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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

____________

FORM 10-K

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

 For the Fiscal Year Ended December 31, 2001

 Commission File Number 0-21656

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

 Registrant’s telephone number, including area code:  (706) 781-2265

 Securities registered pursuant to Section 12(b) of the Act:  None

 Name of exchange on which registered:  None

 Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $1.00 par value

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  [X]   No [   ]  

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  [ X ]

Aggregate market value of the voting stock held by non-affiliates of the Registrant as of March 7, 2002: $335,346,900 based on $40 per share, the last average sale price known to the Registrant for the common stock, for which there is no established public trading market.

As of March 7, 2002, 11,312,932 shares of common stock were issued, including 140,000 shares deemed outstanding pursuant to prime plus 1/4% convertible subordinated payable-in-kind debentures due December 31, 2006 and presently exercisable options to acquire 477,482 shares.

 DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s Proxy Statement for the Annual Meeting of Shareholders to be held on April 25, 2002 are incorporated herein into Part III by reference.

PART I

ITEM 1.      BUSINESS.

United and the Banks

United Community Banks, Inc. (“United”) was incorporated under the laws of Georgia in 1987 and commenced operations in 1988 by acquiring 100% of the outstanding shares of Union County Bank, Blairsville, Georgia, now known as United Community Bank (“Union County”).  United is a bank holding company registered under the Bank Holding Company Act of 1956.  All of United’s activities are currently conducted by its wholly-owned subsidiaries: Union County, which was organized as a Georgia banking corporation in 1949 and began business in 1950; United Community Bank, Brevard, North Carolina (“North Carolina”), which United acquired in 1990; United Community Bank North Georgia, Blue Ridge, Georgia (“North Georgia”), which United acquired in 1992; United Community Bank Towns County, Hiawassee, Georgia (“Towns County”), which United also acquired in 1992;  United Community Bank White County, Cleveland, Georgia (“White County”), which United acquired in 1995;  and United Community Bank Rabun County, Clayton, Georgia (“Rabun County”), which United acquired in 1997; United Community Bank Metro, Powder Springs, Georgia (“Metro”), which United acquired in 2000; United Community Bank Dawson County, Dawson, Georgia (“Dawson County”), which United also acquired in 2000; and United Community Bank West Georgia, Carrollton, Georgia (“West Georgia”), which United acquired in 2001.  In 1999, United also acquired Bank of Adairsville, Adairsville, Georgia and 1^st Floyd Bank, Rome, Georgia,  which were merged into Union County in 2001.  Union County, North Carolina, North Georgia, Towns County, White County, Rabun County, Metro, Dawson County and West Georgia are collectively referred to in this report as the “Banks.”

The Banks are community-oriented, and offer a full range of retail and corporate banking services, including checking, savings, and time deposit accounts, secured and unsecured loans, wire transfers, trust services, and rental of safe deposit boxes.  As of December 31, 2001, the Banks operated through 49 locations.  To emphasize the commitment to community banking, both Union County and North Georgia operate branches under trade names that are closely identified with the communities in which they are located.

In addition, United owns an inactive insurance agency, United Community Agencies, Inc. (“UAI”) and United Intellectual Property Holdings, Inc. (“UIP”), which holds intellectual property rights such as trademarks and tradenames.

The Mortgage People Company (“TMPC”), a division of Union County, is a full-service retail mortgage lending operation approved as a seller/servicer for Federal National Mortgage Association and Federal Home Mortgage Corporation.  TMPC was organized to provide fixed and adjustable-rate mortgages.  During 2001, TMPC originated $302 million of residential mortgage loans for the purchase of homes and to refinance existing mortgage debt, of which substantially all were sold into the secondary market with no recourse to TMPC.

Acquired by United in 2000, Brintech, Inc. (“Brintech”) is a consulting firm for the financial services industry.  Brintech provides consulting and other advisory and implementation services in the areas of strategic planning, profitability improvement, technology, efficiency, security, network, Internet banking, web site development, marketing, core processing, and telecommunications.

Forward-Looking Statements

This Form 10-K, contains forward-looking statements regarding United Community Banks, Inc., 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:  (1) business increases, productivity gains and other investments are lower than expected or do not occur as quickly as anticipated;  (2) competitive pressures among financial services companies increase significantly;  (3) the

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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;  (4) trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System, change;  (5) inflation, interest rates and/or market conditions fluctuate;  (6) conditions in the stock market, the public debt market and other capital markets deteriorate;  (7) United fails to develop competitive new products and services and/or new and existing customers do not accept these products and services;  (8) financial services laws and regulations change;  (9) technology changes and United fails to adapt to those changes;  (10) consumer spending and saving habits change;  (11) unanticipated regulatory or judicial proceedings occur; and (12) 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-K.

Monetary Policy And Economic Conditions

The operating income and net income of the Banks depend to a substantial extent on the difference between income the Banks receive from their loans, investments, and other earning assets, and the interest the Banks pay on their deposits and other liabilities.  These rates are highly sensitive to many factors that are beyond the control of the Banks, including national and international economic conditions and the monetary policies of various governmental and regulatory authorities.

Competition

The market for banking and bank-related services is highly competitive.  The Banks actively compete in their respective market areas, which collectively cover north Georgia, metro Atlanta and western North Carolina, with other providers of deposit and credit services.  These competitors include other commercial banks, savings banks, savings and loan associations, credit unions, mortgage companies, and brokerage firms.  The following table displays each of the Banks and the respective percentage of total deposits in each county where the Bank has operations.  The table also indicates the ranking by deposit size in each of the local markets.  All information in the table was obtained from the Federal Deposit Insurance Corporation (“FDIC”) Summary of Deposits as of June 30, 2001.

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Loans

The Banks make both secured and unsecured loans to individuals, firms, and corporations.  Secured loans include first and second real estate mortgage loans.  The Banks also make direct installment loans to consumers on both a secured and unsecured basis.  At December 31, 2001, commercial, real estate construction, commercial real estate, residential mortgage and installment loans represented approximately 7%,15%, 32%, 39% and 7% respectively, of United’s total loan portfolio.

Specific risk elements associated with each of the Banks’ lending categories include, but are not limited to:

Inter-agency guidelines adopted by federal bank regulators mandate that financial institutions establish real estate lending policies with maximum allowable real estate loan-to-value limits, subject to an allowable amount of non-conforming loans as a percentage of capital.  The Banks adopted the federal guidelines as their maximum allowable limits in 2001; however, policy exceptions are permitted for real estate loan customers with strong financial credentials.

