News Column

BANKUNITED, INC. - 10-K - Management's Discussion and Analysis of Financial Condition and Results of Operations

February 27, 2014

The following discussion and analysis is intended to assist readers in understanding the consolidated financial condition and results of operations of BankUnited, Inc. and its subsidiaries (the "Company", "we", "us" and "our") and should be read in conjunction with the consolidated financial statements, accompanying footnotes and supplemental financial data included herein. In addition to historical information, this discussion contains forward-looking statements that involve risks, uncertainties and assumptions that could cause actual results to differ materially from management's expectations. Factors that could cause such differences are discussed in the sections entitled "Forward-looking Statements" and "Risk Factors." We assume no obligation to update any of these forward-looking statements. Overview Performance Highlights In evaluating our financial performance, we consider the level of and trends in net interest income, the net interest margin and interest rate spread, the allowance and provision for loan losses, performance ratios such as the return on average assets and return on average equity, asset quality ratios including the ratio of non-performing loans to total loans, non-performing assets to total assets, and portfolio delinquency and charge-off trends. We consider growth in the loan portfolio by region and product type, trends in deposit mix and cost of deposits. We analyze these ratios and trends against our own historical performance, our budgeted performance and the financial condition and performance of comparable financial institutions, regionally and nationally.



Performance highlights include:



Net income for the year ended December 31, 2013 was $208.9 million or

$2.01 per diluted share, compared to $211.3 million or $2.05 per diluted share for the year ended December 31, 2012. Earnings for 2013 generated a return on average stockholders' equity of 11.16% and a return on average assets of 1.55%. Net interest income for 2013 was $646.2 million, an increase of



$48.6 million over the prior year. The net interest margin, calculated

on a tax-equivalent basis, decreased to 5.73% for 2013 from 6.05% for 2012. The decline in the net interest margin resulted from a decrease in the average yield on interest earning assets, partially offset by a



decrease in the average rate paid on interest bearing liabilities. The

primary driver of the decrease in the average yield on interest earning assets was the continued shift in the composition of the loan portfolio away from higher yielding covered loans into new loans



originated at lower current market rates of interest. The decrease in

the average rate paid on interest bearing liabilities resulted from

declines in market interest rates and a continued shift in deposit mix

into lower cost deposit products. The following chart provides a comparison of net interest margin, the interest rate spread, the average yield on 38



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interest earning assets and the average rate paid on interest bearing liabilities for the years ended December 31, 2013 and 2012 (on a tax-equivalent basis): [[Image Removed: GRAPHIC]]



BankUnited launched its New York franchise in 2013. In conjunction

with the New York launch, Herald was merged into BankUnited. We currently operate four locations in Manhattan, one in Long Island and one in Brooklyn.



2013 was marked by strong loan growth across our markets, resulting in

increased geographic diversification in the portfolio. New loans grew by $3.9 billion in 2013 to $7.6 billion. New loan growth was concentrated in the commercial portfolio segment, commensurate with our core business strategy. The following charts compare the composition of our loan portfolio at December 31, 2013 and 2012: [[Image Removed: GRAPHIC]]



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(1)

National platform is defined as purchased residential loans, loans and

leases made by our commercial lending subsidiaries and indirect auto loans.

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Total deposits grew by $2.0 billion to $10.5 billion while demand deposits increased to 27% of total deposits at December 31, 2013. The following charts illustrate the composition of deposits at December 31, 2013 and 2012: [[Image Removed: GRAPHIC]] The cost of deposits continued to decline. The weighted average cost of deposits declined to 0.65% for the year ended December 31, 2013 as compared to 0.81% for the year ended December 31, 2012.





Asset quality remained strong. At December 31, 2013, 99% of the new commercial loan portfolio was rated "pass" and substantially all of the new residential portfolio was current. The ratio of non-performing, non-covered loans to total non-covered loans was 0.31%



and the ratio of non-covered non-performing assets to total assets was

0.16% at December 31, 2013. Credit risk related to the covered assets is significantly mitigated by the Loss Sharing Agreements. A comparison of our non-performing assets ratio to that of our peers is presented in the chart below: [[Image Removed: GRAPHIC]]



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(1)

Calculated as non-covered non-performing assets as a percentage of total

assets.

(2)

Source: SNL Financial. Peers data reflect median values for publicly traded

U.S. banks and thrifts with assets between $10-25 billion and $1-5 billion

in market capitalization.

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The Company's capital ratios exceed all regulatory "well capitalized"

guidelines. The charts below present the Company's regulatory capital ratios compared to regulatory guidelines as of December 31, 2013 and 2012: [[Image Removed: GRAPHIC]] On March 20, 2013, November 8, 2013 and February 18, 2014, we



completed secondary offerings of 22,540,000 shares, 9,947,821 shares

and 9,200,000 shares, respectively, of our common stock, including

pursuant to the exercise of the underwriters' options to purchase

additional shares. The selling stockholders received all net proceeds

and we did not receive any proceeds from these offerings. After

completion of these offerings, our founding private equity investors

owned, in the aggregate, approximately 11.7% of our outstanding common

stock. Opportunities and Challenges



Management has identified significant opportunities for our Company, including:

Our capital position, market presence and experienced lending and deposit gathering teams position us well for continued organic growth in Florida and the Tri-State market, both of which we believe to be attractive banking markets. We also expect continued growth from our national lending platforms.



We continue to evaluate potential strategic acquisitions of financial

institutions and complementary businesses. The potential to further optimize our deposit mix in conjunction with the growth of our core commercial business.



We have also identified significant challenges confronting the industry and our Company:



The current low interest rate environment is likely to continue to put pressure on our net interest margin, particularly as higher yielding covered assets are liquidated or mature and are replaced with assets originated or purchased at current market rates of interest. While economic conditions in our primary markets have generally improved, the potential for economic disruption continues. A slowing of improvement or return to deteriorating business or economic conditions may lead to elevated levels of non-performing assets or impact our ability to sustain the trajectory of new loan growth. Changes in regulatory capital requirements and uncertainty about the



full impact of new regulation may present challenges in the execution

of our business strategy and the management of non-interest expense.

For additional discussion, see "Regulation and Supervision." 41



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Impact of Acquisition Accounting, ACI Loan Accounting and the Loss Sharing

Agreements

The application of acquisition accounting, accounting for loans acquired with evidence of deterioration in credit quality since origination ("ACI" or "Acquired Credit Impaired" loans) and the provisions of the Loss Sharing Agreements have had a material impact on our financial condition and results of operations. The more significant ways in which our financial statements have been impacted are summarized below and discussed in more detail throughout this "Management's Discussion and Analysis of Financial Condition and Results of Operations":





Under the acquisition method of accounting, all of the assets acquired and liabilities assumed in the FSB Acquisition were initially recorded on the consolidated balance sheet at their estimated fair values as of May 21, 2009. These estimated fair values differed materially from the carrying amounts of many of the assets acquired and liabilities assumed as reflected in the financial statements of the Failed Bank immediately prior to the FSB Acquisition. In particular, the carrying amount of investment securities, loans, the FDIC indemnification asset, goodwill and other intangible assets, net deferred tax assets, deposit liabilities, and FHLB advances were materially impacted by these adjustments, which continue to affect the reported amounts of such assets and liabilities; Interest income, interest expense and the net interest margin reflect the impact of accretion of the fair value adjustments made to the carrying amounts of interest earning assets and interest bearing liabilities in conjunction with the FSB Acquisition;



The estimated fair value at which the acquired loans were initially

recorded by the Company was significantly less than the unpaid

principal balances of the loans. No allowance for loan and lease

losses was recorded with respect to acquired loans at the FSB

Acquisition date. The write-down of loans to fair value in conjunction

with the application of acquisition accounting and credit protection

provided by the Loss Sharing Agreements reduce the impact of the provision for loan losses related to the acquired loans on the results of operations; Acquired investment securities were recorded at their estimated fair values at the FSB Acquisition date, significantly reducing the potential for other-than-temporary impairment charges in periods subsequent to the FSB Acquisition for the acquired securities. Certain of the acquired investment securities are covered under the Loss Sharing Agreements. The impact on results of operations of



other-than-temporary impairment charges related to covered securities

is significantly mitigated by indemnification by the FDIC; An indemnification asset related to the Loss Sharing Agreements with the FDIC was recorded in conjunction with the FSB Acquisition. The Loss Sharing Agreements afford the Company significant protection against future credit losses related to covered assets, including up

to 90 days of past due interest, as well as reimbursement of certain expenses;





Non-interest income includes the effect of amortization or accretion

of the indemnification asset; Non-interest income includes gains and losses associated with the



resolution of covered assets and the related effect of indemnification

under the terms of the Loss Sharing Agreements. The impact of gains or losses related to transactions in covered loans and other real estate owned is significantly mitigated by indemnification by the FDIC; and ACI loans that are contractually delinquent may not be reflected as non-accrual loans or non-performing assets due to the accounting



treatment accorded such loans under Accounting Standards Codification

("ASC") section 310-30, "Loans and Debt Securities Acquired with Deteriorated Credit Quality."



These factors may impact the comparability of our financial performance to that of other financial institutions.

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Critical Accounting Policies and Estimates

Our consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles and follow general practices within the banking industry. Application of these principles requires management to make complex and subjective estimates and judgments that affect the amounts reported in the consolidated financial statements and accompanying notes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable and appropriate under current circumstances. These assumptions form the basis for our judgments about the carrying values of assets and liabilities that are not readily available from independent, objective sources. We evaluate our estimates on an ongoing basis. Use of alternative assumptions may have resulted in significantly different estimates. Actual results may differ from these estimates. Accounting policies are an integral part of our financial statements. A thorough understanding of these accounting policies is essential when reviewing our reported results of operations and our financial position. We believe that the critical accounting policies and estimates discussed below involve a heightened level of management judgment due to the complexity, subjectivity and sensitivity involved in their application.



Note 1 to the consolidated financial statements contains a further discussion of our significant accounting policies.

Allowance for Loan and Lease Losses

The allowance for loan and lease losses ("ALLL") represents management's estimate of probable loan losses inherent in the Company's loan portfolio. Determining the amount of the ALLL is considered a critical accounting estimate because of its complexity and because it requires significant judgment and estimation. Estimates that are particularly susceptible to change that may have a material impact on the amount of the ALLL include:





the amount and timing of expected future cash flows from ACI loans and

impaired loans; the value of underlying collateral, which impacts loss severity and certain cash flow assumptions; the selection of proxy data used to calculate loss factors;



our evaluation of the risk profile of various loan portfolio segments,

including internal risk ratings; and our selection and evaluation of qualitative factors.



Note 1 to the consolidated financial statements describes the methodology used to determine the ALLL.

Accounting for Acquired Loans and the FDIC Indemnification Asset

A significant portion of the covered loans are ACI Loans. The accounting for ACI loans requires the Company to estimate the timing and amount of cash flows to be collected from these loans and to continually update estimates of the cash flows expected to be collected over the lives of the loans. Similarly, the accounting for the FDIC indemnification asset requires the Company to estimate the timing and amount of cash flows to be received from the FDIC in reimbursement for losses and expenses related to the covered loans; these estimates are directly related to estimates of cash flows to be received from the covered loans. Estimated cash flows impact the rate of accretion on covered loans and the rate of accretion or amortization on the FDIC indemnification asset as well as the amount of any ALLL to be established related to the covered loans. These cash flow estimates are considered to be critical accounting estimates because they involve significant judgment and assumptions as to their amount and timing. 43



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Covered 1-4 single family residential and home equity loans were placed into homogenous pools at the time of the FSB Acquisition; the ongoing credit quality and performance of these loans is monitored on a pool basis and expected cash flows are estimated on a pool basis. At acquisition, the fair value of the pools was measured based on the expected cash flows to be derived from each pool. For ACI pools, the difference between total contractual payments due and the cash flows expected to be received at acquisition was recognized as non-accretable difference. The excess of expected cash flows over the recorded fair value of each ACI pool at acquisition was recognized as accretable yield. The accretable yield is accreted into interest income over the life of each pool. We monitor the pools quarterly by updating our expected cash flows to determine whether any changes have occurred in expected cash flows that would be indicative of impairment or necessitate reclassification between non-accretable difference and accretable yield. Initial and ongoing cash flow expectations incorporate significant assumptions regarding prepayment rates, the timing of resolution of loans, the timing and amount of loan sales, frequency of default, delinquency and loss severity, which is dependent on estimates of underlying collateral values. Changes in these assumptions could have a potentially material impact on the amount of the ALLL related to the covered loans as well as on the rate of accretion on these loans. Prepayment, delinquency and default curves used to forecast pool cash flows are derived from roll rates generated from the historical performance of the ACI residential loan portfolio observed over the immediately preceding four quarters. Generally, improvements in expected cash flows less than 1% of the expected cash flows from a pool are not recorded. This threshold is judgmentally determined. Generally, commercial loans are monitored and expected cash flows updated at the individual loan level due to the size and other unique characteristics of these loans. The expected cash flows are estimated based on judgments and assumptions which include credit risk grades established in the Bank's ongoing credit review program, likelihood of default based on observations of specific loans during the credit review process as well as applicable industry data, loss severity based on updated evaluations of cash flows from available collateral, and the contractual terms of the underlying loan agreements. Changes in the assumptions that impact forecasted cash flows could result in a potentially material change to the amount of the ALLL or the rate of accretion on these loans. The estimated cash flows from the FDIC indemnification asset are sensitive to changes in the same assumptions that impact expected cash flows on covered loans. Estimated cash flows impact the rate of accretion or amortization on the FDIC indemnification asset. Other Real Estate Owned Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at the fair value of the collateral at the date of foreclosure based on estimates, including some obtained from third parties, less estimated costs to sell, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed, and the assets are carried at the lower of cost or fair value less estimated costs to sell. Significant property improvements that enhance the salability of the property are capitalized to the extent that the carrying value does not exceed estimated realizable value. Legal fees, maintenance and other direct costs of foreclosed properties are expensed as incurred. Given the level of judgment involved in estimating fair value of the properties, accounting for OREO is regarded as a critical accounting policy. Estimates of value of OREO properties are typically based on real estate appraisals performed by independent appraisers. In some cases, if an appraisal is not available, values may be based on brokers' price opinions. These values are generally updated as appraisals become available. 44



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Table of Contents Fair Value Measurements The Company measures certain of its assets and liabilities at fair value on a recurring or non-recurring basis. Assets and liabilities measured at fair value on a recurring basis include investment securities available for sale and derivative instruments. Assets that may be measured at fair value on a non-recurring basis include OREO, impaired loans, loans held for sale, intangible assets, mortgage servicing rights and assets acquired and liabilities assumed in business combinations. The consolidated financial statements also include disclosures about the fair value of financial instruments that are not recorded at fair value. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. Inputs used to determine fair value measurements are prioritized into a three level hierarchy based on observability and transparency of the inputs, summarized as follows:



Level 1-observable inputs that reflect quoted prices in active markets,

Level 2-inputs other than quoted prices in active markets that are

based on observable market data, and

Level 3-unobservable inputs requiring significant management judgment

or estimation.

When observable market inputs are not available, fair value is estimated using modeling techniques such as discounted cash flow analyses and option pricing models. These modeling techniques utilize assumptions that we believe market participants would use in pricing the asset or the liability. Particularly for estimated fair values of assets and liabilities categorized within level 3 of the fair value hierarchy, the selection of different valuation techniques or underlying assumptions could result in fair value estimates that are higher or lower than the amounts recorded or disclosed in our consolidated financial statements. Considerable judgment may be involved in determining the amount that is most representative of fair value.



Because of the degree of judgment involved in selecting valuation techniques and underlying assumptions, fair value measurements are considered critical accounting estimates.

Notes 1, 4 and 17 to our consolidated financial statements contain further information about fair value estimates.

Recent Accounting Pronouncements

See Note 1 to our consolidated financial statements for a discussion of recent accounting pronouncements.

Results of Operations Net Interest Income Net interest income is the difference between interest earned on interest earning assets and interest incurred on interest bearing liabilities and is the primary driver of core earnings. Net interest income is impacted by the relative mix of interest earning assets and interest bearing liabilities, the ratio of interest earning assets to total assets and of interest bearing liabilities to total funding sources, movements in market interest rates, levels of non-performing assets and pricing pressure from competitors.



The mix of interest earning assets is influenced by loan demand, market and competitive conditions in our primary lending markets and by management's continual assessment of the rate of

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return and relative risk associated with various classes of earning assets. The mix of interest bearing liabilities is influenced by management's assessment of the need for lower cost funding sources weighed against relationships with customers and growth requirements and is impacted by competition for deposits in the Company's markets and the availability and pricing of other sources of funds. Net interest income is also impacted by the accounting for ACI loans and to a declining extent, the accretion of fair value adjustments recorded in conjunction with the FSB Acquisition. ACI loans were initially recorded at fair value, measured based on the present value of expected cash flows. The excess of expected cash flows over carrying value, known as accretable yield, is recognized as interest income over the lives of the underlying loans. The positive impact of accretion related to ACI loans on the net interest margin and the interest rate spread is expected to continue to decline as ACI loans comprise a declining percentage of total loans. The proportion of total loans represented by ACI loans is declining as the ACI loans are resolved and new loans are added to the portfolio. ACI loans represented 14.4%, 29.1% and 50.8% of total loans, net of premiums, discounts, deferred fees and costs, at December 31, 2013, 2012 and 2011, respectively. As this trend continues, we expect our net interest margin and interest rate spread to decrease. Consideration received earlier than expected or in excess of expected cash flows may result in a pool of ACI residential loans becoming fully amortized and its carrying value reduced to zero even though outstanding contractual balances and expected cash flows remain related to loans in the pool. Once the carrying value of a pool is reduced to zero, any future proceeds from the remaining loans, representing further realization of accretable yield, are recognized as interest income upon receipt. The carrying value of one pool has been reduced to zero. The UPB of loans remaining in this pool was $64 million at December 31, 2013. Fair value adjustments of interest earning assets and interest bearing liabilities recorded at the time of the FSB Acquisition are accreted to interest income or expense over the lives of the related assets or liabilities. Generally, accretion of these fair value adjustments increases interest income and decreases interest expense, and thus has a positive impact on our net interest income, net interest margin and interest rate spread. The impact of accretion of fair value adjustments on interest income and interest expense will continue to decline as these assets and liabilities mature or are repaid and constitute a smaller portion of total interest earning assets and interest bearing liabilities.



The impact of accretion and ACI loan accounting on net interest income makes it difficult to compare our net interest margin and interest rate spread to those reported by other financial institutions.

