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, 1
st
United Bank (“1
st
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.
On December 11, 2009, we announced that 1
st
United Bank, our banking subsidiary, had entered into a purchase and assumption agreement (the “Republic Agreement”) with the Federal Deposit Insurance Corporation (“FDIC”), as receiver for Republic Federal Bank, National Association (“Republic”), Miami, Florida. According to the terms of the Republic Agreement,
1
st
United Bank assumed all deposits (except certain brokered deposits) and borrowings, and acquired certain assets of Republic. Assets acquired included $238 million in loans based on Republic’s carrying value and $64.2 million in cash and investments. All of Republic’s repossessed or foreclosed real estate and substantially all non-performing loans were retained by the FDIC. Republic operated four banking centers in Miami-Dade County, Florida, and
had approximately 100 employees. We assumed approximately $349.6 million
in deposits in this transactions.
All of the loans acquired are covered by two loss share agreements (the “Loss Share Agreements”) between the FDIC and 1st United Bank, which affords 1st United Bank significant loss protection. Under the Loss Share Agreements, the FDIC will cover 80% of covered loan and foreclosed real estate losses up to $36 million and 95% of losses in excess of that amount. The Loss Share Agreements
also cover third party collection costs and 90 days of accrued interest on covered loans. The term for loss sharing and loss recoveries on residential real estate loans is ten years, while the term for loss sharing and loss recoveries on non-residential real estate loans is five years with respect to losses and eight years with respect to loss recoveries. The reimbursable losses from the FDIC are based on the book value of the relevant loan as determined by the FDIC at the date of
the transaction. New loans made after that date are not covered by the Loss Share Agreements.
1st United Bank received a $34.2 million net discount on the assets acquired. The acquisition was accounted for under the purchase method of accounting in accordance with FASB ASC 805, “Business Combinations.” The purchased assets and assumed liabilities were recorded at their respective acquisition date fair values, and identifiable intangible assets were recorded at fair
value. Fair values are preliminary and subject to refinement for up to one year after the closing date of the acquisition as new information relative to closing date fair values becomes available. We recorded an estimated receivable from the FDIC in the amount of $32.9 million as of December 11, 2009, which represents the fair value of the FDIC’s portion of the losses that are expected to be incurred and reimbursed to us. The Loss Sharing Agreements are
subject to certain servicing procedures as specified in the agreements.
1
st
United Bank did not immediately acquire the furniture or equipment of Republic as part of the Republic Agreement. However, 1
st
United Bank had the option to purchase the furniture and equipment from the FDIC. The term of this option expired March 11, 2010. We have agreed to purchase $495,000 at fair value of furniture and equipment from the FDIC. 1
st
United also had until March 11, 2010, to request the FDIC to repudiate all leases entered into by the former Republic or the leases will be assumed. Each of the four banking centers is leased. We assumed (in one case on a negotiated basis) three branch leases and asked the FDIC to repudiate all other leases including the lease for the Aventura banking facility which will be closed on April 23, 2010. This
branch is within two miles of our North Miami Beach banking facility and we determined closing this branch will have minimal impact on our customers.
As a result of this acquisition, we had 16 banking centers during the first quarter of 2010 vs. 12 banking centers for the first quarter of 2009.
On August 15, 2008, we completed an acquisition of the banking center network, substantially all of the deposits, and selected loans of Citrus Bank, N.A., headquartered in Vero Beach, Florida. We refer to this as the Citrus Acquisition. The Citrus Acquisition resulted in the assumption and acquisition of approximately $87.5 million in deposits and $38 million in net loans. In addition, we expanded our
banking centers to Vero Beach, Sebastian, and Barefoot Bay, Florida. As a condition of receiving regulatory approval of the acquisition, we committed not to enter into any additional acquisition agreements unless it is funded with common stock or until we have been profitable for four consecutive quarters.
On February 29, 2008, we completed the merger and acquisition of Equitable Financial Group, Inc. (“Equitable”) and its wholly-owned subsidiaries Equitable Bank and Equitable Equity Lending, which we refer to as the Equitable Merger. We issued 1,928,610 shares of our common stock and paid cash of approximately $27.6 million to the Equitable shareholders and option holders. The Equitable Merger
increased our banking centers from 8 to 11 locations. In addition, we acquired approximately $146.9 million in net loans, $29.9 million in cash and securities, $136.0 million in deposits and $25.7 million in repurchase agreements and borrowings in the Equitable Merger. We recorded approximately $37.4 million in goodwill and $1.4 million in core deposit intangibles as a result of the Equitable Merger.
We follow a business plan that emphasizes the delivery of commercial banking services to businesses and individuals in our geographic market who desire a high level of personalized service. The business plan includes business banking, professional market services, real estate lending and private banking, as well as full community banking products and services. The business plan also provides for an emphasis
on our Small Business Administration lending program, as well as on small business lending. We focus on the building of a balanced loan and deposit portfolio, with emphasis on low cost liabilities and variable rate loans.
As is the case with banking institutions generally, our operations are materially and significantly influenced by general economic conditions and by related monetary and fiscal policies of financial institution regulatory agencies, including the Federal Reserve Bank and the FDIC. Deposit flows and costs of funds are influenced by interest rates on competing investments and general market rates of interest.
Lending activities are affected by the demand for financing of real estate and other types of loans, which in turn is affected by the interest rates at which such financing may be offered and other factors affecting local demand and availability of funds. We face strong competition in the attraction of deposits (our primary source of lendable funds) and in the origination of loans.
Financial Overview
|
|
•
|
Net income for the quarter ended March 31, 2010 was $346,000 compared to net income of $52,000 for the quarter ended March 31, 2009.
|
|
|
•
|
Net interest margin increased to 4.23% for the quarter ended March 31, 2010, compared to 3.79% for the quarter ended March 31, 2009.
|
|
|
•
|
During the three months ended March 31, 2010, we had approximately $861,000 (approximately $287,000 per month) in personnel related and facilities costs that related to the integration of Republic which will be eliminated by June 30, 2010.
|
|
|
•
|
Nonperforming assets at March 31, 2010 represented 2.22% of total assets compared to 2.16% at December 31, 2009.
|
|
|
•
|
The changes in operating results for the period ended March 31, 2010 when compared to the period ended March 31, 2009 were substantially a result of the Republic acquisition.
|
OPERATING RESULTS
For the three month period ended March 31, 2010, we reported net income of $346,000 compared to a net income of $52,000 for the three month period ended March 31, 2009. We have summarized the material variances between periods below.
