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| FUBC > SEC Filings for FUBC > Form 10-Q on 28-Oct-2009 | All Recent SEC Filings |
28-Oct-2009
Quarterly Report
The following is management's discussion and analysis of certain significant factors that have affected our financial condition and operating results during the periods included in the accompanying consolidated financial statements, and should be read in conjunction with such financial statements. Management's discussion and analysis is divided into subsections entitled "Business Overview," "Operating Results," "Financial Condition," "Capital Resources," "Cash Flows and Liquidity," "Off Balance Sheet Arrangements," "Legislation" and "Critical Accounting Policies." Our financial condition and operating results principally reflect those of its wholly-owned subsidiaries, 1st United Bank ("1st United") and Equitable Equity Lending ("EEL"). The consolidated entity is referred to as the "Company," "Bancorp," "we," "us," or "our."
The following discussion should be read in conjunction with the condensed consolidated financial statements and notes thereto included in this Quarterly Report on Form 10-Q.
This Quarterly Report on Form 10-Q, including this MD&A section, contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, among others, statements about our beliefs, plans, objectives, goals, expectations, estimates and intentions that are subject to significant risks and uncertainties and are subject to change based on various factors, many of which are beyond our control. The words "may," "could," "should," "would," "believe," "anticipate," "estimate," "expect," "intend," "plan," "target," "goal," and similar expressions are intended to identify forward-looking statements.
All forward-looking statements, by their nature, are subject to risks and uncertainties. Our actual future results may differ materially from those set forth in our forward-looking statements. Please see the Introductory Note and Item 1A. Risk Factors of our Annual Report on Form 10-K, as updated from time to time, and in our other filings made from time to time with the SEC after the date of this report.
However, other factors besides those listed above, or in our Quarterly Report or in our Annual Report, also could adversely affect our results, and you should not consider any such list of factors to be a complete set of all potential risks or uncertainties. Any forward-looking statements made by us or on our behalf speak only as of the date they are made. We do not undertake to update any forward-looking statement, except as required by applicable law.
Business Overview
We are a financial holding company headquartered in Boca Raton, Florida.
As is the case with banking institutions generally, our operations are materially and significantly influenced by general economic conditions and by related monetary and fiscal policies of financial institution regulatory agencies, including the Federal Reserve Bank and the FDIC. Deposit flows and costs of funds are influenced by interest rates on competing investments and general market rates of interest. Lending activities are affected by the demand for financing of real estate and other types of loans, which in turn is affected by the interest rates at which such financing may be offered and other factors affecting local demand and availability of funds. We face strong competition in the attraction of deposits (our primary source of lendable funds) and in the origination of loans.
During the nine-month period ended September 30, 2009, we applied, were approved for and issued approximately $10 million in additional capital through the Capital Purchase Program offered by the U.S. Treasury. In exchange, we issued 10,000 shares of our Series C Fixed Rate Cumulative Perpetual Preferred Stock ("Series C Preferred") to the Treasury. Our Series C Preferred Stock pays an annual cumulative dividend of 5% for the first five years, and an annual cumulative dividend of 9% in any years thereafter. We also issued a warrant (the "Warrant") to the Treasury to purchase 500 shares of our Series D Fixed Rate Cumulative Perpetual Preferred Stock ("Series D Preferred Stock") with an exercise price of $0.01 per share. The Treasury exercised the Warrant immediately, and, as a result, we issued 500 shares of our Series D Preferred Stock. Our Series D Preferred Stock pays an annual cumulative dividend of 9%.
We have applied to the Federal Reserve Bank to redeem the Series C Preferred and Series D Preferred from the Treasury Department. The approximate cost of the redemption of these shares will be $10.5 million if approved. As a result, additional accretion for the Series C Preferred and Series D Preferred of $671,000 was recorded during the period ended September 30, 2009 and are included in this $10.5 million.
Our Board has also approved the redemption of the Series B Preferred Stock effective October 31, 2009. At September 30, 2009, the outstanding balance of these shares is $4.595 million and on October 31, 2009. We expect to redeem the Series B Preferred Stock for $4.595 million plus accrued dividends.
On September 16, 2009, we issued 14,000,000 ("the Offering") shares of common stock at $5.00 per share. The total proceeds of the offering was $65.5 million (net of offering costs of $4.5 million). The underwriter for the Offering was provided an over allotment option to purchase up to 2,100,000 additional shares, which on October 6, 2009 they exercised. As a result, additional gross offering proceeds of approximately $10.5 million were received after September 30, 2009. In connection with the Offering, we listed our common stock on the NASDAQ Global Market under the ticker "FUBC".
Financial Overview
• Net income for the quarter ended September 30, 2009 was $184,000 compared to net income of $297,000 in the corresponding quarter in 2008. Net loss for the nine months ended September 30, 2009 was $1,683,000, compared to a loss of $361,000 in the corresponding period in 2008.