Lending Policy

The current lending policy of the Banks is to make loans primarily to persons who reside, work, or own property in their primary market areas.  Unsecured loans are generally made only to persons who qualify for such credit based upon net worth.  Secured loans are made to persons who are well established and have net worth, collateral, and cash flow to support the loan.  Exceptions to the policy are permitted on a case-by-case basis and require the approving officer to document in writing the reason for the exception.  Policy exceptions made for borrowers whose total aggregate loans exceed the approving officer’s credit limit must be reported to the Bank Board of Directors for approval.

The Banks provide each lending officer with written guidelines for lending activities.  Lending authority is delegated by the Boards of Directors of the Banks to loan officers and to Bank loan committees, each of whom is limited in the amount of secured and unsecured loans which he or she can make to a single borrower or related group of borrowers.  Loans in excess of individual officer credit authority must either be approved by a senior officer or authorized loan committee with sufficient approval authority and/or be ratified by the Bank Board of Directors.

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Loan Review and Non-performing Assets

The Loan Review Department of United reviews, or engages an independent third party to review, each of the Banks’ loan portfolios on an annual basis to identify any weaknesses in the portfolio and to assess the general quality of credit underwriting. The results of the reviews by the loan review officers are presented to the Presidents of each of the Banks, the President and the Chief Credit Officer of United, and the Boards of Directors of each of the Banks.  If an individual loan or credit relationship has a weakness identified during the review process, the risk rating of the loan, or all loans comprising a credit relationship, will be downgraded to a classification that most closely matches the current risk level.  The review process also provides for the upgrade of loans that show improvement since the last review.  Since each loan in a credit relationship may have a different credit structure, collateral, and other secondary source of repayment, different loans in a relationship can be assigned different risk ratings.  Under United’s 10-grade loan grading system, grades 1 through 6 are considered “pass” (acceptable) credit risk, grade 7 is a “special mention”  rating,  and grades 8 through 10 are “adversely classified” credits that require management’s attention.  Both the pass and adversely classified ratings, and the entire 10-grade rating scale, provide for a higher numeric rating for increased risk.  For example, a risk rating of 1 is the least risky of all credits and would be typical of a loan that is 100% secured by a deposit at one of the Banks.  Risk ratings of 2 through 6 in the pass category each have incrementally more risk.  The four watch list credit ratings and rating definitions are:

 In addition, the Loan Review Department conducts a quarterly analysis to determine the adequacy of the Allowance for Loan Losses (“ALL”) for each of the Banks.  The aggregation of the ALL analyses for the Banks provides the consolidated analysis for United.  The ALL analysis starts by taking total loans and deducting loans secured by deposit accounts at the Banks, which effectively have no risk of loss.  Next, all loans with an adversely classified rating are deducted.  The remaining loan balance is then multiplied by the average historical loss rate for the preceding three year period (1999 through 2001), as adjusted to reflect current economic conditions, which provides required minimum ALL for pass credits.  The remaining total loans in each of the four watch list  rating categories are then multiplied by a the following loss factors:  Watch (5%); Substandard (25%); Doubtful (50%); and Loss (100%).  There is no current process used to measure or adjust for differences between the loss factors for adversely classified loans used in the ALL analysis and actual losses charged to the ALL.

 Asset/Liability Committees

United’s Committee is composed of the Executive Officers and the Treasurer.  The Banks’ Committees are composed of officers of each of the Banks and the Treasurer of United. All of the Committees are charged with managing the assets and liabilities of United and each of the Banks.  The Committees attempt to manage asset growth, liquidity, and capital to maximize income and reduce interest rate risk.  The Committees direct each Bank’s overall acquisition and allocation of funds.  At periodic meetings, the committees review the monthly asset and liability funds budget in relation to the actual flow of funds and peer group comparisons; the ratio of the amount of rate sensitive assets to the amount of rate sensitive liabilities; the ratio of allowance for loan losses to outstanding and non-performing loans; and other variables, such as expected loan demand, investment opportunities,

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core deposit growth within specified categories, regulatory changes, monetary policy adjustments and the overall state of the economy.  A more comprehensive discussion of United’s Asset/Liability Management and interest rate risk is contained in the Management’s Discussion and Analysis (Part II, Item 7) and Quantitative and Qualitative Disclosures About Market Risk  (Part II, Item 7A) sections of this report.

 Investment Policy

The Banks’ investment portfolio policy is to maximize income consistent with liquidity, asset quality and regulatory constraints.  The policy is reviewed from time to time by United’s Asset/Liability Committee and the Banks’ Boards of Directors.  Individual transactions, portfolio composition, and performance are reviewed and approved periodically by the Banks’ Boards of Directors or a committee thereof.  The Chief Financial Officer and Treasurer of United and the President of each of the Banks administer the policy and report information to the Board of Directors of each of the Banks on a quarterly basis concerning sales, purchases, maturities and calls, resultant gains or losses, average maturity, federal taxable equivalent yields, and appreciation or depreciation by investment categories.

Employees

As of December 31, 2001, United and its subsidiaries had an aggregate of 1,048 full-time equivalent employees.  Neither United nor any of the subsidiaries is a party to any collective bargaining agreement, and United believes that employee relations are good.  None of United’s or the Banks’ Executive Officers are employed pursuant to an employment contract although certain of United’s Executive Officers have change of control agreements in the event of termination upon change of control.  Those agreements are included as exhibits hereto.

Supervision And Regulation

General.  United is a registered bank holding company subject to regulation by the Board of Governors of the Federal Reserve System (the “Federal Reserve”) under the Bank Holding Company Act of 1956, as amended (the “Act”).  United is required to file financial information with the Federal Reserve periodically and is subject to periodic examination by the Federal Reserve.

The Act requires every bank holding company to obtain the Federal Reserve’s prior approval before (1) it may acquire direct or indirect ownership or control of more than 5% of the voting shares of any bank that it does not already control; (2) it or any of its non-bank subsidiaries may acquire all or substantially all of the assets of a bank; and (3) it may merge or consolidate with any other bank holding company.  In addition, a bank holding company is generally prohibited from engaging in, or acquiring, direct or indirect control of the voting shares of any company engaged in non-banking activities.  This prohibition does not apply to activities listed in the Act or found by the Federal Reserve, by order or regulation, to be closely related to banking or managing or controlling banks as to be a proper incident thereto.  Some of the activities that the Federal Reserve has determined by regulation or order to be closely related to banking are:

• making or servicing loans and certain types of leases;
• performing certain data processing services;
• acting as fiduciary or investment or financial advisor;
• providing brokerage services;
• underwriting bank eligible securities;
• underwriting debt and equity securities on a limited basis through separately capitalized subsidiaries; and
• making investments in corporations or projects designed primarily to promote community welfare.

