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 March 31, 2014

OR

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

For the transition period from ____________________ to ____________________

Commission file number 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 April 11, 2014
Common stock, $.01 par value	34,489,547

1st UNITED BANCORP, INC.
March 31, 2014
INDEX

		PAGE NO.
PART I.	FINANCIAL INFORMATION
Item 1.	Consolidated Financial Statements (Unaudited)	3
	Consolidated Balance Sheets (Unaudited) as of March 31, 2014 and December 31, 2013	3
	Consolidated Statements of Operations (Unaudited) for the Three Months Ended March 31, 2014 and 2013	4
	Consolidated Statement of Comprehensive Income (Loss) (Unaudited) for the Three Months Ended March 31, 2014 and 2013	5
	Consolidated Statements of Changes in Shareholders’ Equity (Unaudited) for the Three Months Ended March 31, 2014 and 2013	6
	Consolidated Statements of Cash Flows (Unaudited) for the Three Months Ended March 31, 2014 and 2013	7
	Notes to Consolidated Financial Statements (Unaudited)	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	37
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	64
Item 4.	Controls and Procedures	65
PART II.	OTHER INFORMATION	66
Item 1.	Legal Proceedings	66
Item 1A.	Risk Factors	66
Item 5.	Other Information	66
Item 6.	Exhibits	66
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, 2013 (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 provision for loan loss and the FDIC loss share receivable;

● the frequency and magnitude of foreclosure of our loans;

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

● our customers’ willingness and ability 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;

1

● the limited trading activity of our common stock;

● the concentration of ownership of our common stock;

● 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.

2

ITEM 1.     FINANCIAL STATEMENTS

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

	March 31, 2014			December 31, 2013
ASSETS
Cash and due from financial institutions	$	77,995			$	197,813
Federal funds sold		319				408
Cash and cash equivalents		78,314				198,221
Securities available for sale		323,828				327,961
Loans, net of allowance of $10,033 and $9,648 at March 31, 2014 and December 31, 2013		1,149,316				1,124,571
Nonmarketable equity securities		9,488				9,977
Premises and equipment, net		16,634				16,944
Other real estate owned		16,238				18,580
Company-owned life insurance		24,869				24,710
FDIC loss share receivable		25,951				29,331
Goodwill		63,991				63,991
Core deposit intangible		3,612				3,807
Accrued interest receivable and other assets		26,154				27,020
Total assets	$	1,738,395			$	1,845,113
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits
Non-interest bearing	$	539,640			$	526,311
Interest bearing		889,741				1,021,602
Total deposits		1,429,381				1,547,913
Federal funds purchased and repurchase agreements		23,113				14,363
Federal Home Loan Bank Advances		35,015				35,018
Accrued interest payable and other liabilities		15,645				17,711
Total liabilities		1,503,154				1,615,005
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; 34,489,547 and 34,288,841 issued and outstanding at March 31, 2014 and December 31, 2013, respectively		345				343
Additional paid-in capital		240,023				239,606
Accumulated earnings (deficit)		417				(1,584	)
Accumulated other comprehensive loss		(5,544	)			(8,257	)
Total shareholders’ equity		235,241				230,108
Total liabilities and shareholders’ equity	$	1,738,395			$	1,845,113

See accompanying notes to the consolidated financial statements.

3

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

	Three months ended March 31,
	2014			2013
Interest income:
Loans, including fees	$	17,287		$	16,171
Securities available for sale		2,103			1,368
Federal funds sold and other		148			181
Total interest income		19,538			17,720
Interest expense:
Deposits		797			985
Federal funds purchased and repurchase agreements		4			6
Federal Home Loan Bank and Federal Reserve Bank borrowings		57			—
Total interest expense		858			991
Net interest income		18,680			16,729
Provision for loan losses		333			650
Net interest income after provision for loan losses		18,347			16,079
Non-interest income:
Service charges and fees on deposit accounts		809			796
Net gains on sales of other real estate owned		213			441
Net gains on sales of securities		—			122
Net gains on sales of loans held for sale		—			46
Increase in cash surrender value of Company owned life insurance		159			147
Adjustment to FDIC loss share receivable		(2,648	)		(2,820	)
Other		221			280
Total non-interest income		(1,246	)		(988	)
Non-interest expense:
Salaries and employee benefits		6,556			6,199
Occupancy and equipment		2,021			1,969
Data processing		984			930
Telephone		259			229
Stationery and supplies		74			91
Amortization of intangibles		195			172
Professional fees		417			387
Advertising		69			88
Regulatory assessment		420			358
Other real estate owned expense		401			579
Loan expense		361			347
Other		1,143			1,127
Total non-interest expense		12,900			12,476
Income before taxes		4,201			2,615
Income tax		1,515			995
Net income	$	2,686		$	1,620
Basic earnings per common share	$	0.08		$	0.05
Diluted earnings per common share	$	0.08		$	0.05

See accompanying notes to the consolidated financial statements.

4

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

	Three months ended March 31,
	2014			2013
Net income	$	2,686		$	1,620
Other comprehensive income:
Unrealized holding gains (losses) on securities available for sale		4,350			(749	)
Reclassification adjustment for security gains included in net income(1)		—			(122	)
Income tax benefit (expense)		(1,637	)		328
Other comprehensive income (loss)		2,713			(543	)
Comprehensive income	$	5,399		$	1,077

⁽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 March 31, 2014 and 2013 was $0 and $46, respectively.

See accompanying notes to the consolidated financial statements.

5

1st UNITED BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
Three months ended March 31, 2014 and 2013
(Dollars in thousands)
(unaudited)

	Shares of Common Stock		Common Stock		Additional Paid-In Capital			Accumulated Earnings (Deficit)			Accumulated Other Comprehensive Income (Loss)			Total Shareholders’ Equity
Balance at January 1, 2013		34,070,270	$	341	$	238,089		$	(3,998	)	$	2,258		$	236,690
Net income		—		—		—			1,620			—			1,620
Other comprehensive income (loss)		—		—		—			—			(543	)		(543	)
Stock-based compensation expense		—		—		343			—			—			343
Restricted stock grants		216,786		2		(2	)		—			—			—
Balance at March 31, 2013		34,287,056	$	343	$	238,430		$	(2,378	)	$	1,715		$	238,110
Balance at January 1, 2014		34,288,841	$	343	$	239,606		$	(1,584	)	$	(8,257	)	$	230,108
Net income		—		—		—			2,686			—			2,686
Other comprehensive income (loss)		—		—		—			—			2,713			2,713
Stock-based compensation expense		—		—		419			—			—			419
Dividend paid ($0.02 per share)		—		—		—			(685	)		—			(685	)
Restricted stock grants		200,706		2		(2	)		—			—			—
Balance at March 31, 2014		34,489,547	$	345	$	240,023		$	417		$	(5,544	)	$	235,241

See accompanying notes to the consolidated financial statements.

6

1st UNITED BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three months ended March 31, 2014 and 2013
(Dollars in thousands)
(unaudited)

	2014			2013
Cash flows from operating activities
Net income	$	2,686		$	1,620
Adjustments to reconcile net income to net cash provided by operating activities
Provision for loan losses		333			650
Depreciation and amortization		904			875
Net accretion of purchase accounting adjustments		(3,941	)		(5,047	)
Net amortization of securities		528			1,008
Adjustment to FDIC receivable		2,648			2,820
Increase in cash surrender value of company-owned life insurance		(159	)		(147	)
Stock-based compensation expense		419			343
Net gains on sales of securities		—			(122	)
Net gains on other real estate owned		(213	)		(441	)
Net loss on premises and equipment		9			5
Write-down of other real estate owned		244			464
Net gain on sale of loans held for sale		—			(46)
Loans originated for sale		—			(2,096	)
Proceeds from sale of loans held for sale		—			2,666
Net change in:
Deferred loan fees		(44	)		(78	)
Accrued interest receivable and other assets		(1,192	)		446
Accrued interest payable and other liabilities		(2,155	)		(760	)
Net cash provided by operating activities		67			2,160
Cash flows from investing activities
Proceeds from sales of securities		—			8,815
Proceeds from security maturities calls and prepayments		7,955			18,300
Purchases of securities		—			(79,707	)
Loan originations and payments, net		(23,737	)		(12,776	)
Cash received from FDIC loss sharing agreements		1,003			2,726
Redemption (purchase) of nonmarketable equity securities, net		489			584
Proceeds from the sale of other real estate owned		4,918			2,626
Additions to premises and equipment, net		(169	)		(30	)
Net cash provided by (used in) investing activities		(9,541	)		(59,462	)
Cash flows from financing activities
Net change in deposits		(118,498	)		(2,608	)
Net change in federal funds purchased and repurchase agreements		8,750			(3,245	)
Dividends paid		(685	)		—
Net cash provided by (used in) financing activities		(110,433	)		(5,853	)
Net change in cash and cash equivalents		(119,907	)		(63,155	)
Beginning cash and cash equivalents		198,221			207,117
Ending cash and cash equivalents	$	78,314		$	143,962
Supplemental cash flow information:
Interest paid	$	819		$	972
Taxes paid		—			125
Transfer of loans to other real estate owned		2,607			2,247

See accompanying notes to the consolidated financial statements.

7

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 1^st United. 1^st United is a state chartered commercial bank that provides financial services through its five offices in Palm Beach County, three 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 and one office each in Orange and Hillsborough Counties. Its primary deposit products are checking, savings, and term certificate accounts, and its primary lending products are commercial and residential mortgages, 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 cash flow from operations of businesses. However, the customers’ ability to repay their loans is dependent on the real estate and general market conditions. Other financial instruments, which potentially represent concentrations of credit risk, include deposit accounts in other financial institutions and federal funds sold.

EEL is a commercial finance subsidiary that from time to time will hold foreclosed assets, performing loans or non-performing loans. At March 31, 2014, EEL held $2,388 in 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, 2013.

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 1,286,145 and 2,571,673 shares of common stock were not considered in computing diluted earnings per share for the quarters ended March 31, 2014 and 2013, 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.

8

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. 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 basis points of the allowance for loan losses at March 31, 2014 and December 31, 2013, respectively.

9

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.

NOTE 2 – ACQUISITIONS

Enterprise Bancorp

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 a wholly-owned subsidiary of the Company with and into EBI and 1st United Bank acquired Enterprise Bank through the merger of Enterprise Bank with and into 1st United Bank (collectively, the “Merger”).

