Management's discussion and analysis ("MD&A") provides supplemental information, which sets forth the major factors that have affected our financial condition and results of operations and should be read in conjunction with the Consolidated Financial Statements and related notes included in the Annual Report on Form 10-K. The MD&A is divided into subsections entitled "Business Overview," "Financial Overview," "Financial Condition," "Results of Operations," "Interest Rate Risk Management," "Liquidity and Capital Resources," "Off-Balance Sheet Arrangements," and "Critical Accounting Policies." The following information should provide a better understanding of the major factors and trends that affect our earnings performance and financial condition, and how our performance during 2012 compares with prior years. Throughout this section, 1st United Bancorp, Inc., and its subsidiaries, collectively, are referred to as "Company," "we," "us," or "our." Unless the context indicates otherwise, all dollar amounts in this MD&A are in thousands.

This Annual Report on Form 10-K, 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 this Annual Report for a discussion of factors that could cause our actual results to differ materially from those in the forward-looking statements.

However, other factors besides those listed in Item 1A Risk Factors or discussed in this 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. Our principal subsidiary, 1stUnited, is a Florida-chartered commercial bank, which operates 22 banking centers in Florida, from Central Florida through the Treasure Coast to South Florida, including Brevard, Broward, Hillsborough, Indian River, Miami-Dade, Orange, Palm Beach, Pasco, and Pinellas Counties.

Over the past nine years, we have grown under the stewardship of our highly experienced executive management team. Specifically, we have

? increased total assets from $66.8 million to $1.567 billion;

? increased total net loans from $39.6 million to $904.5 million;

? grown non-interest bearing deposits from $4.6 million to $427.0 million; and

? expanded our branch network from one location to 22 locations.

We follow a business plan that emphasizes the delivery of commercial banking services to businesses and individuals in our geographic market who desire a high level of personalized service. The business plan includes business banking, professional market services, 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 lending program, 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 and variable rate loans.

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.

Our lending operations are entirely within the State of Florida, which has been particularly hard hit in the current economic recession. Evidence of the economic downturn in Florida is particularly reflected in recent unemployment statistics and realization of real estate devaluation. According to data from the U.S. Department of Labor, the Florida unemployment rate (seasonally adjusted) at December 2012 was 8.0% which is above the national average of 7.8%. Although the unemployment rate decreased from 9.9% at the end of 2010 and 12.0% at the end of 2009, Florida continues to have one of the highest unemployment rates in the United States, which has adversely affected our market areas as evidenced by layoffs and business closings, as well as wealth reduction due to depressed markets.

We have also experienced a high volume of bankruptcy filings in Florida during recent years. According to the most recent data available from the U.S. Federal Courts, Florida had the second highest number of bankruptcy filings in the United States through the first three quarters of 2012. Only California experienced more bankruptcy filings. The majority of the filings in Florida were non-business bankruptcies.

Based on data from the U.S. Census Bureau, from 2006 through the end of 2010, median household income decreased by 3.1% in Florida. Additionally, real estate property valuations have also been depressed during the recent economic downturn as evidenced by our higher level of problem assets and credit-related costs. According to the Federal Housing Finance Agency, Florida has experienced negative trends in single-family home prices (as indicated by negative housing price indexes) in nearly every quarter since the beginning of 2007 through the end of 2011. High unemployment, high volumes of non-business bankruptcy filings, decreased median household income, and depressed real estate values all affect the value of our loan portfolio and the associated risks. An extended continuation of the recession in Florida would likely exacerbate the adverse effects of these difficult market conditions on our clients, which would likely have a negative impact on our financial results.

We intend to continue to opportunistically expand and grow our business by building on our business strategy and increasing market share in key Florida markets. We believe the demographics and growth characteristics within the communities we serve will provide significant franchise enhancement opportunities to leverage our core competencies while acquisitive growth will enable us to take advantage of the extensive infrastructure and scalable platform that we have assembled.

A significant portion of our growth has been through acquisitions. Under our current management team, we have announced seven transactions since 2004:

    Acquired Bank                       Headquarters               Year Acquired
    First Western Bank                  Cooper City, Florida       2004
    Equitable Bank                      Fort Lauderdale, Florida   2008
    Citrus Bank, N.A.(1)                Vero Beach, Florida        2008
    Republic Federal Bank, N.A. (2)     Miami, Florida             2009
    The Bank of Miami, N.A.(2)          Miami, Florida             2010
    Old Harbor Bank of Florida (2)      Clearwater, Florida        2011
    Anderen Bank                        Palm Harbor, Florida       2012

(1) Branch acquisition

(2) FDIC-assisted transaction

Anderen Financial, Inc.