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In addition, effective March 11, 2000, bank holding companies whose banking subsidiaries are all well-capitalized and well-managed may apply to become a financial holding company.  Financial holding companies have the authority to engage in activities that are “financial in nature” that are not permitted for other bank holding companies.  Some of the activities that the Act provides are financial in nature are:

• lending, exchanging, transferring, investing for others or safeguarding money or securities;
• insuring, guaranteeing, or indemnifying against loss, harm, damage, illness, disability, or death, or providing and issuing annuities, and acting as principal, agent, or broker with respect thereto;
• providing financial, investment, or economic advisory services, including advising an investment company;
• issuing or selling instruments representing interests in pools of assets permissible for a bank to hold directly; and
• underwriting, dealing in or making a market in securities.

United must also register with the Georgia Department of Banking and Finance (“DBF”) and file periodic information with the DBF.  As part of such registration, the DBF requires information with respect to the financial condition, operations, management and intercompany relationships of United and the Banks and related matters.  The DBF may also require such other information as is necessary to keep itself informed as to whether the provisions of Georgia law and the regulations and orders issued thereunder by the DBF have been complied with, and the DBF may examine United and each of the Banks.  The North Carolina Banking Commission (“NCBC”), which has the statutory authority to regulate non-banking affiliates of North Carolina banks, in 1992 began using this authority to examine and regulate the activities of North Carolina-based holding companies owning North Carolina-based banks.  Although the NCBC has not exercised its authority to date to examine and regulate holding companies outside of North Carolina that own North Carolina banks, it is likely the NCBC may do so in the future.

United is an “affiliate” of the Banks under the Federal Reserve Act, which imposes certain restrictions on (1) loans by the Banks to United, (2) investments in the stock or securities of United by the Banks, (3) the Banks’ taking the stock or securities of an “affiliate” as collateral for loans by the Bank to a borrower, and (4) the purchase of assets from United by the Banks.  Further, a bank holding company and its subsidiaries are prohibited from engaging in certain tie-in arrangements in connection with any extension of credit, lease or sale of property or furnishing of services.  Each of United’s subsidiaries is regularly examined by the Federal Deposit Insurance Corporation (the “FDIC”).  Union County, North Georgia, White County, Towns County, Rabun County, Metro, Dawson County and West Georgia as state banking associations organized under Georgia law, are subject to the supervision of, and are regularly examined by, the DBF.  North Carolina is subject to the supervision of, and is regularly examined by, the NCBC and the FDIC.  Both the FDIC and the DBF must grant prior approval of any merger, consolidation or other corporation reorganization involving Union County, North Georgia, White County, Towns County, Rabun County, Metro, Dawson County, or West Georgia, and the FDIC and the NCBC must grant prior approval of any merger, consolidation, or other corporate reorganization of North Carolina.  A bank can be held liable for any loss incurred by, or reasonably expected to be incurred by, the FDIC in connection with the default of a commonly-controlled institution.

Payment of Dividends.  United is a legal entity separate and distinct from the Banks.  Most of the revenues of United result from dividends paid to it by the Banks.  There are statutory and regulatory requirements applicable to the payment of dividends by the Banks, as well as by United to its shareholders.

Union County, North Georgia, Towns County, White County, Rabun County, Metro, Dawson County and West Georgia are each state chartered banks regulated by the DBF and the FDIC.  Under the regulations of the DBF, dividends may not be declared out of the retained earnings of a state bank without first obtaining the written permission of the DBF, unless such bank meets all the following requirements:

Under North Carolina law, the Board of Directors of North Carolina may declare a dividend for as much of the undivided profits of North Carolina as it deems appropriate.

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The payment of dividends by United and the Banks may also be affected or limited by other factors, such as the requirement to maintain adequate capital above regulatory guidelines.  In addition, if, in the opinion of the applicable regulatory authority, a bank under its jurisdiction is engaged in or is about to engage in an unsafe or unsound practice (which, depending upon the financial condition of the bank, could include the payment of dividends), such authority may require, after notice and hearing, that such bank cease and desist from such practice.  The FDIC has issued a policy statement providing that insured banks should generally only pay dividends out of current operating earnings.  In addition to the formal statutes and regulations, regulatory authorities consider the adequacy of each of the Bank’s total capital in relation to its assets, deposits and other such items.  Capital adequacy considerations could further limit the availability of dividends to the Banks.  At December 31, 2001, net assets available from the Banks to pay dividends without prior approval from regulatory authorities totaled approximately $17 million.  For 2001, United’s declared cash dividend payout to common stockholders was 15.6% of net income.

Monetary Policy.  The results of operations of the Banks are affected by credit policies of monetary authorities, particularly the Federal Reserve.  The instruments of monetary policy employed by the Federal Reserve include open market operations in U.S. government securities, changes in the discount rate on bank borrowings and changes in reserve requirements against bank deposits.  In view of changing conditions in the national economy and in the money markets, as well as the effect of actions by monetary and fiscal authorities, including the Federal Reserve, no prediction can be made as to possible future changes in interest rates, deposit levels, loan demand, or the business and income of the Banks.

Capital Adequacy.  The Federal Reserve and the FDIC have implemented substantially identical risk-based rules for assessing bank and bank holding company capital adequacy.  These regulations establish minimum capital standards in relation to assets and off-balance sheet exposures as adjusted for credit risk.  Banks and bank holding companies are required to have (1) a minimum level of total capital (as defined) to risk-weighted assets of eight percent (8%); and  (2) a minimum Tier I Capital (as defined) to risk-weighted assets of four percent (4%).  In addition, the Federal Reserve and the FDIC have established a minimum three percent (3%) leverage ratio of Tier I Capital to total assets for the most highly-rated banks and bank holding companies.  “Tier I Capital” generally consists of common equity not including unrecognized gains and losses on securities, minority interests in equity accounts of consolidated subsidiaries and certain perpetual preferred stock less certain intangibles.  The Federal Reserve and the FDIC will require a bank holding company and a bank, respectively, to maintain a leverage ratio greater than three percent (3%) if either is experiencing or anticipating significant growth or is operating with less than well-diversified risks in the opinion of the Federal Reserve.  The Federal Reserve and the FDIC use the leverage ratio in tandem with the risk-based ratio to assess the capital adequacy of banks and bank holding companies.  The FDIC, the Office of the Comptroller of the Currency (the “OCC”) and the Federal Reserve have amended, effective January 1, 1997, the capital adequacy standards to provide for the consideration of interest rate risk in the overall determination of a bank’s capital ratio, requiring banks with greater interest rate risk to maintain adequate capital for the risk.  The revised standards have not had a significant effect on United’s capital requirements.

