10-K 1 i00046_fubc-10k.htm

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

 

FORM 10-K

ý ANNUAL FINANCIAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2013
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____________ to ____________

 

(Exact name of Registrant as specified in its charter)

Florida   001-34462   65-0925265
(State of Incorporation)   (Commission File Number)   (IRS Employer Identification No.)
         
One North Federal Highway, Boca Raton, Florida   33432
(Address of principal executive offices)   (Zip Code)

 

    (561) 362-3435    
(Registrant’s telephone number, including area code)
 
Securities registered pursuant to Section 12(b) of the Act:

 

Title of Each Class   Name of Each Exchange on which Registered
Common Stock, $0.01 par value   The NASDAQ Stock Market LLC
     

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes o No x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

  Large accelerated filer o Accelerated filer x Non-accelerated filer o Smaller Reporting Company o
         

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

The aggregate market value of the registrant’s common stock, $0.01 par value per share, held by non-affiliates of the registrant on June 30, 2013, the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $210 million (based on the sales price at which of the Registrant’s common stock was last sold on that date). Shares of the registrant’s common stock held by each officer and director and each person known to the registrant to own 10% or more of the outstanding voting power of the registrant have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not a determination for other purposes.

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class   Outstanding at January 31, 2014
Common Stock, $0.01 par value per share   34,288,841 shares
     

DOCUMENTS INCORPORATED BY REFERENCE

Portions of our Proxy Statement for the Annual Meeting of Shareholders to be held on May 27, 2014 are incorporated by reference in Part III.

 

 

 

 
 

1ST UNITED BANCORP, INC.
For the year ended December 31, 2013

TABLE OF CONTENTS

        Page
         
PART I      
         
  Item 1. Business   3
  Item 1A. Risk Factors   33
  Item 1B. Unresolved Staff Comments   45
  Item 2. Properties   46
  Item 3. Legal Proceedings   47
  Item 4. Mine Safety Disclosures   47
       
PART II      
         
  Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities   47
  Item 6. Selected Financial Data   48
  Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations   50
  Item 7A. Quantitative and Qualitative Disclosures about Market Risk   74
  Item 8. Financial Statements and Supplementary Data   74
  Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure   125
  Item 9A. Controls and Procedures   125
  Item 9B. Other Information   125
         
PART III      
         
  Item 10. Directors, Executive Officers and Corporate Governance   126
  Item 11. Executive Compensation   126
  Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters   126
  Item 13. Certain Relationships and Related Transactions and Director Independence   127
  Item 14. Principal Accountant Fees and Services   127
         
PART IV      
         
  Item 15. Exhibits and Financial Statement Schedules   127
         
Signatures   131

 

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INTRODUCTORY NOTE

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

This Annual Report on Form 10-K 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. In addition to those risks discussed in this Annual Report under Item 1A Risk Factors, factors that could cause our actual results to differ materially from those in the forward-looking statements include, without limitation:

§our ability to comply with the terms of the loss sharing agreements with the FDIC;
§legislative or regulatory changes, including the Dodd-Frank Wall Street Reform and Consumer Protection Act and Basel III;
§our ability to integrate the business and operations of companies and banks that we have acquired and those we may acquire in the future;
§the failure to achieve expected gains, revenue growth, and/or expense savings from past and future acquisitions;
§the strength of the United States economy in general and the strength of the local economies in which we conduct operations;
§the accuracy of our financial statement estimates and assumptions, including the estimate for our loan loss provision and the FDIC loss share receivable;
§the frequency and magnitude of foreclosure of our loans;
§increased competition and its effect on pricing, including the impact on our net interest margin from repeal of Regulation Q; our customers’ willingness to make timely payments on their loans;
§changes in the securities and real estate markets;
§changes in monetary and fiscal policies of the U.S. Government;
§inflation, interest rate, market and monetary fluctuations;
§the effects of our lack of a diversified loan portfolio, including the risks of geographic and industry concentrations;
§our need and our ability to incur additional debt or equity financing;
§the effects of harsh weather conditions, including hurricanes, and man-made disasters;
§our ability to comply with the extensive laws and regulations to which we are subject; the willingness of customers to accept third-party products and services rather than our products and services and vice versa;
§technological changes;
§negative publicity and the impact on our reputation;
§the effects of security breaches and computer viruses that may affect our computer systems;
§changes in consumer spending and saving habits;
§changes in accounting principles, policies, practices or guidelines;
§the limited trading activity of our common stock;
§the concentration of ownership of our common stock; our ability to retain key members of management;
§anti-takeover provisions under federal and state law as well as our Articles of Incorporation and our Bylaws;
§other risks described from time to time in our filings with the Securities and Exchange Commission;
§and our ability to manage the risks involved in the foregoing.

 

However, other factors besides those listed in Item 1A Risk Factors or discussed in this 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.

 

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PART I

Item 1. Business

About Us

General

We are a financial holding company headquartered in Boca Raton, Florida. Our principal subsidiary, 1st United Bank, is a Florida-chartered commercial bank, which operates 21 banking centers in Florida, from Central Florida through the Treasure Coast to Southeast Florida, including Brevard, Broward, Hillsborough, Indian River, Miami-Dade, Orange, Palm Beach and Pinellas Counties. Over the past ten years, we have grown under the stewardship of our highly experienced executive management team. Specifically, we have:

  increased total assets from $66.8 million to $1.845 billion;

 

  increased total net loans from $39.6 million to $1.125 billion;

 

  grown non-interest bearing deposits from $4.6 million to $526 million; and

 

  expanded our branch network from one location to 21 locations.

 

In this report, the terms “Company,” “Bancorp,” “we,” “us,” or “our” mean 1st United Bancorp, Inc. and all of its consolidated subsidiaries. “1st United” or the “Bank” means 1st United Bank, a Florida chartered commercial bank.

Our Competitive Advantage

We believe we distinguish ourselves from our competitors through the following competitive strengths:

Community Bank Philosophy. We operate with a community banking philosophy where we seek to develop broad customer relationships based on service and convenience while maintaining our conservative approach to lending and strong asset quality. We operate with a private bank ethic for our business, professional, and individual clients. Due to large banking organizations moving their focus to large corporate clients rather than customers in our local communities and the heightened level of consolidation activity among banks in Florida, we believe that our emphasis on personal service will enhance our ability to compete successfully and capitalize on dissatisfaction among customers of larger institutions.

Experienced Management. We believe our success has been built on the strength of our management team and board of directors. Our executive management team has extensive Florida banking experience, collectively over 128 years in the Florida banking market, as well as valuable community and business relationships in our core markets.

Growth Strategies. We have maintained our focus on a strategy of opportunistic expansion and have sought to enhance our franchise by increasing market share in our core markets. As a result, we have completed three FDIC-assisted transactions and two whole bank acquisitions since December 2009. Our executive management team has extensive merger and acquisition experience which we intend to leverage along with our favorable financial position to take advantage of acquisitions that may become available in our market areas. We will continue to be disciplined as it pertains to future acquisitions and only pursue those opportunities that meet our strategic objectives.

Market Opportunity. We operate in what we believe to be some of the most attractive markets in Florida. The community banking industry in these markets remains somewhat distressed. We believe that this distress will give us opportunities to acquire other institutions and increase our market share. We believe we are well-positioned to capitalize on these opportunities.

Focus on Asset Quality. We strive to maintain a high-quality loan portfolio and maintain the quality of our assets. As a result of what we believe to be conservative underwriting standards, prudent loan approval authority levels and procedures, experienced loan officers with an intimate knowledge of the local market, and diligent monitoring of the loan portfolio, our asset quality continues to compare favorably relative to industry and local peers.

Core Deposit Growth. A key source of our strong balance sheet growth has been the generation of a stable base of core deposits. It is our strategy to have a mix of core deposits, which favors non-interest deposits in the range of 15% to 30% of total deposits with time deposits comprising 50% or less of total deposits. As of December 31, 2013, approximately 34% and 19% of our total deposits were comprised of non-interest deposits and time deposits, respectively.

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Net Interest Margin. Our stable funding base consisting primarily of core deposits, coupled with our credit quality, results in a higher net interest margin compared to our peer group of Florida-chartered commercial banks with assets between $500 million and $2 billion, based on data derived from the FDIC Call Reports. Our net interest margin for the fiscal year ended December 31, 2013 was 5.29%. Inclusive within the 5.29% was 1.13% related to the resolution and change in cash flows on acquired assets. Although the historical low interest rate environment has reduced the relative benefit of our low cost funding base, we believe the consistency and low cost nature of our deposits will prove to be more of a competitive advantage in a rising rate environment.

Our Business Strategy

Our business strategy has been to maintain a community bank philosophy, which we believe has been enhanced despite the prodigious growth we have experienced recently, of focusing on and understanding the individualized banking needs of the businesses, professionals and other residents of the local communities surrounding our banking centers. We believe this focus allows us to be more responsive to our customers’ needs and provide a high level of personal service and differentiates us from larger competitors. As a locally managed institution with strong ties to the community, our core customers are primarily comprised of small-to medium-sized businesses, professionals and community organizations who prefer to build a banking relationship with a community bank that offers and combines high quality, competitively priced banking products and services with personalized service. Because of our identity and origin as a locally-owned and operated bank, we believe that our level of personal service provides a competitive advantage over the larger out-of-state banks, which tend to consolidate decision-making authority outside local communities.

A key aspect of our current business strategy is to foster a community-oriented culture where our customers and employees establish long-standing and mutually beneficial relationships. We believe that with our focus on community banking needs and customer service, together with a comprehensive suite of deposit and loan products typically found at larger banks, a highly experienced management team and strategically located banking centers, we are well-positioned to be a strong competitor within our market area. A central part of our strategy is generating core deposits to support growth of a strong and stable loan portfolio.

Growth Through Acquisitions

We intend to continue to opportunistically expand and grow our business by building on our business strategy and increasing market share in our key Florida markets. We believe the demographics and growth characteristics within the communities we serve will provide significant franchise enhancement opportunities to leverage our core competencies while acquisitive growth will enable us to take advantage of the extensive infrastructure and scalable platform that we have assembled.

A significant portion of our growth has been through acquisitions. Under our current management team, we have consummated eight transactions since 2004:

Acquired Bank   Headquarters   Year Acquired
First Western Bank   Cooper City, Florida   2004
Equitable Bank   Fort Lauderdale, Florida   2008
Citrus Bank, N.A.(1)   Vero Beach, Florida   2008
Republic Federal Bank, N.A. (2)   Miami, Florida   2009
The Bank of Miami, N.A.(2)   Miami, Florida   2010
Old Harbor Bank of Florida (2)   Clearwater, Florida   2011
Anderen Financial, Inc.   Palm Harbor, Florida   2012
Enterprise Bancorp, Inc.   North Palm Beach, Florida   2013

 

           

 

(1) Branch acquisition

 

(2) FDIC-assisted transaction

Recent Developments

Acquisition 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 “EBI 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 EBI Merger Agreement) which was comprised of $5.1 million in cash, $20.1 million in retained classified and non-performing loans, $18.3 million in retained non-investment grade and non-performing investments, other investments and derivatives and retained $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.

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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 $5.5 million. We integrated the EBI operations during the third quarter of 2013.

Acquisition of Anderen 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 (Anderen Merger Agreement”), dated October 24, 2011. Pursuant to the terms of the Anderen 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 $5.6 million as a result of the merger which is not deductible for tax purposes. Total net deferred tax assets acquired were $5.7 million, primarily related to loss carry forwards. We completed the integration of AFI in June 2012.

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 Bank of Florida (“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.

Investment Activity

Our consolidated securities portfolio is managed to minimize interest rate risk, maintain sufficient liquidity, and optimize return. The portfolio includes U.S. treasuries, municipal securities, residential collateralized mortgage obligations and commercial and residential mortgage-backed securities. Our financial planning anticipates income streams generated by the securities portfolio based on normal maturity and reinvestment.

The following table sets forth the carrying amount of our investments portfolio, all of which were classified as available-for-sale as of December 31, 2013, 2012 and 2011:

   December 31,
 (Dollars in thousands)  2013  2012  2011
Fair value of investment in:         
U.S. Treasury  $918   $—     $—   
Municipal securities   5,604    469    —   
Residential collateralized mortgage obligations   818    3,759    7,757 
Commercial mortgage-backed   4,074    —      —   
Residential mortgage-backed   316,547    255,894    193,965 
   $327,961   $260,122   $201,722 

 

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The following table sets forth the combined fair value and weighted average yield of our securities available for sale portfolio as of December 31, 2013. Securities not due at a single maturity date, primarily mortgage-backed securities, are shown separately.

   Fair
Value
  Weighted
Average
Yield
(Dollars in thousands)      
U.S. Treasury          
One year or less  $—      —  %
Over one year through five years   —      —   
Over five through ten years   918    2.00 
Over ten years   —      —   
Total  $918    2.00%
           
Municipal Securities          
One year or less  $—      —  %
Over one year through five years   —      —   
Over five through ten years   —      —   
Over ten years   5,604    2.95 
Total  $5,604    2.95%
           
Residential Collateralized Mortgage Obligations          
One year or less  $—      —  %
Over one year through five years   —      —   
Over five through ten years   —      —   
Over ten years   —      —   
Residential collateralized mortgage obligations   818    1.08 
Total  $818    1.08%
           
Commercial Mortgage-backed Securities          
One year or less  $—      —  %
Over one year through five years   —      —   
Over five year through ten years   4,074    2.40 
Over ten years   —      —   
Total  $4,074    2.40%
           
Residential Mortgage-backed Securities          
One year or less  $—      —  %
Over one year through five years   —      —   
Over five year through ten years   —      —   
Over ten years   —      —   
Residential mortgage-backed   316,547    2.49 
Total  $316,547    2.49%
           
Total Fair Value  $327,961    2.48%
Total Amortized Cost  $341,200    2.48%

 

As of December 31, 2013, we did not hold any tax-exempt obligations or instruments from issuers where the amortized cost or market value represented more than ten percent of shareholders’ equity.

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Lending Activity

We have adopted the strategy of presenting a robust and diverse series of lending channels and a suite of loan and loan-related products normally associated with larger banks. While this strategy demands an investment in experienced personnel and enabling systems, we believe it distinguishes us from competing community banks. We intend to continue to provide for the financing needs of the community we serve by offering a variety of loans, including:

  commercial loans, which will include collateralized loans for working capital (including inventory and receivables), business expansion (including real estate construction, acquisitions and improvements), and purchase of equipment and machinery;

 

  small business loans, including SBA lending;

 

  Export-Import Bank insured or guaranteed loans;

 

  residential real estate loans to enable borrowers to purchase, refinance, construct upon or improve real property, and home equity loans; and

 

  consumer loans, including collateralized and uncollateralized loans for financing automobiles, boats, home improvements, and personal investments.

 

We follow a lending policy that permits us to take prudent risks to assist consumers and businesses in our market area. We do not originate any subprime loans. Loan-related interest rates will vary depending on our cost of funds, the loan maturity, and the degree of risk. We are expected to meet the credit needs of customers in the communities we serve while allowing prudent liquidity through our securities portfolio. We expect this positive, community-oriented lending philosophy to translate into a sustainable volume of quality loans into the foreseeable future.

We also help enhance loan quality by staffing with experienced, well-trained lending officers capable of soliciting loan business. Our lending officers, as well as our credit officers and loan committees, recognize and appreciate the importance of exercising care and good judgment in underwriting loans, which supports our safety and profitability goals.

At December 31, 2013, 2012, 2011, 2010 and 2009, the composition of our loan portfolio was as follows:

   December 31,
   2013  2012  2011  2010  2009
(Dollars in thousands)  Amount  % of
Total
  Amount  % of
Total
  Amount  % of
Total
  Amount  % of
Total
  Amount  % of
Total
                               
Residential real estate  $178,844    16%  $165,917    18%  $196,511    22%  $228,354    26%  $200,877    30%
                                                   
Commercial   210,264    18%   179,498    20%   170,183    20%   165,203    19%   115,781    17%
                                                   
Commercial real estate   699,851    62%   514,574    56%   457,276    52%   434,855    50%   282,783    43%
                                                   
Construction and land development   35,286    3%   41,889    5%   43,473    5%   33,893    4%   55,689    8%
                                                   
Consumer and others   9,735    1%   11,290    1%   12,093    1%   13,626    1%   11,873    2%
                                                   
Total loans  $1,133,980    100%  $913,168    100%  $879,536    100%  $875,931    100%  $667,003    100%
                                                   
Allowance for loan losses   (9,648)        (9,788)        (12,836)        (13,050)        (13,282)     
                                                   
Net deferred (fees) costs   239         220         53         (138)        137      
                                                   
Net loans  $1,124,571        $903,600        $866,753        $862,743        $653,858      
                                                   

 

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The following charts illustrate the number of loans in our loan portfolio as of December 31, 2013 and December 31, 2012.

Loan Portfolio as of December 31, 2013

(Dollars in thousands)  Total
Loans
  Total  Percent of
Loan Portfolio
  Percent of
Total Assets
Loan Types                    
Residential:                    
First mortgages   490   $117,830    10.39%   6.39%
HELOCs and equity   400    61,014    5.38%   3.31%
                     
Commercial:                    
Secured – non-real estate   697    145,298    12.81%   7.87%
Secured – real estate   91    57,052    5.03%   3.09%
Unsecured   57    7,914    0.70%   0.43%
                     
Commercial Real Estate:                    
Owner occupied   268    209,467    18.47%   11.35%
Non-owner occupied   328    451,982    39.85%   24.50%
Multi-family   72    38,402    3.39%   2.08%
                     
Construction and Land Development:                    
Construction   12    7,366    0.65%   0.40%
Improved land   24    16,538    1.46%   0.90%
Unimproved land   19    11,382    1.00%   0.62%
                     
Consumer and other   178    9,735    0.87%   0.53%
                     
Total December 31, 2013   2,636   $1,133,980    100.00%   61.47%

 

Loan Portfolio as of December 31, 2012

(Dollars in thousands)  Total
Loans
  Total  Percent of
Loan Portfolio
  Percent of
Total Assets
Loan Types                    
Residential:                    
First mortgages   461   $109,562    12.00%   6.99%
HELOCs and equity   315    56,355    6.17%   3.60%
                     
Commercial:                    
Secured – non-real estate   669    127,514    13.96%   8.14%
Secured – real estate   86    43,613    4.78%   2.78%
Unsecured   43    8,371    0.92%   0.53%
                     
Commercial Real Estate:                    
Owner occupied   233    187,007    20.48%   11.94%
Non-owner occupied   268    290,858    31.85%   18.56%
Multi-family   71    36,709    4.02%   2.34%
                     
Construction and Land Development:                    
Construction   6    3,481    0.38%   0.22%
Improved land   34    20,117    2.20%   1.28%
Unimproved land   25    18,291    2.00%   1.17%
                     
Consumer and other   196    11,290    1.24%   0.72%
                     
Total December 31, 2012   2,407   $913,168    100.00%   58.27%

 

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Of the loan portfolio as of December 31, 2013, 707 loans with a carrying value of $246.7 million (21.8%) are subject to loss sharing agreements with the FDIC ( “Loss Sharing Agreements”) as compared to 892 loans with a carrying value of $327.1 million (35.8%) which were subject to the Loss Sharing Agreements at December 31, 2012. In addition, at December 31, 2013, included in commercial non-real estate secured loans are approximately $12.6 million in Export -Import Bank (“EXIM”) loans which have either insurance or a guarantee of between 90% and 100% from the Export-Import Bank of the United States.

At December 31, 2013, our loan interest rate sensitivity was as follows:

   Maturity and/or Re-pricing Period
(Dollars in thousands)  Total  <1 year
Fixed
  <1 year
Adjustable
  1 to 5
years
Fixed Rate
  1 to 5
years
Adjustable
Rate
  >5 years
Fixed
Rate
  >5 years
Adjustable
Rate
Commercial  $210,264   $27,610   $93,051   $31,951   $14,300   $42,002   $1,350 
Residential real estate   117,830    5,362    53,347    9,688    14,924    34,038    471 
Commercial real estate   699,851    16,558    138,728    178,499    147,206    209,395    9,465 
Construction land development   35,286    1,545    24,588    7,373    148    953    679 
Home equity lines of credit   61,014    28    55,511    4,242    91    1,142    —   
Consumer and other   9,735    909    6,916    1,866    —      44    —   
Total loans  $1,133,980   $52,012   $372,141   $233,619   $176,669   $287,574   $11,965 

 

As shown in the table above, a majority of our loan portfolio has either adjustable rates (approximately 49% of the loan portfolio) or shorter maturity terms.

Real Estate Loans

Real Estate Loans – Commercial

Through our lending division, our commercial real estate loan portfolio includes loans secured by office buildings, warehouses, retail stores and other properties, which are primarily located in or near our markets. Commercial real estate loans are generally originated in amounts up to 70% to 80% of the appraised value of the property securing the loan. In determining whether to originate or purchase multi-family or commercial real estate loans, we consider such factors as the financial condition of the borrower and the debt service coverage provided by the property, business enterprise, related borrowing entities, and guarantors.