• Earnings for the three months ended September 30, 2009 were lower than those recorded in the same period of 2008, mainly due to interest margin contractions due to lower prime lending rate.
• The loss for the nine months ended September 30, 2009 was substantially a result of the provision for loan losses of $3.1 million for the nine months ended September 30, 2009, compared to $475,000 for the nine months ended September 30, 2008. The increase in loan loss provision is in response to the weakening in the financial circumstances of certain borrowers and increased net charge-offs.
• During the nine months ended September 30, 2009, we recorded a $290,000 special FDIC assessment expense and $300,000 lease termination fee which negatively impacted these 2009 periods.
• Net interest margin declined to 3.74% for the nine months ended September 30, 2009, compared to 4.38% for the nine months ended September 30, 2008.
• Operating results for the three and nine months ended September 30, 2009 when compared to the three and nine months ended September 30, 2008, were significantly impacted by the Equitable Merger and Citrus Acquisition.
• Nonperforming assets at September 30, 2009 represented 1.85% of total assets compared to 1.38% at December 31, 2008.
• During the quarter and nine months ended September 30, 2009, we raised net capital proceeds of approximately $65.5 million through the issuance of common stock.
OPERATING RESULTS
For the quarter ended September 30, 2009, we reported net income of $184,000 compared to net income of $297,000 for the third quarter of 2008.
For the nine month period ended September 30, 2009, we reported a net loss of $1,683,000 compared to a net loss of $361,000 for the nine month period ended September 30, 2008. We have summarized the material variances between periods below.
Analysis of Quarters ended September 30, 2009 and 2008
Net Interest Income - Quarters Ended September 30, 2009 and 2008
A substantial portion of the Bank's loans (approximately 60% of total loans) have interest rates that fluctuate at least quarterly with changes in the Bank's prime rate. Since January 1, 2007, the Bank's lending prime rate has decreased from 7.25% to 3.25% at September 30, 2009. This decrease has had a negative impact on our interest income and margin. Our recent quarter's net interest income was positively impacted by internal loan growth and $38 million of loans acquired in the Citrus Acquisition which was effective August 15, 2008.
Net interest income was $5.2 million for the three months ended September 30, 2009, as compared to $5.6 million for the three months ended September 30, 2008, a decrease of $420,000 or 7.5%. The decrease resulted primarily from the effect of 175 basis point reduction of the prime lending rate when comparing the third quarter of 2009 to 2008.
Non-interest Income, Non-interest Expense, Provision for Loan Losses, and Income Taxes - Quarters Ended September 30, 2009 and 2008
Non-interest income includes service charges on deposit accounts, gains or losses on sales of securities and loans, and all other items of income, other than interest, resulting from our business activities. Non-interest income increased by $135,000, or 30.3%, when comparing the third quarter of 2009 to the same period last year. The increase is mainly due to higher gains on sale of securities, and higher other income resulting from receipt of insurance premiums.
During the quarter ending September 30, 2009, we sold approximately $3 million of securities for a net gain of $100,000. The sales of these available for sale securities were made to take advantage of market conditions, repositioning the portfolio and to reduce odd lots and longer duration investments.
Our non-interest expense is comprised of salaries, employee benefits, occupancy and equipment expense and other operating expenses incurred in supporting our various business activities. Non-interest expense decreased by $36,000, or 0.7%, from $5,364,000 for the third quarter of 2008 to $5,328,000 for the current quarter of 2009.
Salaries and employee benefits decreased $282,000 or 10.7% from the quarter ended September 30, 2008, compared to the quarter ended September 30, 2009, mainly due to a planned reduction of staff and reductions in non-executive officer bonuses. Total employees at September 30, 2008 were 152 full-time and 16 part-time compared to 125 full-time and 14 part-time at September 30, 2009. Occupancy and equipment expenses decreased $71,000 or 4.9% from the quarter ending
Professional fees increased by $146,000 to $185,000 for the quarter ended September 30, 2009 due to the increase in loan collection related legal and appraisal fees during the quarter when compared to the quarter ended September 30, 2008. Additionally, we paid higher professional fees as the Company prepares for the Sarbanes Oxley Act Section 404 ("SOX 404") compliance which we anticipated to be required for 2009.
We recorded a $185,000 loan loss provision for the three months ended September 30, 2009, compared to $225,000 for the three months ended September 30, 2008.
We recorded a $93,000 tax expense (based on an effective tax rate of approximately 34%) for the three months ended September 30, 2009, compared to a tax expense of $189,000 for the three months ended September 30, 2008.
