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FUBC > SEC Filings for FUBC > Form 10-Q on 19-Apr-2013All Recent SEC Filings

Show all filings for 1ST UNITED BANCORP, INC. | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for 1ST UNITED BANCORP, INC.


19-Apr-2013

Quarterly Report


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

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

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

CAUTION CONCERNING FORWARD-LOOKING STATEMENTS

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

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

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

BUSINESS OVERVIEW

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

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

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

Recent Mergers & Acquisitions

Pending Acquisition with Enterprise Bancorp, Inc.

On March 22, 2013, the Company announced the signing of a definitive agreement (the "Agreement") to acquire Enterprise Bancorp, Inc. ("EBI"), a Florida corporation, and its wholly-owned subsidiary Enterprise Bank ("EB"), a Florida-chartered commercial bank, for approximately $44 million in total consideration. In accordance with the Agreement, the total consideration of approximately $44 million will be paid consisting of $5.6 million in cash, $24 million consisting of EB non-performing assets and certain other classified EB loans and $14.4 million in impaired and below investment grade investments. In accordance with the Agreement, the value of the non-cash consideration will be based on the carrying value of the assets immediately prior to the closing. The transaction, unanimously approved by the board of directors of both companies, expands the Company's existing franchise in the northern Palm Beach County market place. The merger is expected to be completed during the second half of 2013, subject to satisfaction of customary closing conditions, including regulatory approval and the approval of EBI shareholders. EBI has approximately $234.8 million in total assets with $170.3 million in net loans and $171.4 million in total deposits and $37.5 million in shareholder equity at December 31, 2012. EB operates three banking centers in Palm Beach County. The Company estimates it will record approximately $9 million in goodwill associated with the transaction.

Merger of AFI Financial, Inc.

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

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

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

Acquisition of Old Harbor Bank of Florida

On October 21, 2011, 1st United entered into an agreement with the Federal Deposit Insurance Corporation ("FDIC") to acquire substantially all of the assets of Old Harbor Bank of Florida ("Old Harbor"). The fair value of the assets acquired included $24.7 million in cash and cash equivalents, $31.0 million in securities available for sale, $116.7 million in loans and $2.3 million in other real estate owned. 1st United also assumed approximately $209.6 million in deposits. Old Harbor operated seven banking centers in Pasco and Pinellas Counties, Florida, and had 42 employees.

The deposits were acquired with a 0% premium and assets were acquired at a discount of approximately $8.5 million, subject to customary adjustments. The terms of the Old Harbor Agreement provide for the FDIC to indemnify 1st United against claims with respect to liabilities and assets of Old Harbor or any of its affiliates not assumed or otherwise purchased by 1st United and with respect to certain other claims by third parties.

In connection with the acquisition of Old Harbor, 1st United entered into loss sharing agreements (the "Old Harbor Loss Sharing Agreements") with the FDIC that collectively cover a substantial portion of the loan portfolio and all of the other real estate owned (the "Covered Assets"). None of the other acquired assets of Old Harbor are covered by the Old Harbor Loss Sharing Agreements with the FDIC. The Old Harbor Loss Sharing Agreements provide for the reimbursement of 70% of losses with respect to Covered Assets, up to approximately $49 million. The Old Harbor Loss Sharing Agreements apply to single-family residential mortgage loans and to commercial loans and other real estate owned are for terms of ten and five years (eight years for recoveries), respectively.

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

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

Financial Overview

Net income for the quarter ended March 31, 2013 was $1.6 million compared to net income of $780,000 for the quarter ended March 31, 2012.

Net interest margin was 5.09% for the quarter ended March 31, 2013 compared to 4.73% for the quarter ended March 31, 2012.

During the three months ended March 31, 2012, we incurred approximately $451,000 in personnel, IT and facilities costs and merger reorganization expense that related to the integration of Old Harbor. We had no such costs during the quarter ended March 31, 2013.

The changes in operating results for the three months ended March 31, 2013 when compared to the same three month period ended March 31, 2012 were substantially the result of the AFI merger in April 2012 and the Old Harbor acquisition in October 2011.

Net loans increased by approximately $14.9 million to $918.5 million at March 31, 2013 resulting from new loan production and loan advances of $71.6 million which was partially offset by payoffs, resolutions and principal payments of $54.6 million during the period.

Non-performing assets at March 31, 2013 represented 2.73% of total assets compared to 2.74% at December 31, 2012. Non-performing assets not covered by the Loss Share Agreements represented 1.20% of total assets at March 31, 2013 compared to 1.17% at December 31, 2012.

Securities available for sale increased by approximately $50.8 million from December 31, 2012 to $311.0 million at March 31, 2013. The increase was a result of security purchases of $79.7 million partially offset by investment maturities and prepayments of $18.3 million and proceeds from sales of $8.8 million resulting in gains on sales of $122,000 for the three months ended March 31, 2013. Gains on the sale of securities for the three months ended March 31, 2012 were $498,000.