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-month periods ended March 31, 2010 and 2009 are reflected in the following table:
|
|
|
March 31, 2010
|
|
March 31, 2009
|
|
|
(Dollars in thousands)
|
|
Average
Balance
|
|
Interest
Income/
Expense
|
|
Average
Rates
Earned/
Paid
|
|
Average
Balance
|
|
Interest
Income/
Expense
|
|
Average
Rates
Earned/
Paid
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
677,729
|
|
|
10,542
|
|
|
6.31
|
%
|
$
|
491,343
|
|
$
|
6,477
|
|
|
5.29
|
%
|
|
Investment securities
|
|
|
87,067
|
|
|
834
|
|
|
3.83
|
%
|
|
35,343
|
|
|
442
|
|
|
5.00
|
%
|
|
Federal funds sold and securities purchased under resale agreements
|
|
|
141,109
|
|
|
133
|
|
|
0.38
|
%
|
|
10,183
|
|
|
37
|
|
|
1.46
|
%
|
|
Total interest earning assets
|
|
|
905,905
|
|
|
11,509
|
|
|
5.15
|
%
|
|
536,869
|
|
|
6,956
|
|
|
5.20
|
%
|
|
Non interest-earning assets
|
|
|
131,560
|
|
|
|
|
|
|
|
|
82,951
|
|
|
|
|
|
|
|
|
Allowance for loan losses
|
|
|
(13,374
|
)
|
|
|
|
|
|
|
|
(5,795
|
)
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,024,091
|
|
|
|
|
|
|
|
$
|
614,025
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders’ Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOW accounts
|
|
$
|
106,091
|
|
|
50
|
|
|
0.19
|
%
|
$
|
57,051
|
|
$
|
37
|
|
|
0.26
|
%
|
|
Money market accounts
|
|
|
152,663
|
|
|
379
|
|
|
1.01
|
%
|
|
104,218
|
|
|
240
|
|
|
0.92
|
%
|
|
Savings accounts
|
|
|
35,970
|
|
|
69
|
|
|
0.77
|
%
|
|
13,674
|
|
|
20
|
|
|
0.59
|
%
|
|
Certificates of deposit
|
|
|
313,338
|
|
|
1,414
|
|
|
1.83
|
%
|
|
174,783
|
|
|
1,380
|
|
|
3.17
|
%
|
|
Fed Funds Purchased and Repos
|
|
|
16,956
|
|
|
7
|
|
|
0.17
|
%
|
|
15,737
|
|
|
12
|
|
|
0.31
|
%
|
|
Other borrowings
|
|
|
10,037
|
|
|
135
|
|
|
5.45
|
%
|
|
44,543
|
|
|
199
|
|
|
1.79
|
%
|
|
Total interest-bearing liabilities
|
|
|
635,055
|
|
|
2,054
|
|
|
1.31
|
%
|
|
410,006
|
|
|
1,888
|
|
|
1.85
|
%
|
|
Non interest-bearing liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposit accounts
|
|
|
209,512
|
|
|
|
|
|
|
|
|
99,966
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
7,022
|
|
|
|
|
|
|
|
|
3,234
|
|
|
|
|
|
|
|
|
Total non interest bearing liabilities
|
|
|
216,534
|
|
|
|
|
|
|
|
|
103,200
|
|
|
|
|
|
|
|
|
Shareholders’ equity
|
|
|
172,502
|
|
|
|
|
|
|
|
|
100,819
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders’ equity
|
|
$
|
1,024,091
|
|
|
|
|
|
|
|
$
|
614,025
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest spread
|
|
|
|
|
$
|
9,392
|
|
|
3.84
|
%
|
|
|
|
$
|
5,068
|
|
|
3.35
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest on average earning assets - Margin
|
|
|
|
|
|
|
|
|
4.23
|
%
|
|
|
|
|
|
|
|
3.79
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our net interest income for the 1
st
quarter of 2010 was positively impacted by the increase in average earning assets of $369 million as compared to 2009 due primarily as a result of the loans and investments acquired in the Republic transaction. Total loans increased by $193.7 million, or 39%, from $498 million at March 31, 2009 to $691.7 million at March 31, 2010. At March 31, 2010, loans
represented 65% of total assets and 79% of total deposits and customer repurchase agreements versus 79% of total assets and 104.9% of total deposits and customer repurchase agreements at March 31, 2009. Earnings for the current quarter were positively impacted by the accretion of discount of approximately $1.2 million related to loans acquired in the Republic transaction.
Net interest income was $9.4 million for the three months ended March 31, 2010, as compared to $5.1 million for the three months ended March 31, 2009, an increase of $4.3 million or 85%. The increase resulted primarily from an increase in average earning assets of $369 million or 69% primarily due to the Republic acquisition. In addition, the net interest margin (i.e., net interest income divided by average
earning assets) increased 44 basis points from 3.79% during the three months ended March 31, 2009 to 4.23% during the three months ended March 31, 2010, mainly the result of the accretion of a loan discount of $1.2 million during the quarter on acquired loans which added approximately 60 basis points to the March 31,
2010 margin of 4.23%. This amount was offset by the decrease of average loans as a percent of earning assets of 75% for the period ended March 31, 2010 compared to 92% for the period ended March 31, 2009.
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, 2010 as compared to the three months ended March 31, 2009. 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-month periods ended March 31, 2010 and 2009:
|
(Dollars in thousands)
|
|
March 31, 2010 and 2009
|
|
|
|
|
Change in
Interest
Income/
Expense
|
|
Variance
Due to
Volume
Changes
|
|
Variance
Due to
Rate
Changes
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning assets
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
4,065
|
|
$
|
2,757
|
|
$
|
1,308
|
|
|
Investment securities
|
|
|
392
|
|
|
516
|
|
|
(124
|
)
|
|
Federal funds sold and securities purchased under resale agreements
|
|
|
96
|
|
|
143
|
|
|
(47
|
)
|
|
Total interest-earning assets
|
|
$
|
4,553
|
|
$
|
3,416
|
|
$
|
1,137
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities
|
|
|
|
|
|
|
|
|
|
|
|
NOW accounts
|
|
|
13
|
|
|
25
|
|
|
(12
|
)
|
|
Money market accounts
|
|
|
139
|
|
|
119
|
|
|
20
|
|
|
Savings accounts
|
|
|
49
|
|
|
41
|
|
|
8
|
|
|
Certificates of deposit
|
|
|
34
|
|
|
790
|
|
|
(756
|
)
|
|
Fed Funds Purchased and Repos
|
|
|
(5
|
)
|
|
1
|
|
|
(6
|
)
|
|
Other borrowings
|
|
|
(64
|
)
|
|
(240
|
)
|
|
176
|
|
|
Total interest-bearing liabilities
|
|
|
166
|
|
|
736
|
|
|
(570
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest spread
|
|
$
|
4,387
|
|
$
|
2,680
|
|
$
|
1,707
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest Income, Non-interest Expense, Provision for Loan Losses, and Income Taxes
Non-interest income includes service charges on deposit accounts, 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 $397,000, or 79%, when comparing the first quarter of 2010 to the same period last year. The increase is principally due to higher service charges and fees on deposit accounts.
Service charges increased from the three-month period ended March 31, 2009 by approximately $447,000 to $789,000 for the three month period ended March 31, 2010 primarily as a result of an increase in average deposits during 2010 of $334 million primarily due to the Republic acquisition.