Analysis for Nine Month Periods ended September 30, 2009 and 2008
Net Interest Income - Nine Month Periods ended September 30, 2009 and 2008
Net interest income, which constitutes our principal source of income, represents the excess of interest income on interest-earning assets over interest expense on interest-bearing liabilities. Our principal interest-earning assets are federal funds sold, investment securities and loans. Our interest-bearing liabilities primarily consist of time deposits, interest-bearing checking accounts ("NOW accounts"), savings deposits, money market accounts, repurchase agreements and borrowings from the Federal Home Loan and Federal Reserve Banks. We invest the funds attracted by these interest-bearing liabilities in interest-earning assets. Accordingly, our net interest income depends upon the volume of average interest-earning assets and average interest-bearing liabilities and the interest rates earned or paid on them.
The following table reflects the components of net interest income, setting forth for the nine month periods ended September 30, 2009 and 2008, (1) average assets, liabilities and shareholders' equity, (2) interest income earned on interest-earning assets and interest paid on interest-bearing liabilities, (3) average yields earned on interest-earning assets and average rates paid on interest-bearing liabilities, (4) our net interest spread (i.e., the average yield on interest-earning assets less the average rate on interest-bearing liabilities) and (5) our net interest margin (i.e., the net yield on interest earning assets).
September 30, 2009 September 30, 2008
--------------------------------- ---------------------------------
Average Average
Interest Rates Interest Rates
Average Income/ Earned/ Average Income/ Earned/
Balance Expense Paid Balance Expense Paid
--------- --------- --------- --------- --------- ---------
Assets
Interest earning
assets
Loans $ 499,090 $ 19,334 5.18 % $ 422,885 $ 21,066 6.65 %
Investment securities 42,593 1,455 4.55 % 35,863 1,314 4.89 %
Federal funds sold and
securities purchased
under resale
agreements and other 10,073 132 1.74 % 14,201 369 3.47 %
- ------- -- ------ -- ------ - ------- -- ------ -- ------
Total interest earning
assets 551,756 20,921 5.07 % 472,949 22,749 6.43 %
- ------- -- ------ -- ------ - ------- -- ------ -- ------
Non interest earning
assets 82,155 59,404
Allowance for loan
losses (6,296 ) (3,839 )
- ------- - -------
Total assets $ 627,615 $ 528,514
- ------- - -------
Liabilities and
Shareholders' Equity
Interest bearing
liabilities
NOW accounts $ 60,001 110 0.25 % $ 45,530 387 1.14 %
Money market accounts 102,750 742 0.97 % 89,588 1,433 2.14 %
Savings accounts 13,809 63 0.61 % 8,206 46 0.75 %
Certificates of
deposit 181,560 4,016 2.96 % 147,798 4,232 3.82 %
Customer Repurchase
Agreements 14,703 30 0.27 % 21,174 190 1.20 %
Other borrowings 40,834 542 1.77 % 45,082 969 2.87 %
- ------- -- ------ -- ------ - ------- -- ------ -- ------
Total interest bearing
liabilities 413,657 5,503 1.78 % 357,378 7,257 2.71 %
- ------- -- ------ -- ------ - ------- -- ------ -- ------
Non interest bearing
liabilities
Demand deposit
accounts 103,636 91,084
Other liabilities 3,247 3,413
- ------- - -------
Total non interest
bearing liabilities 106,883 94,497
Shareholders' equity 107,075 76,639
- ------- - -------
Total liabilities and
shareholders' equity $ 627,615 $ 528,514
- ------- - -------
Net interest spread $ 15,418 3.29 % $ 15,492 3.71 %
-- ------ -- ------ -- ------ -- ------
Net interest on
average earning assets
- Margin 3.74 % 4.38 %
-- ------ -- ------
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Rate Volume Analysis
The following table sets forth certain information regarding changes in our interest income and interest expense for the nine months ended September 30, 2009 as compared to the nine months ended September 30, 2008. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to changes in interest rate and changes in the volume. Changes in both volume and rate have been allocated based on the proportionate absolute changes in each category.
September 30, 2009 and 2008
--------------------------------------
Change in Variance Variance
Interest Due to Due to
Income/ Volume Rate
Expense Changes Changes
----------- ----------- ---------
Earning Assets
Loans $ (1,731 ) $ 3,418 $ (5,149 )
Investment securities 141 234 (93 )
Federal funds sold and securities purchased
under resale agreements and other (238 ) (88 ) (150 )
-- -------- --- ------- -- ------
Total interest earning assets $ (1,828 ) $ 3,564 $ (5,392 )
-- -------- --- ------- -- ------
Liabilities and Shareholders' Equity
Interest bearing liabilities
NOW accounts $ (277 ) $ 95 $ (372 )
Money market accounts (691 ) 186 (877 )
Savings accounts 17 27 (10 )
Certificates of deposit (216 ) 857 (1,073 )
Customer Repos (160 ) (45 ) (115 )
Other borrowings (427 ) (84 ) (343 )
-- -------- --- ------- -- ------
Total interest bearing liabilities $ (1,754 ) $ 1,036 $ (2,790 )
-- -------- --- ------- -- ------
Net interest spread $ (74 ) $ 2,528 $ (2,602 )
-- -------- --- ------- -- ------
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Our year-to-date net interest income was positively impacted by the increase in loans from the $38.0 million of loans we acquired in the Citrus Acquisition as well as overall new loan production for the nine months ended September 30, 2009. As the Citrus Acquisition was effective August 15, 2008, the acquired assets only affected net interest income for 2009 and just a portion of the nine month period in 2008.
