MERGERS AND ACQUISITIONS

6 Months Ended

Jun. 30, 2012

MERGERS AND ACQUISITIONS

2. MERGERS AND ACQUISITIONS

At the close of business on July 8, 2011, United acquired 100% of the outstanding common stock of Centra Financial Holdings, Inc. (Centra), a West Virginia corporation headquartered in Morgantown, West Virginia. The acquisition of Centra affords United the opportunity to enhance its existing footprint in Maryland and West Virginia, as well as provide an entry into Pennsylvania. The results of operations of Centra are included in the consolidated results of operations from the date of acquisition.

At consummation, Centra had assets of approximately $1.31 billion, loans of $1.04 billion, deposits of $1.13 billion and shareholders’ equity of $131 million. The transaction was accounted for under the purchase method of accounting and accordingly, assets acquired, liabilities assumed and consideration exchanged were recorded at estimated fair value on the acquisition date.

The aggregate purchase price was approximately $170 million, including common stock valued at $161.4 million and $8.6 million of cash paid for vested stock options and fractional shares. The number of shares issued in the transaction was 6,548,473, which were valued based on the closing market price of $24.65 for United’s common shares on July 8, 2011. The preliminary purchase price has been allocated to the identifiable tangible and intangible assets resulting in preliminary additions to goodwill and core deposit intangibles of approximately $60 million and $12 million, respectively.

Because the consideration paid was greater than the net fair value of the acquired assets and liabilities, the Company recorded goodwill as part of the acquisition. None of the goodwill from the Centra acquisition is expected to be deductible for tax purposes. As a result of the merger, United recorded a downward fair value adjustment of $36.65 million on the loans acquired from Centra, a premium on interest-bearing deposits of $6.53 million and a discount of $564 thousand on junior subordinated debt securities. The discount and premium amounts are being amortized or accreted on an accelerated basis over each liability’s estimated remaining life at the time of acquisition. At June 30, 2012, the premium on the interest-bearing deposits has an estimated remaining life of nine months while the discount on the junior subordinated debt securities has an estimated remaining life of four years. United assumed approximately $621 thousand of liabilities to provide severance benefits to terminated employees of Centra. As of June 30, 2012, no balance remains on these liabilities. The estimated fair values of the acquired assets and assumed liabilities, including identifiable intangible assets, are subject to refinement as additional information becomes available. Any subsequent adjustments to the fair values of acquired assets and liabilities assumed, identifiable intangible assets, or other purchase accounting adjustments will result in adjustments to goodwill within the first 12 months following the date of acquisition.

In many cases, determining the estimated fair value of the acquired assets and assumed liabilities required United to estimate cash flows expected to result from those assets and liabilities and to discount those cash flows at appropriate rates of interest. The most significant of those determinations related to the fair valuation of acquired loans. The fair value of the acquired loans was based on the present value of the expected cash flows. Periodic principal and interest cash flows were adjusted for expected losses and prepayments, then discounted to determine the present value and summed to arrive at the estimated fair value. For such loans, the excess of cash flows expected at acquisition over the estimated fair value is recognized as interest income over the remaining lives of the loans. The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition reflects the impact of estimated credit losses and other factors, such as prepayments. In accordance with GAAP, there was no carry-over of Centra’s previously established allowance for credit losses. As a result, standard industry coverage ratios with regard to the allowance for credit losses are less meaningful after the acquisition of Centra.

The acquired loans were divided into loans with evidence of credit quality deterioration, which are accounted for under 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. Subsequent decreases in the expected cash flows require United to evaluate the need for additions to the Company’s allowance for credit losses. Subsequent improvements in expected cash flows generally result in the recognition of additional interest income over the then remaining lives of the loans.

In conjunction with the Centra merger, the acquired loan portfolio was accounted for at fair value as follows:

	July 8, 2011
Contractually required principal and interest at acquisition	$	1,377,211
Contractual cash flows not expected to be collected		(33,879	)
Expected cash flows at acquisition		1,343,332
Interest component of expected cash flows		(321,297	)
Basis in acquired loans at acquisition – estimated fair value	$	1,022,035

Included in the above table is information related to acquired impaired loans. Specifically, contractually required principal and interest, cash flows expected to be collected and estimated fair value of acquired impaired loans were $72,647, $48,112, and $46,446, respectively.

The consideration paid for Centra’s common equity and the amounts of acquired identifiable assets and liabilities assumed as of the acquisition date were as follows:

Purchase price:
Value of common shares issued (6,548,473 shares)	$	161,420
Cash for stock options and fractional shares		8,576
Total purchase price		169,996
Identifiable assets:
Cash and cash equivalents		57,661
Investment securities		128,078
Loans held for sale		2,062
Loans		1,022,035
Premises and equipment		20,126
Core deposit intangibles		12,439
Other assets		51,656
Total identifiable assets	$	1,294,057
Identifiable liabilities:
Deposits	$	1,132,885
Short-term borrowings		28,566
Long-term borrowings		19,436
Other liabilities		3,273
Total identifiable liabilities		1,184,160
Net assets acquired including identifiable intangible assets		109,897
Resulting goodwill	$	60,099

The following table provides a reconciliation of goodwill:

Goodwill at December 31, 2011	$	371,693
Reductions:
Options exercised from previous acquisitions		(34	)
Adjustment to goodwill from Centra acquisition		(9	)
Goodwill at June 30, 2012	$	371,650

The following table discloses the impact of Centra since the acquisition on July 8, 2011 through the end of the second quarter of 2012. The table also presents certain unaudited pro forma information for the results of operations for the six months ended June 30, 2011 as if the Centra merger had occurred on January 1, 2011. These results combine the historical results of Centra into United’s consolidated statement of income and, while certain adjustments were made for the estimated impact of certain fair valuation adjustments and other acquisition-related activity, they are not indicative of what would have occurred had the acquisition taken place on the indicated date nor are they intended to represent or be indicative of future results of operations. In particular, no adjustments have been made to eliminate the amount of Centra’s provision for credit losses for 2011 that may not have been necessary had the acquired loans been recorded at fair value as of the beginning of 2011. Additionally, United expects to achieve operating cost savings and other business synergies as a result of the acquisition which are not reflected in the pro forma amounts.

	Centra actual since acquisition through June 30, 2012		Proforma Six Months Ended June 30, 2011
Total Revenues (1)	$	61,765	$	176,942
Net Income		25,437		32,206

⁽¹⁾ Represents net interest income plus other income