News Column

UNITED BANKSHARES INC/WV - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

May 12, 2014

FORWARD-LOOKING STATEMENTS

Congress passed the Private Securities Litigation Act of 1995 to encourage corporations to provide investors with information about the company's anticipated future financial performance, goals, and strategies. The act provides a safe harbor for such disclosure, in other words, protection from unwarranted litigation if actual results are not the same as management expectations.

United desires to provide its shareholders with sound information about past performance and future trends. Consequently, any forward-looking statements contained in this report, in a report incorporated by reference to this report, or made by management of United in this report, in any other reports and filings, in press releases and in oral statements, involve numerous assumptions, risks and uncertainties. Actual results could differ materially from those contained in or implied by United's statements for a variety of factors including, but not limited to: changes in economic conditions; business conditions in the banking industry; movements in interest rates; competitive pressures on product pricing and services; success and timing of business strategies; the nature and extent of governmental actions and reforms; and rapidly changing technology and evolving banking industry standards.



RECENT DEVELOPMENTS

On December 10, 2013, the banking agencies issued a final rule implementing Section 619 of the Dodd-Frank Act, commonly referred to as the "Volcker Rule". The final rule requires banking entities to divest disallowed securities by July 21, 2015, unless, upon application, the Federal Reserve grants extensions to July 21, 2017. On January 14, 2014, the banking agencies approved an interim final rule to permit banking entities to retain interests in certain collateralized debt obligations backed primarily by trust preferred securities (Trup Cdos) from the prohibitions under the Volcker Rule. On July 2, 2013, the Federal Reserve, United's and its banking subsidiaries' primary federal regulator, published final rules (the Basel III Capital Rules) establishing a new comprehensive capital framework for U.S. banking organizations. The rules implement the Basel Committee's December 2010 framework known as "Basel III" for strengthening international capital standards as well as certain provisions of the Dodd-Frank Act. The Basel III Capital Rules substantially revise the risk-based capital requirements applicable to bank holding companies and depository 50



--------------------------------------------------------------------------------

Table of Contents

institutions, including United and its banking subsidiaries, compared to the current U.S. risk-based capital rules. The Basel III Capital Rules define the components of capital and address other issues affecting the numerator in banking institutions' regulatory capital ratios. The Basel III Capital Rules also address risk weights and other issues affecting the denominator in banking institutions' regulatory capital ratios and replace the existing risk-weighting approach, which was derived from Basel I capital accords of the Basel Committee, with a more risk-sensitive approach based, in part, on the standardized approach in the Basel Committee's 2004 "Basel II" capital accords. The Basel III Capital Rules also implement the requirements of Section 939A of the Dodd-Frank Act to remove references to credit ratings from the federal banking agencies' rules. The Basel III Capital Rules are effective for United and its banking subsidiaries on January 1, 2015 (subject to a phase-in period). Management believes that, as of March 31, 2014 United and its banking subsidiaries would meet all capital adequacy requirements under the Basel III Capital Rules on a fully phased-in basis if such requirements were currently effective.



INTRODUCTION

The following discussion and analysis presents the significant changes in financial condition and the results of operations of United and its subsidiaries for the periods indicated below. This discussion and the unaudited consolidated financial statements and the notes to unaudited Consolidated Financial Statements include the accounts of United Bankshares, Inc. and its wholly-owned subsidiaries, unless otherwise indicated. Management has evaluated all significant events and transactions that occurred after March 31, 2014, but prior to the date these financial statements were issued, for potential recognition or disclosure required in these financial statements. In addition, after the close of business on January 31, 2014, United acquired 100% of the outstanding common stock of Virginia Commerce Bancorp, Inc. (Virginia Commerce), a Virginia corporation headquartered in Arlington, Virginia. The results of operations of Virginia Commerce are included in the consolidated results of operations from the date of acquisition. The acquisition of Virginia Commerce enhances United's existing footprint in the Washington, D.C. MSA. Virginia Commerce was merged with and into George Mason Bankshares, Inc., a wholly-owned subsidiary of United (the Merger) in a transaction to be accounted for under the acquisition method of accounting. At consummation, Virginia Commerce had assets of approximately $2.77 billion, loans of $2.10 billion, and deposits of $2.02 billion. In addition, on February 20, 2014, United sold a former branch building for approximately $11.1 million and recognized a before-tax gain of $8.98 million.



This discussion and analysis should be read in conjunction with the unaudited Consolidated Financial Statements and accompanying notes thereto, which are included elsewhere in this document.

USE OF NON-GAAP FINANCIAL MEASURES

This discussion and analysis contains certain financial measures that are not recognized under GAAP. Under SEC Regulation G, public companies making disclosures containing financial measures that are not in accordance with GAAP must also disclose, along with each "non-GAAP" financial measure, certain additional information, including a reconciliation of the non-GAAP financial measure to the closest comparable GAAP financial measure, as well as a statement of the company's reasons for utilizing the non-GAAP financial measure. Generally, United has presented these non-GAAP financial measures because it believes that these measures provide meaningful additional information to assist in the evaluation of United's results of operations or financial position. Presentation of these non-GAAP financial measures is consistent with how United's management evaluates its performance internally and these non-GAAP financial measures are frequently used by securities analysts, investors and other interested parties in the evaluation of companies in the banking industry. Specifically, this discussion contains certain references to financial measures identified as tax-equivalent net interest income and noninterest income excluding the results of the noncash, other-than-temporary impairment charges as well as net gains and losses from sales and calls of investment securities. Management believes these non-GAAP financial measures to be helpful 51



--------------------------------------------------------------------------------

Table of Contents

in understanding United's results of operations or financial position. However, this non-GAAP information should be considered supplemental in nature and not as a substitute for related financial information prepared in accordance with GAAP. Where non-GAAP financial measures are used, the comparable GAAP financial measure, as well as reconciliation to that comparable GAAP financial measure, as well as a statement of the company's reasons for utilizing the non-GAAP financial measure, can be found within this discussion and analysis. Investors should recognize that United's presentation of these non-GAAP financial measures might not be comparable to similarly titled measures at other companies.



APPLICATION OF CRITICAL ACCOUNTING POLICIES

The accounting and reporting policies of United conform with U.S. generally accepted accounting principles. In preparing the consolidated financial statements, management is required to make estimates, assumptions and judgments that affect the amounts reported in the financial statements and accompanying notes. These estimates, assumptions and judgments, which are reviewed with the Audit Committee of the Board of Directors, are based on information available as of the date of the financial statements. Actual results could differ from these estimates. These policies, along with the disclosures presented in the financial statement notes and in this financial review, provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined. Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions, and estimates underlying those amounts, management has identified the determination of the allowance for credit losses, the valuation of investment securities and the related other-than-temporary impairment analysis, and the calculation of the income tax provision to be the accounting areas that require the most subjective or complex judgments, and as such could be most subject to revision as new information becomes available.



Allowance for Credit Losses

As explained in Note 6, Allowance for Credit Losses to the unaudited Consolidated Financial Statements, the allowance for loan losses represents management's estimate of the probable credit losses inherent in the lending portfolio. Determining the allowance for loan losses requires management to make estimates of losses that are highly uncertain and require a high degree of judgment. At March 31, 2014, the allowance for loan losses was $74.3 million and is subject to periodic adjustment based on management's assessment of current probable losses in the loan portfolio. Such adjustment from period to period can have a significant impact on United's consolidated financial statements. To illustrate the potential effect on the financial statements of our estimates of the allowance for loan losses, a 10% increase in the allowance for loan losses would have required $7.4 million in additional allowance (funded by additional provision for credit losses), which would have negatively impacted the first quarter of 2014 net income by approximately $4.8 million, after-tax or $0.08 diluted per common share. Management's evaluation of the adequacy of the allowance for loan losses and the appropriate provision for loan losses is based upon a quarterly evaluation of the loan portfolio. This evaluation is inherently subjective and requires significant estimates, including estimates related to the amounts and timing of future cash flows, value of collateral, losses on pools of homogeneous loans based on historical loss experience, and consideration of current economic trends, all of which are susceptible to constant and significant change. The allowance allocated to specific credits and loan pools grouped by similar risk characteristics is reviewed on a quarterly basis and adjusted as necessary based upon subsequent changes in circumstances. In determining the components of the allowance for loan losses, management considers the risk arising in part from, but not limited to, charge-off and delinquency trends, current economic and business conditions, lending policies and procedures, the size and risk characteristics of the loan portfolio, concentrations of credit, and other various factors. The methodology used to determine the allowance for loan losses is described in Note 6. A discussion of the factors leading to changes in the amount of the allowance for credit losses is included in the Provision for Credit Losses section of this Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A). Additional information relating to United's loans is included in Note 4, Loans to the unaudited 52



--------------------------------------------------------------------------------

Table of Contents

Consolidated Financial Statements.