Total loans grew by $14.1 million, or 2.9%, from $486.3 million at September 30, 2008 to $500.4 million at September 30, 2009. At September 30, 2009, net loans represented 70.5% of total assets and 105.1% of total deposits and customer repurchase agreements versus 77.8% of total assets and 105.7% of total deposits and customer repurchase agreements at September 30, 2008. Earnings for the nine months ended September 30, 2009, were negatively impacted by the full impact of decreases in the overnight funds rate and the Bank's prime lending rate which occurred throughout 2008. A substantial portion of the Bank's loans (approximately 60% of total loans) fluctuate at least quarterly with changes in the Bank's prime rate. Since January 1, 2007, the Bank's lending prime rate has decreased from 7.25% to 3.25% at September 30, 2009. This decrease has had a negative impact on our interest income and margin.
Net interest income was $15.4 million for the nine months ended September 30, 2009, as compared to $15.5 million for the nine months ended September 30, 2008, a decrease of $74,000 or 0.48%. The decrease resulted primarily from a decrease in interest rates, offset by an increase in average earning assets of $78.8 million or 16.7% primarily due to the Equitable Merger and Citrus Acquisition. The net interest margin (i.e., net interest income divided by average earning assets) decreased 64 basis points from 4.38% during the nine months ended September 30, 2008 to 3.74% during the nine months ended September 30, 2009. The decrease was mainly the result of aggressive reductions by the Federal Reserve of the discount rate and overnight federal funds rate. At the same time, we have remained conservatively competitive with interest rates offered to our deposit customers. Further decreases to the prime lending rate may negatively impact our net interest income. Alternatively, an increase in the prime lending rate will positively impact our net interest income as the majority of our loan portfolio is at variable rates.
Noninterest income includes service charges on deposit accounts, gains or losses on sales of securities and loans, and all other items of income, other than interest, resulting from our business activities. Noninterest income increased by $576,000, or 40.8%, when comparing the first nine months of 2009 to the same period last year. The increase is principally due to gain on sale of securities of $630,000, and higher service charges and fees on deposit accounts, which was offset by a decrease in other non-interest income.
During the nine months ended September 30, 2009, we sold approximately $12.8 million of securities for a net gain of $630,000. The sales of these available for sale securities were made to take advantage of market conditions by selling some callable agencies bonds and to partially offset the one time cost associated with a lease termination and a special FDIC assessment described below.
We have experienced an overall slow down in the origination of residential loans for sale during 2009 resulting in a decrease in net gain on sales of residential loans of $13,000 to $85,000 for the nine month period ended September 30, 2009. The slow down has been primarily a result of the overall slow down in home sales in South Florida. In addition, gains and fees on sales of government guaranteed loans decreased from $17,000 in the period ended September 30, 2008 to $0 in the period ended September 30, 2009. This is also a result of significant slowdown in Small Business Administration loans being made by us.
Service charges increased from the nine-month period ended September 30, 2008, by approximately $89,000 to $976,000 for the nine-month period ending September 30, 2009, as a result of an increase in average deposits during 2009 of $80 million primarily due to the Equitable Merger and Citrus Acquisition. Other income decreased by $87,000 to $296,000 for the nine months ended September 30, 2009, primarily as a result of an overall decrease in new loan and prepayment activities and lower income from our company owned life insurance.
Noninterest expense is comprised of salaries, employee benefits, occupancy and equipment expense and other operating expenses incurred in supporting our various business activities. Noninterest expense decreased by $87,000, or 0.5%, from $17,006,000 for the first three quarters of 2008 to $16,919,000 for 2009.
The following summarizes the changes in Non-Interest Expense accounts for the nine months ended September 30, 2009 compared to the nine months ended September 30, 2008:
Nine months ended
September 30, September 30,
2009 2008 Difference
--------------- --------------- ------------
Salaries and employee benefits $ 7,160 $ 7,855 $ (695 )
Occupancy and equipment 4,540 4,125 415
Data processing 1,395 1,249 146
Telephone 427 373 54
Stationery and supplies 177 213 (36 )
Amortization of Intangibles 237 165 72
Professional fees 551 165 386
Advertising 49 113 (64 )
Merger reorganization expenses - 1,289 (1,289 )
FDIC Assessment 885 226 659
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