In addition, Section 38 of the Federal Deposit Insurance Act implemented the prompt corrective action provisions that Congress enacted as a part of the Federal Deposit Insurance Corporation Improvement Act of 1991 (the “1991 Act”).  The “prompt corrective action” provisions set forth five regulatory zones in which all banks are placed largely based on their capital positions.  Regulators are permitted to take increasingly harsh action as a bank’s financial condition declines.  Regulators are also empowered to place in receivership or require the sale of a bank to another depository institution when a bank’s capital leverage ratio reaches 2%.  Better capitalized institutions are generally subject to less onerous regulation and supervision than banks with lesser amounts of capital.  The FDIC has adopted regulations implementing the prompt corrective action provisions of the 1991 Act, which place financial institutions in the following five categories based upon capitalization ratios: (1) a “well capitalized” institution has a total risk-based capital ratio of at least 10%, a Tier I risk-based ratio of at least 6% and a leverage ratio of at least 5%; (2) an “adequately capitalized” institution has a total risk-based capital ratio of at least 8%, a Tier I risk-based ratio of at least 4% and a leverage ratio of at least 4%; (3) an “undercapitalized” institution has a total risk-based capital ratio of under 8%, a Tier I risk-based ratio of under 4% or a leverage ratio of under 4%; (4) a “significantly undercapitalized” institution has a total risk-based capital ratio of under 6%, a Tier I risk-based ratio of under 3% or a leverage ratio of under 3%; and (5) a “critically undercapitalized” institution has a leverage ratio of 2% or less.  Institutions in any of the three undercapitalized categories would be prohibited from declaring dividends or making capital distributions.  The FDIC regulations also establish procedures for “downgrading” an institution to a lower capital category based on supervisory factors other than capital.  As of December 31, 2001 and 2000, the most recent notifications from the FDIC categorized each of the Banks as “well capitalized” under current regulations.

Recent Developments.  On November 12, 1999, President Clinton signed the Gramm-Leach-Bliley Act, a very significant piece of legislation intended to modernize the financial services industry.  The bill repeals the anti-affiliation provisions of the 1933

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Glass-Steagall Act to allow for the merger of banking and securities organizations and permits banking organizations to engage in insurance activities including insurance underwriting.  The bill also allows bank holding companies to engage in financial activities that are “financial in nature or complementary to a financial activity.”  The act lists the expanded areas that are financial in nature and includes insurance and securities underwriting and merchant banking among others.  The bill also:

• prohibits non-financial entities from acquiring or establishing a thrift while grandfathering existing thrifts owned by non-financial entities.
• establishes state regulators as the appropriate functional regulators for insurance activities but provides that state regulators cannot “prevent or significantly interfere” with affiliations between banks and insurance firms.
• contains provisions designed to protect consumer privacy.  The bill requires financial institutions to disclose their policy for collecting and protecting confidential information and allows consumers to “opt out” of information sharing except with unaffiliated third parties who market the institutions’ own products and services or pursuant to joint agreements between two or more financial institutions.
• provides for functional regulation of a bank’s securities activities by the Securities and Exchange Commission.

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Executive Officers Of United

Executive Officers of United are elected by the Board of Directors annually and hold office until they sooner resign or are removed from office by the Board of Directors.

The Executive Officers of United, and their ages, positions with United and the Banks and terms of office as of February 28, 2002, are as follows:

None of the above officers is related to another and there are no arrangements or understandings between them and any other person pursuant to which any of them was elected as an officer, other than arrangements or understandings with directors or officers of United acting solely in their capacities as such.

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ITEM 2.      PROPERTIES.

The executive offices of United are located at 220 Earnest Street, Blairsville, Georgia. United leases this property.  The Banks conduct business from facilities primarily owned by the respective banks, all of which are in a good state of repair and appropriately designed for use as banking facilities.  The Banks provide services or perform operational functions at 52 locations, of which 43 locations are owned and 9 are leased. Note 6 to United’s Consolidated Financial Statements includes additional information regarding amounts invested in premises and equipment.

ITEM 3.      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 4.      SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

No matters were submitted to a vote of the security holders of United during the fourth quarter of the fiscal year covered by this report.

PART II

ITEM 5.      MARKET FOR UNITED’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

Stock.  There is no established public trading market for United’s common stock.  United has filed an application and has received approval to be listed on The Nasdaq Stock Market.  United’s common stock will begin trading on March 18, 2002 under the ticker symbol : UCBI.  At December 31, 2001, there were approximately 5,000 shareholders of record.  Management of United is aware of 521 sales and transfers of United’s stock in 2001, aggregating approximately 637,000 shares in blocks ranging from one share to 27,000 shares at prices ranging from $29.00 to $45.00 per share.

Dividends.  United declared cash dividends of $.40 per common share in 2001 and $.30 per common share in 2000.  Federal and state laws and regulations impose restrictions on the ability of United and the Banks to pay dividends.  Additional information regarding this item is included in Note 12 to the Consolidated Financial Statements and under the heading of “Supervision and Regulation” in Part I of this report.

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Item 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
             AND RESULTS OF OPERATIONS

The following discussion is intended to provide insight into the financial condition and results of operations of United and should be read in conjunction with the consolidated financial statements and accompanying notes.  

Overview

United is a bank holding company registered under the Bank Holding Company Act of 1956 and was incorporated under the laws of the state of Georgia in 1987. United’s activities are conducted by its wholly-owned subsidiaries, which include a financial services company, and the following banking institutions, (which banks are collectively referred to as the “Banks” in this discussion):

(1) Organized as a Georgia banking corporation in 1949 and began business in 1950.

At December 31, 2001, United had total consolidated assets of $2.7 billion, total loans of $2 billion, total deposits of $2.1 billion and stockholders’ equity of $195 million.  Excluding merger related charges, United’s net income for 2001 was $28.3 million, an increase of $6.6 million, or 30%, from 2000, and diluted earnings per share increased to $2.61 in 2001, from $2.07 in 2000, or 26%.   Return on average common stockholders equity for 2001 was 16.73%, as compared to 15.06% for 2000.  Reported net income of $27.2 million and reported diluted earnings per share of $2.51 for 2001, increased 80% and 81%, respectively, over reported net income of $14.5 million and reported diluted earnings per share of $1.39 for 2000. 

Significant Transactions During 2001

On November 7, 2001, United completed its merger with Peoples Bancorp, Inc. (“West Georgia”), a single-bank holding company located in Carrollton, Georgia. United issued 358,126 shares of common stock in exchange for all outstanding shares of West Georgia.  The transaction was recorded as a purchase, with the results of operations of West Georgia included in earnings from the date of merger.