Appraisals on properties securing commercial real estate loans originated by us are performed by an independent appraiser at the time the loan is made and are reviewed internally by our Credit and Risk Management division. In addition, our underwriting procedures generally require verification of the borrower’s credit history, income and financial condition, banking relationships, and income and expenses for the property. We generally obtain personal guarantees for our commercial real estate loans.

Real Estate Loans – Residential

We originate a mix of fixed rate and adjustable rate residential mortgage loans. Lending officers contact local builders, realtors, government officials, community leaders, and other groups to determine the residential credit needs of the communities we serve.

We offer adjustable rate mortgages, which are commonly referred to as ARMs, and maintain these ARMs in our portfolio or sell the ARMs in the secondary market. We also originate fixed rate loans from within our primary service area. The majority of fixed rate loans are either held in portfolio or sold in the secondary mortgage market.

Our ARMs generally have interest rates that adjust annually at a margin over the weekly average yield on U.S. Treasury securities published by the Federal Reserve, adjusted to a constant maturity of one year. The maximum interest rate adjustment of our ARMs are generally 2% annually and 6% over the life of the loan, above or below the initial rate on the loan.

9
 

We embrace written, non-discriminatory underwriting standards for use in the underwriting and review of every loan considered for origination or purchase. Our board of directors reviews and approves these underwriting standards annually.

Our underwriting standards for residential mortgage loans generally conform to standards established by Fannie Mae and Freddie Mac. Our underwriters and secondary market buyers obtain or review each loan application to determine the borrower’s ability to repay, and confirm significant information through the use of credit reports, financial statements, employment and other verifications.

When originating a residential real estate mortgage loan, we obtain a new appraisal of the property from an independent third party to determine the adequacy of the collateral, and the appraisal will be reviewed by one of the underwriters. Borrowers are required to obtain casualty insurance and, if applicable, flood insurance in amounts at least equal to the outstanding loan balance or the maximum amount allowed by law.

We require that a survey be conducted and title insurance be obtained, insuring the priority of our mortgage lien. Underwriters review all loans to ensure that guidelines are met or that waivers are obtained in limited situations where offsetting factors exist.

Construction - Residential and Commercial Real Estate Loans

The construction loan portfolio includes residential real estate, commercial real estate and homeowners’ association projects. Generally, construction loans have terms which match permanent financing offered by us. During the construction phase, the borrower may pay interest only.

Through our lending divisions, we originate real estate construction loans to individuals for the construction of their residences, to businesses and business owners primarily for owner-occupied commercial real estate, and to homeowners’ associations for general repair and/or improvements to the properties. Our construction loans typically have terms up to 18 months, and generally, the maximum loan-to-value ratio at origination is 80%. The loan-to-cost maximum ratio is generally 70% to 80% for residential and commercial construction and up to 100% for homeowners’ associations.

We provide construction loans on commercial real estate projects secured by industrial properties, office buildings or other property. We emphasize projects that are owner-occupied. Following the construction phase, loans will be converted to permanent financing.

Land Loans

Our portfolio includes exposure to land development, both residential and commercial. Typically, borrowers have or had preliminary plans for development and were waiting for final plans to be completed to submit for construction financing.

The following chart illustrates the composition of our construction and land development loan portfolio in relation to total loans as December 31, 2013, 2012 and 2011.

   December 31,
   2013  2012  2011
(Dollars in thousands)  Balance  % of
Loans
  Balance  % of
Loans
  Balance  % of
Loans
Construction                              
Residential  $272    0.02%  $2,721    0.30%  $3,135    0.36%
Residential Spec   1,423    0.13%   —      —  %   1,492    0.17%
Commercial   5,671    0.50%   760    0.08%   263    0.03%
Commercial Spec   —      0.00%   —      —  %   3,283    0.37%
Land Development                              
Residential   5,377    0.47%   4,798    0.53%   1,918    0.22%
Residential Spec   5,223    0.45%   11,829    1.28%   18,473    2.11%
Commercial   6,044    0.53%   8,538    0.93%   1,048    0.12%
Commercial Spec   11,276    0.99%   13,243    1.45%   13,861    1.57%
Total  $35,286    3.09%  $41,889    4.57%  $43,473    4.95%

 

10
 

Approximately $6.5 million or 18.4% of the construction and land development loan portfolio at December 31, 2013 is covered by the Loss Sharing Agreements. This compares to $8.4 million or 20.1% of the construction and land development loan portfolio at December 31, 2012 covered by the Loss Sharing Agreements.

Consumer Loans

We originate consumer loans bearing both fixed and prime-based variable interest rates. We originate our loans directly through our banking centers, business bankers and residential lenders. Residential real estate secured loans are originated through our lenders who are licensed to make these loans.

We focus our consumer lending on the origination of direct first or second mortgage loans and home equity loans (secured by a junior lien on residential real property), and home improvement loans. These loans are typically based on a maximum 60% to 80% loan-to-value ratio. Second mortgage and home improvement loans generally will originate on either a line of credit or a fixed term basis ranging from 5 to 30 years. We also extend personal loans, which may be secured by various forms of collateral, both real and personal, or to a minimal extent, on an unsecured basis.

Commercial Loans

We focus on the commercial loan market comprised of small to medium-sized businesses with combined borrowing needs generally up to $10.0 million. These businesses include professional associations (physicians, law firms, and accountants), medical services, retail trade, construction, transportation, wholesale trade, manufacturing, and tourism-related service industries.

Our commercial loans are primarily derived from our market area and underwritten on the basis of the borrowers’ ability to service such debt from recurring income. As a general practice, we will take as collateral a security interest in any available real estate, equipment, or other assets, although such loans may also be made on an uncollateralized, but guaranteed, basis. Short-term assets primarily secure collateralized working capital loans, whereas long-term assets primarily collateralize term loans.

In certain situations, we use various loan programs sponsored by the SBA. Properly utilized, SBA loans can help to reduce our loan portfolio risk and can generate non-interest income.

As part of the acquisition of Republic Federal Bank, N.A. (“Republic”), we obtained an EXIM lending operation. Our EXIM lending operation makes loans to companies that export U.S. goods and services to international markets and makes loans to foreign companies to facilitate the purchase of U.S. goods. Loans made under this program are insured or guaranteed between 90% and 100% by the Export Import Bank of the United States. At December 31, 2013, we had approximately $12.6 million in EXIM loans.

Loan Administration and Underwriting

Through our Credit and Risk Management division, we use our loan origination underwriting procedures to assess both the borrower’s ability to make principal and interest payments and the value of the collateral securing the loan. Our Credit and Risk Management division is responsible for a battery of management and board risk management monitoring and for reporting to various management and board committees. To manage risk, we have adopted written loan policies and procedures, and our loan portfolio is administered under a defined process. That process includes guidelines for loan underwriting standards and risk assessment, procedures for loan approvals, loan grading, ongoing identification and management of credit deterioration and portfolio reviews to assess loss exposure and to test compliance with our credit policies and procedures.

Our Board of Directors has approved set levels of lending authority to the Management Loan Committee, as well as limited authority for certain officers based on the loan type and amount. All use of delegated loan authorities is preceded by a determination of the worthiness of the loan request by the Credit and Risk Management division. Typically, the Management Loan Committee reviews loan requests and if a particular request exceeds the loan authority limits delegated to this committee, these requests, if approved, are presented to 1st United’s Board Loan Committee for final approval.

Before and after loan closing, our loan operations personnel review all loans for adequacy of documentation and compliance with regulatory requirements. Our loan review personnel analyze loans over certain size thresholds, problem loans and loans with certain loan quality ratings to ensure that appropriate credit risk ratings are assigned and ultimately to assist in determining the adequacy of the allowance for loan losses.

11
 

Loan Quality

Management seeks to maintain a high quality portfolio of loans through sound underwriting and lending practices. As of December 31, 2013 and 2012, approximately 86% and 84%, 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 activities 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 loans to borrowers engaged in similar business-related 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 December 31, 2013 and 2012, there was 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) that exceeded 10.0% of total loans, except that as of such dates loans collateralized with mortgages on real estate represented 86% and 84%, respectively, of the loan portfolio and were to borrowers in varying activities, businesses and geographic markets.

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. At December 31, 2013, we had $18.6 million of OREO property of which $10.8 million were a result of the Old Harbor, The Bank of Miami, N.A. (“TBOM”) and Republic acquisitions and are covered under their respective Loss Sharing Agreements. We had $19.5 million of OREO property as of December 31, 2012, of which $13.2 million were a result of the Old Harbor, TBOM and Republic acquisitions and covered under their respective Loss Sharing Agreements.

The following is a summary of other real estate owned as of December 31, 2013 and 2012:

   2013  2012
 (Dollars in thousands)  Assets Not
Subject
to Loss Sharing
Agreements
  Assets Subject to
Loss Sharing
Agreements
  Total  Assets Not
Subject
to Loss Sharing
Agreements
  Assets Subject to Loss Sharing
Agreements
  Total
Commercial real estate  $5,761   $8,979   $14,740   $5,708   $10,372   $16,080 
Residential real estate   2,002    1,838    3,840    646    2,803    3,449 
Total  $7,763   $10,817   $18,580   $6,354   $13,175   $19,529 

 

12
 

As of December 31, 2013, we had approximately $1.1 million of the total of $18.6 million in other real estate under contract to sell at approximately the carrying value of the asset.

We have identified certain assets as risk elements. 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. These assets present more than the normal risk that we will be unable to eventually collect or realize their full carrying value.

Our risk elements at December 31, 2013, 2012, 2011, 2010 and 2009 were as follows:

   December 31, 2013  December 31, 2012
 (Dollars in thousands)  Assets Not
Subject to
Loss Sharing
Agreements
  Assets
Subject to
Loss Sharing
Agreements
  Total  Assets Not
Subject to
Loss Sharing
Agreements
  Assets
Subject to
Loss Sharing
Agreements
  Total
Non-Accrual Loans                              
Residential real estate  $48   $3,137   $3,185   $2,019   $4,085   $6,104 
Home equity lines   491    96    587    796    103    899 
Commercial real estate   3,297    3,045    6,342    3,430    6,393    9,823 
Construction and land development   3,688    35    3,723    3,440    288    3,728 
Commercial   1,518    455    1,973    185    539    724 
Consumer   26    —      26    29    —      29 
Total  $9,068   $6,768   $15,836   $9,899   $11,408   $21,307 
                               
Accruing => 90 days past due                              
Residential real estate  $—     $—     $—     $—     $—     $—   
Home equity lines   —      —      —      —      —      —   
Commercial real estate   —      —      —      1,457    —      1,457 
Construction and land development   —      —      —      —      —      —   
Commercial   —      —      —      620    32    652 
Consumer   —      —      —      —      —      —   
Total  $—     $—     $—     $2,077   $32   $2,109 
                               
Total non-accruing loans  $9,068   $6,768   $15,836   $9,899   $11,408   $21,307 
Accruing => 90 days past due   —      —      —      2,077    32    2,109 
Foreclosed real estate   7,763    10,817    18,580    6,354    13,175    19,529 
Total non-performing assets   16,831    17,585    34,416    18,330    24,615    42,945 
Performing troubled debt restructured loans   17,281    1,365    18,646    23,844    429    24,273 
Total non-performing assets and performing troubled debt restructured loans  $34,112   $18,950   $53,062   $42,174   $25,044   $67,218 
                               
Ratios                              
Total non-accruing and accruing => 90 days past due loans to total loans   0.80%   0.60%   1.40%   1.31%   1.25%   2.56%
Total non-performing assets to total assets   0.91%   0.95%   1.87%   1.17%   1.57%   2.74%
Total non-performing assets and performing troubled debt restructured loans to total assets   1.85%   1.03%   2.88%   2.69%   1.60%   4.29%

 

13
 

 

(Dollars in thousands)  December 31,
   2011  2010  2009
Non-Accrual Loans               
Residential real estate  $9,725   $9,784   $469 
Home equity lines   967    1,638    —   
Commercial real estate   18,650    8,885    8,566 
Construction and land development   431    1,877    5,258 
Commercial   13,053    314    1,277 
Other   3    289    —   
Total  $42,829   $22,787   $15,570 
                
Accruing => 90 days past due               
Residential real estate  $—     $—     $—   
Home equity lines   —      —      —   
Commercial real estate   647    —      —   
Construction and land development   —      —      —   
Commercial   —      —      54 
Other   —      —      —   
Total  $647   $—     $54 
                
Total non-accruing loans  $42,829   $22,787   $15,570 
Accruing => 90 days past due   647    —      54 
Foreclosed real estate   13,512    7,409    635 
Total non-performing assets   56,988    30,196    16,259 
                
Performing troubled debt restructured loans   21,837    14,672    1,990 
Total non-performing assets and performing troubled debt restructured loans  $78,825   $48,868   $18,249 
                
Ratios               
Total non-accruing loans to total loans   4.94%   2.60%   2.34%
Total non-performing assets to total assets   4.01%   2.38%   1.60%
Total non-performing assets and performing troubled debt restructured loans to total assets   5.55%   3.54%   1.80%

 

Included in non-accrual loans at December 31, 2013 are $2.8 million purchase credit impaired loans for which cash flows could not be reasonably estimated with $2.7 million of these loans subject to Loss Sharing Agreements. Additionally, included in non-accrual loans at December 31, 2013 and 2012 are $4.2 million and $2.2 million respectively, of loans performing in accordance with their contractual terms but which the Company has placed on non-accrual due to identified risks within the credits. Of the nonperforming assets and performing troubled debt restructuring at December 31, 2013, $19.0 million were acquired in the Old Harbor, TBOM and Republic transactions and are all covered under the Loss Sharing Agreements as compared to $25.0 million at December 31, 2012 for a decrease of $6.0 million. These assets were initially recorded at fair value and as such we do not expect to incur any significant future losses on these assets.

At December 31, 2013, we had approximately $1.1 million in other real estate owned approved for sale and pending closing for which no additional losses are expected.

During the year ended December 31, 2013, for nonperforming assets not subject to Loss Sharing Agreements, we had approximately $895,000 in non-accrual loans which were charged-off, $7.1 million were paid off or transferred to OREO, $7.2 million were added to non-accrual and $29,000 were returned to accrual status.

14
 

Past due loans, categorized by loans subject to Loss Sharing Agreements and those not subject to Loss Sharing Agreements, at December 31, 2013 and 2012 were as follows:

December 31, 2013

   Accruing 30 - 59  Accruing 60-89  Non-Accrual/Accrual
90 days and over
  Total
(Dollars in thousands)  Loans
Subject to
Loss Sharing
Agreements
  Loans Not
Subject to
Loss Sharing
Agreements
  Loans
Subject to
Loss Sharing
Agreements
  Loans Not
Subject to
Loss Sharing
Agreements
  Loans
Subject to
Loss Sharing
Agreements
  Loans Not
Subject to
Loss Sharing
Agreements
  Loans
Subject to
Loss Sharing
Agreements
  Loans Not
Subject to
Loss Sharing
Agreements
Residential
real estate
  $333   $1,085   $162   $24   $3,233   $539   $3,728   $1,648 
Commercial   —      461    —      —      455    1,518    455    1,979 
Commercial
real estate
   —      —      —      1,737    3,045    3,297    3,045    5,034 
Construction and land development   —      —      —      —      35    3,688    35    3,688 
Consumer and other   —      34    —      —      —      26    —      60 
Total December 31, 2013  $333   $1,580   $162   $1,761   $6,768   $9,068   $7,263   $12,409 

 

December 31, 2012

   Accruing 30 - 59  Accruing 60-89  Non-Accrual/accrual and
90 days and over
  Total
(Dollars in thousands)  Loans
Subject to
Loss Sharing
Agreements
  Loans Not
Subject to
Loss Sharing
Agreements
  Loans
Subject to
Loss Sharing
Agreements
  Loans Not
Subject to Loss
Sharing
Agreements
  Loans
Subject to
Loss Sharing
Agreements
  Loans Not
Subject to
Loss Sharing
Agreements
  Loans Subject
to Loss Sharing
Agreements
  Loans Not
Subject to
Loss Sharing
Agreements
Residential
real estate
  $1,013   $292   $1,207   $—     $4,188   $2,815   $6,408   $3,107 
Commercial   —      200    —      94    571    805    571    1,099 
Commercial
real estate
   581    1,873    —      1,707    6,393    4,887    6,974    8,467 
Construction and land development   —      2,767    —      —      288    3,440    288    6,207 
Consumer and other   —      99    —      —      —      29    —      128 
Total December 31, 2012  $1,594   $5,231   $1,207   $1,801   $11,440   $11,976   $14,241   $19,008 

 

Total past due loans decreased $13.6 million from $33.2 million at December 31, 2012 to $19.7 million at December 31, 2013. Past due loans subject to Loss Sharing Agreements decreased by $6.9 from $14.2 million at December 31, 2012 to $7.3 million at December 31, 2013. The decrease was due to a reduction in loans past due 30-89 days of approximately $2.3 million and a reduction in loans past due greater than 90 days and nonaccrual of $4.7 million. Past due loans not subject to Loss Sharing Agreements decreased by $6.6 million from $19.0 million at December 31, 2012 to $12.4 million at December 31, 2013. The decrease was due to a reduction of loans past due 30-59 days of $3.7 million and nonaccrual loans over 90 days past due of $2.9 million due to resolutions during the year ended December 31, 2013. Loans not subject to Loss Sharing Agreements and past due 30-59 days at December 31, 2012 included $4.8 million in loans for which a renewal was pending and finalized and closed in early January 2013.

Modifications of terms for our loans and their inclusion as troubled debt restructurings are based on individual facts and circumstances. Loan modifications that are included as troubled debt restructurings may involve a reduction of the stated interest rate on the loan, extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk, deferral of principal payments and/or forgiveness of principal, regardless of the period of the modification. Generally, we will allow interest rate reductions for a period of less than two years after which the loan reverts back to the contractual interest rate. Each of the loans included as troubled debt restructurings at December 31, 2013 had either an interest rate modification ranging from 6 months to 2 years before reverting back to the original interest rate and/or a deferral of principal payments which can range from 6 to 12 months before reverting back to an amortizing loan. All of the loans were modified due to financial stress of the borrower. The following is a summary of our troubled debt restructurings as of December 31, 2013 and 2012, respectively, which are performing in accordance with their modification agreements.

15
 

 

(Dollars in thousands)  December 31, 2013  December 31, 2012
Residential real estate  $834   $605 
Commercial real estate   15,341    17,315 
Construction and land development   143    2,654 
Commercial   2,328    3,699 
Total  $18,646   $24,273 

 

The decrease of $5.6 million in performing restructured loans to $18.6 million at December 31, 2013 from $24.3 million at December 31, 2012 was due to new performing modifications of $1.8 million offset by $3.8 million in repayments and resolutions of modified loans and $3.6 million in loans that defaulted under the terms of their modification agreement during the year and are included in nonaccrual loans at December 31, 2013

At December 31, 2013, there were 18 loans which were troubled debt restructured loans with a carrying amount of $7.5 million and specific reserves of $608,000 that were non-accrual and included in non-accrual loans. There were 12 loans classified as troubled debt restructured loans with a carrying value of $5.7 million and specific reserves of $66,000 that were non-accrual and included in non-accrual loans at December 31, 2012. Loans retain their accrual status at their time of modification. As a result, if the loan is on non-accrual at the time that it is modified, it stays on non-accrual, and if a loan is accruing at the time of modification, it generally stays on accrual. A loan on non-accrual will be individually evaluated based on sustained adherence to the terms of the modification agreement prior to being placed on accrual status. Troubled debt restructurings are considered impaired. The average yield on the loans classified as troubled debt restructurings was 4.38% and 4.76% at December 31, 2013 and 2012, respectively.

During the year ended December 31, 2013, we had approximately $6.6 million in loans on which we lowered the interest rate prior to maturity to competitively retain a loan. During the year ended December 31, 2012, we had approximately $11.8 million in loans on which we lowered the interest rate prior to maturity to competitively retain the loan. Due to the borrowers’ significant deposit balances and/or the overall quality of the loans, these loans were not included in troubled debt restructurings for the years ended December 31, 2012 and 2011, respectively. In addition, each of these borrowers was not considered to be in financial distress and the modified terms matched current market terms for borrowers with similar risk characteristics. We had no other loans where we extended the maturity or forgave principal that were not already included in troubled debt restructurings or otherwise impaired.

