Quarterly Report (10-q)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2013

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

For the transition period from ____________________ to ____________________

Commission file number 001-34462

1ST UNITED BANCORP, INC.
(Exact Name of Registrant as specified in its charter)

FLORIDA	65-0925265
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)

One North Federal Highway, Boca Raton	33432
(Address of Principal Executive Offices)	(Zip Code)

(561) 362-3400
(Registrant’s Telephone Number, Including Area Code)

N/A
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report.)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filer o	Accelerated filer x	Non-accelerated filer o	Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.


Class		Outstanding at July 8, 2013
Common stock, $.01 par value		34,287,056

1st UNITED BANCORP, INC.
June 30, 2013
INDEX

		PAGE NO.
PART I.	FINANCIAL INFORMATION

Item 1.	Consolidated Financial Statements (Unaudited)	3

	Consolidated Balance Sheets (Unaudited) as of June 30, 2013 and December 31, 2012	3

	Consolidated Statements of Operations (Unaudited) for the Three and Six Months Ended June 30, 2013 and 2012	4

	Consolidated Statement of Comprehensive Income (Unaudited) for the Three and Six Months Ended June 30, 2013 and 2012	5

	Consolidated Statements of Changes in Shareholders’ Equity (Unaudited) for the Six Months Ended June 30, 2013 and 2012	6

	Consolidated Statements of Cash Flows (Unaudited) for the Six Months Ended June 30, 2013 and 2012	7

	Notes to Unaudited Consolidated Financial Statements	8

Item 2 .	Management’s Discussion and Analysis of Financial Condition and Results of Operations	38

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	65

Item 4.	Controls and Procedures	66

PART II.	OTHER INFORMATION	66

Item 1.	Legal Proceedings	66

Item 1A .	Risk Factors	66

Item 5.	Other Information	66

Item 6.	Exhibits	67

SIGNATURES		68

INTRODUCTORY NOTE
Caution Concerning Forward-Looking Statements

The SEC encourages companies to disclose forward-looking information so that investors can better understand a company’s future prospects and make informed investment decisions. This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, among others, statements about our beliefs, plans, objectives, goals, expectations, estimates and intentions that are subject to significant risks and uncertainties and are subject to change based on various factors, many of which are beyond our control. The words “may,” “could,” “should,” “would,” “believe,” “anticipate,” “estimate,” “expect,” “intend,” “plan,” “target,” “goal,” and similar expressions are intended to identify forward-looking statements.

All forward-looking statements, by their nature, are subject to risks and uncertainties. Our actual future results may differ materially from those set forth in the forward-looking statements. Our ability to achieve our financial objectives could be adversely affected by the factors discussed in detail in Part I, Item 2., “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Part II, Item 1A., “Risk Factors” in this Quarterly Report on Form 10-Q, the following sections of our Annual Report on Form 10-K for the year ended December 31, 2012 (the “Annual Report”): (a) “Introductory Note” in Part I, Item 1. “Business;” (b) “Risk Factors” in Part I, Item 1A. as updated in our subsequent quarterly reports on Form 10-Q; and (c) “Introduction” in Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in Part II, Item 7, as well as:

●

our ability to comply with the terms of the loss sharing agreements with the FDIC;

●

legislative or regulatory changes, including the Dodd-Frank Wall Street Reform and Consumer Protection Act and Basel III;

●

our ability to integrate the business and operations of companies and banks that we have acquired and those we may acquire in the future;

●

the failure to achieve expected gains, revenue growth, and/or expense savings from past and future acquisitions;

●

the strength of the United States economy in general and the strength of the local economies in which we conduct operations;

●

the accuracy of our financial statement estimates and assumptions, including the estimate for our loan loss provision and the FDIC loss share receivable;

●

the frequency and magnitude of foreclosure of our loans;

●

the reduction in FDIC insurance on certain non-interest bearing accounts due to the expiration of the Transaction Account Guarantee program;

●

increased competition and its effect on pricing, including the impact on our net interest margin from repeal of Regulation Q;

●

our customers’ willingness to make timely payments on their loans;

●

the effects of the health and soundness of other financial institutions;

●

changes in the securities and real estate markets;

●

changes in monetary and fiscal policies of the U.S. Government;

●

inflation, interest rate, market and monetary fluctuations;

●

the effects of our lack of a diversified loan portfolio, including the risks of geographic and industry concentrations;

●

our need and our ability to incur additional debt or equity financing;

●

the effects of harsh weather conditions, including hurricanes, and man-made disasters;

●

our ability to comply with the extensive laws and regulations to which we are subject;

●

the willingness of clients to accept third-party products and services rather than our products and services and vice versa;

●

technological changes;

●

negative publicity and the impact on our reputation;

●

the effects of security breaches and computer viruses that may affect our computer systems;

●

changes in consumer spending and saving habits;

●

changes in accounting principles, policies, practices or guidelines;

●

the limited trading activity of our common stock;

●

the concentration of ownership of our common stock;

●

our ability to retain key members of management;

●

anti-takeover provisions under federal and state law as well as our Articles of Incorporation and our Bylaws;

●

other risks described from time to time in our filings with the Securities and Exchange Commission; and

●

our ability to manage the risks involved in the foregoing.

However, other factors besides those listed above could adversely affect our results, and you should not consider any such list of factors to be a complete set of all potential risks or uncertainties. These forward-looking statements are not guarantees of future performance, but reflect the present expectations of future events by our management and are subject to a number of factors and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. Any forward-looking statements made by us speak only as of the date they are made. We do not undertake to update any forward-looking statement, except as required by applicable law.

ITEM 1. FINANCIAL STATEMENTS

1ST UNITED BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands)
(unaudited)


	June 30, 2013			December 31, 2012
ASSETS
Cash and due from financial institutions	$	78,847		$	206,871
Federal funds sold		264			246
Cash and cash equivalents		79,111			207,117
Securities available for sale		354,869			260,122
Loans held for sale		—			524
Loans, net of allowance of $10,063 and $9,788 at June 30, 2013 and December 31, 2012		924,727			903,600
Nonmarketable equity securities		8,028			8,625
Premises and equipment, net		17,174			17,780
Other real estate owned		18,104			19,529
Company-owned life insurance		21,385			21,092
FDIC loss share receivable		35,249			46,735
Goodwill		58,499			58,499
Core deposit intangible		2,930			3,268
Accrued interest receivable and other assets		25,223			19,888
Total assets	$	1,545,299		$	1,566,779

LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits
Non-interest bearing	$	447,207		$	426,968
Interest bearing		844,911			876,054
Total deposits		1,292,118			1,303,022
Federal funds purchased and repurchase agreements		12,883			19,855
Accrued interest payable and other liabilities		7,709			7,212
Total liabilities		1,312,710			1,330,089
Commitments and contingencies (Note 9)
Shareholders’ equity
Preferred stock – no par, 5,000,000 shares authorized; no shares issued or outstanding		—			—
Common stock – $0.01 par value; 60,000,000 shares authorized; 34,287,056 and 34,070,270 issued and outstanding at June 30, 2013 and December 31, 2012, respectively		343			341
Additional paid-in capital		238,814			238,089
Accumulated deficit		(952	)		(3,998	)
Accumulated other comprehensive income (loss)		(5,616	)		2,258
Total shareholders’ equity		232,589			236,690
Total liabilities and shareholders’ equity	$	1,545,299		$	1,566,779

See accompanying notes to the consolidated financial statements.

1st UNITED BANCORP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)
(unaudited)


	Three months ended June 30,						Six months ended June 30,
	2013			2012			2013			2012
Interest income:
Loans, including fees	$	18,741		$	17,303		$	34,912		$	31,675
Securities available for sale		1,648			1,677			3,016			3,004
Federal funds sold and other		157			186			338			375

Total interest income		20,546			19,166			38,266			35,054
Interest expense:
Deposits		894			1,473			1,879			2,901
Federal funds purchased and repurchase agreements		4			3			10			6
Federal Home Loan Bank and Federal Reserve Bank borrowings		—			—			—			6

Total interest expense		898			1,476			1,889			2,913

Net interest income		19,648			17,690			36,377			32,141
Provision for loan losses		1,300			3,100			1,950			4,400

Net interest income after provision for loan losses		18,348			14,590			34,427			27,741
Non-interest income:
Service charges and fees on deposit accounts		803			878			1,599			1,711
Net gains on sales of other real estate owned		393			1,218			833			1,953
Net gains on sales of securities		609			1,175			732			1,673
Net gains on sales of loans held for sale		12			46			58			65
Increase in cash surrender value of Company owned life insurance		146			125			293			187
Adjustment to FDIC loss share receivable		(4,922	)		(3,042	)		(7,741	)		(5,117	)
Other		240			191			520			398
Total non-interest income		(2,719	)		591			(3,706	)		870

Non-interest expense:
Salaries and employee benefits		6,028			6,238			12,227			11,946
Occupancy and equipment		1,969			2,020			3,938			3,965
Data processing		926			937			1,856			1,815
Telephone		218			261			447			475
Stationery and supplies		98			138			189			263
Amortization of intangibles		166			182			339			325
Professional fees		452			426			839			818
Advertising		47			63			135			135
Merger reorganization expense		128			1,309			128			1,760
Disposal of banking center		404			—			404			—
Regulatory assessment		370			387			728			745
Other real estate owned expense		457			392			1,037			763
Loan expense		455			682			803			1,249
Other		1,110			1,127			2,234			2,078
Total non-interest expense		12,828			14,162			25,304			26,337

Income before taxes		2,801			1,019			5,417			2,274
Income tax expense		1,034			372			2,029			847
Net income	$	1,767		$	647		$	3,388		$	1,427

Basic earnings per common share	$	0.05		$	0.02		$	0.10		$	0.04
Diluted earnings per common share	$	0.05		$	0.02		$	0.10		$	0.04

See accompanying notes to the consolidated financial statements.

1st UNITED BANCORP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Dollars in thousands)
(unaudited)

	Three months ended June 30,						Six months ended June 30,
	2013			2012			2013			2012
Net income	$	1,767		$	647		$	3,388		$	1,427
Other comprehensive income (loss):
Unrealized gains (losses) on securities available for sale		(11,142	)		1,651			(11,892	)		1,292
Reclassification adjustment for security gains included in net income ⁽¹⁾		(609	)		(1,175	)		(732	)		(1,673	)
Income tax benefit (expense)		4,422			(180	)		4,750			144
Other comprehensive income (loss)		(7,329	)		296			(7,874	)		(237	)
Comprehensive income (loss)	$	(5,562	)	$	943		$	(4,486	)	$	1,190

⁽¹⁾

Amounts are included in net gains on sales of securities on the Consolidated Statements of Operations in total non-interest income. Income tax expense associated with the reclassification adjustment for the three months ended June 30, 2013 and 2012 was $229 and $442, respectively. Income tax expense associated with the reclassification adjustment for the six months ended June 30, 2013 and 2012 was $275 and $630, respectively.

See accompanying notes to the consolidated financial statements.

1st UNITED BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
Six months ended June 30, 2013 and 2012
(Dollars in thousands)
(unaudited)

	Shares of Common Stock		Common Stock		Additional Paid-In Capital			Accumulated Deficit			Accumulated Other Comprehensive Income (Loss)			Total Shareholders’ Equity
Balance at January 1, 2012		30,569,032	$	307	$	217,800		$	(5,319	)	$	2,563		$	215,351
Net income		—		—		—			1,427			—			1,427
Other comprehensive income (loss)		—		—		—			—			(237	)		(237	)
Stock-based compensation expense		—		—		604			—			—			604
Restricted stock grants		360,884		3		(3	)		—			—			—
Issuance of common stock, net of costs of $15		3,140,354		31		19,080			—			—			19,111
Balance at June 30, 2012		34,070,270	$	341	$	237,481		$	(3,892	)	$	2,326		$	236,256

Balance at January 1, 2013		34,070,270	$	341	$	238,089		$	(3,998	)	$	2,258		$	236,690
Net income		—		—		—			3,388			—			3,388
Other comprehensive income (loss)		—		—		—			—			(7,874	)		(7,874	)
Stock-based compensation expense		—		—		727			—			—			727
Dividends paid ($0.01 per share)		—		—		—			(342	)		—			(342	)
Restricted stock grants		216,786		2		(2	)		—			—			—
Balance at June 30, 2013		34,287,056	$	343	$	238,814		$	(952	)	$	(5,616	)	$	232,589

See accompanying notes to the consolidated financial statements.

1st UNITED BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six months ended June 30, 2013 and 2012
(Dollars in thousands)
(unaudited)

	2013			2012
Cash flows from operating activities
Net income	$	3,388		$	1,427
Adjustments to reconcile net income to net cash provided by operating activities
Provision for loan losses		1,950			4,400
Depreciation and amortization		1,816			1,628
Net accretion of purchase accounting adjustments		(10,337	)		(8,052	)
Net amortization of securities		1,954			1,138
Adjustment to FDIC receivable		7,741			5,117
Increase in cash surrender value of company-owned life insurance		(293	)		(187	)
Stock-based compensation expense		727			604
Net gains on sales of securities		(732	)		(1,673	)
Net gains on other real estate owned		(833	)		(1,953	)
Net loss on premises and equipment		—			4
Net gain on sale of loans held for sale		(58	)		(65	)
Write-down of other real estate owned		642			326
Disposal of branch		404			—
Loans originated for sale		(2,871	)		(3,866	)
Proceeds from sale of loans held for sale		3,453			3,871
Net change in:
Deferred income tax		—			135
Deferred loan fees		64			(53	)
Accrued interest receivable and other assets		(1,058	)		735
Accrued interest payable and other liabilities		102			(2,586	)
Net cash provided by operating activities		6,059			950
Cash flows from investing activities
Proceeds from sales of securities		30,755			102,521
Proceeds from security maturities calls and prepayments		35,074			37,888
Purchases of securities		(174,421	)		(60,875	)
Loan originations and payments, net		(16,614	)		52,059
Cash received from FDIC loss sharing agreements		3,745			11,073
Redemption (purchase) of nonmarketable equity securities, net		597			3,242
Purchase of Company owned life insurance		—			(15,500	)
Proceeds from the sale of other real estate owned		5,178			4,615
Cash paid in connection with merger		—			(11,166	)
Additions to premises and equipment, net		(409	)		(661	)
Net cash provided by (used in) investing activities		(116,095	)		123,196
Cash flows from financing activities
Net change in deposits		(10,656	)		15,900
Net change in federal funds purchased and repurchase agreements		(6,972	)		202
Net change in Federal Home Loan Bank advance		—			(5,000	)
Dividends paid		(342	)		—
Net cash provided by (used in) financing activities		(17,970	)		11,102
Net change in cash and cash equivalents		(128,006	)		135,248
Beginning cash and cash equivalents		207,117			165,424

Ending cash and cash equivalents	$	79,111		$	300,672
Supplemental cash flow information:
Interest paid	$	1,940		$	2,865
Taxes paid		1,585			357
Transfer of loans to other real estate owned		3,562			17,676

See accompanying notes to the consolidated financial statements.

1st UNITED BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(unaudited)

NOTE 1 – BASIS OF PRESENTATION

Nature of Operations and Principles of Consolidation : The consolidated financial statements include 1st United Bancorp, Inc. (“Bancorp or “Company”) and its wholly-owned subsidiaries, 1st United Bank (“1st United”) and Equitable Equity Lending (“EEL”), together referred to as “the Company.” Intercompany transactions and balances are eliminated in consolidation.

Bancorp’s primary business is the ownership and operation of 1st United. 1st United is a state chartered commercial bank that provides financial services through its four offices in Palm Beach County; four offices in Broward County; four offices in Miami-Dade County; one office each in the cities of Vero Beach, Sebastian and Barefoot Bay; four offices in Pinellas County; and one office each in Pasco, Orange and Hillsborough counties. 1st United’s primary deposit products are checking, savings, and term certificate accounts, and its primary lending products are commercial and residential mortgages, and commercial and installment loans. Substantially all loans are secured by specific items of collateral including commercial and residential real estate, business assets and consumer assets. Commercial loans are expected to be repaid from the cash flow supporting the operations of businesses.

EEL is a commercial finance subsidiary that from time to time will hold foreclosed assets, performing loans or non-performing loans. At June 30, 2013, EEL held $2,401 in performing loans and $536 in non-performing loans.

The accompanying consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and, therefore, do not include all information and notes necessary for a complete presentation of the financial position, results of operations and cash flow activity required in accordance with accounting principles generally accepted in the United States. In the opinion of management of the Company, all adjustments (consisting only of normal recurring adjustments) necessary for a fair statement of results for the interim periods have been made. These consolidated financial statements and notes should be read in conjunction with the consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012.

In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported asset and liability balances and revenue and expense amounts and the disclosure of contingent assets and liabilities. Actual results could differ significantly from those estimates. Certain amounts for the prior year have been reclassified to conform to the current year’s presentation.

Operations are managed and financial performance is evaluated on a company-wide basis. Accordingly, all financial operations are considered by management to be aggregated in one reportable operating segment.

Earnings Per Common Share : Basic earnings per common share is net income divided by the weighted average number of common shares outstanding during the period. Diluted earnings per share include the dilutive effect of additional potential common shares issuable under stock options and restricted stock. Earnings per common share is restated for all stock splits and stock dividends through the date of issue of the consolidated financial statements.

Stock options to acquire 2,571,673 and 3,989,029 shares of common stock were not considered in computing diluted earnings per share for the quarters ended June 30, 2013 and 2012, respectively, because consideration of those instruments would be antidilutive. Stock options to acquire 2,571,673 and 3,823,550 shares of common stock were not considered in computing diluted earnings per share for the six months ended June 30, 2013 and 2012, respectively, because consideration of those instruments would be antidilutive.

FDIC Loss Share Receivable . The FDIC Loss Share Receivable represents the estimated amounts due from the Federal Deposit Insurance Corporation (“FDIC”) related to the loss share agreements which were booked as of the acquisition dates of Republic Federal Bank, N.A. (“Republic”), The Bank of Miami, N.A. (“TBOM”) and Old Harbor Bank of Florida (“Old Harbor”). The receivable represents the discounted value of the FDIC’s reimbursable portion of estimated losses we expect to realize on loans and other real estate (“Covered Assets”) acquired as a result of the TBOM, Republic and Old Harbor acquisitions. As losses are realized on Covered Assets, the portion that the FDIC pays the Company in cash for principal and up to 90 days of interest reduces the FDIC Loss Share Receivable.

1st UNITED BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(unaudited)

NOTE 1 – BASIS OF PRESENTATION (continued)

The FDIC Loss Share Receivable is reviewed quarterly and adjusted for any changes in expected cash flows based on recent performance and expectations for future performance of the Covered Assets. Prior to October 1, 2012, any increases in cash flows of Covered Assets would be accreted into income over the life of the Covered Asset and would reduce immediately the FDIC Loss Share Receivable. Subsequent to October 1, 2012, due to the adoption of new guidance by the Financial Accounting Standards Board (“FASB”), any increases in cash flows of Covered Assets will be accreted into income over the life of the covered asset with a reduction to the FDIC Loss Share Receivable over the shorter of the life of the loan or the remaining term of the respective Loss Share Agreements. Any decreases in the expected cash flows of the Covered Assets will result in the impairment to the Covered Asset and an increase in the FDIC Loss Share Receivable to be reflected immediately. Non-cash adjustments to the FDIC Loss Share Receivable are recorded to non-interest income.

Certain Acquired Loans : As part of business acquisitions, the Company evaluated each of the acquired loans under ASC 310-30 to determine whether (1) there was evidence of credit deterioration since origination, and (2) it was probable that we would not collect all contractually required payment receivable. The Company determined the best indicator of such evidence was an individual loan’s payment status and/or whether a loan was determined to be classified by us based on our review of each individual loan. Therefore, generally each individual loan that should have been or was on nonaccrual at the acquisition date, loans contractually past due 60 days or more, and each individual loan that was classified by us were included subject to ASC 310-30. These loans were recorded at the discounted expected cash flows of the individual loan and are currently disclosed in Note 4.

Loans which were evaluated under ASC 310-30, and where the timing and amount of cash flows can be reasonably estimated, were accounted for in accordance with ASC 310-30-35. The Company applies the interest method for these loans under this subtopic and the loans are excluded from non-accrual. If, at acquisition, we identified loans that we could not reasonably estimate cash flows or if subsequent to acquisition such cash flows could not be estimated, such loans would be included in non-accrual. These acquired loans are recorded at the allocated fair value, such that there is no carryover of the seller’s allowance for loan losses. Such acquired loans are accounted for individually. The Company estimates the amount and timing of expected cash flows for each purchased loan, and the expected cash flows in excess of the allocated fair value is recorded as interest income over the remaining life of the loan (accretable yield). The excess of the loan’s contractual principal and interest over expected cash flows is not recorded (non-accretable difference). Over the life of the loan, expected cash flows continue to be estimated. If the present value of expected cash flows is less than the carrying amount, a loss is recorded through the allowance for loan losses. If the present value of expected cash flows is greater than the carrying amount, it is recognized as part of future interest income.

Allowance for Loan Losses . In originating loans, the Company recognizes that credit losses will be experienced and the risk of loss will vary with, among other things: general economic conditions; the type of loan being made; the creditworthiness of the borrower over the term of the loan; and, in the case of a collateralized loan, the quality of the collateral for such a loan. The allowance for loan losses represents our estimate of the allowance necessary to provide for probable incurred losses in the loan portfolio. In making this determination, the Company analyzes the ultimate collectability of the loans in its portfolio, feedback provided by internal loan staff, the independent loan review function and information provided by examinations performed by regulatory agencies.