10

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

NOTE 2 – ACQUISITIONS (continued)

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(less the $400 holdback described below), $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 of a share of EBI common stock was entitled to consideration from the Company equal to approximately $6.01 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 $400 to defray potential damages and related expenses incurred to defend or settle certain litigation. The Company does not anticipate the litigation and related costs will exceed the $400. The Company recorded goodwill associated with the transaction of approximately $5,492 which is not deductible for tax purposes. The Company acquired a net deferred tax liability of $233 and recorded a deferred tax asset in other assets as a result of purchase accounting adjustments.

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, and deposits with the assistance of third party valuations. The valuation of FHLB advances was based on current rates for similar borrowings. The estimated fair values over loans are subject to refinement as additional information relative to the closing date fair values becomes available through the measurement period.

The acquisition of EBI is consistent with the Company’s plans to continue to enhance its market area and competitive position within the state of Florida. This acquisition expands the Company’s 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 contributed to the resulting goodwill in the transaction. The fair value of assets acquired and liabilities assumed on July 1, 2013 were as follows:

	July 1, 2013
Cash	$	44,576
Securities available for sale		3,972
Federal Home Loan Bank stock		1,855
Loans		159,168
Core deposit intangible		1,283
Fixed assets		421
Other assets		1,039
TOTAL ASSETS ACQUIRED	$	212,314
Deposits	$	177,160
Federal Home Loan Advances		35,025
Other		906
TOTAL LIABILITIES ASSUMED	$	213,091
Excess of liabilities assumed over assets acquired	$	777
Cash paid		4,715
Goodwill	$	5,492

11

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

NOTE 2 – ACQUISITIONS (continued)

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, 2013, 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 March 31,
	2014(1)		2013
Net interest and other income	$	17,434	$	20,834
Net income		2,686		2,826
Basic earnings per share		0.08		0.08
Diluted earnings per share		0.08		0.08

⁽¹⁾ The merger was effective July 1, 2013. There were no proforma adjustments subsequent to July 1, 2013.

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
March 31, 2014
U.S. Treasury	$	934	$	—	$	(8	)	$	926
Municipal Securities		6,368		—		(355	)		6,013
Commercial mortgaged-backed		4,444		—		(308	)		4,136
Residential collateralized mortgage obligations		554		—		(4	)		550
Residential mortgage-backed		320,417		604		(8,818	)		312,203
	$	332,717	$	604	$	(9,493	)	$	323,828
December 31, 2013
U.S. Treasury	$	935	$	—	$	(17	)	$	918
Municipal Securities		6,368		—		(764	)		5,604
Commercial mortgaged-backed		4,469		—		(395	)		4,074
Residential collateralized mortgage obligations		826		—		(8	)		818
Residential mortgage-backed		328,602		442		(12,497	)		316,547
	$	341,200	$	442	$	(13,681	)	$	327,961

At March 31, 2014 and December 31, 2013, 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 March 31, 2014 and December 31, 2013 were issued or sponsored by U.S. government agencies.

The amortized cost and fair value of debt securities at March 31, 2014 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		934		926
Due after ten years		6,368		6,013
Commercial mortgage-backed		4,444		4,136
Residential mortgage-backed and residential collateralized mortgage obligations		320,971		312,753
	$	332,717	$	323,828

12

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

NOTE 3 – SECURITIES (continued)

Securities as of March 31, 2014 and December 31, 2013 with a fair value of $32,636 and $30,208, 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 months ended March 31, 2014 and 2013, respectively, were as follows:

	Three months ended March 31,
	2014		2013
Proceeds from sale	$	—	$	8,815
Gross gain	$	—	$	122
Gross (loss)		—		—
Net gains on sales of securities	$	—	$	122

Gross unrealized losses at March 31, 2014 and December 31, 2013, 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
March 31, 2014
U.S. Treasury	$	926	$	(8	)	$	—	$	—		$	926	$	(8	)
Municipal securities		5,568		(299	)		445		(56	)		6,013		(355	)
Residential collateralized mortgage obligations		—		—			550		(4	)		550		(4	)
Commercial mortgaged-backed		4,136		(308	)		—		—			4,136		(308	)
Residential mortgage-backed		256,848		(8,270	)		9,064		(548	)		265,912		(8,818	)
	$	267,478	$	(8,885	)	$	10,059	$	(608	)	$	277,537	$	(9,493	)
December 31, 2013
U.S. Treasury	$	918	$	(17	)	$	—	$	—		$	918	$	(17	)
Municipal securities		5,190		(678	)		413		(86	)		5,603		(764	)
Residential collateralized mortgage obligations		—		—			818		(8	)		818		(8	)
Commercial mortgaged-backed		—		—			4,073		(395	)		4,073		(395	)
Residential mortgage-backed		277,291		(12,353	)		3,644		(144	)		280,935		(12,497	)
	$	283,399	$	(13,048	)	$	8,948	$	(633	)	$	292,347	$	(13,681	)

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 March 31, 2014, there were 84 available for sale securities with unrealized losses of which one was a U.S. Treasury security, eight were municipal securities, three were residential collateralized mortgage obligations, one was a commercial mortgage-backed security and 71 were residential mortgage backed securities. At December 31, 2013, there were 92 available for sale securities with unrealized losses of which one was a U.S. Treasury security, eight were municipal securities, three were residential collateralized mortgage obligations, one was a commercial mortgage-backed security and 79 were residential mortgage-backed securities. At March 31, 2014 and December 31, 2013, securities with unrealized losses had declined in fair value by 3.42% and 4.68%, respectively, from the Company’s amortized cost basis. The decline in fair value is attributable to changes in interest rates and liquidity, and not credit quality. The Company does not have the intent to sell these mortgage backed securities and it is likely that it will not be required to sell these securities prior to their anticipated recovery. The Company does not consider these securities to be other–than–temporarily impaired at March 31, 2014.

13

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

NOTE 4 – LOANS

Loans at March 31, 2014 and December 31, 2013 were as follows:

	March 31, 2014							December 31, 2013
	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	$	26,444	$	185,118	$	211,562		$	27,573	$	182,691	$	210,264
Real estate:
Residential		61,389		117,017		178,406			68,259		110,585		178,844
Commercial		135,510		581,277		716,787			144,311		555,540		699,851
Construction and land development		6,325		35,043		41,368			6,505		28,781		35,286
Consumer and other		—		10,943		10,943			2		9,733		9,735
	$	229,668	$	929,398		1,159,066		$	246,650	$	887,330		1,133,980
Add (deduct):
Unearned income and net deferred loan costs						283							239
Allowance for loan losses						(10,033	)						(9,648	)
					$	1,149,316						$	1,124,571

The Company has segregated and evaluated 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 Brevard, Broward, Hillsborough, Indian River, Miami-Dade, Orange, Hillsborough, Palm Beach and Pinellas 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 are 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 unsecured 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.

14

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 months ended March 31, 2014 and 2013 was as follows:

	Commercial			Residential Real Estate			Commercial Real Estate			Construction and Land Development			Consumer and Other		Total
Beginning balance, January 1, 2014	$	3,084		$	2,437		$	3,550		$	485		$	92	$	9,648
Provisions for loan losses		(382	)		414			292			(4	)		13		333
Loans charged off		(86	)		(42	)		(169	)		—			—		(297	)
Recoveries		29			—			318			2			—		349
Ending Balance, March 31, 2014	$	2,645		$	2,809		$	3,991		$	483		$	105	$	10,033

	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		768		119			281			(534	)		16			650
Loans charged off		—		(53	)		(58	)		(898	)		(16	)		(1,025	)
Recoveries		16		1			2			91			—			110
Ending Balance, March 31, 2013	$	3,519	$	1,936		$	3,623		$	404		$	41		$	9,523

Allowance for Loan Losses Allocation

As of March 31, 2014:	Commercial		Residential Real Estate		Commercial Real Estate		Construction and Land Development		Consumer and Other		Total
Specific Reserves:
Impaired loans	$	735	$	847	$	232	$	269	$	10		2,093
Purchase credit impaired loans		463		320		689		—		—		1,472
Total specific reserves		1,198		1,167		921		269		10		3,565
General reserves		1,447		1,642		3,070		214		95		6,468
Total	$	2,645	$	2,809	$	3,991	$	483	$	105	$	10,033
Loans individually evaluated for impairment	$	3,791	$	3,347	$	16,898		3,791	$	10	$	27,837
Purchase credit impaired loans		7,369		12,784		32,784		2,265		24		55,226
Loans collectively evaluated for impairment		200,402		162,275		667,105		35,312		10,909		1,076,003
Total	$	211,562	$	178,406	$	716,787	$	41,368	$	10,943	$	1,159,066

15

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

NOTE 4 – LOANS (continued)

As of December 31, 2013:	Commercial		Residential Real Estate		Commercial Real Estate		Construction and Land Development		Consumer and Other		Total
Specific Reserves:
Impaired loans	$	835	$	460	$	413	$	271	$	—	$	1,979
Purchase credit impaired loans		464		269		278		—		—		1,011
Total specific reserves		1,299		729		691		271		—		2,990
General reserves		1,785		1,708		2,859		214		92		6,658
Total	$	3,084	$	2,437	$	3,550	$	485	$	92	$	9,648
Loans individually evaluated for impairment	$	3,937	$	3,567	$	19,625	$	3,830	$	—	$	30,959
Purchase credit impaired loans		7,426		16,556		38,854		2,354		25		65,215
Loans collectively evaluated for impairment		198,901		158,721		641,372		29,102		9,710		1,037,806
Total	$	210,264	$	178,844	$	699,851	$	35,286	$	9,735	$	1,133,980

The following tables present loans individually evaluated for impairment by class of loan as of March 31, 2014 and December 31, 2013, respectively.