Investment Securities

Accounting estimates are used in the presentation of the investment portfolio and these estimates impact the presentation of United's financial condition and results of operations. United classifies its investments in debt as either held to maturity or available for sale and its equity securities as available for sale. Securities held to maturity are accounted for using historical costs, adjusted for amortization of premiums and accretion of discounts. Securities available for sale are accounted for at fair value, with the net unrealized gains and losses, net of income tax effects, presented as a separate component of shareholders' equity. When available, fair values of securities are based on quoted prices or prices obtained from third party vendors. Third party vendors compile prices from various sources and may determine the fair value of identical or similar securities by using pricing models that consider observable market data. Prices obtained from third party vendors that do not reflect forced liquidation or distressed sales are not adjusted by management. Where prices reflect forced liquidation or distressed sales, as is the case with United's portfolio of trust preferred securities (Trup Cdos), management estimates fair value based on a discounted cash flow methodology using appropriately adjusted discount rates reflecting nonperformance and liquidity risks. Due to the subjective nature of this valuation process, it is possible that the actual fair values of these securities could differ from the estimated amounts, thereby affecting United's financial position, results of operations and cash flows. The potential impact to United's financial position, results of operations or cash flows for changes in the valuation process cannot be reasonably estimated. If the estimated value of investments is less than the cost or amortized cost, the investment is considered impaired and management evaluates whether an event or change in circumstances has occurred that may have a significant adverse effect on the fair value of the investment. If such an event or change has occurred, management must exercise judgment to determine the nature of the potential impairment (i.e., temporary or other-than-temporary) in order to apply the appropriate accounting treatment. If United intends to sell, or is more likely than not they will be required to sell an impaired debt security before recovery of its amortized cost basis less any current period credit loss, other-than-temporary impairment is recognized in earnings. The amount recognized in earnings is equal to the entire difference between the security's amortized cost basis and its fair value at the balance sheet date. If United does not intend to sell, and is not more likely than not they will be required to sell the impaired debt security prior to recovery of its amortized cost basis less any current-period credit loss, the other-than-temporary impairment is separated into the following: 1) the amount representing the credit loss, which is recognized in earnings, and 2) the amount related to all other factors, which is recognized in other comprehensive income. Given the recent disruptions in the financial markets, the decision to recognize other-than-temporary impairment on investment securities has become more difficult as complete information is not always available and market conditions and other relevant factors are subject to rapid changes. Therefore, the other-than-temporary impairment assessment has become a critical accounting policy for United. For additional information on management's consideration of investment valuation and other-than-temporary impairment, see Note 3, Investment Securities, and Note 12, Fair Value Measurements, to the unaudited consolidated financial statements.



Accounting for Acquired Loans

Loans acquired are initially recorded at their acquisition date fair values. The fair value of the acquired loans are based on the present value of the expected cash flows, including both principal and interest and prepayments. Periodic principal and interest cash flows are adjusted for expected losses and prepayments, then discounted to determine the present value and summed to arrive at the estimated fair value. Fair value estimates involve assumptions and judgments as to credit risk, interest rate risk, prepayment risk, liquidity risk, default rates, loss severity, payment speeds, collateral values and discount rate.



Acquired loans are divided into loans with evidence of credit quality deterioration, which are accounted for under

53



--------------------------------------------------------------------------------

Table of Contents

ASC topic 310-30 (acquired impaired) and loans that do not meet this criteria, which are accounted for under ASC topic 310-20 (acquired performing). Acquired impaired loans have experienced a deterioration of credit quality from origination to acquisition for which it is probable that United will be unable to collect all contractually required payments receivable, including both principal and interest. In the assessment of credit quality, numerous assumptions, interpretations and judgments must be made, based on internal and third-party credit quality information and ultimately the determination as to the probability that all contractual cash flows will not be able to be collected. This is a point in time assessment and inherently subjective due to the nature of the available information and judgment involved. Subsequent to the acquisition date, United continues to estimate the amount and timing of cash flows expected to be collected on acquired impaired loans. Increases in expected cash flows will generally result in a recovery of any previously recorded allowance for loan losses, to the extent applicable, and/or a reclassification from the nonaccretable difference to accretable yield, which will be recognized prospectively. The present value of any decreases in expected cash flows after the acquisition date will generally result in an impairment charge recorded as a provision for loan losses, resulting in an increase to the allowance for loans losses For acquired performing loans, the difference between the acquisition date fair value and the contractual amounts due at the acquisition date represents the fair value adjustment. Fair value adjustments may be discounts (or premiums) to a loan's cost basis and are accreted (or amortized) to interest income over the the loan's remaining life using the level yield method. Subsequent to the acquisition date, the methods utilized to estimate the required allowance for loan losses for these loans is similar to originated loans.



See Note 2, Merger and Acquisitions, and Note 4, Loans, to the unaudited Consolidated Financial Statements for information regarding United's acquired loans disclosures.

Income Taxes United's calculation of income tax provision is inherently complex due to the various different tax laws and jurisdictions in which we operate and requires management's use of estimates and judgments in its determination. The current income tax liability also includes income tax expense related to our uncertain tax positions as required in ASC topic 740, "Income Taxes." Changes to the estimated accrued taxes can occur due to changes in tax rates, implementation of new business strategies, resolution of issues with taxing authorities and recently enacted statutory, judicial and regulatory guidance. These changes can be material to the Company's operating results for any particular reporting period. The analysis of the income tax provision requires the assessments of the relative risks and merits of the appropriate tax treatment of transactions, filing positions, filing methods and taxable income calculations after considering statutes, regulations, judicial precedent and other information. United strives to keep abreast of changes in the tax laws and the issuance of regulations which may impact tax reporting and provisions for income tax expense. United is also subject to audit by federal and state authorities. Because the application of tax laws is subject to varying interpretations, results of these audits may produce indicated liabilities which differ from United's estimates and provisions. United continually evaluates its exposure to possible tax assessments arising from audits and records its estimate of probable exposure based on current facts and circumstances. The potential impact to United's operating results for any of the changes cannot be reasonably estimated. See Note 15, Income Taxes, to the unaudited Consolidated Financial Statements for information regarding United's ASC topic 740 disclosures.



Use of Fair Value Measurements

United determines the fair value of its financial instruments based on the fair value hierarchy established in ASC topic 820, whereby the fair value of certain assets and liabilities is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. ASC topic 820 establishes a three-level hierarchy for disclosure of assets and liabilities recorded at fair value. The classification 54



--------------------------------------------------------------------------------

Table of Contents

of assets and liabilities within the hierarchy is based on whether the inputs in the methodology for determining fair value are observable or unobservable. Observable inputs reflect market-based information obtained from independent sources (Level 1 or Level 2), while unobservable inputs reflect management's estimate of market data (Level 3). For assets and liabilities that are actively traded and have quoted prices or observable market data, a minimal amount of subjectivity concerning fair value is needed. Prices and values obtained from third party vendors that do not reflect forced liquidation or distressed sales are not adjusted by management. When quoted prices or observable market data are not available, management's judgment is necessary to estimate fair value. At March 31, 2014, approximately 11.23% of total assets, or $1.33 billion, consisted of financial instruments recorded at fair value. Of this total, approximately 94.03% or $1.25 billion of these financial instruments used valuation methodologies involving observable market data, collectively Level 1 and Level 2 measurements, to determine fair value. Approximately 5.97% or $79.54 million of these financial instruments were valued using unobservable market information or Level 3 measurements. Most of these financial instruments valued using unobservable market information were pooled trust preferred investment securities classified as available-for-sale. At March 31, 2014, only $1.03 million or less than 1% of total liabilities were recorded at fair value. This entire amount was valued using methodologies involving observable market data. United does not believe that any changes in the unobservable inputs used to value the financial instruments mentioned above would have a material impact on United's results of operations, liquidity, or capital resources. See Note 12, Fair Value Measurements, to the unaudited Consolidated Financial Statements for additional information regarding ASC topic 820 and its impact on United's financial statements.



Any material effect on the financial statements related to these critical accounting areas are further discussed in this MD&A.

FINANCIAL CONDITION

United's total assets as of March 31, 2014 were $11.89 billion which was an increase of $3.15 billion or 36.07% from December 31, 2013, primarily the result of the acquisition of Virginia Commerce Bancorp, Inc. (Virginia Commerce) after the close of business on January 31, 2014. Portfolio loans increased $2.06 billion or 30.78%, cash and cash equivalents increased $162.75 million or 39.06%, investment securities increased $477.24 million or 53.66%, goodwill increased $333.74 million or 88.87%, other assets increased $96.88 million or 30.03%, bank premises and equipment increased $8.12 million or 11.62% and interest receivable increased $9.33 million or 34.99% due primarily to the Virginia Commerce merger. Total liabilities increased $2.58 billion or 33.49% from year-end 2013. This increase in total liabilities was due mainly to an increase of $1.96 billion or 29.61% and $606.73 million or 60.28% in deposits and borrowings, respectively, mainly due to the Virginia Commerce acquisition. Shareholders' equity increased $574.39 million or 55.14% from year-end 2013 due primarily to the acquisition of Virginia Commerce.



The following discussion explains in more detail the changes in financial condition by major category.