The allowance for loan losses is evaluated at the portfolio segment level using the same methodology for each segment. The historical net losses for a rolling three year period is the basis for the general reserve for each segment which is adjusted for each of the same qualitative factors (i.e., nature and volume of portfolio, economic and business conditions, classification, past due and non-accrual trends) evaluated by each individual segment. Impaired loans and related specific reserves for each of the segments are also evaluated using the same methodology for each segment. The qualitative factors totaled approximately 7 and 11 basis points of the allowance for loan losses at June 30, 2013 and December 31, 2012, respectively.

1st UNITED BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(unaudited)

NOTE 1 – BASIS OF PRESENTATION (continued)

A loan is considered impaired when, based on current information and events, it is probable the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays (loan payments made within 90 days of the due date) and payment shortfalls (which are tracked as past due amounts) generally are not classified as impaired. The Company determines the past due status of a loan based on the number of days contractually past due. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.

Charge-offs of loans are made by portfolio segment at the time that the collection of the full principal, in management’s judgment, is doubtful. This methodology for determining charge-offs is consistently applied to each segment.

On a quarterly basis, management reviews the adequacy of the allowance for loan losses. Commercial credits are graded by risk management and the loan review function validates the assigned credit risk grades. In the event that a loan is downgraded, it is included in the allowance analysis at the lower grade. To establish the appropriate level of the allowance, the Company reviews and classifies loans (including all impaired and nonperforming loans) as to potential loss exposure. The Company’s analysis of the allowance for loan losses consists of three components: (i) specific credit allocation established for expected losses resulting from analysis developed through specific credit allocations on individual loans for which the recorded investment in the loan exceeds the fair value; (ii) general portfolio allocation based on historical loan loss experience for each loan category; and (iii) qualitative reserves based on general economic conditions as well as specific economic factors in the markets in which the Company operates.

The specific credit allocation component of the allowance for loan losses is based on a regular analysis of loans where the internal credit rating is at or below the substandard classification and the loan is determined to be impaired as determined by management.

The impairment, if any, is determined based on either the present value expected future cash flows discounted at the loan’s effective interest rate, the market price of the loan, or if the loan is collateral dependent, the fair value of the underlying collateral less estimated cost of sale. The Company may classify a loan as substandard; however, it may not be classified as impaired. A loan may be classified as substandard by management if, for example, the primary source of repayment is insufficient, the financial condition of the borrower and/or guarantors has deteriorated or there are chronic delinquencies.

Troubled Debt Restructurings . A loan is considered a troubled debt restructured loan based on individual facts and circumstances. A modification may include either an increase or reduction in interest rate or deferral of principal payments or both. Loans for which the terms have been modified resulting in a concession, and for which the borrower is experiencing financial difficulties, are considered troubled debt restructurings. The Company classifies troubled debt restructured loans as impaired and evaluates the need for an allowance for loan losses on a loan-by-loan basis. An allowance for loan losses is based on either the present value of estimated future cash flows or the estimated fair value of the underlying collateral. Loans retain their interest accrual status at the time of modification.

1st UNITED BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(unaudited)

NOTE 2 – ACQUISITIONS

On April 1, 2012, the Company completed its acquisition of Anderen Financial, Inc., a Florida corporation and its wholly-owned subsidiary Anderen Bank, a Florida-chartered commercial bank (Anderen Financial, Inc. and Anderen Bank are subsequently referred to herein collectively as “AFI”), pursuant to the Agreement and Plan of Merger, dated October 24, 2011 (the “Merger Agreement”). Pursuant to the terms of the Merger Agreement, each share of AFI common stock, $0.01 par value per share, was cancelled and automatically converted into the right to receive cash, common stock of the Company or a combination of cash and common stock of the Company. AFI shareholders could elect to receive cash, stock, or a combination of 50% cash and 50% stock, provided, however, that each such election was subject to mandatory allocation procedures to ensure the total consideration was approximately 50% cash and 50% stock. The total value of the consideration paid to AFI shareholders was $38,250 which consisted of approximately $19,125 in cash and 3,140,354 shares of the Company’s common stock. The Company’s common stock was valued at $6.09 per share, which was determined to be the fair value of the stock on the date of acquisition, with a total value of $19,065. The Company incurred $1,309 in merger reorganization expense during the year ended December 31, 2012 related to this acquisition. The Company recorded goodwill of $5,994 as a result of the merger which is not deductible for tax purposes. Total net deferred tax assets acquired was $5,651, primarily related to loss carry forwards. Additionally, the Company recorded $4,251 in deferred tax assets, which are included in other assets, as a result of purchase accounting adjustments. The Company completed the integration of AFI in June 2012.

The Company accounted for the transaction under the acquisition method of accounting which requires purchased assets and liabilities assumed to be recorded at their respective fair values at the date of acquisition. See Note 4 for additional information related to the fair value of loans acquired. The Company determined the fair value of core deposit intangibles, securities, fixed assets and deposits with the assistance of third party valuations. The fair value of other real estate owned (“OREO”) was based on recent appraisals of the properties. The estimated fair values were subject to refinement as additional information relative to the closing date fair values became available through the measurement period. As a result, the Company updated the previously reported consolidated balance sheet for the year ended December 31, 2012 for the final measurement period adjustments.

1st UNITED BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(unaudited)

NOTE 2 – ACQUISITIONS (continued)

The acquisition of AFI is consistent with the Company’s plans to continue to enhance its footprint and competitive position within the state of Florida. This acquisition complemented the initial expansion into the Florida Gulf Coast markets with the acquisition of Old Harbor. The Company believes it is well-positioned to deliver superior customer service, achieve stronger financial performance and enhance shareholder value through the synergies of combined operations. All of these factors contributed to the resulting goodwill in the transaction. The fair value of the assets acquired and liabilities assumed on April 1, 2012 were as follows:

	April 1, 2012 (as initially reported)		Final Measurement Period Adjustments			April 1, 2012 (As adjusted)
Cash	$	1,444	$	—		$	1,444
Federal Funds sold		6,500		—			6,500
Securities available for sale		37,742		—			37,742
Federal Home Loan Bank stock		496		—			496
Loans		131,986		(373	)		131,613
Other real estate owned		527		—			527
Core deposit intangible		692		—			692
Fixed assets		5,595		—			5,595
Other assets		10,911		(50	)		10,861
TOTAL ASSETS ACQUIRED	$	195,893	$	(423	)	$	195,470

Deposits	$	160,979	$	—		$	160,979
Other		2,124		111			2,235
TOTAL LIABILITIES ASSUMED	$	163,103	$	111		$	163,214

Excess of assets acquired over liabilities assumed	$	32,790	$	534		$	32,256
Purchase price		38,250		—			38,250
Goodwill	$	5,460	$	534		$	5,994

The following summarizes the net interest and other income, net income and earnings per share as if the merger with AFI was effective as of January 1, 2012, the beginning of the annual period prior to acquisition. There were no material, nonrecurring adjustments to the pro forma net interest and other income, net income and earnings per share presented below:

	Three months ended June 30,				Six months ended June 30,
	2013		2012 ⁽¹⁾		2013		2012 ⁽¹⁾
Net interest and non-interest income	$	16,929	$	18,281	$	32,671	$	35,369

Net income		1,767		647		3,388		1,692

Basic earnings per share		0.05		0.02		0.10		0.05

Diluted earnings per share		0.05		0.02		0.10		0.05

⁽¹⁾

The merger was effective April 1, 2012. There were no proforma adjustments subsequent to April 1, 2012.

1st UNITED BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(unaudited)

NOTE 3 – SECURITIES

The amortized cost and fair value of securities available for sale and the related gross unrealized gains and losses recognized in accumulated other comprehensive income (loss) were as follows.

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
June 30, 2013
Municipal Securities	$	6,366	$	—	$	(677	)	$	5,689
Residential collateralized mortgage obligations		1,856		—		(22	)		1,834
Residential mortgage-backed		355,649		406		(8,709	)		347,346
	$	363,871	$	406	$	(9,408	)	$	354,869
December 31, 2012
Municipal Securities	$	500	$	—	$	(31	)	$	469
Residential collateralized mortgage obligations		3,793		—		(34	)		3,759
Residential mortgage-backed		252,208		3,831		(145	)		255,894
	$	256,501	$	3,831	$	(210	)	$	260,122

At June 30, 2013 and December 31, 2012, there were no holdings of securities of any one issuer, other than the government agencies, in an amount greater than 10% of shareholders’ equity. All of the residential collateralized mortgage obligations and residential mortgage-backed securities at June 30, 2013 and December 31, 2012 were issued or sponsored by U.S. government agencies.

The amortized cost and fair value of debt securities at June 30, 2013 by contractual maturity were as shown in the table below. Securities not due at a single maturity date, primarily mortgage-backed securities, are shown separately.

	Amortized Cost		Fair Value
Due in one year or less	$	—	$	—
Due from one to five years		—		—
Due from five to ten years		—		—
Due after ten years		6,366		5,689
Residential mortgage-backed and residential collateralized mortgage obligations		357,505		349,180
	$	363,871	$	354,869

Securities as of June 30, 2013 and December 31, 2012 with a fair value of $33,322 and $28,891, respectively, were pledged to secure public deposits and repurchase agreements.

Proceeds and gross gains and (losses) from the sale of securities available for sales for the three and six months ended June 30, 2013 and 2012, respectively, were as follows:

	Three months ended June 30,				Six months ended June 30,
	2013		2012		2013		2012
Proceeds from sale	$	21,939	$	72,577	$	30,755	$	102,521
Gross gain		609		1,175		732		1,673
Gross (loss)		—		—		—		—
Net gains (losses) on sales of securities	$	609	$	1,175	$	732	$	1,673

1st UNITED BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(unaudited)

NOTE 3 – SECURITIES (continued)

Gross unrealized losses at June 30, 2013 and December 31, 2012, respectively, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, were as follows.

	Less than 12 Months					12 Months or More				Total
	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
June 30, 2013
Municipal Securities	$	5,689	$	(677	)	$	—	$	—	$	5,689	$	(677	)
Residential collateral mortgage obligations		1,834		(22	)		—		—		1,834		(22	)
Residential mortgage-backed		318,399		(8,709	)		21		—		318,420		(8,709	)
	$	325,922	$	(9,408	)	$	21	$	—	$	325,943	$	(9,408	)
December 31, 2012
Municipal Securities	$	469	$	(31	)	$	—	$	—	$	469	$	(31	)
Residential collateral mortgage obligations		3,759		(34	)		—		—		3,759		(34	)
Residential mortgage-backed		35,838		(145	)		14		—		35,852		(145	)
	$	40,066	$	(210	)	$	14	$	—	$	40,080	$	(210	)

In determining other than temporary impairment (“OTTI”) for debt securities, management considers many factors, including: (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, (3) whether the market decline was affected by macroeconomic conditions, and (4) whether the Company has the intent to sell the debt security or more likely than not will be required to sell the debt security before its anticipated recovery. The assessment of whether OTTI exists involves a high degree of subjectivity and judgment and is based on the information available to management at a point in time.

At June 30, 2013, there were 97 available for sale securities with unrealized losses, of which 8 were municipal securities, 3 were residential collateral mortgage obligations, and 86 were residential mortgage-backed securities. At December 31, 2012, there were 15 available for sale securities with unrealized losses, of which one was a municipal security, three were residential collateral mortgage obligations, and 11 were residential mortgage-backed securities. At June 30, 2013 and December 31, 2012, securities with unrealized losses had declined in fair value by 2.81% and 0.52%, respectively, from the Company’s amortized cost basis. The decrease in fair value is attributable to changes in the interest rate environment. Based on the Company’s assessment, the unrealized losses at June 30, 2013 and December 31, 2012 were deemed to be temporary.

1st UNITED BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(unaudited)

NOTE 4 – LOANS

Loans at June 30, 2013 and December 31, 2012 were as follows:

	June 30, 2013							December 31, 2012
	Loans Subject to Loss Share Agreements		Loans Not Subject to Loss Share Agreements		Total			Loans Subject to Loss Share Agreements		Loans Not Subject to Loss Share Agreements		Total
Commercial	$	32,835	$	151,752	$	184,587		$	33,025	$	146,473	$	179,498
Real estate:
Residential		77,859		69,981		147,840			86,981		78,936		165,917
Commercial		182,965		363,116		546,081			198,666		315,908		514,574
Construction and land development		7,820		39,169		46,989			8,426		33,463		41,889
Consumer and other		7		9,130		9,137			11		11,279		11,290
	$	301,486	$	633,148		934,634		$	327,109	$	586,059		913,168
Add (deduct):
Unearned income and net deferred loan (fees) costs						156							220
Allowance for loan losses						(10,063	)						(9,788	)
					$	924,727						$	903,600

The Company has segregated and evaluates its loan portfolio through five portfolio segments. The five segments are residential real estate, commercial, commercial real estate, construction and land development, and consumer and other. The Company’s business activity is concentrated with customers located in Palm Beach, Broward, Miami-Dade, Pinellas, Pasco, Orange and Hillsborough counties. Therefore, the Company’s exposure to credit risk is significantly affected by changes in these counties.

Residential real estate loans are a mixture of fixed rate and adjustable rate residential mortgage loans. As a policy, the Company holds adjustable and fixed rate loans and also sells to the secondary market. Changes in interest rates or market conditions may impact a borrower’s ability to meet contractual principal and interest payments. Residential real estate loans are secured by real property.

Commercial loan borrowers consist of small- to medium-sized businesses including professional associations, medical services, retail trade, construction, transportation, wholesale trade, manufacturing and tourism. Commercial loans are derived from our market areas and underwritten based on the borrower’s ability to service debt from the business’s underlying cash flows. As a general practice, we obtain collateral such as real estate, equipment or other assets, although other commercial loans may be uncollateralized but guaranteed.

Commercial real estate loans include loans secured by office buildings, warehouses, retail stores and other property located in or near our markets. These loans are originated based on the borrower’s ability to service the debt and secondarily based on the fair value of the underlying collateral.

Construction loans include residential and commercial real estate loans and are typically for owner-occupied or pre-sold/pre-leased properties. The terms of these loans are generally short-term with permanent financing upon completion. Land development loans include loans to develop both residential and commercial properties.

Consumer and other loans include second mortgage loans, home equity loans secured by junior and senior liens on residential real estate and home improvement loans. These loans are originated based primarily on credit scores, debt-to-income ratios and loan-to-value ratios.

1st UNITED BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(unaudited)

NOTE 4 – LOANS (continued)

Activity in the allowance for loan losses for the three and six months ended June 30, 2013 was as follows:

	Commercial		Residential Real Estate			Commercial Real Estate			Construction and Land Development		Consumer and Other			Total
Beginning balance, April 1, 2013	$	3,519	$	1,936		$	3,623		$	404	$	41		$	9,523
Provisions for loan losses		82		362			665			202		(11	)		1,300
Loans charged off		—		(54	)		(739	)		—		—			(793	)
Recoveries		18		—			2			2		11			33
Ending Balance, June 30, 2013	$	3,619	$	2,244		$	3,551		$	608	$	41		$	10,063

	Commercial		Residential Real Estate			Commercial Real Estate			Construction and Land Development			Consumer and Other			Total
Beginning balance, January 1, 2013	$	2,735	$	1,869		$	3,398		$	1,745		$	41		$	9,788
Provisions for loan losses		850		480			947			(332	)		5			1,950
Loans charged off		—		(106	)		(798	)		(898	)		(16	)		(1,818	)
Recoveries		34		1			4			93			11			143
Ending Balance, June 30, 2013	$	3,619	$	2,244		$	3,551		$	608		$	41		$	10,063

Activity in the allowance for loan losses for the three and six months ended June 30, 2012 was as follows:

	Commercial			Residential Real Estate			Commercial Real Estate			Construction and Land Development			Consumer and Other			Total
Beginning balance, April 1, 2012	$	4,593		$	1,833		$	3,601		$	2,270		$	69		$	12,366
Provisions for loan losses		3,335			(66	)		452			(590	)		(31	)		3,100
Loans charged off		(5,151	)		(357	)		(682	)		—			—			(6,190	)
Recoveries		9			2			69			—			—			80
Ending Balance, June 30, 2012	$	2,786		$	1,412		$	3,440		$	1,680		$	38		$	9,356

	Commercial			Residential Real Estate			Commercial Real Estate			Construction and Land Development			Consumer and Other			Total
Beginning balance, January 1, 2012	$	3,111		$	1,945		$	5,302		$	2,409		$	69		$	12,836
Provisions for loan losses		4,827			(6	)		411			(751	)		(81	)		4,400
Loans charged off		(5,182	)		(641	)		(2,379	)		—			—			(8,202	)
Recoveries		30			114			106			22			50			322
Ending Balance, June 30, 2012	$	2,786		$	1,412		$	3,440		$	1,680		$	38		$	9,356

1st UNITED BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(unaudited)

NOTE 4 – LOANS (continued)

Allowance for Loan Losses Allocation

As of June 30, 2013:

	Commercial		Residential Real Estate		Commercial Real Estate		Construction and Land Development		Consumer and Other		Total
Specific Reserves:
Impaired loans	$	1,463	$	507	$	826	$	276	$	—	$	3,072
Purchase credit impaired loans		368		181		334		—		—		883
Total specific reserves		1,831		688		1,160		276		—		3,955
General reserves		1,788		1,556		2,391		332		41		6,108
Total	$	3,619	$	2,244	$	3,551	$	608	$	41	$	10,063
Loans individually evaluated for impairment	$	5,237	$	3,214	$	23,262	$	3,899	$	—	$	35,612
Purchase credit impaired loans		8,842		16,846		43,828		4,123		29		73,668
Loans collectively evaluated for impairment		170,508		127,780		478,991		38,967		9,108		825,354
Total	$	184,587	$	147,840	$	546,081	$	46,989	$	9,137	$	934,634

As of December 31, 2012:

	Commercial		Residential Real Estate		Commercial Real Estate		Construction and Land Development		Consumer and Other		Total
Specific Reserves:
Impaired loans	$	510	$	474	$	1,128	$	1,002	$	—	$	3,114
Purchase credit impaired loans		355		359		306		—		—		1,020
Total Specific Reserves		865		833		1,434		1,002		—		4,134
General reserves		1,870		1,036		1,964		743		41		5,654
Total	$	2,735	$	1,869	$	3,398	$	1,745	$	41	$	9,788
Loans individually evaluated for impairment	$	4,168	$	5,825	$	24,006	$	6,094	$	—	$	40,093
Purchase credit impaired loans		8,923		18,363		52,276		4,221		30		83,813
Loans collectively evaluated for impairment		166,407		141,729		438,292		31,574		11,260		789,262
Total	$	179,498	$	165,917	$	514,574	$	41,889	$	11,290	$	913,168

1st UNITED BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(unaudited)

NOTE 4 – LOANS (continued)

The following tables present loans individually evaluated for impairment by class of loan as of June 30, 2013 and December 31, 2012, respectively.