During the quarter ended March 31, 2010, we had a realized loss of approximately $10,000 on the sale of securities as compared to a gain of $63,000 for the quarter ended March 31, 2009.
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 increased by $3,166,000, or 59%, from $5,377,000 for the first quarter of 2009 to $8,543,000 for the current quarter.
The following summarizes the changes in Non-Interest Expense accounts for the three months ended March 31, 2010 compared to the three months ended March 31, 2009:
|
|
|
Three months ended
|
|
|
|
|
|
|
March 31,
2010
|
|
March 31,
2009
|
|
Difference
|
|
|
Salaries and employee benefits
|
|
$
|
4,080
|
|
$
|
2,427
|
|
$
|
1,643
|
|
|
Occupancy and equipment
|
|
|
1,696
|
|
|
1,422
|
|
|
274
|
|
|
Data processing
|
|
|
588
|
|
|
457
|
|
|
131
|
|
|
Telephone
|
|
|
183
|
|
|
135
|
|
|
48
|
|
|
Stationery and supplies
|
|
|
71
|
|
|
62
|
|
|
9
|
|
|
Amortization of Intangibles
|
|
|
114
|
|
|
84
|
|
|
30
|
|
|
Professional fees
|
|
|
383
|
|
|
95
|
|
|
288
|
|
|
Advertising
|
|
|
35
|
|
|
18
|
|
|
17
|
|
|
Merger reorganization expenses
|
|
|
360
|
|
|
—
|
|
|
360
|
|
|
FDIC Assessment
|
|
|
339
|
|
|
197
|
|
|
142
|
|
|
Impairment of available for sale securities
|
|
|
—
|
|
|
63
|
|
|
(63)
|
|
|
Other
|
|
|
694
|
|
|
407
|
|
|
287
|
|
|
Total non-interest expense
|
|
$
|
8,543
|
|
$
|
5,377
|
|
$
|
3,166
|
|
Salary and employee benefits increased by approximately $1,643,000 to $4,080,000 for the period ended March 31, 2010 as compared to the period ended March 31, 2009 of $2,437,000 primarily as a result of the acquisition of the Republic operation, including four banking centers at the end of 2009. Included in this amount is approximately $350,000 (approximately $117,000 monthly) of personnel related costs that
will be eliminated by June 30, 2010 due to the integration of Republic. Full time equivalents at the end of March 31, 2010 were 220 compared to 149 at March 31, 2009. Approximately 28 positions will be eliminated as part of the integration.
Occupancy and Equipment increased by approximately $274,000 to $1,696,000 for the period ended March 31, 2010 as compared to the period ended March 31, 2009 of $1,422,000 primarily as a result of the acquisition of the Republic operation, including four banking centers at the end of 2009. Approximately $150,000 (approximately $50,000 per month) of this increase will be eliminated effective July 1, 2010 as a
result of the integration of the Republic operation.
The Merger reorganization expense represents the accrual during the quarter of stay bonuses for employees whose positions have been eliminated by June 30, 2010. A similar amount will be recorded in the second quarter during which the stay bonus will be paid and no further accrual will be recorded.
Professional fees increased by $288,000 to $331,000 for the quarter ended March 31, 2010 primarily a result of costs related to the increase in non-performing assets during this period as compared to 2009.
The other increases in other expenses were primarily due to the Republic acquisition.
We recorded a $1.3 million loan loss provision for the three months ended March 31, 2010, compared to $105,000 for the three months ended March 31, 2009. The $1.3 million provision for the three months ended March 31, 2010 was primarily a result of the increase in classified assets and the continuing deterioration of values of underlying collateral on these assets.
We recorded an income tax expense of $217,000 for the three months ended March 31, 2010, compared to a $38,000 tax expense for the three months ended March 31, 2009.
FINANCIAL CONDITION
At March 31, 2010, our total assets were $1.05 billion and our net loans were $678 million or 65% of total assets. At December 31, 2009, our total assets were $1.02 billion and our net loans were $668 million or 66% of total assets. Net loans increased by approximately $11 million to $678 million at March 31, 2010 due primarily to new loan production during the quarter. Despite this growth, compared to the
prior two years, the growth rate of the loan portfolio has slowed. This is generally a result of an overall slowdown in commercial loan production in the markets serviced by 1
st
United Bank, as well as an increased level of commercial loan payoffs.
At March 31, 2010, the allowance for loan losses was $13.5 million or 1.95% of total loans. At December 31, 2009, the allowance for loan losses was $13.3 million or 1.95% of total loans.
At March 31, 2010, our total deposits were $842.6 million, an increase of $39.8 million (5%) over December 31, 2009 of $802.8 million. Non-interest bearing deposits represented 27% of total deposits at March 31, 2010 compared to 24% at December 31, 2009. These increases are due to our overall business development efforts.
Loan Quality
Management seeks to maintain a high quality of loans through sound underwriting and lending practices. As of March 31, 2010 and December 31, 2009, approximately 84% and 81%, respectively, of the total loan portfolio was collateralized by commercial and residential real estate mortgages.
Unlike residential mortgage loans, which generally are made on the basis of the borrower’s ability to repay from employment and other income and which are collateralized by real property whose value tends to be more readily ascertainable, non-real estate secured commercial loans typically are underwritten on the basis of the borrower’s ability to make repayment from the cash flow of its business
and generally are collateralized by a variety of business assets, such as accounts receivable, equipment and inventory. As a result, the availability of funds for the repayment of commercial loans may be substantially dependent on the success of the business itself, which is subject to adverse conditions in the economy. Commercial loans are generally repaid from operational earnings, collection of rent or conversion of assets. Commercial loans also entail certain additional risks since
they usually involve large loan balances to single borrowers or a related group of borrowers, resulting in a more concentrated loan portfolio. Further, the collateral underlying the loans may depreciate over time, cannot be appraised with as much precision as residential real estate, and may fluctuate in value based on the success of the business.
Loan concentrations are defined as amounts loaned to a number of borrowers engaged in similar activities, which would cause them to be similarly impacted by economic or other conditions. We, on a routine basis, monitor these concentrations in order to consider adjustments in our lending practices to reflect economic conditions, loan-to-deposit ratios, and industry trends. As of March 31, 2010 and December
31, 2009, no concentration of loans within any portfolio category to any group of borrowers engaged in similar activities or in a similar business (other than noted below) exceeded 10% of total loans, except that as of such dates loans collateralized with mortgages on real estate represented 84% and 81%, respectively, of the loan portfolio and were to borrowers in varying activities and businesses. We develop and maintain profitable business relationships with custom residential
homebuilders primarily in Palm Beach, Miami-Dade and Broward Counties and to a lesser extent in surrounding markets. Business banking provides loan facilities to qualified custom homebuilders to support the construction of speculative and pre-sold custom one-to-four family residences, as well as lot acquisition loans, guidance lines of credit and for commercial real estate. Business banking provides loan facilities ranging from commercial purpose non-real estate secured loans and
commercial purpose real estate secured loans, to guidance lines of credit, EXIM bank loans and SBA loans. From time to time, Business Banking also provides commercial and residential real estate acquisition and construction loans to qualified builders and developers, although this line of business is subdued at this time in the business cycle.