Other real estate owned ("OREO") decreased by $463,000 to $19.1 million at March 31, 2013 from $19.5 million at December 31, 2012. The change was due to the foreclosure of $2.4 million of loans which was partially offset by OREO sales of $2.6 million and fair value adjustments of $464,000 for the three months ended March 31, 2013. At March 31, 2013, we had $1.8 million of OREO under contract for sale and expected to close.

FDIC loss share receivable was reduced by approximately $5.5 million from $46.7 million at December 31, 2012 to $41.2 million at March 31, 2013. The decrease was due to cash receipts of approximately $2.7 million, a reduction of $3.1 million related to adjustments resulting from the disposition of acquired loans at above their discounted carrying values and the impact of changes in anticipated cash flows offset by accretion of income on the receivable of $238,000.

Deposits decreased by $2.7 million from $1.303 billion at December 31, 2012 to $1.300 billion at March 31, 2013 due primarily to recurring customer activity. The percentage of non-interest bearing deposits to total deposits was approximately 34% at March 31, 2013 compared to 33% at December 31, 2012.

OPERATING RESULTS

For the quarter ended March 31, 2013, we reported net income of $1.6 million compared to net income of $780,000 for the quarter ended March 31, 2012.

Analysis for Three Month Periods ended March 31, 2013 and 2012

Net Interest Income

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

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

Net interest earnings for the three months ended March 31, 2013 and 2012, respectively, are reflected in the following table:

                                                  March 31, 2013                        March 31, 2012
                                                                   Average                               Average
                                                      Interest      Rates                   Interest      Rates
                                          Average      Income/     Earned/      Average      Income/     Earned/
(Dollars in thousands)                    Balance      Expense      Paid        Balance      Expense      Paid
Assets
Interest-earning assets
Loans                                   $   914,403   $  16,171        7.17 % $   876,212   $  14,372        6.58 %
Investment securities                       290,990       1,368        1.88 %     208,392       1,327        2.55 %
Federal funds sold and securities
purchased under resale agreements           127,027         181        0.58 %     141,832         189        0.53 %
Total interest-earning assets             1,332,420      17,720        5.39 %   1,226,436      15,888        5.19 %
Non interest-earning assets                 228,582                               189,726
Allowance for loan losses                    (9,661 )                             (13,256 )
Total assets                            $ 1,551,341                           $ 1,402,906

Liabilities and Shareholders' Equity
Interest-bearing liabilities
NOW accounts                            $   171,953   $      55        0.13 % $   134,930   $      55        0.16 %
Money market accounts                       317,349         256        0.33 %     308,235         462        0.60 %
Savings accounts                             63,117          40        0.26 %      59,220          55        0.37 %
Certificates of deposit                     306,421         634        0.84 %     319,697         856        1.07 %
Fed funds purchased and repurchase
agreements                                   19,290           6        0.13 %      10,596           3        0.11 %
Federal Home Loan Bank advances and
other borrowings                                  -           -        0.00 %         550           6        4.38 %
Total interest-bearing liabilities          878,130         991        0.46 %     833,228       1,437        0.69 %

Non-interest bearing liabilities
Demand deposit accounts                     429,035                               343,450
Other liabilities                             6,473                                 9,444
Total non-interest-bearing
liabilities                                 435,508                               352,894
Shareholders' equity                        237,703                               216,784
Total liabilities and shareholders'
equity                                  $ 1,551,341                           $ 1,402,906
Net interest spread                                   $  16,729        4.94 %               $  14,451        4.50 %

Net interest on average earning
assets - Margin                                                        5.09 %                                4.73 %

Our net interest income for the three months ended March 31, 2013 was positively impacted by the increase in average earning assets of $106.0 million as compared to the three months ended March 31, 2012. The increase was primarily the result of net loans originated during the quarter ended March 31, 2013 and loans acquired in the AFI merger in April 2012 as well as purchases of securities during the quarter ended March 31, 2013. Earnings for the current quarter were positively impacted by the accretion of discounts related to acquired loans of approximately $4.9 million as compared to $3.5 million for the same period in 2012. Included in the $4.9 million of accretion of discount for the quarter ended March 31, 2013 was approximately $3.0 million related to the disposition of assets acquired in the transactions above the discounted carrying value of the asset. Upon evaluation, we took a charge of approximately $3.0 million as an adjustment to FDIC loss share receivable in total non-interest income within the consolidated statements of operations substantially related to changes in cash flows of loss share assets. Included in the $3.5 million of accretion discount for the quarter ended March 31, 2012 was approximately $1.6 million related to the disposition of assets above the discounted carrying values. Upon evaluation, we took a charge of approximately $2.4 million as an adjustment to FDIC loss share receivable in total non-interest income due to changes in cash flows of loss share assets.