On April 1, 2012, the Company completed its acquisition of AFI, pursuant to the Merger Agreement. Pursuant to the terms of the Merger Agreement, each outstanding share of AFI common stock, $0.01 par value per share, was cancelled and automatically converted into the right to receive cash, common stock of the Company or a combination of cash and common stock of the Company. AFI shareholders could elect to receive cash, stock, or a combination of 50% cash and 50% stock, provided, however, that each election was subject to mandatory allocation procedures to ensure the total consideration was approximately 50% cash and 50% stock. The value of the AFI per share consideration was $7.73 calculated per the Merger Agreement. The total value of the consideration paid to AFI shareholders was $38.3 million which consisted of approximately $19.1 million in cash and 3,140,354 shares of the Company's common stock. The Company's common stock was valued at $6.09 per share with a total value of $19.1 million, net of approximately $61,000 of costs. The Company recorded goodwill of $5.8 million as a result of the merger which is not deductible for tax purposes. Total net deferred tax assets acquired was $5.9 million, primarily related to loss carry forwards. The Company completed the integration of AFI in June 2012.

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

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

Old Harbor Bank of Florida

On October 21, 2011, the 1st United acquired certain assets and assumed substantially all of the deposits, other than depository organized - brokered deposits, and certain from the FDIC. Assets acquired included cash and cash equivalents, investments securities, loans and other real estate owned. A majority of the loans and all other real estate owned are covered under loss sharing agreements between the FDIC and 1st United.

The deposits were acquired with a 0% premium and assets were acquired at a discount of approximately $8.5 million, subject to customary adjustments. The FDIC's obligation to reimburse the Company for losses with respect to Covered Assets begins with the first dollar of loss incurred. The FDIC will reimburse 1stUnited for 70% of losses with respect to Covered Assets, up to approximately $49 million. 1st United will reimburse the FDIC for 70% of recoveries with respect to losses for which the FDIC paid 1st United 70% reimbursement under the Loss Sharing Agreements. The loss sharing agreement applicable to single-family residential mortgage loans provides for FDIC loss sharing and 1st United reimbursement to the FDIC for ten years. The loss sharing agreement applicable to commercial loans and other real estate owned provides for FDIC loss sharing for five years and 1st United reimbursement for eight years. In addition, on December 15, 2021, 1st United will pay to the FDIC 50% of the excess, if any, of
(1) $9,761 minus (2) the sum of (a) 25% of the asset discount bid made in connection with the acquisition, (b) 20% of the Cumulative Shared-Loss Payments (as defined below) and (c) 3.5% of the total loans subject to loss sharing. For the purposes of the above calculation, "Cumulative Shared-Loss Payments" means
(i) the aggregate of all of the payments made or payable to the Company under the loss sharing agreements minus (ii) the aggregate of all of the payments made or payable to the FDIC under the loss sharing agreements

The Company accounted for the transaction under the acquisition method of accounting which requires purchased assets and assumed liabilities to be recorded at their respective acquisition date fair values. The estimated fair values were completed in 2012. Changes from our original estimates of fair value were due to additional information related to the fair value over loans, other real estate and the FDIC loss share receivable. As a result of the transaction, 1st United recorded goodwill of $7.5 million in the consolidated balance sheet for the year ended December 31, 2011.

On the date of acquisition, 1st United did not immediately acquire the furniture or equipment or any of the owned facilities of Old Harbor. Management assessed each banking location and determined not to assume three branches, two of which were leased and one of which was owned. Management believes the customers at these closed banking centers can be served at the retained locations. 1st United agreed to purchase two banking facilities and related furniture and equipment for $2.2 million and lease two banking facilities.

The Bank of Miami Acquisition

On December 17, 2010, 1st United acquired certain assets and liabilities of TBOM from the FDIC. Assets acquired included loans, other real estate owned cash and investments. 1stUnited also assumed all deposits (except certain brokered deposits) and borrowings.

All of the loans and other real estate owned are covered by two loss sharing agreements between the FDIC and 1st United. Under these loss sharing agreements, the FDIC will cover 80% of covered loan and other real estate losses for loans and other real estate owned acquired. The TBOM Loss Sharing Agreements also cover third party collection costs and 90 days of accrued interest on covered loans. The term for loss sharing and loss recoveries on residential real estate loans is ten years, while the term for loss sharing and loss recoveries on non-residential real estate loans is five years with respect to losses and eight years with respect to loss recoveries. The reimbursable losses from the FDIC are based on the book value of the relevant loan as determined by the FDIC at the date of the transaction. New loans made after that date are not covered by TBOM the Loss Sharing Agreements. The TBOM Loss Sharing Agreements related to the TBOM acquisition are subject to certain servicing procedures as specified in the agreements.

