 %     .28 %
 
                       
Non-performing assets as a percentage of total assets
    .14       .22       .24  
     Non-performing loans, which include non-accrual loans and accruing loans past due over 90 days, totaled $6.5 million at June 30, 2006, compared with $12.0 million at December 31, 2005 and $11.5 million at June 30, 2005. The ratio of non-performing loans to total loans decreased 14 basis points from June 30, 2005 and 13 basis points from December 31, 2005. Non-performing assets, which include non-performing loans and foreclosed real estate, totaled $8.8 million at June 30, 2006, compared with $13.0 million at December 31, 2005 and $13.5 million at June 30, 2005.
     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 placed on non-accrual status, interest previously accrued, but not collected, is reversed against current interest revenue. Depending on management’s evaluation of the borrower and loan collateral, interest revenue on a non-accrual loan may be recognized on a cash basis as payments are received. There were no commitments to lend additional funds to customers whose loans were on non-accrual status at June 30, 2006.
     At June 30, 2006 and 2005, there were $1.3 million and $6.9 million, respectively, of loans classified as impaired under the definition outlined in SFAS No. 114. Specific reserves allocated to these impaired loans totaled $332,000 at June 30, 2006, and $1.7 million at June 30, 2005. The average recorded investment in impaired loans for the quarters ended June 30, 2006 and 2005, was $1.7 million and $7.0 million, respectively. Interest revenue recognized on loans while they were impaired for the second quarter and first six months of 2006 approximated $8,000 and $22,000, respectively, compared with $9,000 and $13,000 for the same periods in 2005.
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 available for sale at quarter-end decreased $16 million from second quarter of 2005. The investment portfolio is used as a supplemental tool to stabilize interest rate sensitivity and increase net interest revenue. At June 30, 2006, the securities portfolio accounts for approximately 15% of total assets, compared with 17% at December 31, 2005 and 18% at June 30, 2005.
     The investment securities portfolio primarily consists of U.S. Government agency securities, U.S. Government sponsored agency mortgage-backed securities, non-agency mortgage-backed securities, 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 the contractual maturities because loans underlying the securities may 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 timing of cash receipts and can result in the holding of a below market yielding asset for a longer time period.

20


Table of Contents

Deposits
     Total deposits at June 30, 2006 were $5.0 billion, an increase of $1.0 billion, or 26%, from June 30, 2005. Total non-interest-bearing demand deposit accounts of $662 million increased $72 million, or 12%, and interest-bearing demand and savings accounts of $1.5 billion increased $161 million, or 12%, reflecting the success of United’s initiatives to raise core deposits.
     Total time deposits as of June 30, 2006 were $2.8 billion, an increase of $785 million, or 38%, from the second quarter of 2005. Time deposits less than $100,000 totaled $1.4 billion, compared with $1.0 billion a year ago, an increase of 33%. Time deposits of $100,000 and greater totaled $1.1 billion, compared with $697 million at June 30, 2005, an increase of 59%. United actively pursued time deposits as rates were as much as 50 basis points below wholesale borrowings with similar terms. United utilizes “brokered” time deposits, issued in certificates of less than $100,000, as an alternative source of cost-effective funding. Brokered time deposits outstanding at June 30, 2006 were $340 million compared with $311 million at June 30, 2005, an increase of 9%.
Wholesale Funding
     At June 30, 2006, both of the Banks were shareholders in the Federal Home Loan Bank (“FHLB”). Through this affiliation, FHLB secured advances totaled $459 million and $800 million at June 30, 2006 and 2005, respectively, and were priced at rates competitive with time deposits of like maturities. United anticipates continued utilization of this short and long-term source of funds. FHLB advances outstanding at June 30, 2006 had both fixed and floating interest rates ranging from 2.72% to 6.59%. Additional information regarding FHLB advances, including scheduled maturities, is provided in Note 10 to the consolidated financial statements included in United’s 2005 Form 10-K.
Interest Rate Sensitivity Management
     The absolute level and volatility of interest rates can have a significant impact 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.
     Net interest revenue is 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 regularly 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 utilizes to estimate the sensitivity of net interest revenue to changes in interest rates is an interest rate simulation model. Such estimates are based upon a number of assumptions for various scenarios, including the level of balance sheet growth, deposit repricing characteristics and the rate of prepayments. The simulation model measures the potential change in net interest revenue over a twelve-month period under various interest rate scenarios. United’s baseline scenario assumes rates remain flat (“flat rate scenario”) over the next twelve months and is the scenario that all others are compared to in order to measure the change in net interest revenue. United runs ramp scenarios that assume gradual increases and decreases of 200 basis points each over the next twelve months. United’s policy for net interest revenue simulation is limited to a change from the flat rate scenario of less than 10% for the up or down 200 basis point ramp scenarios over twelve months. At June 30, 2006, United’s simulation model indicated that a 200 basis point increase in rates over the next twelve months would cause an approximate 3.4% increase in net interest revenue and a 200 basis point decrease in rates over the next twelve months would cause an approximate 6.2% decrease in net interest revenue.
     In order to manage its interest rate sensitivity, United uses off-balance sheet contracts that are considered derivative financial instruments. Derivative financial instruments can be a cost and capital effective means of modifying the repricing characteristics of on-balance sheet assets and liabilities. The offset of these instruments is included in United’s simulation modeling. At June 30, 2006, United was a party to interest rate swap contracts under which it pays a variable rate and receives a fixed rate.