Cash and Cash Equivalents

Cash and cash equivalents at March 31, 2014 increased $162.75 million or 39.06% from year-end 2013. Of this total increase, interest-bearing deposits with other banks increased $101.20 million or 36.00% as United placed excess cash in an interest-bearing account with the Federal Reserve. In addition, cash and due from banks increased $61.55 million or 45.66% and federal funds sold were flat. During the first three months of 2014, net cash of $35.29 million, $64.28 million and $63.18 million was provided by operating activities, investing activities, and financing activities, respectively. See the unaudited Consolidated Statements of Cash Flows for data on cash and cash equivalents provided and used in operating, investing and financing activities for the first three months of 2014 and 2013. 55



--------------------------------------------------------------------------------

Table of Contents

Securities

Total investment securities at March 31, 2014 increased $477.24 million or 53.66% from year-end 2013. Virginia Commerce added $476.54 million in investment securities, including purchase accounting amounts, upon consummation of the acquisition. Securities available for sale increased $465.89 million or 60.09%. This change in securities available for sale reflects $461.76 million acquired from Virginia Commerce, $259.61 million in sales, maturities and calls of securities, $252.10 million in purchases, and an increase of $11.23 million in market value. Securities held to maturity were flat, decreasing $209 thousand or less than 1% from year-end 2013 due to calls and maturities of securities. Other investment securities increased $11.56 million or 15.81% from year-end 2013. Virginia Commerce added $14.78 million in other investment securities. The following table summarizes the changes in the available for sale securities since year-end 2013: March 31 December 31 % (Dollars in thousands) 2014 2013 $ Change Change U.S. Treasury securities and obligations of U.S. Government corporations and agencies $ 221,125$ 171,754$ 49,371 28.75 % State and political subdivisions 145,974 62,709 83,265 132.78 % Mortgage-backed securities 797,258 466,428 330,830 70.93 % Asset-backed securities 8,649 9,227 (578 ) (6.26 %) Marketable equity securities 4,062 3,870 192 4.96 % Trust preferred collateralized debt obligations 46,181 43,449 2,732 6.29 % Single issue trust preferred securities 12,730 12,632 98 0.78 % Corporate securities 5,197 5,215



(18 ) (0.35 %)

Total available for sale securities, at fair value $ 1,241,176$ 775,284$ 465,892 60.09 % The following table summarizes the changes in the held to maturity securities since year-end 2013: March 31 December 31 $ % (Dollars in thousands) 2014 2013 Change Change U.S. Treasury securities and obligations of U.S. Government corporations and agencies $ 10,722$ 10,762$ (40 ) (0.37 %) State and political subdivisions 10,198 10,367 (169 ) (1.63 %) Mortgage-backed securities 46 50 (4 ) (8.00 %) Single issue trust preferred securities 19,770 19,766 4 0.02 % Other corporate securities 20 20 0 0.00 % Total held to maturity securities, at amortized cost $ 40,756$ 40,965$ (209 ) (0.51 %) At March 31, 2014, gross unrealized losses on available for sale securities were $33.44 million. Securities in an unrealized loss position at March 31, 2014 consisted primarily of Trup Cdos and agency commercial mortgage-backed securities. The Trup Cdos relate mainly to underlying securities of financial institutions. The agency commercial mortgage-backed securities relate mainly to income-producing multifamily properties and provide a guaranty of full and timely payments of principal and interest by Fannie Mae or Freddie Mac. As of March 31, 2014, United's mortgage-backed securities had an amortized cost of $800.83 million, with an estimated fair value of $797.31 million. The portfolio consisted primarily of $522.77 million in agency residential mortgage-backed securities with a fair value of $524.29 million, $15.61 million in non-agency residential mortgage-backed securities with an estimated fair value of $16.17 million, and $262.44 million in commercial agency mortgage-backed securities with an estimated fair value of $256.86 million. As of March 31, 2104, United's asset-backed securities had an amortized cost of $8.68 million, with an estimated fair value of $8.65 million. 56



--------------------------------------------------------------------------------

Table of Contents

As of March 31, 2014, United's corporate securities had an amortized cost of $110.92 million, with an estimated fair value of $84.29 million. The portfolio consisted primarily of $68.32 million in Trup Cdos with a fair value of $46.18 million and $34.13 million in single issue trust preferred securities with an estimated fair value of $28.83 million. In addition to the trust preferred securities, the Company held positions in various other corporate securities, including marketable equity securities, with an amortized cost of $8.47 million and a fair value of $9.28 million, only one of which was individually significant. The Trup Cdos consisted of pools of trust preferred securities issued by trusts related primarily to financial institutions and to a lesser extent, insurance companies. The Company has no exposure to Real Estate Investment Trusts (REITs) in its investment portfolio. The Company owns both senior and mezzanine tranches in the Trup Cdos; however, the Company does not own any income notes. The senior and mezzanine tranches of Trup Cdos generally have some protection from defaults in the form of over-collateralization and excess spread revenues, along with waterfall structures that redirect cash flows in the event certain coverage test requirements have failed. Generally, senior tranches have the greatest protection, with mezzanine tranches subordinated to the senior tranches, and income notes subordinated to the mezzanine tranches. The fair value of senior tranches represents $11.97 million of the Company's pooled securities, while mezzanine tranches represent $34.21 million. Of the $34.21 million in mezzanine tranches, $12.44 million are now in the Senior position as the Senior notes have been paid to a zero balance. As of March 31, 2014, Trup Cdos with a fair value of $5.78 million were investment grade, $3.75 million were split-rated, and the remaining $36.65 million were below investment grade. In terms of capital adequacy, the Company allocates additional risk-based capital to the below investment grade securities. As of March 31, 2014, United's single issue trust preferred securities had a fair value of $28.83 million. Of the $28.83 million, $8.91 million or 30.89% were investment grade; $632 thousand or 2.19% were unrated; $7.80 million or 27.07% were split rated; and $11.49 million or 39.85% were below investment grade. The two largest exposures accounted for 49.80% of the $28.83 million. These included Wells Fargo at $8.30 million and SunTrust Bank at $6.06 million. All single-issue trust preferred securities, with the exception of two securities totaling $632 thousand, are currently receiving full scheduled principal and interest payments.



The following two tables provide a summary of Trup Cdos with at least one rating below investment grade as of March 31, 2014:

Unrealized Credit- Amortized Fair Loss Related Description Tranche Class Moodys S&P Fitch Cost Basis Value (Gain) OTTI SECURITY 1 Senior Sr Ca NR WD $ 2,725$ 2,436$ 289$ 1 ,219 SECURITY 2 Senior (org Mezz) B Ca NR WD 7,204 3,962 3,242 6,622 SECURITY 3 Senior (org Mezz) Mez C NR WD 0 0 0 61 SECURITY 4 Mezzanine C C NR C 1,258 581 677 1,546 SECURITY 5 Mezzanine C-2 Ca NR C 1,978 866 1,112 185 SECURITY 6 Mezzanine C-1 Ca NR C 1,916 1,538 378 1,316 SECURITY 7 Mezzanine B-1 Caa2 NR C 4,487 2,799 1,688 41 SECURITY 8 Mezzanine B-1 Ca NR C 3,676 2,691 985 1,651 SECURITY 9 Senior (org Mezz) Mez Ca NR C 0 0 0 3,214 SECURITY 10 Mezzanine B Ca NR D 4,954 800 4,154 11,046 SECURITY 11 Mezzanine B-1 Ca NR D 0 0 0 7,606 SECURITY 12 Senior (org Mezz) Mez Caa1 NR C 1,781 2,124 (343 ) 588 SECURITY 13 Senior (org Mezz) Mez Caa1 NR C 1,164 1,239 (75 ) 406 57



--------------------------------------------------------------------------------

Table of Contents Unrealized Credit- Amortized Fair Loss Related Description Tranche Class Moodys S&P Fitch Cost Basis Value (Gain) OTTI SECURITY 14 Mezzanine B-1 Ca NR C 3,622 1,425 2,197 422 SECURITY 15 Mezzanine B Caa3 NR C 6,436 4,000 2,436 3,531 SECURITY 16 Mezzanine B-2 Ca NR C 3,821 1,900 1,921 1,179 SECURITY 17 Mezzanine B-1 Ca NR C 2,250 1,650 600 750 SECURITY 18 Senior A-3 Aa2 BB+ A 5,000 3,750 1,250 0 SECURITY 19 Senior (org Mezz) B Ba1 NR BB 3,446 2,584 862 0 SECURITY 20 Mezzanine B-2 NR CCC+ CCC 2,531 2,531 0 756 SECURITY 21 Mezzanine B-1 NR CCC- CCC 2,050 2,150 (100 ) 450 SECURITY 22 Mezzanine B-1 Caa1 NR C 2,500 1,375 1,125 0 $ 62,799$ 40,401$ 22,398$ 42,589 Expected Deferrals Projected and Defaults Recovery/ Excess # of Issuers Deferrals Defaults as a % of Cure Rates Subordination Amortized Discount Currently as % of as a % of Remaining on as % of



Cost as a % as a % of

Performing Original Original Performing Deferring Performing of Par Par Value Desc. (1) Collateral