The acquisition was accounted for under the acquisition method of accounting. 1st United received a $38 million net discount on the assets acquired and recorded a receivable from the FDIC of $36.3 million as of December 17, 2010. An acquisition gain totaling $10.1 million was recorded as a component of non-interest income on the consolidated statement of operations for the year ended December 31, 2010.

As part of the acquisition, 1st United had the option to acquire the furniture or equipment and any owned facilities from the FDIC. 1st United also had the option to repudiate or assume all leases entered into by the former TBOM. Two of the former TBOM banking facilities were leased and one was owned. Management determined not to retain any of the TBOM branches and services the acquired deposits from existing 1st United banking centers.

Republic Federal Acquisition

On December 11, 2009, 1st United entered into a purchase and assumption agreement (the "Republic Agreement") with the FDIC, as receiver for Republic Federal Bank, National Association ("Republic"), Miami, Florida. According to the terms of the Republic Agreement, 1st United assumed all deposits (except certain brokered deposits) and borrowings, and acquired certain assets of Republic. Assets acquired included loans and cash and investments. All of Republic's repossessed or foreclosed real estate and substantially all non-performing loans were retained by the FDIC. Republic operated four banking centers in Miami-Dade County, Florida, and had approximately 100 employees. The Company assumed approximately $349.6 million in deposits in this transaction.

All of the Republic loans acquired are covered by two loss sharing agreements (the "Republic Loss Sharing Agreements") between the FDIC and 1st United, which affords 1st United significant loss protection. Under the Republic Loss Sharing Agreements, the FDIC will cover 80% of covered loan and foreclosed real estate losses up to $36 million and 95% of losses in excess of that amount. 1st United received a $34.2 million net discount on the assets acquired. The Republic Loss Sharing Agreements also cover third party collection costs and 90 days of accrued interest on covered loans. The term for loss sharing and loss recoveries on residential real estate loans is ten years, while the term for loss sharing and loss recoveries on non-residential real estate loans is five years with respect to losses and eight years with respect to loss recoveries. The Company recorded an estimated receivable from the FDIC in the amount of $43.8 million, which represents the fair value of the FDIC's portion of the losses that are expected to be incurred and reimbursed to the Company. The reimbursable losses from the FDIC are based on the book value of the relevant loan as determined by the FDIC at the date of the transaction.

Financial Overview

? Net earnings for the year ended December 31, 2012 were $4.7 million compared to net earnings of $3.7 million in 2011.

? Net interest margin increased to 5.13% for the twelve months ended December 31, 2012 compared to 4.76% for the twelve months ended December 31, 2011.

? During the year ended December 31, 2012, we incurred approximately $1.8 million in personnel, IT and facilities costs and merger reorganization expense that related to the integration of AFI and Old Harbor. During the year ended December 31, 2011, we incurred approximately $1.1 million in personnel, IT, facilities and merger reorganization expense related to the integration of TBOM.

? The changes in operating results for the year ended December 31, 2012 when compared to the year ended December 31, 2011, and for the balance sheet at December 31, 2012 when compared to December 31, 2011, were substantially a result of the AFI Acquisition in April 2012 and Old Harbor in October 2011.

? Non-performing assets at December 31, 2012 represented 2.74% of total assets compared to 4.01% at December 31, 2011. Non-performing assets not covered by the Loss Sharing Agreements represented 1.17% of total assets at December 31, 2012 compared to 2.39% at December 31, 2011.

? Total assets increased to $1.567 billion at December 31, 2012 from $1.421 billion at December 31, 2011 primarily due to the AFI acquisition.

? Securities available for sale increased by approximately $58.4 million from $201.7 million at December 31, 2011 to $260.1 million at December 31, 2012. The increase was a result of the Company investing excess liquidity of approximately $194.3 million primarily in residential mortgage backed securities during the year ended December 31, 2012, as well as the acquisition of $37.7 million of residential mortgage backed securities from AFI, which was offset by sales of $102.5 million and maturities and principal payments of $69.7 million.

? Net loans increased by approximately $37.2 million to $904.0 million at December 31, 2012 from $866.8 million at December 31, 2011. The change was due to the acquisition of $132.0 million of loans in connection with the merger of AFI as well as new loan production which was offset by payoffs and resolutions during the year.

? Other real estate owned increased by $6.1 million to $19.5 million from $13.5 million at December 31, 2011. The increase was due to the foreclosure of $30.0 million of loans which was partially offset by OREO sales of $24.1 million, net of a $3.3 million gain for the year ended December 31, 2012. At December 31, 2012, we had $777,000 in OREO under contract for sale.