Significant Transactions During 2000

Stock Offering

On August 4, 2000, United completed a public offering of 418,377 shares of common stock at a price of $38.00 per share providing $15.8 million in new equity capital, net of offering-related expenses. United used the net proceeds of the offering to provide capital for its subsidiary banks and for general corporate purposes, including the reduction of parent company debt.

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Mergers

On September 29, 2000, United completed its merger with Brintech, Inc. (“Brintech”), a consulting firm based in New Smyrna Beach, Florida, in exchange for 283,390 shares of United common stock. In addition, United issued $2.9 million of preferred stock to key non-shareholder employees of Brintech in connection with satisfaction of certain contractual obligations triggered by the change in control of Brintech. Additional information about the business of Brintech is included in the Fee Revenue section of this discussion.

On July 26, 2000, United completed its mergers with North Point Bancshares, Inc. (“Dawson County”), a single-bank holding company based in Dawsonville, Georgia, and Independent Bancshares, Inc. (“Metro”), a single-bank holding company based in Powder Springs, Georgia. United issued 958,024 shares of common stock in exchange for all outstanding shares of Dawson County and 817,604 shares of common stock in exchange for all outstanding shares of Metro.

These mergers were accounted for as poolings of interests, and United’s financial results preceding the dates of the mergers were restated to reflect the combined financial position and results of operations of the acquired units.

Trust Preferred Securities

In 2000, United formed two wholly owned statutory trusts, which issued $15 million of guaranteed preferred beneficial interests in United’s junior subordinated deferrable interest debentures. These debentures qualify as Tier I capital under Federal Reserve Board guidelines. All of the common securities of the trusts are owned by United. The proceeds from the issuance of the securities and the Trust Preferred Securities were used by the trusts to purchase $15.5 million of junior subordinated debentures of United, which carry a fixed interest rate. The proceeds received by United from the sale of the junior subordinated debentures were used to prepay line of credit borrowings of approximately $12.5 million and for other corporate purposes. The debentures represent the sole asset of the trusts. The debentures and related income statement effects are eliminated in United’s financial statements.  Refer to Note 9 to the consolidated financial discussion for further information on the terms and structure of these securities.

Other Transactions

On September 8, 2000, United completed the sale of substantially all assets of its consumer finance company subsidiaries to Lendmark Financial Services, Inc. (“Lendmark”) for cash. The assets sold to Lendmark consisted primarily of consumer installment loans, net of the associated allowance for loan losses, with outstanding principal balances of approximately $6.5 million.  There was no material gain or loss recorded in connection with this transaction.  The financial assets and liabilities that were not acquired by Lendmark were transferred to one of United’s affiliate banks or to United. The operations of both United Family Finance Co. and United Family Finance Co. of North Carolina were discontinued.   Management does not expect to re-enter the consumer finance company business. 

Results of Operations

During 2001, 2000 and 1999, United’s reported net income included certain merger related charges.   These charges included losses relating to the realignment and sale of a portion of the securities portfolio in 2000, as well as expenses related to mergers completed in all three years.   Reported net income for 2001 was $27.2 million, or $2.51 per diluted share, compared to $14.5 million, or $1.39 per diluted share for 2000 and $16.1 million or $1.56 per diluted share for 1999. The reported results for 2001 provided a return on average common stockholders’ equity of 16.08% and a return on average assets of 1.05%.

The remainder of this financial discussion will focus on operating earnings which exclude merger related charges.  Management believes operating earnings provide a more suitable basis for analysis.  For additional information on nonrecurring charges, refer to Note 2 to the Consolidated Financial Statements.

Net income, excluding merger related charges, was $28.3 million in 2001, an increase of 30% from the $21.7 million earned in 2000.  Diluted earnings per common share were $2.61 for 2001, compared with $2.07 reported for 2000, an increase of 26%.  Return on average common equity for 2001 was 16.73%, compared with 15.06% for 2000.  Return on average assets for 2001 was 1.10% as compared to .89% in 2000.

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Net Interest Revenue (Taxable Equivalent)

Net interest revenue (the difference between the interest earned on assets and the interest paid on deposits and liabilities) is the single largest component of United's 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 totaled $109.2 million in 2001, an increase of $12.6 million, or 13%, from the level recorded in 2000.  Net interest revenue for 2000 increased $15.6 million, or 19%, over the 1999 level.

 The banking industry uses two key ratios to measure relative profitability of net interest revenue.  The net interest rate spread measures the difference between the average yield on earning assets and the average rate paid on interest bearing liabilities.  The interest rate spread eliminates the impact of non-interest bearing deposits 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 total average earning assets which includes the positive impact of obtaining a portion of the funding of earning assets with customers’ non-interest bearing deposits.

Average interest earning assets increased $100 million, or 4%, over 2000, reflecting loan growth net of attrition in the securities portfolio. Loan demand continued despite softening economic conditions, resulting in a 10% increase in average loan balances from 2000 with demand accelerating toward the end of the year.  Approximately half of the increase in interest-earning assets was funded by interest-bearing sources as the increase in interest-bearing liabilities was approximately $50 million over 2000.

The declining rate environment caused a reduction of yields earned on assets and rates paid on deposits and other borrowings.  During 2001, the Federal Reserve reduced the targeted federal funds rate eleven times for a total reduction of 475 basis points, ending with a rate of 1.75%.  The Federal Reserve’s actions in 2001 stood in sharp contrast to 2000 when the targeted federal funds rate was increased 100 basis points during the early part of the year.  United responded to the falling rate environment of 2001 by actively managing the cost of funds while remaining competitive on deposit products.  Improvement in earning-asset mix and an increase in non-interest bearing deposits, positively contributed to net interest revenue.  The result was a 37 basis point increase in the net interest spread and a 35 basis point increase in the net interest margin.

For the years 2001, 2000, and 1999, United’s net interest spread was 3.90%, 3.53% and 3.58%, while the net interest margin was 4.51%, 4.16% and 4.07%, respectively.  An increase in the balance of non-interest bearing funding sources led to the increase in the net interest margin from 1999 to 2000 while the net interest spread remained relatively flat.

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The following table shows, for the past three years, the relationship between interest revenue and interest expense and the average balances of interest-earning assets and interest-bearing liabilities.

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The following table shows the relative impact on net interest revenue of changes in the average outstanding balances (volume) of earning assets and interest bearing liabilities and the rates earned and paid by United on such assets and liabilities.

Provision for Loan Losses

The provision for loan losses was $6.0 million in 2001, compared with $7.3 million in 2000, and $6.0 million in 1999. The provision as a percentage of average outstanding loans for 2001, 2000 and 1999 was .32%, .43% and .43%, respectively.  The ratio of net loan charge-offs to average outstanding loans for 2001 was .25%, compared with .18% for 2000 and .15% for 1999.  The provision for loan losses for each year is the amount necessary to position the allowance for loan losses at an amount adequate to absorb losses inherent in the loan portfolio as of the balance sheet date.