	Recorded Investment in Impaired Loans With Allowance
As of March 31, 2014	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	$	841	$	732	$	125	$	716	$	716	$	176
HELOCs and equity		207		200		115		563		563		431
Commercial:
Secured – non-real estate		311		311		17		3,507		1,464		666
Secured – real estate		54		52		52		—		—		—
Unsecured		—		—		—		—		—		—
Commercial Real Estate:
Owner occupied		302		274		9		902		902		34
Non-owner occupied		465		324		67		2,576		2,576		122
Multi-family		—		—		—		—		—		—
Construction and Land Development:
Construction		—		—		—		—		—		—
Improved land		—		—		—		526		526		269
Unimproved land		—		—		—		—		—		—
Consumer and other		—		—		—		10		10		10
Total March 31, 2014	$	2,180	$	1,893	$	385	$	8,800	$	6,757	$	1,708

16

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
As of March 31, 2014	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	$	1,388	$	1,090	$	151	$	46
HELOCs and equity		59		—		—		—
Commercial:
Secured – non-real estate		—		—		1,280		801
Secured – real estate		—		—		1,163		1,163
Unsecured		—		—		28		—
Commercial Real Estate:
Owner occupied		—		—		5,960		5,388
Non-owner occupied		1,199		1,032		6,525		6,402
Multi-family		—		—		—		—
Construction and Land Development:
Construction		—		—		—		—
Improved land		—		—		7,524		3,265
Unimproved land		—		—		—		—
Consumer and other		—		—		—		—
Total March 31, 2014	$	2,646	$	2,122	$	22,631	$	17,065

17

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
As of December 31, 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	$	1,089	$	192	$	632	$	632	$	171
HELOCs and equity		39		38		38		191		191		59
Commercial:
Secured – non-real estate		359		357		53		3,719		1,537		730
Secured – real estate		54		52		52		—		—		—
Unsecured		—		—		—		—		—		—
Commercial Real Estate:
Owner occupied		302		274		23		1,469		1,049		41
Non-owner occupied		466		329		76		4,291		4,283		273
Multi-family		—		—		—		—		—		—
Construction and Land Development:
Construction		—		—		—		—		—		—
Improved land		—		—		—		527		527		271
Unimproved land		—		—		—		—		—		—
Consumer and other		—		—		—		—		—		—
Total December 31, 2013	$	2,474	$	2,139	$	434	$	10,829	$	8,219	$	1,545

18

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
As of December 31, 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	$	1,451	$	1,170	$	106	$	—
HELOCs and equity		59		—		447		447
Commercial:
Secured – non-real estate		—		—		1,126		810
Secured – real estate		—		—		1,181		1,181
Unsecured		—		—		—		—
Commercial Real Estate:
Owner occupied		—		—		5,437		5,287
Non-owner occupied		1,597		1,374		7,144		7,029
Multi-family		—		—		—		—
Construction and Land Development:
Construction		—		—		—		—
Improved land		—		—		7,597		3,303
Unimproved land		—		—		—		—
Consumer and other		—		—		—		—
Total December 31, 2013	$	3,107	$	2,544	$	23,038	$	18,057

19

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 the three months ended March 31, 2014 and 2013, respectively, were as follows:

	Three months ended March 31, 2014						Three months ended March 31, 2013
	Average Recorded Investment		Interest Income		Cash Basis		Average Recorded Investment		Interest Income		Cash Basis
Residential Real Estate:
First mortgages	$	2,593	$	7	$	8	$	3,994	$	4	$	4
HELOC and equity		763		4		3		1,306		2		2
Commercial:
Secured non real estate		2,618		12		12		3,127		25		26
Secured real estate		1,222		11		15		1,274		13		13
Unsecured		—		—		—		—		—		—
Commercial Real Estate:
Owner occupied		6,582		61		37		10,748		81		76
Non-owner occupied		10,375		95		95		11,880		86		86
Multifamily		—		—		—		1,560		—		—
Construction and Land Development:
Construction		—		—		—		—		—		—
Improved Land		3,810		2		2		3,566		2		2
Unimproved Land		—		—		—		—		—		—
Consumer and Other:		10		—		—		—		—		—
Total		27,973	$	192	$	172	$	37,455	$	213	$	209

Generally, interest accrued on loans 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 installment loans are generally charged-off after 90 plus days past due 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. During the three months ended March 31, 2014 and 2013, interest income not recognized on non-accrual loans (but would have been recognized if these loans were current) was approximately $153 and $251, respectively.

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. Nonperforming loans represent loans which are not performing in accordance with the contractual loan agreements. Included in the tables that follow are loans in non-accrual and 90 plus days past due categories with a carrying value of $14,929 and $15,836 as of March 31, 2014 and December 31, 2013, respectively. There were one loan which was 90 days or greater past due and accruing interest income at March 31, 2014 for $361 and no loans which were 90 days or greater past due and accruing interest income at December 31, 2013. Nonperforming loans and impaired loans are defined differently. As such, some loans may be included in both categories, whereas other loans may only be included in one category.

20

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

NOTE 4 – LOANS (continued)

The book balance of loans accounted for under ASC 310-30 at March 31, 2104 and December 31, 2013 which were contractually accruing 30 to 59 days past due were $0 and $6,508, respectively; 30 to 59 days contractually past due and non-accrual were $0 and $0, respectively; contractually 60 to 89 days past due and accruing were $0 and $0, respectively; contractually 60 to 89 days past due and non-accrual were $434 and $0, respectively; contractually 90 plus days past due and accruing were $0 and $0, respectively and contractually 90 plus days past due and non-accrual were $13,534 and $28,815, 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 $361 and $0 at March 31, 2014 and December 31, 2013, respectively.

The following tables summarize past due and non-accrual loans by the number of days past due as of March 31, 2014 and December 31, 2013

	Accruing 30 - 59				Accruing 60-89				Non-Accrual/Accrual and 90 days and over past due				Total
	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	$	260	$	447	$	—	$	—	$	2,626	$	46	$	2,886	$	493
HELOCs and equity		149		58		—		—		256		418		405		476
Commercial:
Secured – non-real estate		—		326		—		270		—		1,459		—		2,055
Secured – real estate		—		—		—		352		401		361		401		713
Unsecured		—		—		—		—		—		—		—		—
Commercial Real Estate:
Owner occupied		—		1,674		—		—		713		2,834		713		4,508
Non-owner occupied		502		—		—		—		1,918		482		2,420		482
Multi-family		—		—		—		—		58		—		58		—
Construction and Land Development:
Construction		—		—		—		—		—		—		—		—
Improved land		—		—		—		—		—		3,650		—		3,650
Unimproved land		—		—		—		—		34		—		34		—
Consumer and other		—		—		—		—		—		34		—		34
Total March 31, 2014	$	911	$	2,505	$	—	$	622	$	6,006	$	9,284	$	6,917	$	12,411

21

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/Accrual and 90 days and over past due				Total
	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	$	306	$	1,085	$	—	$	24	$	3,137	$	48	$	3,443	$	1,157
HELOCs and equity		27		—		162		—		96		491		285		491
Commercial:
Secured – non-real estate		—		461		—		—		39		1,518		39		1,979
Secured – real estate		—		—		—		—		416		—		416		—
Unsecured		—		—		—		—		—		—		—		—
Commercial Real Estate:
Owner occupied		—		—		—		1,737		722		1,115		722		2,852
Non-owner occupied		—		—		—		—		2,261		2,182		2,261		2,182
Multi-family		—		—		—		—		62		—		62		—
Construction and Land Development:
Construction		—		—		—		—		—		—		—		—
Improved land		—		—		—		—		—		3,688		—		3,688
Unimproved land		—		—		—		—		35		—		35		—
Consumer and other		—		34		—		—		—		26		—		60
Total December 31, 2013	$	333	$	1,580	$	162	$	1,761	$	6,768	$	9,068	$	7,263	$	12,409

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 March 31, 2014 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 4.18% and 4.38% as of March 31, 2014 and December 31, 2013. Troubled debt restructuring loans are considered impaired.

22

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

NOTE 4 – LOANS (continued)

During the quarter ended March 31, 2014, the Company modified $134 in residential real estate loans. During the quarter ended March 31, 2013, the Company modified $272 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 the Company’s performing troubled debt restructurings as of March 31, 2014 and December 31, 2013, respectively, all of which were performing in accordance with the restructured terms:

	March 31, 2014		December 31, 2013
Residential real estate	$	907	$	834
Commercial real estate		12,907		15,341
Construction and land development		142		143
Commercial		2,279		2,328
Total	$	16,235	$	18,646

Of the $16,235 of performing troubled debt restructurings at March 31, 2014, $11,756 was classified as special mention and $4,479 was classified as substandard. Of the $18,646 of performing troubled debt restructurings at December 31, 2013, $11,062 was classified as special mention and $7,584 was classified as substandard. These loans had a specific reserve in the allowance for loan losses at March 31, 2014 and December 31, 2013 of $622 and $635, respectively.

Total non-accruing troubled debt restructurings as of March 31, 2014 and December 31, 2013, respectively, were as follows:

	March 31, 2014		December 31, 2013
Residential real estate	$	317	$	330
Commercial real estate		3,332		3,307
Construction and land development		3,266		3,303
Commercial		473		536
Consumer		10		—
Total	$	7,398	$	7,476

These loans had a specific reserve in the allowance for loan losses at March 31, 2014 and December 31, 2013 of $487 and $608, respectively. There were 2 loans for $1,740 which were modified within the twelve months ended March 31, 2014 that defaulted within the three months ending March 31, 2014 and had a specific reserve of $10 at March 31, 2014. There were no loans modified within the twelve months ended March 31, 2013 which defaulted within the three months ended March 31, 2013.

During the three month period ended March 31, 2014, the Company lowered the interest rate on $470 of loans prior to maturity which the Company did not consider to be troubled debt restructurings. During the year ended December 31, 2013, the Company lowered the interest rate on $10,618 of loans 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 March 31, 2014. The Company has allocated $1,109 and $1,243 of specific reserves to customers whose loan terms have been modified in troubled debt restructurings as of March 31, 2014 and December 31, 2013, respectively.

23

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

NOTE 4 – LOANS (continued)

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.

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 March 31, 2014 or December 31, 2013.