	Recorded Investment in Impaired Loans With Allowance
June 30, 2013	Loans Subject to Loss Share Agreements						Loans Not Subject to Loss Share Agreements
	Unpaid Principal		Recorded Investment		Allowance for Loan Losses Allocated		Unpaid Principal		Recorded Investment		Allowance for Loan Losses Allocated
Residential Real Estate:
First mortgages	$	1,254	$	1,033	$	267	$	390	$	390	$	64
HELOCs and equity		39		38		38		251		250		138

Commercial:
Secured – non-real estate		349		349		19		5,743		2,547		1,392
Secured – real estate		54		52		52		—		—		—
Unsecured		—		—		—		—		—		—

Commercial Real Estate:
Owner occupied		2,534		2,263		121		1,171		1,151		86
Non-owner occupied		1,399		1,083		321		4,325		4,318		295
Multi-family		—		—		—		319		318		3

Construction and Land Development:
Construction		—		—		—		—		—		—
Improved land		—		—		—		529		529		276
Unimproved land		—		—		—		—		—		—

Consumer and other		—		—		—		—		—		—

Total June 30, 2013	$	5,629	$	4,818	$	818		12,728	$	9,503	$	2,254

1st UNITED BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(unaudited)

NOTE 4 – LOANS (continued)

	Recorded Investment in Impaired Loans
	With No Allowance
June 30, 2013	Loans Subject to Loss Share Agreements				Loans Not Subject to Loss Share Agreements
	Unpaid Principal		Recorded Investment		Unpaid Principal		Recorded Investment
Residential Real Estate:
First mortgages	$	1,081	$	896	$	—	$	—
HELOCs and equity		59		—		607		607

Commercial:
Secured – non-real estate		—		—		1,424		1,084
Secured – real estate		—		—		1,505		1,205
Unsecured		—		—		73		—

Commercial Real Estate:
Owner occupied		—		—		7,777		7,228
Non-owner occupied		757		648		5,651		5,578
Multi-family		1,244		675		—		—

Construction and Land Development:
Construction		—		—		—		—
Improved land		—		—		7,729		3,370
Unimproved land		—		—		—		—

Consumer and other		—		—		—		—

Total June 30, 2013	$	3,141	$	2,219	$	24,766	$	19,072

1st UNITED BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(unaudited)

NOTE 4 – LOANS (continued)

	Recorded Investment in Impaired Loans With Allowance
December 31, 2012	Loans Subject to Loss Share Agreements						Loans Not Subject to Loss Share Agreements
	Unpaid Principal		Recorded Investment		Allowance for Loan Losses Allocated		Unpaid Principal		Recorded Investment		Allowance for Loan Losses Allocated
Residential Real Estate:
First mortgages	$	1,823	$	1,414	$	355	$	393	$	393	$	62
HELOCs and equity		40		40		40		156		156		17

Commercial:
Secured – non-real estate		473		473		122		2,337		1,453		388
Secured – real estate		—		—		—		—		—		—
Unsecured		—		—		—		—		—		—

Commercial Real Estate:
Owner occupied		2,538		2,277		233		2,973		2,540		185
Non-owner occupied		470		353		25		4,680		4,680		437
Multi-family		1,250		1,250		248		—		—		—

Construction and Land
Development:
Construction		—		—		—		—		—		—
Improved land		—		—		—		148		148		42
Unimproved land		—		—		—		2,506		2,506		960

Consumer and other		—		—		—		—		—		—

Total December 31, 2012	$	6,594	$	5,807	$	1,023	$	13,193	$	11,876	$	2,091

1st UNITED BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(unaudited)

NOTE 4 – LOANS (continued)

	Recorded Investment in Impaired Loans
	With No Allowance
December 31, 2012	Loans Subject to Loss Share Agreements				Loans Not Subject to Loss Share Agreements
	Unpaid Principal		Recorded Investment		Unpaid Principal		Recorded Investment
Residential Real Estate:
First mortgages	$	478	$	423	$	6,008	$	5,362
HELOCs and equity		—		—		644		644

Commercial:
Secured – non-real estate		—		—		3,150		2,026
Secured – real estate		—		—		9,563		9,514
Unsecured		—		—		—		—

Commercial Real Estate:
Owner occupied		—		—		476		476
Non-owner occupied		398		345		11,868		8,089
Multi-family		1,271		1,271		—		—

Construction and Land Development:
Construction		—		—		—		—
Improved land		—		—		8,598		3,761
Unimproved land		—		—		—		—

Consumer and other		—		—		—		—

Total December 31, 2012	$	2,147	$	2,039	$	40,307	$	29,872

1st UNITED BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(unaudited)

NOTE 4 – LOANS (continued)

Average of impaired loans and related interest income for three and six months ended June 30, 2013 and 2012, respectively, were as follows:

	Three months ended June 30, 2013						Six months ended June 30, 2013
	Average Recorded Investment		Interest Income		Cash Basis		Average Recorded Investment		Interest Income		Cash Basis
Residential Real Estate:
First mortgages	$	2,357	$	4	$	3	$	2,329	$	9	$	8
HELOC and equity		902		2		2		911		3		3

Commercial:
Secured non real estate		3,992		26		23		3,560		60		57
Secured real estate		1,262		12		12		1,268		24		24
Unsecured		—		—		—		—		—		—

Commercial Real Estate:
Owner occupied		10,667		81		76		10,707		162		152
Non-owner occupied		11,758		84		84		11,819		166		167
Multifamily		1,370		—		—		1,465		—		—

Construction and Land Development:
Construction		—		—		—		—		—		—
Improved Land		3,909		2		2		3,738		8		8
Unimproved Land		—		—		—		—		—		—

Consumer and Other:		—		—		—		—		—		—

Total	$	36,217	$	211	$	202	$	35,797	$	432	$	419

	Three months ended June 30, 2012						Six months ended June 30, 2012
	Average Recorded Investment		Interest Income		Cash Basis		Average Recorded Investment		Interest Income		Cash Basis
Residential Real Estate:
First mortgages	$	5,290	$	4	$	4	$	4,554	$	8	$	9
HELOC and equity		965		—		—		963		—		—

Commercial:
Secured non real estate		2,828		17		17		3,120		34		35
Secured real estate		1,358		12		13		1,362		28		30
Unsecured		1		—		—		1		—		—

Commercial Real Estate:
Owner occupied		9,455		72		68		8,866		170		174
Non-owner occupied		12,204		108		118		12,277		225		231
Multifamily		1,270		—		—		1,270		—		—

Construction and Land Development:
Construction		—		—		—		—		—		—
Improved Land		3,740		—		—		3,746		34		34
Unimproved Land		2,516		27		32		2,516		54		59

Consumer and Other:		—		—		—		6		—		—

Total	$	39,627	$	240	$	252	$	38,681	$	553	$	572

1st UNITED BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(unaudited)

NOTE 4 – LOANS (continued)

Modifications of terms for the Company’s loans and their inclusion as troubled debt restructurings are based on individual facts and circumstances. Loan modifications that are included as troubled debt restructurings may involve a reduction of the stated interest rate of the loan, an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk, or deferral of principal payments, regardless of the period of the modification. Generally, the Company will allow interest rate reductions for a period of less than two years after which the loan reverts back to the contractual interest rate. Each of the loans included as troubled debt restructurings at June 30, 2013 had either an interest rate modification from 6 months to 2 years before reverting back to the original interest rate or a deferral of principal payments which can range from 6 to 12 months before reverting back to an amortizing loan. All of the loans were modified due to financial stress of the borrower. In order to determine if a borrower is experiencing financial difficulty, an evaluation is performed to determine the probability that the borrower will be in payment default on any of its debt in the foreseeable future with the modification. This evaluation is performed under the Company’s internal underwriting policy.

Loans retain their accrual status at the time of their modification. As a result, if a loan is on non-accrual at the time it is modified, it stays as non-accrual, and if a loan is on accrual at the time of the modification, it generally stays on accrual. A loan on non-accrual will be individually evaluated based on sustained adherence to the terms of the modification agreement prior to being reclassified to accrual status. The Company monitors the performance of loans modified on a monthly basis. A modified loan will be reclassified to non-accrual and is in default if the loan is not performing in accordance with the modification agreement, the loan becomes contractually past due in accordance with the modification agreement or other weaknesses are observed which makes collection of principal and interest unlikely. The Company’s policy is to evaluate and potentially return a troubled debt restructured loan from a non-accrual to accrual status upon the receipt of all past due principal and/or interest payments since the date of and in accordance with the terms of the modification agreement and when future payments are reasonable assured. The average yield on the performing loans classified as troubled debt restructurings were 4.42% and 4.76% as of June 30, 2013 and December 31, 2012, respectively. Troubled debt restructuring loans are considered impaired.

During the quarter ended June 30, 2013, the Company modified $837 in commercial real estate loans. During the six months ended June 30, 2013, the Company modified $1,108 in commercial real estate loans. During the quarter ended June 30, 2012, the Company modified $1,765 in commercial real estate loans. During the six months ended June 30, 2012, the Company modified $295 in commercial loans and $3,125 in commercial real estate loans. All troubled debt restructurings are classified as either special mention or substandard by the Company.

The following is a summary of our performing troubled debt restructurings as of June 30, 2013 and December 31, 2012, respectively, all of which were performing in accordance with the restructured terms:

	June 30, 2013		December 31, 2012
Residential real estate	$	598	$	605
Commercial real estate		15,498		17,315
Construction and land development		145		2,654
Commercial		3,234		3,699
Total	$	19,475	$	24,273

Of the $19,475 of performing trouble debt restructurings at June 30, 2013, $12,207 was classified as special mention and $7,268 was classified as substandard. Of the $24,273 of performing trouble debt restructurings at December 31, 2012, $12,416 was classified as special mention and $11,857 was classified as substandard.

1st UNITED BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(unaudited)

NOTE 4 – LOANS (continued)

Total non-accruing troubled debt restructurings as of June 30, 2013 and December 31, 2012, respectively, were as follows:

	June 30, 2013		December 31, 2012
Residential real estate	$	290	$	1,885
Commercial real estate		2,723		166
Construction and land development		3,370		3,440
Commercial		367		185
Total	$	6,750	$	5,676

These loans had a specific reserve in the allowance for loan losses at June 30, 2013 and December 31, 2012 of $589 and $66, respectively. There were no loans modified within the twelve months ended June 30, 2013 that defaulted within the three or six months ending June 30, 2013. There were no loans modified within the twelve months ended June 30, 2012 which defaulted within the three or six months ended June 30, 2012.

During the three and six month periods ended June 30, 2013, the Company lowered the interest rate on $11,080 and $21,655, respectively, of loans prior to maturity which the Company did not consider to be troubled debt restructurings. During the year ended December 31, 2012, we had approximately $11,800 in loans on which we lowered the interest rate prior to maturity to competitively retain the loan. Due to the borrowers’ significant deposit balances and/or overall quality of the loans, these loans were not included in troubled debt restructurings. In addition, each of these borrowers were not considered to be in financial distress and the modified terms matched current market terms for borrowers with similar risk characteristics. The Company had no other loans where we extended the maturity or forgave principal that were not already included in troubled debt restructurings or otherwise impaired.

The Company had no commitments to lend additional funds for loans classified as troubled debt restructurings at June 30, 2013. The Company has allocated $1,423 and $2,030 of specific reserves to customers whose loan terms have been modified in troubled debt restructurings as of June 30, 2013 and December 31, 2012, respectively.

Interest accrued and unpaid at the time a loan is placed on non-accrual status is charged against interest income. During the quarters ended June 30, 2013 and 2012, interest income not recognized on non-accrual loans (but would have been recognized if these loans were current) was approximately $273 and $244, respectively. During six months ended June 30, 2013 and 2012, interest income not recognized on non-accrual loans (but would have been recognized if these loans were current) was approximately $524 and $758, respectively.

1st UNITED BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(unaudited)

NOTE 4 – LOANS (continued)

Non-accrual loans represent loans which are 90 days and over past due and loans for which management believes collection of contractual amounts due are uncertain of collection. Included in the tables that follow are loans in non-accrual as well as 90 days and over past due categories with a carrying value of $21,619 and $23,416 as of June 30, 2013 and December 31, 2012, respectively. Loans accounted for under ASC 310-30 at June 30, 2013 and December 31, 2012 which were contractually accruing 30 to 59 days past due were $0 and $2,720, respectively; 30 to 59 days contractually past due and non-accrual were $1,277 and $274, respectively; contractually 60 to 89 days past due and accruing were $333 and $0, respectively; contractually 60 to 89 days past due and non-accrual were $277 and $805, respectively; contractually 90 plus days past due and accruing were $405 and $1,804, respectively and contractually 90 plus days past due and non-accrual were $19,688 and $20,666, respectively. These amounts are excluded from the disclosures of loans past due and on non-accrual. Loans which are 90 days or greater past due and accruing interest income were $0 and $2,109 at June 30, 2013 and December 31, 2012, respectively. The following tables summarize past due and non-accrual loans by the number of days past due as of June 30, 2013 and December 31, 2012, respectively:

	Accruing 30 – 59				Accruing 60-89				Non-Accrual and 90 days and over past due				Total
June 30, 2013	Loans Subject to Loss Share Agreements		Loans Not Subject to Loss Share Agreements		Loans Subject to Loss Share Agreements		Loans Not Subject to Loss Share Agreements		Loans Subject to Loss Share Agreements		Loans Not Subject to Loss Share Agreements		Loans Subject to Loss Share Agreements		Loans Not Subject to Loss Share Agreements
Residential Real Estate:
First mortgages	$	—	$	—	$	—	$	171	$	3,184	$	53	$	3,184	$	224
HELOCs and equity		—		—		—		—		99		706		99		706

Commercial:
Secured – non-real estate		—		161		—		513		14		1,951		14		2,625
Secured – real estate		—		—		—		—		445		—		445		—
Unsecured		—		—		—		—		—		—		—		—

Commercial Real Estate:
Owner occupied		—		1,737		—		—		2,788		1,667		2,788		3,404
Non-owner occupied		—		—		249		—		2,819		2,761		3,068		2,761
Multi-family		—		—		—		—		746		318		746		318

Construction and Land Development:
Construction		—		—		—		—		—		—		—		—
Improved land		—		—		—		—		—		3,754		—		3,754
Unimproved land		—		—		—		—		285		—		285		—

Consumer and other		—		—		—		—		—		29		—		29
Total June 30, 2013	$	—	$	1,898	$	249	$	684	$	10,380	$	11,239	$	10,629	$	13,821

1st UNITED BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(unaudited)

NOTE 4 – LOANS (continued)

	Accruing 30 – 59				Accruing 60-89				Non-Accrual and 90 days and over past due				Total
December 31, 2012	Loans Subject to Loss Share Agreements		Loans Not Subject to Loss Share Agreements		Loans Subject to Loss Share Agreements		Loans Not Subject to Loss Share Agreements		Loans Subject to Loss Share Agreements		Loans Not Subject to Loss Share Agreements		Loans Subject to Loss Share Agreements		Loans Not Subject to Loss Share Agreements
Residential Real Estate:
First mortgages	$	1,013	$	95	$	1,207	$	—	$	4,085	$	2,019	$	6,305	$	2,114
HELOCs and equity		—		197		—		—		103		796		103		993

Commercial:
Secured – non-real estate				200		—		94		147		805		147		1,099
Secured – real estate		—		—		—		—		424		—		424		—
Unsecured		—		—		—		—		—		—		—		—

Commercial Real Estate:
Owner occupied		—		1,873		—		—		2,820		2,487		2,820		4,360
Non-owner occupied		581		—		—		1,707		2,242		2,085		2,823		3,792
Multi-family		—		—		—		—		1,331		315		1,331		315

Construction and Land Development:
Construction		—		—		—		—		—		—		—		—
Improved land		—		—		—		—		—		3,440		—		3,440
Unimproved land		—		2,767		—		—		288		—		288		2,767

Consumer and other		—		99		—		—		—		29		—		128
Total December 31, 2012	$	1,594	$	5,231	$	1,207	$	1,801	$	11,440	$	11,976	$	14,241	$	19,008

Credit Quality Indicators:

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. Loans classified as substandard or special mention are reviewed quarterly by the Company for further deterioration or improvement to determine if appropriately classified and impairment. All other loans greater than $1,000, commercial and personal lines of credit greater than $100, and unsecured loans greater than $100 are specifically reviewed at least annually to determine the appropriate loan grading. In addition, during the renewal process of any loan, as well if a loan becomes past due, the Company will evaluate the loan grade.

Loans excluded from the scope of the annual review process above are generally classified as pass credits until: (a) they become past due; (b) management becomes aware of deterioration in the credit worthiness of the borrower; or (c) the customer contacts the Company for a modification. In these circumstances, the loan is specifically evaluated for potential classification as to special mention, substandard or doubtful. The Company uses the following definitions for risk ratings:

Special Mention. Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.

1st UNITED BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(unaudited)

NOTE 4 – LOANS (continued)

Substandard. Loans classified as substandard are inadequately protected by the current net worth and payment capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. There were no doubtful loans at June 30, 2013 or December 31, 2012.

			Loans Subject to Loss Share Agreements						Loans Not Subject to Loss Share Agreements
	Total		Pass		Special Mention		Substandard		Pass		Special Mention		Substandard
June 30, 2013
Residential Real Estate:
First mortgages	$	96,605	$	64,902	$	1,189	$	3,184	$	24,205	$	2,506	$	619
HELOCs and equity		51,235		8,454		31		99		35,873		634		6,144

Commercial:
Secured – non-real estate		124,860		20,866		349		14		97,951		1,856		3,824
Secured – real estate		52,265		11,083		—		445		39,214		800		723
Unsecured		7,462		78		—		—		6,399		566		419

Commercial Real Estate:
Owner occupied		174,492		32,937		7,785		2,788		122,571		735		7,676
Non-owner occupied		334,574		114,870		909		2,819		206,133		3,878		5,965
Multi-family		37,015		20,111		—		746		15,839		—		319

Construction and Land Development:
Construction		16,828		—		—		—		16,828		—		—
Improved land		17,031		3,928		—		—		6,237		2,694		4,172
Unimproved land		13,130		3,607		—		285		9,238		—		—

Consumer and other		9,137		7		—		—		8,466		532		132
Total June 30, 2013	$	934,634	$	280,843	$	10,263	$	10,380	$	588,954	$	14,201	$	29,993

1st UNITED BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(unaudited)

NOTE 4 – LOANS (continued)

			Loans Subject to Loss Share Agreements						Loans Not Subject to Loss Share Agreements
	Total		Pass		Special Mention		Substandard		Pass		Special Mention		Substandard
December 31, 2012
Residential Real Estate:
First mortgages	$	109,562	$	71,487	$	2,547	$	4,085	$	26,304	$	2,552	$	2,587
HELOCs and equity		56,355		8,728		31		103		39,180		5,375		2,938

Commercial:
Secured – non-real estate		127,514		19,801		405		115		99,537		4,346		3,310
Secured – real estate		43,613		12,199		—		425		28,227		2,030		732
Unsecured		8,371		80		—		—		7,724		140		427

Commercial Real Estate:
Owner occupied		187,007		37,696		7,943		2,820		123,106		6,285		9,157
Non-owner occupied		290,858		123,224		2,321		2,242		147,104		11,278		4,689
Multi-family		36,709		21,089		—		1,331		13,974		—		315

Construction and Land Development:
Construction		3,481		—		—		—		3,481		—		—
Improved land		20,117		4,033		—		—		9,071		3,138		3,875
Unimproved land		18,291		3,888		—		505		11,392		—		2,506

Consumer and other		11,290		11		—		—		10,552		584		143
Total December 31, 2012	$	913,168	$	302,236	$	13,247	$	11,626	$	519,652	$	35,728	$	30,679

As part of the AFI merger as well as acquisitions of Old Harbor in 2011, TBOM in 2010 and Republic in 2009 from the FDIC and of Equitable Financial Group, Inc. and Citrus Bank, N.A. in 2008, the Company acquired certain loans for which there was, at acquisition, evidence of deterioration of credit quality since origination and it was probable, at acquisition, that all contractually required payments would not be collected. The carrying amount of these loans at June 30, 2013 was approximately $73,668, net of a discount of $22,315. The Company maintained an allowance for loan losses of $883 at June 30, 2013 for loans acquired with deteriorated credit quality.

During the three months ended June 30, 2013 and 2012, the Company accreted $5,107 and $3,026, respectively, into interest income on acquired loans. During the six months ended June 30, 2013 and 2012, the Company accreted $7,959 and $4,873, respectively, into interest income on acquired loans. The remaining accretable discount was $15,984 at June 30, 2013. In addition, $68,843 of the $73,668 in loans is covered by the FDIC loss share agreements.

Loans related to the AFI merger for which it was probable at acquisition that all contractually required payments would not be collected were as follows:

	April 2012
Contractually required payments receivable of loans purchased during the year ended December 31, 2012:	$	15,339

Cash flows expected to be collected at acquisition	$	8,602
Fair value of acquired loans at acquisition	$	7,716
Accretable yield	$	886

1st UNITED BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(unaudited)

NOTE 4 – LOANS (continued)

Loans acquired from AFI for which we were unable to reasonably estimate cash flows were $1,559 on the date of acquisition and were included in non-accrual loans.

The initial fair value for loans without specifically identified credit deficiencies was based primarily on a discounted cash flow methodology that considered factors including the type of loan and related collateral, classification and accrual status, fixed or variable interest rate, term of loan and whether or not the loan was amortizing, and current discount rates. Loans were grouped together according to similar characteristics and were treated in the aggregate when applying various valuation techniques. The discount rates used for loans were based on current market rates for new originations of comparable loans and included adjustments for liquidity concerns. The discount rate does not include a factor for credit losses as that has been included in the estimated cash flows. Management prepared the purchase price allocations, and in part relied on a third party for the valuation of covered non-impaired loans at April 1, 2012.

NOTE 5 – FAIR VALUES

Fair Value Measurements

Fair value is defined as the price that would be received on the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The accounting guidance establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

●

Level I: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

●

Level II: Significant other observable inputs other than Level I prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

●

Level III: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

The fair values of securities available for sale are determined by obtaining quoted prices on nationally recognized securities exchanges (Level I inputs) or matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level II inputs).

Assets measured at fair value on a recurring basis at June 30, 2013 and December 31, 2012, are summarized below.

	Fair value measurements at June 30, 2013 using
	June 30, 2013		Quoted prices in active markets for identical assets (Level I)		Significant other observable inputs (Level II)		Significant unobservable inputs (Level III)
Securities Available for Sale:
Municipal Securities	$	5,689	$	—	$	5,689	$	—
Residential collateralized mortgage obligations		1,834		—		1,834		—
Residential mortgage-backed		347,346		—		347,346		—
	$	354,869	$	—	$	354,869	$	—

1st UNITED BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(unaudited)

NOTE 5 – FAIR VALUES (continued)

	Fair value measurements at December 31, 2012 using
	December 31, 2012		Quoted prices in active markets for identical assets (Level I)		Significant other observable inputs (Level II)		Significant unobservable inputs (Level III)
Securities available for sale:
Municipal Securities	$	469	$	—	$	469	$
Residential collateralized mortgage obligations		3,759		—		3,759	$	—
Residential mortgage-backed		255,894		—		255,894		—
	$	260,122	$	—	$	260,122	$	—

There were no liabilities measured at fair value on a recurring basis at June 30, 2013 and December 31, 2012.