21


Table of Contents

     The following table presents the interest rate swap contracts outstanding at June 30, 2006.
Table 9 — Interest Rate Swap Contracts
As of June 30, 2006
(dollars in thousands)
                                 
    Notional     Rate     Rate     Fair  
Type/Maturity   Amount     Received     Paid(1)     Value  
Cash Flow Contracts
                               
September 30, 2006
  $ 10,000       7.04 %     8.25 %   $ (37 )
October 12, 2006
    15,000       6.94       8.25       (67 )
December 4, 2006
    15,000       5.85       8.25       (209 )
December 17, 2006
    30,000       5.99       8.25       (390 )
December 31, 2006
    25,000       7.59       8.25       (117 )
January 3, 2007
    25,000       7.11       8.25       (185 )
January 3, 2007
    25,000       7.63       8.25       (124 )
January 18, 2007
    25,000       6.51       8.25       (281 )
March 21, 2007
    25,000       7.00       8.25       (275 )
April 19, 2007
    15,000       5.85       8.25       (403 )
May 13, 2007
    15,000       6.47       8.25       (316 )
May 13, 2007
    10,000       6.47       8.25       (210 )
May 13, 2007
    25,000       6.47       8.25       (442 )
October 23, 2007
    54,000       6.08       8.25       (1,110 )
 
                               
 
                       
 
                               
Total Cash Flow Contracts
  $ 314,000       6.61 %     8.25 %   $ (4,166 )
 
                       

(1)   Based on prime rate at June 30, 2006.
     Derivative financial instruments used for hedging purposes 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 impact of change in the fair value of the derivative financial instrument and the offsetting impact of the change in fair value of the hedged asset or liability. At June 30, 2006, all United’s derivatives were designated as cash flow hedges of prime based loans.
     Subsequent to June 30, 2006, management began an initiative to reduce United’s interest rate sensitivity. As part of this initiative, United terminated all of its existing receive fixed, pay prime swap contracts and replaced them with $405 million notional in new receive fixed, pay prime swaps. In addition, United entered into prime based interest rate floor contracts with a notional value of $500 million. The losses resulting from the termination of the existing swap contracts will be amortized over the remaining original maturity for each contract.
     All of the new derivative contracts will be accounted for as cash flow hedges of prime based loans. Management plans to complete these and other transactions during the third quarter as it moves its balance sheet toward a more interest-rate neutral position.
     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 is minimal and should not have any material unintended impact on the 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 Banks’ customers, both depositors and borrowers.