Net interest income was $16.7 million for the three months ended March 31, 2013, as compared to $14.5 million for the three months ended March 31, 2012, an increase of $2.3 million, or 15.76%. The increase resulted primarily from an increase in average earning assets of $106.0 million or 8.64% primarily due to the AFI merger in April 2012, net loan originations and purchases of securities during the quarter ended March 31, 2013. Accretion income increased quarter over quarter by $1.4 million and was coupled with a reduction in the cost of funds of 19 basis points offset by a decrease in the yield earned on securities quarter over quarter. The net interest margin (i.e., net interest income divided by average earning assets) increased 36 basis points from 4.73% during the three months ended March 31, 2012 to 5.09% during the three months ended March 31, 2013, mainly the result of an increase in interest accretion on acquired loans and the increase in overall interest earning assets. Accretion of $4.9 million on acquired loans added approximately 148 basis points to the quarter ended March 31, 2013 net interest margin. Of the 148 basis points, 91 basis points related to resolved loss share assets and changes in cash flows during the quarter. This compares to accretion of loan discount of $3.5 million during the three months ended March 31, 2012, which added approximately 115 basis points to the March 31, 2012 margin. Of the 115 basis points, 53 basis points related to resolved loss share assets and changes in cash flows during the quarter. For the three months ended March 31, 2013, average loans represented 58.94% of total average assets and 69.95% of total average deposits and customer repurchase agreements, compared to average loans of 62.46% of total average assets and average loans of 74.50% to total average deposits and customer repurchase agreements at March 31, 2012. Our cost of funds was approximately 19 basis points lower for the three months ended March 31, 2013, as compared to March 31, 2012, primarily as a result of lower rates offered on our deposit products.

Rate Volume Analysis

The following table sets forth certain information regarding changes in our interest income and interest expense for the three months ended March 31, 2013 as compared to the three months ended March 31, 2012. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to changes in interest rate and changes in the volume. Changes in both volume and rate have been allocated based on the proportionate absolute changes in each category.

Changes in interest earnings for the three months ended March 31, 2013 and 2012:

                                                                 March 31, 2013 and 2012
                                                            Change
                                                              in         Variance     Variance
                                                           Interest       Due to       Due to
                                                           Income/        Volume        Rate
(Dollars in thousands)                                     Expense       Changes      Changes
Assets
Interest-earning assets
Loans                                                     $    1,799    $      644   $    1,155
Investment securities                                             41           443         (402 )
Federal funds sold and securities purchased under
resale agreements                                                 (8 )         (21 )         13

Total interest-earning assets                             $    1,832    $    1,066   $      766
Liabilities
Interest-bearing liabilities
NOW accounts                                              $        -    $       13   $      (13 )
Money market accounts                                           (206 )          13         (219 )
Savings accounts                                                 (15 )           3          (18 )
Certificates of deposit                                         (222 )         (34 )       (188 )
Fed funds purchased and repurchase agreements                      3             3            -
Other borrowings                                                  (6 )          (6 )          -

Total interest-bearing liabilities                              (446 )          (8 )       (438 )

Net interest spread                                       $    2,278    $    1,074   $    1,204

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

Non-interest income includes service charges and fees on deposit accounts, net gains or losses on sales of securities, and all other items of income, other than interest, resulting from our business activities. Non-interest income decreased by $1.3 million for the quarter ended March 31, 2013 when compared to the quarter ended March 31, 2012. The decrease was principally a result of an adjustment to the FDIC loss share receivable due to the resolution of assets above their carrying value and a reduction in the gain on the sales of securities offset by an increase in gains on the sale of other real estate owned during the quarter.

During the three months ended March 31, 2013, the Company sold approximately $8.8 million in securities for gains on the sale of $122,000. This compared to sales of $29.9 million for gains on the sale of securities of $498,000 for the three months ended March 31, 2012.

During the three months ended March 31, 2013, the Bank received proceeds from the sale of OREO properties of $2.6 million with a carrying value of $2.1 million and recorded a net gain of $441,000 on the these dispositions as compared to sales of OREO with a carrying value of $2.3 million and recorded gains on dispositions of $735,000 for the three months ended March 31, 2012. Net gains on the resolution of OREO covered under loss sharing agreements for the three months ended March 31, 2013 and 2012 were $441,000 and $760,000, respectively.

The adjustment to the FDIC indemnification asset during the quarter ended March 31, 2013 represented a $3.0 million expense related to changes in cash flows on assets covered by Loss Share Agreements and the resolution of OREO property which reduces the FDIC receivable. This compares to $2.4 million for the quarter ended March 31, 2012. These amounts were partially offset by interest income earned on the FDIC receivable of $238,000 and $294,000 for the quarters ended March 31, 2013 and 2012, respectively.

Non-interest expense is comprised of salaries and employee benefits, occupancy and equipment expense and other operating expenses incurred in supporting our various business activities. Non-interest expense increased by $300,000, or 2.5%, from $12.2 million for the three months ended March 31, 2012 to $12.5 million for the three months ended March 31, 2013, primarily due to operations acquired as a result of the AFI merger on April 1, 2012 and an approximately . . .

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