The fair value of impaired loans with specific allocations of the allowance for loan losses and other real estate owned is based on recent real estate appraisals less estimated costs of sale. For residential real estate impaired loans and other real estate owned, appraised values are based on the comparative sales approach. For commercial and commercial real estate impaired loans and other real estate owned, appraisers may use either a single valuation approach or a combination of approaches such as comparative sales, cost or the income approach. A significant unobservable input in the income approach is the estimated income capitalization rate for a given piece of collateral. Adjustments to appraisals may be made by the appraiser to reflect local market conditions or other economic factors and may result in changes in the fair value of a given assets over time. As such, the fair value of impaired loans and other real estate owned are considered a Level III in the fair value hierarchy.

The Company recovers the carrying value of other real estate owned through the sale of the property. The ability to affect future sales prices is subject to market conditions and factors beyond our control and may impact the estimated fair value of a property.

Appraisals for impaired loans and other real estate owned are performed by certified general appraisers whose qualifications and licenses have been reviewed and verified by the Company. Once reviewed, a member of the appraisal department reviews the assumptions and approaches utilized in the appraisal as well as the overall resulting fair value in comparisons to independent data sources such as recent market data or industry wide statistics. On an annual basis, the Company compares the actual selling price of collateral that has been sold to the most recent appraised value to determine what additional adjustments, if any, should be made to the appraisal value to arrive at fair value. Based on our most recent analysis, no discounts to current appraisals have been warranted.

1st UNITED BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(unaudited)

NOTE 5 – FAIR VALUES (continued)

The significant unobservable inputs used in the fair value measurements for Level 3 assets measured at fair value on a nonrecurring basis as of June 30, 2013 and December 31, 2012 are as follows:

Impaired Loans	Valuation Techniques	Range of Unobservable Inputs

Residential	Appraisals of collateral value	Adjustment for age of comparable sales, generally an increase of 0-25%
Commercial	Discounted cash flow model	Discount rate from 0% to 6%
Commercial Real Estate	Appraisals of collateral value	Market capitalization rates between 8% and 12%. Market rental rates for similar properties
Construction and land development	Appraisals of collateral value	Adjustment for age of comparable sales, generally a decline of 5% to no change

Other real estate

Residential	Appraisals of collateral value	Adjustment for age of comparable sales, generally an increase of 0-25%
Commercial	Appraisals of collateral value	Adjustment for age of comparable sales, generally a decline of 15% to no change

Assets measured at fair value on a non-recurring basis are summarized below.

	Fair value measurements at June 30, 2013 using
	June 30, 2013		Quoted prices in active markets for identical assets (Level I)		Significant other observable inputs (Level II)		Significant unobservable inputs (Level III)
Assets:
Impaired loans
Residential real estate	$	1,204	$	—	$	—	$	1,204
Commercial		1,485		—		—		1,485
Commercial real estate		8,307		—		—		8,307
Construction and land development		253		—		—		253
Consumer and other		—		—		—		—
	$	11,249	$	—	$	—	$	11,249
Other real estate owned:
Commercial real estate	$	13,866	$	—	$	—	$	13,866
Residential real estate		4,238		—		—		4,238
	$	18,104	$	—	$	—	$	18,104

At June 30, 2013, impaired loans, which had a specific allowance for loan losses allocated, had a carrying amount of $14,321, with a valuation allowance of $3,072 resulting in an additional provision of loan losses of $908 during the six months ended June 30, 2013.

1st UNITED BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(unaudited)

NOTE 5 – FAIR VALUES (continued)

Other real estate owned, which are measured for impairment using the fair value of the collateral less estimated cost to sell, had a carrying amount of $18,104, and had no valuation allowance at June 30, 2013. During the three and six months ended June 30, 2013, the Company recorded write-downs to other real estate owned of $114 and $641 due to reductions in the estimated fair value of properties.

	Fair value measurements at December 31, 2012 using
	December 31, 2012		Quoted prices in active markets for identical assets (Level I)		Significant other observable inputs (Level II)		Significant unobservable inputs (Level III)
Assets:
Impaired loans
Residential	$	1,529	$	—	$	—	$	1,529
Commercial		1,416		—		—		1,416
Commercial real estate		9,972		—		—		9,972
Construction and land development		1,652		—		—		1,652
Consumer and other		—		—		—		—
	$	14,569	$	—	$	—	$	14,569
Other real estate owned:
Commercial real estate	$	16,080	$	—	$	—	$	16,080
Residential real estate		3,449		—		—		3,449
	$	19,529	$	—	$	—	$	19,529

Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a carrying amount of $17,683, with a valuation allowance of $3,114 resulting in an additional provision for loan losses of $3,778 for the year ended December 31, 2012.

Other real estate owned, which are measured for impairment using the fair value of the collateral less estimated cost to sell, had a carrying amount of $19,529, with no valuation allowance for the year ended December 31, 2012.

Transfers of assets and liabilities between levels within the fair value hierarchy are recognized when an event or change in circumstances occurs. There have been no transfers between fair value levels for 2013 and 2012.

1st UNITED BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(unaudited)

NOTE 5 – FAIR VALUES (continued)

Carrying amount and estimated fair values of financial instruments were as follows at June 30, 2013 and December 31, 2012, respectively.

	June 30, 2013				December 31, 2012
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Financial assets
Cash and cash equivalents	$	79,111	$	79,111	$	207,117	$	207,117
Securities available for sale		354,869		354,869		260,122		260,122
Loans, net, including loans held for sale		924,727		929,144		904,124		910,761
Nonmarketable equity securities		8,028		N/A		8,625		N/A
FDIC loss share receivable		35,249		35,249		46,735		46,735
Accrued interest receivable		3,611		3,611		3,428		3,428

Financial liabilities
Deposits	$	1,292,118	$	1,267,324	$	1,303,022	$	1,299,140
Federal funds purchased and repurchase agreements		12,883		12,883		19,855		19,855
Accrued interest payable		263		263		314		314

Fair value methods and assumptions are periodically evaluated by the Company. The methods and assumptions used to estimate fair value are described as follows:

Cash and cash equivalents

The carrying amounts of cash and cash equivalents approximate the fair value and are classified as Level I in the fair value hierarchy.

Loans, net

The fair value of variable rate loans that reprice frequently and with no significant change in credit risk is based on the carrying value and results in a classification of Level III within the fair value hierarchy. Fair value for other loans are estimated using discounted cash flows analysis using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality resulting in a Level III classification in the fair value hierarchy. The methods used to estimate the fair value of loans do not necessarily represent an exit price.

Nonmarketable equity securities

Nonmarketable equity securities include Federal Home Loan Bank Stock and Federal Reserve Bank Stock. It is not practicable to determine the fair value of nonmarketable equity securities due to restrictions placed on their transferability.

1st UNITED BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(unaudited)

NOTE 5 – FAIR VALUES (continued)

FDIC Loss Share Receivable

The fair value of the FDIC Loss Share Receivable represents the discounted value of the FDIC’s reimbursed portion of estimated losses the Company expects to realize on loans and other real estate owned covered under Loss Sharing Agreements. As a result, the fair value is considered a Level III classification in the fair value hierarchy.

Deposits

The fair value of non-interest bearing demand deposits is equal to the amount payable at the reporting date (i.e. carrying value) resulting in a Level 1 classification in the fair value hierarchy. The fair value of interest bearing demand deposits (e.g. interest bearing, savings and certain types of money market accounts) are, by definition, equal to the amount payable in demand at the reporting date (i.e. carrying value) resulting in a Level II classification in the fair value hierarchy. The carrying amounts of variable rate, fixed-term money market accounts and certificate of deposits approximates their fair value at the reporting date in a Level II classification in the fair value hierarchy. Fair values for fixed rate certificates of deposit are estimated using a discounted cash flows calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits resulting in a Level II classification.

Federal Funds purchased and repurchase agreements

The carrying amounts of federal funds and repurchase agreements generally mature within ninety days and approximate their fair value resulting in a Level II classification in the fair value hierarchy.

Federal Home Loan Advances

The fair value of Federal Home Loan Bank Advances are estimated using a discounted cash flow analysis based on the current borrowing rates for similar types of borrowings and are classified as a Level II in the fair value hierarchy.

Accrued interest receivable/payable

The carrying amounts of accrued interest receivable approximate fair value resulting in a Level III classification. The carrying amounts of accrued interest payable approximate fair value resulting in a Level II classification.

Off-balance sheet instruments

The fair value of off-balance-sheet instruments is based on the current fees that would be charged to enter into or terminate such arrangements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. The fair value of commitments is not material.

1st UNITED BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(unaudited)

NOTE 6 – FDIC LOSS SHARE RECEIVABLE

The activity in the FDIC loss share receivable which resulted from the acquisition of financial institutions covered under loss share agreements with the FDIC were as follows:

	Three months ended June 30,						Six months ended June 30,
	2013			2012			2013			2012

Beginning of period	$	41,189		$	66,210		$	46,735		$	72,895
Cash received		(1,018	)		(6,559	)		(3,745	)		(11,073	)
Discount accretion		239			214			477			509
Reduction for changes in cash flow estimates		(5,161	)		(3,256	)		(8,218	)		(5,626	)
Other		—			—			—			(96	)
End of period	$	35,249		$	56,609		$	35,249		$	56,609

As of June 30, 2013 and December 31, 2012, the Company has determined that the FDIC loss share receivable is collectible. The reduction for changes in cash flow estimates is primarily due to resolutions of covered assets in excess of the amount expected, which includes sales, payoffs and transfers to (and sales of) other real estate owned as well as a reduction due to changes in expected cash flows of the remaining covered assets.

NOTE 7 – ADOPTION OF NEW ACCOUNTING STANDARDS

In February 2013, the Financial Accounting Standards Board (FASB) issued updated guidance related to disclosure of reclassification amounts out of other comprehensive income. The standard requires that companies present either in a single note or parenthetically on the face of the financial statements, the effect of significant amounts reclassified from each component of accumulated other comprehensive income based on its source and the income statement line items affected by the reclassification. The new requirements will take effect for public companies in fiscal years, and interim periods within those years, beginning after December 15, 2012. The Company adopted this standard on January 1, 2013. The effect of adopting this standard increased our disclosure surrounding reclassification items out of accumulated other comprehensive income.

1st UNITED BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(unaudited)

NOTE 8 – EARNINGS PER COMMON SHARE

Basic earnings per common share is net income divided by the weighted average number of common shares outstanding during the period. Diluted earnings per share includes the dilutive effect of additional potential common shares issuable under stock options and restricted stock.

	Three months ended June 30,				Six months ended June 30,
	2013		2012		2013		2012
Net income	$	1,767	$	647	$	3,388	$	1,427
Basic EPS:
Weighted average shares of common stock outstanding		33,772,105		33,725,613		33,773,327		32,155,277
Basic EPS	$	0.05	$	0.02	$	0.10	$	0.04

Diluted EPS:
Weighted average shares of common stock outstanding		33,772,105		33,725,613		33,773,327		32,155,277
Effect of dilutive shares:
Stock options		141,446		—		112,311		—
Restricted stock		43,816		2,074		34,238		2,867
Total dilutive shares		33,957,367		33,727,687		33,919,876		32,158,144
Diluted EPS	$	0.05	$	0.02	$	0.10	$	0.04

NOTE 9 – COMMITMENTS AND CONTINGENCIES

The Company issues loan commitments, lines of credit, and letters of credit to meet its customers’ financing needs. Commitments to make loans are generally made for periods ranging from 60 to 90 days and may expire without being used. Off balance sheet risk to credit loss may exist up to the face amount of these instruments. The Company uses the same credit policies to make such commitments as are used to originate loans which include obtaining collateral at the time exercise of the commitment.

The contractual amount of financial instruments with off-balance-sheet risk were as follows at June 30, 2013 and December 31, 2012.

	June 30, 2013				December 31, 2012
	Fixed Rate		Variable Rate		Fixed Rate		Variable Rate
Commitments to make loans	$	35,764	$	23,426	$	23,661	$	2,958
Unused lines of credit		797		83,461		664		72,103
Stand-by letters of credit		5,609		901		5,349		1,610

The fixed rate loan commitments have interest rates ranging from 3.0% to 8.25% and the underlying loans have maturities ranging from six months to 30 years.

NOTE 10 – SUBSEQUENT EVENT

Prior to commencement of business on July 1, 2013, the Company completed its acquisition of Enterprise Bancorp, Inc., a Florida corporation (“EBI”), and its wholly owned subsidiary Enterprise Bank of Florida, a Florida-chartered commercial bank (“Enterprise”), pursuant to the Agreement and Plan of Merger (the “Merger Agreement”), dated March 22, 2013, as amended, by and among the Company, 1st United Bank, EBI and Enterprise. In accordance with the Merger Agreement, the Company acquired EBI through the merger of EBI with and into a wholly-owned subsidiary of the Company and 1st United Bank acquired Enterprise Bank through the merger of Enterprise Bank with and into 1st United Bank (collectively, the “Merger”).

1st UNITED BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(unaudited)

NOTE 10 – SUBSEQUENT EVENT (continued)

1st United Bank acquired approximately $160,000 in loans and assumed $176,900 in deposits. Pursuant to the terms of the Merger Agreement, each share of EBI common stock issued and outstanding was converted into the right to receive consideration based on EBI’s total consolidated assets and the EBI Tangible Book Value (as defined in the Merger Agreement) as of June 30, 2013. The total value of the consideration paid to EBI shareholders was approximately $45,565, which consisted of approximately $5,115 in cash, $22,138 in loans (including all nonperforming loans), other real estate, and repossessed assets of Enterprise and $18,312 in impaired and below investment grade securities and other investments of Enterprise. Each holder (other than the majority shareholder of EBI and its affiliates) of a share of EBI common stock was entitled to a cash payment from the Registrant equal to approximately $6.05 per share (less their per share pro rata portion of the $400 holdback described below). The total consideration paid to all EBI shareholders in connection with the Merger was subject to a holdback amount of up to $400 to defray damages and related expenses incurred to defend or settle certain litigation. The Company expects to record goodwill associated with the transaction of approximately $9,500.

The Merger of EBI was completed on July 1, 2013 and the Company is in the process of determining the initial fair values of the assets and liabilities acquired. The acquisition of EBI is consistent with the Company’s plans to continue to enhance its footprint and competitive position within the state of Florida. This acquisition expands our existing presence in the Northern Palm Beach County marketplace and adds one new banking center. The Company believes it is well-positioned to deliver superior customer service, achieve stronger financial performance and enhance shareholder value through the synergies of combined operations. All of these factors will contribute to the resulting goodwill in the transaction.

The following summarizes the net interest and other income, net income and earnings per share as if the merger with EBI was effective as of January 1, 2012, the beginning of the annual period prior to acquisition. There were no material, nonrecurring adjustments to the pro forma net interest and other income, net income and earnings per share presented below:

	Three months ended June 30,				Six months ended June 30,
	2013		2012		2013		2012
Net interest and non-interest income	$	16,929	$	20,048	$	37,902	$	39,871

Net income		770		483		2,767		3,024

Basic earnings per share		0.02		0.01		0.08		0.09

Diluted earnings per share		0.02		0.01		0.08		0.09

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following is management’s discussion and analysis of certain significant factors that have affected our financial condition and operating results during the periods included in the accompanying consolidated financial statements, and should be read in conjunction with such financial statements. Management’s discussion and analysis is divided into subsections entitled “Business Overview,” “Operating Results,” “Financial Condition,” “Capital Resources,” “Cash Flows and Liquidity,” “Off Balance Sheet Arrangements,” and “Critical Accounting Policies.” Our financial condition and operating results principally reflect those of its wholly-owned subsidiaries, 1st United Bank (“1st United”) and Equitable Equity Lending (“EEL”). The consolidated entity is referred to as the “Company,” “Bancorp,” “we,” “us,” or “our.”

The following discussion should be read in conjunction with the condensed consolidated financial statements and notes thereto included in this Quarterly Report on Form 10-Q.

CAUTION CONCERNING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q, including this MD&A section, contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, among others, statements about our beliefs, plans, objectives, goals, expectations, estimates and intentions that are subject to significant risks and uncertainties and are subject to change based on various factors, many of which are beyond our control. The words “may,” “could,” “should,” “would,” “believe,” “anticipate,” “estimate,” “expect,” “intend,” “plan,” “target,” “goal,” and similar expressions are intended to identify forward-looking statements.

All forward-looking statements, by their nature, are subject to risks and uncertainties. Our actual future results may differ materially from those set forth in our forward-looking statements. Please see the Introductory Note and Item 1A. Risk Factors of our Annual Report on Form 10-K, as updated from time to time, and in our other filings made from time to time with the SEC after the date of this report.

However, other factors besides those listed above, or in our Quarterly Report or in our Annual Report, also could adversely affect our results, and you should not consider any such list of factors to be a complete set of all potential risks or uncertainties. Any forward-looking statements made by us or on our behalf speak only as of the date they are made. We do not undertake to update any forward-looking statement, except as required by applicable law.

BUSINESS OVERVIEW

We are a financial holding company headquartered in Boca Raton, Florida with principal corporate operations in West Palm Beach, Florida.

We follow a business plan that emphasizes the delivery of banking services to businesses and individuals in our geographic market who desire a high level of personalized service. The business plan includes business banking, services to professionals, real estate lending and private banking, as well as full community banking products and services. The business plan also provides for an emphasis on our Small Business Administration and Export-Import Bank lending programs, as well as on small business lending. We focus on the building of a balanced loan and deposit portfolio, with emphasis on low cost liabilities.

As is the case with banking institutions generally, our operations are materially and significantly influenced by general economic conditions and by related monetary and fiscal policies of financial institution regulatory agencies, including the Federal Reserve Bank and the FDIC. Deposit flows and costs of funds are influenced by interest rates on competing investments and general market rates of interest. Lending activities are affected by the demand for financing of real estate and other types of loans, which in turn is affected by the interest rates at which such financing may be offered and other factors affecting local demand and availability of funds. We face strong competition in the attraction of deposits (our primary source of lendable funds) and in the origination of loans.

Recent Mergers & Acquisitions

Merger of Enterprise Bancorp, Inc.

On July 1, 2013, the Company completed its merger of Enterprise Bancorp, Inc., a Florida corporation (“EBI”), and its wholly-owned subsidiary Enterprise Bank of Florida, a Florida-chartered commercial bank (“Enterprise”), pursuant to the Agreement and Plan of Merger (the “Merger Agreement”), dated March 22, 2013, as amended, by and among the Company, 1st United Bank, EBI and Enterprise. 1st United acquired approximately $160 million in loans, with an average yield of 5.08%, and approximately $177 million of deposits, with an average yield of 0.53%. Total consideration for the net assets acquired was $45.6 million (or 1.22 times tangible book value, as defined by the Merger Agreement) which was comprised of $5.1 million in cash, $20.5 million in classified and non-performing loans, $18.3 million in non-investment grade and non-performing investments and derivatives and $1.7 million in OREO and other repossessed assets. The Company does not anticipate recording any net additional classified or non-performing loans, OREO or non-investment grade investments upon evaluation of the assets acquired for fair value.

The former Enterprise gives 1st United continued expansion within the attractive northern Palm Beach County, Florida marketplace, providing opportunities for new loan and deposit growth. In addition, of the three banking centers acquired, during the third quarter 2013, one EBI banking center will be consolidated into an existing 1st United banking center. In addition, one of 1 ^st United’s banking centers will be consolidated into a banking center of the former Enterprise. The result will be one net new 1st United banking center located in Jupiter, Florida, added as a part of this transaction. The Company estimates it will retain 13 of the total 42 EBI employees including two experienced lenders and branch and operation employees. The Company estimates one-time merger related expenses to be $1.8 million which are anticipated to be incurred during the third quarter of 2013. Total goodwill is estimated at $9.5 million with an estimated three-year earn-back period. The operations of EBI are anticipated to be integrated during the third quarter of 2013.

Merger of AFI Financial, Inc.

On April 1, 2012, the Company completed its acquisition of Anderen Financial, Inc., a Florida corporation and its wholly-owned subsidiary Anderen Bank, a Florida-chartered commercial bank (collectively referred to herein as “AFI”), pursuant to the Agreement and Plan of Merger, dated October 24, 2011. Pursuant to the terms of the merger agreement, each share of AFI common stock, $0.01 par value per share, was cancelled and automatically converted into the right to receive cash, common stock of the Company or a combination of cash and common stock of the Company. AFI shareholders could elect to receive cash, stock, or a combination of 50% cash and 50% stock, provided, however, that each such election was subject to mandatory allocation procedures to ensure the total consideration was approximately 50% cash and 50% stock. The value of the per share consideration was $7.73. The total value of the consideration paid to AFI shareholders was $38.3 million, which consisted of approximately $19.1 million in cash and 3,140,354 shares of the Company’s common stock. The Company’s common stock was valued at $6.09 per share with a total value of $19.1 million. The Company recorded goodwill of $6.0 million as a result of the merger which is not deductible for tax purposes. Total net deferred tax assets acquired were $5.9 million, primarily related to loss carry forwards. The Company completed the integration of AFI in June 2012.

The Company accounted for the transaction under the acquisition method of accounting which requires purchased assets and liabilities assumed to be recorded at their respective fair values at the date of acquisition. See Note 4 for additional information related to the fair value of loans acquired. The Company uses third party valuations to determine the fair value of the core deposit intangible, securities, fixed assets and deposits. The fair value of other real estate owned was based on recent appraisals of the properties. The estimated fair values are considered preliminary and are subject to refinement as additional information relative to the closing date fair values becomes available during the measurement period. While additional significant changes to the closing date fair values are not expected, any information relative to the changes in these fair values will be evaluated to determine if such changes are due to events and circumstances that existed as of the acquisition date.