The following tables present, for the years ended December 31, 2013, 2012 and 2011, information about (i) average balances, the total dollar amount of taxable equivalent interest income from earning assets and the resultant average yields; (ii) average balances, the total dollar amount of interest expense on interest bearing liabilities and the resultant average rates; (iii) net interest income; (iv) the interest rate spread; and (v) the net interest margin. Non-accrual and restructured loans are included in the average balances presented in this table; however, interest income foregone on non-accrual loans is not 46



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included. Interest income, yields, spread and margin have been calculated on a tax equivalent basis (dollars in thousands):

2013 2012 2011 Average Yield/ Average Yield/ Average Yield/ Balance Interest(1) Rate(1) Balance Interest(1) Rate(1) Balance Interest(1) Rate(1) Assets: Interest earning assets: Loans $ 6,817,786$ 625,948 9.18 % $ 4,887,209$ 588,950 12.05 % $ 3,848,837$ 513,539 13.34 % Investment securities available for sale 4,135,407 117,289 2.84 % 4,611,379 135,833 2.95 % 3,654,137 127,630 3.49 % Other interest earning assets 500,306 5,342 1.07 % 522,184 4,931 0.94 % 628,782 2,743 0.44 % Total interest earning assets 11,453,499 748,579 6.54 % 10,020,772 729,714 7.28 % 8,131,756 643,912 7.92 %

Allowance for loan and lease losses (62,461 ) (56,463 ) (57,462 ) Non-interest earning assets 2,057,923 2,387,719 2,866,486 Total assets $ 13,448,961$ 12,352,028$ 10,940,780 Liabilities and Stockholders' Equity: Interest bearing liabilities: Interest bearing demand deposits $ 582,623 2,698 0.46 % $ 504,614 3,155 0.63 % $ 382,329 2,499 0.65 % Savings and money market deposits 4,280,531 20,620 0.48 % 3,912,444



24,093 0.62 % 3,366,466 29,026 0.86 % Time deposits 2,844,377 37,248 1.31 % 2,632,451

38,930 1.48 % 2,585,201 44,248 1.71 % Total interest bearing deposits 7,707,531 60,566 0.79 % 7,049,509 66,178 0.94 % 6,333,996 75,773 1.20 % FHLB advances and other borrowings 2,098,231 32,045 1.53 % 2,240,345 57,091 2.55 % 2,247,401 63,164 2.81 % Total interest bearing liabilities 9,805,762 92,611 0.94 % 9,289,854 123,269 1.33 % 8,581,397 138,937 1.62 % Non-interest bearing demand deposits 1,586,007 1,099,448 622,377 Other non-interest bearing liabilities 184,645 265,399 282,416 Total liabilities 11,576,414 10,654,701 9,486,190



Stockholders'

equity 1,872,547 1,697,327 1,454,590 Total liabilities and stockholders' equity $ 13,448,961$ 12,352,028$ 10,940,780 Net interest income $ 655,968$ 606,445$ 504,975 Interest rate spread 5.60 % 5.95 % 6.30 % Net interest margin 5.73 % 6.05 % 6.21 %



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(1)

On a tax-equivalent basis where applicable

Increases and decreases in interest income, calculated on a tax-equivalent basis, and interest expense result from changes in average balances (volume) of interest earning assets and liabilities, as well as changes in average interest rates. The following table shows the effect that these factors had on the interest earned on our interest earning assets and the interest incurred on our interest bearing liabilities for the years indicated. The effect of changes in volume is determined by multiplying the change in volume by the previous year's average rate. Similarly, the effect of rate changes is calculated 47



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by multiplying the change in average rate by the previous year's volume. Changes applicable to both volume and rate have been allocated to volume (in thousands):

2013 Compared to 2012 2012



Compared to 2011

Change Due Change Due Increase Change Due



Change Due Increase

to Volume to Rate (Decrease) to Volume to Rate (Decrease) Interest Income Attributable to: Loans $ 177,261$ (140,263 )$ 36,998$ 125,061$ (49,650 )$ 75,411 Investment securities available for sale (13,471 ) (5,073 ) (18,544 ) 27,935 (19,732 ) 8,203 Other interest earning assets (268 ) 679 411 (956 ) 3,144 2,188 Total interest income 163,522 (144,657 ) 18,865 152,040 (66,238 ) 85,802 Interest Expense Attributable to: Interest bearing demand deposits 401 (858 ) (457 ) 732 (76 ) 656 Savings and money market deposits 2,004 (5,477 ) (3,473 ) 3,147 (8,080 ) (4,933 ) Time deposits 2,793 (4,475 ) (1,682 ) 628



(5,946 ) (5,318 )

Total interest bearing deposits 5,198 (10,810 ) (5,612 ) 4,507 (14,102 ) (9,595 ) FHLB advances and other borrowings (2,194 ) (22,852 ) (25,046 ) (457 )



(5,616 ) (6,073 )

Total

interest

expense 3,004 (33,662 ) (30,658 ) 4,050



(19,718 ) (15,668 )

Increase (decrease) in net interest income $ 160,518$ (110,995 )$ 49,523$ 147,990$ (46,520 )$ 101,470 Year ended December 31, 2013 compared to year ended December 31, 2012 Net interest income, calculated on a tax-equivalent basis, was $656.0 million for the year ended December 31, 2013 compared to $606.4 million for the year ended December 31, 2012, an increase of $49.6 million. The increase in net interest income was comprised of an increase in interest income of $18.9 million and a decrease in interest expense of $30.7 million. The increase in tax-equivalent interest income resulted primarily from a $37.0 million increase in interest income from loans offset by an $18.5 million decrease in interest income from investment securities available for sale. Increased interest income from loans was attributable to a $1.9 billion increase in the average balance outstanding partially offset by a 2.87% decrease in the tax equivalent yield to 9.18% for the year ended December 31, 2013 from 12.05% for the year ended December 31, 2012. Offsetting factors contributing to the overall decline in the yield on loans included: New loans originated at lower market rates of interest comprised a greater percentage of the portfolio for the year ended December 31,



2013 than for the comparable period in 2012. New loans represented

75.8% of the average balance of loans outstanding for the year ended

December 31, 2013 as compared to 55.8% for the year ended December 31,

2012. We expect the impact of growth of the new loan portfolio to lead

to further declines in the overall yield on loans in future periods.

The tax equivalent yield on new loans declined to 3.77% for the year ended December 31, 2013 from 4.34% for the year ended December 31, 2012, primarily reflecting the addition of loans to the portfolio at lower market rates. 48



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The yield on covered loans increased to 26.13% for the year ended December 31, 2013 from 21.80% for the year ended December 31, 2012. The increase in the yield on covered loans resulted primarily from (i) improvements in the timing and amount of expected cash flows and



corresponding transfers from non-accretable difference to accretable

yield and (ii) an increase in the amount of interest income recognized

in connection with the sale of ACI residential loans from the pool

with a carrying value of zero, which accounted for a 1.68% increase in

the yield on covered loans. Interest income on loans included $50.6 million and $29.9 million in proceeds from sales of loans in this pool for the years ended December 31, 2013 and 2012,



respectively. We expect the impact on interest income of sale proceeds

related to this pool to decline significantly in the future. The average balance of investment securities available for sale decreased by $476 million for the year ended December 31, 2013 from the year ended December 31, 2012 while the tax-equivalent yield declined to 2.84% for the year ended December 31, 2013 from 2.95% for the same period in 2012. The decline in yield resulted from lower prevailing market interest rates and changes in portfolio composition. The decline in average balance resulted from sales of investment securities, discussed further in the sections entitled "Non-Interest Income" and "Analysis of Financial Condition-Investment Securities Available for Sale." The primary components of the decrease in interest expense for the year ended December 31, 2013 as compared to the year ended December 31, 2012 were a $5.6 million decline in interest expense on deposits and a $25.0 million decline in interest expense on FHLB advances and other borrowings. The most significant factor contributing to the decline in interest expense on deposits was a decline in market interest rates, leading to a decrease in the average rate paid on interest bearing deposits to 0.79% for the year ended December 31, 2013 from 0.94% for the year ended December 31, 2012. This decrease was partially offset by an increase of $658 million in average interest bearing deposits. The average rate paid on FHLB advances and other borrowings, inclusive of the impact of cash flow hedges and fair value accretion, declined by 1.02% to 1.53% for the year ended December 31, 2013 from 2.55% for the year ended December 31, 2012. This decline reflected the impact of the extinguishment and maturity of higher rate advances. The net interest margin, calculated on a tax-equivalent basis, for the year ended December 31, 2013 was 5.73% as compared to 6.05% for the year ended December 31, 2012, a decrease of 32 basis points. The interest rate spread decreased to 5.60% for the year ended December 31, 2013 from 5.95% for the year ended December 31, 2012. The declines in net interest margin and interest rate spread resulted primarily from lower yields on loans and investment securities partly offset by a lower cost of deposits and borrowings, as discussed above. We expect the net interest margin and interest rate spread to decrease in future years as new loans are added to the portfolio at lower current rates and higher yielding legacy assets continue to decline. The net interest margin was also positively impacted by the increase in the ratio of non-interest bearing demand deposits to total deposits and an increase in the ratio of interest-earning assets to total assets. Year ended December 31, 2012 compared to year ended December 31, 2011 Net interest income, calculated on a tax-equivalent basis, was $606.4 million for the year ended December 31, 2012 compared to $505.0 million for the year ended December 31, 2011, an increase of $101.4 million. The increase in net interest income was comprised of an increase in interest income of $85.8 million and a decrease in interest expense of $15.7 million.



The increase in tax-equivalent interest income resulted primarily from a $75.4 million increase in interest income from loans and an $8.2 million increase in interest income from investment securities available for sale.

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Increased interest income from loans was attributable to a $1.0 billion increase in the average balance outstanding offset by a decrease in the average yield to 12.05% for 2012 from 13.34% for 2011. Offsetting factors contributed to the overall decline in the yield on loans:





New loans originated at lower market rates of interest comprised a greater percentage of the portfolio in 2012 than in 2011. New loans represented 55.8% of the average balance of loans outstanding in 2012 as compared to 24.0% in 2011. The tax equivalent yield on new loans was 4.34% for the year ended December 31, 2012 as compared to 4.93% for the year ended December 31, 2011.





The yield on loans acquired in the FSB Acquisition increased to 21.80%

for 2012 as compared to 16.00% for 2011. This increase resulted from

(i) generally improved default frequency and severity rates leading to

an increase in expected cash flows; (ii) covered loans being resolved at a faster rate than previously expected leading to acceleration of both actual and forecasted cash flows and higher accretion; and (iii) recognition of all proceeds from resolution of loans in the



residential pool with a carrying value of zero as interest income, as

discussed above. Specifically, proceeds of $29.9 million from the sale of loans in this pool were recognized as interest income in the fourth quarter of 2012. The average balance of investment securities available for sale increased by $1.0 billion for the year ended December 31, 2012 over the year ended December 31, 2011 while the yield declined to 2.95% for 2012 from 3.49% for 2011. The decline in yield was primarily a result of adding securities to the portfolio at lower prevailing rates. The primary components of the decrease in interest expense for the year ended December 31, 2012 as compared to the year ended December 31, 2011 were a $9.6 million decline in interest expense on deposits and a $6.1 million decline in interest expense on FHLB advances and other borrowings. The most significant factor contributing to the decline in interest expense on deposits was a decline in the average rate paid on interest bearing deposits to 0.94% in 2012 as compared to 1.20% in 2011, partly offset by a $0.7 billion increase in the average balance outstanding. The decrease in average rate resulted primarily from a decline in market rates of interest across deposit products. In addition, accretion of fair value adjustments of time deposits declined by $6.5 million for the year ended December 31, 2012 as compared to the year ended December 31, 2011. The average rate paid on FHLB advances, inclusive of the impact of cash flow hedges and fair value accretion, declined by 0.25%, to 2.56% in 2012 from 2.81% in 2011. This decline resulted primarily from maturing advances being rolled over at lower market rates, partially offset by a decline of $4.3 million in accretion of fair value adjustments. The net interest margin, calculated on a tax-equivalent basis, for the year ended December 31, 2012 was 6.05% as compared to 6.21% for the year ended December 31, 2011, a decrease of 16 basis points. The interest rate spread declined to 5.95% for the year ended December 31, 2012 from 6.30% for the year ended December 31, 2011. The declines in net interest margin and interest rate spread resulted primarily from lower yields on loans and investment securities partly offset by a lower cost of deposits and borrowings, as discussed above.



Provision for Loan Losses

The provision for loan losses is the amount of expense that, based on our judgment, is required to maintain the ALLL at an adequate level to absorb probable losses inherent in the loan portfolio at the balance sheet date and that, in management's judgment, is appropriate under U.S. generally accepted accounting principles. The determination of the amount of the ALLL is complex and involves a high degree of judgment and subjectivity. Our determination of the amount of the allowance and corresponding provision for loan losses considers ongoing evaluations of the credit quality of and level of credit risk inherent in various segments of the loan portfolio and of individually significant credits, 50



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levels of non-performing loans and charge-offs, statistical trends and economic and other relevant factors. See "Analysis of the Allowance for Loan and Lease Losses" below for more information about how we determine the appropriate level of the allowance. Because the determination of fair value at which the loans acquired in the FSB Acquisition were initially recorded encompassed assumptions about expected future cash flows and credit risk, no ALLL was recorded at the date of acquisition. An allowance related to ACI loans is recorded only when estimates of future cash flows related to these loans are revised downward, indicating further deterioration in credit quality. An allowance for non-ACI loans may be established if factors considered relevant by management indicate that the credit quality of the non-ACI loans has deteriorated. Since the recognition of a provision for (recovery of) loan losses on covered loans represents an increase (reduction) in the amount of reimbursement we ultimately expect to receive from the FDIC, we also record an increase (decrease) in the FDIC indemnification asset for the present value of the projected increase (reduction) in reimbursement, with a corresponding increase (decrease) in non-interest income, recorded in "Net gain (loss) on indemnification asset" as discussed below in the section entitled "Non-interest income." Therefore, the impact on our results of operations of any provision for (recovery of) loan losses on covered loans is significantly mitigated by the corresponding impact on non-interest income. For the years ended December 31, 2013, 2012 and 2011, we recorded recoveries of losses on covered loans of $(1.7) million, $(0.5) million and $(7.7) million and increases (reductions) in related non-interest income of $(1.6) million, $0.3 million and $(6.3) million, respectively. Also see the section below entitled "Termination of the Commercial Shared-Loss Agreement." For the years ended December 31, 2013, 2012 and 2011, we recorded provisions for loan losses of $33.7 million, $19.4 million and $21.5 million, respectively, related to new loans. These loans are not protected by the Loss Sharing Agreements and as such, these provisions are not offset by increases in non-interest income. The increase in the provision for new loans for the year ended December 31, 2013 as compared to the year ended December 31, 2012 was driven primarily by growth in the new loan portfolio and losses of $15.3 million recognized on one commercial loan relationship, partially offset by reductions in general loss factors applied in determining the ALLL. See the section entitled "Analysis of the Allowance for Loan and Lease Losses" below for further discussion. The provision for new loans declined for the year ended December 31, 2012 as compared to the year ended December 31, 2011 in spite of increased loan growth in 2012. The impact of loan growth on the provision for loan losses was partially offset by decreases in the peer group loss factors applied in determining the ALLL for the new commercial portfolio.



Non-Interest Income

The Company reported non-interest income of $31.1 million, $89.2 million and $163.2 million for the years ended December 31, 2013, 2012 and 2011, respectively. A significant portion of our non-interest income relates to the covered assets, including the resolution of assets covered by our Loss Sharing Agreements with the FDIC, gains and losses on the covered assets and accretion or amortization of the FDIC indemnification asset. Typically, the primary components of non-interest income of financial institutions are service charges and fees and gains or losses related to the sale or valuation of investment securities, loans and other assets. Thus, it is difficult to compare the amount and composition of our non-interest income with that of other financial institutions of our size. 51



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The following table presents a comparison of the categories of non-interest income for the years ended December 31, 2013, 2012 and 2011 (in thousands):

2013 2012



2011

(Amortization) accretion of FDIC indemnification asset $ (36,943 )$ 15,306$ 55,901 Income from resolution of covered assets, net 78,862 51,016 18,776 Net gain (loss) on indemnification asset (50,638 )



(6,030 ) 79,812 FDIC reimbursement of costs of resolution of covered assets

9,397 19,569 31,528 Loss on sale of covered loans, net (16,195 )



(29,270 ) (70,366 ) Other-than-temporary impairment ("OTTI") on covered investment securities available for sale

(963 ) - - Mortgage insurance income 2,061 9,772 16,904 Non-interest income from covered assets (14,419 ) 60,363 132,555 Service charges and fees 14,255 12,716 11,128 Gain on sale of non-covered loans, net 726 613 652 Gain on investment securities available for sale, net 9,592 17,039 1,136 Loss on extinguishment of debt - (14,175 ) - Loss on termination of interest rate swap - (8,701 ) - Other non-interest income 20,952 21,392 17,746 $ 31,106$ 89,247$ 163,217 Non-interest income related to transactions in the covered assets Historically, a significant portion of our non-interest income has resulted from transactions related to the resolution of assets covered by our Loss Sharing Agreements with the FDIC and (amortization) accretion of the FDIC indemnification asset. As covered assets continue to decline as a percentage of total assets, we expect the impact of these transactions on results of operations to decrease. As anticipated, the Company began amortizing the FDIC indemnification asset in 2013. In prior years, we recorded accretion of the FDIC indemnification asset. (Amortization) accretion of the FDIC indemnification asset totaled $(36.9) million, $15.3 million and $55.9 million for the years ended December 31, 2013, 2012 and 2011, respectively. As the expected cash flows from ACI loans have increased as discussed above, expected cash flows from the FDIC indemnification asset have decreased. The FDIC indemnification asset was initially recorded at its estimated fair value of $3.4 billion, representing the present value of estimated future cash payments from the FDIC for probable losses on covered assets. As projected cash flows from the ACI loans have increased, the yield on the loans has increased accordingly and the estimated future cash payments from the FDIC have decreased. This change in estimated cash flows is recognized prospectively, consistent with the recognition of the increased cash flows from the ACI loans. As a result, beginning in the first quarter of 2013, the FDIC indemnification asset is being amortized to the amount of the estimated future cash flows. For the years ended December 31, 2013, 2012 and 2011, the average rate at which discount was (amortized) accreted on the FDIC indemnification asset was (2.76)%, 0.89% and 2.48%, respectively. The rate of amortization will increase if estimated future cash payments from the FDIC decrease. If recent trends continue, we expect the rate of amortization of the indemnification asset to increase in future periods. The amount of amortization is impacted by both the change in the amortization rate and the decrease in the average balance of the indemnification asset. The average balance of the indemnification asset decreased primarily as a result of the submission of claims and receipt of cash from the FDIC under the terms of the Loss Sharing Agreements. As we continue to submit claims under the Loss Sharing Agreements and recognize periodic amortization, the balance of the indemnification asset will continue to decline. 52



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The balance of the FDIC indemnification asset is also reduced or increased as a result of decreases or increases in estimated cash flows to be received from the FDIC related to the gains or losses recorded in our consolidated financial statements from transactions in the covered assets. When these transaction gains or losses are recorded, we also record an offsetting amount in the consolidated statement of income line item "Net gain (loss) on indemnification asset." This line item includes the significantly mitigating impact of FDIC indemnification related to the following types of transactions in covered assets: gains or losses from the resolution of covered assets; provisions for (recoveries of) losses on covered loans; gains or losses on the sale of covered loans; gains or losses on covered investment securities; gains or losses on the sale of OREO; and impairment of OREO. Each of these types of transactions is discussed further below.