Impaired Loans

The following table presents loans individually evaluated for impairment by class of loan as of December 31, 2013:

   Recorded Investment in Impaired Loans
   With Allowance  With No Allowance
December 31, 2013  Loans Subject to Loss
Sharing Agreements
  Loans Not Subject to Loss
Sharing Agreements
  Loans
Subject to
Loss Sharing
Agreements
  Loans Not
Subject to Loss
Sharing
Agreements
(Dollars in thousands)  Recorded
Investment
  Allowance
for Loan
Losses
Allocated
  Recorded
Investment
  Allowance
for Loan
Losses
Allocated
  Recorded
Investment
  Recorded
Investment
Residential real estate  $1,127   $230   $823   $230   $1,170   $447 
Commercial   409    105    1,537    730    —      1,991 
Commercial real estate   603    99    5,332    314    1,374    12,316 
Construction and land development   —      —      527    271    —      3,303 
Consumer and other   —      —      —      —      —      —   
Total December 31, 2013  $2,139   $434   $8,219   $1,545   $2,544   $18,057 

 

16
 

The following table presents loans individually evaluated for impairment by class of loan as of December 31, 2012:

   Recorded Investment in Impaired Loans
   With Allowance  With No Allowance
December 31, 2012  Loans Subject to Loss
Sharing Agreements
  Loans Not Subject to Loss
Sharing Agreements
  Loans
Subject to
Loss Sharing
Agreements
  Loans Not
Subject to Loss
Sharing
Agreements
(Dollars in thousands)  Recorded
Investment
  Allowance
for Loan
Losses
Allocated
  Recorded
Investment
  Allowance
for Loan
Losses
Allocated
  Recorded
Investment
  Recorded
Investment
Residential Real Estate  $1,454   $395   $549   $79   $1,065   $2,757 
Commercial   473    122    1,453    388    —      2,242 
Commercial Real Estate   3,880    506    7,220    622    648    12,258 
Construction and Land Development   —      —      2,654    1,002    —      3,440 
Consumer and other   —      —      —      —      —      —   
Total December 31, 2012  $5,807   $1,023   $11,876   $2,091   $1,713   $20,697 

 

Overall, impaired loans decreased from $40.1 million at December 31, 2012 to $31.0 million at December 31, 2013, primarily due to resolutions, including sales, payoffs and transfers to other real estate owned, during the year ended December 31, 2013. Impaired loans subject to Loss Sharing Agreements decreased by $2.8 million due to our evaluation of the portfolio. Impaired loans not subject to Loss Sharing Agreement decreased by $6.3 million from $32.6 million at December 31, 2012 to $26.3 million at December 31, 2013, primarily due to transfers to other real estate owned and resolutions, including sales and payoffs of loans during the year ended December 31, 2013.

During the years ended December 31, 2013, 2012, 2011, 2010, and 2009, interest income not recognized on non-accrual loans (but would have been recognized if these loans were current) was approximately $970,000, $1.3 million, $1.5 million, $858,000 and $436,000, respectively. Excluded from impaired loans at December 31, 2013 are $2.7 million of purchase credit impaired loans subject to Loss Sharing Agreements in which cash flows could not be reasonably estimated which are included in non-accrual loans.

Allowance for Loan Losses

At December 31, 2013, the allowance for loan losses was $9.6 million or 0.85% of total loans. At December 31, 2012, the allowance for loan losses was $9.8 million or 1.07% of total loans. Included within total loans was $149.4 million in loans acquired from EBI on July 1, 2013 which are recorded at fair value and for which minimal allowance was allocated at December 31, 2013. Excluding these loans, the allowance for loan losses was approximately 0.98% of total loans.

The reduction in the allowance for loan losses at December 31, 2013 as compared to December 31, 2012 was approximately $140,000. The reduction was due to lower specific reserves of $1.1 million at December 31, 2013 as compared to December 31, 2012 due to lower impaired loans and classified assets year over year. The reduction in the specific portion of the allowance for loan losses was offset by an increase in the general portion of the allowance for loan losses of $1.0 million year over year. At December 31, 2012, we had $11.9 million of impaired loans not covered by Loss Sharing Agreements with an allocated allowance for loan loss of $2.1 million, as compared to $8.2 million of impaired loans not covered by Loss Sharing Agreements with an allocated allowance of $1.5 million at December 31, 2013. In addition, overall loans graded special mention not covered by Loss Sharing Agreements decreased by $20.0 million (or 55.9%) from December 31, 2012 to December 31, 2013 which had a positive impact on the general portion of the allowance for loan losses.

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 and guarantors over the term of the loan; insurance; whether the loan is covered by a Loss Sharing Agreement; 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 amount necessary to provide for probable incurred credit 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.

17
 

The allowance for loan losses is evaluated at the portfolio segment level using the same methodology for each segment. The historical net losses for a rolling two-year period is the basis for the general reserve for each segment which is adjusted for each of the same qualitative factors (i.e., nature and volume of portfolio, economic and business conditions, classification, past due and non-accrual trends) evaluated by each individual segment. Impaired loans and related specific reserves for each of the segments are also evaluated using the same methodology for each segment. The qualitative factors added approximately 7 and 11 basis points to the general reserve of the allowance for loan losses at December 31, 2013 and 2012, respectively.

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Loans, for which the terms have been modified, and for which the borrower is experiencing financial difficulties, are considered troubled debt restructurings and generally classified as impaired.

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 (loan payments made within 90 days of the due date) and payment shortfalls (which are tracked as past due amounts) 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, the borrower’s and guarantor’s financial condition and the amount of the shortfall in relation to the principal and interest owed.

Charge-offs of loans are made by portfolio segment at the time that the collection of the full principal, in management’s judgment, is doubtful. This methodology for determining charge-offs is consistently applied to each segment.

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 loans (including all impaired and non-performing 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 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. Third party appraisals are used to determine the fair value of underlying collateral. At a minimum, a new appraisal is obtained annually for all impaired loans based on an “as is” value. Generally no adjustments, other than a reduction for estimated disposal costs, are made by the Company to third party appraisals to determine the fair value of the assets. The impact on the allowance for loan losses of new appraisals are reflected in the period the appraisal is received. A loan may also be classified as substandard and not be classified as impaired by management. 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. The following is a summary of our loan classifications at December 31, 2013 and 2012:

      Loans Subject to Loss Sharing Agreements  Loans Not Subject to Loss Sharing Agreements
(Dollars in thousands)  Total  Pass  Special
Mention
  Substandard  Pass  Special
Mention
  Substandard
December 31, 2013                                   
Residential real estate  $178,844   $63,712   $1,152   $3,395   $99,259   $4,661   $6,665 
Commercial   210,264    26,799    319    455    176,434    2,647    3,610 
Commercial real estate   699,851    133,219    8,047    3,045    537,439    5,324    12,777 
Construction and land development:   35,286    6,470    —      35    22,037    2,656    4,088 
Consumer and other   9,735    2    —      —      9,135    480    118 
Total December 31, 2013  $1,133,980   $230,202   $9,518   $6,930   $844,304   $15,768   $27,258 

 

18
 

 

      Loans Subject to Loss Sharing Agreements  Loans Not Subject to Loss Sharing Agreements
(Dollars in thousands)  Total  Pass  Special
Mention
  Substandard  Pass  Special Mention  Substandard
December 31, 2012                                   
Residential Real Estate  $165,917   $80,215   $2,578   $4,188   $65,484   $7,927   $5,525 
Commercial   179,498    32,080    405    540    135,488    6,516    4,469 
Commercial Real Estate   514,574    182,009    10,264    6,393    284,184    17,563    14,161 
Construction and Land Development:   41,889    7,921    —      505    23,944    3,138    6,381 
Consumer and other   11,290    11    —      —      10,552    584    143 
Total December 31, 2012  $913,168   $302,236   $13,247   $11,626   $519,652   $35,728   $30,679 

 

Substandard loans totaled $34.2 million at December 31, 2013 (of which $6.9 million were subject to the Loss Sharing Agreements) and $42.3 million at December 31, 2012 (of which $11.6 million were subject to the Loss Sharing Agreements). The decrease of $8.0 million since December 31, 2012 was primarily due to the resolution, including charge-offs, sales, payoffs and transfers to other real estate owned. Of the decrease of $8 million, $3.4 million is related to loans not covered under loss sharing agreements. We regularly evaluate the classifications of loans and recommend either upgrades or downgrades to credits as events or circumstances warrant. In addition, at December 31, 2013, we had $31.0 million (or 2.7% of total loans) in loans we classified as impaired. This compares to $40.1 million or 4.4% of total loans at December 31, 2012. The decrease was primarily due to the resolution, including sales, payoffs and transfers to other real estate owned, of loans during the year. At December 31, 2013 and December 31, 2012, the specific credit allocation included in the allowance for loan losses for loans impaired was approximately $2.0 million and $3.1 million, respectively. The specific credit allocation for impaired loans is adjusted based on appraisals obtained at least annually. All loans classified as substandard that are collateralized by real estate are also re-appraised at a minimum on an annual basis.

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, or other weaknesses. At December 31, 2013, we had $25.3 million (2.2% of outstanding loans) of loans classified as Special Mention, which included $9.5 million in loans subject to Loss Sharing Agreements, which compares to $49.0 million (5.4% of outstanding loans) of which $13.2 million were subject to Loss Sharing Agreements, at December 31, 2012. Special Mention loans not subject to Loss Sharing Agreements decreased by $19.9 million to $15.8 million at December 31, 2013, as compared to $35.7 million at December 31, 2012. The decrease is attributable to the resolution, including sales, payoffs and transfers to other real estate owned, of loans and ongoing reviews of loans classified as special mention. If there is further deterioration on these loans, they may be classified substandard in the future, and depending on whether the loan is considered impaired, a specific credit allocation may be needed resulting in increased provisions for loan losses.

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 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.

Management remains watchful of credit quality issues. Should the economic climate deteriorate from current levels, borrowers may experience difficulty repaying loans. As a result, the level of non-performing loans, charge-offs and delinquencies could rise and require further increases in loan loss provisions.

During the years ended December 31, 2013 and 2012, we recorded $3.5 million and $6.4 million, respectively, in provision for loan losses primarily as a result of charge-offs during the period, changes within classified and impaired loans and new appraisals on the underlying collateral of impaired loans.

19
 

During the years ended December 31, 2013, 2012, 2011, 2010, and 2009, the activity in our allowance for loan losses was as follows:

   Year ended December 31,
 (Dollars in thousands)  2013  2012  2011  2010  2009
Balance at beginning of period  $9,788   $12,836   $13,050   $13,282   $5,799 
Provision charged to expense   3,475    6,350    7,000    13,520    13,240 
Charge-offs   (3,810)   (9,826)   (7,366)   (13,933)   (5,788)
Recoveries   195    428    152    181    31 
Balance at end of period  $9,648   $9,788   $12,836   $13,050   $13,282 
                          
Net charge-offs /average total loans   0.35%   1.01%   0.87%   2.01%   1.14%

 

The following table reflects the allowance allocation per loan category and percent of loans in each category to total loans for the periods indicated:

As of December 31, 2013:

(Dollars in thousands)  Commercial  Residential
Real Estate
  Commercial
Real Estate
  Construction
and Land
Development
  Consumer
and Other
  Total
Specific Reserves:                              
Impaired loans  $835   $460   $413   $271   $—     $1,979 
Purchase credit impaired loans   464    269    278    —      —      1,011 
Total specific reserves   1,299    729    691    271    —      2,990 
General reserves   1,785    1,708    2,859    214    92    6,658 
Total  $3,084   $2,437   $3,550   $485   $92   $9,648 
                               
Total Loans  $210,264   $178,844   $699,851   $35,286   $9,735   $1,133,980 
                               
Allowance as percent of loans
per category as of
December 31, 2013
   1.47%   1.36%   0.51%   1.37%   0.95%   0.85%

 

As of December 31, 2012:

(Dollars in thousands)  Commercial  Residential
Real Estate
  Commercial
Real Estate
  Construction
and Land
Development
  Consumer
and Other
  Total
Specific Reserves:                              
Impaired loans  $510   $474   $1,128   $1,002   $—     $3,114 
Purchase credit impaired loans   355    359    306    —      —      1,020 
Total specific reserves   865    833    1,434    1,002    —      4,134 
General reserves   1,870    1,036    1,964    743    41    5,654 
Total  $2,735   $1,869   $3,398   $1,745   $41   $9,788 
                               
Total Loans  $179,498   $165,917   $514,574   $41,889   $11,290   $913,168 
                               
Allowance as percent of loans
per category as of
December 31, 2012
   1.52%   1.13%   0.66%   4.13%   0.36%   1.07%

 

20
 

As of December 31, 2011:

(Dollars in thousands)  Commercial  Residential
Real Estate
  Commercial
Real Estate
  Construction
and Land
Development
  Consumer
and Other
  Total
Specific Reserves:                              
Impaired loans  $1,719   $188   $2,563   $892   $—     $5,362 
Purchase credit impaired loans   —      110    542    —      —      652 
Total specific reserves   1,719    298    3,105    892    —      6,014 
General reserves   1,392    1,647    2,197    1,517    69    6,822 
Total  $3,111   $1,945   $5,302   $2,409   $69   $12,836 
                               
Total Loans  $170,183   $196,511   $457,276   $43,473   $12,093   $879,536 
                               
Allowance as percent of loans
per category as of
December 31, 2011
   1.83%   0.99%   1.16%   5.54%   0.57%   1.46%

 

As of December 31, 2010:

(Dollars in thousands)  Commercial  Residential
Real Estate
  Commercial
Real Estate
  Construction
and Land
Development
  Consumer
and Other
  Total
Specific Reserves:                              
Impaired loans  $260   $1,781   $1,497   $822   $108   $4,468 
Purchase credit impaired loans   —      89    215    —      —      304 
Total specific reserves   260    1,870    1,712    822    108    4,772 
General reserves   3,572    1,156    2,433    1,073    44    8,278 
Total  $3,832   $3,026   $4,145   $1,895   $152   $13,050 
                               
Total Loans  $165,203   $228,354   $434,855   $33,893   $13,626   $875,931 
                               
Allowance as percent of loans
per category as of
December 31, 2010
   2.32%   1.33%   0.95%   5.59%   1.12%   1.49%

 

As of December 31, 2009:

(Dollars in thousands)  Amount  % of loans in each
category
Commercial loans  $3,415    17%
Real estate loans   8,973    81%
Consumer loans   232    2%
Other   662    —   
Total  $13,282    100%

 

The allowance for loan losses for construction and land development decreased from $1.7 million at December 31, 2012 to $485,000 at December 31, 2013. The decrease in the general reserves for construction and land development loans from $743,000 at December 31, 2012 to $214,000 at December 31, 2013 primarily related to the improvement in historical loss factors over the previous period and a decrease in these types of loans year over year. The decrease in the specific portion of the reserve related to the charge-off of one impaired construction and land development loan during the year ended December 31, 2013 for $896,000. The overall balance in loans held as construction and land development decreased from December 31, 2012 to December 31, 2013 by $6.6 million which was generally driven by resolutions and payments of $9.1 million during the year, offset by the addition of EBI balances of $2.5 million which did not have a general reserve at December 31, 2013.

The allowance for loan loss related to residential real estate increased from $1.9 million at December 31, 2012 to $2.4 million at December 31, 2013. The increase was due to an increase in the general portion of the reserve from $1.0 million at December 31, 2012 to $1.7 million at December 31, 2013. The increase was due to an increase in residential loans of approximately $7.1 million and an increase in the historical loss factors related to these loans.

21
 

The specific portion of the allowance for loan losses related to commercial real estate loans decreased $743,000 from $1.4 million at December 31, 2012 to $691,000 at December 31, 2013 due to the resolution and foreclosure of impaired loans during 2013 and the reduction in specific reserves due to improvements in the underlying collateral values.

The overall general reserve as a percentage of loans collectively evaluated for impairment was 0.64% at December 31, 2013 which compares to 0.72% at December 31, 2012 and 0.95% at December 31, 2011. Excluding loans acquired as a result of the EBI merger on July 1, 2013, which as of December 31, 2013 had a minimal general reserve allocated, the general reserve as a percentage of loans collectively evaluated for impairment would be 0.74%.Excluding loans acquired as a result of the AFI merger on April 1, 2012, the general reserve as a percentage of loans collectively evaluated for impairment would be 0.82%. The 8 basis point decrease in this general reserve ratio as compared to December 31, 2012 was primarily a result of a decrease of 48.4% ($23.7 million) in special mention loans from December 31, 2012 to December 31, 2013 which have a higher allocation of general reserve.

The following table reflects charge-offs and recoveries per loan category:

(Dollars in thousands)  December 31, 
   2013   2012   2011 2010   2009 
   Charge-
offs
   Recoveries   Charge-
offs
   Recoveries   Charge-
offs
   Recoveries   Charge-
offs
   Recoveries    Charge-
offs
   Recoveries 
Commercial real estate  $1,862   $9   $3,159   $110   $1,937   $35   $2,204   $46   $2,394   $2 
Residential real estate   309    10    1,019    189    2,829    13    2,069    26    —      —   
Construction and land development   898    96    —      36    1,162    36    7,125    15    1,805    —   
Commercial   724    66    5,648    43    1,306    63    1,617    80    1,549    27 
Consumer and others   17    14    —      50    132    5    918    14    40    2 
Total  $3,810   $195   $9,826   $428   $7,366   $152   $13,933   $181   $5,788   $31 

 

Net charge-offs for the year ended December 31, 2013 were approximately $3.6 million compared to $9.4 million for the year ended December 31, 2012. During the year ended December 31, 2012, the Company strategically resolved an $11.4 million non-performing loan collateralized by 15 gas stations through acceptance of a bulk sale offer at below appraised values. The resolution resulted in a $5.4 million charge-off during the year.

Deposits

We maintain a full range of deposit products, accounts and services to meet the needs of the residents and businesses in our primary service area. Products include an array of checking account programs for individuals and small businesses, including money market accounts, certificates of deposit, IRA accounts, and sweep investment capabilities. We seek to make our services convenient to the community by offering 24-hour ATM access at some of our facilities, access to other ATM networks available at other local financial institutions and retail establishments, telephone banking services to include account inquiry and balance transfers, and courier service to certain customers who meet minimum qualifications. We also take advantage of the use of technology by allowing our customers banking access via the Internet and various advanced systems for cash management for our business customers. The rapid decline in the price of technology is now allowing smaller banks the ability to offer many of the sophisticated products previously only available to customers of large banks. It is our strategy to have a mix of core deposits, which favors non-interest bearing deposits in the range of 15% to 30% of total deposits with time deposits comprising 50% or less of total core deposits. This strategy, to be successful, requires high levels of relationship banking supported by strong distribution and product strategies. At December 31, 2013, we had approximately $333.1 million in deposits by foreign nationals banking in the United States which were primarily assumed as part of the TBOM and Republic transactions. At December 31, 2013, we had wholesale certificates of deposit of $64.3 million. 1st United also participates in the Certification of Deposit Account Registration System (“CDARS”) and maintained $39.4 million of reciprocal deposits at December 31, 2013.

22
 

As of December 31, 2013, 2012, and 2011, the average distribution by type of our deposit accounts was as follows:

(Dollars in thousands)  December 31,
   2013  2012  2011
   Average
Balance
  Avg
Rate
  Average
Balance
  Avg
Rate
  Average
Balance
  Avg
Rate
Noninterest bearing accounts  $467,445    —     $385,066    —     $325,277    —   
                               
Interest bearing accounts                              
NOW accounts  $206,527    0.13%  $154,687    0.15%  $125,267    0.18%
Money market accounts   343,377    0.31%   338,242    0.46%   278,104    0.79%
Savings accounts   62,792    0.26%   63,736    0.30%   44,696    0.53%
Certificates of deposit   296,983    0.73%   336,970    0.98%   297,806    1.12%
Average interest bearing deposits  $909,679    0.40%   893,695    0.59%  $745,873    0.80%
Average total deposits  $1,377,124    0.27%  $1,278,701    0.41%  $1,071,150    0.56%

 

As of December 31, 2013, certificates of deposit of $100,000 or more mature as follows:

(Dollars in thousands)  Amount  Weighted
Average Rate
       
Up to 3 months  $55,092    0.56%
3 to 6 months   41,660    0.70%
6 to 12 months   41,956    0.65%
Over 12 months   64,007    1.02%
   $202,715    0.75%

 

Maturity terms, service fees and withdrawal penalties are established by us on a periodic basis. The determination of rates and terms is predicated on funds acquisition and liquidity requirements, rates paid by competitors, growth goals and federal regulations.

Borrowings

The following tables reflect borrowing activity for the years ended December 31, 2013, 2012, and 2011:

(Dollars in thousands)  December 31, 2013  December 31, 2012
   Actual  Weighted
Avg Rate
  YTD
Avg
  Avg
Rate
Paid
  Actual  Weighted
Avg Rate
  YTD
Avg
  Avg
Rate
Paid
Repurchase agreements  $14,363    0.11%  $15,824    0.11%  $19,855    0.12%  $11,779    0.13%
FHLB advances   35,000    0.50%   18,623    0.50%   —      4.68%   137    4.60%
Total  $49,363        $34,447        $19,855        $11,916      

 

   December 31, 2011
   Actual  Weighted
Avg Rate
  YTD
Avg
  Avg
Rate
Paid
Repurchase agreements  $8,746    0.13%  $11,998    0.13%
FHLB advances   5,000    4.60%   5,000    4.60%
Other borrowings   —      —      4,053    2.80%
Total  $13,746        $21,051      

 

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Maximum balance at any given month end during the periods of analysis is reflected in the following tables:

(Dollars in thousands)  December 31,
   2013  2012  2011
   Maximum Balance at
any month-end
  Maximum Balance at
any month-end
  Maximum Balance
at any month-end
Repurchase agreements  $18,956    Feb-13   $20,201    Nov-12   $17,405    Jan-11 
FHLB advances   60,000    Sept-13    —      —      5,000    Jan-11 
Other borrowings   —      —      —      —      4,750    Jan-11 

 

Competition

Commercial banking in Florida, including our market, is highly competitive due in large part to Florida’s historical profile of population growth and wealth. Our markets contain not only community banks, but also significant numbers of the country’s largest commercial and wealth management/trust banks.