Collateral Collateral (2) Collateral Collateral

Value (3) 1 6 10.7 % 13.3 % 8.3 % 65 - 85% (75.8 )% 67.1 % 32.9 % 2 7 0.7 % 11.1 % 7.0 % 90% (72.6 )% 50.9 % 49.1 % 3 0 1.9 % 3.6 % 0.0 % 0% 0.0 % 0.0 % 100.0 % 4 37 18.8 % 13.4 % 7.0 % 0 - 90% (12.7 )% 43.3 % 56.7 % 5 39 10.4 % 12.9 % 7.5 % 55 - 90% (6.9 )% 91.3 % 8.7 % 6 45 7.5 % 19.0 % 6.7 % 0 - 90% (19.1 )% 58.5 % 41.5 % 7 22 1.5 % 18.8 % 7.2 % 60% (11.2 )% 85.0 % 15.0 % 8 29 1.4 % 21.8 % 7.1 % 75% (23.9 )% 68.3 % 31.7 % 9 N/A N/A N/A N/A N/A N/A N/A N/A 10 8 4.6 % 14.6 % 6.8 % 10% (67.9 )% 31.0 % 69.0 % 11 N/A N/A N/A N/A N/A N/A N/A N/A 12 7 0.0 % 19.5 % 5.7 % N/A (4.0 )% 79.7 % 20.3 % 13 7 0.0 % 19.5 % 5.7 % N/A (4.0 )% 89.3 % 10.7 % 14 32 22.3 % 7.5 % 7.1 % 15 - 90% (3.9 )% 89.0 % 11.0 % 15 16 5.1 % 19.0 % 9.5 % 15 - 90% (36.4 )% 64.4 % 35.6 % 16 15 6.1 % 17.9 % 7.1 % 0 - 90% (27.9 )% 76.4 % 23.6 % 17 28 6.9 % 15.0 % 7.6 % 0 - 90% (8.0 )% 75.0 % 25.0 % 18 30 5.8 % 12.9 % 6.3 % 15% 57.6 % 100.0 % 0.0 % 19 5 0.6 % 4.6 % 7.0 % 90% 30.8 % 100.0 % 0.0 % 20 14 4.5 % 4.0 % 7.7 % 0% 21.9 % 77.0 % 23.0 % 21 14 9.3 % 0.0 % 6.4 % 15% 11.3 % 82.0 % 18.0 % 22 33 4.9 % 11.5 % 7.7 % 50 - 90% 0.5 % 100.0 % 0.0 %



(1) "Performing" refers to all outstanding issuers less issuers that have either

defaulted or are currently deferring their interest payment.

(2) "Expected Deferrals and Defaults" refers to projected future defaults on

performing collateral and does not include the projected defaults on

deferring collateral.

(3) The "Discount" in the table above represents the Par Value less the Amortized

Cost. This metric generally approximates the level of OTTI that has been

incurred on these securities. 58



--------------------------------------------------------------------------------

Table of Contents

The Company defines "Excess Subordination" as all outstanding collateral less the sum of (i) 100% of the defaulted collateral, (ii) the sum of the projected net loss amounts for each piece of the deferring but not defaulted collateral and (iii) the amount of each Trup Cdo's debt that is either senior to or pari passu with our security's priority level. The calculation of excess subordination in the above table does not consider the OTTI the Company has recognized on these securities. While the ratio of excess subordination provides some insight on overall collateralization levels, the Company completes an expected cash flow analysis each quarter to determine whether an adverse change in future cash flows has occurred under ASC 320. The standard specifies that a cash flow projection can be present-valued at the security specific effective interest rate and the resulting present value compared to the amortized cost in order to quantify the credit component of impairment. The Company utilizes the cash flow models to determine the net realizable value and assess whether additional OTTI has occurred. While the ratio of excess subordination provides some insight on overall collateralization levels, the Company does not utilize this ratio to calculate OTTI. The ratio of excess subordination represents only one component of the projected cash flow. The Company believes the excess subordination is limited as it does not consider the following: Waterfall structure and redirection of cash flows Excess interest spread Cash reserves The collateral backing of a particular tranche can be increased by decreasing the more senior liabilities of the Trup Cdo tranche. This occurs when collateral deterioration due to defaults and deferrals triggers alternative waterfall provisions of the cash flow. The waterfall structure of the bond requires the excess spread to be rerouted away from the most junior classes of debt (which includes the income notes) in order to pay down the principal of the most senior liabilities. As these senior liabilities are paid down, the senior and mezzanine tranches become better secured (due to the rerouting away from the income notes). Therefore, variances will exist between the calculated excess subordination measure and the amount of OTTI recognized due to the impact of the specific structural features of each bond as it relates to the cash flow models. The following is a summary of available for sale single-issue trust preferred securities with at least one rating below investment grade as of March 31, 2014: Amortized Unrealized Security Moodys S&P Fitch Cost Fair Value Loss/(Gain) Emigrant NR NR CCC $ 5,660$ 4,320$ 1,340 Bank of America Ba1 NR BB+ 4,577 4,000 577 M&T Bank NR BBB BB+ 2,985 3,262 (277 ) Citigroup Ba1 BB+ BBB- 504 506 (2 ) Bank of America Ba1 BB+ BB+ 500 509 (9 ) $ 14,226$ 12,597$ 1,629 Additionally, the Company owns two single-issue trust preferred securities that are classified as held-to-maturity and include at least one rating below investment grade. These securities include SunTrust Bank ($7.40 million) and Royal Bank of Scotland ($972 thousand). During the first quarter of 2014, United recognized net other-than-temporary impairment charges totaling $639 thousand on certain Trup Cdos, which are not expected to be sold. Other than these securities, management does not believe that any other individual security with an unrealized loss as of March 31, 2014 is other-than-temporarily impaired. United believes the decline in value resulted from changes in market interest rates, credit spreads and liquidity, not an adverse change in the expected contractual cash flows. Based on a review of each of the securities in the investment portfolio, management concluded that it was not probable that it would be unable to realize the cost 59



--------------------------------------------------------------------------------

Table of Contents

basis investment and appropriate interest payments on such securities. United has the intent and the ability to hold these securities until such time as the value recovers or the securities mature. However, United acknowledges that any impaired securities may be sold in future periods in response to significant, unanticipated changes in asset/liability management decisions, unanticipated future market movements or business plan changes. Further information regarding the amortized cost and estimated fair value of investment securities, including remaining maturities as well as a more detailed discussion of management's other-than-temporary impairment analysis, is presented in Note 3 to the unaudited Notes to Consolidated Financial Statements.



Loans

Loans held for sale decreased $671 thousand or 15.84% as loan sales in the secondary market exceeded loan originations during the first three months of 2014. Portfolio loans, net of unearned income, increased $2.06 billion or 30.78% from year-end 2013 mainly as a result of the Virginia Commerce acquisition which added $2.01 billion, including purchase accounting amounts, in portfolio loans. Since year-end 2013, commercial, financial and agricultural loans increased $1.38 billion or 35.24% as commercial real estate loans increased $1.14 billion and commercial loans (not secured by real estate) increased $234.68 million. In addition, residential real estate loans and construction and land development loans increased $356.41 million or 19.57% and $320.61 million or 47.83%, respectively, while other consumer loans increased $12.50 million or 4.02%. The increases were due primarily to the Virginia Commerce acquisition. Otherwise, portfolio loans, net of unearned income, grew organically $54.42 million from year-end 2013. The following table summarizes the changes in the major loan classes since year-end 2013: March 31 December 31 $ % (Dollars in thousands) 2014 2013 Change Change Loans held for sale $ 3,565$ 4,236



$ (671 ) (15.84 %)

Commercial, financial, and agricultural: Owner-occupied commercial real estate $ 1,101,388$ 654,963$ 446,425 68.16 % Nonowner-occupied commercial real estate 2,614,912 1,917,785 697,127 36.35 % Other commercial loans 1,573,037 1,338,355 234,682 17.54 % Total commercial, financial, and agricultural $ 5,289,337$ 3,911,103$ 1,378,234 35.24 % Residential real estate 2,177,784 1,821,378 356,406 19.57 % Construction & land development 990,974 670,364 320,610 47.83 % Consumer: Bankcard 10,138 11,023 (885 ) (8.03 %) Other consumer 313,114 299,731 13,383 4.47 % Less: Unearned income (13,021 ) (9,016 )



(4,005 ) 44.42 %

Total Loans, net of unearned income $ 8,768,326$ 6,704,583

$ 2,063,743 30.78 %

For a further discussion of loans see Note 4 to the unaudited Notes to Consolidated Financial Statements.

Other Assets

Other assets increased $96.88 million or 30.03% from year-end 2013. The Virginia Commerce acquisition added $106.24 million in other assets plus an additional $17.14 million in core deposit intangibles. The cash surrender value of bank-owned life insurance policies increased $46.77 million, of which, $46.72 million was acquired from Virginia Commerce while the remaining increase was due to a slight increase in the cash surrender value. The remainder of the increase in other assets is the result of an increase of $21.76 million in deferred tax assets, an increase of $5.61 million in OREO and an increase of $2.69 million in income taxes receivable. 60