A rollforward of the FDIC indemnification asset from December 31, 2010 to December 31, 2013 follows (in thousands):

Balance, December 31, 2010$ 2,667,401 Accretion 55,901 Reduction for claims filed (753,963 ) Net gain on indemnification asset 79,812 Balance, December 31, 2011 2,049,151 Accretion 15,306 Reduction for claims filed (600,857 ) Net loss on indemnification asset (6,030 ) Balance, December 31, 2012 1,457,570 Amortization (36,943 ) Reduction for claims filed (164,872 ) Net loss on indemnification asset (50,638 ) Balance, December 31, 2013$ 1,205,117 Covered loans may be resolved through prepayment, short sale of the underlying collateral, foreclosure, sale of the loans or charge-off. For loans resolved through prepayment, short sale or foreclosure, the difference between consideration received in resolution of the loans and the carrying value of the loans is recorded in the consolidated statement of income line item "Income from resolution of covered assets, net." Both gains and losses on individual resolutions are included in this line item. Losses from the resolution of covered loans increase the amount recoverable from the FDIC under the Loss Sharing Agreements. Gains from the resolution of covered loans reduce the amount recoverable from the FDIC under the Loss Sharing Agreements. These additions to or reductions in amounts recoverable from the FDIC related to the resolution of covered loans are recorded in non-interest income in the line item "Net gain (loss) on indemnification asset" and reflected as corresponding increases or decreases in the FDIC indemnification asset. The amount of income or loss recorded in any period will be impacted by the number and UPB of covered loans resolved, the amount of consideration received, and our ability to accurately project cash flows from ACI loans in future periods. 53



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As history of the performance and resolution of ACI loans has grown and we have updated our projections of cash flows from the ACI loans, gains or losses recorded on resolution of covered loans have declined in absolute terms. As our projections of cash flows from the ACI loans have been updated, these cash flows have increasingly been reflected in interest income, through increased yields and higher accretion, rather than in income from resolution of covered assets. A reduction in the volume of covered asset resolutions has also contributed to this trend. For the years ended December 31, 2013, 2012 and 2011, ACI loans with a UPB of $465 million, $1.0 billion and $1.7 billion were resolved by payment in full, foreclosure or short sale. The following table provides further detail of the components of income from resolution of covered assets, net for the years ended December 31, 2013, 2012 and 2011 (in thousands): 2013 2012 2011 Payments in full $ 69,673$ 70,562$ 90,773 Foreclosures (2,657 ) (19,326 ) (46,726 ) Short sales (2,334 ) (5,046 ) (25,185 ) Charge-offs (927 ) (2,918 ) (6,917 ) Recoveries 15,107 7,744 6,831



Income from resolution of covered assets, net $ 78,862$ 51,016$ 18,776

Income from resolution of covered assets, net was $78.9 million, $51.0 million and $18.8 million, respectively, for the years ended December 31, 2013, 2012 and 2011. The increase in income for the year ended December 31, 2013 compared to the year ended December 31, 2012 resulted mainly from increased recoveries on commercial loans and lower losses from residential foreclosure resolutions, whereas the increase in income for the year ended December 31, 2012 compared to 2011 was primarily due to lower losses on resolutions from foreclosures and short sales, partially offset by a decrease in income from payments in full. The substantial majority of income from resolution of covered assets has resulted from transactions covered under the Single Family Shared-Loss Agreement. The decrease in the income from payments in full for the year ended December 31, 2012 compared to the year ended December 31, 2011 was the result of additional history with the performance of covered loans being reflected in our updated cash flow forecasts and a decline in the number of paid in full resolutions. In 2013, the number of paid in full resolutions increased, but the average income per resolution decreased. The increase in the number of paid in full resolutions was primarily associated with an increase in refinancing activity as a result of low interest rates and improved home prices. The decrease in average income per resolution was a result of the updated cash flow forecasts. We expect the impact of payments in full to decline in the future as the number of loans in the portfolio likely to be resolved in this manner decreases and the cash flow forecasts reflect the historical payoff activity. A decline in the level of foreclosure and short sale activity coupled with improving home prices led to a decrease in losses on resolutions from foreclosures and short sales in 2013 compared to 2012 and in 2012 compared to 2011.



The impact of charge-offs has declined year over year due primarily to reductions in the number and dollar amount of charge-offs of home equity lines of credit.

Recoveries increased in 2013 primarily due to two large commercial loan recoveries. We expect the amount of commercial recoveries to decrease in the future.

Under the Purchase and Assumption Agreement, we are permitted to sell on an annual basis up to 2.5% of the covered loans, based upon the UPB at the time of the FSB Acquisition, or approximately $280 million, without prior consent of the FDIC. Any losses incurred from such loan sales are covered 54



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under the Loss Sharing Agreements. The significantly mitigating amounts recoverable from the FDIC related to these losses are recorded as increases in the FDIC indemnification asset and corresponding increases in the non-interest income line item "Net gain (loss) on indemnification asset." Sales of covered loans for the years ended December 31, 2013, 2012 and 2011 are summarized as follows (in thousands): 2013 2012 2011 Unpaid principal balance of loans sold(1) $ 127,972$ 165,999$ 268,588 Cash proceeds, net of transaction costs(1) $ 64,588$ 69,986$ 75,782 Carrying value of loans sold(1) 80,783



99,256 146,148

Net pre-tax impact on earnings, excluding gain on indemnification asset(1) $ (16,195 )$ (29,270 )$ (70,366 ) Gain on indemnification asset(2) $ 21,021$ 30,725$ 56,053



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(1)

Excludes loans sold from a pool of ACI loans with a zero carrying value.

(2)

Includes gains of $8,326 and $7,302 related to loans sold from a pool of

ACI loans with a zero carrying value for the years ended December 31, 2013

and 2012, respectively.

Loans were sold on a non-recourse basis to third parties. The decline in loss on sale of covered loans for the year ended December 31, 2013 as compared to the year ended December 31, 2012 and for the year ended December 31, 2012 as compared to the year ended December 31, 2011 resulted from (i) improved pricing on the sales and (ii) a lower UPB of loans sold from pools other than the zero carrying value pool. No loss on sale of loans was recorded in the consolidated financial statements on the sale of loans from this pool once its carrying value was reduced to zero; rather, proceeds from sale of loans in this pool were reflected in interest income upon receipt as discussed above. Since reimbursements from the FDIC under the Loss Sharing Agreements are calculated based on UPB of the loans rather than on their financial statement carrying amounts, the gain on indemnification asset recorded related to the sale of covered loans for 2013 and 2012 included a component related to the sale of loans from the zero carrying value pool. We anticipate that we will continue to exercise our right to sell covered loans on a quarterly basis in the future. Additional impairment arising since the FSB Acquisition related to covered loans is recorded in earnings through the provision for losses on covered loans. Under the terms of the Loss Sharing Agreements, the Company is entitled to recover from the FDIC a portion of losses on these loans; therefore, the discounted amount of additional expected cash flows from the FDIC related to these losses is recorded in non-interest income in the line item "Net gain (loss) on indemnification asset" and reflected as a corresponding increase in the FDIC indemnification asset. Alternatively, a recovery of the provision for loan losses related to covered loans results in a reduction in the amounts the Company expects to recover from the FDIC and a corresponding reduction in the FDIC indemnification asset and in non-interest income, reflected in the line item "Net gain (loss) on indemnification asset." The Company records impairment charges related to declines in the net realizable value of OREO properties subject to the Loss Sharing Agreements and recognizes additional gains or losses upon the eventual sale of such OREO properties. These amounts are included in non-interest expense in the consolidated financial statements. The estimated increase or reduction in amounts recoverable from the FDIC with respect to these gains and losses is reflected as an increase or decrease in the FDIC indemnification asset and in non-interest income in the line item "Net gain (loss) on indemnification asset." 55



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As discussed further in the section entitled "Investment Securities Available for Sale", the net loss on indemnification asset for the year ended December 31, 2013 was also impacted by an OTTI loss recognized on one covered security. Net gain (loss) on indemnification asset of $(50.6) million, $(6.0) million and $79.8 million was recorded for the years ended December 31, 2013, 2012 and 2011, respectively, representing the net change in the FDIC indemnification asset from increases or decreases in cash flows estimated to be received from the FDIC related to gains and losses from covered assets as discussed in the preceding paragraphs. The net impact on earnings before taxes of these transactions related to covered assets for the years ended December 31, 2013, 2012 and 2011 was $20.4 million, $10.5 million and $(12.2) million, respectively, as detailed in the following tables (in thousands): 2013 Net Gain (Loss) on Net Impact on Transaction Indemnification Pre-tax Income (Loss) Asset Earnings Recovery of losses on covered loans $ 1,738 $ (1,574 ) $ 164 Income from resolution of covered assets, net 78,862 (64,793 ) 14,069 Loss on sale of covered loans (16,195 ) 21,021 4,826 OTTI on covered investment securities available for sale (963 ) 770 (193 ) Gain on sale of OREO 9,568 (7,611 ) 1,957 Impairment of OREO (1,939 ) 1,549 (390 ) $ 71,071 $ (50,638 ) $ 20,433 2012 Net Gain (Loss) on Net Impact on Transaction Indemnification Pre-tax Income (Loss) Asset Earnings Recovery of losses on covered loans $ 503 $ 344 $ 847 Income from resolution of covered assets, net 51,016 (41,962 ) 9,054 Loss on sale of covered loans (29,270 ) 30,725 1,455 Gain on sale of OREO 4,164 (3,078 ) 1,086 Impairment of OREO (9,926 ) 7,941 (1,985 ) $ 16,487 $ (6,030 ) $ 10,457 56



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Table of Contents 2011 Net Gain (Loss) on Net Impact on Transaction Indemnification Pre-tax Income (Loss) Asset Earnings Recovery of losses on covered loans $ 7,692 $ (6,327 ) $ 1,365 Income from resolution of covered assets, net 18,776 (6,871 ) 11,905 Loss on sale of covered loans (70,366 ) 56,053 (14,313 ) Loss on sale of OREO (23,576 ) 17,272 (6,304 ) Impairment of OREO (24,569 ) 19,685 (4,884 ) $ (92,043 ) $ 79,812 $ (12,231 ) Certain OREO and foreclosure related expenses associated with covered assets, including fees paid to attorneys and other service providers, property preservation costs, maintenance and repair costs, advances for taxes and insurance, appraisal costs and inspection costs are also reimbursed under the terms of the Loss Sharing Agreements. Such expenses are recorded in non-interest expense when incurred, and the reimbursement is recorded as "FDIC reimbursement of costs of resolution of covered assets" in non-interest income when submitted to the FDIC, generally upon ultimate resolution of the underlying covered assets. This may result in the expense and the related income from reimbursements being recorded in different periods. For the years ended December 31, 2013, 2012, and 2011 non-interest expense included approximately $8.3 million, $20.3 million and $32.0 million, respectively, of such expenses. During the years ended December 31, 2013, 2012, and 2011, claims of $9.4 million, $19.6 million, and $31.5 million, respectively, were submitted to the FDIC. As of December 31, 2013, $13.5 million of expenses incurred to date remained to be submitted for reimbursement from the FDIC in future periods. Mortgage insurance income represents mortgage insurance proceeds received with respect to covered loans in excess of the portion of losses on those loans that is recoverable from the FDIC. Mortgage insurance proceeds up to the amount of losses on covered loans recoverable from the FDIC offset amounts otherwise reimbursable by the FDIC. Year over year declines in mortgage insurance income reflect the reduced volume of covered loan foreclosure resolution activity over the period.



We expect the net impact on non-interest income of transactions in the covered assets to decline in future periods as these assets comprise a smaller percentage of our total assets.

Other components of non-interest income

Gains from the sale of investment securities available for sale for the year ended December 31, 2013 included the following:



Net gains of $2.3 million related to the liquidation of our positions

in collateralized loan obligations ("CLOs") and certain re-securitized

real estate mortgage investment conduits ("Re-remics") in response to

the release of the Volcker Rule (Section 619 of the Dodd-Frank Wall

Street Reform and Consumer Protection Act). The amortized cost basis

of the CLOs sold was approximately $431 million, comprising our entire

CLO portfolio. The amortized cost basis of the Re-remics sold was approximately $119 million.



Net gains of $1.6 million from the sale of securities formerly held by

Herald in conjunction with the merger of Herald into BankUnited. The remaining gains related to the sale of securities, primarily longer duration fixed rate securities, to fund loan originations. 57



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During the year ended December 31, 2012 we sold agency mortgage-backed securities with an aggregate fair value of $527 million and a combined effective yield of 1.22%, utilizing the proceeds to extinguish $520 million of FHLB advances and terminate a cash flow hedge with a combined cost of borrowing of 3.46%. We realized a gain on sale of these securities of $10.0 million, a loss on extinguishment of the FHLB advances of $14.2 million and a loss on termination of the cash flow hedge of $8.7 million. In addition, we recognized approximately $6.4 million of aggregate realized gains in 2012 from the liquidation of our position in non-investment grade and certain other preferred stock positions in order to reduce our concentration in bank preferred stock investments. The most significant components of other non-interest income include (i) rental income on equipment under operating lease; (ii) residential mortgage modification incentives; (iii) for the year ended December 31, 2012, a gain recorded on the acquisition of Herald; and (iv) for the years ended December 31, 2012 and 2011, investment services income. The most significant fluctuations in non-interest income were:





Other non-interest income for the year ended December 31, 2013

included $8.4 million in rental income on equipment under operating

lease compared to $0.8 million for the year ended December 31, 2012, reflecting the growth of the portfolio of equipment under lease. There was no rental income on equipment under operating lease for the year ended December 31, 2011. Modification incentives totaled $5.6 million, $6.0 million and $3.0 million for the years ended December 31, 2013, 2012 and 2011, respectively. Investment services income totaled $0.9 million, $4.4 million and $7.5 million for the years ended December 31, 2013, 2012 and 2011, respectively. This line of business was discontinued in 2013. Other non-interest income for the year ended December 31, 2012 included a gain of $5.3 million on the acquisition of Herald. Non-Interest Expense



The following table presents the components of non-interest expense for the years ended December 31, 2013, 2012 and 2011 (in thousands):

2013 2012



2011

Employee compensation and benefits $ 173,763$ 173,261



$ 272,991

Occupancy and equipment 63,766 54,465



36,680

Impairment of other real estate owned 1,939 9,926



24,569

(Gain) loss on sale of other real estate owned (9,568 ) (4,164 )

23,576

Foreclosure and other real estate owned expense 10,442 20,268

31,977

Deposit insurance expense 7,648 7,248



8,480

Professional fees 21,934 15,468



17,330

Telecommunications and data processing 13,034 12,462



12,041

Other non-interest expense 44,392 34,139 28,161 $ 327,350$ 323,073$ 455,805 Non-interest expense as a percentage of average assets, excluding a $110.4 million equity based compensation charge recorded in conjunction with the IPO in 2011, was 2.4%, 2.6.% and 3.2% for the years ended December 31, 2013, 2012 and 2011, respectively. The more significant components of non-interest expense are discussed below. 58



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Table of Contents Employee compensation and benefits As is typical for financial institutions, employee compensation and benefits represents the single largest component of recurring non-interest expense. Employee compensation and benefits for the year ended December 31, 2013 as compared to the year ended December 31, 2012 reflected a decrease of $10.0 million in equity-based compensation resulting primarily from the vesting in 2012 of instruments issued in conjunction with the IPO. Increased compensation costs related to the Company's growth and expansion into New York offset this decrease in equity-based compensation. Excluding the impact of the $110.4 million equity based compensation charge recorded in conjunction with the IPO as discussed further below, employee compensation and benefits increased by $10.7 million or 6.6% for the year ended December 31, 2012 as compared to the year ended December 31, 2011. This increase in employee compensation and benefits costs reflected growth and expansion of our operations and continued enhancement of our management team and supporting personnel. We expect compensation and benefits costs to increase in 2014 as employment levels increase to support the growth of the Company. Prior to the consummation of the IPO, our employee compensation and benefits expense included expense related to equity awards in the form of Profits Interest Units ("PIUs") issued to certain members of executive management. The PIUs were divided into two equal types of profits interests. Half of the PIUs, referred to as time-based PIUs, vested with the passage of time following the grant date. Compensation expense related to time-based PIUs was recorded on a straight line basis over the vesting period based on their fair value. Fair value of the time-based PIUs was estimated using a Black-Scholes option pricing model incorporating estimates of the per share value of our common stock and assumptions as to expected volatility, dividends, expected term, and risk-free rates. The remaining half of the PIUs, referred to as IRR-based PIUs, vested immediately prior to the consummation of the IPO and compensation expense related to the IRR-based PIUs was recorded at that time. In conjunction with the IPO, the PIUs were exchanged for a combination of vested and unvested common shares and vested and unvested stock options. The unvested instruments corresponded to the unvested time-based PIUs and continued to vest according to the original vesting schedule of such time-based PIUs. The remainder of these instruments vested in 2012. At the time of the IPO, we recorded additional compensation expense of approximately $110.4 million related to the vesting of the IRR-based PIUs and the adjustment of the fair value of the vested portion of time-based PIUs. This charge to compensation expense was offset by a credit to paid-in capital and therefore did not impact the Company's capital position. Fair value of the PIUs at the date of the IPO was measured based on the fair value of the common shares and options for which they were exchanged. The common shares were valued at the IPO price of $27. Fair value of the options was estimated using a Black-Scholes option pricing model. Employee compensation and benefits expense included $13.2 million and $141.0 million, inclusive of the $110.4 million charge recorded in conjunction with the IPO, for the years ended December 31, 2012 and 2011, respectively, related to PIUs and instruments issued in exchange for PIUs.



Occupancy and equipment

Occupancy and equipment expense increased by $9.3 million or 17.1% for the year ended December 31, 2013 as compared to the year ended December 31, 2012 and by $17.8 million, or 48.5% for the year ended December 31, 2012 as compared to the year ended December 31, 2011. These increases related primarily to the expansion and refurbishment of our Florida branch network and enhancements to our technology platforms and, for 2013, additional costs related to the launch of our New York franchise. 59



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Table of Contents OREO and foreclosure related components of non-interest expense During the years ended December 31, 2013, 2012 and 2011, substantially all of the gains or losses recognized on the sale or impairment of OREO related to properties covered by the Loss Sharing Agreements. Therefore, any gains or losses from sale or impairment of OREO were substantially offset by gains or losses related to indemnification by the FDIC recognized in non-interest income. Generally, OREO and foreclosure related expenses incurred on covered assets, which comprised the majority of OREO and foreclosure related expenses for the year ended December 31, 2013 and all of OREO and foreclosure related expense for 2012 and 2011, are also eligible for reimbursement under the terms of the Loss Sharing Agreements. Impairment of OREO totaled $1.9 million, $9.9 million and $24.6 million for the years ended December 31, 2013, 2012 and 2011, respectively. Net (gain) loss on the sale of OREO totaled $(9.6) million for the year ended December 31, 2013, $(4.2) million for the year ended December 31, 2012 and $23.6 million for the year ended December 31, 2011. These declines in impairment and improvements in results reflect continuing trends of lower levels of OREO and foreclosure activity and an improving real estate market.



The following tables summarize OREO sale activity for the years ended December 31, 2013, 2012 and 2011 (dollars in thousands):

2013 2012 2011 Percent Percent Percent Units of Total Total Gain Units of Total Total Gain Units of Total Total Gain sold Units (Loss) sold Units (Loss) sold Units (Loss) Residential OREO sales 557 94.6 % $ 5,687 1,326 96.9 % $ 2,798 2,785 98.6 % $ (24,068 ) Commercial OREO sales 32 5.4 % 3,881 42 3.1 % 1,366 40 1.4 % 492 589 100.0 % $ 9,568 1,368 100.0 % $ 4,164 2,825 100.0 % $ (23,576 ) 2013 2012 2011 Average Average Average Percent Gain Percent Gain Percent Gain Units of Total or Units of Total or Units of Total or sold Units (Loss) sold Units (Loss) sold Units (Loss) Residential OREO sales: Units sold at a gain 330 59.2 % $ 28 659 49.7 % $ 22 870 31.2 % $ 16 Units sold at a loss 227 40.8 % $ (16 ) 667 50.3 % $ (17 ) 1,915 68.8 % $ (20 ) 557 100.0 % $ 10 1,326 100.0 % $ 2 2,785 100.0 % $ (9 ) Foreclosure and other real estate owned expenses decreased by $9.8 million for the year ended December 31, 2013 as compared to the year ended December 31, 2012 and by $11.7 million for the year ended December 31, 2012 as compared to the year ended December 31, 2011. These declines were primarily attributable to decreases in the levels of foreclosure activity and OREO inventory. There were 317, 1,027 and 2,214 residential units in the foreclosure pipeline and 157, 402 and 778 residential units in OREO inventory at December 31, 2013, 2012 and 2011, respectively. Loans are deemed eligible for foreclosure referral based on state specific and CFPB guidelines, which is generally after 120 days delinquency. Prior to referral, extensive reviews are performed to ensure that all collection and loss mitigation efforts have been exhausted. We have performed an internal assessment of our foreclosure practices and procedures and of our vendor management processes related to outside vendors that assist us in the foreclosure process. This assessment did not reveal any deficiencies in processes and procedures that we believe to be of significance. 60



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Table of Contents Other components of non-interest expense Professional fees increased by $6.5 million for the year ended December 31, 2013 as compared to the year ended December 31, 2012 primarily due to increased consulting and advisory fees related to regulatory compliance. The decline in professional fees for the year ended December 31, 2012 as compared to the year ended December 31, 2011 resulted primarily from a decrease in legal and professional fees related to the acquisition of Herald. The most significant components of other non-interest expense are advertising and promotion, depreciation of equipment under operating lease, insurance, travel and general office expense. Period over period increases in other non-interest expense related primarily to general organic growth of our business. In addition, depreciation on equipment under operating lease of $4.3 million was recognized for the year ended December 31, 2013 compared to $0.4 million for the year ended December 31, 2012.