Financial Overview

OPERATING RESULTS

For the quarter ended June 30, 2013, we reported net income of $1.8 million compared to net income of $647,000 for the quarter ended June 30, 2012. For the six months ended June 30, 2013, we reported net income of $3.4 million compared to net income of $1.4 million for the six months ended June 30, 2012. The increase in net income for the three and six months ended June 30, 2013 as compared to the same periods ended June 30, 2012 was mostly due to an increase in the net interest margin and a reduction in provisions for loan losses.

●

Net income for the quarter ended June 30, 2013 was $1.8 million compared to net income of $647,000 for the quarter ended June 30, 2012. Net income for the six months ended June 30, 2013 was $3.4 million compared to $1.4 million for the six months ended June 30, 2012.

●

Net interest margin was 5.79% for the quarter ended June 30, 2013 compared to 5.14% for the quarter ended June 30, 2012. Net interest margin was 5.45% for the six months ended June 30, 2013 compared to 4.95% for the six months ended June 30, 2012.

●

During the three months and six months ended June 30, 2013, we incurred approximately $128,000 in merger reorganization expense that related to the pending merger with Enterprise. During the three and six months ended June 30, 2012, we incurred approximately $1.3 million and $1.8 million, respectively, in personnel, IT and facilities costs and merger reorganization expense that related to the integration of AFI and Old Harbor.

●

During the three months ended June 30, 2013, the Company strategically approved the closure of one banking center located on the west coast of Florida. The banking center is expected to close in the fourth quarter 2013. As a result, the Company recorded termination expenses of $404,000 related to a facility lease and fixed assets.

●

Net loans increased by approximately $21.1 million to $924.7 million for the six months ended June 30, 2013 resulting from new loan production and loan advances of $148.7 million which was partially offset by payoffs, resolutions, including transfers to OREO, and principal payments of $127.6 million during the period. Net loans increased by approximately $6.3 million from $918.5 million at March 31, 2013 to $924.7 million for the three months ended June 30, 2013 resulting from new loan production and loan advances of $77.1 million which was partially offset by payoffs, resolutions, including transfer to OREO, and principal payments of $70.1 million during the period.

●

Non-performing assets at June 30, 2013 represented 2.57% of total assets compared to 2.74% at December 31, 2012. Non-performing assets not covered by the Loss Share Agreements represented 1.22% of total assets at June 30, 2013 compared to 1.17% at December 31, 2012.

●

Securities available for sale increased by approximately $94.7 million from December 31, 2012 to $354.9 million at June 30, 2013. The increase was a result of security purchases of $174.4 million partially offset by investment maturities and prepayments of $35.1 million and proceeds from sales of $30.8 million resulting in gains on sales of $732,000 for the six months ended June 30, 2013. Gains on the sale of securities for the six months ended June 30, 2012 were $1.7 million. Gains on the sale of securities for the three months ended June 30, 2013 and 2012 were $609,000 and $1.2 million, respectively.

●

Other real estate owned (“OREO”) decreased by $1.4 million to $18.1 million at June 30, 2013 from $19.5 million at December 31, 2012. The change was due to OREO sales of $5.2 million which was partially offset by the foreclosure of $3.6 million of loans and fair value adjustments of $642,000 for the six months ended June 30, 2013. Gains on the sale of OREO for six months ended June 30, 2013 and 2012 were $833,000 and $2.0 million, respectively. At June 30, 2013, we had $806,000 of OREO under contract for sale and expected to close in the third quarter of 2013 with no additional loss anticipated.

●

The FDIC loss share receivable was reduced by approximately $11.5 million from $46.7 million at December 31, 2012 to $35.2 million at June 30, 2013. The decrease was due to cash receipts of approximately $3.7 million, a reduction of $8.2 million related to adjustments resulting from the disposition of acquired loans at above their discounted carrying values and the impact of changes in anticipated cash flows offset by accretion of income on the receivable of $477,000.

●

Deposits slightly decreased by $10.9 million from $1.303 billion at December 31, 2012 to $1.292 billion at June 30, 2013. Non-interest bearing deposits increased by $20.2 million to $447.2 million at June 30, 2013, as compared to December 31, 2012. The percentage of non-interest bearing deposits to total deposits was approximately 35% at June 30, 2013 compared to 33% at December 31, 2012.

Analysis for Three Month Periods ended June 30, 2013 and 2012

Net Interest Income

Net interest income, which constitutes our principal source of income, represents the excess of interest income on interest-earning assets over interest expense on interest-bearing liabilities. Our principal interest-earning assets are federal funds sold, investment securities and loans. Our interest-bearing liabilities primarily consist of time deposits, interest-bearing checking accounts (“NOW accounts”), savings deposits and money market accounts. We invest the funds attracted by these interest-bearing liabilities in interest-earning assets. Accordingly, our net interest income depends upon the volume of average interest-earning assets and average interest-bearing liabilities and the interest rates earned or paid on them.

The following table reflects the components of net interest income, setting forth for the periods presented, (1) average assets, liabilities and shareholders’ equity, (2) interest income earned on interest-earning assets and interest paid on interest-bearing liabilities, (3) average yields earned on interest-earning assets and average rates paid on interest-bearing liabilities, (4) our net interest spread (i.e., the average yield on interest-earning assets less the average rate on interest-bearing liabilities) and (5) our net interest margin (i.e., the net yield on interest-earning assets).

Net interest earnings for the three months ended June 30, 2013 and 2012, respectively, are reflected in the following table:

	June 30, 2013								June 30, 2012
(Dollars in thousands)	Average Balance			Interest Income/ Expense		Average Rates Earned/ Paid			Average Balance			Interest Income/ Expense		Average Rates Earned/ Paid
Assets
Interest-earning assets
Loans	$	938,128		$	18,741		8.01	%	$	985,902		$	17,303		7.04	%
Investment securities		326,100			1,648		2.02	%		240,673			1,677		2.79	%
Federal funds sold and securities purchased under resale agreements		97,027			157		0.65	%		152,619			186		0.49	%
Total interest-earning assets		1,361,255		$	20,546		6.05	%	$	1,379,194		$	19,166		5.57	%
Non interest-earning assets		220,682								230,491
Allowance for loan losses		(9,915	)							(13,007	)
Total assets	$	1,572,022							$	1,596,678

Liabilities and Shareholders’ Equity
Interest-bearing liabilities
NOW accounts	$	186,017		$	59		0.13	%	$	161,259		$	61		0.15	%
Money market accounts		320,558			243		0.30	%		360,215			460		0.51	%
Savings accounts		62,069			40		0.26	%		66,386			50		0.30	%
Certificates of deposit		288,290			552		0.77	%		366,799			902		0.99	%
Fed funds purchased and repurchase agreements		16,147			4		0.10	%		10,555			3		0.11	%
Federal Home Loan Bank advances and other borrowings		—			—		0.00	%		—			—		0.00	%
Total interest-bearing liabilities		873,081			898		0.41	%		965,214			1,476		0.61	%

Non-interest bearing liabilities
Demand deposit accounts		453,339								385,543
Other liabilities		6,584								9,889
Total non-interest-bearing liabilities		459,923								395,432
Shareholders’ equity		239,018								236,032
Total liabilities and shareholders’ equity	$	1,572,022							$	1,596,678
Net interest spread				$	19,648		5.64	%				$	17,690		4.96	%

Net interest on average earning assets - Margin							5.79	%							5.14	%

Our net interest income for the three months ended June 30, 2013 was impacted by a decrease in total average earning assets of $17.9 million as compared to the three months ended June 30, 2012 and an increase in the overall yield earned in loans during the quarter ended June 30, 2013. The decrease in total average earning assets was primarily due to a reduction in general funding sources period-over-period. Earnings for the current quarter were positively impacted by the accretion of discounts related to acquired loans of approximately $7.3 million as compared to $4.7 million for the same period in 2012. Included in the $7.3 million of accretion of discount for the quarter ended June 30, 2013 was approximately $5.4 million related to the disposition of assets acquired in the transactions above the discounted carrying value of the asset. For the quarter ended June 30, 2013, we took a charge of approximately $5.2 million as an adjustment to FDIC loss share receivable in total non-interest income within the consolidated statements of operations substantially related to changes in cash flows of loss share assets. Included in the $4.7 million of accretion discount for the quarter ended June 30, 2012 was approximately $2.0 million related to the disposition of assets above the discounted carrying values. For the quarter ended June 30, 2012, we took a charge of approximately $3.3 million as an adjustment to FDIC loss share receivable in total non-interest income within the consolidated statements of operations substantially related to changes in cash flows of loss share assets.

Net interest income was $19.6 million for the three months ended June 30, 2013, as compared to $17.7 million for the three months ended June 30, 2012, an increase of $1.9 million, or 11.07%. The increase resulted primarily from accretion related to acquired assets during period-over-period of $3.4 million offset by a decrease in average earning assets of $17.9 million or 1.30%. Accretion income increased quarter over quarter by $2.6 million and was coupled with a reduction in the cost of funds of 17 basis points and partially offset by a decrease in the yield earned on securities quarter over quarter. The net interest margin (i.e., net interest income divided by average earning assets) increased 64 basis points from 5.14% during the three months ended June 30, 2012 to 5.79% during the three months ended June 30, 2013, mainly the result of an increase in interest accretion on acquired loans and a reduction in the cost of funds. Accretion of $7.3 million on acquired loans added approximately 215 basis points to the quarter ended June 30, 2013 net interest margin. Of the 215 basis points, 159 basis points related to resolved loss share assets and changes in cash flows during the quarter. This compares to accretion of loan discount of $4.7 million during the three months ended June 30, 2012, which added approximately 138 basis points to the June 30, 2012 margin. Of the 138 basis points for the quarter ended June 30, 2012, 59 basis points related to resolved loss share assets and changes in cash flows. For the three months ended June 30, 2013, average loans represented 59.68% of total average assets and 70.73% of total average deposits and customer repurchase agreements, compared to average loans of 61.75% of total average assets and average loans of 72.99% to total average deposits and customer repurchase agreements at June 30, 2012. Our cost of funds was approximately 17 basis points lower for the three months ended June 30, 2013, as compared to June 30, 2012, primarily as a result of lower rates offered on our deposit products.

Rate Volume Analysis

The following table sets forth certain information regarding changes in our interest income and interest expense for the three months ended June 30, 2013 as compared to the three months ended June 30, 2012. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to changes in interest rate and changes in the volume. Changes in both volume and rate have been allocated based on the proportionate absolute changes in each category.

Changes in interest earnings for the three months ended June 30, 2013 and 2012:

	June 30, 2013 and 2012
(Dollars in thousands)	Change in Interest Income/ Expense			Variance Due to Volume Changes			Variance Due to Rate Changes
Assets
Interest-earning assets
Loans	$	1,438		$	(869	)	$	2,307
Investment securities		(29	)		503			(532	)
Federal funds sold and securities purchased under resale agreements		(29	)		(79	)		50

Total interest-earning assets	$	1,380		$	(445	)	$	1,825
Liabilities
Interest-bearing liabilities
NOW accounts	$	(2	)	$	9		$	(11	)
Money market accounts		(217	)		(46	)		(171	)
Savings accounts		(10	)		(3	)		(7	)
Certificates of deposit		(350	)		(172	)		(178	)
Fed funds purchased and repurchase agreements		1			1			—
Other borrowings		—			—			—

Total interest-bearing liabilities		(578	)		(211	)		(367	)

Net interest spread	$	1,958		$	(234	)	$	2,192

Non-interest Income, Non-interest Expense, Provision for Loan Losses, and Income Tax Expense

Non-interest income includes service charges and fees on deposit accounts, net gains or losses on sales of securities, and all other items of income, other than interest, resulting from our business activities. Non-interest income decreased by $3.3 million for the quarter ended June 30, 2013 when compared to the quarter ended June 30, 2012. The decrease was principally a result of an increase in the adjustment to the FDIC loss share receivable due to the resolution of assets above their carrying value, a reduction in the gain on the sales of securities and a reduction in the gains on the sale of other real estate owned quarter over quarter.

During the three months ended June 30, 2013, we sold approximately $21.9 million in securities for gains on the sale of $609,000. This compared to sales of $72.6 million for gains on the sale of securities of $1.2 million for the three months ended June 30, 2012.

During the three months ended June 30, 2013, we received proceeds from the sale of OREO properties of $2.6 million with a carrying value of $2.2 million and recorded a net gain of $393,000 on the these dispositions as compared to sales of $3.5 million of OREO with a carrying value of $2.3 million. Net gains on the resolution of OREO covered under loss sharing agreements for the three months ended June 30, 2013 and 2012 were $388,000 and $1.2 million, respectively.

The adjustment to the FDIC indemnification asset during the quarter ended June 30, 2013 represented a $5.2 million expense related to changes in cash flows on assets covered by Loss Share Agreements and the resolution of OREO property which reduces the FDIC receivable. This compares to $3.3 million for the quarter ended June 30, 2012. These amounts were partially offset by interest income earned on the FDIC receivable of $239,000 and $214,000 for the quarters ended June 30, 2013 and 2012, respectively.

Non-interest expense is comprised of salaries and employee benefits, occupancy and equipment expense and other operating expenses incurred in supporting our various business activities. Non-interest expense decreased by $1.3 million, or 9.42%, from $14.2 million for the three months ended June 30, 2012 to $12.8 million for the three months ended June 30, 2013, primarily due to less merger reorganization expense quarter over quarter as well as lower salary and loan related expense.

The following summarizes the changes in non-interest expense accounts for the three months ended June 30, 2013 compared to the three months ended June 30, 2012:

	Three months ended
(Dollars in thousands)	June 30, 2013		June 30, 2012		Difference
Salaries and employee benefits	$	6,028	$	6,238	$	(210	)
Occupancy and equipment		1,969		2,020		(51	)
Data processing		926		937		(11	)
Telephone		218		261		(43	)
Stationery and supplies		98		138		(40	)
Amortization of intangibles		166		182		(16	)
Professional fees		452		426		26
Advertising		47		63		(16	)
Merger reorganization expense		128		1,309		(1,181	)
Disposal of banking center		404		—		404
Regulatory assessment		370		387		(17	)
Other real estate owned expense		457		392		65
Loan expense		455		682		(227	)
Other		1,110		1,127		(17	)
Total non-interest expense	$	12,828	$	14,162	$	(1,334	)

Salary and employee benefits decreased by approximately $210,000 or 3.37% to $6.0 million for the three months ended June 30, 2013 as compared to $6.2 million for the three months ended June 30, 2012. The decrease was primarily due to the integration of AFI operations during June 2012 and the related reduction in full-time equivalent employee positions.

Merger reorganization expenses decreased by $1.2 million to $128,000 for the quarter ended June 30, 2013 as compared to June 30, 2012. Merger reorganization expense incurred in the quarter ended June 30, 2013 was primarily related to professional expenses associated with the pending merger with Enterprise Bank. The expense associated with the quarter ended June 30, 2012 related to the merger and integration of AFI which was completed in June 2012.

Other real estate owned (“OREO”) expense increased by $65,000 to $457,000 for the three months ended June 30, 2013, as compared to $392,000 for the three months ended June 30, 2012. The change was primarily due to an increase in write downs on OREO due to changes in estimated fair values during the quarter ended June 30, 2013 on properties of $114,000 as compared to $62,000 for the quarter ended June 30, 2012.

Loan expense primarily includes the costs associated with the collection of legacy as well as loss sharing assets. Loan expense decreased by $227,000 from $682,000 for the three months ended June 30, 2012 as compared to $455,000 for the three months ended June 30, 2013. The change was primarily due to a reduction in non-performing non-loss share assets period-over-period.

During the quarter ended June 30, 2013, the Company determined to strategically close one banking center on the west coast of Florida. The banking center is expected to close during the fourth quarter of 2013 with both employees and customers relocated to other 1 ^st United banking centers. The Company expensed $404,000 for the remaining term on the facility lease and leasehold improvements and other fixed assets during the quarter. Annualized operating expense savings due to this banking center closure is approximately $400,000 per year.

The provision for loan losses is charged to earnings to bring the allowance for loan losses to a level deemed adequate by management and is based upon anticipated experience, the volume and type of lending conducted by us, the amounts of past due and non-performing loans, general economic conditions, particularly as they relate to our market area, and other factors related to the collectability of our loan portfolio. During the quarter ended June 30, 2013, we recorded $1.3 million in provision for loan losses as compared to $3.1 million for the three months ended June 30, 2012. The decrease in the provision for loan losses between the two quarters was primarily due to the strategic resolution of an $11.4 million loan collateralized by 15 gas stations with an associated charge-off of $5.2 million during the quarter ended June 30, 2012. Additionally, there was a reduction in impaired and classified loans period-over-period and further stabilization of the values on the underlying collateral on impaired loans. Net charge-offs for the quarter ended June 30, 2013 were $760,000 as compared to $6.1 million for the quarter ended June 30, 2012.

We recorded income tax expense of $1.0 million for the three months ended June 30, 2013, compared to $372,000 for the three months ended June 30, 2012. The increase is due to higher pretax income for the three months ended June 30, 2013 as compared to the three months ended June 30, 2012.

Analysis for Six Month Periods ended June 30, 2013 and 2012

Net Interest Income

Net interest earnings for the six month periods ended June 30, 2013 and 2012 are reflected in the following table:

	June 30, 2013								June 30, 2012
(Dollars in thousands)	Average Balance			Interest Income/ Expense		Average Rates Earned/ Paid			Average Balance			Interest Income/ Expense		Average Rates Earned/ Paid
Assets
Interest-earning assets
Loans	$	926,331		$	34,912		7.60	%	$	931,057		$	31,675		6.82	%
Investment securities		308,642			3,016		1.95	%		224,533			3,004		2.68	%
Federal funds sold and securities purchased under resale agreements		111,944			338		0.61	%		147,226			375		0.51	%
Total interest-earning assets		1,346,917			38,266		5.73	%		1,302,816			35,054		5.40	%
Non interest-earning assets		224,811								209,564
Allowance for loan losses		(9,988	)							(13,132	)
Total assets	$	1,561,740							$	1,499,248

Liabilities and Shareholders’ Equity
Interest-bearing liabilities
NOW accounts	$	179,024		$	113		0.13	%	$	148,094		$	117		0.16	%
Money market accounts		318,964			500		0.32	%		334,225			920		0.55	%
Savings accounts		62,590			80		0.26	%		62,803			105		0.34	%
Certificates of deposit		297,305			1,186		0.80	%		343,248			1,759		1.03	%
Fed funds purchased and repurchase agreements		17,710			10		0.11	%		10,575			6		0.11	%
Federal Home Loan Bank advances and other borrowings		—			—		0.00	%		276			6		4.36	%
Total interest-bearing liabilities		875,593			1,889		0.44	%		899,221			2,913		0.65	%

Non-interest bearing liabilities
Demand deposit accounts		441,255								364,496
Other liabilities		6,529								9,667
Total non-interest-bearing liabilities		447,784								374,163
Shareholders’ equity		238,363								225,864
Total liabilities and shareholders’ equity	$	1,561,740							$	1,499,248
Net interest spread				$	36,377		5.29	%				$	32,141		4.75	%

Net interest on average earning assets - Margin							5.45	%							4.95	%

Our net interest income for the six months ended June 30, 2013 was positively impacted by the increase in average earning assets of $44.1 million or 3.39% compared to the six months ended June 30, 2012 primarily the result of a net increase in the average balance of investment securities of $84.1 million period-over-period offset by a reduction in the average balance of federal funds sold. These increases were offset by a reduction in the overall yield earned on investments period to period. Earnings for the six months ended June 30, 2013 were also positively impacted by the accretion of discounts related to acquired loans of approximately $12.2 million as compared to $8.3 million for the same period in 2012. Included in the $12.2 million of accretion of discount in the six months ended June 30, 2013 was approximately $8.4 million related to the disposition of loans acquired in the FDIC transactions above the discounted carrying value of the asset. For the six months ended June 30, 2013, we took a charge of approximately $8.2 million as an adjustment to the FDIC loss share receivable in total non-interest income within the consolidated statements of operations substantially related to changes in cash flows of loss share assets. Included in the $8.3 million of accretion discount in the six months ended June 30, 2012 was approximately $3.6 million related to the disposition of assets above the discounted carrying values. For the six months ended June 30, 2012, we took a charge of approximately $5.6 million as an adjustment to the FDIC loss share receivable in total non-interest income due to changes in cash flows of loss share assets.

Net interest income was $36.4 million for the six months ended June 30, 2013, as compared to $32.1 million for the six months ended June 30, 2012, an increase of $4.2 million, or 13.18%. The increase in net interest income resulted primarily from an increase in average earning assets of $44.1 million to an increase in interest accretion on acquired loans of $3.9 million and a reduction of the costs of funds of 35 basis points and a decrease in the yield earned on securities period-over-period. The net interest margin (i.e., net interest income divided by average earning assets) increased 50 basis points from 4.95% during the six months ended June 30, 2012 to 5.45% at June 30, 2013, mainly the result of an increase in accretion earned on acquired assets and a decrease in the cost of funds offset by lower overall yields earned on the investment portfolio. Accretion of $12.2 million on acquired loans added approximately 182 basis points to the net interest margin for the six months ended June 30, 2013. Of the 182 basis points, 126 basis points related to the accretion of the disposition of loans acquired above the discounted carrying value. This compares to accretion of loan discount of $8.3 million during the six months ended June 30, 2012, which added approximately 127 basis points to the June 30, 2012 margin. Within the 127 basis points at June 30, 2012, 56 basis points related to the accretion of the disposition of assets acquired above the discounted carrying value. For the six months ended June 30, 2013, average loans represented 59.31% of total average assets and 70.34% of total average deposits and customer repurchase agreements, compared to average loans of 62.10% of total average assets and average loans of 73.69% to total average deposits and customer repurchase agreements at June 30, 2012. Our cost of funds was approximately 35 basis points lower for the six months ended June 30, 2013, as compared to 2012, primarily as a result of lower rates on transaction accounts and in the renewal of time deposits.