Interest rates, both on loans and deposits, and prices of fee-based services are significant competitive factors among financial institutions generally. Other important competitive factors include office location, office hours, the quality of customer service, community reputation, continuity of personnel and services, and, in the case of larger commercial customers, relative lending limits and the ability to offer sophisticated cash management and other commercial banking services. Many of our larger competitors have greater resources, broader geographic markets, more extensive branch networks, and higher lending limits than we do. They also can offer more products and services and can better afford and make more effective use of media advertising, support services and electronic technology than we can.

Our largest competitors in the market include Wells Fargo & Company, Bank of America Corporation, SunTrust Banks Inc., JPMorgan Chase & Co., Citigroup Inc., Regions Financial Corporation, BB&T Corporation, Raymond James Financial, Inc., and Bank United, Inc. These institutions capture the majority of the deposits in the market. According to data provided by the FDIC, as of June 30, 2013, the latest date for which data was publicly available, our market share, on a pro forma basis, was less than 1% in each county where we operate. As of June 30, 2013, there were a total of 165 depository institutions operating in our markets. We believe that community banks can compete successfully by providing personalized service and making timely, local decisions and thus draw business away from larger institutions in the market. We also believe that further consolidation in the banking industry is likely to create additional opportunities for community banks to capture deposits from affected customers who may become dissatisfied as their financial institutions change ownership. In addition, we believe that the continued growth of our banking markets affords us an opportunity to capture new deposits from new residents.

Seasonality

We do not believe our base of business to be seasonal in nature.

Marketing and Distribution

In order to market our deposit products, we use local print advertising, provide sales incentives for our employees and offer special events to generate customer traffic.

Our Board of Directors and management team realize the importance of forging partnerships within the community as a method of expanding our customer base and serving the needs of our community. In this regard, we are an active participant in various community activities and organizations. Participation in such events and organizations allows management to determine what additional products and services are needed in our community as well as assisting in our efforts to determine credit needs in accordance with the Community Reinvestment Act.

Regulatory Considerations

We must comply with state and federal banking laws and regulations that control virtually all aspects of our operations. These laws and regulations generally aim to protect our depositors, not necessarily our shareholders or our creditors. Any changes in applicable laws or regulations may materially affect our business and prospects. Proposed legislative or regulatory changes may also affect our operations. The following description summarizes some of the laws and regulations to which we are subject. References to applicable statutes and regulations are brief summaries, do not purport to be complete, and are qualified in their entirety by reference to such statutes and regulations.

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The Company

We are registered with the Federal Reserve as a financial holding company under the Gramm-Leach-Bliley Act and are registered with the Federal Reserve as a bank holding company under the Bank Holding Company Act of 1956. As a result, we are subject to supervisory regulation and examination by the Federal Reserve. The Gramm-Leach-Bliley Act, the Bank Holding Company Act, and other federal laws subject financial holding companies to particular restrictions on the types of activities in which they may engage, and to a range of supervisory requirements and activities, including regulatory enforcement actions for violations of laws and regulations.

Permitted Activities.

The Gramm-Leach-Bliley Act modernized the U.S. banking system by: (i) allowing bank holding companies that qualify as “financial holding companies” to engage in a broad range of financial and related activities; (ii) allowing insurers and other financial service companies to acquire banks; (iii) removing restrictions that applied to bank holding company ownership of securities firms and mutual fund advisory companies; and (iv) establishing the overall regulatory scheme applicable to bank holding companies that also engage in insurance and securities operations. The general effect of the law was to establish a comprehensive framework to permit affiliations among commercial banks, insurance companies, securities firms, and other financial service providers. Activities that are financial in nature are broadly defined to include not only banking, insurance, and securities activities, but also merchant banking and additional activities that the Federal Reserve, in consultation with the Secretary of the Treasury, determines to be financial in nature, incidental to such financial activities, or complementary activities that do not pose a substantial risk to the safety and soundness of depository institutions or the financial system generally.

In contrast to financial holding companies, bank holding companies are limited to managing or controlling banks, furnishing services to or performing services for its subsidiaries, and engaging in other activities that the Federal Reserve determines by regulation or order to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. In determining whether a particular activity is permissible, the Federal Reserve must consider whether the performance of such an activity reasonably can be expected to produce benefits to the public that outweigh possible adverse effects. Possible benefits include greater convenience, increased competition, and gains in efficiency. Possible adverse effects include undue concentration of resources, decreased or unfair competition, conflicts of interest, and unsound banking practices. Despite prior approval, the Federal Reserve may order a bank holding company or its subsidiaries to terminate any activity or to terminate ownership or control of any subsidiary when the Federal Reserve has reasonable cause to believe that a serious risk to the financial safety, soundness or stability of any bank subsidiary of that bank holding company may result from such an activity.

Changes in Control.

Subject to certain exceptions, the Bank Holding Company Act and the Change in Bank Control Act, together with the applicable regulations, require Federal Reserve approval (or, depending on the circumstances, no notice of disapproval) prior to any person or company acquiring “control” of a bank or bank holding company. A conclusive presumption of control exists if an individual or company acquires the power, directly or indirectly, to direct the management or policies of an insured depository institution or to vote 25% or more of any class of voting securities of any insured depository institution. A rebuttable presumption of control exists if a person or company acquires 10% or more but less than 25% of any class of voting securities of an insured depository institution and either the institution has registered securities under Section 12 of the Securities Exchange Act of 1934 or as we will refer to as the Exchange Act, or no other person will own a greater percentage of that class of voting securities immediately after the acquisition. Our common stock is registered under Section 12 of the Exchange Act.

The Federal Reserve maintains a policy statement on minority equity investments in banks and bank holding companies, that generally permits investors to (i) acquire up to 33 percent of the total equity of a target bank or bank holding company, subject to certain conditions, including (but not limited to) that the investing firm does not acquire 15 percent or more of any class of voting securities, and (ii) designate at least one director, without triggering the various regulatory requirements associated with control.

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As a bank holding company, we are required to obtain prior approval from the Federal Reserve before (i) acquiring all or substantially all of the assets of a bank or bank holding company, (ii) acquiring direct or indirect ownership or control of more than 5% of the outstanding voting stock of any bank or bank holding company (unless we own a majority of such bank’s voting shares), or (iii) merging or consolidating with any other bank or bank holding company. In determining whether to approve a proposed bank acquisition, federal bank regulators will consider, among other factors, the effect of the acquisition on competition, the public benefits expected to be received from the acquisition, the projected capital ratios and levels on a post-acquisition basis, and the acquiring institution’s record of addressing the credit needs of the communities it serves, including the needs of low and moderate income neighborhoods, consistent with the safe and sound operation of the bank, under the Community Reinvestment Act of 1977.

Under Florida law, a person or entity proposing to directly or indirectly acquire control of a Florida bank must also obtain permission from the Florida Office of Financial Regulation. Florida statutes define “control” as either (i) indirectly or directly owning, controlling or having power to vote 25% or more of the voting securities of a bank; (ii) controlling the election of a majority of directors of a bank; (iii) owning, controlling, or having power to vote 10% or more of the voting securities as well as directly or indirectly exercising a controlling influence over management or policies of a bank; or (iv) as determined by the Florida Office of Financial Regulation. These requirements will affect us because 1st United is chartered under Florida law and changes in control of us are indirect changes in control of 1st United.

Tying.

Bank holding companies and their affiliates are prohibited from tying the provision of certain services, such as extending credit, to other services or products offered by the holding company or its affiliates, such as deposit products.

Capital; Dividends; Source of Strength.

The Federal Reserve imposes certain capital requirements on bank holding companies under the Bank Holding Company Act, including a minimum leverage ratio and a minimum ratio of “qualifying” capital to risk-weighted assets. These requirements are described below under “Capital Regulations.” Subject to its capital requirements and certain other restrictions, we are able to borrow money to make a capital contribution to 1st United, and such loans may be repaid from dividends paid from 1st United to us.

The ability of 1st United to pay dividends, however, is subject to regulatory restrictions that are described below under “Dividends.” We are also able to raise capital for contributions to 1st United by issuing securities without having to receive regulatory approval, subject to compliance with federal and state securities laws.

In accordance with Federal Reserve policy, which has been codified by the Dodd-Frank Act, we are expected to act as a source of financial strength to 1st United and to commit resources to support 1st United in circumstances in which we might not otherwise do so. In furtherance of this policy, the Federal Reserve may require a financial holding company to terminate any activity or relinquish control of a nonbank subsidiary (other than a nonbank subsidiary of a bank) upon the Federal Reserve’s determination that such activity or control constitutes a serious risk to the financial soundness or stability of any subsidiary depository institution of the bank holding company. Further, federal bank regulatory authorities have additional discretion to require a financial holding company to divest itself of any bank or nonbank subsidiary if the agency determines that divestiture may aid the depository institution’s financial condition.

1st United Bank

1st United is a banking institution that is chartered by and headquartered in the State of Florida, and it is subject to supervision and regulation by the Florida Office of Financial Regulation. The Florida Office of Financial Regulation supervises and regulates all areas of 1st United’s operations including, without limitation, the making of loans, the issuance of securities, the conduct of 1st United’s corporate affairs, the satisfaction of capital adequacy requirements, the payment of dividends, and the establishment or closing of banking centers. 1st United is also a member bank of the Federal Reserve System, which makes 1st United’s operations subject to broad federal regulation and oversight by the Federal Reserve. In addition, 1st United’s deposit accounts are insured by the FDIC to the maximum extent permitted by law, and the FDIC has certain enforcement powers over 1st United.

As a state-chartered banking institution in the State of Florida, 1st United is empowered by statute, subject to the limitations contained in those statutes, to take and pay interest on, savings and time deposits, to accept demand deposits, to make loans on residential and other real estate, to make consumer and commercial loans, to invest, with certain limitations, in equity securities and in debt obligations of banks and corporations and to provide various other banking services for the benefit of 1st United’s customers. Various consumer laws and regulations also affect the operations of 1st United, including state usury laws, laws relating to fiduciaries, consumer credit and equal credit opportunity laws, and fair credit reporting. In addition, the Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”) prohibits insured state chartered institutions from conducting activities as principal that are not permitted for national banks. A bank, however, may engage in an otherwise prohibited activity if it meets its minimum capital requirements and the FDIC determines that the activity does not present a significant risk to the Deposit Insurance Fund.

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Reserves.

The Federal Reserve requires all depository institutions to maintain reserves against some transaction accounts (primarily NOW and Super NOW checking accounts). The balances maintained to meet the reserve requirements imposed by the Federal Reserve may be used to satisfy liquidity requirements. An institution may borrow from the Federal Reserve Bank “discount window” as a secondary source of funds, provided that the institution meets the Federal Reserve Bank’s credit standards.

Dividends.

1st United is subject to legal limitations on the frequency and amount of dividends that can be paid to us. The Federal Reserve may restrict the ability of 1st United to pay dividends if such payments would constitute an unsafe or unsound banking practice. These regulations and restrictions may limit our ability to obtain funds from 1st United for our cash needs, including funds for acquisitions and the payment of dividends, interest, and operating expenses.

In addition, Florida law also places restrictions on the declaration of dividends from state chartered banks to their holding companies. Pursuant to the Florida Financial Institutions Code, the board of directors of state-chartered banks, after charging off bad debts, depreciation and other worthless assets, if any, and making provisions for reasonably anticipated future losses on loans and other assets, may quarterly, semi-annually or annually declare a dividend of up to the aggregate net profits of that period combined with the bank’s retained net profits for the preceding two years and, with the approval of the Florida Office of Financial Regulation and Federal Reserve, declare a dividend from retained net profits which accrued prior to the preceding two years. Before declaring such dividends, 20% of the net profits for the preceding period as is covered by the dividend must be transferred to the surplus fund of the bank until this fund becomes equal to the amount of the bank’s common stock then issued and outstanding. A state-chartered bank may not declare any dividend if (i) its net income (loss) from the current year combined with the retained net income (loss) for the preceding two years aggregates a loss or (ii) the payment of such dividend would cause the capital account of the bank to fall below the minimum amount required by law, regulation, order or any written agreement with the Florida Office of Financial Regulation or a federal regulatory agency.

Insurance of Accounts and Other Assessments.

We pay our deposit insurance assessments to the Deposit Insurance Fund, which is determined through a risk-based assessment system. Our deposit accounts are currently insured by the Deposit Insurance Fund generally up to a maximum of $250,000 per separately insured depositor.

Under the current assessment system, the FDIC assigns an institution to one of four risk categories designed to measure risk. Total base assessment rates currently range from 0.025% of deposits for an institution in the highest rated sub-category of the highest rated category to 0.45% of deposits for an institution in the lowest rated category. In addition, all FDIC insured institutions are required to pay assessments to the FDIC at an annual rate of approximately six tenths of a basis point of insured deposits to fund interest payments on bonds issued by the Financing Corporation, an agency of the federal government established to recapitalize the predecessor to the Savings Association Insurance Fund. These assessments will continue until the Financing Corporation bonds mature in 2017 through 2019.

Under the Federal Deposit Insurance Act (the “FDIA”), the FDIC may terminate deposit insurance upon a finding that the institution has engaged in unsafe and unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC.

27
 

Transactions With Affiliates.

Pursuant to Sections 23A and 23B of the Federal Reserve Act and Regulation W, the authority of 1st United to engage in transactions with related parties or “affiliates” or to make loans to insiders is limited. Loan transactions with an “affiliate” generally must be collateralized and certain transactions between 1st United and its “affiliates”, including the sale of assets, the payment of money or the provision of services, must be on terms and conditions that are substantially the same, or at least as favorable to 1st United, as those prevailing for comparable nonaffiliated transactions. In addition, 1st United generally may not purchase securities issued or underwritten by affiliates.

Loans to executive officers, directors or to any person who directly or indirectly, or acting through or in concert with one or more persons, owns, controls or has the power to vote more than 10% of any class of voting securities of a bank, which we refer to as “10% Shareholders”, or to any political or campaign committee the funds or services of which will benefit those executive officers, directors, or 10% Shareholders or which is controlled by those executive officers, directors or 10% Shareholders, are subject to Sections 22(g) and 22(h) of the Federal Reserve Act and their corresponding regulations (Regulation O) and Section 13(k) of the Exchange Act relating to the prohibition on personal loans to executives (which exempts financial institutions in compliance with the insider lending restrictions of Section 22(h) of the Federal Reserve Act). Among other things, these loans must be made on terms substantially the same as those prevailing on transactions made to unaffiliated individuals and certain extensions of credit to those persons must first be approved in advance by a disinterested majority of the entire board of directors. Section 22(h) of the Federal Reserve Act prohibits loans to any of those individuals where the aggregate amount exceeds an amount equal to 15% of an institution’s unimpaired capital and surplus plus an additional 10% of unimpaired capital and surplus in the case of loans that are fully secured by readily marketable collateral, or when the aggregate amount on all of the extensions of credit outstanding to all of these persons would exceed 1st United’s unimpaired capital and unimpaired surplus. Section 22(g) identifies limited circumstances in which 1st United is permitted to extend credit to executive officers.

Community Reinvestment Act.

The Community Reinvestment Act and its corresponding regulations are intended to encourage banks to help meet the credit needs of their service area, including low and moderate income neighborhoods, consistent with the safe and sound operations of the banks. These regulations provide for regulatory assessment of a bank’s record in meeting the credit needs of its service area. Federal banking agencies are required to make public a rating of a bank’s performance under the Community Reinvestment Act. The Federal Reserve considers a bank’s Community Reinvestment Act rating when the bank submits an application to establish banking centers, merge, or acquire the assets and assume the liabilities of another bank. In the case of a financial holding company, the Community Reinvestment Act performance record of all banks involved in the merger or acquisition are reviewed in connection with the filing of an application to acquire ownership or control of shares or assets of a bank or to merge with any other financial holding company. An unsatisfactory record can substantially delay or block the transaction. 1st United received a satisfactory rating on its most recent Community Reinvestment Act assessment.

Capital Regulations.

The Federal Reserve has adopted risk-based capital adequacy guidelines for financial holding companies and their subsidiary state-chartered banks that are members of the Federal Reserve System. As described above, the federal banking regulators have issued final rules that are effective January 1, 2015 for community banks. These final rules are major changes to the current general risk-based capital rule, and are designed to substantially conform with the Basel III international standards.

Current Guidelines. The current guidelines require all financial holding companies and federally regulated banks to maintain a minimum risk-based total capital ratio equal to 8%, of which at least 4% must be Tier I Capital. Tier I Capital, which includes common shareholders’ equity, noncumulative perpetual preferred stock, and a limited amount of cumulative perpetual preferred stock and certain trust preferred securities, less certain goodwill items and other intangible assets, is required to equal at least 4% of risk-weighted assets. The remainder (“Tier II Capital”) may consist of (i) an allowance for loan losses of up to 1.25% of risk-weighted assets, (ii) excess of qualifying perpetual preferred stock, (iii) hybrid capital instruments, (iv) perpetual debt, (v) mandatory convertible securities, and (vi) subordinated debt and intermediate-term preferred stock up to 50% of Tier I Capital. Total capital is the sum of Tier I and Tier II Capital less reciprocal holdings of other banking organizations’ capital instruments, investments in unconsolidated subsidiaries and any other deductions as determined by the appropriate regulator (determined on a case by case basis or as a matter of policy after formal rule making).

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In computing total risk-weighted assets, bank and financial holding company assets are given risk-weights of 0%, 20%, 50% and 100%. In addition, certain off-balance sheet items are given similar credit conversion factors to convert them to asset equivalent amounts to which an appropriate risk-weight will apply. Most loans will be assigned to the 100% risk category, except for performing first mortgage loans fully secured by 1- to 4-family and certain multi-family residential property, which carry a 50% risk rating. Most investment securities (including, primarily, general obligation claims on states or other political subdivisions of the United States) will be assigned to the 20% category, except for municipal or state revenue bonds, which have a 50% risk-weight, and direct obligations of the U.S. Treasury or obligations backed by the full faith and credit of the U.S. Government, which have a 0% risk-weight. In covering off-balance sheet items, direct credit substitutes, including general guarantees and standby letters of credit backing financial obligations, are given a 100% conversion factor. Transaction-related contingencies such as bid bonds, standby letters of credit backing non-financial obligations, and undrawn commitments (including commercial credit lines with an initial maturity of more than one year) have a 50% conversion factor. Short-term commercial letters of credit are converted at 20% and certain short-term unconditionally cancelable commitments have a 0% factor.

The federal bank regulatory authorities have also adopted regulations that supplement the risk-based guidelines. These regulations generally require banks and financial holding companies to maintain a minimum level of Tier I Capital to total assets less goodwill of 4% (the “leverage ratio”). The Federal Reserve permits a bank to maintain a minimum 3% leverage ratio if the bank achieves a 1 rating under the CAMELS rating system in its most recent examination, as long as the bank is not experiencing or anticipating significant growth. The CAMELS rating is a non-public system used by bank regulators to rate the strength and weaknesses of financial institutions. The CAMELS rating is comprised of six categories: capital adequacy, asset quality, management, earnings, liquidity, and sensitivity to market risk.

Banking organizations experiencing or anticipating significant growth, as well as those organizations which do not satisfy the criteria described above, will be required to maintain a minimum leverage ratio ranging generally from 4% to 5%. The bank regulators also continue to consider a “tangible Tier I leverage ratio” in evaluating proposals for expansion or new activities.

The tangible Tier I leverage ratio is the ratio of a banking organization’s Tier I Capital, less deductions for intangibles otherwise includable in Tier I Capital, to total tangible assets.

Federal law and regulations establish a capital-based regulatory scheme designed to promote early intervention for troubled banks and require the FDIC to choose the least expensive resolution of bank failures. The capital-based regulatory framework contains five categories of compliance with regulatory capital requirements, including “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized,” and “critically undercapitalized.” To qualify as a “well-capitalized” institution, a bank must have a leverage ratio of no less than 5%, a Tier I Capital ratio of no less than 6%, and a total risk-based capital ratio of no less than 10%, and the bank must not be under any order or directive from the appropriate regulatory agency to meet and maintain a specific capital level. Generally, a financial institution must be “well capitalized” before the Federal Reserve will approve an application by a financial holding company to acquire or merge with a bank or bank holding company.

Under the regulations, the applicable agency can treat an institution as if it were in the next lower category if the agency determines (after notice and an opportunity for hearing) that the institution is in an unsafe or unsound condition or is engaging in an unsafe or unsound practice. The degree of regulatory scrutiny of a financial institution will increase, and the permissible activities of the institution will decrease, as it moves downward through the capital categories. Institutions that fall into one of the three undercapitalized categories may be required to (i) submit a capital restoration plan; (ii) raise additional capital; (iii) restrict their growth, deposit interest rates, and other activities; (iv) improve their management; (v) eliminate management fees; or (vi) divest themselves of all or a part of their operations. Financial holding companies controlling financial institutions can be called upon to boost the institutions’ capital and to partially guarantee the institutions’ performance under their capital restoration plans.

It should be noted that the minimum ratios referred to above are merely guidelines and the bank regulators possess the discretionary authority to require higher capital ratios.