--------------------------------------------------------------------------------

Table of Contents

Deposits

Deposits represent United's primary source of funding. Total deposits at March 31, 2014 increased $1.96 billion or 29.61% from year-end 2013 as a result of the Virginia Commerce acquisition. Virginia Commerce added $2.02 billion in deposits, including purchase accounting amounts. In terms of composition, noninterest-bearing deposits increased $482.67 million or 25.75% while interest-bearing deposits increased $1.48 billion or 31.13% from December 31, 2013. Organically, deposits declined $63.65 million from year-end 2013. The increase in noninterest-bearing deposits was due mainly to increases in commercial noninterest-bearing deposits of $365.14 million or 26.72%, personal noninterest-bearing deposits of $70.45 million or 17.12% and noninterest-bearing public funds of $12.25 million or 22.71% as a result of the Virginia Commerce acquisition. The increase in interest-bearing deposits was due mainly to the Virginia Commerce acquisition as all major categories of interest-bearing deposits increased. Interest-bearing money market accounts (MMDAs) increased $548.96 million or 44.85%, time deposits over $100,000 increased $276.96 million or 31.36%, time deposits under $100,000 increased $190.79 million or 21.50%, and regular savings balances increased $68.90 million or 12.39%. The $548.96 million increase in interest-bearing MMDAs is due to a $374.15 million and a $175.03 million increase in personal MMDAs and commercial MMDAs, respectively. Public funds MMDAs, on the other hand, were flat. The $276.96 million increase in time deposits over $100,000 is the result of a $219.38 million increase in fixed rate certificates of deposits (CDs), a $43.17 million increase in Certificate of Deposit Account Registry Service (CDARS) balances and a $14.38 million increase in variable rate CDs. The $190.79 million increase in time deposits under $100,000 is due to fixed rate CDs increasing $171.56 million while variable rate CDs increased $14.26 million. Interest-bearing checking deposits increased $392.06 million mainly due to a $334.32 million increase in personal interest-bearing checking accounts and a $68.89 million increase in commercial interest-bearing checking accounts. State and municipal interest-bearing checking accounts decreased $11.15 million. The following table summarizes the changes in the deposit categories since year-end 2013: March 31 December 31 (Dollars In thousands) 2014 2013 $ Change % Change Demand deposits $ 2,357,188$ 1,874,520$ 482,668 25.75 % Interest-bearing checking 1,588,015 1,195,956 392,059 32.78 % Regular savings 625,080 556,183 68,897 12.39 % Money market accounts 1,773,080 1,224,116 548,964 44.85 %



Time deposits under $100,000 1,078,306 887,516 190,790 21.50 %

Time deposits over $100,000 1,160,239 883,280 276,959 31.36 % Total deposits $ 8,581,908$ 6,621,571$ 1,960,337 29.61 % Borrowings Total borrowings at March 31, 2014 increased $606.73 million or 60.28% during the first three months of 2014. Virginia Commerce added $468.15 million, including purchase accounting amounts, upon consummation of the acquisition. Since year-end 2013, short-term borrowings increased $298.15 million or 69.22% due to a $339.84 million increase in short-term securities sold under agreements to repurchase. Federal funds purchased decreased $1.69 million or 6.09%. Virginia Commerce added $263.82 million in short-term borrowings. Long-term borrowings increased $308.58 million or 53.60% since year-end 2013 as long-term FHLB advances increased $204.34 million. In addition, United assumed $53.70 million in long-term securities sold under agreements to repurchase and $50.64 million of junior subordinated debt securities, respectively, including purchase accounting amounts, in the Virginia Commerce acquisition. 61



--------------------------------------------------------------------------------

Table of Contents

The table below summarizes the change in the borrowing categories since year-end 2013: March 31 December 31 (Dollars in thousands) 2014 2013 $ Change % Change Federal funds purchased $ 26,000$ 27,685$ (1,685 ) (6.09 %) Short-term securities sold under agreements to repurchase 527,904 188,069 339,835 180.70 % Long-term securities sold under agreements to repurchase 53,453 0 53,453 100.00 % Short-term FHLB advances 175,000 215,000 (40,000 ) (18.60 %) Long-term FHLB advances 581,404 377,069 204,335 54.19 % Issuances of trust preferred capital securities 249,420 198,628 50,792 25.57 % Total borrowings $ 1,613,181$ 1,006,451$ 606,730 60.28 %



For a further discussion of borrowings see Notes 8 and 9 to the unaudited Notes to Consolidated Financial Statements.

Accrued Expenses and Other Liabilities

Accrued expenses and other liabilities at March 31, 2014 increased $9.56 million or 15.06% from year-end 2013. Virginia Commerce added $10.26 million. In particular, business franchise taxes increased $1.48 million, interest payable increased $1.27 million and other accrued expenses of $3.04 million. In addition, dividends payable increased $5.95 million due to the additional shares issued in the Virginia Commerce acquisition. Partially offsetting these increases in accrued expenses and other liabilities is a $1.10 million decrease in accrued employee expenses due mainly to declines in deferred compensation and incentives payable and an $874 thousand decrease in income taxes payable due to a timing difference in payments.



Shareholders' Equity

Shareholders' equity at March 31, 2014 increased $574.39 million or 55.14% from December 31, 2013 mainly as a result of the Virginia Commerce acquisition. The Virginia Commerce transaction added approximately $552 million as 18,330,347 shares were issued from United's authorized but unissued shares for the merger at a cost of approximately $548 million. Earnings net of dividends for the first three months of 2014 were $8.04 million. Accumulated other comprehensive income increased $8.71 million due mainly to an increase of $7.30 million in United's available for sale investment portfolio, net of deferred income taxes. The after tax non-credit portion of OTTI losses was $1.10 million and the after-tax accretion of pension costs was $310 thousand for the first quarter of 2014.



RESULTS OF OPERATIONS

Overview

Net income for the first three months of 2014 was $30.12 million or $0.48 per diluted share compared to $21.58 million or $0.43 per share for the first three months of 2013. United's annualized return on average assets for the first three months of 2014 was 1.14% and return on average shareholders' equity was 8.57% as compared to 1.05% and 8.72% for the first three months of 2013. As previously mentioned, United completed its acquisition of Virginia Commerce after the close of business on January 31, 2014. The financial results of Virginia Commerce are included in United's results from the acquisition date. As previously mentioned, during the first quarter of 2014 United sold a former branch building which resulted in a before-tax gain of $8.98 million. The results for the first quarter of 2014 also included noncash, before-tax, other-than-temporary impairment charges of $639 thousand on certain investment securities and a net gain on sales and calls of 62



--------------------------------------------------------------------------------

Table of Contents

investment securities of $824 thousand. The results for the first quarter of 2013 included noncash, before-tax, other-than-temporary impairment charges of $834 thousand on certain investment securities. Net interest income for the first three months of 2014 was $85.30 million, which was an increase of $18.48 million or 27.66% from net interest income of $66.82 million for the first three months of 2013. The increase in net interest income occurred because total interest income increased $18.84 million while total interest expense only increased $359 thousand from the first quarter of 2013. The provision for loan losses was $4.68 million for the first three months of 2014 as compared to $5.19 million for the first three months of 2013. Noninterest income was $26.52 million for the first three months of 2014, up $8.17 million or 44.54% when compared to the first three months of 2013. Noninterest expense increased $12.91 million or 26.76% for the first three months of 2014 compared to the same period in 2013. Income taxes increased $5.71 million for the first three months of 2014 as compared to the first three months of 2013. The effective tax rate was 34.49% and 32.00% for the first quarter of 2014 and 2013, respectively.



The following discussion explains in more detail the results of operations by major category.

Net Interest Income Net interest income represents the primary component of United's earnings. It is the difference between interest income from earning assets and interest expense incurred to fund these assets. Net interest income is impacted by changes in the volume and mix of interest-earning assets and interest-bearing liabilities, as well as changes in market interest rates. Such changes, and their impact on net interest income in 2014 and 2013, are presented below. Net interest income for the first three months of 2014 was $85.30 million, which was an increase of $18.48 million or 27.66% from the first quarter of 2013. The $18.48 million increase in net interest income occurred because total interest income increased $18.84 million while total interest expense only increased $359 thousand from the first quarter of 2013. On a linked-quarter basis, net interest income for the first quarter of 2014 increased $16.12 million or 23.29% from the fourth quarter of 2013. The $16.12 million increase in net interest income occurred because total interest income increased $17.53 million while total interest expense only increased $1.41 million from the fourth quarter of 2013. Generally, interest income for the first quarter of 2014 increased from the first and fourth quarters of 2013 because of the earning assets added from the Virginia Commerce acquisition. Likewise, interest expense for the first quarter of 2014 increased from the first and fourth quarters of 2013 because of the interest-bearing liabilities added from Virginia Commerce. However, the increase in interest expense was partially mitigated by the accretion of fair value premiums recorded on the interest-bearing deposits and long-term securities sold under agreements to repurchase acquired from Virginia Commerce. For the purpose of this remaining discussion, net interest income is presented on a tax-equivalent basis to provide a comparison among all types of interest earning assets. The tax-equivalent basis adjusts for the tax-favored status of income from certain loans and investments. Although this is a non-GAAP measure, United's management believes this measure is more widely used within the financial services industry and provides better comparability of net interest income arising from taxable and tax-exempt sources. United uses this measure to monitor net interest income performance and to manage its balance sheet composition. Tax-equivalent net interest income for the first quarter of 2014 was $86.91 million, an increase of $18.56 million or 27.16% from the first quarter of 2013. This increase in tax-equivalent net interest income was primarily attributable to an increase in average earning assets from the Virginia Commerce acquisition. Average earning assets increased $2.12 billion or 28.85% from the first quarter of 2013. Average net loans increased $1.58 billion or 24.70% for the first quarter of 2014 while average investment securities increased $473.82 million or 64.15%. In addition, the average cost of funds declined 14 basis points from the first quarter of 2013. In particular, the average cost of long-term borrowings declined 175 basis points due mainly to the repayment of certain higher-cost long-term FHLB borrowings. Partially offsetting the increases to tax-equivalent net interest income for the first quarter of 2014 was a decline of 15 basis points in the average yield on earning assets as compared to the first quarter of 2013. In particular, the yield on average net loans declined 11 basis points due to payoffs of higher yielding loans coupled with the re-investment of this cash inflow into new loans at lower interest rates. The net interest margin for the first quarter of 2014 was 3.70%, which was a decrease of 5 basis points from a net interest margin of 3.75% for the first quarter of 2013. 63



--------------------------------------------------------------------------------

Table of Contents

On a linked-quarter basis, United's tax-equivalent net interest income for the first quarter of 2014 increased $16.25 million or 23.00% from the fourth quarter of 2013 due mainly to an increase in average earning assets as a result of the Virginia Commerce acquisition. Average earning assets increased $1.82 billion or 23.72% from the fourth quarter of 2013 as average investment securities and average net loans increased $365.38 million or 43.14% and $1.40 billion or 21.34%, respectively, for the quarter. In addition, the average yield on earning assets increased 3 basis points while the average cost of funds declined 3 basis points from the fourth quarter of 2013. The net interest margin of 3.70% for the first quarter of 2014 was an increase of 4 basis points from the net interest margin of 3.66% for the fourth quarter of 2013.



