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FUBC > SEC Filings for FUBC > Form 10-Q on 21-Oct-2013All Recent SEC Filings

Show all filings for 1ST UNITED BANCORP, INC.

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


21-Oct-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 programs, as well as on small business lending. We focus on the building of a balanced loan and deposit portfolio, with emphasis on low cost liabilities.

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

Recent Mergers & Acquisitions

Merger of Enterprise Bancorp, Inc.

On July 1, 2013, we completed our acquisition of Enterprise Bancorp, Inc., a Florida corporation ("EBI"), and its wholly-owned subsidiary Enterprise Bank of Florida, a Florida-chartered commercial bank ("Enterprise"), pursuant to the Agreement and Plan of Merger (the "Merger Agreement"), dated March 22, 2013, as amended, by and among the Company, 1st United Bank, EBI and Enterprise. 1st United acquired approximately $159.2 million in loans, with an average yield of 5.08%, and approximately $177 million of deposits, with an average cost of 0.53%. Total consideration for the net assets acquired was $45.6 million (or 1.22 times tangible book value, as defined by the Merger Agreement) which was comprised of $5.1 million in cash, $20.5 million in classified and non-performing loans, $18.3 million in non-investment grade and non-performing investments, other investments and derivatives and $1.7 million in OREO and other repossessed assets. The Company did not acquire any non-performing loans, OREO or non-investment grade investments due to the acquisition of EBI.

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

The former Enterprise provides 1st United continued expansion within the attractive northern Palm Beach County, Florida marketplace, providing opportunities for new loan and deposit growth. In addition, of the three banking centers acquired one EBI banking center was consolidated into an existing 1st United banking center during the third quarter 2013. In addition, one of 1st United's banking centers was consolidated into a banking center of the former Enterprise. The result was one net new 1st United banking center located in Jupiter, Florida. We incurred merger related expenses of $1.7 million primarily during the third quarter of 2013 related to the integration of operations and terminations of leases and contracts. Total goodwill recorded was $5.7 million with an estimated three-year earn-back period. We integrated the EBI operations during the third quarter of 2013.

Merger of AFI Financial, Inc.

On April 1, 2012, we completed our 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 our common stock. Our common stock was valued at $6.09 per share with a total value of $19.1 million. We 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. We completed the integration of AFI in June 2012.

We accounted for the transaction under the acquisition method of accounting which requires purchased assets and liabilities assumed to be recorded at their respective fair values at the date of acquisition. See Note 4 for additional information related to the fair value of loans acquired. We use third party valuations to determine the fair value of the core deposit intangible, securities, fixed assets and deposits. The fair value of other real estate owned was based on recent appraisals of the properties. The estimated fair values were finalized in early 2013. The acquisition of AFI is consistent with our 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. We believe we are 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.

Financial Overview

OPERATING RESULTS

For the quarter ended September 30, 2013, we reported net income of $880,000 compared to net income of $1.6 million for the quarter ended September 30, 2012. For the nine months ended September 30, 2013, we reported net income of $4.3 million compared to net income of $3.0 million for the nine months ended September 30, 2012. The decrease in net income for the three months ended September 30, 2013 as compared to the same period ended September 30, 2012 was mostly due to one-time merger and integration and banking center disposal expenses incurred in 2013. The increase in net income for the nine months ended September 30, 2013 as compared to the prior period was due to an increase in net interest income and a decrease in the provision for loan losses offset by an increase in operating expenses.

? During the three months and nine months ended September 30, 2013, we incurred approximately $1.6 million and $1.7 million, respectively, in personnel, IT, facilities and merger reorganization expense that related to the integration of EBI. During the three and nine months ended September 30, 2012, we incurred approximately $24,000 and $1.8 million, respectively, in personnel, IT and facilities costs and merger reorganization expense that related to the integrations of AFI and Old Harbor.

? During the three and nine months ended September 30, 2013, we strategically approved the closure of two banking centers. During the second quarter of 2013, we approved the closure of one banking center on the west coast of Florida, which was closed on October 4, 2013. An additional banking center located in Broward County was approved to be closed in the third quarter of 2013 and it is anticipated to be closed early in the first quarter of 2014. As a result of these banking center closures, we recorded termination expenses of $228,000 and $632,000 related to the facility leases, fixed assets and severance expense during the three and nine months ended September 30, 2013, respectively.

? Net interest margin was 4.88% for the quarter ended September 30, 2013 compared to 5.33% for the quarter ended September 30, 2012. Net interest margin was 5.24% for the nine months ended September 30, 2013 compared to 5.08% for the nine months ended September 30, 2012.

? The Company recorded provision for loan losses of $745,000 and $2.7 million for the three and nine months ended September 30, 2013, respectively, compared to provision for loan losses of $1.1 million and $5.5 million, respectively, for similar periods in 2012.