The provision for loan losses is based on management’s evaluation of inherent risks in the loan portfolio and the corresponding analysis of the allowance for loan losses.  Additional discussions on loan quality and the allowance for loan losses are0 included in the Asset Quality section of this report.

 Fee Revenue

Total fee revenue for 2001, excluding merger-related charges, was $25.3 million, compared with $18.9 million in 2000 and $15.7 million in 1999.  The following table presents the components of fee revenue for 2001, 2000 and 1999.

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A significant source of fee revenue for United is service charges and fees on deposit accounts.  Total deposit service charges and fees for 2001 were $9.9 million compared with $8.2 million in 2000.  The growth in service charges and fee revenue was primarily due to the increase in the number of deposit accounts and transactions.

Mortgage loan and related fees for 2001 were $6.2 million, more than three times the fees recorded in 2000.  The increase in origination volume was due to the lower interest rate environment which increased the market for mortgage refinancing.  Substantially all of the fees were the result of a higher volume of loan originations which totaled $302 million of residential mortgages in 2001, as compared to $116 million in 2000.  Substantially all of the mortgages were subsequently sold into the secondary market, including the right to service these loans. 

Consulting fees for 2001 were $4.7 million, slightly less than the amount reported for 2000 reflecting some softness in demand for consulting projects in the fourth quarter of 2001.

Amounts shown above for 2000 exclude $2.7 million in securities losses related to merger transactions.

Operating Expense

Total operating expense for 2001 was $83.9 million, compared with $74.0 million in 2000 and $63.5 million in 1999. Operating expense for 2001, 2000 and 1999, excludes $1.6 million, $7.6 million and $1.8 million, respectively, of merger-related charges.  These charges primarily consisted of employee contractual obligations, write-off of obsolete equipment and other merger costs.  The following table presents the components of operating expense, excluding merger related charges, for the years ended December 31, 2001, 2000 and 1999.

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Total salaries and benefits for 2001 were $50 million, an increase of $7.5 million, or 18%, over 2000.  This increase was primarily due to adding staff to support business growth, new services offered to customers, strengthening of management at the holding company and a merger with West Georgia.  At December 31, 2001, United had 1,048 full-time equivalent employees as compared with 968 at year-end 2000.

Occupancy expense for 2001 was $8 million, an increase of $.7 million, or 9%, from 2000.  The increase is primarily attributable to additional space to support growth in business and new offices.

Communications and equipment expense, which includes software-related expenses, data circuit costs, local phone service, long-distance service and cellular service, increased $.9 million, or 19%, during 2001.  The increase was due primarily to the growth in customers and transactions and software and related maintenance costs incurred in connection with integration and automation projects completed in 2001.

Postage, printing and supplies expense increased $.9 million, or 26%, primarily due to costs incurred in connection with United’s branding campaign and business expansion.  During the course of the year, and especially during the fourth quarter of 2001, United incurred charges to write off existing inventories of stationery and supplies with United’s old brand names.  Additional costs were incurred in establishing the new brand name throughout United’s markets.

Professional fees were up $.6 million, or 21%, from 2000.  The increase was primarily due to costs associated with several operating and new product initiatives including Internet banking and imaging roll-out, and higher legal fees incurred to resolve several non-performing loans.

The efficiency ratio measures total operating expenses as a percentage of total revenue, excluding the provision for loan losses, net securities gains (losses) and merger-related expenses.   United’s efficiency ratio for 2001 was 62.52% as compared with 64.15% for 2000. The improvement in the efficiency ratio is due to managements’ focus on controlling operating expenses and improving operating results.

Income Taxes

Income taxes, excluding taxable equivalent adjustments and the tax benefit resulting from merger-related charges, were $14.1 million in 2001 compared with $10.0 million in 2000 and $7.7 million in 1999.  The effective tax rates (as a percentage of pre-tax net income) for 2001, 2000 and 1999 were 33.2%, 31.4% and 30.9%, respectively.  These effective tax rates are lower than the statutory tax rate primarily due to interest revenue on certain investment securities and loans that are exempt from income taxes.  Additional information regarding income taxes can be found in Note 10 to the Consolidated Financial Statements.

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Balance Sheet Review

Total assets at December 31, 2001 were $2.7 billion, an increase of $220 million, or 9%, from December 31, 2000.  On an average basis, total assets increased $132 million, or 5%, from 2000 to 2001.  Average interest earning assets for 2001 were $2.4 billion, compared with $2.3 billion for 2000, an increase of 4%.

Loans

Total loans averaged $1.9 billion in 2001, compared with $1.7 billion in 2000, an increase of 10%.   At December 31, 2001, total loans were $2 billion, an increase of $216 million, or 12%, from December 31, 2000.  Over the past five years, United has experienced strong loan growth in all markets, with particular strength in loans secured by real estate, both residential and non-residential.  The following table presents a summary of the loan portfolio by category over that period.

Substantially all of United’s loans are to customers located in Georgia and North Carolina, the immediate market areas of the Banks.  This includes loan customers who have a seasonal residence in the Banks’ market areas.  The following table indicates United’s loans by specific collateral type or loan purpose as of December 31, 2001 and 2000:

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As of December 31, 2001, United’s 20 largest credit relationships consisted of loans and loan commitments ranging from $3.6 to $15.2 million, with an aggregate total credit exposure of $126.3 million.   All of these customers have been underwritten in accordance with United’s credit quality standards and structured in order to minimize United’s potential exposure to loss. 

The following table sets forth the maturity distribution of commercial and real estate construction loans, including the interest rate sensitivity for loans maturing greater than one year, as of December 31, 2001.  United’s loan policy does not permit automatic roll-over of matured loans.

Asset Quality and Risk Elements

United manages asset quality and controls credit risk through diversification of the loan portfolio and the application of policies designed to promote sound underwriting and loan monitoring practices.  United's loan administration function is charged with monitoring asset quality, establishing credit policies and procedures and enforcing the consistent application of these policies and procedures at all of the Banks.  Additional information on United’s loan administration function is included in Item 1 under the heading Loan Review and Non-performing Assets.

The provision for loan losses charged to earnings is based upon management’s judgment of the amount necessary to maintain the allowance at a level adequate to absorb probable losses.  The amount each year is dependent upon many factors including loan growth, net charge-offs, changes in the composition of the loan portfolio, delinquencies, management's assessment of loan portfolio quality, the value of collateral, and economic factors and trends.  The evaluation of these factors is performed by United’s credit administration department through an analysis of the adequacy of the allowance for loan losses.