Income Taxes

The provision for income taxes for the years ended December 31, 2013, 2012 and 2011 was $109.1 million, $133.6 million and $129.6 million, respectively. The Company's effective tax rate was 34.3%, 38.7% and 67.2% for the years ended December 31, 2013, 2012 and 2011, respectively. The Company's effective tax rate differed from the statutory federal tax rate of 35.0% for the years ended December 31, 2013 and 2012 primarily due to the effect of state income taxes and the impact of income not subject to federal tax. For the year ended December 31, 2011, the effective tax rate differed from the statutory federal rate primarily due to non-deductible equity based compensation, the provision for uncertain state income tax positions and to a lesser extent, the impact of state income taxes and income not subject to federal tax. The decrease in the effective tax rate for the year ended December 31, 2013 compared to the year ended December 31, 2012 reflected the impact of changes in certain state tax positions and apportionment rates and the release of reserves for uncertain state tax positions as a result of the lapse in the statute of limitations related thereto in 2013. The decrease in the effective tax rate for the year ended December 31, 2012 compared to 2011 reflected the decrease in non-deductible equity based compensation, which totaled $10.4 million and $134.4 million for the years ended December 31, 2012 and 2011, respectively. Non-deductible equity based compensation related primarily to PIUs and the equity instruments for which PIUs were exchanged at the time of the IPO. At December 31, 2013 and 2012, the Company had net deferred tax assets of $71 million and $62 million, respectively. Based on an evaluation of both positive and negative evidence related to ultimate realization of deferred tax assets, we have concluded it is more likely than not that the deferred tax assets will be realized. Persuasive positive evidence leading to this conclusion as of December 31, 2013 included the availability of sufficient tax loss carrybacks and future taxable income resulting from reversal of existing taxable temporary differences to assure realization of the deferred tax assets. Realization of deferred tax assets as of December 31, 2013 is not dependent, to any significant extent, on the generation of additional future taxable income.



For more information, see Note 12 to the consolidated financial statements.

Termination of the Commercial Shared-Loss Agreement

FDIC loss sharing under the terms of the Commercial Shared-Loss Agreement is scheduled to terminate on May 21, 2014. At December 31, 2013, commercial and consumer loans with a carrying value of $202 million, investment securities available for sale with an amortized cost of $138 million and a carrying value of $206 million and commercial OREO with a carrying value of $7 million were covered under the Commercial Shared-Loss Agreement. Under the terms of the Purchase and Assumption Agreement, during the nine months prior to the termination date, the Bank may request consent from the FDIC to sell commercial and consumer loans. If the FDIC consents, any losses 61



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incurred on such sales will be eligible for loss share coverage. If the FDIC does not consent, then the Commercial Shared-Loss Agreement will be extended for two years after the scheduled termination date, or through May 21, 2016, with respect to the loans requested to be included in such sales. The Bank will have the right to sell all or any portion of such loans without FDIC consent at any time within the nine months prior to the extended termination date, and any losses incurred will be covered under the Commercial Shared-Loss Agreement. These provisions of the Purchase and Assumption Agreement and Commercial Shared-Loss Agreement with respect to asset sales and extension of the termination date do not apply to covered investment securities, which may only be sold with the consent of the FDIC. FDIC loss sharing with respect to covered investment securities will terminate on May 21, 2014. We will bear all credit risk with respect to covered assets after the termination of FDIC loss sharing. Subsequent to December 31, 2013, we requested and received approval from the FDIC to sell certain covered commercial and consumer loans. Loans that had a carrying value of approximately $87 million at December 31, 2013 will be transferred to loans held for sale at the lower of carrying value or estimated fair value during the quarter ending March 31, 2014, and any resulting adjustment to the amount of indemnification expected to be received from the FDIC with respect to such loans will be recorded. The carrying value of such loans at the date of sale may differ from their carrying value at December 31, 2013 due to normal, ongoing payment and resolution activity. FDIC loss sharing with respect to the remaining covered commercial and consumer loans will terminate on May 21, 2014. The substantial majority of covered commercial and consumer loans are ACI loans. Our estimates of expected cash flows with respect to these loans, and therefore the rate of accretion on the loans, have incorporated certain assumptions with respect to the amount and timing of cash flows from loan sales. To the extent actual results differ from those assumptions, our results of operations in future periods will be impacted.



Analysis of Financial Condition

Average interest-earning assets increased $1.4 billion to $11.5 billion for the year ended December 31, 2013 from $10.0 billion for the year ended December 31, 2012. This increase was driven by a $1.9 billion increase in the average balance of outstanding loans, partially offset by a $476 million decrease in the average balance of investment securities available for sale. The increase in average loans reflected growth of $2.4 billion in average new loans outstanding, partially offset by a $508 million decrease in the average balance of loans acquired in the FSB Acquisition. The decrease in average investment securities available for sale resulted primarily from the sale and repayment of investment securities. Average non-interest earning assets declined by $330 million. The most significant component of this decline was the decrease in the FDIC indemnification asset. Growth of the new loan portfolio, resolution of covered loans, declines in the balance of investment securities and declines in the amount of the FDIC indemnification asset are trends that are expected to continue. Average interest bearing liabilities increased by $516 million to $9.8 billion for the year ended December 31, 2013 from $9.3 billion for the year ended December 31, 2012, due primarily to an increase of $658 million in average interest bearing deposits, partially offset by a $142 million decrease in average FHLB advances. Average non-interest bearing deposits increased by $487 million.



Average stockholders' equity increased by $175 million, due largely to the retention of earnings.

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Table of Contents Investment Securities Available for Sale The following table shows the amortized cost and fair value of investment securities at December 31, 2013, 2012 and 2011. All of our investment securities are classified as available for sale (in thousands): 2013 2012 2011 Amortized Fair Amortized Fair Amortized Fair Cost Value Cost Value Cost Value U.S. Treasury and Government agency securities $ - $ - $ 34,998$ 35,154 $ - $ - U.S. Government agency and sponsored enterprise residential mortgage-backed securities 1,548,671 1,574,303 1,520,047 1,584,523 1,952,095 1,985,713 U.S. Government agency and sponsored enterprise commercial mortgage-backed securities 27,132 26,777 58,518 60,416 - - Re-Remics 267,525 271,785 575,069 585,042 544,924 546,310 Private label residential mortgage-backed securities and CMOs 255,184 310,118 386,768 448,085 342,999 387,687 Private label commercial mortgage-backed securities 814,114 808,772 413,110 433,092 255,868 262,562 Collateralized loan obligations - - 252,280 253,188 - - Non-mortgage asset-backed securities 172,329 178,994 233,791 241,346 414,274 410,885 Mutual funds and preferred stocks 140,806 149,677 141,509 149,653 252,087 253,817 State and municipal obligations - - 25,127 25,353 24,994 25,270 Small Business Administration securities 295,892 308,937 333,423 339,610 301,109 303,677 Other debt securities 3,542 7,761 12,887 16,950 3,868 6,056 $ 3,525,195$ 3,637,124$ 3,987,527$ 4,172,412$ 4,092,218$ 4,181,977 Investment securities available for sale totaled $3.6 billion at December 31, 2013 compared to $4.2 billion at December 31, 2012 and 2011. The decline of the investment portfolio during 2013 reflected the deployment of proceeds from the sale and repayment of securities to fund loan originations and liquidation of certain positions in response to the release of the Volcker Rule. Our investment strategy has focused on providing liquidity necessary for day-to-day operations, adding a suitable balance of high credit quality, diversifying assets to the consolidated balance sheet, managing interest rate risk, and generating acceptable returns given our established risk parameters. We have sought to maintain liquidity and manage interest rate risk by investing a significant portion of the 63



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portfolio in high quality liquid securities consisting primarily of U.S. Government agency floating rate mortgage-backed securities. We have also invested in highly rated structured products including private label residential and commercial mortgage-backed securities, Re-Remics and non-mortgage asset-backed securities collateralized by small balance commercial loans, auto loans and student loans as well as bank preferred stocks and U.S. Small Business Administration securities that, while somewhat less liquid, provide us with higher yields. Relatively short effective portfolio duration helps mitigate interest rate risk arising from the currently low level of market interest rates. The weighted average expected life of the investment portfolio as of December 31, 2013 was 4.4 years and the effective duration was 2.1 years. Regulations implementing the Volcker Rule were approved in December 2013. Among other provisions, the regulations generally will serve to prohibit us from holding an ownership interest, as defined, in a covered fund, also as defined. Although uncertainty remains as to how the regulations will be interpreted and implemented by regulatory authorities, we identified certain securities in our portfolio that we believe may be deemed impermissible investments under the regulations. Those securities included CLOs, Re-Remics and certain Trust Preferred Collateralized Debt Obligations. In anticipation of and in response to issuance of these regulations, we liquidated our entire portfolio of CLOs and certain of our Re-remic positions as discussed above in the section entitled "Results of Operations-Non-Interest Income-Other components of non-interest income." At December 31, 2013, we held Re-remics with a carrying value of $272 million and Trust Preferred Collateralized Debt Obligations with a carrying value of $5 million. At December 31, 2013, all but one of these securities were in unrealized gain positions; the one security in an unrealized loss position had a de-minimis unrealized loss of $1 thousand. The Re-remics are an amortizing portfolio and we estimate that their carrying value will be significantly reduced through normal amortization and prepayments prior to the required compliance date. We will continue to evaluate our holdings in light of the newly issued regulations and any further interpretations or implementation guidance that may be forthcoming, if any. As currently promulgated, we must be in compliance with the regulations implementing the Volcker Rule by July 2015. For further discussion of the Volcker Rule, see the section entitled "Item 1. Business-Regulation and Supervision-The Volcker Rule."



A summary of activity in the investment portfolio for the year ended December 31, 2013 follows (in thousands):

Balance, beginning of period $ 4,172,412 Purchases 1,095,477 Proceeds from repayments (681,361 ) Sales, maturities and calls (871,035 ) Amortization of discounts and premiums, net (4,447 ) OTTI (963 ) Change in unrealized gains (72,959 ) Balance, end of period $ 3,637,124 64



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The following tables show, as of December 31, 2013, 2012 and 2011, the breakdown of covered and non-covered securities in the Company's investment portfolio (in thousands): 2013 Covered Securities Non-Covered Securities Gross Gross Amortized Unrealized Fair Amortized Unrealized Fair Cost Gains Losses Value Cost Gains Losses Value U.S. Government agency and sponsored enterprise residential mortgage-backed securities $ - $ - $ - $ - $ 1,548,671$ 34,191$ (8,559 )$ 1,574,303 U.S. Government agency and sponsored enterprise commercial mortgage-backed securities - - - - 27,132 - (355 ) 26,777 Re-Remics - - - - 267,525 4,261 (1 ) 271,785 Private label residential mortgage-backed securities and CMOs 119,434 56,539 (110 ) 175,863 135,750

329 (1,824 ) 134,255 Private label commercial mortgage-backed securities - - - - 814,114 7,638 (12,980 ) 808,772 Non-mortgage asset-backed securities - - - - 172,329 6,676 (11 ) 178,994 Mutual funds and preferred stocks 15,419 6,726 - 22,145 125,387 4,015 (1,870 ) 127,532 Small Business Administration securities - - - - 295,892 13,045 - 308,937 Other debt securities 3,542 4,219 - 7,761 - - - - $ 138,395$ 67,484$ (110 )$ 205,769$ 3,386,800$ 70,155$ (25,600 )$ 3,431,355 2012 Covered Securities Non-Covered Securities Amortized Gross Unrealized Fair



Amortized Gross Unrealized Fair

Cost Gains Losses Value Cost Gains Losses Value U.S. Treasury and Government agency securities $ - $ - $ - $ - $ 34,998$ 157$ (1 )$ 35,154 U.S. Government agency and sponsored enterprise residential mortgage-backed securities - - - - 1,520,047 64,476 - 1,584,523 U.S. Government agency and sponsored enterprise commercial mortgage-backed securities - - - - 58,518 1,898 - 60,416 Re-Remics - - - - 575,069 10,063 (90 ) 585,042 Private label residential mortgage-backed securities and CMOs 143,739 58,266 (185 ) 201,820 243,029 3,437 (201 ) 246,265 Private label commercial mortgage-backed securities - - - - 413,110 19,982 - 433,092 Collateralized loan obligations - - - - 252,280 908 - 253,188 Non-mortgage asset-backed securities - - - - 233,791 7,672 (117 ) 241,346 Mutual funds and preferred stocks 16,382 1,439 (361 ) 17,460 125,127 7,066 - 132,193 State and municipal obligations - - - - 25,127 249 (23 ) 25,353 Small Business Administration securities - - - - 333,423 6,187 - 339,610 Other debt securities 3,723 3,502 - 7,225 9,164 561 - 9,725 $ 163,844$ 63,207$ (546 )$ 226,505$ 3,823,683$ 122,656$ (432 )$ 3,945,907 65



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Table of Contents 2011 Covered Securities Non-Covered Securities Amortized Gross Unrealized Fair



Amortized Gross Unrealized Fair

Cost Gains Losses Value Cost Gains Losses Value U.S. Government agency and sponsored enterprise residential mortgage-backed securities $ - $ - $ - $ - $ 1,952,095$ 34,823$ (1,205 )$ 1,985,713 Re-Remics - - - - 544,924 4,972 (3,586 ) 546,310 Private label residential mortgage-backed securities and CMOs 165,385 44,746 (310 ) 209,821 177,614 1,235 (983 ) 177,866 Private label commercial mortgage-backed securities - - - - 255,868 6,694 - 262,562 Non-mortgage asset-backed securities - - - - 414,274 2,246 (5,635 ) 410,885 Mutual funds and preferred stocks 16,382 491 (556 ) 16,317 235,705 3,071 (1,276 ) 237,500 State and municipal obligations - - - - 24,994 278 (2 ) 25,270 Small Business Administration securities - - - - 301,109 2,664 (96 ) 303,677 Other debt securities 3,868 2,188 - 6,056 - - - - $ 185,635$ 47,425$ (866 )$ 232,194$ 3,906,583$ 55,983$ (12,783 )$ 3,949,783



As discussed above in the section entitled "Results of Operations-Termination of the Commercial Shared-Loss Agreement", FDIC loss share coverage on covered investment securities will end on May 21, 2014.

Covered securities include private label residential mortgage-backed securities, mortgage-backed security mutual funds, trust preferred collateralized debt obligations, U.S. Government sponsored enterprise preferred stocks and corporate debt securities covered under the Commercial Shared-Loss Agreement. BankUnited will be reimbursed 80%, or 95% if cumulative losses exceed the $4.0 billion stated threshold, of realized losses, other-than-temporary impairments, and reimbursable expenses associated with the covered securities through the scheduled termination of the Commercial Shared-Loss Agreement. BankUnited must pay the FDIC 80%, or 95% if cumulative losses are greater than the stated threshold, of realized gains and other-than-temporary impairment recoveries for a period of three years following the termination of the Commercial Shared-Loss Agreement. Unrealized losses recognized in accumulated other comprehensive income do not qualify for loss sharing. BankUnited cannot sell securities covered under the Loss Sharing Agreements without prior approval of the FDIC.



The following table shows the scheduled maturities, carrying values and current yields for our investment portfolio as of December 31, 2013. Scheduled maturities have been adjusted for anticipated

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prepayments of mortgage-backed and other pass through securities. Yields on tax-exempt securities have been calculated on a tax-equivalent basis (dollars in thousands): After One Year After Five Years Within One Year Through Five Years Through Ten Years After Ten Years Total Weighted Weighted Weighted Weighted Weighted Carrying Average Carrying Average Carrying Average Carrying Average Carrying Average Value Yield Value Yield Value Yield Value Yield Value Yield U.S. Government agency and sponsored enterprise residential mortgage-backed securities $ 188,775 2.16 % $ 871,675 2.22 % $ 383,657 1.85 % $ 130,196 1.77 % $ 1,574,303 2.08 % U.S. Government agency and sponsored enterprise commercial mortgage-backed securities 552 2.10 % 2,414 2.10 % 16,758 2.05 % 7,053 2.29 % 26,777 2.12 % Re-Remics 97,809 3.52 % 161,166 3.35 % 12,694 4.04 % 116 2.62 % 271,785 3.44 % Private label residential mortgage-backed securities and CMOs 82,558 6.10 % 143,228 7.41 % 54,883 8.92 % 29,449 9.11 % 310,118 7.49 % Private label commercial mortgage-backed securities 3,564 1.84 % 455,599 2.24 % 349,609 2.54 % - - 808,772 2.37 % Non-mortgage asset-backed securities 38,534 3.67 % 121,858 3.50 % 18,578 3.51 % 24 5.44 % 178,994 3.54 % Small Business Administration securities 62,444 1.93 % 150,190 1.92 % 68,108 1.89 % 28,195 1.85 % 308,937 1.91 % Other debt securities - - - - - - 7,761 7.28 % 7,761 7.28 % $ 474,236 3.14 % $ 1,906,130 2.71 % $ 904,287 2.56 % $ 202,794 2.84 % 3,487,447 2.73 % Mutual funds and preferred stocks with no scheduled maturity 149,677 6.02 % Total investment securities available for sale $ 3,637,124 2.87 % As of December 31, 2013, 92.6% of the non-covered securities were backed by the U.S. Government, U.S. Government agencies or sponsored enterprises or were rated AAA. All remaining non-covered securities were investment grade. The investment portfolio was in a net unrealized gain position of $112 million at December 31, 2013 with aggregate fair value equal to 103% of amortized cost. Net unrealized gains included $138 million of gross unrealized gains and $26 million of gross unrealized losses. Securities in unrealized loss positions for 12 months or more had an aggregate fair value of $10 million representing 0.3% of the fair value of the portfolio, with total unrealized losses of $0.2 million at December 31, 2013. Gross unrealized losses on covered securities for which loss share coverage is scheduled to terminate in May, 2014 totaled $0.1 million at December 31, 2013. We evaluate the credit quality of individual securities in the portfolio quarterly to determine whether any of the investments in unrealized loss positions are other-than-temporarily impaired. This evaluation considers, but is not necessarily limited to, the following factors, the relative significance of which varies depending on the circumstances pertinent to each individual security:





our intent to hold the security until maturity or for a period of time

sufficient for a recovery in value; whether it is more likely than not that we will be required to sell the security prior to recovery of its amortized cost basis; the length of time and extent to which fair value has been less than amortized cost; adverse changes in expected cash flows; collateral values and performance; the payment structure of the security, including levels of subordination or over-collateralization; changes in the economic or regulatory environment; 67



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the general market condition of the geographic area or industry of the

issuer;



the issuer's financial condition, performance and business prospects;

and changes in credit ratings. During the year ended December 31, 2013, OTTI of $963 thousand was recognized on an intermediate term mortgage mutual fund investment which had been in a continuous unrealized loss position for 34 months. Due primarily to the length of time the investment had been in a continuous unrealized loss position and an increasing measure of impairment, we determined the impairment to be other than temporary. This security is covered under the Loss Sharing Agreements; therefore, the impact of the impairment was significantly mitigated by an increase of $770 thousand in the FDIC indemnification asset and in non-interest income, reflected in the consolidated statement of income line item "Net gain (loss) on indemnification asset". No securities were determined to be other-than-temporarily impaired during the years ended December 31, 2012 and 2011. We do not intend to sell securities in significant unrealized loss positions. Based on an assessment of our liquidity position and internal and regulatory guidelines for permissible investments and concentrations, it is not more likely than not that we will be required to sell securities in significant unrealized loss positions prior to recovery of amortized cost basis. The severity and duration of impairment of individual securities in the portfolio is generally not material. Unrealized losses in the portfolio at December 31, 2013 were primarily attributable to an increase in medium and long-term market interest rates. The timely repayment of principal and interest on U.S. Government agency and sponsored enterprise securities in unrealized loss positions is explicitly or implicitly guaranteed by the full faith and credit of the U.S. Government. Management either engaged a third party to perform, or performed internally, projected cash flow analyses of the private label residential mortgage-backed securities, Re-Remics, private label commercial mortgage-backed securities and non-mortgage asset-backed securities in unrealized loss positions, incorporating CUSIP level collateral default rate, voluntary prepayment rate, severity and delinquency assumptions. Based on the results of this analysis, no credit losses were projected. Given the expectation of timely repayment of principal and interest and the generally limited duration and severity of impairment, we concluded that none of the debt securities in unrealized loss positions were other-than-temporarily impaired. Given the generally limited duration and severity of impairment, the results of our analysis of the financial condition of the issuers of financial institution preferred stocks in unrealized loss positions and consideration of the factors leading to unrealized losses and the nature of the underlying holdings of a mutual fund investment in an unrealized loss position, we considered the impairment of these equity securities to be temporary.