United's tax-equivalent net interest income also includes the impact of acquisition accounting fair value adjustments.

The following table provides the discount/premium and net accretion impact to tax-equivalent net interest income for the three months ended March 31, 2014, March 31, 2013 and December 31, 2013:

Three Months Ended March 31 March 31 December 31 (Dollars in thousands) 2014 2013 2013 Loan accretion $ 1,344$ 1,138 $ 530 Certificates of deposit 979 0 0 Long-term borrowings 96 (28 ) (28 ) Total $ 2,419$ 1,110 $ 502



The following table reconciles the difference between net interest income and tax-equivalent net interest income for the three months ended March 31, 2014, March 31, 2013 and December 31, 2013:

Three Months Ended March 31 March 31 December 31 (Dollars in thousands) 2014 2013 2013

Net interest income, GAAP basis $ 85,302$ 66,822$ 69,186 Tax-equivalent adjustment (1) 1,608 1,524 1,472 Tax-equivalent net interest income $ 86,910$ 68,346$ 70,658



(1) The tax-equivalent adjustment combines amounts of interest income on

federally nontaxable loans and investment securities using the statutory

federal income tax rate of 35%. All interest income on loans and investment

securities was subject to state income taxes. 64



--------------------------------------------------------------------------------

Table of Contents

The following table shows the unaudited consolidated daily average balance of major categories of assets and liabilities for the three-month period ended March 31, 2014 and 2013, respectively, with the interest and rate earned or paid on such amount. The interest income and yields on federally nontaxable loans and investment securities are presented on a tax-equivalent basis using the statutory federal income tax rate of 35%. Interest income on all loans and investment securities was subject to state income taxes. Three Months Ended Three Months Ended March 31, 2014 March 31, 2013 Average Interest Avg. Rate Average Interest Avg. Rate (Dollars in thousands) Balance (1) (1) Balance (1) (1) ASSETS Earning Assets: Federal funds sold and securities repurchased under agreements to resell and other short-term investments $ 292,393$ 167 0.23 % $ 223,237$ 129 0.23 % Investment Securities: Taxable 1,103,055 6,529 2.37 % 649,413 3,612 2.22 % Tax-exempt 109,395 1,313 4.80 % 89,222 1,171 5.25 % Total Securities 1,212,450 7,842 2.59 % 738,635 4,783 2.59 % Loans, net of unearned income (2) 8,052,658 88,763 4.46 % 6,472,600 72,937 4.56 % Allowance for loan losses (74,068 ) (74,410 ) Net loans 7,978,590 4.50 % 6,398,190 4.61 % Total Earning Assets 9,483,433 $ 96,772 4.13 % 7,360,062 $ 77,849 4.28 % Other assets 1,237,400 935,570 TOTAL ASSETS $ 10,720,833$ 8,295,632



LIABILITIES

Interest-Bearing Funds: Interest-bearing deposits $ 5,696,698$ 6,401 0.46 % $ 4,904,286$ 6,977 0.58 % Short-term borrowings 606,476 353 0.24 % 313,360 200 0.26 % Long-term borrowings 809,580 3,108 1.56 % 284,883 2,326 3.31 % Total Interest-Bearing Funds 7,112,754 9,862 0.56 % 5,502,529 9,503 0.70 % Noninterest-bearing deposits 2,132,041 1,731,775 Accrued expenses and other liabilities 49,717 57,475 TOTAL LIABILITIES 9,294,512 7,291,779 SHAREHOLDERS' EQUITY 1,426,321 1,003,853 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 10,720,833$ 8,295,632 NET INTEREST INCOME $ 86,910$ 68,346 INTEREST SPREAD 3.57 % 3.58 % NET INTEREST MARGIN 3.70 % 3.75 %



(1) The interest income and the yields on federally nontaxable loans and

investment securities are presented on a tax-equivalent basis using the

statutory federal income tax rate of 35%.

(2) Nonaccruing loans are included in the daily average loan amounts outstanding.

65



--------------------------------------------------------------------------------

Table of Contents

Provision for Loan Losses

For the quarters ended March 31, 2014 and 2013, the provision for loan losses was $4.68 million and $5.19 million, respectively. Net charge-offs were $4.54 million for the first quarter of 2014 as compared to net charge-offs of $4.93 million for the same quarter in 2013. These lower amounts of provision expense and net charge-offs for the first quarter of 2014 compared to the first quarter of 2013 were due mainly to credit quality improvement within the loan portfolio and a decline in the recognition of impairment allocations. On a linked-quarter basis, the provision for loans losses increased $336 thousand while net charge-offs decreased $177 thousand from the fourth quarter of 2013. Annualized net charge-offs as a percentage of average loans were 0.23% for the first quarter of 2014. This ratio compares very favorably to United's most recently reported Federal Reserve peer group banking companies' (bank holding companies with total assets over $10 billion) net charge-offs to average loans percentage of 0.45% for the year of 2013. At March 31, 2014, nonperforming loans were $96.13 million or 1.10% of loans, net of unearned income compared to nonperforming loans of $81.13 million or 1.21% of loans, net of unearned income at December 31, 2013. The components of nonperforming loans include: 1) nonaccrual loans, 2) loans which are contractually past due 90 days or more as to interest or principal, but have not been put on a nonaccrual basis and 3) loans whose terms have been restructured for economic or legal reasons due to financial difficulties of the borrowers. Loans past due 90 days or more were $27.81 million at March 31, 2014, an increase of $16.77 million or 151.83% from $11.04 million at year-end 2013. The increase was due mainly to four loans to one commercial customer totaling $10.1 million being 90-plus days delinquent at March 31, 2014. At March 31, 2014, nonaccrual loans were $60.21 million, a decrease of $1.72 million or 2.78% from $61.93 million at year-end 2013. The slight decrease in nonaccrual loans was primarily due to foreclosures on real estate collateral which led to a transfer from nonaccrual to other real estate owned. Restructured loans were $8.11 million at March 31, 2014 as compared to $8.16 million restructured loans at year-end 2013. The decrease was due to repayments. No loans were restructured during the first quarter of 2014. The loss potential on these loans has been properly evaluated and allocated within the company's allowance for loan losses. Nonperforming assets include nonperforming loans and real estate acquired in foreclosure or other settlement of loans (OREO). Total nonperforming assets of $139.92 million, including OREO of $43.79 million at March 31, 2014, represented 1.18% of total assets. Loans are designated as impaired when, in the opinion of management, the collection of principal and interest in accordance with the loan contract is doubtful. At March 31, 2014, impaired loans were $255.30 million, which was an increase of $162.64 million or 175.53% from the $92.66 million in impaired loans at December 31, 2013. This increase in impaired loans was due mainly to loans with evidence of credit quality deterioration in the amount of $157.76 million added in the Virginia Commerce acquisition. For further details regarding impaired loans, see Note 5 to the unaudited Consolidated Financial Statements. United maintains an allowance for loan losses and a reserve for lending-related commitments. The combined allowance for loan losses and reserve for lending-related commitments are referred to as the allowance for credit losses. At March 31, 2014, the allowance for credit losses was $76.46 million which was comparable to $76.34 million at December 31, 2013. At March 31, 2014, the allowance for loan losses was $74.34 million as compared to $74.20 million at December 31, 2013. As a percentage of loans, net of unearned income, the allowance for loan losses was 0.85% at March 31, 2014 and 1.11% at December 31, 2013. The ratio of the allowance for loan losses to nonperforming loans or coverage ratio was 77.33% and 91.46% at March 31, 2014 and December 31, 2013, respectively. For United, this ratio at March 31, 2014 decreased from the ratio at December 31, 2013 mainly because United was unable to carry-over Virginia Commerce's previously established allowance for loan losses because acquired loans are recorded at fair value in accordance with accounting rules. Therefore, United 66