The following charts illustrate the composition of our loan portfolio as of March 31, 2010 and December 31, 2009.
Loan Portfolio as of March 31, 2010
(Dollars in thousands)
|
Loan Types
|
|
Total Loans
|
|
Balance
Outstanding
|
|
% of Loan
Portfolio
|
|
% of Total
Assets
|
|
|
Commercial Real Estate
|
|
|
323
|
|
$
|
315,623
|
|
|
45.63
|
%
|
|
30.19
|
%
|
|
Construction and Development Loans
|
|
|
45
|
|
|
56,073
|
|
|
8.11
|
%
|
|
5.36
|
%
|
|
Commercial and Industrial
|
|
|
498
|
|
|
110,174
|
|
|
15.93
|
%
|
|
10.54
|
%
|
|
Closed End First Lien 1-4 Family
|
|
|
374
|
|
|
128,055
|
|
|
18.51
|
%
|
|
12.25
|
%
|
|
Home Equity Line of Credit
|
|
|
257
|
|
|
52,907
|
|
|
7.65
|
%
|
|
5.06
|
%
|
|
Multi-family Loans
|
|
|
25
|
|
|
13,394
|
|
|
1.94
|
%
|
|
1.28
|
%
|
|
Consumer Loans
|
|
|
209
|
|
|
14,445
|
|
|
2.09
|
%
|
|
1.38
|
%
|
|
Closed-End Junior Lien 1-4 Family
|
|
|
16
|
|
|
829
|
|
|
0.12
|
%
|
|
0.08
|
%
|
|
Other
|
|
|
—
|
|
|
160
|
|
|
0.02
|
%
|
|
0.01
|
%
|
|
Total
|
|
|
1,747
|
|
$
|
691,660
|
|
|
100.00
|
%
|
|
66.15
|
%
|
Loan Portfolio as of December 31, 2009
(Dollars in thousands)
|
Loan Types
|
|
Total Loans
|
|
Balance
Outstanding
|
|
% of Loan
Portfolio
|
|
% of Total
Assets
|
|
|
Commercial Real Estate and Farm Loans
|
|
|
257
|
|
$
|
269,440
|
|
|
39.57
|
%
|
|
26.53
|
%
|
|
Construction and Development Loans
|
|
|
44
|
|
|
55,689
|
|
|
8.18
|
%
|
|
5.48
|
%
|
|
Commercial and Industrial
|
|
|
552
|
|
|
117,349
|
|
|
17.24
|
%
|
|
11.56
|
%
|
|
Closed End First Lien 1-4 Family
|
|
|
437
|
|
|
154,765
|
|
|
22.73
|
%
|
|
15.24
|
%
|
|
Home Equity Line of Credit
|
|
|
251
|
|
|
50,127
|
|
|
7.36
|
%
|
|
4.94
|
%
|
|
Multi-family Loans
|
|
|
39
|
|
|
20,574
|
|
|
3.02
|
%
|
|
2.03
|
%
|
|
Consumer Loans
|
|
|
188
|
|
|
11,902
|
|
|
1.75
|
%
|
|
1.17
|
%
|
|
Closed-End Junior Lien 1-4 Family
|
|
|
16
|
|
|
857
|
|
|
0.13
|
%
|
|
0.08
|
%
|
|
Other
|
|
|
0
|
|
|
137
|
|
|
0.02
|
%
|
|
0.01
|
%
|
|
Total
|
|
|
1,784
|
|
$
|
680,840
|
|
|
100.00
|
%
|
|
67.04
|
%
|
The following chart illustrates the composition of our construction and land development loan portfolio as of March 31, 2010 and year-end 2009.
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
March 31, 2010
|
|
December 31, 2009
|
|
|
|
|
Balance
|
|
% of
Total Loans
|
|
Balance
|
|
% of
Total Loans
|
|
|
Construction
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
$
|
—
|
|
|
0.00
|
%
|
$
|
—
|
|
|
0.00
|
%
|
|
Residential Spec
|
|
|
10,813
|
|
|
1.56
|
%
|
|
9,938
|
|
|
1.46
|
%
|
|
Commercial
|
|
|
—
|
|
|
0.00
|
%
|
|
1,108
|
|
|
0.16
|
%
|
|
Commercial Spec
|
|
|
3,301
|
|
|
0.48
|
%
|
|
3,259
|
|
|
0.48
|
%
|
|
Land Development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
|
3,181
|
|
|
0.46
|
%
|
|
1,890
|
|
|
0.28
|
%
|
|
Residential Spec
|
|
|
23,883
|
|
|
3.45
|
%
|
|
24,922
|
|
|
3.66
|
%
|
|
Commercial
|
|
|
—
|
|
|
0.00
|
%
|
|
—
|
|
|
0.00
|
%
|
|
Commercial Spec
|
|
|
14,895
|
|
|
2.15
|
%
|
|
14,572
|
|
|
2.14
|
%
|
|
Total
|
|
$
|
56,073
|
|
|
8.11
|
%
|
$
|
55,689
|
|
|
8.18
|
%
|
Generally, interest on loans accrues and is credited to income based upon the principal balance outstanding. It is management’s policy to discontinue the accrual of interest income and classify a loan as non-accrual when principal or interest is past due 90 days or more unless, in the determination of management, the principal and interest on the loan are well collateralized and in the process of
collection. Consumer installment loans are generally charged-off after 90 days of delinquency unless adequately collateralized and in the process of collection. Loans are not returned to accrual status until principal and interest payments are brought current and future payments appear reasonably certain. Interest accrued and unpaid at the time a loan is placed on non-accrual status is charged against interest income.
Real estate acquired by us as a result of foreclosure or by deed in lieu of foreclosure is classified as other real estate owned (“OREO”). OREO properties are recorded at the lower of cost or fair value less estimated selling costs, and the estimated loss, if any, is charged to the allowance for credit losses at the time it is transferred to OREO. Further write-downs in OREO are recorded at the
time management believes additional deterioration in value has occurred and are charged to non-interest expense. We had $286,000 of OREO property as of March 31, 2010, as compared to $635,000 at December 31, 2009.