? Net loans increased by approximately $208.5 million to $1.11 billion for the nine months ended September 30, 2013 resulting from the acquisition of loans from EBI of $159.2, new loan production and loan advances of $246.0 million which was partially offset by payoffs, resolutions, including transfers to OREO, and principal payments of $196.8 million during the period. Net loans increased by approximately $187.4 million from $924.7 million at June 30, 2013 to $1.11 billion at September 30, 2013 resulting from the acquisition of loans from EBI of $159.2 million, new loan production and loan advances of $97.3 million which was partially offset by payoffs, resolutions, including transfer to OREO, and principal payments of $69.2 million during the period.

? Non-performing assets at September 30, 2013 represented 2.23% of total assets compared to 2.74% at December 31, 2012. Non-performing assets not covered by the Loss Share Agreements represented 1.10% of total assets at September 30, 2013 compared to 1.17% at December 31, 2012.

? Securities available for sale increased by approximately $81.8 million from December 31, 2012 to $341.9 million at September 30, 2013. The increase was a result of security purchases of $174.4 million and the acquisition of $4.0 million of EBI securities partially offset by investment maturities and prepayments of $48.6 million and proceeds from sales of $33.7 million resulting in gains on sales of $824,000 for the nine months ended September 30, 2013. Gains on the sale of securities for the nine months ended September 30, 2012 were $1.7 million. Gains on the sale of securities for the three months ended September 30, 2013 were $93,000 as compared to no gains on sale of securities for the three months ended September 30, 2012.

? Other real estate owned ("OREO") decreased by $3.1 million to $16.5 million at September 30, 2013 from $19.5 million at December 31, 2012. The change was due to OREO sales of $8.3 million and fair value adjustments on existing properties of $785,000 which was partially offset by the foreclosure of $5.0 million of loans. Gains on the sale of OREO for three months ended September 30, 2013 and 2012 were $179,000 and $1.0 million, respectively. Gains on the sale of OREO for nine months ended September 30, 2013 and 2012 were $1.0 million and $3.0 million, respectively. At September 30, 2013, we had $1.1 million of OREO under contract for sale and expected to close in the fourth quarter of 2013 with no additional loss anticipated.

? The FDIC loss share receivable was reduced by approximately $15.5 million from $46.7 million at December 31, 2012 to $31.3 million at September 30, 2013. The decrease was due to cash receipts of approximately $4.9 million, a reduction of $11.1 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 $551,000.

? Goodwill increased $5.7 million from $58.5 million to $64.2 million due to the acquisition of EBI.

? Deposits increased by $96.2 million from $1.303 billion at December 31, 2012 to $1.4 billion at September 30, 2013 due primarily to the acquisition of $177.2 million in deposits from the EBI acquisition offset by a reduction in higher priced certificates of deposits and normal customer balance fluctuations. Non-interest bearing deposits increased by $40.7 million to $467.7 million at September 30, 2013, as compared to December 31, 2012, with $26.6 million of the increase from the EBI acquisition and the remaining amount due to our continued emphasis on this strategic initiative. The percentage of non-interest bearing deposits to total deposits was approximately 33% at September 30, 2013 and December 31, 2012.

Analysis for Three Month Periods ended September 30, 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 September 30, 2013 and 2012, respectively, are reflected in the following table:

                                             September 30, 2013                       September 30, 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                              $ 1,103,522     $ 17,353        6.24 %   $   940,792     $ 17,933        7.56 %
Investment securities                  346,681        2,012        2.32 %       190,527        1,032        2.17 %
Federal funds sold and
securities
purchased under resale
agreements                              63,142          155        0.97 %       202,494          218        0.43 %
Total interest-earning assets        1,513,345     $ 19,520        5.12 %   $ 1,333,813     $ 19,183        5.71 %
Non interest-earning assets            233,537                                  250,204
Allowance for loan losses              (10,029 )                                 (9,680 )
Total assets                       $ 1,736,853                              $ 1,574,337

Liabilities and Shareholders'
Equity
Interest-bearing liabilities
NOW accounts                       $   218,029     $     73        0.13 %   $   157,299     $     60        0.15 %
Money market accounts                  380,278          309        0.32 %       349,320          355        0.40 %
Savings accounts                        63,510           42        0.26 %        65,250           46        0.28 %
Certificates of deposit                301,709          448        0.59 %       341,128          813        0.95 %
Fed funds purchased and
repurchase agreements                   12,756            3        0.09 %        10,144            3        0.12 %
Federal Home Loan Bank advances
and other borrowings                    38,486           45        0.46 %            -            -         0.00 %
Total interest-bearing
liabilities                          1,014,768          920        0.36 %       923,141        1,277        0.55 %

Non-interest bearing liabilities
Demand deposit accounts                478,456                                  404,962
Other liabilities                       11,394                                    7,829
Total non-interest-bearing
liabilities                            489,850                                  412,791
Shareholders' equity                   232,235                                  238,405
Total liabilities and
shareholders'
equity                             $ 1,736,853                              $ 1,574,337
Net interest spread                                $ 18,600        4.76 %                   $ 17,906        5.16 %

Net interest on average earning
assets -
Margin                                                             4.88 %                                   5.33 %

Our net interest income for the three months ended September 30, 2013 was impacted by an increase in total average earning assets of $179.5 million as well as a decrease in the overall yield paid on interest bearing liabilities as compared to the three months ended September 30, 2012. The increase in total average earning assets was due to the EBI acquisition, the purchase of investment securities with excess cash reserves and net growth on originated loans.