22


Table of Contents

     The primary 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, so that United can also meet the investment requirements of its shareholders as market interest rates change. 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. Mortgage loans held for sale totaled $24 million at June 30, 2006, and typically turn over every 45 days as the closed loans are sold to investors in the secondary market.
     The liability section of the balance sheet provides liquidity through interest-bearing and noninterest-bearing deposit accounts. Federal funds purchased, 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.
     United has available one line of credit at its holding company with another financial institution totaling $45 million. At June 30, 2006, United had no outstanding balance on this line of credit. United had sufficient qualifying collateral to increase FHLB advances by $495 million at June 30, 2006. United’s internal policy limits brokered deposits to 25% of total non-brokered deposits. At June 30, 2006, United had the capacity to increase brokered deposits by $819 million and still remain within this limit.
     As disclosed in United’s consolidated statement of cash flows, net cash provided by operating activities was $22.5 million for the six months ended June 30, 2006. The major contributors in this category were net income of $33.0 million, depreciation, amortization and accretion of $8.4 million, provision for loan losses of $7.2 million, and stock based compensation of $1.3 million. They were offset by an increase in mortgage loans held for sale of $1.7 million, a decrease in accrued expenses and other liabilities of $7.0 million, and an increase in other assets and accrued interest receivable of $18.5 million. Net cash used by investing activities of $428.5 million consisted primarily of a net increase in loans totaling $417.5 million, purchases of premises and equipment of $17.1 million, and $63.3 million used to purchase investment securities, partially offset by proceeds from sales of securities of $7.6 million, maturities and calls of investment securities of $59.0 million, and sales of premises, equipment and other real estate of $2.6 million. Net cash provided by financing activities consisted primarily of a net increase in deposits of $499.1 million, a net increase in federal funds purchased, repurchase agreements, and other short-term borrowings of $126.7 million, and proceeds from exercise of stock options and common stock issued for employee benefit plans of $2.2 million, partially offset by a net decrease in FHLB advances of $177.0 million, and cash dividends paid of $6.0 million. In the opinion of management, the liquidity position at June 30, 2006 is sufficient to meet its expected cash flow requirements.
Capital Resources and Dividends
     Shareholders’ equity at June 30, 2006 was $496.3 million, an increase of $80.3 million, or 19% from June 30, 2005. Accumulated other comprehensive income (loss) is not included in the calculation of regulatory capital adequacy ratios. Excluding the change in the accumulated other comprehensive income (loss), shareholders’ equity increased $98.1 million, or 24%, from June 30, 2005. Dividends of $6.4 million, or $.16 per share, were declared on common stock during the first six months of 2006, an increase of 20% from the amount declared in the same period in 2005 due to a 14% increase in the dividend rate and an increase in the number of outstanding shares. The dividend payout ratio for the second quarter was 19% for 2006 and 2005. United has historically retained the majority of its earnings in order to provide a cost effective source of capital for continued growth and expansion. However, in recognition that cash dividends are an important component of shareholder value, United has instituted a dividend program that provides for increased cash dividends when earnings and capital levels permit.
     United’s Board of Directors has authorized the repurchase of United’s outstanding common stock for the general corporate purposes. At June 30, 2006, 1,000,000 shares may be repurchased under the current authorization through December 31, 2007.
     United’s common stock trades on the Nasdaq Global Market under the symbol “UCBI”. Below is a quarterly schedule of high, low and closing stock prices and average daily volume for 2006 and 2005.
Table 10 — Stock Price Information
                                                                 
    2006   2005
    High   Low   Close   Avg Volume   High   Low   Close   Avg Volume
First quarter
  $ 29.64     $ 26.02     $ 28.15       59,252     $ 27.92     $ 23.02     $ 23.73       42,662  
Second quarter
    31.26       27.02       30.44       92,937       26.44       21.70       26.02       63,805  
Third quarter
                                    29.36       25.75       28.50       59,305  
Fourth quarter
                                    30.50       25.32       26.66       74,710  

23


Table of Contents

The following table presents the quarterly cash dividends declared in 2006 and 2005 and the respective payout ratios as a percentage of basic earnings per share, which excludes merger-related charges.
Table 11 — Dividend Payout Information
                                 
    2006   2005
    Dividend   Payout %   Dividend   Payout %
First quarter
  $ .08       20     $ .07       20  
Second quarter
    .08       19       .07       19  
Third quarter
                    .07       19  
Fourth quarter
                    .07       18  
     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-adjusted 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. 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.
     The following table shows United’s capital ratios, as calculated under regulatory guidelines, at June 30, 2006 and 2005.
Table 12 — Capital Ratios
(dollars in thousands)
                                 
    2006   2005
    Actual   Regulatory   Actual   Regulatory
    Amount   Minimum   Amount   Minimum
Tier I Leverage:
                               
Amount
  $ 443,094     $ 181,376     $ 343,649     $ 156,713  
Ratio
    7.33 %     3.00 %     6.58 %     3.00 %
 
                               
Tier I Risk-Based:
                               
Amount
  $ 443,094     $ 202,567     $ 343,649     $ 170,815  
Ratio
    8.75 %     4.00 %     8.05 %     4.00 %
 
                               
Total Risk-Based:
                               
Amount
  $ 571,202     $ 405,134     $ 463,122     $ 341,629  
Ratio
    11.28 %     8.00 %     10.85 %     8.00 %
     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.
     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 for the highest-rated bank holding companies which are not undertaking significant expansion programs, 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 capital ratios of United and the Banks currently exceed the minimum ratios as defined by federal regulators. United monitors these ratios to ensure that United and the Banks remain above regulatory minimum guidelines.

24


Table of Contents

Impact 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 impact 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 impact of inflation on financial results depends on United’s ability to react to changes in interest rates and, by such reaction, reduce the inflationary impact 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 June 30, 2006 from that presented in the Annual Report on Form 10-K for the year ended December 31, 2005. The interest rate sensitivity position at June 30, 2006 is included in management’s discussion and analysis on page 21 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 June 30, 2006. Based on, and as of the date of, that evaluation, United’s Chief Executive Officer and Chief Financial Officer have 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.
     There were no changes in United’s internal controls over financial reporting that occurred during United’s last fiscal quarter that have materially affected, or are reasonably like to materially affect, United’s internal controls over financial reporting.