--------------------------------------------------------------------------------

Table of Contents

recorded a downward fair value adjustment of approximately $90.4 million on the loans acquired from Virginia Commerce. In addition, nonperforming loans increased $15.00 million or 18.48% while the allowance for loan losses was relatively flat from year-end 2013. Adjustments to risk grades within the allowance for loan loss analysis were based on delinquency and loss trends of such loans and resulted in decreased allowance allocations of $62 thousand or less than 1%. This decrease in allocations coincided with the decrease of net charge-offs recognized in the first quarter. There was an increase in the estimate for imprecision of $202 thousand. The Company's detailed methodology and analysis indicated only a slight increase in the allowance for loan losses primarily because of the offsetting factors of changes within historical loss rates and reduced loss allocations on impaired loans. Allocations are made for specific commercial loans based upon management's estimate of the borrowers' ability to repay and other factors impacting collectibility. Other commercial loans not specifically reviewed on an individual basis are evaluated based on historical loss percentages applied to loan pools that have been segregated by risk. Allocations for loans other than commercial loans are made based upon historical loss experience adjusted for current environmental conditions. The allowance for credit losses includes estimated probable inherent but unidentified losses within the portfolio due to uncertainties in economic conditions, delays in obtaining information, including unfavorable information about a borrower's financial condition, the difficulty in identifying triggering events that correlate perfectly to subsequent loss rates, and risk factors that have not yet fully manifested themselves in loss allocation factors. In addition, a portion of the allowance accounts for the inherent imprecision in the allowance for credit losses analysis. United's formal company-wide review of the allowance for loan losses at March 31, 2014 produced decreased allocations in five of the six loan categories. The commercial real estate owner-occupied loan pool allocation decreased by $187 thousand due mainly to a decrease in specific impairments recognized within the portfolio. The commercial real estate nonowner-occupied loan pool allocation decreased $718 thousand due to a decline in specific impairments recognized within the portfolio. The allocation related to the residential real estate loan pool decreased by $810 thousand due to a decrease in historical loss rates applied to the portfolio. The allowance allocated to real estate construction and development decreased by $1.37 million due to decreases in specific impairments within the portfolio and historical loss rates applied to the portfolio. The consumer loan pool experienced a decrease in allocation of $49 thousand due to a decrease in outstanding loan balances. Offsetting these decreases was an increase in the other commercial loan pool allocation of $3.07 million due to an increase in impairment recognition and higher historical loss rates as the result of a large charge-off in the fourth quarter of 2013. In summary, the overall level of the allowance for loan losses was relatively stable in comparison to year-end 2013 as a result of offsetting factors within the portfolio as described above. An allowance is established for probable credit losses on impaired loans via specific allocations. Nonperforming commercial loans and leases are regularly reviewed to identify impairment. A loan or lease is impaired when, based on current information and events, it is probable that the Company will not be able to collect all amounts contractually due. Measuring impairment of a loan requires judgment and estimates, and the eventual outcomes may differ from those estimates. Impairment is measured based upon the present value of expected future cash flows from the loan discounted at the loan's effective rate, the loan's observable market price or the fair value of collateral if the loan is collateral dependent. When the selected measure is less than the recorded investment in the loan, an impairment has occurred. The allowance for impaired loans was $11.82 million at March 31, 2014 and $12.48 million at December 31, 2013. In comparison to the prior year-end, this element of the allowance decreased by $660 thousand primarily due to decreased specific allocations for the nonowner-occupied commercial real estate and the construction and land development loan pools. 67



--------------------------------------------------------------------------------

Table of Contents

Management believes that the allowance for credit losses of $76.46 million at March 31, 2014 is adequate to provide for probable losses on existing loans and lending-related commitments based on information currently available. Note 6 to the accompanying unaudited Notes to Consolidated Financial Statements provides a progression of the allowance for loan losses by portfolio segment. United's loan administration policies are focused on the risk characteristics of the loan portfolio in terms of loan approval and credit quality. The commercial loan portfolio is monitored for possible concentrations of credit in one or more industries. Management has lending limits as a percentage of capital per type of credit concentration in an effort to ensure adequate diversification within the portfolio. Most of United's commercial loans are secured by real estate located in West Virginia, southeastern Ohio, Pennsylvania, Virginia, Maryland and the District of Columbia. It is the opinion of management that these commercial loans do not pose any unusual risks and that adequate consideration has been given to these loans in establishing the allowance for credit losses. Management is not aware of any potential problem loans, trends or uncertainties, which it reasonably expects will materially impact future operating results, liquidity, or capital resources which have not been disclosed. Additionally, management has disclosed all known material credits, which cause management to have serious doubts as to the ability of such borrowers to comply with the loan repayment schedules. Other Income



Other income consists of all revenues, which are not included in interest and fee income related to earning assets. Noninterest income has been and will continue to be an important factor for improving United's profitability. Recognizing the importance, management continues to evaluate areas where noninterest income can be enhanced.

Included in noninterest income for the first quarter of 2014 was the previously mentioned net gain of $8.98 million on the sale of bank premises as well as noncash, before-tax, other-than-temporary impairment charges of $639 thousand on certain investment securities as compared to noncash, before-tax other-than-temporary impairment charges of $834 thousand on certain investment securities for the first quarter of 2013. In addition, net gains on sales and calls of investment securities were $824 thousand and $140 thousand for the first quarters of 2014 and 2013, respectively. Excluding the net gain on the sale of bank premises, the noncash, other-than-temporary impairment charges as well as net gains and losses from sales and calls of investment securities, noninterest income for the first quarter of 2014 decreased $1.68 million or 8.84% from the first quarter of 2013. Although excluding the net gain on the sale of bank premises and the results of security transactions is a non-GAAP measure, United's management believes noninterest income without the net gain on the sale of bank premises and noncash, before-tax, other-than-temporary impairment charges as well as net securities gains and losses on sale and calls is more indicative of United's performance because it isolates income that is primarily customer relationship driven and is more indicative of normalized operations. In addition, these items can fluctuate greatly from quarter to quarter or could be infrequent and are thus difficult to predict. The following table reconciles the difference between noninterest income and noninterest income excluding the results of security transaction for the three months ended March 31, 2014, March 31, 2013, and December 31, 2013. 68



--------------------------------------------------------------------------------

Table of Contents Three Months Ended March March December (Dollars in thousands) 2014 2013 2013 Total Non-Interest Income, GAAP basis $ 26,520$ 18,348$ 12,046 Less: Net gain on the sale of bank premises 8,976 0 0 Less: Net other-than-temporary impairment losses (639 ) (834 ) (6,361 ) Less: Net gains on sales/calls of investment securities 824 140 934



Non-Interest Income excluding the results of noncash, other than-temporary impairment charges and net gains and losses from sales and calls of investment securities

$ 17,359$ 19,042$ 17,473 Revenue from trust income and brokerage commissions for the first quarter of 2014 increased $763 thousand or 19.92% due mainly to an increase in brokerage volume and an increase in the value of trust assets under management. Revenue from trust and brokerage services was $4.59 million for the first quarter of 2014 as compared to $3.83 million for the first quarter of 2013. Income from bank-owned life insurance policies was $1.25 million for the first quarter of 2014, a decrease of $1.14 million or 47.63% from the first quarter of 2013. This decrease was due to a death benefit in the first quarter of 2013. Mortgage banking income for the first quarter of 2014 decreased $706 thousand or 73.16% from the first quarter of 2013 due to decreased production and sales of mortgage loans in the secondary market. Mortgage loan sales were $16.65 million in the first three months of 2014 as compared to $53.60 million in the first three months of 2013. Other income for the first quarter of 2014 decreased $352 thousand or 40.18% from the first quarter of 2013. This decrease was due to a decline in the income from derivatives not in hedge relationships as a result of a change in the fair value. On a linked-quarter basis, noninterest income for the first quarter of 2014 increased $14.47 million from the fourth quarter of 2013. Included in the results for the first quarter of 2014 was the net gain of $8.98 million on the sale of bank premises and noncash, before-tax, other-than-temporary impairment charges of $639 thousand. Included in the results for the fourth quarter of 2013 were noncash, before-tax, other-than-temporary impairment charges of $6.36 million. Excluding the results of the net gain on the sale of bank premises, the noncash, other-than-temporary impairment charges as well as net gains and losses from sales and calls of investment securities, noninterest income was flat from the fourth quarter of 2013, decreasing $114 thousand or less than 1% due primarily to a decrease of $513 thousand in fees from deposit services which was virtually offset by an increase of $352 thousand in income from trust and brokerage services due to increases in brokerage volume and the value of trust assets under management. Other Expenses Just as management continues to evaluate areas where noninterest income can be enhanced, it strives to improve the efficiency of its operations to reduce costs. Other expenses include all items of expense other than interest expense, the provision for loan losses, and income taxes. Noninterest expense for the first quarter of 2014 was $61.16 million which was an increase of $12.91 million or 26.76% from the first quarter of 2013 due mainly to the Virginia Commerce acquisition. Employee compensation for the first quarter of 2014 increased $8.40 million or 50.61% when compared to the first quarter of 2013, including $3.64 million of merger severance charges. Other than the severance charges, this increase was due mainly to the additional employees from the Virginia Commerce acquisition. Employee benefits expense decreased $369 thousand or 6.16% from the first quarter of 2013 due mainly a decrease in pension expense as a result of a change in the discount rate used in the valuation process at year-end 2013 which more than offset the additional expense from the increased number of employees from the Virginia Commerce acquisition. 69



--------------------------------------------------------------------------------

Table of Contents

Net occupancy expense for the first quarter of 2014 increased $1.24 million or 23.96% from the first quarter of 2013. In particular, building rental expense increased $788 thousand, building maintenance increased $199 thousand and building depreciation increased $123 thousand due mainly to the additional offices acquired from Virginia Commerce. Other real estate owned (OREO) expense was $2.11 million for the first quarter of 2014, an increase of $843 thousand or 66.38% from the first quarter of 2013. This increase was mainly due to a decline in the fair values of OREO properties in the first quarter of 2014. Equipment expense was $1.90 million for the first quarter of 2014, an increase of $202 thousand or 11.89% from the first quarter of 2013. The increase was due mainly to an increase in equipment maintenance as a result of the Virginia Commerce acquisition.