We have identified certain assets as non performing and troubled debt restructuring assets. These assets include non-accruing loans, foreclosed real estate, loans that are contractually past due 90 days or more as to principal or interest payments and still accruing, and troubled debt restructurings. All non-accruing loans and loans accruing 90 days or more are considered impaired and included in our
substandard classification. These assets present more than the normal risk that we will be unable to eventually collect or realize their full carrying value. Our non performing and troubled debt restructuring assets at March 31, 2010 and December 31, 2009 are as follows:
|
(Dollars in thousands)
|
|
March 31, 2010
|
|
December 31, 2009
|
|
|
|
|
Assets Not
Subject to
Loss Share
Agreements
|
|
Assets
Subject to
Loss Share
Agreements
|
|
Total
|
|
|
Assets Not
Subject to
Loss Share
Agreements
|
|
Assets
Subject to
Loss Share
Agreements
|
|
Total
|
|
|
Non-Accrual Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
$
|
5,083
|
|
$
|
185
|
|
$
|
5,268
|
|
|
$
|
469
|
|
$
|
3,094
|
|
$
|
3,563
|
|
|
Home Equity Lines
|
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Commercial Real Estate
|
|
|
9,033
|
|
|
948
|
|
|
9,981
|
|
|
|
8,566
|
|
|
1,075
|
|
|
9,641
|
|
|
Construction and Land Development
|
|
|
4,926
|
|
|
—
|
|
|
4,926
|
|
|
|
5,258
|
|
|
—
|
|
|
5,258
|
|
|
Commercial and Industrial
|
|
|
775
|
|
|
—
|
|
|
775
|
|
|
|
717
|
|
|
118
|
|
|
835
|
|
|
Other
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Total
|
|
$
|
19,817
|
|
$
|
1,133
|
|
$
|
20,950
|
|
|
$
|
15,010
|
|
$
|
4,287
|
|
$
|
19,297
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accruing => 90 days past due
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
|
Home Equity Lines
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Commercial Real Estate
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Construction and Land Development
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Commercial and Industrial
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
54
|
|
|
—
|
|
|
54
|
|
|
Other
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Total
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
|
$
|
54
|
|
$
|
—
|
|
$
|
54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-accruing loans
|
|
$
|
19,817
|
|
$
|
1,133
|
|
$
|
20,950
|
|
|
$
|
15,010
|
|
$
|
4,287
|
|
$
|
19,297
|
|
|
Accruing => 90 days past due
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
54
|
|
|
—
|
|
|
54
|
|
|
Foreclosed real estate
|
|
|
286
|
|
|
—
|
|
|
286
|
|
|
|
635
|
|
|
—
|
|
|
635
|
|
|
Total non-performing assets
|
|
|
20,103
|
|
|
1,133
|
|
|
21,236
|
|
|
|
15,699
|
|
|
4,287
|
|
|
19,986
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trouble debt restructured loans
|
|
|
1,997
|
|
|
—
|
|
|
1,997
|
|
|
|
1,990
|
|
|
—
|
|
|
1,990
|
|
|
Total non-performing assets and restructured loans
|
|
$
|
22,100
|
|
$
|
1,133
|
|
$
|
23,233
|
|
|
$
|
17,689
|
|
$
|
4,287
|
|
$
|
21,976
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratios
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-accruing loans to total loans
|
|
|
|
|
|
|
|
|
3.35
|
%
|
|
|
|
|
|
|
|
|
2.83
|
%
|
|
Total non-performing assets to total assets
|
|
|
|
|
|
|
|
|
2.03
|
%
|
|
|
|
|
|
|
|
|
1.97
|
%
|
|
Total non-performing assets and troubled debt restructured loans to total assets
|
|
|
|
|
|
|
|
|
2.22
|
%
|
|
|
|
|
|
|
|
|
2.16
|
%
|
Since December 31, 2009, approximately $913,000 in non-accrual loans was charged off, and approximately $5.7 million was added (excluding assets acquired in the Republic transaction) to non-accrual during the quarter. The collateral securing one residential loan of $4.1 million was appraised in February 2010 for $4.5 million makes up the majority of this increase. The $334,000 in non performing assets
acquired in the Republic transaction are all covered under the Loss Share Agreements and we do not expect any additional future losses on these assets. Significant loans included in non-accrual loans not covered by Loss Share Agreements, in addition to the one noted above, at March 31, 2010 include: $2.9 million secured by commercial land in Broward County, Florida (appraised at November 2009 at $3.8 million), $2.2 million secured by new commercial office/warehouse property in Broward
County, Florida (appraised January 2010 at $2.5 million), $1.6 million participation loan secured by land in Orlando, Florida (pro rata portion appraised November 2009 at $1.8 million), $1.8 million secured by commercial building in Broward County, Florida (appraised at June 2009 at $1.5 million), $1.7 million secured by an office building in Boca Raton, Florida (appraised January 2010 at $1.8 million), and an $810,000 loan on an office building, on which a contract has been executed
and which is anticipated to close in the second quarter of 2010. The remaining 20 non-accrual loans are each under $750,000. We have specific reserves included in the allowance for loan losses of $2.5 million for potential loan losses to non-accrual loans that are not covered by Loss Share Agreements. We continue to aggressively work to resolve each of these loans. The total allowance for loan losses to non performing loans is 64% at March 31, 2010 compared to 69% at December 31, 2009.
|
Delinquent Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accruing 60-89
|
|
Non-Accrual and
90 day accruing
and Over
|
|
Total
|
|
|
|
|
|
Number
|
|
Amount
|
|
Number
|
|
Amount
|
|
Number
|
|
Amount
|
|
|
As of March 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
|
|
—
|
|
$
|
—
|
|
|
5
|
|
$
|
5,268
|
|
|
5
|
|
$
|
5,268
|
|
|
Home Equity Lines
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Commercial Real Estate
|
|
|
|
2
|
|
|
3,946
|
|
|
14
|
|
|
9,981
|
|
|
15
|
|
|
13,128
|
|
|
Construction and Land
|
|
|
|
—
|
|
|
—
|
|
|
6
|
|
|
4,926
|
|
|
6
|
|
|
4,926
|
|
|
Commercial and Industrial
|
|
|
|
2
|
|
|
719
|
|
|
7
|
|
|
775
|
|
|
9
|
|
|
1,494
|
|
|
Other
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Total
|
|
|
|
4
|
|
$
|
4,665
|
|
|
32
|
|
$
|
20,950
|
|
|
35
|
|
$
|
24,816
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in the table above as of March 31, 2010 in the non-accrual and 90 day and over category are three loans with a carrying value of $1.1 million, which are subject to the Loss Share Agreement.
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accruing 60-89
|
|
Non-Accrual and
90 day accruing
and Over
|
|
Total
|
|
|
|
|
|
Number
|
|
Amount
|
|
Number
|
|
Amount
|
|
Number
|
|
Amount
|
|
|
As of December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
|
|
3
|
|
$
|
241
|
|
|
24
|
|
$
|
3,563
|
|
|
27
|
|
$
|
3,804
|
|
|
Home Equity Lines
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Commercial Real Estate
|
|
|
|
7
|
|
|
5,384
|
|
|
14
|
|
|
9,641
|
|
|
21
|
|
|
15,025
|
|
|
Construction and Land
|
|
|
|
1
|
|
|
2,150
|
|
|
3
|
|
|
5,258
|
|
|
4
|
|
|
7,408
|
|
|
Commercial and Industrial
|
|
|
|
3
|
|
|
1,047
|
|
|
16
|
|
|
889
|
|
|
19
|
|
|
1,936
|
|
|
Other
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Total
|
|
|
|
14
|
|
$
|
8,822
|
|
|
57
|
|
$
|
19,351
|
|
|
71
|
|
$
|
28,173
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in the table above as of December 31, 2009 in the accruing 60 - 89 category are 8 loans with a carrying value of $3.9 million, and in the non-accrual and 90 day and over category are 35 loans with a carrying value of $4.0 million, which are subject to the Loss Share Agreements.
|
Impaired Loans
|
|
|
|
March 31, 2010
|
|
December 31, 2009
|
|
|
Loans with no allocated allowance for loan losses
|
|
$
|
7,542
|
|
$
|
5,900
|
|
|
Loans with allocation for loan losses
|
|
|
14,261
|
|
|
11,100
|
|
|
Total Impaired
|
|
$
|
21,803
|
|
$
|
17,000
|
|
|
|
|
|
|
|
|
|
|
|
Amount of allowance for loan losses allocated
|
|
$
|
2,506
|
|
$
|
1,522
|
|
All non-accrual loans and troubled debt restructurings are included in impaired loans.