For further discussion of our analysis of investment securities for other-than-temporary impairment, see Note 4 to the consolidated financial statements.

We use third-party pricing services to assist us in estimating the fair value of investment securities. We perform a variety of procedures to ensure that we have a thorough understanding of the methodologies and assumptions used by the pricing services including obtaining and reviewing written documentation of the methods and assumptions employed, conducting interviews with valuation desk personnel, performing on-site walkthroughs and reviewing model results and detailed assumptions used to value selected securities as considered necessary. Our classification of prices within the fair value hierarchy is based on an evaluation of the nature of the significant assumptions impacting the valuation of each type of security in the portfolio. We have established a robust price challenge process that includes a review by our treasury front office of all prices provided on a monthly basis. Any price evidencing unexpected month over month fluctuations or deviations from our expectations based on recent observed trading activity and other information available in the marketplace that would impact the value of the security is challenged. Responses to the price challenges, which generally include 68



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specific information about inputs and assumptions incorporated in the valuation and their sources, are reviewed in detail. If considered necessary to resolve any discrepancies, a price will be obtained from an additional independent valuation specialist. We do not typically adjust the prices provided, other than through this established challenge process. Our primary pricing services utilize observable inputs when available, and employ unobservable inputs and proprietary models only when observable inputs are not available. As a matter of course, the services validate prices by comparison to recent trading activity whenever such activity exists. Quotes obtained from the pricing services are typically non-binding. We have also established a quarterly price validation process whereby we verify the prices provided by our primary pricing service for a sample of securities in the portfolio. Sample sizes vary based on the type of security being priced, with higher sample sizes applied to more difficult to value security types. Verification procedures may consist of obtaining prices from an additional outside source or internal modeling, generally based on Intex. We have established acceptable percentage deviations from the price provided by the initial pricing source. If deviations fall outside the established parameters, we will obtain and evaluate more detailed information about the assumptions and inputs used by each pricing source or, if considered necessary, employ an additional valuation specialist to price the security in question. When there are price discrepancies, the final determination of fair value is based on careful consideration of the assumptions and inputs employed by each of the pricing sources given our knowledge of the market for each individual security and may include interviews with the outside pricing sources utilized. Depending on the results of the validation process, sample sizes may be extended for particular classes of securities. Results of the validation process are reviewed by the treasury front office and by senior management. The majority of our investment securities are classified within level 2 of the fair value hierarchy. Certain preferred stocks and U.S. Treasury securities are classified within level 1 of the hierarchy. At December 31, 2013 and 2012, 5.6% and 5.9%, respectively, of our investment securities were classified within level 3 of the fair value hierarchy. Securities classified within level 3 of the hierarchy at December 31, 2013 included certain private label residential mortgage-backed securities and trust preferred securities. These securities were classified within level 3 of the hierarchy because proprietary assumptions related to voluntary prepayment rates, default probabilities and loss severities were considered significant to the valuation. Approximately 88.2% of the private label residential mortgage-backed securities and all of the trust preferred securities classified within level 3, were covered securities. There were no transfers of investment securities between levels of the fair value hierarchy during the year ended December 31, 2013.



For additional discussion of the fair values of investment securities, see Note 17 to the consolidated financial statements.

Loans

The loan portfolio comprises the Company's primary interest-earning asset. The following tables show the composition of the loan portfolio and the breakdown of the portfolio among covered ACI

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loans, covered non-ACI loans, non-covered ACI loans and new loans at December 31 of the years indicated (dollars in thousands):

2013 Covered Loans Non-Covered Loans Percent of ACI Non-ACI ACI New Loans Total Total

Residential: 1 - 4 single family residential $ 1,057,012$ 70,378 $ - $ 1,800,332$ 2,927,722 32.4 % Home equity loans and lines of credit 39,602 127,807 - 1,535 168,944 1.9 % 1,096,614 198,185 - 1,801,867 3,096,666 34.3 % Commercial: Multi-family 33,354 - 8,093 1,097,872 1,139,319 12.6 % Commercial real estate Owner occupied 49,861 689 5,318 712,844 768,712 8.5 % Non-owner occupied 93,089 52 1,449 946,543 1,041,133 11.5 % Construction and land 10,600 729 - 138,091 149,420 1.7 % Commercial and industrial 6,050 6,234 - 2,266,407 2,278,691 25.3 % Lease financing - - - 337,382 337,382 3.7 % 192,954 7,704 14,860 5,499,139 5,714,657 63.3 % Consumer 1,679 - - 213,107 214,786 2.4 % Total loans 1,291,247 205,889 14,860 7,514,113 9,026,109 100.0 % Premiums, discounts and deferred fees and costs, net - (13,248 ) - 40,748 27,500 Loans net of premiums, discounts, deferred fees and costs 1,291,247 192,641 14,860 7,554,861 9,053,609 Allowance for loan and lease losses (2,893 ) (9,502 ) - (57,330 ) (69,725 ) Loans, net $ 1,288,354$ 183,139$ 14,860$ 7,497,531$ 8,983,884 70



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Table of Contents 2012 Covered Loans Non-Covered Loans Percent of ACI Non-ACI ACI New Loans Total Total Residential: 1 - 4 single family residential $ 1,300,109$ 93,438 $ - $ 920,713$ 2,314,260 41.5 % Home equity loans and lines of credit 52,499 157,691 - 1,954 212,144 3.8 % 1,352,608 251,129 - 922,667 2,526,404 45.3 % Commercial: Multi-family 56,148 716 - 307,183 364,047 6.5 % Commercial real estate Owner occupied 58,675 850 4,087 451,130 514,742 9.3 %



Non-owner

occupied 115,057 60 - 343,576 458,693 8.2 % Construction and land 18,064 829 - 72,361 91,254 1.6 % Commercial and industrial 14,608 11,627 - 1,334,991 1,361,226 24.4 % Lease financing - - - 225,980 225,980 4.1 % 262,552 14,082 4,087 2,735,221 3,015,942 54.1 % Consumer 2,239 - - 33,526 35,765 0.6 % Total loans 1,617,399 265,211 4,087 3,691,414 5,578,111 100.0 % Premiums, discounts and deferred fees and costs, net - (18,235 ) - 11,863 (6,372 ) Loans net of premiums, discounts, deferred fees and costs 1,617,399 246,976 4,087 3,703,277 5,571,739 Allowance for loan and lease losses (8,019 ) (9,874 ) - (41,228 ) (59,121 ) Loans, net $ 1,609,380$ 237,102$ 4,087$ 3,662,049$ 5,512,618 71



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Table of Contents 2011 Covered Loans Non-Covered Loans Percent of ACI Non-ACI ACI New Loans Total Total Residential: 1 - 4 single family residential $ 1,681,866$ 117,992 $ - $ 461,431$ 2,261,289 54.1 % Home equity loans and lines of credit 71,565 182,745 - 2,037 256,347 6.1 % 1,753,431 300,737 - 463,468 2,517,636 60.2 % Commercial: Multi-family 61,710 791 - 108,178 170,679 4.1 % Commercial real estate 219,136 32,678 4,220 311,434 567,468 13.6 % Construction and land 37,120 163 - 30,721 68,004 1.7 % Commercial and industrial 24,007 20,382 - 699,798 744,187 17.8 % Lease financing - - - 100,180 100,180 2.4 % 341,973 54,014 4,220 1,250,311 1,650,518 39.6 % Consumer 2,937 - - 3,372 6,309 0.2 % Total loans 2,098,341 354,751 4,220 1,717,151 4,174,463 100.0 % Premiums, discounts and deferred fees and costs, net - (30,281 ) - (7,124 ) (37,405 ) Loans net of premiums, discounts, deferred fees and costs 2,098,341 324,470 4,220 1,710,027 4,137,058 Allowance for loan and lease losses (16,332 ) (7,742 ) - (24,328 ) (48,402 ) Loans, net $ 2,082,009$ 316,728$ 4,220$ 1,685,699$ 4,088,656 72



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Table of Contents 2010 Covered Loans Non-Covered Loans Percent of ACI Non-ACI ACI New Loans Total Total Residential: 1 - 4 single family residential $ 2,421,016$ 151,945 $ - $ 113,439$ 2,686,400 67.5 % Home equity loans and lines of credit 98,599 206,797 - 2,255 307,651 7.7 % 2,519,615 358,742 - 115,694 2,994,051 75.2 % Commercial: Multi-family 73,015 5,548 - 34,271 112,834 2.8 % Commercial real estate 299,068 33,938 - 118,857 451,863 11.4 %



Construction

and land 56,518 170 - 10,455 67,143 1.7 %



Commercial

loans and leases 49,731 30,139 - 266,586 346,456 8.7 % 478,332 69,795 - 430,169 978,296 24.6 % Consumer 4,403 - - 3,056 7,459 0.2 % Total loans 3,002,350 428,537 - 548,919 3,979,806 100.0 % Premiums, discounts and deferred fees and costs, net - (34,840 ) - (10,749 ) (45,589 ) Loans net of premiums, discounts, deferred fees and costs 3,002,350 393,697 - 538,170 3,934,217 Allowance for loan and lease losses (39,925 ) (12,284 ) - (6,151 ) (58,360 ) Loans, net $ 2,962,425$ 381,413 $ - $ 532,019$ 3,875,857 2009 Covered Loans Non-Covered Loans Percent of ACI Non-ACI ACI New Loans Total Total Residential: 1 - 4 single family residential $ 3,306,306$ 184,669 $ - $ 43,110$ 3,534,085 76.0 % Home equity loans and lines of credit 113,578 215,591 - 1,615 330,784 7.1 % 3,419,884 400,260 - 44,725 3,864,869 83.1 % Commercial: Multi-family 71,321 4,971 - 700 76,992 1.7 % Commercial real estate 363,965 39,733 24,460 428,158 9.2 % Construction and land 88,715 550 - - 89,265 1.9 % Commercial and industrial 81,765 48,635 - 51,565 181,965 3.9 % 605,766 93,889 - 76,725 776,380 16.7 % Consumer 7,065 - - 3,151 10,216 0.2 % Total loans 4,032,715 494,149 - 124,601 4,651,465 100.0 % Premiums, discounts and deferred fees and costs, net - (39,986 ) - 40 (39,946 ) Loans net of premiums, discounts, deferred fees and costs 4,032,715 454,163 - 124,641 4,611,519 Allowance for loan and lease losses (20,021 ) (1,266 ) - (1,334 ) (22,621 ) Loans, net $ 4,012,694$ 452,897 $ - $ 123,307$ 4,588,898 73



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Total loans, net of premiums, discounts, deferred fees and costs, increased by $3.5 billion to $9.1 billion at December 31, 2013, from $5.6 billion at December 31, 2012. New loans grew by $3.9 billion while loans acquired in the FSB Acquisition declined by $370 million from December 31, 2012 to December 31, 2013. New residential loans grew by $892 million and new commercial loans grew by $2.8 billion during the year ended December 31, 2013. Residential loan growth was attributable primarily to purchases of residential mortgages through established correspondent channels. Growth in new loans, net of premiums, discounts, deferred fees and costs, for the year ended December 31, 2013 included $1.1 billion for the Florida franchise, $1.3 billion for the New York franchise and $1.5 billion for what we refer to as national platforms, consisting of our residential mortgage purchase program, the Bank's three commercial lending subsidiaries and our indirect auto platform. Growth for the national platforms included $815 million, $499 million and $186 million attributable to purchased residential mortgages, the lending subsidiaries and indirect auto lending, respectively. At December 31, 2013, $3.2 billion or 42%, $1.6 billion or 21% and $2.8 billion or 37% of the new portfolio was attributable to the Florida and New York regions and national platforms, respectively. The percentage of the new portfolio attributable to the New York region is expected to continue to grow. At December 31, 2013, 2012, 2011, 2010 and 2009 respectively, 16%, 33%, 59%, 86% and 97% of loans, net of premiums, discounts, deferred fees and costs, were covered loans. Covered loans are declining and new loans increasing as a percentage of the total portfolio as covered loans are repaid or resolved and new loan originations and purchases increase. This trend is expected to continue.



Residential Mortgages

Residential mortgages totaled $3.1 billion, or 34.3% of total loans and $2.5 billion, or 45.3% of total loans at December 31, 2013 and 2012, respectively. The decline in this portfolio segment as a percentage of loans is a result of the resolution of covered loans, including transfers to OREO, partially offset by residential loan purchases and to a lesser extent, originations, and a strategic emphasis on commercial lending.

The new residential loan portfolio includes both originated and purchased loans. At December 31, 2013 and 2012, $170 million or 9.5% and $93 million or 10.1%, respectively, of our new 1-4 single family residential loans were originated loans; $1.6 billion or 90.5% and $828 million or 89.9%, respectively, of our new 1-4 single family residential loans were purchased loans. We currently originate 1-4 single family residential mortgage loans with terms ranging from 10 to 30 years, with either fixed or adjustable interest rates, primarily to customers in Florida and New York. New residential mortgage loans are primarily closed-end first lien loans for the purchase or re-finance of owner occupied property. We have purchased loans to supplement our mortgage origination platform and to geographically diversify our loan portfolio. The purchased residential portfolio consists primarily of jumbo mortgages on owner-occupied properties. At December 31, 2013, the purchased residential loan portfolio included $257 million of interest-only loans, substantially all of which begin amortizing 10 years after origination. We intend to expand and enhance our residential origination channel in both the Florida and New York regions and expect originations to comprise a larger portion of the residential portfolio in the future. The number of newly originated residential mortgage loans that are re-financings of covered loans is not significant.



Home equity loans and lines of credit are not significant to the new loan portfolio.

We do not originate option adjustable rate mortgages ("ARMs"), "no-doc" or "reduced-doc" mortgages and do not utilize wholesale mortgage origination channels although the covered loan portfolio contains loans with these characteristics. The Company's exposure to future losses on these mortgage loans is mitigated by the Loss Sharing Agreements. The following table presents a breakdown 74



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of the 1-4 single family residential mortgage portfolio categorized between fixed rate loans and ARMs at December 31, 2013 and 2012 (dollars in thousands): 2013 Covered Percent of Loans New Loans Total Total 1 - 4 single family residential loans: Fixed rate loans $ 421,143$ 841,987$ 1,263,130 42.9 % ARM Loans 695,539 985,793 1,681,332 57.1 % $ 1,116,682$ 1,827,780$ 2,944,462 100.0 % 2012 Covered Percent of Loans New Loans Total Total 1 - 4 single family residential loans: Fixed rate loans $ 495,321$ 446,161$ 941,482 40.7 % ARM Loans 883,372 489,510 1,372,882 59.3 % $ 1,378,693$ 935,671$ 2,314,364 100.0 % Included in ARM loans above are payment option ARMs representing 32.7% and 41.5% of total ARM loans outstanding as of December 31, 2013 and 2012, respectively, based on UPB. All of the option ARMs are covered loans and the substantial majority are ACI loans. The ACI loans are accounted for in accordance with ASC 310-30; therefore, the optionality embedded in these loans does not impact the carrying value of the loans or the amount of interest income recognized on them. These features are taken into account in quarterly updates of expected cash flows from these loans.



At December 31, 2013 and 2012, the majority of the 1-4 single family residential loans outstanding were to customers domiciled in the following states (dollars in thousands):

2013 Covered Percent of Loans New Loans Total Total California $ 80,919$ 865,342$ 946,261 32.1 % Florida 604,384 241,827 846,211 28.7 % New York 31,406 119,147 150,553 5.1 % Illinois 69,966 37,539 107,505 3.7 % Others 330,007 563,925 893,932 30.4 % $ 1,116,682$ 1,827,780$ 2,944,462 100.0 % 2012 Covered Percent of Loans New Loans Total Total Florida $ 775,408$ 124,945$ 900,353 38.9 % California 95,987 438,760 534,747 23.1 % Illinois 87,195 26,951 114,146 4.9 % New York 37,890 47,914 85,804 3.7 % Others 382,213 297,101 679,314 29.4 % $ 1,378,693$ 935,671$ 2,314,364 100.0 % 75



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No state other than those detailed above represented borrowers with more than 3.7% of total 1-4 single family residential loans outstanding at December 31, 2013 and 2012.

Commercial loans

The commercial portfolio segment includes loans secured by multi-family properties, loans secured by both owner-occupied and non-owner occupied commercial real estate, construction, land, commercial and industrial loans and direct financing leases.

Commercial real estate loans include term loans secured by owner and non-owner occupied income producing properties including rental apartments, mixed-use properties, industrial properties, retail shopping centers, office buildings, warehouses and hotels as well as real estate secured lines of credit. Loans secured by commercial real estate typically have shorter repayment periods and re-price more frequently than 1-4 single family residential loans but may have longer terms and re-price less frequently than commercial and industrial loans. The Company's underwriting standards generally provide for loan terms of five to ten years, with amortization schedules of no more than thirty years. Loan-to-value ("LTV") ratios are typically limited to no more than 80%. In addition, the Company usually obtains personal guarantees or carve-out guarantees of the principals as an additional enhancement for commercial real estate loans. Owner-occupied commercial real estate loans typically have risk profiles more closely aligned with those of commercial and industrial loans than with other types of commercial real estate loans. Construction and land loans represented less than 2% of the total loan portfolio at December 31, 2013. Construction and land loans are generally made for projects expected to stabilize within twelve months of completion in submarkets with strong fundamentals. At December 31, 2013, the carrying value of construction loans with available interest reserves totaled $47 million; the amount of available interest reserves totaled $1 million. All of these loans were rated "pass" at December 31, 2013. Commercial loans are typically made to growing companies and middle market businesses and include equipment loans, secured and unsecured working capital lines of credit, formula-based loans, mortgage warehouse lines, taxi medallion loans, lease financing, Small Business Administration product offerings and, to a lesser extent, acquisition finance credit facilities. These loans may be structured as term loans, typically with maturities of three to seven years or less, or revolving lines of credit which may have multi-year maturities. Commercial loans also include shared national credits totaling $457 million at December 31, 2013, for borrowers in our geographic footprint. Through three wholly-owned lending subsidiaries, the Bank provides small business equipment financing, municipal essential use equipment financing and transportation equipment financing to businesses and municipalities throughout North America. This financing may take the form of term loans or leases. Management's loan origination strategy is heavily focused on the commercial portfolio segment, which comprised 73.2% and 74.1% of new loans as of December 31, 2013 and 2012, respectively. New commercial loans that represent re-financings of covered loans are not significant.