25


Table of Contents

Part II. Other Information
Item 1. Legal Proceedings
     In the ordinary course of operations, United and the Banks 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, 2005, but United did revise and clarify the following risk factor:
     The risk factor under the heading “United’s concentration of construction loans is subject to unique risks that could adversely affect earnings.” is replaced with the following:
United’s concentration of construction loans is subject to unique risks that could adversely affect earnings.
     United’s construction loan portfolio was $2.0 billion at June 30, 2006, comprising 41% of total loans. Construction loans are often riskier than home equity loans or residential mortgage loans to individuals. In the event of a general economic slowdown, they would represent higher risk due to slower sales and reduced cash flow that could impact the borrowers’ ability to repay on a timely basis.
     In addition, although regulations and regulatory policies affecting banks and financial services companies undergo continuous change and we cannot predict when changes will occur or the ultimate effect of any changes, there has been recent regulatory focus on construction, development and other commercial real estate lending. A change in the state and federal banking laws, regulations or policies applicable to construction, development or other commercial real estate loans could subject us to substantial limitations with respect to making such loans, increase the costs of making such loans, or require us to have a greater amount of capital to support this kind of lending, all of which could have a material adverse effect on our profitability or financial condition.”
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds – None
Item 3. Defaults upon Senior Securities – None
Item 4. Submission of Matters to a Vote of Securities Holders
     United held its annual meeting of shareholders on April 26, 2006.
     At the annual meeting the shareholders elected Jimmy C. Tallent, Robert L. Head, Jr., W.C. Nelson, Jr., A. William Bennett, Robert H. Blalock, Guy W. Freeman, Thomas C. Gilliland, Charles E. Hill, Hoyt O. Holloway, Clarence W. Mason, Sr., and Tim Wallis as directors to serve until the next annual meeting and until their successors are elected and qualified. Of the 40,110,716 shares outstanding on the record date, 30,932,478 shares were voted representing 77% of the outstanding shares. The elections were approved by the votes set forth in the following table.
                 
Election of Directors   Shares Voted in Favor   Shares Withheld
Jimmy C. Tallent
    30,519,778       412,700  
Robert L. Head, Jr.
    30,287,500       644,978  
W.C. Nelson, Jr.
    30,063,947       868,531  
A. William Bennett
    30,534,871       397,607  
Robert H. Blalock
    30,578,772       353,706  
Guy W. Freeman
    30,338,064       594,414  
Thomas C. Gilliland
    30,369,639       562,839  
Charles E. Hill
    30,535,989       396,489  
Hoyt O. Holloway
    30,535,913       396,565  
Clarence W. Mason, Sr.
    30,536,259       396,219  
Tim Wallis
    30,257,884       674,594  
     Shareholders also voted on a proposal to implement a new Employee Stock Purchase Plan that was effective on January 1, 2006. This proposal was approved by the votes set forth in the following table.
                         
Other Proposals   Shares Voted in Favor   Shares Voted Against   Shares Withheld
Employee Stock Purchase Plan
    23,567,560       562,112       203,111  

26


Table of Contents

Item 5. Other Information – None
Item 6. Exhibits
  3.1   Restated Articles of Incorporation of United Community Banks, Inc., (incorporated herein by reference to Exhibit 3.1 to United Community Banks, Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2001, File No. 0-21656, filed with the Commission on August 14, 2001).
 
  3.2   Amendment to the Restated Articles of Incorporation of United Community Banks, Inc. (incorporated herein by reference to Exhibit 3.3 to United Community Banks, Inc.’s Registration Statement on Form S-4, File No. 333-118893, filed with the Commission on September 9, 2004).
 
  3.3   Amended and Restated Bylaws of United Community Banks, Inc., dated September 12, 1997 (incorporated herein by reference to Exhibit 3.1 to United Community Banks, Inc.’s Annual Report on Form 10-K, for the year ended December 31, 1997, File No. 0-21656, filed with the Commission on March 27, 1998).
 
  4.1   See Exhibits 3.1, 3.2 and 3.3 for provisions of the Restated Articles of Incorporation, as amended, and Amended and Restated Bylaws, which define the rights of the Shareholders.
 
  10.1   Amendment number 2 to United Community Banks, Inc. 2000 Key Employee Stock Option Plan, dated April 26, 2006.
 
  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

27


Table of Contents

Signatures
     Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this 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: August 4, 2006
 
 

28