At March 31, 2010 and December 31, 2009, we had approximately $2.0 million of loans classified as troubled debt restructurings that are performing in accordance with the restructured terms.
During the quarters ended March 31, 2010 and 2009, interest income not recognized on non-accrual loans (but would have been recognized if these loans were current) was approximately $66,400, and $44,900, respectively.
Allowance for Loan Losses
At March 31, 2010, the allowance for loan losses was $13.5 million or 1.95% of total loans. At March 31, 2010, no portion of the allowance for loan losses related to the approximately $177.4 million of loans covered under the Loss Share Agreements. At December 31, 2009, the allowance for loan losses was $13.3 million or 1.95% of total loans. In originating loans, we recognize that credit losses will be
experienced and the risk of loss will vary with, among other things: general economic conditions; the type of loan being made; the creditworthiness of the borrower over the term of the loan; and, in the case of a collateralized loan, the quality of the collateral for such a loan. The allowance for loan losses represents our estimate of the allowance necessary to provide for probable incurred losses in the loan portfolio. In making this determination, we analyze the ultimate
collectability of the loans in our portfolio, feedback provided by internal loan staff, the independent loan review function and information provided by examinations performed by regulatory agencies.
On a quarterly basis, management reviews the adequacy of the allowance for loan losses. Commercial credits are graded by risk management and the loan review function validates the assigned credit risk grades. In the event that a loan is downgraded, it is included in the allowance analysis at the lower grade. To establish the appropriate level of the allowance, we review and classify a sample of loans
(including all impaired and nonperforming loans) as to potential loss exposure.
Our analysis of the allowance for loan losses consists of three components: (i) specific credit allocation established for expected losses resulting from analysis developed through specific credit allocations on individual loans for which the recorded investment in the loan exceeds the fair value; (ii) general portfolio allocation based on historical loan loss experience for each loan category; and (iii)
qualitative reserves based on general economic conditions as well as specific economic factors in the markets in which we operate.
The specific credit allocation component of the allowance for loan losses is based on a regular analysis of loans where the internal credit rating is at or below the substandard classification and the loan is determined to be impaired as determined by management. The amount of impairment, if any, is determined based on either the present value of expected future cash flows discounted at the loan’s
effective interest rate, the market price of the loan, or, if the loan is collateral dependent, the fair value of the underlying collateral less cost of sale. A loan may also be classified as substandard and not be classified as impaired by management. The allowance for these loans is calculated based on historical charge-offs for the substandard loan categories combined with specifically evaluating the underlying credit and collateral of each loan. A loan may be classified as
substandard by management if, for example, the primary source of repayment is insufficient, the financial condition of the borrower and/or guarantors has deteriorated or there are chronic delinquencies.
|
Substandard loans
|
March 31, 2010
|
|
|
|
Loans Not Subject to Loss Share Agreements
|
|
Loans Subject to Loss Share Agreements
|
|
Total
|
|
|
Substandard – Impaired
|
|
$
|
21,803
|
|
$
|
—
|
|
$
|
21,803
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Substandard – Not Impaired
|
|
|
44,704
|
|
|
20,016
|
|
|
64,720
|
|
|
Total Loans Classified as Substandard
|
|
$
|
66,507
|
|
$
|
20,016
|
|
$
|
86,523
|
|
|
Substandard loans
|
December 31, 2009
|
|
|
|
Loans Not Subject to Loss Share Agreements
|
|
Loans Subject to Loss Share Agreements
|
|
Total
|
|
|
Substandard – Impaired
|
|
$
|
17,000
|
|
$
|
—
|
|
$
|
17,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Substandard – Not Impaired
|
|
|
38,296
|
|
|
21,656
|
|
|
59,952
|
|
|
Total Loans Classified as Substandard
|
|
$
|
55,296
|
|
$
|
21,656
|
|
$
|
76,952
|
|
All non-accrual loans, troubled debt restructurings and acquired loans which we assessed at the time of acquisition to be improbable of collecting all contractual, required payments are included in substandard loans.
The total of substandard loans, which include all impaired loans, non-accrual loans, troubled debt restructurings and loans acquired in the Republic transaction, Equitable Merger and Citrus Acquisition, for which we assessed at the time of acquisition to be improbable of collecting all contractually required payments, totaled $86.5 million at March 31, 2010 and $77.0 million at December 31, 2009. Included in
the $86.5 million in substandard are $19.4 million (net of discount of $21.0 which includes an accretable portion of $4.4 million) acquired in the Republic transaction which we assessed at the time of acquisition to be improbable of collecting all contractually, required payments. Approximately $6.2 million of loans acquired in the Equitable Merger and Citrus Acquisition, which we assessed at the time of acquisition to be improbable of collecting all contractually required payments, are
included in the substandard classification at March 31, 2010, and at December 31, 2009. Of these loans, $5.1 million at March 31, 2010 and $4.5 million at December 31, 2009 are included in non-accrual loans and were considered impaired at December 31, 2009. In addition, at March 31, 2010, we identified approximately $21.8 million (or 3.2% of total loans) in loans we have classified as impaired which are included in our substandard classification. This compares to $17.0 million or
2.5% of total loans at December 31, 2009. At March 31, 2010 and December 31, 2009, the specific credit allocation included in the allowance for loan losses for loans impaired was approximately $2.5 million and $2.6 million, respectively.
We determine the general portfolio allocation component of the allowance for loan losses statistically using a loss analysis that examines historical loan loss experience adjusted for current environmental factors. We perform the loss analysis quarterly and update loss factors regularly based on actual experience. The general portfolio allocation element of the allowance for loan losses also includes
consideration of the amounts necessary for concentrations and changes in portfolio mix and volume.
We also have loans classified as Special Mention. We classify loans as Special Mention if there are declining trends in the borrower’s business, questions regarding condition or value of the collateral and other weaknesses. At March 31, 2010, we had $14.3 million (2.1% of outstanding loans) in the Special Mention category which compares to $24.0 million (4.8% of outstanding loans) at December 31, 2009.