24

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
As of March 31, 2014	Total		Pass		Special Mention		Substandard		Pass		Special Mention		Substandard
Residential Real Estate:
First mortgages	$	113,992	$	49,610	$	1,060	$	2,626	$	55,887	$	4,096	$	713
HELOCs and equity		64,414		7,805		31		256		49,943		510		5,869
Commercial:
Secured – non-real estate		148,293		16,572		311		—		127,339		1,664		2,407
Secured – real estate		55,813		9,086		—		401		44,813		800		713
Unsecured		7,456		75		—		—		6,866		107		408
Commercial Real Estate:
Owner occupied		222,285		25,306		7,562		713		181,004		313		7,387
Non-owner occupied		447,417		86,389		406		1,918		350,655		4,990		3,059
Multi-family		47,085		13,158		—		58		33,869		—		—
Construction and Land Development:
Construction		12,480		—		—		—		12,480		—		—
Improved land		17,724		2,869		—		—		8,169		2,644		4,042
Unimproved land		11,164		3,422		—		34		7,708		—		—
Consumer and other		10,943		—		—		—		10,367		454		122
Total March 31, 2014	$	1,159,066	$	214,292	$	9,370	$	6,006	$	889,100	$	15,578	$	24,720

25

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
As of December 31, 2013	Total		Pass		Special Mention		Substandard		Pass		Special Mention		Substandard
Residential Real Estate:
First mortgages	$	117,830	$	56,000	$	1,121	$	3,137	$	52,822	$	4,032	$	718
HELOCs and equity		61,014		7,712		31		258		46,437		629		5,947
Commercial:
Secured – non-real estate		145,298		17,555		319		39		123,168		1,733		2,484
Secured – real estate		57,052		9,168		—		416		45,955		800		713
Unsecured		7,914		76		—		—		7,311		114		413
Commercial Real Estate:
Owner occupied		209,467		26,129		7,638		722		167,238		315		7,425
Non-owner occupied		451,982		93,010		409		2,261		345,941		5,009		5,352
Multi-family		38,402		14,080		—		62		24,260		—		—
Construction and Land Development:
Construction		7,366		—		—		—		7,366		—		—
Improved land		16,538		2,943		—		—		6,851		2,656		4,088
Unimproved land		11,382		3,527		—		35		7,820		—		—
Consumer and other		9,735		2		—		—		9,135		480		118
Total December 31, 2013	$	1,133,980	$	230,202	$	9,518	$	6,930	$	844,304	$	15,768	$	27,258

As part of the AFI merger in 2012, the 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 March 31, 2014 was approximately $55,226, net of a discount of $27,130. The Company maintained an allowance for loan losses of $1,472 at March 31, 2014 for loans acquired with deteriorated credit quality. The Company did not acquire any loans for which there was evidence of credit deterioration since origination in connection with the acquisition of EBI. During the three months ended March 31, 2014 and 2013, the Company accreted $2,704 and $2,852, respectively, into interest income on acquired loans. The remaining accretable discount was $17,643 at March 31, 2014. In addition, $52,958 of the $55,226 in loans is covered by the FDIC loss share agreements.

The initial fair value for loans acquired from EBI 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 the date of each acquisition, respectively. The fair value of loans acquired from EBI was $159,168. The gross contractual amount acquired was $161,078 and the Company expects to collect a majority of this amount based on current information available.

26

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

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 March 31, 2014 and December 31, 2013, are summarized below.

	Fair value measurements at March 31, 2014 using
	March 31, 2014		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:
U.S. Treasury	$	926	$	—	$	926	$	—
Municipal securities		6,013		—		6,013		—
Commercial mortgage-backed		4,136		—		4,136		—
Residential collateralized mortgage obligations		550		—		550		—
Residential mortgage-backed		312,203		—		312,203		—
	$	323,828	$	—	$	323,828	$	—

	Fair value measurements at December, 2013 using
	December 31, 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:
U.S. Treasury	$	918	$	—	$	918	$	—
Municipal securities		5,604		—		5,604		—
Commercial mortgage-backed		4,074		—		4,074		—
Residential collateralized mortgage obligations		818		—		818		—
Residential mortgage-backed		316,547		—		316,547		—
	$	327,961	$	—	$	327,961	$	—

27

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

NOTE 5 – FAIR VALUES (continued)

There were no liabilities measured at fair value on a recurring basis at March 31, 2014 and December 31, 2013.

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 on collateral for impaired loans and other real estate owned which has not been sold to the appraisal value to arrive at fair value. Based on our most recent analysis, no discounts to current appraisals have been warranted.

The significant unobservable inputs used in the fair value measurements for Level 3 assets measured at fair value on a nonrecurring basis as of March 31, 2014 and December 31, 2013 are as follows:

Impaired Loans	Valuation Techniques	Range of Unobservable Inputs
Residential	Appraisals of collateral value	Adjustment for sales comparatives related to physical features including gross living area, site size, location and condition, generally a decline of 10% to an increase of 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 35% to no change
Other Real Estate
Residential	Appraisals of collateral value	Adjustment for sales comparatives related to physical features including gross living area, site size, location and condition, generally an decline of 10% to an increase of 25%
Commercial	Appraisals of collateral value	Adjustment for age and physical conditions of comparable sales, generally a decline of 20% to an increase of 30%

28

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

NOTE 5 – FAIR VALUES (continued)

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

	Fair value measurements at March 31, 2014 using
	March 31, 2014		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	$	1,364	$	—	$	—	$	1,364
Commercial		1,092		—		—		1,092
Commercial real estate		3,844		—		—		3,844
Construction and land development		257		—		—		257
Consumer and other		—		—		—		—
	$	6,557	$	—	$	—	$	6,557
Other real estate owned:
Commercial real estate	$	11,751	$	—	$	—	$	11,751
Residential real estate		4,487		—		—		4,487
	$	16,238	$	—	$	—	$	16,238

At March 31, 2014, impaired loans, which had a specific allowance for loan losses allocated, had a carrying amount of $8,650, with a valuation allowance of $2,093 resulting in an additional provision of loan losses of $412 during the three months ended March 31, 2014.

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 $16,238, and had no valuation allowance at March 31, 2014. During the three months ended March 31, 2014 the Company recorded write-downs to other real estate owned of $244 due to reductions in the estimated fair value of properties.

	Fair value measurements at December 31, 2013 using
	December 31, 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	$	1,490	$	—	$	—	$	1,490
Commercial		1,111		—		—		1,111
Commercial real estate		5,522		—		—		5,522
Construction and land development		256		—		—		256
Consumer and other		—		—		—		—
	$	8,379	$	—	$	—	$	8,379
Other real estate:
Commercial	$	14,740	$	—	$	—	$	14,740
Residential		3,840		—		—		3,840
	$	18,580	$	—	$	—	$	18,580

29

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

NOTE 5 – FAIR VALUES (continued)

At December 31, 2013, impaired loans, which had a specific allowance for loan losses allocated, had a carrying amount of $10,358, with a valuation allowance of $1,979. For the quarter ended March 31, 2013, we recorded additional provision for loan losses of $787.

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 $18,580, and had no valuation allowance at December 31, 2013. During the three months ended March 31, 2013, the Company recorded write-downs to other real estate owned of $464 due to reductions in the estimated fair value of properties.

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 2014 and 2013.

Carrying amount and estimated fair values of financial instruments were as follows at March 31, 2014 and December 31, 2013, respectively.

	March 31, 2014				December 31, 2103
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Financial assets
Cash and cash equivalents	$	78,314	$	78,314	$	198,221	$	198,221
Securities available for sale		323,828		323,828		327,961		327,961
Loans, net, including loans held for sale		1,149,316		1,152,545		1,124,571		1,130,355
Nonmarketable equity securities		9,488		N/A		9,977		N/A
FDIC loss share receivable		25,951		25,951		29,331		29,331
Accrued interest receivable		3,988		3,988		3,991		3,991
Financial liabilities
Deposits	$	1,429,381	$	1,430,115	$	1,547,913	$	1,548,743
Federal funds purchased and repurchase agreements		23,113		23,114		14,363		14,364
Federal Home Loan Bank advances		35,015		35,165		35,018		35,167
Accrued interest payable		321		321		282		282

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 re-price 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.

30

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.

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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 March 31,
	2014			2013
Beginning of period	$	29,331		$	48,568
Cash received		(1,003	)		(2,726	)
Discount accretion		21			238
Reduction for changes in cash flow estimates		(2,669	)		(3,058	)
Other		271			—
End of period	$	25,951		$	43,022

As of March 31, 2014 and December 31, 2013, 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.

Pursuant to each loss share agreement, the Company calculates an estimated amount due to the FDIC related to losses in acquired assets. An amount is payable at the end of the year of each respective loss share agreement and is generally based on the actual losses incurred. At March 31, 2014 and December 31, 2013, the Company calculated $4,488 and 4,218 due to the FDIC pursuant to these contracts and recorded these amounts in other liabilities in the consolidated balance sheets.

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.

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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 March 31,
	2014		2013
Net income	$	2,686	$	1,620
Basic EPS:
Weighted average shares of common stock outstanding		33,847,574		33,772,105
Basic EPS	$	0.08	$	0.05
Diluted EPS:
Weighted average shares of common stock outstanding		33,847,574		33,772,105
Effect of dilutive shares:
Stock options		490,757		77,029
Restricted stock		113,892		37,596
Total dilutive shares		34,452,223		33,886,730
Diluted EPS	$	0.08	$	0.05

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 was as follows at March 31, 2014 and December 31, 2013.

	March 31, 2014				December 31, 2013
	Fixed Rate		Variable Rate		Fixed Rate		Variable Rate
Commitments to make loans	$	32,196	$	18,450	$	29,104	$	22,557
Unused lines of credit		7,029		90,229		9,283		98,035
Stand-by letters of credit		6,882		707		7,205		782

The fixed rate loan commitments have interest rates ranging from 3.0% to 6.25% and the underlying loans have maturities ranging from seven months to 30 years.

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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.

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Recent Mergers & Acquisitions

Merger of Enterprise Bancorp, Inc.

On July 1, 2013, we completed our 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 “EBI Merger Agreement”), dated March 22, 2013, as amended, by and among the Company, 1st United Bank, EBI and Enterprise. 1st United acquired approximately $159.2 million in loans, with an average yield of 5.08%, and approximately $177 million of deposits, with an average cost 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 EBI Merger Agreement) which was comprised of $5.1 million in cash, $20.1 million in classified and non-performing loans, $18.3 million in non-investment grade and non-performing investments, other investments and derivatives and $1.7 million in OREO and other repossessed assets. The Company did not acquire any non-performing loans, OREO or non-investment grade investments due to the acquisition of EBI.

We 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. We use third party valuations to determine the fair value of the core deposit intangible, securities and deposits. The valuation of FHLB advances was based on current rates for similar borrowings. 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.

The former Enterprise provides 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 one EBI banking center was consolidated into an existing 1st United banking center during the third quarter 2013. In addition, one of 1^st United’s banking centers was consolidated into a banking center of the former Enterprise. The result was one net new 1st United banking center located in Jupiter, Florida. We incurred merger related expenses of $1.7 million primarily during the third quarter of 2013 related to the integration of operations and terminations of leases and contracts. Total goodwill recorded was $5.5 million. We integrated the EBI operations during the third quarter of 2013.

Financial Overview

OPERATING RESULTS

For the quarter ended March 31, 2014, we reported net income of $2.7 million compared to net income of $1.6 million for the quarter ended March 31, 2013. The increase in net income for the three months ended March 31, 2014 as compared to the same period ended March 31, 2013 was mostly an increase in interest income on loans and securities and a reduction in the provision for loan losses offset by an increase in salaries and employee benefits.

● Net interest margin was 4.97% for the quarter ended March 31, 2014 compared to 5.09% for the quarter ended March 31, 2013.

● The Company recorded provision for loan losses of $333,000 for the three months ended March 31, 2014, compared to provision for loan losses of $650,000 the three months ended March 31, 2013.