As of December 31, 2013, we exceeded the requirements contained in the applicable regulations, policies and directives pertaining to capital adequacy to be classified as “well capitalized”, and are unaware of any material violation or alleged violation of these regulations, policies or directives. Rapid growth, poor loan portfolio performance, or poor earnings performance, or a combination of these factors, could change our capital position in a relatively short period of time, making additional capital infusions necessary.

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Guidelines Effective January 1, 2015. In July 2013, the Federal Reserve Board released its final rules which will implement in the United States the Basel III regulatory capital reforms from the Basel Committee on Banking Supervision and certain changes required by the Dodd-Frank Act. Under the final rule, minimum requirements will increase for both the quality and quantity of capital held by banking organizations. In this respect, the final rule implements strict eligibility criteria for regulatory capital instruments and improves the methodology for calculating risk-weighted assets to enhance risk sensitivity. Consistent with the international Basel framework, the rule includes a new minimum ratio of Common Equity Tier I Capital to Risk-Weighted Assets of 4.5% and a Common Equity Tier I Capital conservation buffer of 2.5% of risk-weighted assets. The conservation buffer will be phased in from 2016 through 2019. The rule also, among other things, raises the minimum ratio of Tier I Capital to Risk-Weighted Assets from 4% to 6% and includes a minimum leverage ratio of 4% for all banking organizations.

Prompt Corrective Action.

Immediately upon becoming undercapitalized, a depository institution becomes subject to the provisions of Section 38 of the FDIA, which: (i) restrict payment of capital distributions and management fees; (ii) require that the appropriate federal banking agency monitor the condition of the institution and its efforts to restore its capital; (iii) require submission of a capital restoration plan; (iv) restrict the growth of the institution’s assets; and (v) require prior approval of certain expansion proposals. The appropriate federal banking agency for an undercapitalized institution also may take any number of discretionary supervisory actions if the agency determines that any of these actions is necessary to resolve the problems of the institution at the least possible long-term cost to the deposit insurance fund, subject in certain cases to specified procedures. These discretionary supervisory actions include: (i) requiring the institution to raise additional capital; (ii) restricting transactions with affiliates; (iii) requiring divestiture of the institution or the sale of the institution to a willing purchaser; and (iv) any other supervisory action that the agency deems appropriate. These and additional mandatory and permissive supervisory actions may be taken with respect to significantly undercapitalized and critically undercapitalized institutions.

Interstate Banking and Branching.

The Bank Holding Company Act was amended by the Interstate Banking Act. The Interstate Banking Act provides that adequately capitalized and managed financial and bank holding companies are permitted to acquire banks in any state.

State laws prohibiting interstate banking or discriminating against out-of-state banks are preempted. States are not permitted to enact laws opting out of this provision; however, states are allowed to adopt a minimum age restriction requiring that target banks located within the state be in existence for a period of years, up to a maximum of five years, before a bank may be subject to the Interstate Banking Act. The Interstate Banking Act, as amended by the Dodd-Frank Act, establishes deposit caps which prohibit acquisitions that result in the acquiring company controlling 30% or more of the deposits of insured banks and thrift institutions held in the state in which the target maintains a branch or 10% or more of the deposits nationwide. States have the authority to waive the 30% deposit cap. State-level deposit caps are not preempted as long as they do not discriminate against out-of-state companies, and the federal deposit caps apply only to initial entry acquisitions.

Under the Dodd-Frank Act, national banks and state banks are able to establish branches in any state if that state would permit the establishment of the branch by a state bank chartered in that state. Florida law permits a state bank to establish a branch of the bank anywhere in the state. Accordingly, under the Dodd-Frank Act, a bank with its headquarters outside the State of Florida may establish branches anywhere within Florida.

Anti-money Laundering.

The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (“USA PATRIOT Act”), provides the federal government with additional powers to address terrorist threats through enhanced domestic security measures, expanded surveillance powers, increased information sharing and broadened anti-money laundering requirements. By way of amendments to the Bank Secrecy Act (“BSA”), the USA PATRIOT Act puts in place measures intended to encourage information sharing among bank regulatory and law enforcement agencies. In addition, certain provisions of the USA PATRIOT Act impose affirmative obligations on a broad range of financial institutions.

Among other requirements, the USA PATRIOT Act and the related Federal Reserve regulations require banks to establish anti-money laundering programs that include, at a minimum:

§internal policies, procedures and controls designed to implement and maintain the savings association’s compliance with all of the requirements of the USA PATRIOT Act, the BSA and related laws and regulations;
§systems and procedures for monitoring and reporting of suspicious transactions and activities;
§a designated compliance officer;
§employee training;
§an independent audit function to test the anti-money laundering program;
§procedures to verify the identity of each customer upon the opening of accounts; and
§heightened due diligence policies, procedures and controls applicable to certain foreign accounts and relationships.

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Additionally, the USA PATRIOT Act requires each financial institution to develop a customer identification program (“CIP”) as part of our anti-money laundering program. The key components of the CIP are identification, verification, government list comparison, notice and record retention. The purpose of the CIP is to enable the financial institution to determine the true identity and anticipated account activity of each customer. To make this determination, among other things, the financial institution must collect certain information from customers at the time they enter into the customer relationship with the financial institution. This information must be verified within a reasonable time through documentary and non-documentary methods. Furthermore, all customers must be screened against any CIP-related government lists of known or suspected terrorists. We and our affiliates have adopted policies, procedures and controls to comply with the BSA and the USA PATRIOT Act.

Regulatory Enforcement Authority.

Federal and state banking laws grant substantial enforcement powers to federal and state banking regulators. This enforcement authority includes, among other things, the ability to assess civil money penalties, to issue cease and desist or removal orders and to initiate injunctive actions against banking organizations and institution-affiliated parties. In general, these enforcement actions may be initiated for violations of laws and regulations and unsafe or unsound practices. Other actions or inactions may provide the basis for enforcement action, including misleading or untimely reports filed with regulatory authorities.

Federal Home Loan Bank System.

1st United is a member of the FHLB of Atlanta, which is one of 12 regional Federal Home Loan Banks. Each FHLB serves as a reserve or central bank for its members within its assigned region. It is funded primarily from funds deposited by member institutions and proceeds from the sale of consolidated obligations of the FHLB system. It makes loans to members (i.e. advances) in accordance with policies and procedures established by the board of trustees of the FHLB.

As a member of the FHLB of Atlanta, 1st United is required to own capital stock in the FHLB in an amount at least equal to 0.12% (or 12 basis points) of the 1st United’s total assets at the end of each calendar year (with a dollar cap of $20 million), plus 4.5% of its outstanding advances (borrowings) from the FHLB of Atlanta under the activity-based stock ownership requirement. On December 31, 2013, 1st United was in compliance with this requirement.

Privacy.

Under the Gramm-Leach-Bliley Act, federal banking regulators adopted rules limiting the ability of banks and other financial institutions to disclose nonpublic information about consumers to nonaffiliated third parties. The rules require disclosure of privacy policies to consumers and, in some circumstances, allow consumers to prevent disclosure of certain personal information to nonaffiliated third parties.

Consumer Laws and Regulations.

1st United is also subject to other federal and state consumer laws and regulations that are designed to protect consumers in transactions with banks. While the list set forth below is not exhaustive, these laws and regulations include the Truth in Lending Act, the Truth in Savings Act, the Electronic Funds Transfer Act, the Expedited Funds Availability Act, the Check Clearing for the 21st Century Act, the Fair Credit Reporting Act, the Equal Credit Opportunity Act, the Fair Housing Act, the Home Mortgage Disclosure Act, the Fair and Accurate Credit Transactions Act, the Mortgage Disclosure Improvement Act, and the Real Estate Settlement Procedures Act, among others. These laws and regulations mandate certain disclosure requirements and regulate the manner in which financial institutions must deal with customers when taking deposits or making loans to such customers. 1st United must comply with the applicable provisions of these consumer protection laws and regulations as part of its ongoing customer relations.

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Future Legislative Developments.

Various legislative acts are from time to time introduced in Congress and the Florida legislature. This legislation may change banking statutes and the environment in which our banking subsidiary and we operate in substantial and unpredictable ways. We cannot determine the ultimate effect that potential legislation, if enacted, or implementing regulations with respect thereto, would have upon our financial condition or results of operations or that of our banking subsidiary.

Effect of Governmental Monetary Policies.

The commercial banking business in which 1st United engages is affected not only by general economic conditions, but also by the monetary policies of the Federal Reserve. Changes in the discount rate on member bank borrowing, availability of borrowing at the “discount window,” open market operations, the imposition of changes in reserve requirements against member banks’ deposits and assets of foreign banking centers and the imposition of and changes in reserve requirements against certain borrowings by banks and their affiliates are some of the instruments of monetary policy available to the Federal Reserve. These monetary policies are used in varying combinations to influence overall growth and distributions of bank loans, investments and deposits, and this use may affect interest rates charged on loans or paid on deposits. The monetary policies of the Federal Reserve have had a significant effect on the operating results of commercial banks and are expected to continue to do so in the future. The monetary policies of the Federal Reserve are influenced by various factors, including inflation, unemployment, and short-term and long-term changes in the international trade balance and in the fiscal policies of the U.S. Government. Future monetary policies and the effect of such policies on the future business and earnings of 1st United cannot be predicted.

Income Taxes

We are subject to income taxes at the federal level and subject to state taxation in Florida. We file a consolidated federal income tax return with a fiscal year ending on December 31.

Employees

As of December 31, 2013, we had a total of approximately 304 employees, including approximately 290 full-time employees. The employees are not represented by a collective bargaining unit. We consider relations with employees to be good.

Segment Reporting

We have one reportable segment.

Website Access to Company’s Reports

Our Internet website is www.1stunitedbankfl.com. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, including any amendments to those reports filed or furnished pursuant to section 13(a) or 15(d), and reports filed pursuant to Section 16, 13(d), and 13(g) of the Exchange Act are available free of charge through our website as soon as reasonably practicable after they are electronically filed with, or furnished to, the Securities and Exchange Commission. The information on our website is not incorporated by reference into this report.

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Item 1A. Risk Factors

An investment in our common stock contains a high degree of risk. You should consider carefully the following risk factors before deciding whether to invest in our common stock. Our business, including our operating results and financial condition, could be harmed by any of these risks. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially and adversely affect our business. The trading price of our common stock could decline due to any of these risks, and you may lose all or part of your investment. In assessing these risks, you should also refer to the other information contained in our filings with the SEC, including our financial statements and related notes.

Risks Related to Our Business

Failure to comply with the terms of the Loss Sharing Agreements with the FDIC may result in significant losses.

On October 21, 2011, 1st United entered into an Assumption Agreement – Whole Bank; All Deposits (“Old Harbor Purchase and Assumption Agreement”) with the FDIC, pursuant to which 1st United assumed all deposits and certain identified assets and liabilities of Old Harbor Bank, a Florida-chartered commercial bank headquartered in Clearwater, Florida. 1st United also entered into Loss Sharing Agreements with the FDIC. Under the Loss Sharing Agreements, 1st United will share losses in the losses on assets covered under the Old Harbor Purchase and Assumption Agreement. The FDIC will reimburse 1st United for 70% of up to $49 million of losses with respect to the acquired $116.7 million loan portfolio and the $2.3 million of other real estate owned, or “OREO” at fair value.

On December 17, 2010, 1st United entered into an Assumption Agreement – Whole Bank; All Deposits (“Bank of Miami Purchase and Assumption Agreement”) with the FDIC, pursuant to which 1st United assumed all deposits and certain identified assets and liabilities of The Bank of Miami, a national association headquartered in Miami, Florida. 1st United also entered into Loss Sharing Agreements with the FDIC. Under the Loss Sharing Agreements, 1st United will share in the losses on assets covered under the Bank of Miami Purchase and Assumption Agreement. The FDIC will reimburse 1st United for 80% of losses with respect to the $218.2 million loan portfolio and the $8.2 million of OREO, at fair value on the date acquired.

On December 11, 2009, 1st United entered into an Assumption Agreement – Whole Bank; All Deposits (“Republic Purchase and Assumption Agreement”) with the FDIC, pursuant to which 1st United assumed all deposits (except certain broker deposits) and certain identified assets and liabilities of Republic Federal Bank, a national association headquartered in Miami, Florida. 1st United also entered into Loss Sharing Agreements with the FDIC. Under the Loss Sharing Agreements, 1st United will share in the losses on assets covered under the Republic Purchase and Assumption Agreement. The FDIC will reimburse 1st United for 80% of losses of up to $36 million with respect to the entire $185 million acquired loan portfolio at fair value. The FDIC will reimburse 1st United for 95% of losses in excess of $36 million with respect to the $238 million acquired loan portfolio.

The Old Harbor Purchase and Assumption Agreement, the Republic Purchase and Assumption Agreement and the Bank of Miami Purchase and Assumption Agreement and their respective Loss Sharing Agreements have specific, detailed and cumbersome compliance, servicing, notification and reporting requirements, including certain restrictions on our change of control. The Loss Sharing Agreements prohibit the assignment by 1st United of its rights under the Loss Sharing Agreements and the sale or transfer of any subsidiary of 1stUnited holding title to assets covered under the Loss Sharing Agreements without the prior written consent of the FDIC. An assignment would include (i) the merger or consolidation of 1st United with or into another bank; (ii) our merger or consolidation with or into another company; (iii) the sale of all or substantially all of the assets of 1st United to another company or person; (iv) a sale by any one or more shareholders of more than 9% of the outstanding shares of 1st United Bancorp, Inc., 1st United, or any subsidiary holding assets subject to the Loss Sharing Agreements or (v) the sale of shares by 1st United Bancorp, Inc., 1st United, or any subsidiary holding assets subject to the Loss Sharing Agreements, in a public or private offering, that increases the number of outstanding shares by more than 9%. 1st United’s rights under the Loss Sharing Agreements will terminate if any assignment of the Loss Sharing Agreements occurs without the prior written consent of the FDIC.

Our failure to comply with the terms of the Loss Sharing Agreements or to properly service the loans and OREO under the requirements of the Loss Sharing Agreements may cause individual loans or large pools of loans to lose eligibility for loss sharing payments from the FDIC. This could result in material losses that are currently not anticipated.

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We may incur losses if we are unable to successfully manage interest rate risk.

Our profitability depends to a large extent on 1st United’s net interest income, which is the difference between income on interest-earning assets, such as loans and investment securities, and expense on interest-bearing liabilities such as deposits and borrowings. We are unable to predict changes in market interest rates, which are affected by many factors beyond our control, including inflation, recession, unemployment, money supply, domestic and international events and changes in the United States and other financial markets. Our net interest income may be reduced if: (i) more interest-earning assets than interest-bearing liabilities reprice or mature during a time when interest rates are declining or (ii) more interest-bearing liabilities than interest-earning assets reprice or mature during a time when interest rates are rising.

Changes in the difference between short- and long-term interest rates may also harm our business. For example, short-term deposits may be used to fund longer-term loans. When differences between short-term and long-term interest rates shrink or disappear, as is likely in the current zero interest rate policy environment, the spread between rates paid on deposits and received on loans could narrow significantly, decreasing our net interest income.

If market interest rates rise rapidly, interest rate adjustment caps may limit increases in the interest rates on adjustable rate loans, thereby reducing our net interest income.

The required accounting treatment of troubled loans we acquired through acquisitions could result in higher net interest margins and interest income in current periods and lower net interest margins and interest income in future periods.

Under U.S. GAAP, we are required to record troubled loans acquired through acquisitions at fair value which may underestimate the actual performance of such loans. As a result, if these loans outperform our original fair value estimates, the difference between our original estimate and the actual performance of the loan (the “discount”) is accreted into net interest income. Thus, our net interest margins may initially appear higher. In 2013 and 2012, our net interest margins were increased by 1.56% (which 1.13% was due to the resolution of and changes in cash flows on acquired assets) and 1.50% (which 0.81% was due to the resolution of and changes in cash flows on acquired assets), respectively, because of these discount accretions. We expect the yields on our loans to decline as our acquired loan portfolio pays down or matures and we expect downward pressure on our interest income to the extent that the runoff on our acquired loan portfolio is not replaced with comparable high-yielding loans. This could result in higher net interest margins and interest income in current periods and lower net interest rate margin and lower interest income in future periods.

We may face risks with respect to future expansion.

As a strategy, we have sought to increase the size of our operations by aggressively pursuing business development opportunities. We have made acquisitions of financial institutions and may continue to seek whole bank or branch acquisitions in the future. Acquisitions and mergers involve a number of risks, including:

§the time and costs associated with identifying and evaluating potential acquisitions and merger partners;
§the ability to finance an acquisition and possible ownership and economic dilution to existing shareholders;
§diversion of management’s attention to the negotiation of a transaction, and the integration of the operations and personnel of the acquired institution;
§the incurrence and possible impairment of goodwill associated with an acquisition and possible adverse short-term effects on results of operations; and
§the risk of loss of key employees and customers.

We may incur substantial costs to expand, and such expansion may not result in the levels of profits we seek. Integration efforts for any future mergers and acquisitions may not be successful and following any future merger or acquisition, after giving it effect, we may not achieve financial results comparable to or better than our historical experience.

Future acquisitions may dilute shareholder value.

We regularly evaluate opportunities to acquire other financial institutions. As a result, merger and acquisition discussions and, in some cases, negotiations may take place and future mergers or acquisitions involving cash, debt, or equity securities may occur at any time. Acquisitions typically involve the payment of a premium over book and market values, and, therefore, some dilution of our tangible book value and net income per common share may occur in connection with any future acquisitions.

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Our business may be adversely affected by conditions in financial markets and economic conditions generally.

Our business is concentrated in the South and Central Florida market areas. As a result, our financial condition, results of operations and cash flows are subject to changes if there are changes in the economic conditions in these areas. A prolonged period of economic recession or other adverse economic conditions in these areas could have a negative impact on us. A significant decline in general economic conditions nationally, caused by inflation, recession, acts of terrorism, outbreak of hostilities or other international or domestic occurrences, unemployment, changes in securities markets, declines in the housing market, a tightening credit environment or other factors could impact these local economic conditions and, in turn, have a material adverse effect on our financial condition and results of operations.

Economic conditions began deteriorating during the latter half of 2007 and have not fully recovered since that time. Although economic conditions are improving, business activity across a wide range of industries and regions, including South and Central Florida, has been greatly reduced. While unemployment in the U.S. and our market areas has begun to improve, unemployment remains elevated compared to recent historical levels prior to 2007. As a result of this economic crisis, many lending institutions, including us, have experienced declines in the performance of their loans, including construction, land development and land loans, commercial loans and consumer loans. Moreover, competition among depository institutions for deposits and quality loans has increased significantly. Loan demand has not returned to pre-recession levels. In addition, the values of real estate collateral supporting many commercial loans and home mortgages declined during the recession, and despite recent increasing property values in our markets, prices have not fully recovered. Overall, the general business environment has had an adverse effect on our business, and the environment may not improve in the near term. Accordingly, unless and until conditions improve, our business, financial condition and results of operations could continue to be adversely affected.

Our success is highly dependent upon our ability to retain the members of our senior management team and the loss of key personnel may adversely affect us.

Our success is, and expected to remain, highly dependent on our senior management team, including Messrs. Orlando, Schupp, Marino, Jacobson, and Ostermayer. As a community bank, it is our management’s extensive knowledge of and relationships in the community that generate business for us. Successful execution of our growth strategy will continue to place significant demands on our management and the loss of any such services may adversely affect our growth and profitability.

An inadequate allowance for loan losses would reduce our earnings.

We are exposed to the risk that our customers will be unable to repay their loans according to their terms and that any collateral securing the payment of their loans will not be sufficient to assure full repayment. This will result in credit losses that are inherent in the lending business. We evaluate the collectability of our loan portfolio and provide an allowance for loan losses that we believe is adequate based upon such factors as:

§the risk characteristics of various classifications of loans;
§previous loan loss experience;
§specific loans that have loss potential;
§delinquency trends;
§estimated fair market value of the collateral;
§current economic conditions; and
§geographic and industry loan concentrations.

As of December 31, 2013, 1st United’s allowance for loan losses was $9.6 million, which represented approximately 0.85% of its total amount of loans. 1st United had $15.8 million in non-accruing loans as of December 31, 2013, of which approximately $6.8 million are covered by Loss Sharing Agreements. The allowance may not prove sufficient to cover future loan losses. Although management uses the best information available to make determinations with respect to the allowance for loan losses, future adjustments may be necessary if economic conditions differ substantially from the assumptions used or adverse developments arise with respect to 1st United’s non-performing or performing loans. In addition, regulatory agencies, as an integral part of their examination process, periodically review the estimated losses on loans. Such agencies may require us to recognize additional losses based on their judgments about information available to them at the time of their examination. Accordingly, the allowance for loan losses may not be adequate to cover loan losses or significant increases to the allowance may be required in the future if economic conditions should worsen. Material additions to 1st United’s allowance for loan losses would adversely impact our net income and capital.

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If our nonperforming assets increase, our earnings will suffer.