If there is further deterioration on these loans they may be classified substandard in the future, and depending on the fair value of the loan a specific credit allocation may be needed resulting in increased provisions for loan losses.
We base the allowance for loan losses on estimates and ultimate realized losses may vary from current estimates. We review these estimates quarterly, and as adjustments, either positive or negative, become necessary, we make a corresponding increase or decrease in the provision for loan losses. The methodology used to determine the adequacy of the allowance for loan losses is consistent with prior years and
there were no reallocations.
Management remains watchful of credit quality issues. Should the economic climate deteriorate from current levels, borrowers may experience difficulty repaying loans and the level of non-performing loans, charge-offs and delinquencies could rise and require further increases in loan loss provisions.
Investment Securities
We manage our consolidated securities portfolio, which represented 9.6% of our average earning asset base for the quarter ended March 31, 2010, as compared to 6.69% at year ended December 31, 2009, to minimize interest rate risk, maintain sufficient liquidity, and maximize return. The portfolio includes callable agency bonds, US Treasury Securities, mortgage-backed securities, and collateralized mortgage
obligations. Corporate obligations consist of investment grade obligations of public corporations. Our financial planning anticipates income streams generated by the securities portfolio based on normal maturity, pay downs and reinvestment.
Deposits
Total deposits increased by $39.8 million from December 31, 2009 to total deposits of $842.6 million at March 31, 2010, due primarily to business development efforts. Broker deposits at March 31, 2010 were $26.0 million, or less than 3.1% of deposits. At March 31, 2010, non-interest bearing deposits represented approximately 26.6% of deposits compared to 24.2% at December 31, 2009.
CAPITAL RESOURCES
We are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and prompt corrective action regulations involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet
capital requirements can initiate regulatory action.
The Federal banking regulatory authorities have adopted certain “prompt corrective action” rules with respect to depository institutions. The rules establish five capital tiers: “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized,” and “critically undercapitalized.” The various federal
banking regulatory agencies have adopted regulations to implement the capital rules by, among other things, defining the relevant capital measures for the five capital categories. An institution is deemed to be “well capitalized” if it has a total risk-based capital ratio of 10% or greater, a Tier 1 risk-based capital ratio of 6% or greater, and a Tier 1 leverage ratio of 5% or greater and is not subject to a regulatory order, agreement, or directive to meet and maintain a
specific capital level. At March 31, 2010, 1st United Bank met the capital ratios of a “well capitalized” financial institution with a total risk-based capital ratio of 16.8%, a Tier 1 risk-based capital ratio of 14.6%, and a Tier 1 leverage ratio of 7.9%. Depository institutions which fall below the “adequately capitalized” category generally are prohibited from making any capital distribution, are subject to growth limitations, and are required to submit a
capital restoration plan. There are a number of requirements and restrictions that may be imposed on institutions treated as “significantly undercapitalized” and, if the institution is “critically undercapitalized,” the banking regulatory agencies have the right to appoint a receiver or conservator. The following represents 1
st
United Bancorp’s and 1
st
United Bank’s regulatory Capital Ratios for the respective periods:
|
|
|
Actual
|
|
Minimum for
Capital Adequacy
|
|
Minimum for
Well Capitalized
|
|
|
(Dollars in thousands)
|
|
Amount
|
|
%
|
|
Amount
|
|
%
|
|
Amount
|
|
%
|
|
|
As of March 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital to risk-weighted assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
135,661
|
|
|
25.42
|
%
|
$
|
42,687
|
|
|
8.00
|
%
|
$
|
53,358
|
|
|
10.00
|
%
|
|
1st United
|
|
|
88,726
|
|
|
16.78
|
%
|
|
42,310
|
|
|
8.00
|
%
|
|
52,887
|
|
|
10.00
|
%
|
|
Tier I capital to risk-weighted assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
123,907
|
|
|
23.22
|
%
|
|
21,343
|
|
|
4.00
|
%
|
|
32,015
|
|
|
6.00
|
%
|
|
1st United
|
|
|
77,036
|
|
|
14.57
|
%
|
|
21,155
|
|
|
4.00
|
%
|
|
31,732
|
|
|
6.00
|
%
|
|
Tier I capital to total average assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
123,907
|
|
|
12.71
|
%
|
|
39,000
|
|
|
4.00
|
%
|
|
48,751
|
|
|
5.00
|
%
|
|
1st United
|
|
|
77,036
|
|
|
7.94
|
%
|
|
38,833
|
|
|
4.00
|
%
|
|
48,541
|
|
|
5.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital to risk-weighted assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
134,518
|
|
|
25.76
|
%
|
$
|
41,777
|
|
|
8.00
|
%
|
$
|
52,221
|
|
|
10.00
|
%
|
|
1st United
|
|
|
87,486
|
|
|
16.91
|
%
|
|
41,400
|
|
|
8.00
|
%
|
|
51,750
|
|
|
10.00
|
%
|
|
Tier I capital to risk-weighted assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
122,907
|
|
|
23.54
|
%
|
|
20,888
|
|
|
4.00
|
%
|
|
31,333
|
|
|
6.00
|
%
|
|
1st United
|
|
|
75,939
|
|
|
14.67
|
%
|
|
20,700
|
|
|
4.00
|
%
|
|
31,050
|
|
|
6.00
|
%
|
|
Tier I capital to total average assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
122,907
|
|
|
17.33
|
%
|
|
28,367
|
|
|
4.00
|
%
|
|
35,459
|
|
|
5.00
|
%
|
|
1st United
|
|
|
75,939
|
|
|
10.70
|
%
|
|
28,383
|
|
|
4.00
|
%
|
|
35,479
|
|
|
5.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS AND LIQUIDITY
Our primary sources of cash are deposit growth, maturities and amortization of loans and investment securities, operations, and borrowing. We use cash from these and other sources to first fund loan growth. Any remaining cash is used primarily to purchase a combination of short, intermediate, and longer-term investment securities.
We manage our liquidity position with the objective of maintaining sufficient funds to respond to the needs of depositors and borrowers and to take advantage of earnings enhancement opportunities. In addition to the normal inflow of funds from core-deposit growth together with repayments and maturities of loans and investments, we use other short-term funding sources such as brokered time deposits,
securities sold under agreements to repurchase, overnight federal funds purchased from correspondent banks and the acceptance of short-term deposits from public entities, and Federal Home Loan Bank advances.
We monitor, stress test and manage our liquidity position on several bases, which vary depending upon the time period. As the time period is stress test expanded, other data is factored in, including estimated loan funding requirements, estimated loan payoffs, investment portfolio maturities or calls, and anticipated depository buildups or runoffs.
We classify all of our securities as available-for-sale to maintain significant liquidity. Our liquidity position is further enhanced by structuring our loan portfolio interest payments as monthly, complemented by retail credit and residential mortgage loans in our loan portfolio, resulting in a steady stream of loan repayments. In managing our investment portfolio, we provide for staggered maturities so
that cash flows are provided as such investments mature.