Data processing expense increased $506 thousand or 18.53% for the first quarter of 2014 as compared to the first quarter of 2013 due to the additional processing as a result of the Virginia Commerce acquisition.

On a linked-quarter basis, noninterest expense for the first quarter of 2014 increased $13.18 million or 27.48% from the fourth quarter of 2013 generally due to additional operating and merger-related expenses from the Virginia Commerce acquisition. In particular, employee compensation expense increased $7.76 million. The increase includes the merger severance charges mentioned above, increases in net occupancy expense of $1.56 million, merger expenses of $1.06 million and data processing fees of $267 thousand mainly the result of the Virginia Commerce acquisition. In addition, OREO expense increased $807 thousand due to a decline in the fair values of OREO properties.



Income Taxes

For the first quarter of 2014, income tax expense was $15.86 million as compared to $10.16 million for the first quarter of 2013, an increase of $5.71 million or 56.18% due to higher earnings. In addition, United increased its current tax expense by $685 thousand due to an adjustment in the deferred tax rate. On a linked-quarter basis, income tax expense was $9.25 million for the fourth quarter of 2013. United's effective tax rate was approximately 34.49% for the first quarter of 2014 as compared to 32.00% for the first and fourth quarters of 2013. The effective tax rate was increased by 1% as a direct result of the Virginia Commerce acquisition. The remaining increase was due to the adjustment in the deferred tax rate related to a reduction in the State of West Virginia corporate income tax rate as well as a change in apportionment factors. Going forward, United expects its effective tax rate to be 33% on future earnings in 2014. For further details related to income taxes, see Note 15 of the unaudited Notes to Consolidated Financial Statements contained within this document.



Contractual Obligations, Commitments, Contingent Liabilities and Off-Balance Sheet Arrangements

United has various financial obligations, including contractual obligations and commitments, that may require future cash payments. Please refer to United's Annual Report on Form 10-K for the year ended December 31, 2013 for disclosures with respect to United's fixed and determinable contractual obligations. As previously mentioned, United completed its acquisition of Virginia Commerce during the first quarter of 2014. As such, United assumed the financial obligations of Virginia Commerce, including contractual obligations and commitments, which also may require future payments. Otherwise, there have been no material changes outside the ordinary course of business since year-end 2013 in the specified contractual obligations disclosed in United's Annual Report on Form 10-K. As of March 31, 2014, United recorded a liability for uncertain tax positions, including interest and penalties, of $2.80 million in accordance with ASC topic 740. This liability represents an estimate of tax positions that United has taken in its tax returns which may ultimately not be sustained upon examination by tax authorities. Since the ultimate amount and timing of any future cash settlements cannot be predicted with reasonable certainty, this estimated liability is excluded from the contractual obligations table in the 2013 Form 10-K report. United also enters into derivative contracts, mainly to protect against adverse interest rate movements on the value of certain assets or liabilities, under which it is required to either pay cash to or receive cash from counterparties 70



--------------------------------------------------------------------------------

Table of Contents

depending on changes in interest rates. Derivative contracts are carried at fair value and not notional value on the consolidated balance sheet. Because the derivative contracts recorded on the balance sheet at March 31, 2014 do not present the amounts that may ultimately be paid under these contracts, they are excluded from the contractual obligations table in the 2013 Form 10-K report. Further discussion of derivative instruments is presented in Note 11 to the unaudited Notes to Consolidated Financial Statements. United is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include loan commitments and standby letters of credit. United's maximum exposure to credit loss in the event of nonperformance by the counterparty to the financial instrument for the loan commitments and standby letters of credit is the contractual or notional amount of those instruments. United uses the same policies in making commitments and conditional obligations as it does for on-balance sheet instruments. Since many of the commitments are expected to expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements. Further discussion of off-balance sheet commitments is included in Note 10 to the unaudited Notes to Consolidated Financial Statements.



Liquidity

In the opinion of management, United maintains liquidity that is sufficient to satisfy its depositors' requirements and the credit needs of its customers. Like all banks, United depends upon its ability to renew maturing deposits and other liabilities on a daily basis and to acquire new funds in a variety of markets. A significant source of funds available to United is "core deposits". Core deposits include certain demand deposits, statement and special savings and NOW accounts. These deposits are relatively stable, and they are the lowest cost source of funds available to United. Short-term borrowings have also been a significant source of funds. These include federal funds purchased and securities sold under agreements to repurchase as well as advances from the FHLB. Repurchase agreements represent funds which are obtained as the result of a competitive bidding process. Liquid assets are cash and those items readily convertible to cash. All banks must maintain sufficient balances of cash and near-cash items to meet the day-to-day demands of customers and United's cash needs. Other than cash and due from banks, the available for sale securities portfolio and maturing loans are the primary sources of liquidity. The goal of liquidity management is to ensure the ability to access funding which enables United to efficiently satisfy the cash flow requirements of depositors and borrowers and meet United's cash needs. Liquidity is managed by monitoring funds' availability from a number of primary sources. Substantial funding is available from cash and cash equivalents, unused short-term borrowing and a geographically dispersed network of branches providing access to a diversified and substantial retail deposit market.



Short-term needs can be met through a wide array of outside sources such as correspondent and downstream correspondent federal funds and utilization of Federal Home Loan Bank advances.

Other sources of liquidity available to United to provide long-term as well as short-term funding alternatives, in addition to FHLB advances, are long-term certificates of deposit, lines of credit, borrowings that are secured by bank premises or stock of United's subsidiaries and issuances of trust preferred securities. In the normal course of business, United through its Asset Liability Committee evaluates these as well as other alternative funding strategies that may be utilized to meet short-term and long-term funding needs. For the three months ended March 31, 2014, cash of $35.29 million was provided by operating activities due mainly to net income of $30.12 million for the quarter. Net cash of $64.28 million was provided by investing activities which was primarily due to net cash received of $97.30 million in the Virginia Commerce acquisition. In addition, net proceeds from sales of bank premises and equipment were $9.68 million. Partially offsetting these sources of cash was loan growth of $54.42 million. During the first three months of 2014, net cash of $63.18 million was provided by 71



--------------------------------------------------------------------------------

Table of Contents

financing activities due primarily to net proceeds of $104.34 million and $34.33 million received from long-term FHLB and short-term borrowings, respectively. Partially offsetting these increases was a decrease in deposits of $63.65 million. An additional use of cash for financing activities was the payment of cash dividends in the amount of $16.14 million for the quarter. The net effect of the cash flow activities was an increase in cash and cash equivalents of $162.75 million for the first three months of 2014. United anticipates it can meet its obligations over the next 12 months and has no material commitments for capital expenditures. There are no known trends, demands, commitments, or events that will result in or that are reasonably likely to result in United's liquidity increasing or decreasing in any material way. United also has lines of credit available. See Notes 8 and 9 to the accompanying unaudited Notes to Consolidated Financial Statements for more details regarding the amounts available to United under lines of credit.



The Asset Liability Committee monitors liquidity to ascertain that a liquidity position within certain prescribed parameters is maintained. No changes are anticipated in the policies of United's Asset Liability Committee.

Capital Resources

United's capital position is financially sound. United seeks to maintain a proper relationship between capital and total assets to support growth and sustain earnings. United has historically generated attractive returns on shareholders' equity. Based on regulatory requirements, United and its banking subsidiaries are categorized as "well capitalized" institutions. United's risk-based capital ratios of 13.33% at March 31, 2014 and 13.71% at December 31, 2013, were both significantly higher than the minimum regulatory requirements. United's Tier I capital and leverage ratios of 12.42% and 11.60%, respectively, at March 31, 2014, are also well above regulatory minimum requirements. United's Tier I capital and leverage ratios at December 31, 2013 were 12.51% and 10.72%, respectively. Total shareholders' equity was $1.62 billion at March 31, 2014, increasing $574.39 million or 55.14% from December 31, 2013 primarily due to the Virginia Commerce acquisition and the retention of earnings. United's equity to assets ratio was 13.60% at March 31, 2014 as compared to 11.93% at December 31, 2013. The primary capital ratio, capital and reserves to total assets and reserves, was 14.15% at March 31, 2014 as compared to 12.69% at December 31, 2013. United's average equity to average asset ratio was 13.30% for the first quarter of 2014 as compared to 12.10% the first quarter of 2013. All of these financial measurements reflect a financially sound position. During the first quarter of 2014, United's Board of Directors declared a cash dividend of $0.32 per share. Total cash dividends declared were $22.09 million for the first quarter of 2014 which was an increase of $6.48 million or 41.53% from dividends declared of $15.61 million for the first quarter of 2013. The increase was due mainly to the additional shares issued in the Virginia Commerce acquisition as well as an increase of $0.01 per share in the cash dividend amount.


For more stories on investments and markets, please see HispanicBusiness' Finance Channel



Source: Edgar Glimpses


Story Tools






HispanicBusiness.com Facebook Linkedin Twitter RSS Feed Email Alerts & Newsletters