Rate Volume Analysis

The following table sets forth certain information regarding changes in our interest income and interest expense for the six months ended June 30, 2013 as compared to the six months ended June 30, 2012. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to changes in interest rate and changes in the volume. Changes in both volume and rate have been allocated based on the proportionate absolute changes in each category.

Changes in interest earnings for the six months ended June 30, 2013 and 2012:

	June 30, 2013 and 2012
(Dollars in thousands)	Change in Interest Income/ Expense			Variance Due to Volume Changes			Variance Due to Rate Changes
Assets
Interest-earning assets
Loans	$	3,237		$	(162	)	$	3,399
Investment securities		12			949			(937	)
Federal funds sold and securities purchased under resale agreements		(37	)		(99	)		62

Total interest-earning assets	$	3,212		$	688		$	2,524
Liabilities
Interest-bearing liabilities
NOW accounts	$	(4	)	$	22		$	(26	)
Money market accounts		(420	)		(40	)		(380	)
Savings accounts		(25	)		—			(25	)
Certificates of deposit		(573	)		(216	)		(357	)
Fed funds purchased and repurchase agreements		4			4			—
Other borrowings		(6	)		(6	)		—

Total interest-bearing liabilities		(1,024	)		(236	)		(788	)
Net interest spread	$	4,236		$	924		$	3,312

Non-interest Income, Non-interest Expense, Provision for Loan Losses, and Income Tax Expense – Six Month Periods Ended June 30, 2013 and June 30, 2012

Non-interest income includes service charges and fees on deposit accounts, net gains or losses on sales of securities, and all other items of income, other than interest, resulting from our business activities. Non-interest income decreased by $4.6 million for the six months ended June 30, 2013 when compared to the six months ended June 30, 2012. The decrease was principally a result of an adjustment to the FDIC loss share receivable due to the resolution of assets above their carrying value, a reduction in the gain on the sales of securities and a reduction in gains on the sale of other real estate owned during the six months ended June 30, 2013.

The adjustment to the FDIC indemnification asset during the six months ended June 30, 2013 represented a $8.2 million charge related to changes in cash flows on assets covered by Loss Share Agreements and the resolution of OREO property which reduces the FDIC receivable. This compares to $5.6 million for the six months ended June 30, 2012. These amounts were partially offset by interest income earned on the FDIC receivable of $477,000 and $509,000 for the six months ended June 30, 2013 and 2012, respectively.

During the six months ended June 30, 2013, the Company had sales of $30.8 million of available for sale securities for a net gain of $732,000 as compared to sales of $102.5 million of available for sale securities for a net gain of $1.7 during the six months ended June 30, 2012.

During the six months ended June 30, 2013, the Bank received proceeds of $5.2 million from the sales of OREO properties with a carrying value of $4.4 million and recorded net gains on the dispositions of $833,000 as compared to sales of $6.6 million in OREO properties with a carrying value of $4.6 million and recorded gains on the dispositions of $2.0 million for the six month period ended June 30, 2012. Net gains related to the resolution of OREO covered under loss sharing agreements was $797,000 million and $1.9 million for the six months ended June 30, 2013 and 2012, respectively.

Non-interest expense is comprised of salaries and employee benefits, occupancy and equipment expense and other operating expenses incurred in supporting our various business activities. Non-interest expense decreased by $1.0 million, or 3.92%, from $26.3 million for the six months ended June 30, 2012 to $25.3 million for the six months ended June 30, 2013, primarily due to a reduction in merger reorganization expense and loan expense partially offset by an increase in salaries and employee benefits and OREO expense.

The following summarizes the changes in non-interest expense accounts for the six months ended June 30, 2013 compared to the six months ended June 30, 2012:

	Six months ended
(Dollars in thousands)	June 30, 2013		June 30, 2012		Difference
Salaries and employee benefits	$	12,227	$	11,946	$	281
Occupancy and equipment		3,938		3,965		(27	)
Data processing		1,856		1,815		41
Telephone		447		475		(28	)
Stationery and supplies		189		263		(74	)
Amortization of intangibles		339		325		14
Professional fees		839		818		21
Advertising		135		135		—
Merger reorganization expense		128		1,760		(1,632	)
Disposal of banking center		404		—		404
Regulatory assessment		728		745		(17	)
OREO expense		1,037		763		274
Loan expense		803		1,249		(446	)
Other		2,234		2,078		156
Total non-interest expense	$	25,304	$	26,337	$	(1,033	)

Salary and employee benefits increased by approximately $281,000 million to $12.2 million for the six months ended June 30, 2013 as compared to $11.9 million for the six months ended June 30, 2012, primarily due to an increase in incentive compensation related to the increase in loan production period-over-period and an increase in costs associated with employee benefit programs.

Merger reorganization expenses decreased by $1.6 million to $128,000 for the six months ended June 30, 2013 as compared to the six months June 30, 2012 of $1.8 million as a result of the merger and integration of AFI during the six months ended June 30, 2012. The $128,000 of expense for the six months ended June 30, 2013 was primarily the result of the pending merger with Enterprise which was completed on July 1, 2013. Merger reorganization expenses for the six months ended June 30, 2012 include legal and professional, IT integration and conversion, severance and lease termination fees.

OREO expense increased by $274,000 to $1.0 million for the six months ended June 30, 2013, as compared to $763,000 for the six months ended June 30, 2012. The change was due to an increase in write downs on OREO due to changes in estimated fair values during the six months ended June 30, 2013 on properties of $642,000 as compared to $326,000 for the six months ended June 30, 2012.

Loan expenses primarily include the costs associated with the collection of non-loss sharing agreements as well as loss sharing assets. Loan expenses decreased by $446,000 from $1.2 million for the six months ended June 30, 2012 to $803,000 for the six months ended June 30, 2013. The change was primarily due a reduction in impaired and classified loans period-over-period.

The provision for loan losses is charged to earnings to bring the allowance for loan losses to a level deemed adequate by management and is based upon anticipated experience, the volume and type of lending conducted by us, the amounts of past due and non-performing loans, general economic conditions, particularly as they relate to our market area, and other factors related to the collectability of our loan portfolio. During the six months ended June 30, 2013, we recorded $2.0 million in provision for loan losses as compared to $4.4 million for the six months ended June 30, 2012. The decrease in the provision for loan losses between the two periods was primarily due to a reduction in impaired and classified loans period-over-period and further stabilization of the values on the underlying collateral on impaired loans. Additionally, during the six month period ended June 30, 2012, the Company strategically resolved an $11.4 million non-performing loan collateralized by 15 gas stations through acceptance of a bulk sale offer at below appraised values. The resolution resulted in a $5.2 million charge-off during the six months ended June 30, 2012 on the $11.4 million loan. Net charge-offs for the six months ended June 30, 2013 were $1.7 million as compared to $7.9 million for the six months ended June 30, 2012.

We recorded income tax expense of $2.0 million for the six months ended June 30, 2013, compared to $847,000 for the six months ended June 30, 2012. The increase is due to higher pretax income for the six months ended June 30, 2013 as compared to the six months ended June 30, 2012.

FINANCIAL CONDITION

At June 30, 2013, our total assets were $1.545 billion and our net loans were $924.7 million or 59.8% of total assets. At December 31, 2012, our total assets were $1.567 billion and our net loans were $903.6 million or 57.7% of total assets. Cash and cash equivalents decreased since December 31, 2012 through the funding of net loan growth and purchases of securities during the six months ended June 30, 2013. Net total loans increased by approximately $21.1 million to $924.7 million at June 30, 2013 due primarily to new loan production and loan advances of $148.7 million offset by payoffs, resolutions, including transfer to OREO, and principal reductions of $127.6 million.

At June 30, 2013, the allowance for loan losses was $10.1 million or 1.08% of total loans. At December 31, 2012, the allowance for loan losses was $9.8 million or 1.07% of total loans.

Securities available for sale increased by $94.7 million to $354.9 million at June 30, 2013 due to purchases of $174.4 million, offset by sales of $30.8 million and maturities and prepayments of $35.1 million since December 31, 2012.

At June 30, 2013, our total deposits were $1.292 billion, a slight decrease of $10.9 million compared to $1.303 billion at December 31, 2012. Non-interest bearing deposits represented 34.61% of total deposits at June 30, 2013 compared to 32.77% at December 31, 2012.

Loan Quality

Management seeks to maintain a high quality loan portfolio through sound underwriting and lending practices. The banking industry and its regulators view elements of loan concentrations as a concern that can give rise to deterioration in loan quality if not managed effectively. As of June 30, 2013 and December 31, 2012, approximately 84.9% and 83.9%, respectively, of the total loan portfolio was collateralized by commercial and residential real estate mortgages.

Loan concentrations are defined as amounts loaned to a number of borrowers engaged in similar activities, and/or located in the same region, sufficient to cause them to be similarly impacted by economic or other conditions. We regularly monitor these concentrations in order to consider adjustments in our lending practices to reflect economic conditions, loan-to-deposit ratios, and industry trends. As of June 30, 2013 and December 31, 2012, there were no concentration of loans within any portfolio category to any group of borrowers engaged in similar activities or in a similar business (other than noted below) that exceeded 10% of total loans, except that as of such dates loans collateralized with mortgages on real estate represented 84.9% and 83.9%, respectively, of the total loan portfolio and were to a broad base of borrowers in varying activities, businesses, locations and real estate types.

At 1st United, we consider our focus to be in business banking. Through our business banking activities, we provide commercial purpose real estate secured loans as referenced above and also provide commercial and residential real estate loans. Business banking also provides loan facilities ranging from commercial purpose non-real estate secured loans, to lines of credit, Export/Import Bank loans, SBA loans and letters of credit.

Commercial loans, unlike residential real estate loans (which generally are made on the basis of the borrower’s ability to repay from employment and other income and which are collateralized by real property with values tending to be more readily ascertainable), are non-real estate secured commercial loans typically underwritten on the basis of the borrower’s ability to make repayment from the cash flow of its business and generally are collateralized by a variety of business assets, such as accounts receivable, equipment and inventory. As a result, the availability of funds for the repayment of commercial loans may be substantially dependent on the success of the business itself, which is subject to adverse conditions in the economy. Commercial loans are generally repaid from operational earnings, the collection of rent, or conversion of assets. Commercial loans can also entail certain additional risks when they involve larger loan balances to single borrowers or a related group of borrowers, resulting in a more concentrated loan portfolio. Further, the collateral underlying the loans may depreciate over time, cannot be appraised with as much precision as residential real estate, and may fluctuate in value based on the success of the business.

The following charts illustrate the composition of loans in our loan portfolio as of June 30, 2013 and December 31, 2012.

Loan Portfolio as of June 30, 2013

(Dollars in thousands)	Total Loans		Total		Percent of Loan Portfolio			Percent of Total Assets
Loan Types
Residential Real Estate:
First mortgages		419	$	96,605		10.34	%		6.25	%
HELOCs and equity		300		51,235		5.48	%		3.32	%

Commercial:
Secured – non-real estate		659		124,860		13.36	%		8.08	%
Secured – real estate		89		52,265		5.59	%		3.38	%
Unsecured		43		7,462		0.80	%		0.48	%

Commercial Real Estate:
Owner occupied		222		174,492		18.67	%		11.29	%
Non-owner occupied		272		334,574		35.80	%		21.65	%
Multi-family		70		37,015		3.96	%		2.40	%

Construction and Land Development:
Construction		12		16,828		1.80	%		1.09	%
Improved land		30		17,031		1.82	%		1.10	%
Unimproved land		20		13,130		1.40	%		0.85	%

Consumer and other		175		9,137		0.98	%		0.59	%

Total June 30, 2013		2,311	$	934,634		100.00	%		60.48	%

Loan Portfolio as of December 31, 2012

(Dollars in thousands)	Total Loans		Total		Percent of Loan Portfolio			Percent of Total Assets
Loan Types
Residential Real Estate:
First mortgages		461	$	109,562		12.00	%		6.99	%
HELOCs and equity		315		56,355		6.17	%		3.60	%

Commercial:
Secured – non-real estate		669		127,514		13.96	%		8.14	%
Secured – real estate		86		43,613		4.78	%		2.78	%
Unsecured		43		8,371		0.92	%		0.53	%

Commercial Real Estate:
Owner occupied		233		187,007		20.48	%		11.94	%
Non-owner occupied		268		290,858		31.85	%		18.56	%
Multi-family		71		36,709		4.02	%		2.34	%

Construction and Land Development:
Construction		6		3,481		0.38	%		0.22	%
Improved land		34		20,117		2.20	%		1.28	%
Unimproved land		25		18,291		2.00	%		1.17	%

Consumer and other		196		11,290		1.24	%		0.72	%

Total December 31, 2012		2,407	$	913,168		100.00	%		58.27	%

The following chart illustrates the composition of our construction and land development loan portfolio as of June 30, 2013 and December 31, 2012.

	June 30, 2013					December 31, 2012
(Dollars in thousands)	Balance		% of Total Loans			Balance		% of Total Loans
Construction
Residential	$	2,982		0.32	%	$	2,721		0.30	%
Residential spec		—		—	%		—		—	%
Commercial		13,846		1.48	%		760		0.08	%
Commercial spec		—		—	%		—		—	%
Land Development
Residential		4,729		0.51	%		4,798		0.53	%
Residential spec		5,490		0.58	%		11,829		1.28	%
Commercial		7,495		0.80	%		8,538		0.93	%
Commercial spec		12,447		1.33	%		13,243		1.45	%
Total	$	46,989		5.02	%	$	41,889		4.57	%

Generally, interest on loans accrues and is credited to income based upon the principal balance outstanding. It is management’s policy to discontinue the accrual of interest income and classify a loan as non-accrual when principal or interest is past due 90 days or more unless, in the determination of management, the principal and interest on the loan are well collateralized and in the process of collection. Consumer loans are generally charged-off after 90 days of delinquency unless adequately collateralized and in the process of collection. Loans are not returned to accrual status until principal and interest payments are brought current and future payments appear reasonably certain. Interest accrued and unpaid at the time a loan is placed on non-accrual status is charged against interest income.

We have identified certain assets as non-performing and troubled debt restructuring assets. These assets include non-accruing loans, foreclosed real estate, loans that are contractually past due 90 days or more as to principal or interest payments and still accruing, and troubled debt restructurings. All troubled debt restructurings, non-accruing loans and loans accruing 90 days or more past due are considered impaired. These assets present more than the normal risk that we will be unable to eventually collect or realize their full carrying value.

Modifications of terms for our loans and their inclusion as troubled debt restructurings are based on individual facts and circumstances. Loan modifications that are included as troubled debt restructurings may involve a reduction of the stated interest rate on the loan, extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk, deferral of principal payments and/or forgiveness of principal, regardless of the period of the modification. Generally, we will allow interest rate reductions for a period of less than two years after which the loan reverts back to the contractual interest rate. Each of the loans included as troubled debt restructurings at June 30, 2013 and December 31, 2012 had either an interest rate modification ranging from 6 months to 2 years before reverting back to the original interest rate and/or a deferral of principal payments which can range from 6 to 12 months before reverting back to an amortizing loan. All of the loans were modified due to financial distress of the borrower. The following is a summary of the unpaid principal balance of loans classified as troubled debt restructurings as of June 30, 2013, and December 31, 2012, which are performing in accordance with their modification agreements.

(Dollars in thousands)	June 30, 2013		December 31, 2012
Residential real estate	$	598	$	605
Commercial real estate		15,498		17,315
Construction and land development		145		2,654
Commercial		3,234		3,699
Total	$	19,475	$	24,273

The decrease of $4.8 million in performing restructured loans to $19.5 million at June 30, 2013 from $24.3 million at December 31, 2012 was due to new performing modifications of approximately $1.1 million offset by approximately $3.0 million in loans that defaulted under the terms of their modification agreement and were included in nonaccrual at December 31, 2012. In addition, there were approximately $2.9 million in repayments and resolutions of modified loans.

At June 30, 2013, there were 14 loans that were troubled debt restructured loans with a carrying amount of $6.8 million and specific reserves of $589,000 that were non-accrual and included in non-accrual loans. At December 31, 2012, there were 12 loans which were troubled debt restructured loans with a carrying amount of $5.7 million and specific reserves of $66,000 that were non-accrual and included in non-accrual loans. The increase in non-accrual troubled debt restructured loans from December 31 is due to the inclusion of three new loans as non-accrual of $1.2 million offset by payments of $120,000. Loans retain their accrual status at their time of modification. As a result, if the loan is on non-accrual at the time that it is modified, it stays on non-accrual, and if a loan is accruing at the time of modification, it generally stays on accrual. A loan on non-accrual will be individually evaluated based on sustained adherence to the terms of the modification agreement prior to being placed on accrual status. Troubled debt restructurings are considered impaired. The average yield on the loans classified as troubled debt restructurings was 4.42% and 4.76% at June 30, 2013 and December 31, 2012, respectively.

During the six months ended June 30, 2013, we had $21.7 million in loans for which we lowered the interest rate prior to maturity to competitively retain a loan. During the year ended December 31, 2012, we had approximately $11.8 million in loans on which we lowered the interest rate prior to maturity to competitively retain a loan. Due to the borrowers’ significant deposit balances and/or the overall quality of the loans, these loans were not included in troubled debt restructurings. In addition, each of these borrowers was not considered to be in financial distress and the modified terms matched current market terms for borrowers with similar risk characteristics. We had no other loans where we extended the maturity or forgave principal that were not already included in troubled debt restructurings or otherwise impaired.

During the three months ended June 30, 2013 and 2012, interest income not recognized on non-accrual loans (but would have been recognized if these loans were current) were approximately $273,000 and $244,000, respectively. During the six months ended June 30, 2013 and 2012, interest income not recognized on non-accrual loans were approximately $524,000 and $758,000, respectively.

Our non-performing and troubled debt restructuring assets at June 30, 2013 and December 31, 2012 were as follows:

	June 30, 2013									December 31, 2012
(Dollars in thousands)	Assets Not Subject to Loss Share Agreements			Assets Subject to Loss Share Agreements			Total			Assets Not Subject to Loss Share Agreements			Assets Subject to Loss Share Agreements			Total
Non-Accrual Loans
Residential real estate	$	53		$	3,184		$	3,237		$	2,019		$	4,085		$	6,104
Home equity lines		706			99			805			796			103			899
Commercial real estate		4,746			6,353			11,099			3,430			6,393			9,823
Construction and land development		3,754			285			4,039			3,440			288			3,728
Commercial		1,951			459			2,410			185			539			724
Other		29			—			29			29			—			29
Total	$	11,239		$	10,380		$	21,619		$	9,899		$	11,408		$	21,307

Accruing => 90 days past due
Residential real estate	$	—		$	—		$	—		$	—		$	—		$	—
Home equity lines		—			—			—			—			—			—
Commercial real estate		—			—			—			1,457			—			1,457
Construction and land development		—			—			—			—			—			—
Commercial		—			—			—			620			32			652
Other		—			—			—			—			—			—
Total	$	—		$	—		$	—		$	2,077		$	32		$	2,109

Total non-accruing loans	$	11,239		$	10,380		$	21,619		$	9,899		$	11,408		$	21,307
Accruing => 90 days past due		—			—			—			2,077			32			2,109
Foreclosed real estate		7,586			10,518			18,104			6,354			13,175			19,529
Total non-performing assets		18,825			20,898			39,723			18,330			24,615			42,945
Trouble debt restructured loans		17,956			1,519			19,475			23,844			429			24,273
Total non-performing assets and troubled debt restructured loans	$	36,781		$	22,417		$	59,198		$	42,174		$	25,044		$	67,218

Ratios
Total non-accruing and accruing => 90 days past due to total loans		1.20	%		1.11	%		2.31	%		1.31	%		1.25	%		2.56	%
Total non-performing assets to total assets		1.22	%		1.35	%		2.57	%		1.17	%		1.57	%		2.74	%
Total non-performing assets and troubled debt restructured loans to total assets		2.38	%		1.45	%		3.83	%		2.69	%		1.60	%		4.29	%

Included in non-accrual loans are purchase credit impaired loans of $4.4 million for which cash flows could not be reasonably estimated with $3.7 million of these loans subject to Loss Share Agreements. Of the non-performing assets and performing troubled debt restructured loans at June 30, 2013, $20.9 million were acquired in the Old Harbor, TBOM and Republic transactions and are all covered under the loss share agreements as compared to $25.0 million at December 31, 2012.

At June 30, 2013, we had approximately $1.5 million of other real estate owned and non-accrual loans approved for sale and pending closing during the third quarter 2013 for which no additional losses are expected.