At December 31, 2013, our nonperforming assets (which consist of non-accruing loans, accruing loans 90+ days delinquent, and foreclosed real estate assets) totaled $34.4 million, or 1.87 % of total assets, which is a decrease of $8.5 million or 19.9% over nonperforming assets at December 31, 2012. At December 31, 2012 and December 31, 2011, our nonperforming assets were $42.9 million or 2.74% of total assets and $57.0 million or 4.01%, respectively. Nonperforming assets included $17.6 million, $24.6 million, and $23.0 million assets covered by Loss Sharing Agreements as of December 31, 2013, December 31, 2012, and December 31, 2011, respectively. Our nonperforming assets adversely affect our net income in various ways. We do not record interest income on non-accrual loans or real estate owned. We must reserve for probable losses, which is established through a current period charge to the provision for loan losses as well as from time to time, as appropriate, write down the value of properties in our other real estate owned portfolio to reflect changing market values. Additionally, there are legal fees associated the resolution of problem assets as well as carrying costs such as taxes, insurance and maintenance related to our other real estate owned. Further, the resolution of nonperforming assets requires the active involvement of management, which can distract them from more profitable activity. Finally, if our estimate for the recorded allowance for loan losses proves to be incorrect and our allowance is inadequate, we will have to increase the allowance accordingly.

Our loan portfolio includes loans with a higher risk of loss which could lead to higher loan losses and nonperforming assets.

We originate commercial real estate loans, construction and development loans, consumer loans, and residential mortgage loans primarily within our market area. Commercial real estate, commercial, and construction and development loans tend to involve larger loan balances to a single borrower or groups of related borrowers and are most susceptible to a risk of loss during a downturn in the business cycle. These loans also have historically had greater credit risk than other loans for the following reasons:

§Commercial Real Estate Loans. Repayment is dependent on income being generated in amounts sufficient to cover operating expenses and debt service. These loans also involve greater risk because they are generally not fully amortizing over a loan period, but rather have a balloon payment due at maturity. A borrower’s ability to make a balloon payment typically will depend on being able to either refinance the loan or timely sell the underlying property. As of December 31, 2013, commercial real estate loans, including multi-family loans, comprised approximately 67% of our total loan portfolio.
§Commercial Loans. Repayment is generally dependent upon the successful operation of the borrower’s business. In addition, the collateral securing the loans may depreciate over time, be difficult to appraise, be illiquid, or fluctuate in value based on the success of the business. As of December 31, 2013, commercial loans comprised approximately 14% of our total loan portfolio.
§Construction and Development Loans. The risk of loss is largely dependent on our initial estimate of whether the property’s value at completion equals or exceeds the cost of property construction and the availability of take-out financing. During the construction phase, a number of factors can result in delays or cost overruns. If our estimate is inaccurate or if actual construction costs exceed estimates, the value of the property securing our loan may be insufficient to ensure full repayment when completed through a permanent loan, sale of the property, or by seizure of collateral. As of December 31, 2013, construction and development loans comprised approximately 3% of our total loan portfolio.

The increased risks associated with these types of loans result in a correspondingly higher probability of default on such loans (as compared to single-family real estate loans). Loan defaults would likely increase our loan losses and nonperforming assets and could adversely affect our allowance for loan losses.

Confidential customer information transmitted through 1st United’s online banking service is vulnerable to security breaches and computer viruses, which could expose 1st United to litigation and adversely affect its reputation and ability to generate deposits.

1st United provides its customers the ability to bank online. The secure transmission of confidential information over the Internet is a critical element of online banking. 1st United’s network or those of its customers could be vulnerable to unauthorized access, computer viruses, phishing schemes and other security problems. 1st United may be required to spend significant capital and other resources to protect against the threat of security breaches and computer viruses, or to alleviate problems caused by security breaches or viruses. To the extent that 1st United’s activities or the activities of its customers involve the storage and transmission of confidential information, security breaches and viruses could expose 1st United to claims, litigation and other possible liabilities. Any inability to prevent security breaches or computer viruses could also cause existing customers to lose confidence in 1st United’s systems and could adversely affect its reputation and its ability to generate deposits.

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We may need additional capital resources in the future and these capital resources may not be available on acceptable terms or at all.

We may need to incur additional debt or equity financing in the future to make strategic acquisitions or investments, for future growth, to fund losses or additional provisions for loan losses in the future, or to maintain certain capital levels in accordance with banking regulations. Such financing may not be available to us on acceptable terms or at all. Our ability to raise additional capital may also be restricted by the Loss-Sharing Agreements we entered into with the FDIC if the capital raise would effect a change in control of 1st United.

Further, in the event that we offer additional shares of our common stock in the future, our Articles of Incorporation do not provide shareholders with preemptive rights and such shares may be offered to investors other than our existing shareholders for prices at or below the then current market price of our common stock, all at the discretion of the Board. If we do sell additional shares of common stock to raise capital, the sale could reduce market price per share of common stock and dilute your ownership interest and such dilution could be substantial.

Since we engage in lending secured by real estate and may be forced to foreclose on the collateral property and own the underlying real estate, we may be subject to the increased costs associated with the ownership of real property, which could result in reduced net income.

Since we originate loans secured by real estate, we may have to foreclose on the collateral property to protect our investment and may thereafter own and operate such property, in which case we are exposed to the risks inherent in the ownership of real estate.

The amount that we, as mortgagee, may realize after a default is dependent upon factors outside of our control, including, but not limited to:

§General or local economic conditions;
§Environmental cleanup liability;
§Neighborhood values;
§Interest rates;
§Real estate taxes;
§Operating expenses of the mortgaged properties;
§Supply and demand for rental units or properties;
§Our ability to obtain and maintain adequate occupancy of the properties;
§Zoning laws;
§Governmental rules, regulations and fiscal policies; and
§Acts of God.

Certain expenditures associated with the ownership of real estate, principally real estate taxes and maintenance costs, may adversely affect the income from the real estate. Therefore, the cost of operating real property may exceed the rental income earned from such property, and we may have to advance funds in order to protect our investment or we may be required to dispose of the real property at a loss.

Changing conditions in Latin America could adversely affect our business.

A substantial number of our customers have economic and cultural ties to Latin America and, as a result, we are likely to feel the effects of adverse economic and political conditions in Latin America. As of December 31, 2013, approximately $269.5 million of our deposits were from foreign nationals whose primary residence is Latin America. U.S. and global economic policies, political or political tension, and global economic conditions may adversely impact the Latin American economies. If economic conditions in Latin America change, we could experience an outflow of deposits by those of our customers with connections to Latin America.

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Liquidity risk could impair our ability to fund operations and jeopardize our financial condition.

Liquidity is essential to our business. An inability to raise funds through deposits, borrowings, and other sources, could have a substantial negative effect on our liquidity. Our access to funding sources in amounts adequate to finance our activities on terms that are acceptable to us could be impaired by factors that affect us specifically or the financial services industry or economy in general. Factors that could negatively impact our access to liquidity sources include:

§a decrease in the level of our business activity as a result of an economic downturn in the markets in which our loans are concentrated;
§adverse regulatory action against us; or
§our inability to attract and retain deposits.

Our ability to borrow could be impaired by factors that are not specific to us or our region, such as a disruption in the financial markets or negative views and expectations about the prospects for the financial services industry and the unstable credit markets.

An impairment in the carrying value of our goodwill could negatively impact our earnings and capital.

Goodwill is initially recorded at fair value and is not amortized, but is reviewed for impairment at least annually or more frequently if events or changes in circumstances indicate that the carrying value may not be recoverable. Given the current economic environment and conditions in the financial markets, we could be required to evaluate the recoverability of goodwill prior to our normal annual assessment if we experience disruption in our business, unexpected significant declines in our operating results, or sustained market capitalization declines. These types of events and the resulting analyses could result in goodwill impairment charges in the future. These non-cash impairment charges could adversely affect our results of operations in future periods, and could also significantly impact certain financial ratios and limit our ability to obtain financing or raise capital in the future. A goodwill impairment charge does not adversely affect the calculation of our risk based and tangible capital ratios. As of December 31, 2013, we had $64.0 million in goodwill, which represented approximately 3.5% of our total assets.

Our future success is dependent on our ability to compete effectively in the highly competitive banking industry.

We face vigorous competition from other banks and other financial institutions, including savings and loan associations, savings banks, finance companies and credit unions for deposits, loans and other financial services in our market area. A number of these banks and other financial institutions with whom we compete for business and deposits are significantly larger than we are and have substantially greater access to capital and other resources, as well as larger lending limits and branch systems, and offer a wider array of banking services. To a limited extent, we also compete with other providers of financial services, such as money market mutual funds, brokerage firms, consumer finance companies, insurance companies and governmental organizations which may offer more favorable financing than we can. Many of our non-bank competitors are not subject to the same extensive regulations that govern us.

As a result, these non-bank competitors have advantages over us in providing certain services. We expect competition to increase in the future as a result of legislative, regulatory and technological changes and the continuing trend of consolidation in the financial services industry. Our profitability depends upon our continued ability to compete successfully in our primary market area and our lending territory. Consolidation and increasing competition may reduce or limit our margins, net interest income and our market share which could adversely affect our results of operations and financial condition.

Consumers and businesses may decide not to use banks to complete their financial transactions.

Technology and other changes are allowing parties to complete financial transactions that historically have involved banks at one or both ends of the transaction. For example, consumers can now pay bills and transfer funds directly without banks. This could result in the loss of fee income as well as the loss of customer deposits and income generated from those deposits and could have a material adverse effect on our financial condition and results of operations.

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Risks Related to Regulation and Legislation

Recently enacted legislation, particularly the Dodd-Frank Act, could materially and adversely affect us by increasing compliance costs, heightening our risk of noncompliance with applicable regulations, and changing the competitive landscape in the banking industry.

From time to time, the U.S. Congress and state legislatures consider changing laws and enact new laws to further regulate the financial services industry. On July 21, 2010, President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, or the Dodd-Frank Act, into law. The Dodd-Frank Act has resulted in sweeping changes in the regulation of financial institutions. The Dodd-Frank Act contains numerous provisions that affect all banks and bank holding companies. Many of these provisions remain subject to regulatory rule-making and implementation, the effects of which are not yet known. Although we cannot predict the specific impact and long-term effects that the Dodd-Frank Act and the regulations promulgated thereunder will have on us and our prospects, our target markets and the financial industry more generally, we believe that the Dodd-Frank Act and the regulations promulgated thereunder are likely to impose additional administrative and regulatory burdens that will obligate us to incur additional expenses and will adversely affect our margins and profitability. We will also have a heightened risk of noncompliance with the additional regulations. Finally, the impact of some of these new regulations is not known and may affect our ability to compete long-term with larger competitors.

The new Basel III Capital Standards may have an adverse effect on us.

In July 2013, the Federal Reserve Board released its final rules which will implement in the United States the Basel III regulatory capital reforms from the Basel Committee on Banking Supervision and certain changes required by the Dodd-Frank Act. Under the final rule, minimum requirements will increase for both the quality and quantity of capital held by banking organizations. Consistent with the international Basel framework, the rule includes a new minimum ratio of Common Equity Tier I Capital to Risk-Weighted Assets of 4.5% and a Common Equity Tier I Capital conservation buffer of 2.5% of risk-weighted assets that will apply to all supervised financial institutions. The rule also, among other things, raises the minimum ratio of Tier I Capital to Risk-Weighted Assets from 4% to 6% and includes a minimum leverage ratio of 4% for all banking organizations. We must begin transitioning to the new rules effective January 1, 2015. The impact of the new capital rules is likely to require us to maintain higher levels of capital, which will lower our return on equity.

New regulations could adversely impact our earnings due to, among other things, increased compliance costs or costs due to noncompliance.

 

The Consumer Financial Protection Bureau has issued a rule, effective as of January 14, 2014, designed to clarify for lenders how they can avoid monetary damages under the Dodd-Frank Act, which would hold lenders accountable for ensuring a borrower’s ability to repay a mortgage. Loans that satisfy this “qualified mortgage” safe-harbor will be presumed to have complied with the new ability-to-repay standard. Under the Consumer Financial Protection Bureau’s rule, a “qualified mortgage” loan must not contain certain specified features, including but not limited to:

 

§excessive upfront points and fees (those exceeding 3% of the total loan amount, less “bona fide discount points” for prime loans);
§interest-only payments;
§negative-amortization; and
§terms longer than 30 years.

 

Also, to qualify as a “qualified mortgage,” a borrower’s total monthly debt-to-income ratio may not exceed 43%. Lenders must also verify and document the income and financial resources relied upon to qualify the borrower for the loan and underwrite the loan based on a fully amortizing payment schedule and maximum interest rate during the first five years, taking into account all applicable taxes, insurance and assessments. The Consumer Financial Protection Bureau’s rule on qualified mortgages could limit our ability or desire to make certain types of loans or loans to certain borrowers, or could make it more expensive and/or time consuming to make these loans, which could adversely impact our growth or profitability.

 

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Additionally, on December 10, 2013, five financial regulatory agencies, including our primary federal regulator, the Federal Reserve, adopted final rules (the “Final Rules”) implementing the so-called Volcker Rule embodied in Section 13 of the Bank Holding Company Act, which was added by Section 619 of the Dodd-Frank Act.  The Final Rules prohibit banking entities from, among other things, (1) engaging in short-term proprietary trading for their own accounts, and (2) having certain ownership interests in and relationships with hedge funds or private equity funds (“covered funds”).   The Final Rules are intended to provide greater clarity with respect to both the extent of those primary prohibitions and of the related exemptions and exclusions.  The Final Rules also require each regulated entity to establish an internal compliance program that is consistent with the extent to which it engages in activities covered by the Volcker Rule, which must include (for the largest entities) making regular reports about those activities to regulators.  Community banks, such as 1st United, have been afforded some relief under the Final Rules.  If such banks are engaged only in exempted proprietary trading, such as trading in U.S. government, agency, state and municipal obligations, they are exempt entirely from compliance program requirements.  Moreover, even if a community bank engages in proprietary trading or covered fund activities under the rule, they need only incorporate references to the Volcker Rule into their existing policies and procedures.  The Final Rules are effective April 1, 2014, but the conformance period has been extended from its statutory end date of July 21, 2014 until July 21, 2015.  We are currently evaluating the Final Rules, which are lengthy and detailed.

 

The Federal Reserve’s repeal of the prohibition against payment of interest on demand deposits (Regulation Q) and the elimination of the FDIC’s TAG program may increase competition for such deposits and ultimately increase interest expense.

A major portion of our net income comes from our interest rate spread, which is the difference between the interest rates paid by us on amounts used to fund assets and the interest rates and fees we receive on our interest-earning assets. Our interest-earning assets include outstanding loans extended to our customers and securities held in our investment portfolio. We fund assets using deposits and other borrowings. Our goal has been to maintain non-interest-bearing deposits in the range of 15% to 25% of total deposits, and, as of December 31, 2013 we maintained approximately 34% of deposits as non-interest bearing.

On July 14, 2011, the Federal Reserve issued final rules to repeal Regulation Q, which had prohibited the payment of interest on demand deposits by institutions that are member banks of the Federal Reserve System. The final rules implement Section 627 of the Dodd-Frank Act, which repealed Section 19(i) of the Federal Reserve Act in its entirety effective July 21, 2011. As a result, banks and thrifts are now permitted to offer interest-bearing demand deposit accounts to commercial customers, which were previously forbidden under Regulation Q. The repeal of Regulation Q may cause increased competition from other financial institutions for these deposits. If we decide to pay interest on demand accounts, we would expect our interest expense to increase. Although Regulation Q has been effective for over two years, the impact may not have been realized yet because of the current zero interest rate policy environment.

We are subject to extensive regulation that could restrict our activities and impose financial requirements or limitations on the conduct of our business and limit our ability to receive dividends from the 1st United.

1st United is subject to extensive regulation, supervision and examination by the Florida Office of Financial Regulation, the Federal Reserve, and the FDIC. Our compliance with these industry regulations is costly and restricts certain of our activities, including payment of dividends, mergers and acquisitions, investments, loans and interest rates charged, interest rates paid on deposits, access to capital and brokered deposits and locations of banking offices. If we are unable to meet these regulatory requirements, our financial condition, liquidity and results of operations would be materially and adversely affected.

1st United must also meet regulatory capital requirements imposed by our regulators. An inability to meet these capital requirements would result in numerous mandatory supervisory actions and additional regulatory restrictions, and could have a negative impact on our financial condition, liquidity and results of operations.

In addition to the regulations of the Florida Office of Financial Regulation, the Federal Reserve, and the FDIC, as a member of the Federal Home Loan Bank, 1st United must also comply with applicable regulations of the Federal Housing Finance Agency and the Federal Home Loan Bank.

1st United’s activities are also regulated under consumer protection laws applicable to our lending, deposit and other activities. In addition, the Dodd-Frank Act imposes significant additional regulation on our operations. Regulation by all of these agencies is intended primarily for the protection of our depositors and the Deposit Insurance Fund and not for the benefit of our shareholders. Our failure to comply with these laws and regulations, even if the failure follows good faith effort or reflects a difference in interpretation, could subject us to restrictions on our business activities, fines and other penalties, any of which could adversely affect our results of operations, capital base and the price of our securities. Further, any new laws, rules and regulations could make compliance more difficult or expensive or otherwise adversely affect our business and financial condition. Please refer to the Section entitled “Business – Regulatory Considerations” in this Annual Report on Form 10-K.

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Florida financial institutions, such as 1st United, face a higher risk of noncompliance and enforcement action with the Bank Secrecy Act and other anti-money laundering statutes and regulations.

Since September 11, 2001, banking regulators have intensified their focus on anti-money laundering and Bank Secrecy Act compliance requirements, particularly the anti-money laundering provisions of the USA PATRIOT Act. There is also increased scrutiny of compliance with the rules enforced by the Office of Foreign Assets Control. Since 2004, federal banking regulators and examiners have been extremely aggressive in their supervision and examination of financial institutions located in the State of Florida with respect to the institution’s Bank Secrecy Act/Anti-Money Laundering compliance. Consequently, numerous formal enforcement actions have been issued against financial institutions.

In order to comply with regulations, guidelines and examination procedures in this area, 1st United has been required to adopt new policies and procedures and to install new systems. If 1st United’s policies, procedures and systems are deemed deficient or the policies, procedures and systems of the financial institutions that it has already acquired or may acquire in the future are deficient, 1st United would be subject to liability, including fines and regulatory actions. Such regulatory action may include restrictions on 1st United’s ability to pay dividends and the necessity to obtain regulatory approvals to proceed with certain aspects of its business plan, including its acquisition plans. In addition, because 1st United operates in Florida and because of the recent acquisitions of Old Harbor Bank and the acquisition of AFI and EBI, we expect that 1st United will face a higher risk of noncompliance and enforcement action with the Bank Secrecy Act and other anti-money laundering statutes and regulations.

Our eligibility to continue to use a short form registration statement on Form S-3 may affect our ability to opportunistically access the capital markets.

The ability to conduct primary offerings under a registration statement on Form S-3 has benefits to issuers who are eligible to use this short form registration statement. Form S-3 permits an eligible issuer to incorporate by reference its past and future filings and reports made under the Securities Exchange Act of 1934, as amended, or the Exchange Act. In addition, Form S-3 enables eligible issuers to conduct primary offerings “off the shelf” under Rule 415 of the Securities Act of 1933, as amended, or the Securities Act. The shelf registration process under Form S-3, combined with the ability to incorporate information on a forward basis, allows issuers to avoid additional delays and interruptions in the offering process and to access the capital markets in a more expeditious and efficient manner than raising capital in a standard registered offering on Form S-1. One of the requirements for Form S-3 eligibility is for an issuer to have timely filed its Exchange Act reports (including Form 10-Ks, Form 10-Qs and certain Form 8-Ks) for the 12- month period immediately preceding either the filing of the Form S-3, or a subsequent determination date. If, in the future, we fail to meet the eligibility requirements for Form S-3 we will lose our ability for a period of time to efficiently and expeditiously access the capital markets which could adversely impact our financial condition and capital ratios.

Risks Related to Market Events

Our loan portfolio is heavily concentrated in mortgage loans secured by properties in South and Central Florida which heightens our risk of loss than if we had a more geographically diversified portfolio.

Our interest-earning assets are heavily concentrated in mortgage loans secured by properties located in South and Central Florida. As of December 31, 2013, 71.3% of our loans secured by real estate were secured by commercial and residential properties located in Palm Beach, Miami-Dade, Broward, Hillsborough, Orange and Pasco Counties, Florida. The concentration of our loans in this region subjects us to risk that a downturn in the area economy, such as the one the area is currently experiencing, could result in a decrease in loan originations and an increase in delinquencies and foreclosures. As a result of this concentration, we may face greater risk than if our lending were more geographically diversified. In addition, since a large portion of our portfolio is secured by properties located in South and Central Florida, the occurrence of a natural disaster, such as a hurricane, could result in a decline in loan originations, a decline in the value or destruction of mortgaged properties, and an increase in the risk of delinquencies, foreclosures or loss on loans originated by us. We may suffer further losses due to the decline in the value of the properties underlying our mortgage loans, which would have an adverse impact on our operations.

Our concentration in loans secured by real estate may increase our credit losses, which would negatively affect our financial results.

Due to the relatively close proximity of our geographic markets, we have both geographic concentrations as well as concentrations in the types of loans funded. Specifically, due to the nature of our markets, a significant portion of the portfolio has historically been secured with real estate. As of December 31, 2013, approximately 66.8% and 15.8% of our $1.1 billion loan portfolio was secured by commercial real estate and residential real estate (including home equity loans), respectively. As of December 31, 2013, approximately 3.1% of total loans were secured by property under construction and land development.