Consumer Loans

Consumer loans are comprised primarily of indirect auto loans, representing 94.4% of new consumer loans at December 31, 2013. At December 31, 2013, the substantial majority of indirect auto loans were to borrowers in Florida, New York and New Jersey. At December 31, 2013, 51% of the indirect auto portfolio was new car financing and 49% was used car financing. To mitigate compliance risk with respect to the indirect auto business, we have put in place dealer due diligence and monitoring processes and have initiated a detailed internal review process. The consumer portfolio segment also includes consumer installment financing, loans secured by certificates of deposit, unsecured personal lines of credit and demand deposit account overdrafts. 76



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Table of Contents Loan Maturities The following table sets forth, as of December 31, 2013, the maturity distribution of our loan portfolio by category, based on UPB. Commercial loans are presented by contractual maturity. Contractual maturities of 1-4 single family residential loans have been adjusted for an estimated rate of prepayments on all loans, and defaults on ACI loans, based on historical trends, current interest rates, types of loans and refinance patterns (in thousands): After One One Year or Through Five After Five Less Years Years Total Residential: 1 - 4 single family residential $ 981,018$ 2,156,326$ 1,700,473$ 4,837,817 Home equity loans and lines of credit 72,175 104,880 65,526 242,581 1,053,193 2,261,206 1,765,999 5,080,398 Commercial: Multi-family 50,325 512,660 587,914 1,150,899 Commercial real estate 211,020 777,106 856,448 1,844,574 Construction and land 82,934 59,385 7,367 149,686 Commercial and industrial 625,331 1,321,859 332,243 2,279,433 Lease financing 109,574 189,898 37,910 337,382 1,079,184 2,860,908 1,821,882 5,761,974 Consumer 35,424 150,350 29,497 215,271 $ 2,167,801$ 5,272,464$ 3,617,378$ 11,057,643 The following table shows the distribution of UPB of those loans that mature in more than one year between fixed and adjustable interest rate loans as of December 31, 2013 (in thousands): Interest Rate Type Fixed Adjustable



Total

Residential:

1 - 4 single family residential $ 1,603,851$ 2,252,948$ 3,856,799

Home equity loans and lines of credit 18,596 151,810 170,406 1,622,447 2,404,758 4,027,205 Commercial: Multi-family 893,760 206,814 1,100,574 Commercial real estate 1,045,517 588,037 1,633,554 Construction and land 5,284 61,468 66,752 Commercial and industrial 869,599 784,503 1,654,102 Lease financing 227,808 - 227,808 3,041,968 1,640,822 4,682,790 Consumer 173,693 6,154 179,847 $ 4,838,108$ 4,051,734$ 8,889,842 Asset Quality

In discussing asset quality, a distinction must be made between covered loans and new loans. New loans were underwritten under significantly different and generally more conservative standards than the covered loans. In particular, credit approval policies have been strengthened, wholesale mortgage 77



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origination channels have been eliminated, "no-doc" and option ARM loan products have been eliminated, and real estate appraisal policies have been improved. Although the risk profile of covered loans is higher than that of new loans, our exposure to loss related to the covered loans is significantly mitigated by the Loss Sharing Agreements and by the fair value basis recorded in these loans resulting from the application of acquisition accounting. The Commercial Shared-Loss Agreement is scheduled to terminate on May 21, 2014. Certain loans currently eligible for FDIC loss sharing may no longer be eligible for loss sharing after that date. For further discussion, see the section entitled "Results of Operations-Termination of the Commercial Shared-Loss Agreement." We have established a robust credit risk management framework and put in place an experienced team to lead the workout and recovery process for the commercial and commercial real estate portfolios. We have also implemented a dedicated internal loan review function that reports directly to our Audit and Risk Committee. We have an experienced resolution team in place for covered residential mortgage loans, and have implemented outsourcing arrangements with industry leading firms in certain areas such as OREO resolution. Loan performance is monitored by our credit administration, workout and recovery and loan review departments. Commercial loans are regularly reviewed by our internal loan review department. Relationships with committed balances greater than $1 million are reviewed at least annually. The Company utilizes a 13 grade internal asset risk classification system as part of its efforts to monitor and improve commercial asset quality. Loans exhibiting potential credit weaknesses that deserve management's close attention and that if left uncorrected may result in deterioration of the repayment capacity of the borrower are categorized as special mention. These borrowers may exhibit negative financial trends or erratic financial performance, strained liquidity, marginal collateral coverage, declining industry trends or weak management. Loans with well-defined credit weaknesses that may result in a loss if the deficiencies are not corrected are assigned a risk rating of substandard. These borrowers may exhibit payment defaults, insufficient cash flows, operating losses, increasing balance sheet leverage, project cost overruns, unreasonable construction delays, exhausted interest reserves, or declining collateral values. Loans with weaknesses so severe that collection in full is highly questionable or improbable, but because of certain reasonably specific pending factors have not been charged off, are assigned risk ratings of doubtful. Residential mortgage loans and consumer loans are not individually risk rated. Delinquency status is the primary measure we use to monitor the credit quality of these loans. We also consider original LTV and FICO score to be significant indicators of credit quality for the new 1-4 single family residential portfolio and FICO score to be a significant indicator of credit quality for the new consumer indirect auto portfolio. New Loans Commercial The ongoing asset quality of significant commercial loans is monitored on an individual basis through our regular credit review and risk rating process. We believe internal risk rating is the best indicator of the credit quality of commercial loans. Homogenous groups of smaller balance commercial loans may be monitored collectively. At December 31, 2013, new commercial loans with aggregate balances of $8 million, $26 million and $10 million were rated special mention, substandard and doubtful, respectively. At December 31, 2012, new commercial loans aggregating $21 million, $49 million and $1 million were rated special mention, substandard and doubtful, respectively. See Note 5 to the consolidated financial statements for more detailed information about risk rating of new commercial loans. 78



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Table of Contents Residential At December 31, 2013 and 2012, new 1-4 single family residential loans totaling $0.6 million and $0.2 million, respectively, were 90 days or more past due. New 1-4 single family residential loans past due less than 90 days totaled $3 million and $8 million at December 31, 2013 and 2012, respectively. The majority of our new residential mortgage portfolio consists of loans purchased through established correspondent channels. The credit parameters for purchasing loans are similar to the underwriting guidelines in place for our mortgage origination platform. For purchasing seasoned loans, good payment history is required. In general, we purchase performing jumbo mortgage pools which have FICO scores above 700, primarily are owner-occupied and full documentation, and have a current LTV of 80% or less. We perform due diligence on the purchased loans for credit, compliance, counterparty, payment history and property valuation. The following table shows the distribution of new 1-4 single family residential loans by original FICO and LTV as of December 31, 2013 and 2012 (in thousands): 2013 FICO LTV 720 or less 721 - 740 741 - 760 761 or greater Total 60% or less $ 37,293$ 60,626$ 86,920$ 473,250$ 658,089 60% - 70% 25,861 45,485 77,253 308,242 456,841 70% - 80% 19,610 60,021 116,332 472,279 668,242 More than 80% 26,492 5,487 3,166 9,463 44,608 $ 109,256$ 171,619$ 283,671$ 1,263,234$ 1,827,780 2012 FICO LTV 720 or less 721 - 740 741 - 760 761 or greater Total 60% or less $ 33,141$ 29,292$ 35,761$ 217,249$ 315,443 60% - 70% 16,852 12,286 41,863 159,068 230,069 70% - 80% 28,251 27,068 54,367 256,605 366,291 More than 80% 16,822 1,505 1,200 4,341 23,868 $ 95,066$ 70,151$ 133,191$ 637,263$ 935,671 At December 31, 2013, the purchased loan portfolio had the following characteristics: 44.8% were fixed rate loans; substantially all were full documentation with an average FICO score of 769 and average LTV of 64.5%. The majority of this portfolio was owner-occupied, with 94.6% primary residence, 4.8% second homes and 0.6% investment properties. In terms of vintage, 2.6% of the portfolio was originated pre-2011, 15.3% in 2011, 26.6% in 2012 and 55.5% in 2013. Similarly, the originated loan portfolio had the following characteristics at December 31, 2013: 68.3% were fixed rate loans, 100% were full documentation with an average FICO score of 761 and average LTV of 62.3%. The majority of this portfolio was owner-occupied, with 89.5% primary residence, 9.7% second homes and 0.8% investment properties. In terms of vintage, 7.3% of the portfolio was originated pre-2011, 9.5% in 2011, 22.1% in 2012 and 61.1% in 2013.



Consumer

At December 31, 2013 and 2012, delinquent new consumer loans were insignificant.

The majority of our new consumer portfolio consists of indirect auto loans. In general, we originate indirect auto loans to applicants who are well qualified; the average FICO score for indirect

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auto loans at December 31, 2013 was 731. The indirect auto portfolio at December 31, 2013 was comprised of 38% super-prime, 45% prime and 17% non-prime paper; the average borrower debt-to-income ratio was 30.1%.

Covered Loans

Covered loans consist of both ACI loans and non-ACI loans. At December 31, 2013, covered ACI loans totaled $1.3 billion and covered non-ACI loans totaled $193 million, net of premiums, discounts, deferred fees and costs.



Residential

Covered residential loans were placed into homogenous pools at the time of the FSB Acquisition and the ongoing credit quality and performance of these loans is monitored on a pool basis. The fair value of the pools was initially measured based on the expected cash flows from each pool. Initial cash flow expectations incorporated significant assumptions regarding prepayment rates, frequency of default and loss severity. For ACI pools, the difference between total contractual payments due and the cash flows expected to be received at acquisition was recognized as non-accretable difference. The excess of expected cash flows over the recorded fair value of each ACI pool at acquisition, known as the accretable yield, is being recognized as interest income over the life of each pool. We monitor the pools quarterly to determine whether any significant changes have occurred in expected cash flows that would be indicative of impairment or necessitate reclassification between non-accretable difference and accretable yield. Generally, improvements in expected cash flows less than 1% of the expected cash flows from a pool are not recorded. This materiality threshold may be revised in the future based on management's judgment. Residential mortgage loans, including home equity loans, comprised 87.8% of the UPB of the acquired loan portfolio at the FSB Acquisition date. We performed a detailed analysis of the portfolio to determine the key loan characteristics influencing performance. Key characteristics influencing the performance of the residential mortgage portfolio, including home equity loans, were determined to be delinquency status; product type, in particular, amortizing as opposed to option ARM products; current indexed LTV ratio; and original FICO score. The ACI loans in the residential mortgage portfolio were grouped into ten homogenous static pools based on these characteristics, and the non-ACI residential loans were grouped into two homogenous static pools. There were other variables which we initially expected to have a significant influence on performance and which were considered in our analysis; however, the results of our analysis demonstrated that their impact was less significant after controlling for current indexed LTV, product type, and FICO score. Therefore, these additional factors were not used in grouping the covered residential loans into pools and are not used in monitoring ongoing asset quality of the pools. The factors we considered but determined not to be significant included the level and type of documentation required at origination, i.e., whether a loan was originated under full documentation, reduced documentation, or no documentation programs; occupancy, defined as owner occupied vs. non-owner occupied collateral properties; geography; and vintage, i.e., year of origination. At December 31, 2013, the carrying value of 1-4 single family residential non-ACI loans was $60 million; $3 million or 5.7% of these loans were 30 days or more past due and none were 90 days or more past due. At December 31, 2013, ACI 1-4 single family residential loans totaled $1.1 billion; $99 million or 9.4% of these loans were delinquent by 30 days or more and $56 million or 5.3% were delinquent by 90 days or more. At December 31, 2013, the amount of 1-4 single family residential non-ACI loans to borrowers who have not reaffirmed their debt discharged in Chapter 7 bankruptcy was insignificant. At December 31, 2013, non-ACI home equity loans and lines of credit had an aggregate carrying value of $126 million; $10 million or 7.6% of these loans were 30 days or more past due and $7 million 80



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or 5.2% were 90 days or more past due. ACI home equity loans and lines of credit had a carrying amount of $40 million at December 31, 2013; $6 million or 14.2% of ACI home equity loans and lines of credit were 30 days or more contractually delinquent and $4 million or 10.5% were delinquent by 90 days or more. Home equity loans and lines of credit generally provide that payment terms be reset after an initial contractual period of interest only payments, requiring the pay down of principal through balloon payments or amortization. Additional information regarding ACI and non-ACI home equity loans and lines of credit at December 31, 2013 is summarized as follows: ACI Non-ACI Loans resetting from interest only: Previously reset 5.1 % 7.8 % Scheduled to reset within 12 months 10.2 % 16.2 % Scheduled to reset after 12 months 84.7 % 76.0 % 100.0 % 100.0 % Lien position: First liens 7.4 % 7.2 % Second or third liens 92.6 % 92.8 % 100.0 % 100.0 % Expected loss severity given default is significantly higher for home equity loans that are not first liens. The amount of performing home equity loans and lines of credit in a second or third lien position with a non-performing underlying first lien was insignificant at December 31, 2013.



Although delinquencies in the covered residential portfolio are high, potential future losses to the Company related to these loans are significantly mitigated by the Loss Sharing Agreements.

Commercial

Generally, commercial and commercial real estate loans are monitored individually due to their size and other unique characteristics.

At December 31, 2013, non-ACI commercial loans had an aggregate UPB of $8 million and a carrying value of $7 million; $2 million of these loans were 90 days or more past due. At December 31, 2013, non-ACI commercial loans with aggregate carrying values of $2 million and $0.4 million were rated substandard and doubtful, respectively. At December 31, 2013, there were no non-ACI commercial loans rated special mention.



At December 31, 2013, ACI commercial loans had a carrying value of $208 million, of which $193 million are covered under the Loss Sharing Agreements. At December 31, 2013, loans with aggregate carrying values of $4 million, $69 million and $0.1 million were internally risk rated special mention, substandard and doubtful, respectively. All of the non-covered ACI commercial loans were rated "pass" at December 31, 2013.

Potential future losses to the Company related to the covered loans are significantly mitigated by the Loss Sharing Agreements. The Commercial Shared-Loss Agreement is scheduled to terminate on May 21, 2014. Certain loans currently eligible for FDIC loss sharing may no longer be eligible for loss sharing after that date. For further discussion, see the section entitled "Results of Operations-Termination of the Commercial-Shared Loss Agreement." Substantially all of the non-performing or adversely classified covered commercial loans were included in the population of loans submitted to the FDIC for consent to sell or expected to be resolved prior to May 21, 2014. 81



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Table of Contents Impaired Loans and Non-Performing Assets Non-performing assets generally consist of (i) non-accrual loans, including loans that have been modified in troubled debt restructurings ("TDRs") and placed on non-accrual status or that have not yet exhibited a consistent six month payment history, (ii) accruing loans that are more than 90 days contractually past due as to interest or principal, excluding ACI loans, and (iii) OREO. Impaired loans also typically include loans modified in TDRs that are performing according to their modified terms and ACI loans for which expected cash flows have been revised downward since acquisition (as adjusted for any additional cash flows expected to be collected arising from changes in estimates after acquisition). Impaired ACI loans or pools with remaining accretable yield have not been classified as non-accrual loans and we do not consider them to be non-performing assets. Historically and as of December 31, 2013, the majority of impaired loans and non-performing assets were covered assets. The Company's exposure to loss related to covered assets is significantly mitigated by the Loss Sharing Agreements and by the fair value basis recorded in these assets resulting from the application of acquisition accounting. 82



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The following table summarizes the Company's impaired loans and non-performing assets at December 31 of the years indicated (in thousands):

2013 2012 2011 2010 2009 Non- Non- Non- Non- Covered Covered Covered Covered Covered Covered Covered Covered Assets Assets Total Assets Assets Total Assets Assets Total Assets Assets Total Total(5) Non-accrual loans Residential: 1 - 4 single family residential $ 293$ 194$ 487$ 2,678$ 155$ 2,833$ 7,410 $ - $ 7,410$ 9,585 $ - $ 9,585$ 14,495 Home equity loans and lines of credit 6,559 - 6,559 9,767 - 9,767 10,451 27 10,478 10,817 - 10,817 2,726 Total residential loans 6,852 194 7,046 12,445 155 12,600 17,861 27 17,888 20,402 - 20,402 17,221 Commercial(6): Multi-family - - - - - - - - - 200 - 200 - Commercial real estate 1,042 4,229 5,271 59 1,619 1,678 295 - 295 75 - 75 - Construction and land - 244 244 - 278 278 - 335 335 - - - - Commercial and industrial 2,767 16,612 19,379 4,530 11,907 16,437 6,695 2,469 9,164 1,886 3,211 5,097 150 Lease financing - 1,370 1,370 - 1,719 1,719 - - - - - - - Total commercial loans 3,809 22,455 26,264 4,589 15,523 20,112 6,990 2,804 9,794 2,161 3,211 5,372 150 Consumer: - 75 75 - - - - - - - - - - Total non-accrual loans 10,661 22,724 33,385 17,034 15,678 32,712 24,851 2,831 27,682 22,563 3,211 25,774 17,371 Non-ACI and new loans past due 90 days and still accruing - 512 512 140 38 178 375 - 375 - - - - TDRs 1,765 - 1,765 1,293 348 1,641 824 - 824 - - - - Total non-performing loans 12,426 23,236 35,662 18,467 16,064 34,531 26,050 2,831 28,881 22,563 3,211 25,774 17,371 Other real estate owned 39,672 898 40,570 76,022 - 76,022 123,737 - 123,737 206,680 - 206,680 120,110 Total non-performing assets 52,098 24,134 76,232 94,489 16,064 110,553 149,787 2,831 152,618 229,243 3,211 232,454 137,481 Impaired ACI loans on accrual status(1) 44,286 - 44,286 43,580 - 43,580 94,536 - 94,536 262,130 - 262,130 567,253 Other impaired loans on accrual status - - - - 2,721 2,721 - - - - - - - Non-ACI and new TDRs in compliance with their modified terms 3,588 1,400 4,988 2,650 4,689 7,339 583 - 583 - - - - Total impaired loans and non-performing assets $ 99,972$ 25,534$ 125,506$ 140,719$ 23,474 $

164,193 $ 244,906$ 2,831$ 247,737$ 491,373$ 3,211$ 494,584$ 704,734 Non-performing loans to total loans(2) 0.31 % 0.39 % 0.43 % 0.62 % 0.17 % 0.70 % 0.60 % 0.66 % 0.38 % Non-performing assets to total assets(3) 0.16 % 0.51 % 0.13 % 0.89 % 0.03 % 1.35 % 0.03 % 2.14 % 1.24 % ALLL to total loans(2) 0.76 % 0.77 % 1.11 % 1.06 % 1.42 % 1.17 % 1.14 % 1.48 % 49.00 % ALLL to non-performing loans 246.73 % 195.52 % 256.65 % 171.21 % 859.34 % 167.59 % 191.56 % 226.35 % 130.22 % Net charge-offs to average loans(4) 0.34 % 0.31 % 0.09 % 0.17 % 0.36 % 0.62 % 0.04 % 0.37 % 0.00 %



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(1) Includes TDRs on accrual status. (2)



Total loans for purposes of calculating these ratios are net of premiums,

discounts, deferred fees and costs.