Reviews of non-performing, 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 year.  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 and anticipated economic conditions and other factors.

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The following table presents a summary of changes in the allowance for loan losses for each of the past five years.

Management believes that the allowance for loan losses at December 31, 2001 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 additional charges to the provision for loan losses in future periods if the results of their review warrant such additions.

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Non-performing Assets

Non-performing loans, which include non-accrual loans and accruing loans past due over 90 days, totaled $8.6 million at year-end 2001, compared with $5.6 million at December 31, 2000.  In 2001, two lending relationships with balances greater than $1 million were added to the list of non-accrual loans.  The increase in non-performing loans did not occur in any specific industry.  At December 31, 2001, the ratio of non-performing loans to total loans was .43%, compared with .31% at year-end 2000.  Non-performing assets, which include non-performing loans and foreclosed real estate, totaled $9.7 million at December 31, 2001, compared with $6.7 million at year-end 2000.

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 nor 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.  Loans made by the Banks to facilitate the sale of other real estate are made on terms comparable to loans of similar risk.

There were no commitments to lend additional funds to customers whose loans were on non-accrual status at December 31, 2001.  The table below summarizes non-performing assets for the last five years.

At December 31, 2001, United had $14.7 million of loans which were not classified as non-performing but for which known information about the borrowers’ financial condition caused management to have concern about the ability of the borrowers to comply with the repayment terms of the loans.  These loans were identified through the loan review process described in the Asset Quality and Risk Elements section (see also section titled Loan Review and Non-performing Assets in Item 1) of this discussion above that provides for assignment of a risk rating based on a ten-grade scale to all commercial and commercial real estate loans.  Based on the evaluation of current market conditions, loan collateral, other secondary sources of repayment and cash flow generation, management does not anticipate any significant losses related to these loans.  These loans are subject to continuing management attention and are considered in the determination of the allowance for loan losses.

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 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.

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Total average investment securities decreased 17% during 2001. The decrease in the average balances for 2001 was due to portfolio attrition.  Due to the low rate environment, United allowed the maturity roll-off of the securities portfolio to fund loan demand rather than reinvest in securities with unattractive yields.  The following table shows the carrying value of United’s securities as of December 31, 2001, 2000 and 1999.

The investment securities portfolio consists of U.S. Government and agency securities, municipal securities, various equity securities and U.S. Government sponsored agency mortgage-backed securities.  A mortgage-backed security relies on the underlying mortgage pools of loans to provide a cash flow of principal and interest.  The actual maturities of these securities will differ from the contractual maturities because the loans underlying the security may prepay with or without prepayment penalties.  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.

At December 31, 2001, United had 24% of its total investment securities portfolio in mortgage backed pass-through securities, all of which are issued or backed by Federal agencies, compared with 27% at December 31, 2000.  United did not have securities of any issuer in excess of 10% of equity at year-end 2001 or 2000.  Other mortgage-backed securities, including CMOs, represented 11% of the total securities portfolio at December 31, 2001, compared with 29% at year-end 2000.  See Note 4 to the Consolidated Financial Statements for further discussion of investment portfolio and related fair value and maturity information.

Deposits

Total average deposits for 2001 were $2 billion, an increase of $69 million, or 4% from 2000.  Average non-interest bearing demand deposit accounts increased $24 million, or 10%, and average interest bearing transaction accounts increased $55 million, or 13%, from 2000.  Average time deposits for 2001 were $1.2 billion, flat when compared to 2000. 

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Time deposits of $100,000 and greater totaled $371 million at December 31, 2001, compared with $383 million at year-end 2000. United utilizes “brokered” time deposits, issued in certificates of less than $100,000, as an alternative source of cost-effective funding.  Average brokered time deposits outstanding in 2001 and 2000 were $58.7 and $53.9 million, respectively. Total interest paid on time deposits of $100,000 and greater during 2001 was $19.8 million.  The following table sets forth the scheduled maturities of time deposits of $100,000 and greater and brokered time deposits at December 31, 2001.

Table 12 - Maturities of Time Deposits of $100,000 and Greater and Brokered Deposits

Wholesale Funding

At December 31, 2001, all of the Banks were shareholders in the Federal Home Loan Bank of Atlanta. Through this affiliation, secured advances totaling $290 million were outstanding at rates competitive with time deposits of like maturities.  United anticipates continued utilization of this short and long term source of funds to minimize interest rate risk.  The FHLB advances outstanding at December 31, 2001 had both fixed and floating interest rates ranging from 2.00% to 7.81%.  Approximately 33% of the FHLB advances mature prior to December 31, 2002.  Additional information regarding FHLB advances, including scheduled maturities, is provided in Note 8 to the consolidated financial statements.

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 of United 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 of a bank 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.

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 $16.5 million at December 31, 2001, and typically turn over every 45 days as the closed loans are sold to investors in the secondary market.  Real estate-construction and commercial loans that mature in one year

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or less amounted to $320 million, or 16%, of the total loan portfolio at December 31, 2001. Other short-term investments such as federal funds sold are additional sources of liquidity.

The liability section of the balance sheet provides liquidity through depositors’ interest bearing and non-interest bearing  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 short-term in nature and are used as necessary to fund asset growth and meet other short-term liquidity needs.

As disclosed in United's consolidated statements of cash flows, net cash provided by operating activities was $25 million during 2001.  The major sources of cash provided by operating activities are net income partially offset by changes in other assets and other liabilities. Net cash used in investing activities of $105 million consisted primarily of a net increase in loans of $161 million and securities purchases of $129 million funded largely by sales, maturities and paydowns of securities of $189 million.  Net cash provided by financing activities provided the remainder of funding sources for 2001.  The $101 million of net cash provided by financing activities consisted primarily of a $55 million net increase in deposits, a net increase in FHLB advances of $25 million and an increase of $25 million in federal funds purchased and repurchase agreements.  In the opinion of management, United's liquidity position at December 31, 2001, is sufficient to meet its expected cash flow requirements. 

Capital Resources and Dividends

Stockholders' equity at December 31, 2001 was $195 million, an increase of $36.3 million, or 23%, from December 31, 2000. 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, stockholders’ equity increased 19%. Dividends of $4.2 million, or $.40 per share, were declared on common stock in 2001, an increase of 33% per share from the amount declared in 2000. The dividend payout ratios for 2001 and 2000 were 15.0% and 14.2%, respectively, excluding merger-related charges or 15.6% and 21.3%, respectively, based on reported results.  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, management has instituted a dividend program that provides for increased cash dividends when earnings and capital levels permit.