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The recent downturn in the real estate market, the deterioration in the value of collateral, and the local and national economic recessions, had adversely affected our customers’ ability to repay their loans. If these conditions return, then our customers’ ability to repay their loans will be further eroded. In the event we are required to foreclose on a property securing one of our mortgage loans or otherwise pursue our remedies in order to protect our investment, we may be unable to recover funds in an amount equal to our projected return on our investment or in an amount sufficient to prevent a loss to us due to prevailing economic conditions, real estate values and other factors associated with the ownership of real property. As a result, the market value of the real estate or other collateral underlying our loans may not, at any given time, be sufficient to satisfy the outstanding principal amount of the loans, and consequently, we would sustain loan losses.

The fair value of our investments could decline which would adversely affect our shareholders’ equity.

Our investment securities portfolio as of December 31, 2013 has been designated as available-for-sale pursuant to U.S. GAAP relating to accounting for investments. Such principles require that unrealized gains and losses in the estimated value of the available-for-sale portfolio be “marked to market” and reflected as a separate item in shareholders’ equity (net of tax) as accumulated other comprehensive income.

Shareholders’ equity will continue to reflect the unrealized gains and losses (net of tax) of these investments. The fair value of our investment portfolio may decline, causing a corresponding decline in shareholders’ equity.

Management believes that several factors will affect the fair values of our investment portfolio. These include, but are not limited to, changes in interest rates or expectations of changes, the degree of volatility in the securities markets, inflation rates or expectations of inflation, and the slope of the interest rate yield curve (the yield curve refers to the differences between shorter-term and longer-term interest rates; a positively sloped yield curve means shorter-term rates are lower than longer-term rates). These and other factors may impact specific categories of the portfolio differently, and we cannot predict the effect these factors may have on any specific category.

Risks Related to an Investment in our Common Stock

Limited trading activity for shares of our common stock may contribute to price volatility.

While our common stock is listed and traded on The NASDAQ Global Select Market, there has been limited trading activity in our common stock. The average daily trading volume of our common stock in 2013 was approximately 50,996 shares. Due to the limited trading activity of our common stock, relativity small trades may have a significant impact on the price of our common stock and thereby, the value of your investment in our common stock.

The market price of our common stock may be highly volatile and subject to wide fluctuations in response to numerous factors, including, but not limited to, the factors discussed in other risk factors and the following:

§actual or anticipated fluctuations in our operating results;
§changes in interest rates;
§changes in the legal or regulatory environment in which we operate;
§press releases, announcements or publicity relating to us or our competitors or relating to trends in our industry;
§changes in expectations as to our future financial performance, including financial estimates or recommendations by securities analysts and investors;
§future sales of our common stock;
§changes in economic conditions in our marketplace, general conditions in the U.S. economy, financial markets or the banking industry; and
§other developments affecting our competitors or us.

Our share ownership is concentrated.

Our officers, directors and principal shareholders, together with their affiliates, beneficially own approximately 41% of our voting shares. As a result, these few shareholders, even if they do not act in concert, will exert significant influence over all matters requiring shareholder approval, including the election and removal of directors, any merger, consolidation or sale of all or substantially all of the assets, as well as any charter amendment and other matters requiring shareholder approval. This concentration of ownership may delay or prevent a change in control and may have a negative impact on the market price of the Company’s common stock by discouraging third party investors. In addition, the interests of these shareholders may not always coincide with the interests of the Company’s other shareholders.

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Securities research analysts may not initiate coverage or continue to cover our common stock, and this may have a negative impact on its market price.

The trading market for our common stock will depend in part on the research and reports that securities analysts publish about us and our business. We do not have any control over these securities analysts and they may not cover our common stock. If securities research analysts do not cover our common stock, the lack of research coverage may adversely affect the market price of our common stock. If we are covered by securities analysts and our common stock is the subject of an unfavorable report, our stock price would likely decline. If one or more of these analysts ceases to cover us or fails to publish regular reports on us, we could lose visibility in the financial markets, which would cause our stock price or trading volume to decline.

Our Articles of Incorporation, Bylaws, and certain laws and regulations may prevent or delay transactions you might favor, including our sale or merger.

We are registered with the Federal Reserve as a financial holding company under the Gramm-Leach-Bliley Act and are registered with the Federal Reserve as a bank holding company under the Bank Holding Company Act. As a result, we are subject to supervisory regulation and examination by the Federal Reserve. The Gramm-Leach-Bliley Act, the Bank Holding Company Act, and other federal laws subject financial holding companies to particular restrictions on the types of activities in which they may engage, and to a range of supervisory requirements and activities, including regulatory enforcement actions for violations of laws and regulations.

Provisions of our Articles of Incorporation, Bylaws, certain laws and regulations and various other factors may make it more difficult and expensive for companies or persons to acquire control of us without the consent of our Board of Directors. It is possible, however, that you would want a takeover attempt to succeed because, for example, a potential buyer could offer a premium over the then prevailing price of our common stock.

For example, our Articles of Incorporation permit our Board of Directors to issue preferred stock without shareholder action. The ability to issue preferred stock could discourage a company from attempting to obtain control of us by means of a tender offer, merger, proxy contest or otherwise. We are also subject to certain provisions of the Florida Business Corporation Act and our Articles of Incorporation that relate to business combinations with interested shareholders. Other provisions in our Articles of Incorporation or Bylaws that may discourage takeover attempts or make them more difficult include:

 

§Supermajority voting requirements to remove a director from office;
§Requirement that only directors may fill a Board vacancy;
§Requirement that a special meeting may be called only by a majority vote of our shareholders;
§Provisions regarding the timing and content of shareholder proposals and nominations;
§Supermajority voting requirements to amend our Articles of Incorporation;
§Absence of cumulative voting; and
§Inability for shareholders to take action by written consent.

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We are subject to evolving and expensive corporate governance regulations and requirements. Our failure to adequately adhere to these requirements or the failure or circumvention of our controls and procedures could seriously harm our business.

As a publicly reporting company, we are subject to certain federal, state and other rules and regulations, including applicable requirements of the Dodd- Frank Act and Sarbanes-Oxley Act of 2002. Compliance with these evolving regulations is costly and requires a significant diversion of management time and attention, particularly with regard to disclosure controls and procedures and internal control over financial reporting. Although we have reviewed our disclosure and internal controls and procedures in order to determine whether they are effective, our controls and procedures may not be able to prevent errors or frauds in the future. Faulty judgments, simple errors or mistakes, or the failure of our personnel to adhere to established controls and procedures may make it difficult for us to ensure that the objectives of the control system are met. A failure of our controls and procedures to detect other than inconsequential errors or fraud could seriously harm our business and results of operations.

We may be unable to declare and pay dividends in the future.

We declared a special dividend in December 2012 and December 2013 and also commenced a regular quarterly dividend in 2013. However, the payment of dividends to our shareholders depends largely upon the ability of 1st United to declare and pay dividends to us, as the principal source of our revenue is from such dividends. Our ability to declare and pay dividends depend primarily upon earnings, financial condition and need for funds, as well as governmental policies and regulations applicable to us and 1st United.

1st United is subject to legal limitations on the frequency and amount of dividends that can be paid to us. The Federal Reserve may restrict the ability of 1st United to pay dividends if such payments would constitute an unsafe or unsound banking practice. These regulations and restrictions may limit our ability to obtain funds from 1st United for our cash needs, including funds for acquisitions and the payment of dividends, interest, and operating expenses.

In addition, Florida law also places restrictions on the declaration of dividends from state chartered banks to their holding companies. Pursuant to the Florida Financial Institutions Code, the board of directors of state-chartered banks, after charging off bad debts, depreciation and other worthless assets, if any, and making provisions for reasonably anticipated future losses on loans and other assets, may quarterly, semi-annually or annually declare a dividend of up to the aggregate net profits of that period combined with the bank’s retained net profits for the preceding two years and, with the approval of the Florida Office of Financial Regulation and Federal Reserve, declare a dividend from retained net profits which accrued prior to the preceding two years. Before declaring such dividends, 20% of the net profits for the preceding period as is covered by the dividend must be transferred to the surplus fund of the bank until this fund becomes equal to the amount of the bank’s common stock then issued and outstanding. A state-chartered bank may not declare any dividend if (i) its net income (loss) from the current year combined with the retained net income (loss) for the preceding two years aggregates a loss or (ii) the payment of such dividend would cause the capital account of the bank to fall below the minimum amount required by law, regulation, order or any written agreement with the Florida Office of Financial Regulation or a federal regulatory agency.

The Company’s ability to pay cash dividends is further limited by certain restrictions imposed generally on Florida corporations under the Florida Business Corporation Act, specifically, no cash dividends may be paid if, after payment, (a) the corporation would not be able to pay its debts as they become due in the usual course of business, or (b) the corporation’s total assets would be less than the sum of its total liabilities plus the amount that would be needed, if the corporation were to be dissolved at the time of the distribution, to satisfy the preferential rights upon dissolution of shareholders whose preferential rights are superior to those receiving the distribution.

As a result of the foregoing laws, regulations and restrictions, we may be unable to pay additional dividends to our shareholders in the future.

Shares of our common stock are not an insured deposit and may lose value.

The shares of our common stock are not a bank deposit and will not be insured or guaranteed by the FDIC or any other government agency. Your investment will be subject to investment risk, and you must be capable of affording the loss of your entire investment.

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Sales of a significant number of shares of our common stock in the public markets, or the perception of such sales, could depress the market price of our common stock.

Sales of a substantial number of shares of our common stock in the public markets and the availability of those shares for sale could adversely affect the market price of our common stock. In addition, future issuances of equity securities, including pursuant to outstanding options, could dilute the interests of our existing shareholders, including you, and could cause the market price of our common stock to decline. We may issue such additional equity or convertible securities to raise additional capital. The issuance of any additional shares of common or preferred stock or convertible securities could be substantially dilutive to shareholders of our common stock. Moreover, to the extent that we issue restricted stock units, phantom shares, stock appreciation rights, options or warrants to purchase our common stock in the future and those stock appreciation rights, options or warrants are exercised or as the restricted stock units vest, our shareholders may experience further dilution. Holders of our shares of common stock have no preemptive rights that entitle holders to purchase their pro rata share of any offering of shares of any class or series and, therefore, such sales or offerings could result in increased dilution to our shareholders. We cannot predict the effect that future sales of our common stock would have on the market price of our common stock.

We may issue debt and equity securities or securities convertible into equity securities, any of which may be senior to our common stock as to distributions and in liquidation, which could negatively affect the value of our common stock.

In the future, we may attempt to increase our capital resources by entering into debt or debt-like financing that is unsecured or secured by all or up to all of our assets, or by issuing additional debt or equity securities, which could include issuances of secured or unsecured commercial paper, medium-term notes, senior notes, subordinated notes, preferred stock or securities convertible into or exchangeable for equity securities. In the event of our liquidation, our lenders and holders of our debt and preferred securities would receive a distribution of our available assets before distributions to the holders of our common stock. Because our decision to incur debt and issue securities in our future offerings will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future offerings and debt financings. Further, market conditions could require us to accept less favorable terms for the issuance of our securities in the future.

Item 1B. Unresolved Staff Comments

None

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Item 2. Properties

At December 31, 2013, we operated 22 full service banking centers in Florida, which includes our principal office in Boca Raton, Florida. In addition, we have an Executive/Operations Center which we lease in West Palm Beach, Florida. The following table sets forth our banking centers, date opened and whether owned or leased:

Office Name   Date Opened/Acquired   Own/Lease
           
Boca Raton (Principal Office)   December 2003     Leased
Cooper City Banking Center   April 2004     Leased
West Palm Beach Banking Center   May 2004     Leased
Palm Beach Banking Center   January 2006     Leased
Coral Springs Banking Center   August 2007     Leased
Ft. Lauderdale Banking Center   February 1987 (1)     Leased
North Miami Banking Center   June 1992 (1)     Leased
Coral Ridge Banking Center   November 2004 (1)(7)     Leased
Vero Beach Banking Center   August 2008 (2)     Owned
Sebastian Banking Center   August 2008(2)     Owned
Barefoot Bay Banking Center   August 2008(2)     Owned
Brickell Bay Banking Center   December 11, 2009(3)     Leased
Doral Banking Center   December 11, 2009(3)     Leased
Coral Way Banking Center   September 2010     Leased
Countryside Banking Center   October 2011(4)     Leased
Dunedin Banking Center   October 2011(4)     Owned
Palm Harbor Banking Center   October 2011(4)     Owned
Fort Harrison Banking Center   April 1, 2012(5)     Leased
Winter Park Banking Center   April 1, 2012(5)     Owned
Kennedy Blvd. Banking Center   April 1, 2012(5)     Owned
Palm Beach Gardens Banking Center   July 1, 2013(6)     Leased
Jupiter Banking Center   July 1, 2013(6)     Leased

 

  (1) Represents the original open date of the former Equitable Bank Banking Center. Effective with the Equitable Merger on February 29, 2008, these banking centers became 1st United offices.
     
  (2) Represents banking centers acquired as part of the Citrus acquisition consummated on August 15, 2008.
     
  (3) Represents banking centers acquired as part of the Republic Federal acquisition consummated on December 11, 2009.
     
  (4) Represents banking centers acquired as part of the Old Harbor acquisition consummated on October 21, 2011.
     
  (5) Represents banking centers acquired as part of the AFI acquisition consummated on April 1, 2012.
     
  (6) Represents banking centers acquired as part of the EBI acquisition consummated on July 1, 2013.
     
  (7) The Coral Ridge Banking Center was closed on January 10, 2014.

 

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Item 3. Legal Proceedings

We are periodically a party to or otherwise involved in legal proceedings arising in the normal course of business, such as claims to enforce liens, claims involving the making and servicing of real property loans, and other issues incident to our business. Management does not believe that there is any pending or threatened proceeding against us which, if determined adversely, would have a material adverse effect on our financial position, liquidity, or results of operations.

Item 4. Mine Safety Disclosures.

Not applicable.

PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Our common stock has traded on The NASDAQ Global Market since September 18, 2009 under the symbol “FUBC”. Since January 1, 2012, our common stock has traded on the NASDAQ Global Select Market.

We have restrictions on our ability to pay dividends. Please see Item 1. Business-Regulatory Considerations-Dividends for a discussion of these additional restrictions. As of January 31, 2014, our common stock was held by approximately 454 shareholders of record.

   High  Low  Cash Dividend Per Share
2012               
First Quarter  $6.36   $5.47   $0.00 
Second Quarter   6.39    5.31    0.00 
Third Quarter   6.56    5.40    0.00 
Fourth Quarter   6.83    5.30    0.10(a)
                
2013               
First Quarter  $6.57   $6.04    0.00 
Second Quarter   6.75    6.13    0.01 
Third Quarter   8.15    7.10    0.01 
Fourth Quarter   8.15    7.25    0.11(a)

 

(a)Includes a special dividend of $.10 per share.

 

The following graph and table provide a comparison of the cumulative total returns for our common stock, the NASDAQ Composite Index and the SNL Southeast Bank Index for the periods indicated. The graph assumes that an investor originally invested $100 in shares of our common stock at its closing price on September 18, 2009, the first day that our shares were traded. The stock price information below is not necessarily indicative of future price performance.

 

 

Index 09/18/09 12/31/09 12/31/10 12/31/11 12/31/12 12/31/13
1st United Bancorp, Inc. 100.00 125.26 121.23 97.37 111.41 136.20
NASDAQ Composite 100.00 106.69 126.05 125.05 147.25 206.39
SNL Southeast Bank 100.00 88.40 85.83 50.22 83.42 113.04

 

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Item 6. Selected Financial Data

The following table presents our summary consolidated financial data. We derived our balance sheet and income statement data for the years ended December 31, 2013, 2012, 2011, 2010 and 2009 from our audited financial statements. The summary consolidated financial data should be read in conjunction with, and are qualified in their entirety by, our financial statements and the accompanying notes and the other information included elsewhere in this Annual Report.

Use of Non-GAAP Financial Measures

The information set forth below contains certain financial information determined by methods other than in accordance with generally accepted accounting policies in the United States (“GAAP”). These non-GAAP financial measures are “tangible assets,” “tangible shareholders’ equity,” “tangible book value per common share,” and “tangible equity to tangible assets,” Our management uses these non-GAAP measures in its analysis of our performance because it believes these measures are material and will be used as a measure of our performance by investors.

“Tangible assets” is defined as total assets reduced by goodwill and other intangible assets. “Tangible shareholders’ equity” is defined as total shareholders’ equity reduced by goodwill and other intangible assets. “Tangible equity to tangible assets” is defined as tangible shareholders’ equity divided by tangible assets. These measures are important to many investors in the marketplace who are interested in the equity to assets ratio exclusive of the effect of changes in intangible assets on equity and total assets.

“Tangible book value per common share” is defined as tangible shareholders’ equity divided by total common shares outstanding. This measure is important to many investors in the marketplace who are interested in changes from period to period in book value per share exclusive of changes in intangible assets. Goodwill, an intangible asset that is recorded in a purchase business combination, has the effect of increasing total book value while not increasing our tangible book value.

These disclosures should not be considered in isolation or a substitute for results determined in accordance with GAAP, and are not necessarily comparable to non-GAAP performance measures which may be presented by other bank holding companies. Management compensates for these limitations by providing detailed reconciliations between GAAP information and the non-GAAP financial measures. A reconciliation table is set forth below following the selected consolidated financial data.

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(Dollars in thousands, except per share data)

   As of and for the years ended December 31,
   2013(a)  2012(b)  2011(c)  2010(d)  2009
BALANCE SHEET DATA                         
Total assets  $1,845,113   $1,568,612   $1,421,487   $1,267,181   $1,013,441 
Tangible assets   1,777,315    1,506,845    1,365,722    1,218,884    965,388 
Total loans   1,133,980    913,168    879,536    875,931    667,140 
Allowance for loan losses   9,648    9,788    12,836    13,050    13,282 
Securities available for sale   327,961    260,122    201,722    102,289    88,843 
Goodwill and other intangible assets   67,798    61,767    55,765    48,297    48,053 
Deposits   1,547,913    1,303,022    1,181,708    1,064,687    802,808 
Non-interest bearing deposits   526,311    426,968    329,283    281,285    194,185 
Shareholders’ equity   230,108    236,690    215,351    173,488    170,594 
Tangible shareholders’ equity   162,310    174,923    159,586    125,191    122,541 
INCOME STATEMENT DATA                         
Interest income  $79,750   $72,849   $60,409   $45,763   $28,539 
Interest expense   3,790    5,313    6,349    7,745    7,246 
Net interest income   75,960    67,536    54,060    38,018    21,293 
Provision for loan losses   3,475    6,350    7,000    13,520    13,240 
Net interest income after provision for loan losses   72,485    61,186    47,060    24,498    8,053 
Gain on acquisition   —      —      —      10,133    20,535 
Other non-interest income   (8,250)   (2,666)   1,739    4,411    2,427 
Non-interest expense   53,272    50,984    42,845    36,429    26,168 
Income before income taxes   10,963    7,536    5,954    2,613    4,847 
Income tax expense   4,092    2,808    2,282    1,015    1,827 
Net income   6,871    4,728    3,672    1,598    3,020 
Preferred stock dividends earned   —      —      —      —      (774)
Net income available to common shareholders  $6,871   $4,728   $3,672   $1,598   $2,246 
                          
PER SHARE DATA                         
Basic earnings (loss) per share  $0.20   $0.14   $0.13   $0.06   $0.17 
Diluted earnings (loss) per share  $0.20   $0.14   $0.13   $0.06   $0.17 
Cash dividends declared  $0.13   $0.10    —      —      —   
Dividend payout ratio (f)   65.00%   72.06%   —      —      —   
Book value per common share  $6.71   $6.95   $7.04   $7.00   $6.88 
Tangible book value per common share  $4.73   $5.13   $5.22   $5.05   $4.94 
SELECTED OPERATING RATIOS                         
Return on average assets   0.41%   0.31%   0.28%   0.15%   0.46%
Return on average shareholders’ equity   2.91%   2.03%   1.80%   0.91%   2.44%
Net interest margin (e)   5.29%   5.13%   4.76%   4.06%   3.69%
SELECTED ASSET QUALITY DATA, CAPITAL AND ASSET QUALITY RATIOS                         
Equity/assets   12.47%   15.09%   15.15%   13.69%   16.83%
Tangible equity/tangible assets   9.13%   11.61%   11.69%   10.27%   12.69%
Non-performing loans/total loans   1.40%   2.56%   4.94%   2.60%   2.34%
Non-performing assets/total assets   1.87%   2.74%   4.01%   2.38%   1.60%
Allowance for loan losses/total loans   0.85%   1.07%   1.46%   1.49%   1.99%
Allowance for loan losses/non-performing loans   60.92%   41.80%   29.52%   57.27%   85.0%
Net charge-offs average total loans   0.35%   1.01%   0.87%   2.01%   1.14%
REGULATORY CAPITAL RATIOS FOR THE COMPANY                         
Leverage Ratio   9.66%   11.44%   11.75%   11.78%   12.54%
Tier 1 Risk-based Capital   14.61%   21.21%   23.90%   21.02%   23.23%
Total Risk-based Capital   15.47%   22.43%   25.16%   23.08%   25.45%
REGULATORY CAPITAL RATIOS FOR THE BANK:                         
Leverage Ratio   8.86%   10.25%   9.11%   9.90%   7.72%
Tier 1 Risk-based Capital   13.40%   19.07%   18.61%   17.67%   14.36%
Total Risk-based Capital   14.27%   20.27%   19.87%   19.73%   16.59%

 

  (a) Includes the acquisition of Enterprise Bancorp, Inc. of Florida effective July 1, 2013.
  (b) Includes the acquisition of Anderen Financial, Inc. effective April 1, 2012.
  (c) Includes the acquisition of Old Harbor Bank of Florida effective October 1, 2011.
  (d) Includes the acquisition of The Bank of Miami, N.A. effective December 17, 2010.
  (e) Includes 1.13%, 0.81%, 0.33%, 0.60% and 0%, respectively related to the resolution of and changes in cash flows on acquired assets.
  (f) Calculated based on dividends declared in period regardless of period paid.