(3)

Ratio for non-covered assets is calculated as non-performing non-covered assets to total assets. (4) Annualized. (5) All impaired loans and non-performing assets were covered assets at December 31, 2009. (6) Includes ACI loans for which discount is no longer being accreted. Contractually delinquent ACI loans with remaining accretable yield are not reflected as non-accrual loans because accretable yield continues to be accreted into income. Accretable yield continues to be recorded as long as there continues to be an expectation of future cash flows in excess of carrying amount from these loans. As of December 31, 2013, ACI commercial loans with a carrying value of 83



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$1 million had no remaining accretable yield and are included with non-accrual loans in the table above. The carrying value of ACI loans contractually delinquent by more than 90 days but on which income was still being recognized was $78 million and $177 million at December 31, 2013 and 2012, respectively. The decline in the ratio of the ALLL to total loans, particularly for the new portfolio, at December 31, 2013 as compared to December 31, 2012 is primarily a result of a decrease in the peer group loss factors used in calculating the ALLL for the 1-4 single family residential and commercial portfolios. See the section entitled "Analysis of the Allowance for Loan and Lease Losses" below for a further discussion of the methodology we use to determine the amount of the ALLL. The increase in the annualized net charge-off ratio in 2013 compared to 2012 was primarily due to one commercial loan relationship with charge-offs of $11.1 million during the year ended December 31, 2013. New and non-ACI commercial loans are placed on non-accrual status when (i) management has determined that full repayment of all contractual principal and interest is in doubt, or (ii) the loan is past due 90 days or more as to principal or interest unless the loan is well secured and in the process of collection. New and non-ACI residential and consumer loans are generally placed on non-accrual status when 90 days of interest is due and unpaid. When a loan is placed on non-accrual status, uncollected interest accrued is reversed and charged to interest income. Commercial loans are returned to accrual status only after all past due principal and interest has been collected and full repayment of remaining contractual principal and interest is reasonably assured. Residential loans are returned to accrual status when less than 90 days of interest is due and unpaid. Past due status of loans is determined based on the contractual next payment due date. Loans less than 30 days past due are reported as current. Except for ACI loans accounted for in pools, loans that are the subject of troubled debt restructurings are generally placed on non-accrual status at the time of the modification unless the borrower has no history of missed payments for six months prior to the restructuring. If borrowers perform pursuant to the modified loan terms for at least six months and the remaining loan balances are considered collectable, the loans are returned to accrual status. A loan modification is considered a TDR if the Company, for economic or legal reasons related to the borrower's financial difficulties, grants a concession to the borrower that the Company would not otherwise grant. These concessions may take the form of temporarily or permanently reduced interest rates, payment abatement periods, restructuring of payment terms, extensions of maturity at below market terms, or in some cases, partial forgiveness of principal. Under generally accepted accounting principles, modified ACI loans accounted for in pools are not accounted for as troubled debt restructurings and are not separated from their respective pools when modified. Included in TDRs are residential loans to borrowers who have not reaffirmed their debt discharged in Chapter 7 bankruptcy. The total amount of such loans is not material. To date, TDRs have not had a material impact on our financial condition or results of operations. As of December 31, 2013, 21 commercial loans with an aggregate carrying value of $12 million and 20 residential loans with an aggregate carrying value of $6 million had been modified in TDRs and were included in impaired loans and non-performing assets. Because of the immateriality of the amount of loans modified in TDRs and nature of the modifications, the modifications did not have a material impact on the Company's consolidated financial statements for the years ended December 31, 2013 or 2012. For additional information about TDRs, see Note 5 to the consolidated financial statements. Additional interest income that would have been recognized on non-accrual loans and TDRs had they performed in accordance with their original contractual terms is not material for any period presented. 84



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Table of Contents Potential Problem Loans Potential problem loans have been identified by management as those loans included in the "substandard accruing" risk rating category. These loans are typically performing, but possess specifically identified credit weaknesses that, if not remedied, may lead to a downgrade to non-accrual status and identification as impaired in the near-term. Substandard accruing new loans totaled $14 million at December 31, 2013. The majority of these loans were current as to principal and interest at December 31, 2013. The balance of substandard accruing non-ACI loans was not significant at December 31, 2013.



Loss Mitigation Strategies

We evaluate each loan in default to determine the most effective loss mitigation strategy, which may be modification, short sale, or foreclosure. We offer loan modifications under HAMP to eligible borrowers in the residential portfolio. HAMP is a uniform loan modification process that provides eligible borrowers with sustainable monthly mortgage payments equal to a target 31% of their gross monthly income. As of December 31, 2013, 12,301 borrowers had been counseled regarding their participation in HAMP; 9,010 of those borrowers were initially determined to be potentially eligible for loan modifications under the program. As of December 31, 2013, 1,519 borrowers who did not elect to participate in the program had been sent termination letters and 3,287 borrowers had been denied due to ineligibility. There were 4,117 permanent loan modifications and 87 trial loan modifications at December 31, 2013. Substantially all of these modified loans were ACI loans accounted for in pools.



Analysis of the Allowance for Loan and Lease Losses

The ALLL relates to (i) new loans, (ii) estimated additional losses arising on non-ACI loans subsequent to the FSB Acquisition, and (iii) additional impairment recognized as a result of decreases in expected cash flows on ACI loans due to further credit deterioration. The impact of any additional provision for losses on covered loans is significantly mitigated by an increase in the FDIC indemnification asset. The determination of the amount of the ALLL is, by nature, highly complex and subjective. Future events that are inherently uncertain could result in material changes to the level of the ALLL. General economic conditions including but not limited to unemployment rates, real estate values in our primary market areas and the level of interest rates, as well as a variety of other factors that affect the ability of borrowers' businesses to generate cash flows sufficient to service their debts will impact the future performance of the portfolio.



New and non-ACI Loans

Due to the lack of similarity between the risk characteristics of new loans and covered loans in the residential and home equity portfolios, management does not believe it is appropriate to use the historical performance of the covered residential mortgage portfolio as a basis for calculating the ALLL applicable to new loans. The new loan portfolio is not seasoned and has not yet developed an observable loss trend. Therefore, the ALLL for new residential loans is based primarily on relevant proxy historical loss rates. Beginning in 2013, the ALLL for new 1-4 single family residential loans is estimated using one year loss rates on prime residential mortgage securitizations issued between 2003 and 2008 as a proxy. Prior to 2013, the ALLL was calculated based on historical annualized charge-off rates for a group of peer banks in the Southeast. Given the growth of and geographic diversity in the new purchased residential portfolio, we determined, based on an updated analysis of portfolio characteristics, that prime residential mortgage securitizations provide a more comparable proxy for expected losses in this portfolio class. This determination is supported by the comparability of FICO scores and LTV ratios between loans included in those securitizations and loans in the Bank's portfolio. 85



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A peer group eight quarter average charge-off rate is used to estimate the ALLL for the new home equity loan class. See further discussion of the use of peer group loss factors below. The new home equity portfolio is not a significant component of the overall loan portfolio. Based on an updated analysis of historical performance, OREO and short sale losses, recent trending data and other internal and external factors, we have concluded that historical performance by portfolio class is the best indicator of incurred loss for the non-ACI 1-4 single family residential and home equity portfolio classes. For each of these portfolio classes, a quarterly roll rate matrix is calculated by delinquency bucket to measure the rate at which loans move from one delinquency bucket to the next during a given quarter. An average four quarter roll rate matrix is used to estimate the amount within each delinquency bucket expected to roll to 120+ days delinquent. We assume no cure for those loans that are currently 120+ days delinquent. Prior to the first quarter of 2013, frequency was calculated for each class using a four month roll to loss percentage. Given emerging market and portfolio trends, a 12 month loss emergence period is now being utilized to incorporate performance information from a period that incorporates a broader range of expectations relative to portfolio performance. Loss severity given default is estimated based on internal data about OREO sales and short sales from the portfolio. The ALLL calculation incorporates a 100% loss severity assumption for home equity loans that are projected to roll to default.



The impact on the provision for loan losses of the changes in the source of proxy data used to estimate the ALLL for new residential loans and the loss emergence period used to calculate the ALLL for the non-ACI residential portfolio discussed above was not material.

Since the new commercial loan portfolio is not yet seasoned enough to exhibit a loss trend and the non-ACI commercial portfolio has limited delinquency history, the ALLL for new and non-ACI commercial loans is based primarily on the Company's internal credit risk rating system and peer group average annual historical charge-off rates by loan class. The allowance is comprised of specific reserves for loans that are individually evaluated and determined to be impaired as well as general reserves for individually evaluated loans determined not to be impaired and loans that do not meet our established threshold for individual evaluation. Commercial relationships graded substandard or doubtful and on non-accrual status with committed credit facilities greater than or equal to $750,000 are individually evaluated for impairment. For loans evaluated individually for impairment and determined to be impaired, a specific allowance is established based on the present value of expected cash flows discounted at the loan's effective interest rate, the estimated fair value of the loan, or for collateral dependent loans, the estimated fair value of collateral less costs to sell. Loans modified in TDRs are also evaluated individually for impairment. We believe that loans rated substandard or doubtful that are not individually evaluated for impairment exhibit characteristics indicative of a heightened level of credit risk. Loss factors for these loans are determined by using default frequency and severity information applied at the loan level. Estimated default frequencies and severities are based on available industry data. The peer groups used to calculate the average historical charge-off rates that form the basis for our general reserve calculations for new and non-ACI commercial and new home equity and consumer loans are banks with total assets ranging from $3-$15 billion. We use a peer group of 23 banks in the U.S. Southeast region for loans originated in our Florida market and by our lending subsidiaries, and a peer group of 16 banks in the New York region for loans originated in our New York market. These peer groups include all of the banks in each region within the defined asset size range. Peer bank data is obtained from the Statistics on Depository Institutions Report published by the FDIC for the most recent quarter available. An eight-quarter average net charge-off rate is used. We evaluate the composition of the peer groups annually, or more frequently if, in our judgment, a more frequent evaluation is necessary. The general loss factor for municipal lease receivables is based on historical loss experience of a portfolio of similar assets. 86



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Our internal risk rating system comprises 13 credit grades; grades 1 through 8 are "pass" grades. The risk ratings are driven largely by debt service coverage. Peer group average historical loss rates are adjusted upward for loans rated special mention or assigned a lower "pass" rating. Peer group average historical loss rates are adjusted downward for loans assigned the highest "pass" grades. Qualitative adjustments are made to the ALLL when, based on management's judgment and experience, there are internal or external factors impacting loss frequency and severity not taken into account by the quantitative calculations. Management has grouped potential qualitative adjustments into the following categories: Portfolio performance trends, including levels of delinquencies and non-performing loans; Portfolio growth rates; Exceptions to policy and credit guidelines;



Economic factors, including changes in and levels of real estate price

indices, unemployment rates and GDP; Credit concentrations; and Changes in credit administration management and staff.



At December 31, 2013, qualitative adjustments were made to historical loss percentages related to:



economic factors, specifically changes in real estate price indices,

unemployment rates and GDP; the level of non-performing commercial loans; changes in credit administration staff; loan portfolio growth rates; and the level of policy and procedural exceptions.



Qualitative adjustments represented approximately 13% of the total new and non-ACI ALLL at December 31, 2013.

For non-ACI loans, the allowance is initially calculated based on UPB. The total of UPB, less the calculated allowance, is then compared to the carrying amount of the loans, net of unamortized credit related fair value adjustments established at acquisition. If the calculated balance net of the allowance is less than the carrying amount, an additional allowance is established. Any such increase in the allowance for non-ACI loans will result in a corresponding increase in the FDIC indemnification asset.



ACI Loans

For ACI loans, a valuation allowance is established when periodic evaluations of expected cash flows reflect a decrease resulting from credit related factors from the level of cash flows that were estimated to be collected at acquisition plus any additional expected cash flows arising from revisions in those estimates. We perform a quarterly analysis of expected cash flows for ACI loans. Expected cash flows are estimated on a pool basis for ACI 1-4 single family residential and home equity loans. The analysis of expected pool cash flows incorporates updated pool level expected prepayment rate, default rate, delinquency level and loss severity given default assumptions. Prepayment, delinquency and default curves are derived primarily from roll rates generated from the historical performance of the portfolio over the immediately preceding four quarters. Estimates of default probability also incorporate updated LTV ratios, at the loan level, based on Case-Shiller Home Price Indices for the relevant MSA. Costs and fees represent an additional component of loss on default and are projected using the "Making Home Affordable" cost factors provided by the Federal 87



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government. The ACI home equity roll rates reflect elevated default probabilities as a result of delinquent, related senior liens and loans to borrowers who have not reaffirmed their debt discharged in Chapter 7 bankruptcy.

Based on our projected cash flow analysis, no ALLL related to 1-4 single family residential and home equity ACI pools was recorded at December 31, 2013 or 2012. The primary assumptions underlying estimates of expected cash flows for ACI commercial loans are default probability and severity of loss given default. Updated assumptions for large balance and delinquent loans in the commercial ACI portfolio are based on net realizable value analyses prepared at the individual loan level by the Company's workout and recovery department. Updated assumptions for smaller balance commercial loans are based on a combination of the Company's own historical delinquency and severity data and industry level data. Delinquency data is used as a proxy for defaults as the Company's experience has been that few of these loans return to performing status after being delinquent greater than 60 days. An additional multiplier is applied to the portfolio level default probability in developing assumptions for loans rated special mention, substandard, or doubtful based on the Company's historical delinquency experience. Based on our loan level analysis, we recorded provisions for (recoveries of) loan losses on ACI commercial loans of $(2.9) million, $(4.3) million and $7.2 million for the years ended December 31, 2013, 2012 and 2011, respectively. Related increases (decreases) in the FDIC indemnification asset of $(2.5) million, $(2.7) million and $6.2 million were recorded for the years ended December 31, 2013, 2012 and 2011, respectively. 88



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The following table provides an analysis of the ALLL, provision for loan losses and net charge-offs for the period from May 21, 2009 (inception of operations) through December 31, 2013 (in thousands):

Covered Loans Non-ACI ACI Loans Loans New Loans Total Balance at May 21, 2009 $ - $ - $ - $ - Provision for loan losses: 20,021 1,266 1,334 22,621 Charge-offs: - - - - Recoveries: - - - - Balance at December 31, 2009 20,021 1,266



1,334 22,621

Provision for loan losses: 33,928 12,553 4,926 51,407 Charge-offs: Home equity loans and lines of credit - (1,125 ) - (1,125 ) Multi-family (1,414 ) (166 ) - (1,580 ) Commercial real estate (3,274 ) - - (3,274 ) Construction and land (8,398 ) - - (8,398 ) Commercial loans and leases (938 ) (29 ) (109 ) (1,076 ) Consumer - (215 ) - (215 ) Total Charge-offs (14,024 ) (1,535 ) (109 ) (15,668 ) Total Recoveries - - - - Net Charge-offs: (14,024 ) (1,535 ) (109 ) (15,668 ) Balance at December 31, 2010 39,925 12,284 6,151 58,360 Provision for (recovery of) loan losses: (11,278 ) 3,586 21,520 13,828 Charge-offs: 1 - 4 single family residential - (459 ) - (459 ) Home equity loans and lines of credit - (1,918 ) - (1,918 ) Multi-family (461 ) - - (461 ) Commercial real estate (2,845 ) (674 ) - (3,519 ) Construction and land (7,348 ) - - (7,348 ) Commercial loans and leases (2,873 ) (5,438 ) (3,367 ) (11,678 ) Total Charge-offs (13,527 ) (8,489 ) (3,367 ) (25,383 ) Recoveries: Home equity loans and lines of credit - 20 - 20 Multi-family 565 27 - 592 Commercial real estate 16 131 - 147 Construction and land 625 - - 625 Commercial loans and leases 6 183 24 213 Total Recoveries 1,212 361 24 1,597 Net Charge-offs: (12,315 ) (8,128 ) (3,343 ) (23,786 ) Balance at December 31, 2011 16,332 7,742 24,328 48,402 Provision for (recovery of) loan losses: (4,347 ) 3,844 19,399 18,896 Charge-offs: 1 - 4 single family residential - (245 ) - (245 ) Home equity loans and lines of credit - (3,030 ) - (3,030 ) Multi-family (563 ) - (87 ) (650 ) Commercial real estate (1,482 ) - - (1,482 ) 89



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Table of Contents Covered Loans Non-ACI (continued) ACI Loans Loans New Loans Total Construction and land (1,183 ) - (3 ) (1,186 ) Commercial loans and leases (738 ) (316 ) (2,839 ) (3,893 ) Total Charge-offs (3,966 ) (3,591 ) (2,929 ) (10,486 ) Recoveries: Home equity loans and lines of credit - 29 - 29 Multi-family - 24 - 24 Commercial real estate - 347 - 347 Commercial loans and leases - 1,479 427 1,906 Consumer - - 3 3 Total Recoveries - 1,879 430 2,309 Net Charge-offs: (3,966 ) (1,712 ) (2,499 ) (8,177 ) Balance at December 31, 2012 8,019 9,874 41,228 59,121 Provision for (recovery of) loan losses: (2,891 ) 1,153 33,702 31,964 Charge-offs: 1 - 4 single family residential - (1,276 ) (10 ) (1,286 ) Home equity loans and lines of credit - (2,858 ) - (2,858 ) Commercial real estate (1,162 ) - - (1,162 ) Construction and land (77 ) - - (77 ) Commercial loans and leases (996 ) (171 ) (17,987 ) (19,154 ) Consumer - - (484 ) (484 ) Total Charge-offs (2,235 ) (4,305 ) (18,481 ) (25,021 ) Recoveries: Home equity loans and lines of credit - 90 - 90 Multi-family - 15 - 15 Commercial real estate - 191 - 191 Commercial loans and leases - 2,484 758 3,242 Consumer - - 123 123 Total Recoveries - 2,780 881 3,661 Net Charge-offs: (2,235 ) (1,525 ) (17,600 ) (21,360 ) Balance at December 31, 2013 $ 2,893$ 9,502$ 57,330$ 69,725 90



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The following tables show the distribution of the ALLL, broken out between covered and non-covered loans, as of December 31 of the years indicated (dollars in thousands): 2013 Covered Loans Non-ACI ACI Loans Loans New Loans Total %(1) Residential: 1 - 4 single family residential $ - $ 827$ 6,271$ 7,098 32.4 % Home equity loans and lines of credit - 8,243 12 8,255 1.9 % - 9,070 6,283 15,353 34.3 % Commercial: Multi-family 323 - 3,947 4,270 12.6 % Commercial real estate 1,813 14 11,175 13,002 20.0 % Construction and land 192 6 803 1,001 1.7 % Commercial loans and leases 565 412 32,935 33,912 29.0 % 2,893 432 48,860 52,185 63.3 % Consumer - - 2,187 2,187 2.4 % $ 2,893$ 9,502$ 57,330$ 69,725 100.0 % 2012 Covered Loans Non-ACI ACI Loans Loans New Loans Total %(1) Residential: 1 - 4 single family residential $ - $ 984$ 10,074$ 11,058 41.5 % Home equity loans and lines of credit - 8,087 19 8,106 3.8 % - 9,071 10,093 19,164 45.3 % Commercial: Multi-family 504 5 2,212 2,721 6.5 % Commercial real estate 5,400 31 7,790 13,221 17.5 % Construction and land 350 9 672 1,031 1.6 % Commercial loans and leases 1,765 758 20,047 22,570 28.5 % 8,019 803 30,721 39,543 54.1 % Consumer - - 414 414 0.6 % $ 8,019$ 9,874$ 41,228$ 59,121 100.0 % 91



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Table of Contents 2011 Covered Loans Non-ACI ACI Loans Loans New Loans Total %(1) Residential: 1 - 4 single family residential $ - $ 593$ 4,015$ 4,608 54.1 % Home equity loans and lines of credit - 5,549 18 5,567 6.1 % - 6,142 4,033 10,175 60.2 % Commercial: Multi-family 1,063 5 929 1,997 4.1 % Commercial real estate 10,672 284 4,529 15,485 13.6 % Construction and land 2,310 62 337 2,709 1.7 % Commercial loans and leases 2,287 1,249 14,449 17,985 20.2 % 16,332 1,600 20,244 38,176 39.6 % Consumer - - 51 51 0.2 % $ 16,332$ 7,742$ 24,328$ 48,402 100.0 % 2010 Covered Loans Non-ACI ACI Loans Loans New Loans Total %(1) Residential: 1 - 4 single family residential $ - $ 761$ 168$ 929 67.5 % Home equity loans and lines of credit 18,488 9,229 3 27,720 7.7 % 18,488 9,990 171 28,649 75.2 % Commercial: Multi-family 5,701 633 772 7,106 2.8 % Commercial real estate 5,795 418 1,189 7,402 11.4 % Construction and land 4,891 27 220 5,138 1.7 % Commercial and industrial 5,050 1,216 3,744 10,010 8.7 % 21,437 2,294 5,925 29,656 24.6 % Consumer - - 55 55 0.2 % $ 39,925$ 12,284$ 6,151$ 58,360 100.0 % 92



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Table of Contents 2009 Covered Loans Non-ACI ACI Loans Loans New Loans Total %(1) Residential: 1 - 4 single family residential $ 20,021$ 119$ 65$ 20,205 76.0 % Home equity loans and lines of credit - 11 4 15 7.1 % 20,021 130 69 20,220 83.1 % Commercial: Multi-family - 60 11 71 1.7 % Commercial real estate - 465 303 768 9.2 % Construction and land - 7 - 7 1.9 % Commercial and industrial - 604 905 1,509 3.9 % - 1,136 1,219 2,355 16.7 % Consumer - - 46 46 0.2 % $ 20,021$ 1,266$ 1,334$ 22,621 100.0 %



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(1)

Represents percentage of loans receivable in each category to total loans

receivable.