● Total loans increased by approximately $25.1 million to $1.159 billion for the three months ended March 31, 2014 as a result of new loan production and loan advances of $79.4 million which was partially offset by payoffs, resolutions, including transfers to OREO, and principal payments of $54.3 million during the period.

● Non-performing assets at March 31, 2014 represented 1.81% of total assets compared to 1.87% at December 31, 2013. Non-performing assets not covered by the Loss Share Agreements represented 0.87% of total assets at March 31, 2014 compared to 0.91% at December 31, 2013.

● Securities available for sale decreased by approximately $4.1 million from December 31, 2013 to $323.8 million at March 31, 2014. The decrease was a result of investment maturities and principal payments of $8.0 million offset by a decrease in the net unrealized loss on securities available for sale of $4.4 million.  There were no gains on sales of securities for the three months ended March 31, 2014 as compared to gains on sales of securities of $122,000 for the three months ended March 31, 2013.

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● Other real estate owned (“OREO”) decreased by $2.3 million to $16.2 million at March 31, 2014 from $18.6 million at December 31, 2013. The change was due to the sale of REO of $4.9 million and fair value adjustments on existing properties of $244,000 which was partially offset by the foreclosure of $2.6 million of loans. Gains on the sale of OREO for three months ended March 31, 2014 and 2013 were $213,000 and $441,000, respectively.

● The FDIC loss share receivable was reduced by approximately $3.4 million from $29.3 million at December 31, 2013 to $26.0 million at March 31, 2014. The decrease was due to cash receipts of approximately $1.0 million, a reduction of $2.7 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 $21,000.

● Deposits decreased by $118.5 million from $1.55 billion at December 31, 2013 to $1.43 billion at March 31, 2014 due to the payout of a $128 million short term deposit in January 2014 and normal customer balance fluctuations. Non-interest bearing deposits increased by $13.3 million to $539.6 million at March 31, 2014, as compared to December 31, 2013.  The percentage of non-interest bearing deposits to total deposits was approximately 38% at March 31, 2014 and approximately 34% at December 31, 2013.

Analysis for Three Month Periods ended March 31, 2014 and 2013

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).

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Net interest earnings for the three months ended March 31, 2014 and 2013, respectively, are reflected in the following table:

	March 31, 2014								March 31, 2013
(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	$	1,154,630		$	17,287		6.07	%	$	914,403		$	16,171		7.17	%
Investment securities		328,279			2,103		2.56	%		290,990			1,368		1.88	%
Federal funds sold and securities purchased under resale agreements		40,486			148		1.49	%		127,027			181		0.58	%
Total interest-earning assets		1,523,395			19,538		5.20	%		1,332,420			17,720		5.39	%
Non interest-earning assets		226,980								228,582
Allowance for loan losses		(9,819	)							(9,661	)
Total assets	$	1,740,556							$	1,551,341
Liabilities and Shareholders’ Equity
Interest-bearing liabilities
NOW accounts	$	214,688		$	61		0.12	%	$	171,953		$	55		0.13	%
Money market accounts		331,087			245		0.30	%		317,349			256		0.33	%
Savings accounts		58,192			16		0.11	%		63,117			40		0.26	%
Certificates of deposit		288,022			475		0.67	%		306,421			634		0.84	%
Fed funds purchased and repurchase agreements		16,939			4		0.10	%		19,290			6		0.13	%
Federal Home Loan Bank advances and other borrowings		55,127			57		0.42	%		—			—		0.00	%
Total interest-bearing liabilities		964,055			858		0.36	%		878,130			991		0.46	%
Non-interest bearing liabilities
Demand deposit accounts		526,762								429,035
Other liabilities		14,751								6,473
Total non-interest-bearing liabilities		541,513								435,508
Shareholders’ equity		234,988								237,703
Total liabilities and shareholders’ equity	$	1,740,556							$	1,551,341
Net interest spread				$	18,680		4.84	%				$	16,729		4.94	%
Net interest on average earning assets - Margin							4.97	%							5.09	%

Net interest income was $18.7 million for the three months ended March 31, 2014, as compared to $16.7 million for the three months ended March 31, 2013, an increase of $2.0 million, or 11.7%. The increase resulted primarily from increase in average earning assets of $191.0 million or 14.3% and a reduction in yield on deposits offset by a reduction in accretion income from the resolution of acquired assets. Accretion income decreased quarter over quarter by $970,000 and was offset with a reduction in the cost of funds of 7 basis points. The increase in total average earning assets was due to the EBI acquisition and net loan growth.

Interest earnings for the current quarter were positively impacted by the accretion of discounts related to acquired loans of approximately $3.9 million as compared to $4.9 million for the same period in 2013. Included in the $3.9 million of accretion of discount for the quarter ended March 31, 2014 was approximately $2.8 million related to the disposition of assets acquired in the transactions above the discounted carrying value of the asset and accretion of discounts on purchase credit impaired loans due to increases in estimated cash flows. For the quarter ended March 31, 2014, we took a charge of approximately $2.7 million, including $298,000 related to the resolution of other real estate owned, as an adjustment to the FDIC loss share receivable. This charge was recorded in non-interest income within the consolidated statements of operations and was substantially related to changes in cash flows of loss share assets. Included in the $4.9 million of accretion discount for the quarter ended March 31, 2013 was approximately $3.0 million related to the disposition of assets above the discounted carrying values and accretion of discounts on purchase credit impaired loans due to increases in estimated cash flows. For the quarter ended March 31, 2013, we took a charge of approximately $3.1 million, including $347,000 million related to the resolution of other real estate owned, as an adjustment to the FDIC loss share receivable. This charge was recorded in non-interest income within the consolidated statements of operations substantially related to changes in cash flows of loss share assets.

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The net interest margin (i.e., net interest income divided by average earning assets) decreased 12 basis points from 5.09% during the three months ended March 31, 2013 to 4.97% during the three months ended March 31, 2014. Accretion of loan discounts of $3.9 million on acquired loans added approximately 104 basis points to the quarter ended March 31, 2014 net interest margin. Of the 104 basis points, 75 basis points related to resolved loss share assets and changes in cash flows during the quarter. This compares to accretion of loan discount of $4.9 million during the three months ended March 31, 2013, which added approximately 148 basis points to the March 31, 2013 margin. Of the 148 basis points for the quarter ended March 31, 2013, 91 basis points related to resolved loss share assets and changes in cash flows. For the three months ended March 31, 2014, average loans represented 66.3% of total average assets and 80.4% of total average deposits and customer repurchase agreements, compared to average loans of 58.94% of total average assets and average loans of 69.95% to total average deposits and customer repurchase agreements at March 31, 2013. Our cost of funds was approximately 7 basis points lower for the three months ended March 31, 2014, as compared to March 31, 2013, 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 March 31, 2014 as compared to the three months ended March 31, 2013. 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 March 31, 2014 and 2013:

	March 31, 2014 and 2013
(Dollars in thousands)	Change in Interest Income/ Expense			Variance Due to Volume Changes			Variance Due to Rate Changes
Assets
Interest-earning assets
Loans	$	1,116		$	3,837		$	(2,721	)
Investment securities		735			192			543
Federal funds sold and securities purchased under resale agreements		(32	)		(182	)		150
Total interest-earning assets	$	1,819		$	3,847		$	(2,028	)
Liabilities
Interest-bearing liabilities
NOW accounts	$	6		$	13		$	(7	)
Money market accounts		(11	)		11			(22	)
Savings accounts		(24	)		(3	)		(21	)
Certificates of deposit		(159	)		(36	)		(123	)
Fed funds purchased and repurchase agreements		(1	)		(1	)		—
Other borrowings		57			57			—
Total interest-bearing liabilities		(132	)		41			(173	)
Net interest spread	$	1,951		$	3,806		$	(1,855	)

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

The following is a schedule of non-interest income for three months ended March 31, 2014 and 2013, respectively:

	Three months ended
(Dollars in thousands)	March 31, 2014			March 31, 2013			Difference
Service charges and fees on deposit accounts	$	809		$	796		$	13
Net gains on sales of other real estate owned		213			441			(228	)
Net gains on sales of securities		—			122			(122	)
Net gains on sales of loans held for sale		—			46			(46	)
Increase in cash surrender value of Company owned life insurance		159			147			12
Adjustment to FDIC loss share receivable		(2,648	)		(2,820	)		172
Other		221			280			(59	)
Total non-interest income	$	(1,246	)	$	(988	)	$	(258	)

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 $258,000 for the quarter ended March 31, 2014 when compared to the quarter ended March 31, 2013. The decrease was principally a result of a reduction in the gains on the sales of other real estate, no sales of securities or loans held for sale in the current quarter, offset by a decrease in the adjustment to the FDIC loss share receivable due to less resolution of assets above their carrying value quarter over quarter.

During the three months ended March 31, 2014, we received proceeds from the sale of OREO properties of $4.9 million with a carrying value of $4.7 million and recorded a net gain of $213,000 on the these dispositions as compared to sales of $2.6 million of OREO with a carrying value of $2.1 million resulting in a net gain of $441,000 million for the three months ended March 31, 2013. Net gains on the resolution of OREO covered under loss sharing agreements for the three months ended March 31, 2014 and 2013 were $306,000 and $441,000, respectively.

During the three months ended March 31, 2014, we had no sales of securities. For the three months ended March 31, 2013, we sold approximately $8.8 million in securities for gains of $122,000.

The adjustment to the FDIC loss share receivable during the quarter ended March 31, 2014 represented a $2.7 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 $3.1 million for the quarter ended March 31, 2013. These amounts were partially offset by interest income earned on the FDIC receivable of $21,000 and $239,000 for the quarters ended March 31, 2014 and 2013, 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 increased by $424,000, or 3.4%, from $12.5 million for the three months ended March 31, 2013 to $12.9 million for the three months ended March 31, 2014, primarily due to integration of EBI operations and the assumption of staff and operations from the EBI acquisition offset by lower write downs of other real estate owned.

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The following summarizes the changes in non-interest expense accounts for the three months ended March 31, 2014 compared to the three months ended March 31, 2013:

	Three months ended
(Dollars in thousands)	March 31, 2014		March 31, 2013			Difference
Salaries and employee benefits	$	6,556		$	6,199	$	357
Occupancy and equipment		2,021			1,969		52
Data processing		984			930		54
Telephone		259			229		30
Stationery and supplies		74			91		(17	)
Amortization of intangibles		195			172		23
Professional fees		417			387		30
Advertising		69			88		(19	)
Regulatory assessment		420			358		62
Other real estate owned expense		401			579		(178	)
Loan expense		361			347		14
Other		1,143			1,127		16
Total non-interest expense	$	12,900		$	12,476	$	424

Salary and employee benefits increased by approximately $357,000 or 5.8% to $6.6 million for the three months ended March 31, 2014 as compared to $6.2 million for the three months ended March 31, 2013. The increase was primarily due to staff additions from the EBI acquisition and increased incentive compensation related to various production goals period over period.