Our securities portfolio, federal funds sold, and cash and due from bank deposit balances serve as primary sources of liquidity for 1
st
United Bank. At March 31, 2010, we had approximately $146.2 million in cash and cash equivalents.
At March 31, 2010, we had no short-term borrowings and long term borrowings of $5 million from the FHLB. At March 31, 2010, we had commitments to originate loans totaling $76 million. Scheduled maturities of certificates of deposit during the twelve months following March 31, 2010 totaled $266.7 million, and maturing loans total approximately $306.8 million.
Management believes that we have adequate resources to fund all of our commitments, that substantially all of our existing commitments will be funded in the subsequent twelve months and, if so desired, that we can adjust the rates on certificates of deposit and other deposit accounts to retain deposits in a changing interest rate environment. At March 31, 2010, we had short-term lines available from
correspondent banks totaling $26.0 million. FRB discount window availability of $36.7 million, and borrowing capacity from the FHLB of $96.0 million based on collateral pledged, for a total credit available of
$158.7 million. In addition, being “well capitalized,” the Bank can access the wholesale deposits for approximately $233.9 million based on current policy limits.
OFF-BALANCE SHEET ARRANGEMENTS
We do not currently engage in the use of derivative instruments to hedge interest rate risks. However, we are a party to financial instruments with off-balance sheet risks in the normal course of business to meet the financing needs of our clients.
At March 31, 2010, we had $76 million in commitments to originate loans and $4.8 million in standby letters of credit. Commitments to extend credit are agreements to lend to a customer so long as there is no violation of any condition established in the contract. Commitments generally have termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being
drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Standby letters of credit are conditional commitments issued by us to guarantee the performance of a client to a third party. We use the same credit policies in establishing commitments and issuing letters of credit as we do for on-balance sheet instruments.
If commitments arising from these financial instruments continue to require funding at historical levels, management does not anticipate that such funding will adversely impact our ability to meet on-going obligations. In the event these commitments require funding in excess of historical levels, management believes current liquidity, available lines of credit from the FHLB, investment security maturities
and our revolving credit facility provide a sufficient source of funds to meet these commitments.
CRITICAL ACCOUNTING POLICIES
Allowance for Loan Losses
The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.
The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This
evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.
The allowance consists of specific and general components. The specific component relates to loans that are classified as either loss, doubtful, substandard or special mention. For such loans that are also classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The
general component covers nonclassified loans and is based on historical industry loss experience adjusted for qualitative factors.
A loan is considered impaired when, based on current information and events, it is probable that we will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest
payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the
principal and interest owed. Impairment is measured on a loan by loan basis for commercial and commercial real estate loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.
Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, we do not separately identify individual consumer and residential loans for impairment disclosures.
Goodwill and Intangible Assets
Goodwill represents the excess of cost over fair value of assets of business acquired. Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but instead tested for impairment at least annually. Intangible assets with estimable useful lives are amortized over their respective estimated useful lives to their estimated
residual values. We acquired First Western Bank, on April 7, 2004, Equitable on February 29, 2008 and Citrus on August 15, 2008. Consequently, we were required to record the assets acquired, including identified intangible
assets, and liabilities assumed at their fair value, which involves estimates based on third party valuations, such as appraisals, internal valuations based on discounted cash flow analyses or other valuation techniques. The determination of the useful lives of intangible assets is subjective, as is the appropriate amortization period for such intangible assets. In addition, purchase acquisitions typically
result in recording goodwill, which is subject to ongoing periodic impairment tests based on the fair value of the reporting unit compared to its carrying amount, including goodwill. As of December 31, 2009, the required annual impairment test of goodwill was performed and no impairment existed as of the valuation date. If for any future period we determine that there has been impairment in the carrying value of our goodwill balances, we will record a charge to our earnings, which could
have a material adverse effect on our net income, but not to our risk based capital ratios.
Income Taxes
Deferred income tax assets and liabilities are recorded to reflect the tax consequences on future years of temporary differences between revenues and expenses reported for financial statements and those reported for income tax purposes. Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the years in which those temporary differences are
expected to be realized or settled. Valuation allowances are provided against assets which are not likely to be realized.
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ITEM 4.
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CONTROLS AND PROCEDURES
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(a)
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Evaluation of Disclosure Controls and Procedures
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Our Chief Executive Officer, Rudy E. Schupp, and Chief Financial Officer, John Marino, have evaluated our disclosure controls and procedures, as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Act”), as of the end of the period covered by this report. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer each have concluded that
our disclosure controls and procedures are effective in ensuring that information required to be disclosed by us in the reports that we file or submit under the Act is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Such controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed is accumulated and communicated
to our management, including our principal executive and principal financial officers, to allow timely decisions regarding disclosure.
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(b)
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Changes in Internal Control Over Financial Reporting
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Our management, including our Chief Executive Officer and Chief Financial Officer, has reviewed our internal control over financial reporting, as defined in Rule 13a-15 (f) under the Act. There were no changes in internal control over financial reporting that occurred during the fiscal quarter covered by this report that have materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
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PART II.
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OTHER INFORMATION
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ITEM 1.
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LEGAL PROCEEDINGS
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From time-to-time we may be involved in litigation that arises in the normal course of business. As of the date of this Form 10-Q, we are not a party to any litigation that management believes could reasonably be expected to have a material adverse effect on our financial position or results of operations for an annual period.
In addition to the other information set forth in this Quarterly Report, you should carefully consider the factors discussed in Part I, Item 1A. “Risk Factors” in our Annual Report, as updated in our subsequent quarterly reports. The risks described in our Annual Report are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be
immaterial also may materially adversely affect our business, financial condition and/or operating results.
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ITEM 5.
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OTHER INFORMATION
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On April 27, 2010, we announced via press release our financial results for the three-month period ended March 31, 2010. A copy of our press release is included herein as Exhibit 99.1 and incorporated herein by reference.
The information furnished under Part II, Item 5 of this Quarterly Report, including Exhibit 99.1, shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933, except as shall be expressly set forth by specific reference in such filing.
ITEM 6.
EXHIBITS
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(a)
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The following exhibits are included herein:
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Exhibit No.
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Name
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31.1
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Certification Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended.
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31.2
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Certification Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended.
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32
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Certification Pursuant to 18 U.S.C. Section 1350
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99.1
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Press release to announce earnings, dated April 27, 2010.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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1
ST
UNITED BANCORP, INC.
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(Registrant)
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Date:
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April 27, 2010
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By: /s/ John Marino
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JOHN MARINO
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PRESIDENT AND CHIEF FINANCIAL OFFICER
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(Mr. Marino is the principal financial officer and has been duly authorized to sign on behalf of the Registrant)
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EXHIBIT INDEX
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EXHIBIT
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DESCRIPTION
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31.1
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Certification Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended.
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31.2
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Certification Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended.
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32
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Certification Pursuant to 18 U.S.C. Section 1350
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99.1
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Press release to announce earnings, dated April 27, 2010
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