Since December 31, 2012, for non-performing assets not subject to Loss Share Agreements, we had approximately $58,000 in non-accrual loans which were charged off, $1.5 million were paid off or principal payments were applied, $2.1 million were transferred to OREO, approximately $5.0 million were added to non-accrual and no loans were returned to accrual status during the six months ended June 30, 2012.

Past due loans, categorized by loans subject to Loss Share Agreements and those not subject to Loss Share Agreements, at June 30, 2013 and December 31, 2012, were as follows:

June 30, 2013

(Dollars in thousands)	Accruing 30 - 59				Accruing 60-89				Non-Accrual or Accrual and 90 days and over				Total
	Loans Subject to Loss Share Agreement		Loans Not Subject to Loss Share Agreement		Loans Subject to Loss Share Agreement		Loans Not Subject to Loss Share Agreement		Loans Subject to Loss Share Agreement		Loans Not Subject to Loss Share Agreement		Loans Subject to Loss Share Agreement		Loans Not Subject to Loss Share Agreement
Residential Real Estate	$	—	$	—	$	—	$	171	$	3,283	$	759	$	3,283	$	930
Commercial		—		161		—		513		459		1,951		459		2,625
Commercial Real Estate		—		1,737		249		—		6,353		4,746		6,602		6,483
Construction and Land Development		—		—		—		—		285		3,754		285		3,754
Consumer and other		—		—		—		—		—		29		—		29
Total June 30, 2013	$	—	$	1,898	$	249	$	684	$	10,380	$	11,239	$	10,629	$	13,821

December 31, 2012

(Dollars in thousands)	Accruing 30 - 59				Accruing 60-89				Non-Accrual or Accrual and 90 days and over				Total
	Loans Subject to Loss Share Agreement		Loans Not Subject to Loss Share Agreement		Loans Subject to Loss Share Agreement		Loans Not Subject to Loss Share Agreement		Loans Subject to Loss Share Agreement		Loans Not Subject to Loss Share Agreement		Loans Subject to Loss Share Agreement		Loans Not Subject to Loss Share Agreement
Residential Real Estate	$	1,013	$	292	$	1,207	$	—	$	4,188	$	2,815	$	6,408	$	3,107
Commercial		—		200		—		94		571		805		571		1,099
Commercial Real Estate		581		1,873		—		1,707		6,393		4,887		6,974		8,467
Construction and Land Development		—		2,767		—		—		288		3,440		288		6,207
Consumer and other		—		99		—		—		—		29		—		128
Total December 31, 2012	$	1,594	$	5,231	$	1,207	$	1,801	$	11,440	$	11,976	$	14,241	$	19,008

Past due loans subject to Loss Share Agreements decreased by $3.6 million from $14.2 million at December 31, 2012 to $10.6 million at June 30, 2013. Past due loans not subject to Loss Share Agreements decreased by $5.2 million from $19.0 million at December 31, 2012 to $13.8 million at June 30, 2013. The change in past due loans covered under Loss Share Agreements was due to decrease in accruing loans which were past due less than 90 days by $2.6 million as the Company continues to work towards resolutions of these assets. A decrease in the same category was also noted for loans not covered under Loss Share Agreements which declined by $4.5 million during the six months ended June 30, 2013 and decreases of $1.8 million were also noted for loans non-accrual loans past due greater than 90 days as the Company continues to work to resolve these credits.

Loans which were evaluated under ASC 310-30, and where the timing and amount of cash flows can be reasonably estimated, were accounted for in accordance with ASC 310-30-35. The Company applies the interest method for these loans under this subtopic and the loans are excluded from non-accrual. If at acquisition we identified loans that we could not reasonably estimate cash flows or if subsequent to acquisition such cash flows could not be estimated, such loans would be included in non-accrual. These acquired loans are recorded at the allocated fair value, such that there is no carryover of the seller’s allowance for loan losses. Such acquired loans are accounted for individually. The Company estimates the amount and timing of expected cash flows for each purchased loan, and the expected cash flows in excess of the allocated fair value is recorded as interest income over the remaining life of the loan (accretable yield). The excess of the loan’s contractual principal and interest over expected cash flows is not recorded (non-accretable difference). Over the life of the loan, expected cash flows continue to be estimated. If the present value of expected cash flows is less than the carrying amount, a loss is recorded through the allowance for loan losses. If the present value of expected cash flows is greater than the carrying amount, it is recognized as part of future interest income. The Company had $20.0 million of loans evaluated under ASC 310-30 which were on nonaccrual and past due greater than 90 days in accordance with their loan documents but were performing in accordance with their estimated cash flows. These loans are excluded from the past due categories.

Impaired Loans

The following tables present loans individually evaluated for impairment by class of loan as June 30, 2013 and December 31, 2012.

	Recorded Investment in Impaired Loans
	With Allowance								With No Allowance
June 30, 2013	Loans Subject to Loss Share Agreements				Loans Not Subject to Loss Share Agreements				Loans Subject to Loss Share Agreements		Loans Not Subject to Loss Share Agreements
(Dollars in thousands)	Recorded Investment		Allowance for Loan Losses Allocated		Recorded Investment		Allowance for Loan Losses Allocated		Recorded Investment		Recorded Investment
Residential Real Estate	$	1,071	$	305	$	640	$	202	$	896	$	607
Commercial		401		71		2,547		1,392		—		2,289
Commercial Real Estate		3,346		442		5,787		384		1,323		12,806
Construction and Land Development		—		—		529		276		—		3,370
Consumer and other		—		—		—		—		—		—
Total June 30, 2013	$	4,818	$	818	$	9,503	$	2,254	$	2,219	$	19,072

	Recorded Investment in Impaired Loans
December 31, 2012	With Allowance								With No Allowance
	Loans Subject to Loss Share Agreements				Loans Not Subject to Loss Share Agreements				Loans Subject to Loss Share Agreements		Loans Not Subject to Loss Share Agreements
(Dollars in thousands)	Recorded Investment		Allowance for Loan Losses Allocated		Recorded Investment		Allowance for Loan Losses Allocated		Recorded Investment		Recorded Investment
Residential Real Estate	$	1,454	$	395	$	549	$	79	$	1,065	$	2,757
Commercial		473		122		1,453		388		—		2,242
Commercial Real Estate		3,880		506		7,220		622		648		12,258
Construction and Land Development		—		—		2,654		1,002		—		3,440
Consumer and other		—		—		—		—		—		—
Total December 31, 2012	$	5,807	$	1,023	$	11,876	$	2,091	$	1,713	$	20,697

Overall impaired loans decreased by $4.5 million from $40.1 million at December 31, 2012 to $35.6 million at June 30, 2013. Impaired loans subject to loss share agreements decreased by $483,000. Impaired loans not subject to loss share agreements decreased by $4.0 million from December 31, 2012 to June 30, 2013 primarily due to resolution, including sales, payoffs and transfer to other real estate owned.

Allowance for Loan Losses

At June 30, 2013, the allowance for loan losses was $10.1 million or 1.08% of total loans. At December 31, 2012, the allowance for loan losses was $9.8 million or 1.07% of total loans. At December 31, 2012, we had $11.9 million of impaired loans not covered by Loss Share Agreements with an allocated allowance for loan loss of $2.1 million, as compared to $9.5 million of impaired loans not covered by Loss Share Agreements with an allocated allowance of $2.3 million at June 30, 2013. Charge-offs for the six months ended June 30, 2013 were $1.7 million of which $1.2 million was provided for as of December 31, 2012. In addition, overall loans graded special mention and substandard not covered by Loss Share Agreements decreased by $22.2 million (or 33.45%) from December 31, 2012 to June 30, 2013 which had a positive impact on the general allowance for loan losses. In originating loans, we recognize that credit losses will be experienced and the risk of loss will vary with, among other things: general economic conditions; the type of loan being made; the creditworthiness of the borrower and guarantors over the term of the loan; insurance; whether the loan is covered by a loss share agreement; and, in the case of a collateralized loan, the quality of the collateral for such a loan. The allowance for loan losses represents our estimate of the amount necessary to provide for probable incurred losses in the loan portfolio. In making this determination, we analyze the ultimate collectability of the loans in our portfolio, feedback provided by internal loan staff, the independent loan review function and information provided by examinations performed by regulatory agencies.

The allowance for loan losses is evaluated at the portfolio segment level using the same methodology for each segment. The historical net losses for a rolling three year period is the basis for the general reserve for each segment which is adjusted for each of the same qualitative factors (i.e., nature and volume of portfolio, economic and business conditions, classification, past due and non-accrual trends) evaluated by each individual segment. Impaired loans and related specific reserves for each of the segments are also evaluated using the same methodology for each segment. The qualitative factors totaled approximately 7 and 11 basis points of the allowance for loan losses as of both June 30, 2013 and December 31, 2012, respectively.

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Loans for which the terms have been modified and for which the borrower is experiencing financial difficulties are considered troubled debt restructurings and generally classified as impaired.

Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays (loan payments made within 90 days of the due date) and payment shortfalls (which are tracked as past due amounts) generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, the borrower’s and guarantor’s financial condition and the amount of the shortfall in relation to the principal and interest owed.

Our analysis of the allowance for loan losses consists of three components: (i) specific credit allocation established for expected losses resulting from analysis developed through specific credit allocations on individual loans for which the recorded investment in the loan exceeds the fair value; (ii) general portfolio allocation based on historical loan loss experience for each loan category; and (iii) qualitative reserves based on general economic conditions as well as specific economic factors in the markets in which we operate.

The specific credit allocation component of the allowance for loan losses is based on a regular analysis of loans where the loan is determined to be impaired as determined by management. The amount of impairment, if any, is determined based on either the present value of expected future cash flows discounted at the loan’s effective interest rate, the market price of the loan, or, if the loan is collateral dependent, the fair value of the underlying collateral less cost of sale. Third party appraisals are used to determine the fair value of underlying collateral. At a minimum a new appraisal is obtained annually for all impaired loans based on an “as is” value. Generally no adjustments, other than a reduction for estimated disposal costs, are made by the Company to third party appraisals to determine the fair value of the assets. The impact on the allowance for loan losses for new appraisals is reflected in the period the appraisal is received. A loan may also be classified as substandard and not be classified as impaired by management. A loan may be classified as substandard by management if, for example, the primary source of repayment is insufficient, the financial condition of the borrower and/or guarantors has deteriorated or there are chronic delinquencies.

The following is a summary of our loan classifications at June 30, 2013 and December 31, 2012:

			Loans Subject to Loss Share Agreements						Loans Not Subject to Loss Share Agreements
(Dollars in thousands)	Total		Pass		Special Mention		Substandard		Pass		Special Mention		Substandard
June 30, 2013
Residential Real Estate	$	147,840	$	73,356	$	1,220	$	3,283	$	60,078	$	3,140	$	6,763
Commercial		184,587		32,027		349		459		143,564		3,222		4,966
Commercial Real Estate		546,081		167,918		8,694		6,353		344,543		4,613		13,960
Construction and Land Development:		46,989		7,535		—		285		32,303		2,694		4,172
Consumer and other		9,137		7		—		—		8,466		532		132
Total June 30, 2013	$	934,634	$	280,843	$	10,263	$	10,380	$	588,954	$	14,201	$	29,993


			Loans Subject to Loss Share Agreements						Loans Not Subject to Loss Share Agreements
(Dollars in thousands)	Total		Pass		Special Mention		Substandard		Pass		Special Mention		Substandard
December 31, 2012
Residential Real Estate	$	165,917	$	80,215	$	2,578	$	4,188	$	65,484	$	7,927	$	5,525
Commercial		179,498		32,080		405		540		135,488		6,516		4,469
Commercial Real Estate		514,574		182,009		10,264		6,393		284,184		17,563		14,161
Construction and Land Development:		41,889		7,921		—		505		23,944		3,138		6,381
Consumer and other		11,290		11		—		—		10,552		584		143
Total December 31, 2012	$	913,168	$	302,236	$	13,247	$	11,626	$	519,652	$	35,728	$	30,679

All non-accrual loans are included in substandard loans. Loans classified as troubled debt restructured loans, which are performing under the terms of their modification agreements, are credit graded based on the individual qualities and payment performance of the loan under the terms of the modification agreement. At June 30, 2013 and December 31, 2012, loans which were classified as troubled debt restructured loans which were performing under the terms of their modification agreements and were credit graded as substandard were $7.3 million and $11.9 million, respectively.

Substandard loans totaled $40.4 million at June 30, 2013 (of which $10.4 million were subject to the Loss Share Agreements) and $42.3 million at December 31, 2012 (of which $11.6 million were subject to the Loss Share Agreements). The decrease of $1.9 million since December 31, 2012 was primarily due to the resolution of loans not covered under Loss Share Agreements of $686,000 through sale, payoffs, charge-offs or foreclosure and transfer to other real estate owned during the period offset by the inclusion of one new relationship as substandard during the quarter ending June 30, 2013. There was a decrease of $1.2 million in the total substandard loans covered under Loss Share Agreements period-over-period. We regularly evaluate classifications of loans and recommend either upgrades or downgrades as events or circumstances warrant. In addition, at June 30, 2013, we had $35.6 million (or 3.8% of total loans) of loans classified as impaired. This compares to $40.1 million (or 4.4% of total loans) at December 31, 2012. The decrease was primarily due to the net resolution of loans, including sales, payoffs and transfers to other real estate owned during the quarter. At June 30, 2013 and December 31, 2012, the specific credit allocation included in the allowance for loan losses for loans impaired were approximately $3.1 million and $3.1 million, respectively. The specific credit allocation for impaired loans is adjusted based on appraisals if collateral dependent or anticipated cash flows if not collateral dependent. All loans classified as substandard that are collateralized by real estate are also re-appraised at a minimum on an annual basis.

We also have loans classified as Special Mention. We classify loans as Special Mention if there are declining trends in the borrower’s business, questions regarding condition or value of the collateral, or other weaknesses. At June 30, 2013, we had $24.5 million (2.62% of outstanding loans), which included $10.3 million in loans subject to Loss Share Agreements, which compares to $49.0 million (5.40% of outstanding loans) of which $13.2 million were subject to Loss Share Agreements at December 31, 2012. Special mention loans not subject to Loss Share Agreements were $14.2 million at June 30, 2013, a decrease of $21.5 million from December 31, 2012. The decrease is attributable to resolution of loans, including sales, payoffs and downgrades to substandard as well as ongoing reviews and upgrading of loans classified as special mention. If there is further deterioration on these loans, they may be classified substandard in the future, and depending on whether the loan is considered impaired, a specific credit allocation may be needed resulting in increased provisions for loan losses. Improvement in the underlying loan qualities can also provide for an upgrading of a loan to a watch category.

We determine the general portfolio allocation component of the allowance for loan losses statistically using a loss analysis that examines historical loan loss experience adjusted for current environmental factors. We perform the loss analysis quarterly and update loss factors regularly based on actual experience. The general portfolio allocation element of the allowance for loan losses also includes consideration of the amounts necessary for concentrations and changes in portfolio mix and volume.

We base the allowance for loan losses on estimates and ultimate realized losses may vary from current estimates. We review these estimates quarterly, and as adjustments, either positive or negative, become necessary, we make a corresponding increase or decrease in the provision for loan losses. The methodology used to determine the adequacy of the allowance for loan losses is consistent with prior years and there were no reallocations.

Management remains watchful of credit quality issues. Should the economic climate deteriorate from current levels, borrowers may experience difficulty repaying loans and the level of non-performing loans, charge-offs and delinquencies could rise and require further increases in loan loss provisions.

During the three and six months ended June 30, 2013, we recorded $1.3 million and $2.0 million, respectively, in provision for loan losses primarily as a result of charge-offs during the periods offset by a reduction in classified and non-accrual loans and a leveling of real estate values on the underlying collateral of impaired loans.

Activity in the allowance for loan losses for the three months ended June 30, 2013 was as follows:

(Dollars in thousands)	Commercial		Residential Real Estate			Commercial Real Estate			Construction and Land Development		Consumer and Other			Total
Beginning balance, April 1, 2013	$	3,519	$	1,936		$	3,623		$	404	$	41		$	9,523
Provisions for loan losses		82		362			665			202		(11	)		1,300
Loans charged off		—		(54	)		(739	)		—		—			(793	)
Recoveries		18		—			2			2		11			33
Ending Balance, June 30, 2013	$	3,619	$	2,244		$	3,551		$	608	$	41		$	10,063

Activity in the allowance for loan losses for the three months ended June 30, 2012 was as follows:

(Dollars in thousands)	Commercial			Residential Real Estate			Commercial Real Estate			Construction and Land Development			Consumer and Other			Total
Beginning balance, April 1, 2012	$	4,593		$	1,833		$	3,601		$	2,270		$	69		$	12,366
Provisions for loan losses		3,335			(66	)		452			(590	)		(31	)		3,100
Loans charged off		(5,151	)		(357	)		(682	)		—			—			(6,190	)
Recoveries		9			2			69			—			—			80
Ending Balance, June 30, 2012	$	2,786		$	1,412		$	3,440		$	1,680		$	38		$	9,356

Activity in the allowance for loan losses for the six months ended June 30, 2013 was as follows:

(Dollars in thousands)	Commercial		Residential Real Estate			Commercial Real Estate			Construction and Land Development			Consumer and Other			Total
Beginning balance, January 1, 2013	$	2,735	$	1,869		$	3,398		$	1,745		$	41		$	9,788
Provisions for loan losses		850		480			947			(332	)		5			1,950
Loans charged off		—		(106	)		(798	)		(898	)		(16	)		(1,818	)
Recoveries		34		1			4			93			11			143
Ending Balance, June 30, 2013	$	3,619	$	2,244		$	3,551		$	608		$	41		$	10,063

Activity in the allowance for loan losses for the six months ended June 30, 2012 was as follows:

(Dollars in thousands)	Commercial			Residential Real Estate			Commercial Real Estate			Construction and Land Development			Consumer and Other			Total
Beginning balance, January 1, 2012	$	3,111		$	1,945		$	5,302		$	2,409		$	69		$	12,836
Provisions for loan losses		4,827			(6	)		411			(751	)		(81	)		4,400
Loans charged off		(5,182	)		(641	)		(2,379	)		—			—			(8,202	)
Recoveries		30			114			106			22			50			322
Ending Balance, June 30, 2012	$	2,786		$	1,412		$	3,440		$	1,680		$	38		$	9,356

The decrease in the overall allowance for construction and land development loans from $1.7 million at June 30, 2012 to $608,000 at June 30, 2013 primarily related to the improvement in historical loss factors over the previous period and the resolution and charge-off of one impaired construction and land development loan during the quarter ended March 31, 2013, which was specifically provided for at December 31, 2012. In addition, the overall balance in loans held as construction and land development decreased from June 30, 2012 to June 30, 2013 by $8.8 million which was primarily driven by resolutions and payments during the year.

The increase in the allowance related to commercial loans from $2.8 million for the quarter ended June 30, 2012 to $3.6 million of the quarter ended June 30, 2013 was due to the movement of loans from the general to specific portions of the allowance calculation which resulted in an increase in specific reserves on loans individually evaluated for impairment. The overall general loss factors associated with this category have remained relatively constant throughout the period and include the impact of an $11.4 million commercial charge-off which was incurred during the second quarter of 2012.

The increase in the allowance for loan losses related to residential real estate loans from $1.4 million at June 30, 2012 to $2.2 million at June 30, 2013 was due to the downgrade of acquired loans covered under Loss Sharing Agreements with specific reserves and the increase in the qualitative factor on the HELOC portion of this category period-over-period. Qualitative factors are periodically evaluated by the Company and adjusted for internal and external environmental factors.

The following tables reflect the allowance allocation per loan category and percent of loans in each category to total loans as of June 30, 2013 and December 31, 2012:

As of June 30, 2013:

(Dollars in thousands)	Commercial			Residential Real Estate			Commercial Real Estate			Construction and Land Development			Consumer and Other			Total
Specific Reserves:
Impaired loans	$	1,463		$	507		$	826		$	276		$	—		$	3,072
Purchase credit impaired loans		368			181			334			—			—			883
Total specific reserves		1,831			688			1,160			276			—			3,955
General reserves		1,788			1,556			2,391			332			41			6,108
Total	$	3,619		$	2,244		$	3,551		$	608		$	41		$	10,063
Total Loans	$	184,587		$	147,840		$	546,081		$	46,989		$	9,137		$	934,634
Allowance as percent of loans per category as of June 30, 2013		1.96	%		1.52	%		0.65	%		1.29	%		0.45	%		1.08	%


As of December 31, 2012:

(Dollars in thousands)	Commercial			Residential Real Estate			Commercial Real Estate			Construction and Land Development			Consumer and Other			Total
Specific Reserves:
Impaired loans	$	510		$	474		$	1,128		$	1,002		$	—		$	3,114
Purchase credit impaired loans		355			359			306			—			—			1,020
Total specific reserves		865			833			1,434			1,002			—			4,134
General reserves		1,870			1,036			1,964			743			41			5,654
Total	$	2,735		$	1,869		$	3,398		$	1,745		$	41		$	9,788
Total Loans	$	179,498		$	165,917		$	514,574		$	41,889		$	11,290		$	913,168
Allowance as percent of loans per category as of December 31, 2012		1.52	%		1.13	%		0.66	%		4.17	%		0.36	%		1.07	%

The overall general reserve as a percentage of loans collectively evaluated for impairment was 0.74% at June 30, 2013 as compared to 0.72% at December 31, 2012. The 2 basis point increase in this general reserve ratio as compared to December 31, 2012 was primarily a result of an increase in loans included in this category by $36.1 million since December 31, 2013 coupled with a decrease of 50.0% ($24.5 million) in special mention loans from December 31, 2012 to June 30, 2013 which have a higher allocation of general reserve.