Other real estate owned (“OREO”) expense decreased by approximately $178,000 to $401,000 for the three months ended March 31, 2014, as compared to $579,000 for the three months ended March 31, 2013. The change was primarily due to a decrease in write downs on OREO properties by $220,000 period over period due to changes in estimated fair values. Total write downs were $244,000 during the quarter ended March 31, 2014 as compared to $464,000 for the quarter ended March 31, 2013.

Loan expense includes the costs associated with the collection of legacy as well as loss sharing assets. Loan expense was consistent $361,000 for the quarter ended March 31, 2014 as compared to $347,000 for the three months ended March 31, 2013.

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 March 31, 2014, we recorded $333,000 in provision for loan losses as compared to $650,000 for the three months ended March 31, 2013. The decrease in the provision for loan losses quarter-over-quarter was due to a reduction in charge-offs, one large loan recovery and a reduction of impaired assets. Total charge-offs were $297,000 with recoveries of $349,000, principally related to one loan, for the quarter ended March 31, 2014. Net recoveries for the quarter ended March 31, 2014 were $52,000 as compared to net charge-offs of $915,000 for the quarter ended March 31, 2013.

We recorded income tax expense of $1.5 million for the three months ended March 31, 2014, compared to $995,000 for the three months ended March 31, 2013. The increase is due to higher pretax income for the three months ended March 31, 2014 as compared to the three months ended March 31, 2013.

FINANCIAL CONDITION

At March 31, 2014, our total assets were $1.738 billion and our net loans were $1.149 billion or 66.1% of total assets. At December 31, 2013, our total assets were $1.845 billion and our net loans were $1.125 million or 61.0% of total assets. Cash and cash equivalents decreased primarily as a result of the withdrawal by one customer of a short term deposit of $128 million in January 2014 and net loan origination for the quarter. Total loans increased by approximately $25.1 million to $1.159 billion at March 31, 2014 due to new loan production and loan advances of $79.4 million offset by payoffs, resolutions, including transfer to OREO, and principal reductions of $54.3 million.

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At March 31, 2014, the allowance for loan losses was $10.0 million or 0.87% of total loans. At December 31, 2013, the allowance for loan losses was $9.6 million or 0.85% of total loans.

Securities available for sale decreased by $4.1 million to $323.8 million at March 31, 2014 due to maturities and principal payments of $8.0 million and a reduction in the net unrealized loss since December 31, 2013.

At March 31, 2014, our total deposits were $1.429 billion, a decrease of $118.5 million compared to $1.548 billion at December 31, 2013, due to the withdrawal by one customer of a short term deposit of $128 million in January of 2014. Non-interest bearing deposits represented 37.8% of total deposits at March 31, 2014 compared to 34.0% at December 31, 2013.

At March 31, 2014 and December 31, 2013, Federal Home Loan Bank advances were $35.0 million and were acquired as part of the EBI merger.

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 March 31, 2014 and December 31, 2013, 85.6%, 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 March 31, 2014 and December 31, 2013, 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 85.6%, 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.

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The following charts illustrate the composition of loans in our loan portfolio as of March 31, 2014 and December 31, 2013.

Loan Portfolio as of March 31, 2014

(Dollars in thousands)	Total Loans		Total		Percent of Loan Portfolio			Percent of Total Assets
Loan Types
Residential:
First mortgages		483	$	113,992		9.83	%		6.56	%
HELOCs and equity		399		64,414		5.56	%		3.71	%
Commercial:
Secured – non-real estate		701		148,293		12.79	%		8.53	%
Secured – real estate		92		55,813		4.82	%		3.21	%
Unsecured		54		7,456		0.64	%		0.43	%
Commercial Real Estate:
Owner occupied		274		222,285		19.18	%		12.79	%
Non-owner occupied		337		447,417		38.60	%		25.74	%
Multi-family		73		47,085		4.06	%		2.71	%
Construction and Land Development:
Construction		14		12,480		1.08	%		0.72	%
Improved land		26		17,724		1.53	%		1.02	%
Unimproved land		18		11,164		0.96	%		0.64	%
Consumer and other		179		10,943		0.95	%		0.63	%
Total March 31, 2014		2,650	$	1,159,066		100	%		66.69	%

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Loan Portfolio as of December 31, 2013

(Dollars in thousands)	Total Loans		Total		Percent of Loan Portfolio			Percent of Total Assets
Loan Types
Residential:
First mortgages		490	$	117,830		10.39	%		6.39	%
HELOCs and equity		400		61,014		5.38	%		3.31	%
Commercial:
Secured – non-real estate		697		145,298		12.81	%		7.87	%
Secured – real estate		91		57,052		5.03	%		3.09	%
Unsecured		57		7,914		0.70	%		0.43	%
Commercial Real Estate:
Owner occupied		268		209,467		18.47	%		11.35	%
Non-owner occupied		328		451,982		39.85	%		24.50	%
Multi-family		72		38,402		3.39	%		2.08	%
Construction and Land Development:
Construction		12		7,366		0.65	%		0.40	%
Improved land		24		16,538		1.46	%		0.90	%
Unimproved land		19		11,382		1.00	%		0.62	%
Consumer and other		178		9,735		0.87	%		0.53	%
Total December 31, 2013		2,636	$	1,133,980		100.00	%		61.47	%

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The following chart illustrates the composition of our construction and land development loan portfolio as of March 31, 2014 and December 31, 2013.

	March 31, 2014					December 31, 2013
(Dollars in thousands)	Balance		% of Total Loans			Balance		% of Total Loans
Construction
Residential	$	546		0.05	%	$	272		0.02	%
Residential spec		4,265		0.37	%		1,423		0.13	%
Commercial		7,669		0.66	%		5,671		0.50	%
Commercial spec		—		0.00	%		—		0.00	%
Land Development
Residential		5,240		0.45	%		5,377		0.47	%
Residential spec		5,079		0.44	%		5,223		0.45	%
Commercial		7,478		0.65	%		6,044		0.55	%
Commercial spec		11,091		0.96	%		11,276		0.99	%
Total	$	41,368		3.57	%	$	35,286		3.11	%

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 March 31, 2014 and December 31, 2013 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 March 31, 2014, and December 31, 2013, which are performing in accordance with their modification agreements.

(Dollars in thousands)	March 31, 2014		December 31, 2013
Residential real estate	$	907	$	834
Commercial real estate		12,907		15,341
Construction and land development		142		143
Commercial		2,279		2,328
Total	$	16,235	$	18,646

The decrease of $2.4 million in performing restructured loans to $16.2 million at March 31, 2014 from $18.6 million at December 31, 2013 was due to new performing modifications of approximately $134,000 million offset by approximately $1.7 million in loans that defaulted under the terms of their modification agreement and were included in nonaccrual loans at March 31, 2014. In addition, there were approximately $815,000 in repayments and resolutions of modified loans.

At March 31, 2014, there were 17 loans that were troubled debt restructured loans with a carrying amount of $7.4 million and specific reserves of $487,000 that were non-accrual. At December 31, 2013, there were 18 loans which were troubled debt restructured loans with a carrying amount of $7.5 million and specific reserves of $608,000 that were non-accrual. 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 4.18% and 4.38% at March 31, 2014 and December 31, 2013, respectively.

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During the three months ended March 31, 2014, we had $470,000 in loans for which we lowered the interest rate prior to maturity to competitively retain a loan. During the year ended December 31, 2013, we had approximately $10.6 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 March 31, 2014 and 2013, interest income not recognized on non-accrual loans (but would have been recognized if these loans were current) was approximately $153,000 and $251,000, respectively.

Our non-performing and troubled debt restructured assets at March 31, 2014 and December 31, 2013 were as follows:

	March 31, 2014									December 31, 2013
(Dollars in thousands)	Assets Not Subject to Loss Sharing Agreements			Assets Subject to Loss Sharing Agreements			Total			Assets Not Subject to Loss Sharing Agreements			Assets Subject to Loss Sharing Agreements			Total
Non-Accrual Loans
Residential first mortgages	$	46		$	2,626		$	2,672		$	48		$	3,137		$	3,185
Home equity lines		418			256			674			491			96			587
Commercial real estate		3,316			2,689			6,005			3,297			3,045			6,342
Construction and land development		3,650			34			3,684			3,688			35			3,723
Commercial		1,459			401			1,860			1,518			455			1,973
Consumer		34			—			34			26			—			26
Total	$	8,923		$	6,006		$	14,929		$	9,068		$	6,768		$	15,836
Accruing => 90 days past due
Residential real estate	$	—		$	—		$	—		$	—		$	—		$	—
Home equity lines		—			—			—			—			—			—
Commercial real estate		—			—			—			—			—			—
Construction and land development		—			—			—			—			—			—
Commercial		361			—			361			—			—			—
Consumer		—			—			—			—			—			—
Total	$	361		$	—		$	361		$	—		$	—		$	—
Total non-accruing loans	$	8,923		$	6,006		$	14,929		$	9,068		$	6,768		$	15,836
Accruing => 90 days past due		361			—			361			—			—			—
Foreclosed real estate		5,795			10,443			16,238			7,763			10,817			18,580
Total non-performing assets		15,079			16,449			31,528			16,831			17,585			34,416
Performing troubled debt restructured loans		14,969			1,266			16,235			17,281			1,365			18,646
Total non-performing assets and performing troubled debt restructured loans	$	30,048		$	17,715		$	47,763		$	34,112		$	18,950		$	53,062
Ratios
Total non-accruing and accruing => 90 days past due loans to total loans		0.80	%		0.52	%		1.32	%		0.80	%		0.60	%		1.40	%
Total non-performing assets to total assets		0.87	%		0.95	%		1.81	%		0.91	%		0.95	%		1.87	%
Total non-performing assets and performing troubled debt restructured loans to total assets		1.73	%		1.02	%		2.75	%		1.85	%		1.03	%		2.88	%

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Included in non-accrual loans are purchase credit impaired loans of $2.6 million for which cash flows could not be reasonably estimated with $2.5 million of these loans subject to Loss Share Agreements. Additionally, included in non-accrual loans at March 31, 2014 and December 31, 2013 were $4.8 million and $4.2 million, respectively, of loans performing in accordance with their contractual terms but which the Company placed on non-accrual status due to identified risks within the credit. Of the non-performing assets and performing troubled debt restructured loans at March 31, 2014, $17.7 million were acquired in the Old Harbor, TBOM and Republic transactions and are all covered under the Loss Share Agreements as compared to $19.0 million at December 31, 2013.