Interest earnings for the current quarter were positively impacted by the accretion of discounts related to acquired loans of approximately $4.0 million as compared to $5.9 million for the same period in 2012. Included in the $4.0 million of accretion of discount for the quarter ended September 30, 2013 was approximately $2.8 million related to the disposition of assets acquired in the transactions above the discounted carrying value of the asset and accretion of discounts on purchase credit impaired loans due to increases in estimated cash flows. For the quarter ended September 30, 2013, we took a charge of approximately $2.9 million, including $263,000 related to the resolution of other real estate owned, as an adjustment to the FDIC loss share receivable. This charge was recorded in non-interest income within the consolidated statements of operations and was substantially related to changes in cash flows of loss share assets. Included in the $5.9 million of accretion discount for the quarter ended September 30, 2012 was approximately $3.6 million related to the disposition of assets above the discounted carrying values and accretion of discounts on purchase credit impaired loans due to increases in estimated cash flows. For the quarter ended September 30, 2012, we took a charge of approximately $4.5 million, including $1.1 million related to the resolution of other real estate owned, as an adjustment to the FDIC loss share receivable. This charge was recorded in non-interest income within the consolidated statements of operations substantially related to changes in cash flows of loss share assets.

Net interest income was $18.6 million for the three months ended September 30, 2013, as compared to $17.9 million for the three months ended September 30, 2012, an increase of $694,000, or 3.9%. The increase resulted primarily from increase in average earning assets of $179.5 million or 13.5% and a reduction in yield on deposits offset by a reduction in accretion income from the resolution of acquired assets. Accretion income decreased quarter over quarter by $1.9 million and was offset with a reduction in the cost of funds of 14 basis points.

The net interest margin (i.e., net interest income divided by average earning assets) decreased 45 basis points from 5.33% during the three months ended September 30, 2012 to 4.88% during the three months ended September 30, 2013. Accretion of $4.0 million on acquired loans added approximately 105 basis points to the quarter ended September 30, 2013 net interest margin. Of the 105 basis points, 73 basis points related to resolved loss share assets and changes in cash flows during the quarter. This compares to accretion of loan discount of $5.9 million during the three months ended September 30, 2012, which added approximately 176 basis points to the September 30, 2012 margin. Of the 176 basis points for the quarter ended September 30, 2012, 108 basis points related to resolved loss share assets and changes in cash flows. For the three months ended September 30, 2013, average loans represented 63.5% of total average assets and 75.9% of total average deposits and customer repurchase agreements, compared to average loans of 59.8% of total average assets and average loans of 70.8% to total average deposits and customer repurchase agreements at September 30, 2012. Our cost of funds was approximately 14 basis points lower for the three months ended September 30, 2013, as compared to September 30, 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 September 30, 2013 as compared to the three months ended September 30, 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 September 30, 2013 and 2012:

                                                      September 30, 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                                     $      (580 )       $     2,832        $   (3,412 )
Investment securities                             980                 901                79
Federal funds sold and securities
purchased under resale agreements                 (63 )              (217 )             154

Total interest-earning assets             $       337         $     3,516        $   (3,179 )
Liabilities
Interest-bearing liabilities
NOW accounts                              $        13         $        21        $       (8 )
Money market accounts                             (46 )                30               (76 )
Savings accounts                                   (4 )                (1 )              (3 )
Certificates of deposit                          (365 )               (86 )            (279 )
Fed funds purchased and repurchase
agreements                                         -                    1                (1 )
Other borrowings                                   45                  45                -

Total interest-bearing liabilities               (357 )                10              (367 )

Net interest spread                       $       694         $     3,506        $   (2,812 )

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 increased by $558,000 for the quarter ended September 30, 2013 when compared to the quarter ended September 30, 2012. The increase was principally a result of a decrease in the adjustment to the FDIC loss share receivable due to less resolution of assets above their carrying value offset by a reduction in the gain on the sales of securities and a reduction in the gains on the sale of other real estate owned quarter over quarter.

During the three months ended September 30, 2013, we sold approximately $2.9 million in securities for gains on the sale of $93,000. There were no sales during the third quarter of 2012.

During the three months ended September 30, 2013, we received proceeds from the sale of OREO properties of $3.1 million with a carrying value of $2.9 million and recorded a net gain of $179,000 on the these dispositions as compared to sales of $15.1 million of OREO with a carrying value of $12.0 million resulting . . .

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