? FDIC loss share receivable was reduced by approximately $26.2 million from $72.9 million at December 31, 2011 to $46.7 million at December 31, 2012. The decrease was primarily due to cash receipts from the FDIC of approximately $11.6 million and approximately $13.7 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 $1.2 million.

? Deposits increased by $121.3 million from $1.182 billion at December 31, 2011 to $1.303 billion at December 31, 2012 due primarily from the acquisition of $161.0 million in deposits from the AFI Acquisition and overall growth in non-interest bearing deposits offset by a planned reduction of higher cost acquired deposits. The percentage of non-interest bearing deposits to total deposits was approximately 33% at December 31, 2012 compared to approximately 28% at December 31, 2011.

? Total shareholders' equity increased to $236.7 million at December 31, 2012 from $215.4 million at December 31, 2011 as a result of the acquisition of AFI and the corresponding issuance of $19.1 million in common shares and the result of net earnings for the year ended December 31, 2012 of $4.7 million.

Financial Condition

At December 31, 2012, our total assets were $1.567 billion and our net loans were $904.0 million or 57.7% of total assets. At December 31, 2011, our total assets were $1.421 billion and our net loans were $866.9 million or 61.0% of total assets. The increase in net loans from December 31, 2011 to December 31, 2012 was $37.2 million or 4.3%. This increase was mainly attributed to the AFI Acquisition which added approximately $132.0 million in net loans. During the year ended December 31, 2012, we had new loan production and fundings of approximately $105.0 million (including loans originated for sale) which was offset by payoffs, sales, pay downs and charge-offs during the year.

At December 31, 2012, the allowance for loan losses was $9.8 million or 1.07% of total loans. At December 31, 2011, the allowance for loan losses was $12.8 million or 1.46% of total loans.

At December 31, 2012, our total deposits were $1.303 billion, an increase of $121.3 million (10.3%) over December 31, 2011 of $1.182 billion. The increase was mainly due to the AFI Acquisition in April, 2012, which added approximately $161.0 million in deposits as of December 31, 2012. This was offset by the anticipated runoff of approximately $64.9 million in higher cost time deposits acquired from the Old Harbor Acquisition in October 2011 and the AFI Acquisition in April 2012. Non-interest bearing deposits represented 32.8% of total deposits at December 31, 2012 compared to 27.9% at December 31, 2011.

There were no Federal Home Loan Bank advances as of December 31, 2012 which compares to $5 million in Federal Home Loan Advances at December 31, 2011 that subsequently matured and were repaid in January of 2012.

Refer to Part 1, Item 1. Business for a discussion of our investment portfolio, loan portfolio, deposits and borrowings.

Results of Operations

We recorded net earnings of $4.7 million for the year ended December 31, 2012, compared to net earnings of $3.7 million for the year ended December 31, 2011. Income for the year ended December 31, 2012 was impacted by the Old Harbor acquisition at the end of 2011 as well as the AFI acquisition in April 2012. Income for the year ended December 31, 2012 was also impacted by a reduction in the provision for loan losses year-over year of $650,000 as well as salary, occupancy, data processing and integration expenses of $1.8 million related to the Old Harbor and AFI acquisitions incurred in the year ended December 31, 2012 as compared to $1.1 million in such costs incurred in the year ending December 31, 2011 related to the TBOM and Old Harbor acquisitions. Overall operating expenses increased by $8.1 million primarily as a result of the Old Harbor acquisition in October 2011 as well as the AFI acquisition in April 2012.

We recorded net earnings of $3.7 million for the year ended December 31, 2011, compared to net earnings of $1.6 million for the year ended December 31, 2010. The income for the year ended December 31, 2011 was impacted by the TBOM acquisition at the end of 2010, a reduction in the provision for loan losses year-over-year as well as well as salary, occupancy, data processing and integration expenses of $1.1 million related to the TBOM and Old Harbor acquisitions. Overall operating expenses increased year-over-year primarily as a result of the Old Harbor Acquisition in October 2011, and a full year of operating costs related to the TBOM acquisition in December 2010.

Net Interest Income

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

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

Net interest earnings for the years ended December 31, 2012 and 2011 are reflected in the following table:

(Dollars in thousands)                                        Year ended
                                        December 31, 2012                     December 31, 2011
                                                          Average                               Average
                                             Interest      Rates                   Interest      Rates
                                 Average      Income/     Earned/      Average      Income/     Earned/
                                 Balance      Expense      Paid        Balance      Expense      Paid
Assets
Interest-earning assets
Loans (a)                      $   931,807   $  66,929        7.18 % $   831,830   $  55,311        6.65 %
Investment securities              216,039       5,106        2.36 %     147,608       4,362        2.96 %
Federal funds sold and
. . .