Since December 31, 2013, for non-performing loans not subject to Loss Share Agreements, we had approximately $210,000 in non-accrual loans which were charged off, $2.0 million were paid off or principal payments were applied, no loans were transferred to OREO or returned to accrual status and $2.1 million were added to non-accrual during the three months ended March 31, 2014.

Past due loans, categorized by loans subject to Loss Share Agreements and those not subject to Loss Share Agreements, at March 31, 2014 and December 31, 2013, were as follows:

March 31, 2014

	Accruing 30 - 59				Accruing 60-89				Non-Accrual/accrual and 90 days and over				Total
(Dollars in thousands)	Loans Subject to Loss Sharing Agreements		Loans Not Subject to Loss Sharing Agreements		Loans Subject to Loss Sharing Agreements		Loans Not Subject to Loss Sharing Agreements		Loans Subject to Loss Sharing Agreements		Loans Not Subject to Loss Sharing Agreements		Loans Subject to Loss Sharing Agreements		Loans Not Subject to Loss Sharing Agreements
Residential real estate	$	409	$	505	$	—	$	—	$	2,882	$	464	$	3,291	$	969
Commercial		—		326		—		622		401		1,820		401		2,768
Commercial real estate		502		1,674		—		—		2,689		3,316		3,191		4,990
Construction and land development		—		—		—		—		34		3,650		34		3,650
Consumer and other		—		—		—		—		—		34		—		34
Total March 31, 2014	$	911	$	2,505	$	—	$	622	$	6,006	$	9,284	$	6,917	$	12,411

December 31, 2013

	Accruing 30 - 59				Accruing 60-89				Non-Accrual/Accrual 90 days and over				Total
(Dollars in thousands)	Loans Subject to Loss Sharing Agreements		Loans Not Subject to Loss Sharing Agreements		Loans Subject to Loss Sharing Agreements		Loans Not Subject to Loss Sharing Agreements		Loans Subject to Loss Sharing Agreements		Loans Not Subject to Loss Sharing Agreements		Loans Subject to Loss Sharing Agreements		Loans Not Subject to Loss Sharing Agreements
Residential real estate	$	333	$	1,085	$	162	$	24	$	3,233	$	539	$	3,728	$	1,648
Commercial		—		461		—		—		455		1,518		455		1,979
Commercial real estate		—		—		—		1,737		3,045		3,297		3,045		5,034
Construction and land development		—		—		—		—		35		3,688		35		3,688
Consumer and other		—		34		—		—		—		26		—		60
Total December 31, 2013	$	333	$	1,580	$	162	$	1,761	$	6,768	$	9,068	$	7,263	$	12,409

Past due loans subject to Loss Share Agreements decreased by $346,000 from $7.3 million at December 31, 2013 to $6.9 million at March 31, 2014. Past due loans not subject to Loss Share Agreements were consistent at $12.4 million at March 31, 2014 and December 31, 2013, respectively. The change in past due loans covered under Loss Share Agreements was due to an increase in accruing loans which were past due less than 90 days by $416,000 and a decrease in loans past due greater than 90 days and on non-accrual of $762,000 as the Company continues to work towards resolutions and work out solutions for these assets. A decrease in loans 30-89 days past due was noted for loans not covered under Loss Share Agreements which declined by $214,000 during the three months ended March 31, 2014 offset by an increase in the non-accrual and 90 days or more past due category by $216,000.

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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. At March 31, 2014, the Company had $13.5 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 March 31, 2014 and December 31, 2013.

	Recorded Investment in Impaired Loans
	With Allowance								With No Allowance
March 31, 2014	Loans Subject to Loss Sharing Agreements				Loans Not Subject to Loss Sharing Agreements				Loans Subject to Loss Sharing Agreements		Loans Not Subject to Loss Sharing 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	$	932		240	$	1,279	$	607	$	1,090	$	46
Commercial		363		69		1,464		666		—		1,964
Commercial real estate		598		76		3,478		156		1,032		11,790
Construction and land development		—		—		526		269		—		3,265
Consumer and other		—		—		10		10		—		—
Total March 31, 2014	$	1,893	$	385	$	6,757	$	1,708	$	2,122	$	17,065

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	Recorded Investment in Impaired Loans
	With Allowance								With No Allowance
December 31, 2013	Loans Subject to Loss Sharing Agreements				Loans Not Subject to Loss Sharing Agreements				Loans Subject to Loss Sharing Agreements		Loans Not Subject to Loss Sharing 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	$	1,127	$	230	$	823	$	230	$	1,170	$	447
Commercial		409		105		1,537		730		—		1,991
Commercial real estate		603		99		5,332		314		1,374		12,316
Construction and land development		—		—		527		271		—		3,303
Consumer and other		—		—		—		—		—		—
Total December 31, 2013	$	2,139	$	434	$	8,219	$	1,545	$	2,544	$	18,057

Overall impaired loans decreased by $3.1 million from $31.0 million at December 31, 2013 to $27.8 million at March 31, 2014. Impaired loans subject to loss share agreements decreased by $668,000. Impaired loans not subject to loss share agreements decreased by $2.5 million from December 31, 2013 to March 31, 2014 primarily due to resolutions, including sales, payoffs and transfers to other real estate owned.

Allowance for Loan Losses

At March 31, 2014, the allowance for loan losses was $10.0 million or 0.87% of total loans. Inclusive within total loans is $143.7 million in loans acquired from EBI on July 1, 2013 which are recorded at fair value and for which a minimal allowance was allocated at March 31, 2014. Excluding those loans, the allowance for loan losses as a percentage of total loans would be 0.99% compared to 0.98% at December 31, 2013. At December 31, 2013, the allowance for loan losses was $9.6 million or 0.85% of total loans.

At March 31, 2014 and December 31, 2013, we had $6.8 million and $8.2 million, respectively, of impaired loans not covered by Loss Share Agreements with an allocated allowance for loan loss of $1.7 million and $1.5 million respectively. Charge-offs for the three months ended March 31, 2014 were $297,000 offset by recoveries of $349,000, primarily related to one loan. Of these charge-offs, $259,000 was provided for as of December 31, 2013. Overall loans graded special mention and substandard not covered by Loss Share Agreements decreased by $2.7 million (or 6.3%) from December 31, 2013 to March 31, 2014 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 basis points of the allowance for loan losses as of both March 31, 2014 and December 31, 2013, 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.

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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.

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, we review and classify loans (including all impaired and non-performing loans) as to potential loss exposure.

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.

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The following is a summary of our loan classifications at March 31, 2014 and December 31, 2013:

			Loans Subject to Loss Sharing Agreements						Loans Not Subject to Loss Sharing Agreements
(Dollars in thousands)	Total		Pass		Special Mention		Substandard		Pass		Special Mention		Substandard
March 31, 2014
Residential real estate	$	178,406	$	57,415	$	1,091	$	2,882	$	105,830	$	4,606	$	6,582
Commercial		211,562		25,733		311		401		179,018		2,571		3,528
Commercial real estate		716,787		124,853		7,968		2,689		565,528		5,303		10,446
Construction and land development:		41,368		6,291		—		34		28,357		2,644		4,042
Consumer and other		10,943		—		—		—		10,367		454		122
Total March 31, 2014	$	1,159,066	$	214,292	$	9,370	$	6,006	$	889,100	$	15,578	$	24,720

			Loans Subject to Loss Sharing Agreements						Loans Not Subject to Loss Sharing Agreements
(Dollars in thousands)	Total		Pass		Special Mention		Substandard		Pass		Special Mention		Substandard
December 31, 2013
Residential real estate	$	178,844	$	63,712	$	1,152	$	3,395	$	99,259	$	4,661	$	6,665
Commercial		210,264		26,799		319		455		176,434		2,647		3,610
Commercial real estate		699,851		133,219		8,047		3,045		537,439		5,324		12,777
Construction and land development:		35,286		6,470		—		35		22,037		2,656		4,088
Consumer and other		9,735		2		—		—		9,135		480		118
Total December 31, 2013	$	1,133,980	$	230,202	$	9,518	$	6,930	$	844,304	$	15,768	$	27,258

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 March 31, 2014 and December 31, 2013, loans which were classified as troubled debt restructured loans and were performing under the terms of their modification agreements and were credit graded as substandard were $4.5 million and $7.6 million, respectively.

Substandard loans totaled $30.7 million at March 31, 2014 (of which $6.0 million were subject to the Loss Share Agreements) and $34.2 million at December 31, 2013 (of which $6.9 million were subject to the Loss Share Agreements). The decrease of $3.5 million since December 31, 2013 was primarily due to the resolution of loans not covered under Loss Share Agreements of $2.5 million through sale, payoffs, charge-offs or foreclosure and transfer to other real estate owned during the period. There was a decrease of $924,000 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 March 31, 2014, we had $27.8 million (or 2.4% of total loans) of loans classified as impaired. This compares to $31.0 million (or 2.7% of total loans) at December 31, 2013. The decrease was primarily due to the net resolution of loans, including sales, payoffs and transfers to other real estate owned during the year. At March 31, 2014 and December 31, 2013, the specific credit allocation included in the allowance for loan losses for loans impaired was approximately $2.1 million and $2.0 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 March 31, 2014, we had $24.9 million (2.2% of outstanding loans), which included $9.4 million in loans subject to Loss Share Agreements, which compares to $25.3 million (2.2% of outstanding loans) of which $9.5 million were subject to Loss Share Agreements at December 31, 2013. Special mention loans not subject to Loss Share Agreements were $15.6 million at March 31, 2014, a decrease of $190,000 from December 31, 2013. There was also a decrease in special mention loans subject to loss share of $148,000 from December 31, 2013 to March 31, 2014. These decreases are 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.

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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 months ended March 31, 2014 and 2013, we recorded $333,000 and $650,000, 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.

Activity in the allowance for loan losses for the three months ended March 31, 2014 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 , 2014	$	3,084		$	2,437		$	3,550		$	485		$	92	$	9,648
Provisions for loan losses		(382	)		414			292			(4	)		13		333
Loans charged off		(86	)		(42	)		(169	)		—			—		(297	)
Recoveries		29			—			318			2			—		349
Ending Balance, March 31, 2014	$	2,645		$	2,809		$	3,991		$	483		$	105	$	10,033

Activity in the allowance for loan losses for the three months ended March 31, 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		768		119			281			(534	)		16			650
Loans charged off		—		(53	)		(58	)		(898)			(16	)		(1,025	)
Recoveries		16		1			2			91			—			110
Ending Balance, March 31, 2013	$	3,519	$	1,936		$	3,623		$	404		$	41		$	9,523

The decrease in the allowance related to commercial loans from $3.5 million for the quarter ended March 31, 2013 to $2.6 million of the quarter ended March 31, 2014 was due to a reduction in the specific reserve on impaired and purchased credit impaired loans and a decrease in the general portion of the reserve due to improving historical loss rates in this category.