On December 31, 1996, United completed a private placement of convertible subordinated debentures due December 31, 2006 (the “2006 Debentures”).  The 2006 Debentures bear interest at the rate of 25 basis points over the prime rate, as quoted in the Wall Street Journal,  payable quarterly. The 2006 Debentures may be redeemed, in whole or in part, on or after January 1, 1998, at the option of United upon at least 20 days and not more than 60 days notice, at a redemption price equal to 100% of the principal amount of the debentures to be redeemed plus interest accrued and unpaid as of the date of redemption.  The holders of the 2006 Debentures have the right, exercisable at any time up to December 31, 2006, to convert such debentures at the principal amount thereof into shares of Common Stock of United at the conversion price of $25 per share, subject to adjustment for stock splits and stock dividends.

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 which 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.

United's Tier I capital consists of stockholders' equity, excluding accumulated other comprehensive income, and qualifying capital securities less goodwill and deposit-based intangibles, totaled $212 million at December 31, 2001.  Tier II capital components include supplemental capital components 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 and was $240 million at December 31, 2001. The ratios, as calculated under the guidelines, were 10.5% and 11.9% for Tier I and Total Risk-based Capital, respectively, at December 31, 2001. 

 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 reduced by the amount of 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

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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.  United's leverage ratios at December 31, 2001 and 2000 were 8.0% and 7.5%, respectively.

At December 31, 2001, all three of the capital ratios of United and the Banks exceed the minimum ratios required by federal regulators.  United monitors these ratios to ensure that United and the Banks remain within regulatory guidelines.  Further information regarding the actual and required capital ratios of United and the Banks is provided in Note 12 to the consolidated financial statements.

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 monitor and manage United's interest rate sensitivity position.  In addition, periodic reviews of banking services and products are conducted to adjust pricing in view of current and expected costs.

Outlook

Management expects growth to continue through 2002, although at a slower rate than 2001.  Earnings per share are expected to grow at a rate of 12% to 15% based on a stable net interest margin and anticipated loan growth of 5% to 10%.

ITEM 7A.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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.

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

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 each scenario, 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 six interest rate scenarios.  The first 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.  The second scenario is a most likely scenario that projects the most likely change in rates over the next twelve months based on the slope of the yield curve.  United runs shock scenarios assuming an immediate change interest rates up and down 300 basis points and ramp scenarios that assume gradual increases and decreases of 300 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 15% for the up or down 300 basis point ramp scenarios over twelve months.  At December 31, 2001, United’s simulation model indicated that a 300 basis point decrease in rates over the next twelve months would cause an approximate 5% decrease in net interest revenue and a 300 basis point increase in rates over the next twelve months would cause an approximate 2% increase in net interest revenue.

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 Interest rate sensitivity is a function of the repricing characteristics of United's portfolio of assets and liabilities.  These repricing characteristics are the time frames within which the interest-earning assets and interest-bearing liabilities are subject to change in interest rates either at replacement, repricing or maturity during the life of the instruments.  Interest rate sensitivity management focuses on the maturity structure of assets and liabilities and their repricing characteristics during periods of changes in market interest rates.  Effective interest rate sensitivity management seeks to ensure that both assets and liabilities respond to changes in interest rates within an acceptable timeframe, thereby minimizing the impact of interest rate changes on net interest revenue. Interest rate sensitivity is measured as the difference between the volumes of assets and liabilities in United's current portfolio that are subject to repricing at various time horizons: immediate; one to three months; four to twelve months; one to five years; over five years, and on a cumulative basis.  The differences are known as interest sensitivity gaps.  The following table shows interest sensitivity gaps for these different intervals as of December 31, 2001.

(1)  Cumulative interest rate sensitivity position as a percentage of average total interest-earning assets.

As demonstrated in the preceding table, 78% of interest-bearing liabilities will reprice within twelve months compared with 67% of interest-earning assets, however such changes may not be proportionate with changes in market rates within each balance sheet category.  Changes in the mix of earning assets or supporting liabilities can either increase or decrease the net interest margin without affecting interest rate sensitivity.  In addition, the interest rate spread between an asset and its supporting liability can vary significantly while the timing of repricing for both the asset and the liability remains the same, thus impacting net interest revenue.  This characteristic is referred to as basis risk and generally relates to the possibility that the repricing characteristics of short-term assets tied to United's prime lending rate are different from those of short-term funding sources such as certificates of deposit.

Varying interest rate environments can create unexpected changes in prepayment levels of assets and liabilities that are not reflected in the interest rate sensitivity analysis. These prepayments may have significant impact on United's net interest margin. 

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Because of these factors, an interest sensitivity gap analysis may not provide an accurate assessment of United's exposure to changes in interest rates.

           Table 13 indicates United is in a liability sensitive or negative static gap position for the first twelve months.  This liability sensitive position would generally indicate that United’s net interest revenue would decrease should interest rates rise and would increase should interest rates fall.  United’s simulation model indicates however, that United is asset sensitive and that changes in net interest revenue would be directionally consistent with changes in rates.  The difference between the results of the two analysis tools is primarily due to interest-bearing deposit balances that United has some discretion over the timing and extent of rate changes.  In the simulation model, management has assumed that such deposits are less sensitive to rising rate movements, since management would delay increases in rates until warranted by competitive pressures.  Additionally, interest rate swap contracts having a notional value of $75 million will mature within eight months of December 31, 2001.  United uses both the interest rate gap sensitivity analysis and simulation modeling to determine its exposure to interest rate risk and neither can provide absolute assurance that United is not at risk from interest rate increases and decreases.  Management also evaluates the condition of the economy, the pattern of market interest rates and other economic data to determine the appropriate mix and repricing characteristics of assets and liabilities necessary to optimize the net interest margin.

                The following table presents the expected maturity of the total investment securities by maturity date and average yields based on amortized cost (for all obligations on a fully taxable basis) at December 31, 2001.  The composition and maturity/repricing distribution of the securities portfolio is subject to change depending on rate sensitivity, capital and liquidity needs.

In order to assist in achieving a desired level of interest rate sensitivity, United has entered into off-balance sheet contracts that are considered derivative financial instruments during 2001, 2000 and 1999.  Derivative financial instruments can be a cost and capital effective means of modifying the repricing characteristics of on-balance sheet assets and liabilities.  These contracts include interest rate swaps under which United pays a variable rate and receives a fixed rate, and interest rate cap contracts for which United pays an up-front premium in exchange for a variable cash flow if interest rates exceed the cap contract rate.

The interest rate cap contracts have been written down to their fair value in the consolidated balance sheet.   The following table presents United’s interest rate cap contracts outstanding at December 31, 2001.

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The following table presents United’s interest rate swap contracts outstanding at December 31, 2001.