Significant components of the change in the ALLL at December 31, 2013 as compared to December 31, 2012, include:



A decrease of $(3.8) million for new 1 - 4 single family residential

loans, attributable to a decrease in loss factors resulting from the

use of more comparable proxy loss data as discussed above, partially

offset by growth of the portfolio;



An increase of $12.9 million for new commercial loans and leases, resulting from an increase of $7.9 million in specific reserves for impaired loans and an increase of $5.0 million from the growth of the commercial portfolio, partially offset by decreases in peer group historical loss factors; Increases of $1.7 million for new multi-family loans and $3.4 million for new commercial real estate loans, resulting primarily from the growth of the portfolio, partially offset by decreases in peer group historical loss factors; A $(5.1) million decrease in the allowance for ACI commercial loans resulting from continued resolutions, including charge-offs, of impaired loans in this portfolio class and improvements in expected cash flows; and An increase of $1.8 million for new consumer loans, resulting primarily from the growth of the indirect auto portfolio.



For additional information about the ALLL, see Note 5 to the consolidated financial statements.

Equipment under Operating Lease

Equipment under operating lease consists of railcar equipment we have purchased and leased to North American commercial end-users, predominantly companies in the petroleum/natural gas extraction and railroad line-haul industries. At December 31, 2013, our operating lease fleet consisted of 2,373 rail cars, including covered hoppers, gondolas, open hoppers, boxcars, auto carriers and tank cars. The largest concentration of 1,232 cars is in covered hopper cars used to ship sand for the energy industry. These equipment leases provide additional diversity in asset classes, geography and financing structures, with the potential for attractive after-tax returns. 93



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The primary risks inherent in the equipment leasing business are asset risk resulting from ownership of the equipment on operating lease and credit risk. Asset risk arises from fluctuations in supply and demand for the underlying leased equipment. Railcars are long-lived equipment with useful lives of approximately 35-50 years. The equipment is leased to commercial end-users with average lease terms of 3-7 years at December 31, 2013. We are exposed to the risk that, at the end of the initial or a subsequent lease term, the value of the asset will be lower than expected, potentially resulting in reduced future lease income over the remaining life of the asset or a lower sale value. Asset risk will ultimately impact the financial statements through changes to lease income streams from fluctuations in lease rates and/or utilization. Changes to lease income occur when the existing lease contracts expire, the assets come off lease, and we seek to enter new lease agreements. Asset risk may also lead to changes in depreciation as a result of changes in the residual values of the operating lease assets or through impairment of asset carrying values. Since our operating lease portfolio is relatively new, we do not have historical experience with respect to the expiration of lease terms for our equipment. To date, there have been no impairments of asset carrying values. Asset risk is evaluated and managed by an internal team of leasing professionals with a broad depth and breadth of experience in the leasing business. Additionally, we have partnered with an industry leading, experienced service provider who provides fleet management and servicing, including lease administration and reporting, Regulation Y full service maintenance program and railcar remarketing. Risk is managed by setting appropriate residual values at inception and systematic reviews of residual values based on independent appraisals, performed at least annually. Additionally, our internal management team and our external service provider closely follow the rail markets, monitoring traffic flows, supply and demand trends and the impact of new technologies and regulatory requirements. Demand for railcars is sensitive to shifts in general and industry specific economic and market trends and shifts in trade flows from specific events such as natural or man-made disasters. We seek to mitigate these risks by leasing to a stable end-user base, by maintaining a relatively young and diversified fleet of assets that are expected to maintain relatively stronger and more stable utilization rates despite impacts from unexpected events or cyclical trends and by staggering lease maturities. Credit risk in the leased equipment portfolio results from the potential default of lessees, possibly driven by obligor specific or industry-wide conditions, and is economically less significant than asset risk, because in the operating lease business, there is no extension of credit to the obligor. Instead, the lessor deploys a portion of the useful life of the asset. Credit losses, if any, will manifest through reduced rental income due to missed payments, time off lease, or lower rental payments due either to a restructuring or re-leasing of the asset to another obligor. To date, we have not experienced any credit losses, missed payments, time off lease or restructurings related to our operating lease portfolio. Credit risk in the operating lease portfolio is managed and monitored utilizing credit administration infrastructure, processes and procedures similar to those used to manage and monitor credit risk in the commercial loan portfolio. We also mitigate credit risk in this portfolio by leasing only to high credit quality obligors.



We expect our operating lease portfolio to grow in the future, and may expand into other transportation asset classes.

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The following table presents the changes in OREO for the years ended December 31, 2013, 2012 and 2011 (in thousands):

2013 2012 2011



Balance, beginning of period $ 76,022$ 123,737$ 206,680

Transfers from loan portfolio 68,084 151,302 312,958 Sales (101,597 ) (189,091 ) (371,332 ) Impairment (1,939 ) (9,926 ) (24,569 )



Balance, end of period $ 40,570$ 76,022$ 123,737

At December 31, 2013 and 2012, OREO consisted of the following types of properties (in thousands): 2013 2012 Covered Non-Covered Total Total



1 - 4 single family residential $ 28,310$ 83$ 28,393

$ 58,848 Condominium 4,732 - 4,732 12,887 Multi-family 135 - 135 257 Commercial real estate 5,708 500 6,208 1,512 Land 787 315 1,102 2,518 $ 39,672$ 898$ 40,570$ 76,022



All OREO was covered under the Loss Sharing Agreements at December 31, 2012.

The majority of our residential OREO properties are located in Florida. At December 31, 2013, 64.3% of residential properties were located in Florida, 6.7%, in Illinois, 6.1% in Maryland, 5.9% in California, and 4.8% in Virginia. All of our commercial OREO properties are located in Florida. The decrease in OREO reflects continued efforts to resolve non-performing covered assets and a decline in the level of new foreclosures. Residential OREO inventory declined to 157 units at December 31, 2013 from 402 units at December 31, 2012. Full appraisals, prepared in accordance with prevailing industry standards, are ordered for all OREO properties at the time of transfer to OREO and upon obtaining physical possession. Full appraisals are generally considered stale after 180 days. Broker Price Opinions, used for foreclosure bids, short sales, and modifications, are considered stale after 90 days from the effective date of the report.



Goodwill and Other Intangible Assets

Goodwill consists of $59 million recorded in conjunction with the FSB Acquisition and an additional $8 million recorded in conjunction with the acquisition of two lending subsidiaries in 2010. Other intangible assets consist of core deposit intangible assets and customer relationship intangible assets.

The Company has a single reporting unit. We perform goodwill impairment testing in the third quarter of each fiscal year. As of the 2013 impairment testing date, the estimated fair value of the reporting unit substantially exceeded its carrying amount; therefore, no impairment was indicated.

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The following table presents information about our deposits for the years ended December 31, 2013, 2012 and 2011 (dollars in thousands):

2013 2012 2011 Average Average Average Average Average Average Balance Rate Paid Balance Rate Paid Balance Rate Paid Demand deposits: Non-interest bearing $ 1,586,007 0.00 % $ 1,099,448 0.00 % $ 622,377 0.00 % Interest bearing 582,623 0.46 % 504,614 0.63 % 382,329 0.65 % Money market 3,403,276 0.51 % 2,838,735 0.63 % 2,165,230 0.88 % Savings 877,255 0.37 % 1,073,709 0.58 % 1,201,236 0.83 % Time 2,844,377 1.31 % 2,632,451 1.48 % 2,585,201 1.71 % $ 9,293,538 0.65 % $ 8,148,957 0.81 % $ 6,956,373 1.09 % Total deposits increased by $2.0 billion to $10.5 billion at December 31, 2013 from $8.5 billion at December 31, 2012. The distribution of deposits reflected in the table above reflects growth in lower rate deposit products, including non-interest bearing demand deposits, consistent with management's business strategy. The following table shows scheduled maturities of certificates of deposit with denominations greater than or equal to $100,000 as of December 31, 2013 (in thousands): Three months or less $ 319,716 Over three through six months 374,717 Over six through twelve months 977,706 Over twelve months 457,398 $ 2,129,537 Federal Home Loan Bank Advances and Other Borrowings



At December 31, 2013 and 2012 outstanding FHLB advances and other borrowings consisted of the following (dollars in thousands):

2013 2012 Federal Home Loan Bank advances $ 2,412,050 $



1,916,919

Securities sold under agreements to repurchase 346



8,175

Capital lease obligations 1,917 - $ 2,414,313$ 1,925,094 In addition to deposits, we also utilize FHLB advances to finance our operations; the advances provide us with additional flexibility in managing both term and cost of funding. FHLB advances are secured by FHLB stock and qualifying first mortgage, commercial real estate, and home equity loans 96



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and mortgage-backed securities. The contractual balance of FHLB advances outstanding at December 31, 2013 is scheduled to mature as follows (in thousands): Maturing in: 2014-30 days or less $ 200,000 2014-Over 30 days 1,765,000 2015 270,350 2016 75,000 2017 105,000 Total contractual balance outstanding



2,415,350

Acquisition accounting fair value adjustment and unamortized modification costs (3,300 ) Carrying value $ 2,412,050



The increase in outstanding FHLB advances during the year ended December 31, 2013 corresponds to growth in the loan portfolio.

Capital Resources

Since inception, stockholders' equity has been impacted primarily by the retention of earnings, and to a lesser extent, proceeds from the issuance of common shares and changes in unrealized gains and losses, net of taxes, on investment securities available for sale and cash flow hedges. Stockholders' equity increased $122 million, or 6.8%, from $1.8 billion at December 31, 2012 to $1.9 billion at December 31, 2013. Pursuant to the FDIA, the federal banking agencies have adopted regulations setting forth a five-tier system for measuring the capital adequacy of the financial institutions they supervise. At December 31, 2013 and 2012, BankUnited and the Company had capital levels that exceeded both the regulatory well-capitalized guidelines and all internal capital ratio targets. See Note 16 to the consolidated financial statements for more information about the Company's regulatory capital ratios and requirements. On July 2, 2013 the Federal Reserve Board approved a final rule that implements the Basel III changes to the regulatory capital framework for all U.S. banking organizations. The Company is required to implement the final rule on January 1, 2015, with a phase-in period extending through January 1, 2019. The rule will add another risk-based capital category, common equity tier 1 capital, increase the required tier 1 capital level, increase risk weights for certain of the Company's investment securities, loans and other assets and add some complexity to the risk-based capital calculations. In addition, a capital conservation buffer will be phased in beginning in 2016. In order to avoid limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers, a banking organization must hold this capital conservation buffer composed of common equity tier 1 capital above its minimum risk-based capital requirements. As of December 31, 2013, the adoption of the rule would not have impacted our capital categories.



Liquidity

Liquidity involves our ability to generate adequate funds to support asset growth, meet deposit withdrawal and other contractual obligations, maintain reserve requirements and otherwise conduct ongoing operations. BankUnited's liquidity needs are primarily met by growth in transaction deposit accounts, its cash position, cash flow from its amortizing investment and loan portfolios and reimbursements under the Loss Sharing Agreements. BankUnited also has access to additional liquidity through collateralized borrowings, FHLB advances, term and wholesale deposits or the sale of available 97



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for sale securities. The ALCO policy has established several measures of liquidity which are monitored monthly by ALCO and quarterly by the Board of Directors. The primary measure of liquidity monitored by management is liquid assets (defined as cash and cash equivalents and pledgeable securities) to total assets. BankUnited's liquidity is considered acceptable if liquid assets divided by total assets exceeds 5.0%. At December 31, 2013, BankUnited's liquid assets divided by total assets was 8.4%. Management monitors a one year liquidity ratio, defined as cash and cash equivalents, pledgeable securities, unused borrowing capacity at the FHLB, and loans and non-agency securities maturing within one year divided by deposits and borrowings maturing within one year. The maturity of deposits, excluding certificate of deposits, is based on retention rates derived from the most recent external core deposit analysis obtained by the Company. This ratio allows management to monitor liquidity over a longer time horizon. At December 31, 2013, BankUnited exceeded the acceptable limit established by ALCO for this ratio. Additional measures of liquidity regularly monitored by ALCO include the ratio of FHLB advances to Tier 1 capital plus the ALLL, the ratio of FHLB advances to total assets and a measure of available liquidity to volatile liabilities. At December 31, 2013, BankUnited was within acceptable limits established by ALCO for each of these measures. As a holding company, BankUnited, Inc. is a corporation separate and apart from its banking subsidiary, and therefore, provides for its own liquidity. BankUnited, Inc.'s main sources of funds include management fees and dividends from the Bank and access to capital markets. There are regulatory limitations that affect the ability of the Bank to pay dividends to BankUnited, Inc. Management believes that such limitations will not impact our ability to meet our ongoing short-term cash obligations.



We expect that our liquidity requirements will continue to be satisfied over the next 12 months through these sources of funds.

Interest Rate Risk

The principal component of the Company's risk of loss arising from adverse changes in the fair value of financial instruments, or market risk, is interest rate risk, including the risk that assets and liabilities with similar re-pricing characteristics may not reprice at the same time or to the same degree. The primary objective of the Company's asset/liability management activities is to maximize net interest income, while maintaining acceptable levels of interest rate risk. The ALCO is responsible for establishing policies to limit exposure to interest rate risk, and to ensure procedures are established to monitor compliance with these policies. The guidelines established by ALCO are approved at least annually by the Board of Directors. Management believes that the simulation of net interest income in different interest rate environments provides the most meaningful measure of interest rate risk. Income simulation analysis is designed to capture not only the potential of all assets and liabilities to mature or reprice, but also the probability that they will do so. Income simulation also attends to the relative interest rate sensitivities of these items, and projects their behavior over an extended period of time. Finally, income simulation permits management to assess the probable effects on the balance sheet not only of changes in interest rates, but also of proposed strategies for responding to them. The income simulation model analyzes interest rate sensitivity by projecting net interest income over the next twenty-four months in a most likely rate scenario based on forward interest rate curves versus net interest income in alternative rate scenarios. Management continually reviews and refines its interest rate risk management process in response to the changing economic climate. Currently, our model projects a plus 100, plus 200 and plus 300 basis point change with rates increasing 25 basis points per month until the applicable limit is reached as well as a modified flat scenario incorporating a more flattened yield curve. We did not simulate a decrease in interest rates at December 31, 2013 due to the current low rate environment. We continually evaluate the scenarios being modeled with a view toward adapting them to changing economic conditions, expectations and trends. 98



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The Company's ALCO policy has established that interest income sensitivity will be considered acceptable if forecast net interest income in the plus 200 basis point scenario is within 5% of forecast net interest income in the most likely rate scenario over the next twelve months and within 10% in the second year. The following table illustrates the impact on forecasted net interest income of plus 100, plus 200 and plus 300 basis point scenarios at December 31, 2013 and 2012: Plus 100 Plus 200 Plus 300 December 31, 2013: Twelve Months 1.1 % 1.2 % 1.2 % Twenty Four Months 4.1 % 7.2 % 9.4 % December 31, 2012: Twelve Months 0.9 % 1.3 % 1.1 % Twenty Four Months 5.1 % 9.7 % 12.2 % Management also simulates changes in the economic value of equity ("EVE") in various interest rate environments. The ALCO policy has established parameters of acceptable risk that are defined in terms of the percentage change in EVE from a base scenario under six rate scenarios, derived by implementing immediate parallel movements of plus and minus 100, 200 and 300 basis points from current rates. We did not simulate decreases in interest rates at December 31, 2013 due to the current low rate environment. The parameters established by ALCO stipulate that the change in EVE is considered acceptable if the change is less than 6%, 10% and 14% in plus 100, 200 and 300 basis point scenarios, respectively. As of December 31, 2013, our simulation for BankUnited indicated percentage changes from base EVE of (2.0)%, (4.5)% and (7.8)% in plus 100, 200, and 300 basis point scenarios, respectively. These measures fall within an acceptable level of interest rate risk per the policies established by ALCO. In the event the models indicate an unacceptable level of risk, the Company could undertake a number of actions that would reduce this risk, including the sale of a portion of its available for sale investment portfolio or the use of risk management strategies such as interest rate swaps and caps. Many assumptions were used by the Company to calculate the impact of changes in interest rates, including the change in rates. Actual results may not be similar to the Company's projections due to several factors including the timing and frequency of rate changes, market conditions and the shape of the yield curve. Actual results may also differ due to the Company's actions, if any, in response to the changing rates.



Derivative Financial Instruments

Interest rate swaps are one of the tools we use to manage interest rate risk. These derivative instruments are used to mitigate exposure to changes in interest rates on FHLB advances and time deposits and to manage duration of liabilities. These interest rate swaps are designated as cash flow hedging instruments. The fair value of these instruments is included in other assets and other liabilities in our consolidated balance sheets and changes in fair value are reported in accumulated other comprehensive income. At December 31, 2013, outstanding interest rate swaps designated as cash flow hedges had an aggregate notional amount of $1.7 billion. The aggregate fair value of interest rate swaps designated as cash flow hedges included in other assets was $17 million and the aggregate fair value included in other liabilities was $39 million. Interest rate swaps not designated as cash flow hedges had an aggregate notional amount of $568 million at December 31, 2013. The aggregate fair value of these interest rate swaps included in other assets was $5 million and the aggregate fair value included in other liabilities was $5 million. These interest rate swaps were entered into as accommodations to certain of our commercial borrowers. 99



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See Note 13 to the consolidated financial statements for more information about our derivative positions.

Off-Balance Sheet Arrangements

Commitments

We routinely enter into commitments to extend credit to our customers, including commitments to fund loans or lines of credit and commercial and standby letters of credit. The credit risk associated with these commitments is essentially the same as that involved in extending loans to customers and they are subject to our normal credit policies and approval processes. While these commitments represent contractual cash requirements, a significant portion of commitments to extend credit may expire without being drawn upon. The following table details our outstanding commitments to extend credit as of December 31, 2013 (in thousands): Covered Non-Covered Total Commitments to fund loans $ - $ 685,384 $



685,384

Commitments to purchase loans - 66,290



66,290

Unfunded commitments under lines of credit 51,085 920,638

971,723

Commercial and standby letters of credit - 50,468 50,468 $ 51,085$ 1,722,780$ 1,773,865 Contractual Obligations



The following table contains supplemental information regarding our outstanding contractual obligations as of December 31, 2013 (in thousands):

Less than More than Total 1 year 1 - 3 years 3 - 5 years 5 years Long-term debt obligations $ 2,436,936$ 1,981,265$ 349,916$ 105,755 $ - Operating lease obligations 200,538 22,315 40,035 37,990 100,198 Premises and equipment obligations 7,691 7,691 - - - Certificates of deposits 3,319,768 2,655,693 633,051 30,918 106 Capital lease 5,073 255 404 412 4,002 $ 5,970,006$ 4,667,219$ 1,023,406$ 175,075$ 104,306


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