The increase in the allowance for loan losses related to residential real estate loans from $1.9 million at March 31, 2013 to $2.8 million at March 31, 2014 was due to an increase in specific reserves on impaired loans and an increase in the general portion of the reserve due to historical loss factors.

The increase in the allowance for loan losses related to commercial real estate loans from $3.6 million at March 31, 2013 to $4.0 million at March 31, 2014 was due to a decrease in estimated cash flows for purchased credit impaired loans with a resulting increase in the allowance related to those loans offset by resolution of impaired loans and improving historical loss rates.

The following tables reflect the allowance allocation per loan category and percent of loans in each category to total loans as of March 31, 2014 and December 31, 2013:

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As of March 31, 2014:

(Dollars in thousands)	Commercial			Residential Real Estate			Commercial Real Estate			Construction and Land Development			Consumer and Other			Total
Specific Reserves:
Impaired loans	$	735		$	847		$	232		$	269		$	10		$	2,093
Purchase credit impaired loans		463			320			689			—			—			1,472
Total specific reserves		1,198			1,167			921			269			10			3,565
General reserves		1,447			1,642			3,070			214			95			6,468
Total	$	2,645		$	2,809		$	3,991		$	483		$	105		$	10,033
Total Loans	$	211,562		$	178,406		$	716,787		$	41,368		$	10,943		$	1,159,066
Allowance as percent of loans per category as of March 31, 2014		1.25	%		1.57	%		0.56	%		1.17	%		0.96	%		0.87	%

As of December 31, 2013:

(Dollars in thousands)	Commercial			Residential Real Estate			Commercial Real Estate			Construction and Land Development			Consumer and Other			Total
Specific Reserves:
Impaired loans	$	835		$	460		$	413		$	271		$	—		$	1,979
Purchase credit impaired loans		464			269			278			—			—			1,011
Total specific reserves		1,299			729			691			271			—			2,990
General reserves		1,785			1,708			2,859			214			92			6,658
Total	$	3,084		$	2,437		$	3,550		$	485		$	92		$	9,648
Total Loans	$	210,264		$	178,844		$	699,851		$	35,286		$	9,735		$	1,133,980
Allowance as percent of loans per category as of December 31, 2013		1.47	%		1.36	%		0.51	%		1.37	%		0.95	%		0.85	%

The overall general reserve decreased by $190,000 from $6.7 million at December 31, 2013 to $6.5 million at March 31, 2014. The overall general reserve as a percentage of loans collectively evaluated for impairment was 0.60% at March 31, 2014 as compared to 0.64% at December 31, 2013. The 4 basis point decrease in this general reserve ratio as compared to December 31, 2013 was the result of improvement in historical loss rates.

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 March 31, 2014, we had $16.2 million of OREO property, of which $7.4 million was a result of the Old Harbor acquisition, $2.6 million was a result of the TBOM acquisition and $433,000 as a result of the Republic acquisition and all are covered by their respective Loss Share Agreements. At December 31, 2013, we had $18.6 million of OREO property, of which $10.8 million were a result of the Old Harbor, TBOM and Republic acquisitions and were covered under the respective Loss Share Agreements.

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The following is a summary of other real estate owned as of March 31, 2014 and December 31, 2013:

	March 31, 2014						December 31, 2013
(Dollars in thousands)	Assets Not Subject to Loss Sharing Agreements		Assets Subject to Loss Sharing Agreements		Total		Assets Not Subject to Loss Sharing Agreements		Assets Subject to Loss Sharing Agreements		Total
Commercial real estate	$	5,345	$	6,406	$	11,751	$	5,761	$	8,979	$	14,740
Residential real estate		450		4,037		4,487		2,002		1,838		3,840
Total	$	5,795	$	10,443	$	16,238	$	7,763	$	10,817	$	18,580

At March 31, 2014, we had no OREO under contract for sale.

Investment Securities

We manage our securities available for sale portfolio, which represented 21.5% of our average earning assets at March 31, 2014, as compared to 22.66% at December 31, 2013, to minimize interest rate risk, maintain sufficient liquidity, and maximize return. The portfolio includes treasury securities, municipal securities, commercial and 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. We may use excess liquidity to purchase securities. We did not purchase any securities during the quarter ended March 31, 2014.

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 three months ended March 31, 2014, we received cash of $1.0 million from the FDIC, recorded an adjustment of $2.7 million related to the changes in estimated cash flows of covered assets which were partially offset by the recorded discount accretion of $21,000.

Deposits

Total deposits decreased by $118.5 million from December 31, 2013 to total deposits of $1.429 billion at March 31, 2014, primarily due to withdrawal of a short-term $128 million deposit from one customer in January 2014 offset by normal customer activity. At March 31, 2014, non-interest bearing deposits represented approximately 37.8% of deposits compared to 34.0% at December 31, 2013. Repurchase agreements with customers increased by $8.8 million for the quarter ended March 31, 2014 due to normal customer activity. The Bank participates in the CDARS program (reciprocal) with balances of $36.6 million at March 31, 2014 compared to $39.4 million at December 31, 2013 and maintained brokered deposits of $39.9 million and $24.9 million at March 31, 2014 and December 31, 2013, respectively.

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 March 31, 2014, we met the capital ratios of a “well capitalized” financial holding company with a total risk-based capital ratio of 15.58%, a Tier 1 risk-based capital ratio of 14.70%, and a Tier 1 leverage ratio of 10.09%. 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 requires us to comply by January 1, 2015. We are evaluating the impact of these changes to regulatory capital.

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The following represents Bancorp’s and 1^st United’s regulatory capital ratios as of March 31, 2014 and December 31, 2013:

	Actual					Minimum Capital Adequacy					Minimum for Well Capitalized
	Amount		%			Amount		%			Amount		%
As of March 31, 2014
Total Capital to risk-weighted assets
Consolidated	$	178,281		15.58	%	$	94,546		8.00	%	$	114,432		10.00	%
1st United		160,849		14.10	%		91,270		8.00	%		114,087		10.00	%
Tier I capital to risk-weighted assets
Consolidated		168,248		14.70	%		45,773		4.00	%		68,659		6.00	%
1st United		150,816		13.22	%		45,635		4.00	%		68,452		6.00	%
Tier I capital to total average assets
Consolidated		168,248		10.09	%		66,721		4.00	%		83,401		5.00	%
1st United		160,849		9.07	%		66,498		4.00	%		83,122		5.00	%
As of December 31, 2013
Total Capital to risk-weighted assets
Consolidated	$	172,709		15.47	%	$	89,287		8.00	%	$	111,608		10.00	%
1st United		158,884		14.27	%		89,084		8.00	%		111,355		10.00	%
Tier I capital to risk-weighted assets
Consolidated		163,061		14.61	%		44,643		4.00	%		66,965		6.00	%
1st United		149,236		13.40	%		44,542		4.00	%		66,813		6.00	%
Tier I capital to total average assets
Consolidated		163,061		9.66	%		67,489		4.00	%		84,361		5.00	%
1st United		149,236		8.86	%		67,388		4.00	%		84,235		5.00	%

We have an effective shelf registration statement, under which we may offer additional securities for sale, from time to time if additional capital is required.

We paid a quarterly cash dividend of $0.02 per share in March 2014. We paid a quarterly cash dividend of $0.01 per share on May 8, 2013, August 15, 2013 and November 15, 2013. Additionally, the board of directors declared a $0.10 per share special cash dividend on December 23, 2013 of $3.4 million which was paid January 2014. During December 2012, we paid a $0.10 special cash dividend of $3.4 million to holders of common shares as of the record date.

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.

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We classify all of our securities as available-for-sale to help 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 March 31, 2014, we had approximately $402.1 million in cash and cash equivalents and securities, of which $32.6 million of securities, at fair value, were pledged.

At March 31, 2014, we had no short-term borrowings from the Federal Home Loan Bank and $35.0 million in long-term borrowings from the Federal Home Loan Bank. We acquired $35.0 million in Federal Home Loan Bank advances in connection with the acquisition of EBI.

At March 31, 2014, we had commitments to originate loans totaling $50.6 million and commitments of $97.3 million in unused lines of credit. Scheduled maturities of certificates of deposit during the twelve months following March 31, 2014 total $180.9 million. Loans maturing in the next twelve months total approximately $171.9 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 March 31, 2014, we had short-term lines available from correspondent banks totaling $65.0 million, Federal Reserve Bank discount window availability of $72.8 million, and borrowing capacity from the Federal Home Loan Bank of $148.9 million based on collateral pledged, for a total credit available of $286.7 million. Loans pledged for borrowings outstanding and available borrowings with the Federal Home Loan Bank and the Federal Reserve Bank was $456.5 million and $112.1 million, respectively, at March 31, 2014. In addition, being “well capitalized,” the Bank can access wholesale deposits for approximately $357.1 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 March 31, 2014, we had $50.6 million in commitments to originate loans, $97.3 million in unused lines of credit and $7.6 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.

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The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability 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 are amortized over their respective estimated useful lives to their estimated residual values. 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, 2013, 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.

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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 assets that were 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 us in cash for principal and up to 90 days of interest reduces the FDIC loss share receivable.

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.

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 re-price 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.

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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.

	As of March 31, 2014
Interest rate scenarios	Percent change of net interest income			Percentage change of EVE
Up 300 basis points		1.83	%		(23.45	)%
Up 200 basis points		1.06	%		(16.31	)%
Up 100 basis points		0.18	%		(8.91	)%
Base
Down 100 basis points		(2.14	)%		3.53	%
Down 200 basis points		6.20	%		12.21	%
Down 300 basis points		NA			NA

We had a negative gap position based on contractual and prepayment assumptions for the next 12 months, with a negative cumulative interest rate sensitivity gap as a percentage of total earning assets of 0.74%.

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.

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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 2013 Form 10-K, as updated in our subsequent quarterly reports. The risks described in our 2013 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 April 18, 2014, we announced via press release our financial results for the three month period ended March 31, 2014. 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.

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ITEM 6.     EXHIBITS

(a)     The following exhibits are included herein:

Exhibit No.	Name
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 April 18, 2014.
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.

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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: April 18, 2014	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)

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EXHIBIT INDEX

EXHIBIT	DESCRIPTION
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 April 18, 2014.
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.

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