Other Real Estate Owned

Real estate acquired by us as a result of foreclosure or by deed in lieu of foreclosure is classified as OREO. Write-downs in OREO are recorded at the time management believes additional deterioration in value has occurred and are charged to non-interest expense. At June 30, 2013, we had $18.1 million of OREO property, of which $9.6 million was a result of the Old Harbor acquisition, $526,000 was a result of the TBOM acquisition and $419,000 as a result of the Republic acquisition and all are covered by their respective Loss Share Agreements. At December 31, 2012, we had $19.5 million of OREO property, of which $13.2 million were a result of the Old Harbor, TBOM and Republic acquisitions and were covered under the respective Loss Share Agreements.

The following is a summary of other real estate owned as of June 30, 2013 and December 31, 2012:

	June 30, 2013						December 31, 2012
(Dollars in thousands)	Assets Not Subject to Loss Share Agreements		Assets Subject to Loss Share Agreements		Total		Assets Not Subject to Loss Share Agreements		Assets Subject to Loss Share Agreements		Total
Commercial real estate	$	5,215	$	8,651	$	13,866	$	5,708	$	10,372	$	16,080
Residential real estate		2,371		1,867		4,238		646		2,803		3,449
Total	$	7,586	$	10,518	$	18,104	$	6,354	$	13,175	$	19,529

At June 30, 2013, we had $805,000 of OREO under contract for sale, all of which is covered by Loss Share Agreements.

Investment Securities

We manage our securities available for sale portfolio, which represented 22.91% of our average earning asset base for the six months ended June 30, 2013, as compared to 16.39% at year ended December 31, 2012, to minimize interest rate risk, maintain sufficient liquidity, and maximize return. The portfolio includes municipal securities, residential mortgage-backed securities, and government agency collateralized mortgage obligations. Our financial planning anticipates income streams generated by the securities portfolio based on normal maturity, pay downs and reinvestment. During the six months ended June 30, 2013, the Company utilized excess liquidity to purchase $174.4 million in agency investment securities.

FDIC Loss Share Receivable

The FDIC Loss Share Receivable represents the estimated amounts due from the FDIC related to Loss Share Agreements. The receivable represents the discounted value of the FDIC’s portion of estimated losses expected to be realized on covered assets. The receivable is reviewed quarterly and adjusted for any changes in expected cash flows based on recent performance and expectations for future performance of covered assets. During the six months ended June 30, 2013, the Company received cash of $3.7 million from the FDIC, recorded an adjustment of $8.2 million related to the changes in estimated cash flows of covered assets which were partially offset by the recorded discount accretion of $477,000.

Deposits

Total deposits decreased by $10.9 million from December 31, 2012 to total deposits of $1.292 billion at June 30, 2013, due to normal customer activity. At June 30, 2013, non-interest bearing deposits represented approximately 35% of deposits compared to 33% at December 31, 2012. The Bank had no brokered deposits at June 30, 2013. However, the Bank does participate in the CDARS program (reciprocal) with balances of $31.5 million at June 30, 2013.

CAPITAL RESOURCES

We are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and prompt corrective action regulations involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action.

The Federal banking regulatory authorities have adopted certain “prompt corrective action” rules with respect to depository institutions. The rules establish five capital tiers: “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized,” and “critically undercapitalized.” The various federal banking regulatory agencies have adopted regulations to implement the capital rules by, among other things, defining the relevant capital measures for the five capital categories. An institution is deemed to be “well capitalized” if it has a total risk-based capital ratio of 10% or greater, a Tier 1 risk-based capital ratio of 6% or greater, and a Tier 1 leverage ratio of 5% or greater and is not subject to a regulatory order, agreement, or directive to meet and maintain a specific capital level. At June 30, 2013, the Company met the capital ratios of a “well capitalized” financial holding company with a total risk-based capital ratio of 20.01%, a Tier 1 risk-based capital ratio of 18.89%, and a Tier 1 leverage ratio of 11.26%. Depository institutions which fall below the “adequately capitalized” category generally are prohibited from making any capital distribution, are subject to growth limitations, and are required to submit a capital restoration plan. There are a number of requirements and restrictions that may be imposed on institutions treated as “significantly undercapitalized” and, if the institution is “critically undercapitalized,” the banking regulatory agencies have the right to appoint a receiver or conservator. On July 2, 2013, the Federal banking regulatory authorities announced a new capital framework that we will need to comply with by January 1, 2015. We are evaluating the impact of these changes to regulatory capital.

The following represents Bancorp’s and 1st’s regulatory capital ratios as of June 30, 2013 and December 31, 2012:

	Actual					Minimum for Well Capitalized					Minimum Capital Adequacy
	Amount		%			Amount		%			Amount		%
As of June 30, 2013
Total Capital to risk-weighted assets
Consolidated	$	179,388		20.01	%	$	89,651		10.00	%	$	71,721		8.00	%
1st United		160,610		17.98	%		89,339		10.00	%		71,471		8.00	%
Tier I capital to risk-weighted assets
Consolidated		169,325		18.89	%		53,790		6.00	%		35,860		4.00	%
1st United		150,547		16.85	%		53,603		6.00	%		35,736		4.00	%
Tier I capital to total average assets
Consolidated		169,325		11.26	%		75,157		5.00	%		60,126		4.00	%
1st United		150,547		10.04	%		74,994		5.00	%		59,995		4.00	%

As of December 31, 2012
Total Capital to risk-weighted assets
Consolidated	$	180,143		22.43	%	$	80,301		10.00	%	$	64,241		8.00	%
1st United		161,884		20.27	%		79,854		10.00	%		63,883		8.00	%
Tier I capital to risk-weighted assets
Consolidated		170,355		21.21	%		48,180		6.00	%		32,120		4.00	%
1st United		152,280		19.07	%		47,912		6.00	%		31,942		4.00	%
Tier I capital to total average assets
Consolidated		170,355		11.44	%		74,483		5.00	%		59,586		4.00	%
1st United		152,280		10.25	%		74,252		5.00	%		59,402		4.00	%

Bancorp has an effective shelf registration statement which may be drawn on from time to time if additional capital is required.

The Company paid a special dividend of $0.10 per common share or $3.4 million to holders of record during the year ended December 31, 2012. The Company paid the first quarterly cash dividend of $0.01 per share on May 8, 2013 to shareholders of record as of the close of business on May 2, 2013.

CASH FLOWS AND LIQUIDITY

Our primary sources of cash are deposit growth, maturities and amortization of loans and securities, operations, and borrowing. We use cash from these and other sources to first fund loan growth. Any remaining cash is used primarily to purchase a combination of short, intermediate, and longer-term investment securities.

We manage our liquidity position with the objective of maintaining sufficient funds to respond to the needs of depositors and borrowers and to take advantage of earnings enhancement opportunities. In addition to the normal inflow of funds from core-deposit growth together with repayments and maturities of loans and investments, we use other short-term funding sources such as brokered time deposits, securities sold under agreements to repurchase, overnight federal funds purchased from correspondent banks, the acceptance of short-term deposits from public entities, and Federal Home Loan Bank advances.

We monitor, stress test and manage our liquidity position on several bases, which vary depending upon the time period. As the time period is stress test expanded, other data is factored in, including estimated loan funding requirements, estimated loan payoffs, investment portfolio maturities or calls, and anticipated depository buildups or runoffs.

We classify all of our securities as available-for-sale to maintain significant liquidity. Our liquidity position is further enhanced by structuring our loan portfolio interest payments as monthly, complemented by retail credit and residential mortgage loans in our loan portfolio, resulting in a steady stream of loan repayments. In managing our investment portfolio, we provide for staggered maturities so that cash flows are provided as such investments mature.

Our securities portfolio, federal funds sold, and cash and due from financial institutions balances serve as primary sources of liquidity for 1st United. At June 30, 2013, we had approximately $434.0 million in cash and cash equivalents and securities, of which $33.3 million of securities, at fair value, were pledged.

At June 30, 2013, we had no short-term or long-term borrowings. At June 30, 2013, we had commitments to originate loans totaling $59.2 million and commitments of $84.3 million in unused lines of credit. Scheduled maturities of certificates of deposit during the twelve months following June 30, 2013 total $224.8 million and loans maturing in the next twelve months total approximately $224.9 million.

Management believes that we have adequate resources to fund all of our commitments, that substantially all of our existing commitments will be funded in the subsequent twelve months and, if so desired, that we can adjust the rates on certificates of deposit and other deposit accounts to retain deposits in a changing interest rate environment. At June 30, 2013, we had short-term lines available from correspondent banks totaling $66.0 million, Federal Reserve Bank discount window availability of $58.4 million, and borrowing capacity from the Federal Home Loan Bank of $32.5 million based on collateral pledged, for a total credit available of $156.9 million. In addition, being “well capitalized,” the Bank can access wholesale deposits for approximately $353.0 million based on current policy limits.

OFF-BALANCE SHEET ARRANGEMENTS

We do not currently engage in the use of derivative instruments to hedge interest rate risks. However, we are a party to financial instruments with off-balance sheet risks in the normal course of business to meet the financing needs of our clients.

At June 30, 2013, we had $59.2 million in commitments to originate loans, $84.3 million in unused lines of credit and $6.5 million in standby letters of credit. Commitments to extend credit are agreements to lend to a customer so long as there is no violation of any condition established in the contract. Commitments generally have termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Standby letters of credit are conditional commitments issued by us to guarantee the performance of a client to a third party. We use the same credit policies in establishing commitments and issuing letters of credit as we do for on-balance sheet instruments.

If commitments arising from these financial instruments continue to require funding at historical levels, management does not anticipate that such funding will adversely impact our ability to meet on-going obligations. In the event these commitments require funding in excess of historical levels, management believes current liquidity, available lines of credit from the FHLB, investment security maturities and our revolving credit facility provide a sufficient source of funds to meet these commitments.

CRITICAL ACCOUNTING POLICIES

Allowance for Loan Losses

Management views critical accounting policies as accounting policies that are important to the understanding of our financial statements and also involve estimates and judgments about inherently uncertain matters. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the consolidated balance sheets and assumptions that affect the recognition of income and expenses on the consolidated statements of income for the periods presented. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant change in subsequent periods are described as follows.

The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance for loan losses when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance for loan losses.

The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

The allowance consists of specific and general components. The specific component relates to loans that are individually evaluated for impairment. For such loans, an allowance for loan losses is established based on either the present value of expected future cash flows discounted at the loan’s effective interest rate, the market price of the loan, or, if the loan is collateral dependent, the fair value of the underlying collateral less estimated costs of sale.

A loan is considered impaired when, based on current information and events, it is probable that we will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays (loan payments made within 90 days of the due date) and payment shortfalls (which are tracked as past due amounts) on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Management considers loan payments made within 90 days of the due date to be insignificant payment delays. Payment shortfalls are traced as past due amounts. Impairment is measured on a loan by loan basis for commercial and construction and land development loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral less estimated costs of sale if the loan is collateral dependent.

The general component considers the actual historical charge-offs over a rolling three year period by portfolio segment. The actual historical charge-off ratio is adjusted for qualitative factors including delinquency trends, loss and recovery trends, classified asset trends, non-accrual trends, economic and business conditions and other external factors by portfolio segment of loans.

Goodwill and Intangible Assets

Goodwill represents the excess of cost over fair value of assets of business acquired. Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but instead tested for impairment at least annually. Intangible assets with estimable useful lives are amortized over their respective estimated useful lives to their estimated residual values. We acquired First Western Bank, on April 7, 2004, Equitable on February 29, 2008, Citrus on August 15, 2008, Republic on December 11, 2009, TBOM on December 17, 2010, Old Harbor on October 21, 2011 and AFI on April 1, 2012. Consequently, we were required to record the assets acquired, including identified intangible assets, and liabilities assumed at their fair value, which involves estimates based on third party valuations, such as appraisals, internal valuations based on discounted cash flow analyses or other valuation techniques. The determination of the useful lives of intangible assets is subjective, as is the appropriate amortization period for such intangible assets. In addition, purchase acquisitions typically result in recording goodwill, which is subject to ongoing periodic impairment tests based on the fair value of the reporting unit compared to its carrying amount, including goodwill. As of December 31, 2012, the required annual impairment test of goodwill was performed and no impairment existed as of the valuation date. If for any future period we determine that there has been impairment in the carrying value of our goodwill balances, we will record a charge to our earnings, which could have a material adverse effect on our net income, but not to our risk based capital ratios.

Income Taxes

Deferred income tax assets and liabilities are recorded to reflect the tax consequences on future years of temporary differences between revenues and expenses reported for financial statements and those reported for income tax purposes. Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be realized or settled. A valuation allowance is provided against deferred tax assets which are not likely to be realized.

FDIC Loss Share Receivable

The FDIC Loss Share Receivable represents the estimated amounts due from the FDIC related to the Loss Share Agreements which were booked as of the acquisition dates of Republic, TBOM, and Old Harbor. The receivable represents the discounted value of the FDIC’s reimbursed portion of estimated losses we expect to realize on Covered Assets acquired as a result of these acquisitions. The range of discount rates on the FDIC Loss Share Receivable was 2.12% to 3.97%. As losses are realized on Covered Assets, the portion that the FDIC pays the Company in cash for principal and up to 90 days of interest reduces the FDIC loss share receivable.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our net income is largely dependent on net interest income. Net interest income is susceptible to interest rate risk to the degree that interest-bearing liabilities mature or re-price on a different basis than interest-earning assets. When interest-bearing liabilities mature or re-price more quickly than interest-earning assets in a given period, a significant increase in market rates of interest could adversely affect net interest income. Similarly, when interest-earning assets mature or reprice more quickly than interest-bearing liabilities, falling interest rates could result in a decrease in net interest income. Net interest income is also affected by changes in the portion of interest-earning assets that are funded by interest-bearing liabilities rather than by other sources of funds, such as non-interest-bearing deposits and shareholders’ equity.

We manage our assets and liabilities through 1st United’s Asset Liability Committee (“ALCO”) Board Committee which meets quarterly and through our internal management committee which meets more frequently. Management closely monitors 1st United’s interest at risk calculations through model simulations and reports the results of its rate stress testing to ALCO on a quarterly basis.

We have established policy limits of risk, which are quantitative measures of the percentage change in net interest income (a measure of net interest income at risk) and the fair value of equity capital (a measure of economic value of equity (“EVE”) at risk) resulting from a hypothetical change in interest rates for maturities from one day to 30 years. We measure the potential adverse impact that changing interest rates may have on our short-term earnings, long-term value, and liquidity by employing simulation analysis through the use of computer modeling. The simulation model captures optionality factors such as call features and interest rate caps and floors imbedded in investment and loan portfolio contracts. As with any method of gauging interest rate risk, there are certain shortcomings inherent in the interest rate modeling methodology used by us. When interest rates change, actual movements in different categories of interest-earning assets and interest-bearing liabilities, loan prepayments, and withdrawals of time and other deposits, may deviate significantly from assumptions used in the model. Finally, the methodology does not measure or reflect the impact that higher rates may have on adjustable-rate loan customers’ ability to service their debts, or the impact of rate changes on demand for loan, lease, and deposit products. Our interest rate risk management goal is to avoid unacceptable variations in net interest income and capital levels due to fluctuations in market rates. Management attempts to achieve this goal by balancing, within policy limits, the volume of floating-rate liabilities with a similar volume of floating-rate assets, by keeping the average maturity of fixed-rate asset and liability contracts reasonably matched, by maintaining a pool of administered core deposits, and by adjusting pricing rates to market conditions on a continuing basis.

The balance sheet is subject to testing for interest rate shock possibilities to indicate the inherent interest rate risk. Average interest rates are shocked by plus or minus 100, 200 and 300 basis points (“bp”), although we may elect not to use particular scenarios that we determined are impractical in a current rate environment. 1st United has been consistently within policy limits on rates stress test up and down 100, 200, and 300 bp, both for net interest margin and EVE. Management has closely monitored 1st United’s gap position which has been liability sensitive during a stable rate environment. Variations on EVE have consistently shown low volatility.

	As of June 30, 2013
Interest rate scenarios	Percent change of net interest income			Percentage change of EVE
Up 300 basis points		3.04	%		(17.33	)%
Up 200 basis points		1.78	%		(12.27	)%
Up 100 basis points		0.47	%		(6.79	)%
Base
Down 100 basis points		(2.22	)%		0.78	%
Down 200 basis points		(6.63	)%		7.43	%
Down 300 basis points		(10.87	)%		18.29	%

We had a positive gap position based on contractual and prepayment assumptions for the next 12 months, with a positive cumulative interest rate sensitivity gap as a percentage of total earning assets of 0.75%.

ITEM 4. CONTROLS AND PROCEDURES

(a) Evaluation of Disclosure Controls and Procedures

Our Chief Executive Officer, Rudy E. Schupp, and Chief Financial Officer, John Marino, have evaluated our disclosure controls and procedures, as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this report. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer each have concluded that our disclosure controls and procedures are effective in ensuring that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Such controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed is accumulated and communicated to our management, including our principal executive and principal financial officers, to allow timely decisions regarding disclosure.

(b) Changes in Internal Control Over Financial Reporting

Our management, including our Chief Executive Officer and Chief Financial Officer, has reviewed our internal control over financial reporting, as defined in Rule 13a-15(f) under the Exchange Act. There were no changes in internal control over financial reporting that occurred during the fiscal quarter covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

From time-to-time we may be involved in litigation that arises in the normal course of business. As of the date of this Form 10-Q, we are not a party to any litigation that management believes could reasonably be expected to have a material adverse effect on our financial position or results of operations for an annual period.

ITEM 1A. RISK FACTORS

In addition to the other information set forth in this Quarterly Report, you should carefully consider the factors discussed in Part I, Item 1A. “Risk Factors” in our 2012 Form 10-K, as updated in our subsequent quarterly reports. The risks described in our 2012 Form 10-K are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

ITEM 5. OTHER INFORMATION

On July 23, 2013, we announced via press release our financial results for the three and six month periods ended June 30, 2013. A copy of our press release is included herein as Exhibit 99.1 and incorporated herein by reference.

The information in the immediate previous paragraph including Exhibit 99.1, shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933, except as shall be expressly set forth by specific reference in such filing.

On July 23, 2013, we amended the employment agreements (the “Amended Agreements”) with Warren S. Orlando, the Registrant’s Chairman, Rudy E. Schupp, the Registrant’s Chief Executive Officer, and John Marino, the Registrant’s President (each an “Executive” and collectively, the “Executives”). The Amended Agreements replace Exhibit C, which contains the formula for calculating the equity award program (the “Program”). The Program now includes a performance metric that measures the 3 year relative total shareholder return to a benchmark group.

The foregoing summary of the Amended Agreements is not complete and is qualified in its entirety by reference to the full text of the Amended Agreements, copies of which are included herein as Exhibits 10.1, 10.2, and 10.3 and are each incorporated herein by reference.

ITEM 6. EXHIBITS

(a) The following exhibits are included herein:


Exhibit No.		Name

10.1		Amendment No. 1 to the Third Amended and Restated Employment Agreement with Warren S. Orlando, dated as of July 23, 2013.

10.2		Amendment No. 1 to the Third Amended and Restated Employment Agreement with Rudy E. Schupp, dated as of July 23, 2013.

10.3		Amendment No. 1 to the Third Amended and Restated Employment Agreement with John Marino, dated as of July 23, 2013.

31.1		Certification Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended.

31.2		Certification Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended.

32.1		Certification Pursuant to 18 U.S.C. Section 1350.

99.1		Press release to announce earnings, dated July 23, 2013.

101.INS		XBRL Instance Document.

101.SCH		XBRL Taxonomy Extension Schema Document.

101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document.

101.LAB		XBRL Taxonomy Extension Label Linkbase Document.

101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document.

101.DEF		XBRL Taxonomy Extension Definition Linkbase Document.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	1st UNITED BANCORP, INC.
	(Registrant)

Date: July 23, 2013	By: /s/ John Marino
	JOHN MARINO
	PRESIDENT AND CHIEF FINANCIAL OFFICER
	(Mr. Marino is the principal financial officer and has been duly authorized to sign on behalf of the Registrant)

EXHIBIT INDEX

EXHIBIT	DESCRIPTION

10.1	Amendment No. 1 to the Third Amended and Restated Employment Agreement with Warren S. Orlando, dated as of July 23, 2013.

10.2	Amendment No. 1 to the Third Amended and Restated Employment Agreement with Rudy E. Schupp, dated as of July 23, 2013.

10.3	Amendment No. 1 to the Third Amended and Restated Employment Agreement with John Marino, dated as of July 23, 2013.

31.1	Certification Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended.

31.2	Certification Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended.

32.1	Certification Pursuant to 18 U.S.C. Section 1350.

99.1	Press release to announce earnings, dated July 23, 2013.

101.INS	XBRL Instance Document.

101.SCH	XBRL Taxonomy Extension Schema Document.

101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document.

101.LAB	XBRL Taxonomy Extension Label Linkbase Document.

101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document.

101.DEF	XBRL Taxonomy Extension Definition Linkbase Document.