 

49
 

GAAP Reconciliation

(Dollar amounts in thousands, except per share amounts)

   As of and for the years ended December 31,
   2013  2012  2011  2010  2009
Total assets  $1,845,113   $1,568,612   $1,421,487   $1,267,181   $1,013,441 
Goodwill   (63,991)   (58,499)   (52,505)   (45,008)   (45,008)
Intangible assets, net   (3,807)   (3,268)   (3,260)   (3,289)   (3,045)
Tangible Assets  $1,777,315   $1,506,845   $1,365,722   $1,218,884   $965,388 
                          
Shareholders’ equity  $230,108   $236,690   $215,351   $173,488   $170,594 
Goodwill   (63,991)   (58,499)   (52,505)   (45,008)   (45,008)
Intangible assets, net   (3,807)   (3,268)   (3,260)   (3,289)   (3,045)
Tangible shareholders’ equity  $162,310   $174,923   $159,586   $125,191   $122,541 
                          
Book value per common share  $6.71   $6.95   $7.04   $7.00   $6.88 
Effect of intangible assets   (1.98)   (1.82)   (1.82)   (1.95)   (1.94)
Tangible book value per common share  $4.73   $5.13   $5.22   $5.05   $4.94 
                          
Equity to total assets   12.47%   15.09%   15.15%   13.69%   16.83%
Effect of intangible assets   (3.34)   (3.48)   (3.46)   (3.42)   (4.14)
Tangible equity/tangible assets   9.13%   11.61%   11.69%   10.27%   12.69%

 

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Management’s discussion and analysis (“MD&A”) provides supplemental information, which sets forth the major factors that have affected our financial condition and results of operations and should be read in conjunction with the Consolidated Financial Statements and related notes included in the Annual Report on Form 10-K. The MD&A is divided into subsections entitled “Business Overview,” “Financial Overview,” “Financial Condition,” “Results of Operations,” “Interest Rate Risk Management,” “Liquidity and Capital Resources,” “Off-Balance Sheet Arrangements,” and “Critical Accounting Policies.” The following information should provide a better understanding of the major factors and trends that affect our earnings performance and financial condition, and how our performance during 2013 compared with prior years. Throughout this section, 1st United Bancorp, Inc., and its subsidiaries, collectively, are referred to as “Company,” “we,” “us,” or “our.” Unless the context indicates otherwise, all dollar amounts in this MD&A are in thousands.

CAUTION CONCERNING FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K, 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 this Annual Report for a discussion of factors that could cause our actual results to differ materially from those in the forward-looking statements.

However, other factors besides those listed in Item 1A Risk Factors or discussed in this 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.

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Business Overview

We are a financial holding company headquartered in Boca Raton, Florida. Our principal subsidiary, 1st United, is a Florida-chartered commercial bank, which operates 21 banking centers in Florida, from Central Florida through the Treasure Coast to South Florida, including Brevard, Broward, Hillsborough, Indian River, Miami-Dade, Orange, Palm Beach, and Pinellas Counties.

Over the past ten years, we have grown under the stewardship of our highly experienced executive management team. Specifically, we have:

  increased total assets from $66.8 million to $1.845 billion;

 

  increased total net loans from $39.6 million to $1.125 billion;

 

  grown non-interest bearing deposits from $4.6 million to $526.3 million; and

 

  expanded our branch network from one location to 21 locations.

 

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.

We have experienced a high volume of bankruptcy filings in Florida during recent years. According to the most recent data available from the U.S. Federal Courts, Florida had the second highest number of bankruptcy filings in the United States through the first three quarters of 2013. Only California experienced more bankruptcy filings. The majority of the filings in Florida were non-business bankruptcies.

Based on data from the U.S. Census Bureau, from 2006 through the end of 2010, median household income decreased by 3.1% in Florida. Additionally, real estate property valuations have also been depressed during the recent economic downturn as evidenced by our higher level of problem assets and credit-related costs. According to the Federal Housing Finance Agency, Florida experienced negative trends in single-family home prices (as indicated by negative housing price indexes) in nearly every quarter beginning with the second quarter of 2007 through the end of 2011 with positive housing price indexes through the end of 2013. Economic conditions such a high unemployment, high volumes of non-business bankruptcy filings, decreased median household income, and depressed real estate values all affect the value of our loan portfolio and the associated risks. While general economic conditions have stabilized in the state of Florida, a relapse of the recession or an economic downturn in Florida would likely exacerbate the adverse effects of these difficult market conditions on our clients, which would likely have a negative impact on our financial results.

We intend to continue to opportunistically expand and grow our business by building on our business strategy and increasing market share in key Florida markets. We believe the demographics and growth characteristics within the communities we serve will provide significant franchise enhancement opportunities to leverage our core competencies while acquisitive growth will enable us to take advantage of the extensive infrastructure and scalable platform that we have assembled.

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A significant portion of our growth has been through acquisitions. Under our current management team, we have consummated eight transactions since 2004:

Acquired Bank   Headquarters   Year Acquired
First Western Bank   Cooper City, Florida   2004
Equitable Bank   Fort Lauderdale, Florida   2008
Citrus Bank, N.A.(1)   Vero Beach, Florida   2008
Republic Federal Bank, N.A. (2)   Miami, Florida   2009
The Bank of Miami, N.A.(2)   Miami, Florida   2010
Old Harbor Bank of Florida (2)   Clearwater, Florida   2011
Anderen Financial, Inc.   Palm Harbor, Florida   2012
Enterprise Bancorp, Inc.   North Palm Beach, Florida   2013

 

   
           

 

  (1) Branch acquisition
  (2) FDIC-assisted transaction

 

Enterprise Bancorp, Inc.

On July 1, 2013, the Company completed its 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 “EBI Merger Agreement”), dated March 22, 2013, as amended, by and among the Company, 1st United Bank, EBI and Enterprise. In accordance with the EBI Merger Agreement, the Company acquired EBI through the merger of a wholly-owned subsidiary of the Company with and into EBI and 1st United Bank acquired Enterprise Bank through the merger of Enterprise Bank with and into 1st United Bank (collectively, the “EBI Merger”).

Pursuant to the terms of the EBI Merger Agreement, each share of EBI common stock issued and outstanding was converted into the right to receive consideration based on EBI’s total consolidated assets and the EBI Tangible Book Value (as defined in the EBI Merger Agreement) as of June 30, 2013. The total value of the consideration paid to EBI shareholders was approximately $45.6 million, which consisted of approximately $5.1 million in cash (less the $400,000 holdback described below), $22.1 million in loans (including all nonperforming loans), other real estate, and repossessed assets of Enterprise and $18.3 million in impaired and below investment grade securities and other investments of Enterprise. Each holder of a share of EBI common stock was entitled to consideration from the Company equal to approximately $6.01 per share (less their per share pro rata portion of the $400,000 holdback described below). The total consideration paid to all EBI shareholders in connection with the Merger was subject to a holdback amount of $400,000 to defray potential damages and related expenses incurred to defend or settle certain litigation. The Company does not anticipate the litigation and related costs will exceed the $400,000. The Company recorded goodwill associated with the transaction of approximately $5.5 million which is not deductible for tax purposes. The Company acquired a net deferred tax liability of $233,000 and recorded a deferred tax asset in other assets as a result of purchase accounting adjustments.

The Company accounted for the transaction under the acquisition method of accounting which requires purchased assets and liabilities assumed to be recorded at their respective fair values at the date of acquisition. See Note 4 of the Notes to the Consolidated Financial Statements for additional information related to the fair value of loans acquired. The Company determined the fair value of core deposit intangibles, securities, and deposits with the assistance of third party valuations. The valuation of FHLB advances was based on current rates for similar borrowings. The estimated fair values are subject to refinement as additional information relative to the closing date fair values becomes available through the measurement period.

 

Anderen 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 (Anderen Merger Agreement”), dated October 24, 2011. Pursuant to the terms of the Anderen Merger Agreement, each outstanding 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 election was subject to mandatory allocation procedures to ensure the total consideration was approximately 50% cash and 50% stock. The value of the AFI per share consideration was $7.73 calculated per the Anderen Merger Agreement. The total value of the consideration paid to AFI shareholders was $38.3 million which consisted of approximately $19.1 million in cash and 3,140,354 shares of the Company’s common stock. The Company’s common stock was valued at $6.09 per share with a total value of $19.1 million, net of approximately $61,000 of costs. The Company recorded goodwill of $5.8 million as a result of the merger which is not deductible for tax purposes. Total net deferred tax assets acquired was $5.9 million, primarily related to loss carry forwards. The Company completed the integration of AFI in June 2012.

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The Company accounted for the transaction under the acquisition method of accounting which requires purchased assets and liabilities assumed to be recorded at their respective fair values at the date of acquisition. See Note 4 of the Notes to the Consolidated Financial Statement for additional information related to the fair value of loans acquired. The Company uses third party valuations to determine the fair value of the core deposit intangible, securities, fixed assets and deposits. The fair value of other real estate owned was based on recent appraisals of the properties. The estimated fair value are subject to refinement as additional information relative to the closing date fair values. The Company updated the previously reported consolidated balance sheet for the year ended December 31, 2012 for the final measurement period adjustments.

Financial Overview

  Net earnings for the year ended December 31, 2013 were $6.9 million compared to net earnings of $4.7 million in 2012. Operating results for the year ended December 31, 2013 when compared to the year ended December 31, 2012 were impacted by the EBI Merger in July 2013 and net loan growth of $61.3 million for the year ended December 31, 2013.

 

  Net interest margin increased to 5.29% for the year ended December 31, 2013 compared to 5.13% for the year ended December 31, 2012.  Excluding interest accretion related to the resolution of and changes in cash flows on acquired assets, our net interest margin would have been 4.16% and 4.32% for the years ended December 31, 2013 and 2012, respectively.

 

 

The Company recorded provisions for loan losses of $3.5 million for the year ended December 31, 2013 as compared to $6.4 million for the year ended December 31, 2012. 

 

  During the year ended December 31, 2013, we incurred approximately $1.7 million in personnel, IT and facilities costs and merger reorganization expense that related to the integration of EBI. During the year ended December 31, 2012, we incurred approximately $1.8 million in personnel, IT, facilities and merger reorganization expense related to the integrations of AFI and Old Harbor.

 

  Non-performing assets at December 31, 2013 represented 1.87% of total assets compared to 2.74% at December 31, 2012. Non-performing assets not covered by the Loss Sharing Agreements represented 0.91% of total assets at December 31, 2013 compared to 1.17% at December 31, 2012.

 

  Total assets increased to $1.845 billion at December 31, 2013 from $1.569 billion at December 31, 2012 primarily due to the EBI acquisition. In addition, at December 31, 2013 we had a short term deposit of approximately $128 million that was deposited in December 2013 and subsequently paid out in January, 2014.

 

  Securities available for sale increased by approximately $67.8 million from $260.1 million at December 31, 2012 to $328.0 million at December 31, 2013. The increase was a result of the Company investing excess liquidity of approximately $174.4 million primarily in residential mortgage backed securities during the year ended December 31, 2013, as well as the acquisition of $4.0 million of residential mortgage backed securities from EBI, which was offset by sales of $33.7 million, maturities and principal payments of $57.5 million and an increase in the unrealized loss on securities held of $16.9 million.

 

  Net loans increased by approximately $221.0 million to $1.125 billion at December 31, 2013 from $903.6 million at December 31, 2012. The change was due to the acquisition of $159.2 million of loans in connection with the acquisition of EBI as well as new loan production of $336.6 million which was offset by payoffs and resolutions of $275.3 million during the year.

 

53
 

 

  Other real estate owned decreased by $949,000 to $18.6 million from $19.5 million at December 31, 2012. The change was due to the foreclosure of $8.4 million of loans, OREO proceeds from sales of $9.4 million, net of a $1.1 million gain for the year ended December 31, 2013 and write-downs on properties due to updated fair values of $1.1 million. At December 31, 2013, we had $1.1 million in OREO under contract for sale.

 

  FDIC loss share receivable was reduced by approximately $19.2 million from $48.6 million at December 31, 2012 to $29.3 million at December 31, 2013. The decrease was due to cash receipts from the FDIC of approximately $6.5 million and approximately $15.8 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 $574,000.

 


Deposits increased by $244.9 million from $1.303 billion at December 31, 2012 to $1.548 billion at December 31, 2013 due primarily from the acquisition of $177.2 million in deposits from the EBI Merger and one customer deposit of $128.0 million received in December 2013 and withdrawn in January 2014, offset by anticipated runoff of acquired higher cost time deposits and money market accounts. The percentage of non-interest bearing deposits to total deposits was approximately 34% at December 31, 2013 compared to approximately 33% at December 31, 2012.

 

 

Federal Home Loan Bank Advances were $35.0 million at December 31, 2013 and were assumed in connection with the EBI Merger. There were no Federal Home Loan Bank Advances at December 31, 2012. 

 

  Total shareholders’ equity decreased to $230.1 million at December 31, 2013 from $236.7 million at December 31, 2012.  The change was due to net unrealized losses on securities available for sale in accumulated other comprehensive income (loss) of $8.3 million at December 31, 2013 from a net unrealized gain on securities available for sale of $2.3 million at December 31, 2012.  The decrease in accumulated other comprehensive income (loss) was partially offset by net income for the year ended December 31, 2013 of $6.9 million.

 

Financial Condition

At December 31, 2013, our total assets were $1.845 billion and our net loans were $1.125 billion or 61.0% of total assets. At December 31, 2012, our total assets were $1.569 billion and our net loans were $903.6 million or 57.7% of total assets. The increase in net loans from December 31, 2012 to December 31, 2013 was $221.0 million or 24.5%. These increases were attributed to the EBI Merger which added approximately $159.2 million in net loans. During the year ended December 31, 2013, we had new loan production and fundings of approximately $336.6 million which was offset by payoffs, sales, pay downs and charge-offs of $275.3 million.

At December 31, 2013, the allowance for loan losses was $9.6 million or 0.85% of total loans. At December 31, 2012, the allowance for loan losses was $9.8 million or 1.07% of total loans.

At December 31, 2013, our total deposits were $1.548 billion, an increase of $244.9 million (18.8%) over December 31, 2012 of $1.303 billion. The increase was mainly due to the EBI Merger in July 1, 2013, which added approximately $177.2 million in deposits as of December 31, 2013 and one customer deposit of $128.0 million received in December 2013 and withdrawn in January 2014 offset by anticipated runoff of acquired higher cost time deposits and money market accounts. Non-interest bearing deposits represented 34.0% of total deposits at December 31, 2013 compared to 32.8% at December 31, 2012.

There were $35.0 million in Federal Home Loan Bank advances as of December 31, 2013 which compares to no Federal Home Loan Bank advances as of December 31, 2012. The Federal Home Loan Bank advances were assumed as part of the EBI Merger.

Refer to Part 1, Item 1. Business for a discussion of our investment portfolio, loan portfolio, deposits and borrowings.

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Results of Operations

We recorded net earnings of $6.9 million for the year ended December 31, 2013, compared to net earnings of $4.7 million for the year ended December 31, 2012. Income for the year ended December 31, 2013 was positively impacted by the EBI acquisition in July 2013, an increase in interest income due to net loan growth and purchases of securities available for sale and a reduction in the provision for loan losses year-over year offset by an increase in non-interest expense due to the disposal of two banking centers and equipment and write-downs to our other real estate owned portfolio due to updated appraisals received during 2013.

We recorded net earnings of $4.7 million for the year ended December 31, 2012, compared to net earnings of $3.7 million for the year ended December 31, 2011. Income for the year ended December 31, 2012 was impacted by the Old Harbor acquisition at the end of 2011 as well as the AFI acquisition in April 2012. Income for the year ended December 31, 2012 was also impacted by a reduction in the provision for loan losses year-over year of $650,000 as well as salary, occupancy, data processing and integration expenses of $1.8 million related to the Old Harbor and AFI acquisitions incurred in the year ended December 31, 2012 as compared to $1.1 million in such costs incurred in the year ending December 31, 2011 related to the TBOM and Old Harbor acquisitions. Overall operating expenses increased by $8.1 million in 2012 primarily as a result of the Old Harbor acquisition in October 2011 as well as the AFI acquisition in April 2012.

Net Interest Income

Net interest income, which constitutes the principal source of our income, represents the excess of interest income on interest-earning assets over interest expense on interest-bearing liabilities. The principal interest-earning assets are federal funds sold, investment securities, and loans. Interest-bearing liabilities primarily consist of time deposits, interest-bearing checking accounts (“NOW accounts”), savings deposits, money market accounts, FHLB borrowings, and repurchase agreements. Funds attracted by these interest-bearing liabilities are invested in interest-earning assets. Accordingly, 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).

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Net interest earnings for the years ended December 31, 2013 and 2012 are reflected in the following table:

(Dollars in thousands)  Year ended
   December 31, 2013  December 31, 2012
   Average
Balance
  Interest
Income/
Expense
  Average
Rates
Earned/
Paid
  Average
Balance
  Interest
Income/
Expense
  Average
Rates
Earned/
Paid
Assets                              
Interest-earning assets                              
Loans (a)  $1,023,001   $71,948    7.03%  $931,807   $66,929    7.18%
Investment securities   325,510    7,153    2.20%   216,039    5,106    2.36%
Federal funds sold and securities purchased under resale agreements   88,018    649    0.74%   169,909    814    0.48%
Total interest earning assets   1,436,529    79,750    5.55%   1,317,755    72,849    5.53%
Non-interest earning assets   229,978              225,917           
Allowance for loan losses   (10,019)             (11,381)          
Total Assets  $1,656,488             $1,532,291           
                               
Liabilities                              
Interest-bearing liabilities                              
NOW accounts  $206,527   $262    0.13%  $154,687   $233    0.15%
Money market accounts   343,377    1,073    0.31%   338,242    1,569    0.46%
Savings accounts   62,792    165    0.26%   63,736    194    0.30%
Certificates of deposit   296,983    2,180    0.73%   336,970    3,296    0.98%
Repos   15,824    17    0.11%   11,779    14    0.12%
Other borrowings   18,623    93    0.50%   137    7    5.11%
Total interest-bearing liabilities   944,126    3,790    0.40%   905,551    5,313    0.59%
Non-interest-bearing liabilities                              
Demand deposit accounts   467,445              385,066           
Other liabilities   8,766              8,562           
Total non-interest-bearing liabilities   476,211              393,628           
                               
Shareholders’ Equity   236,151              233,112           
                               
Total Liabilities and Shareholders’ Equity  $1,656,488             $1,532,291           
Net interest spread       $75,960    5.15%       $67,536    4.94%
Net interest on average earning
assets-Margin (b)
             5.29%             5.13%

 

  (a) Average loans include non-performing loans. Interest on loans includes loan origination fees of $678,000 in 2013, and $490,000 in 2012.

 

  (b) Net interest margin is net interest income divided by average total interest-earning assets.

 

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Our net interest income for the year ended December 31, 2013 was positively impacted by an increase in average earning assets of $118.8 million or 9.0% as compared to the year ended December 31, 2012 primarily due to increases in loans from the EBI acquisition as well as net organic loan growth and an increase in investment securities. Earnings were also positively impacted by the accretion of discounts related to acquired loans of approximately $22.3 million for the year ended December 31, 2013 as compared to $19.7 million for the same period in 2012. Included in the $22.3 million of accretion of discount in 2013 was approximately $16.2 million related to the disposition of assets acquired in the transactions above the discounted purchase price of the asset and accretion of discounts on purchased credit impaired loans due to increases in estimated cash flows. For the year ended December 31, 2013, we took a charge of approximately $15.8 million, including $1.0 million related to the resolution of other real estate owned, as an adjustment to the FDIC receivable. This charge was recorded in non-interest income in the consolidated statements of operations and was substantially related to changes in cash flows of loss share assets. Included in the $19.7 million of accretion of discount in 2012 was approximately $10.7 million related to the disposition of assets acquired in the transactions above the discounted purchase price of the asset. For the year ended December 31, 2012, we took a charge of approximately $13.7 million, including $3.4 million related to the resolution of other real estate owned, as an adjustment to the FDIC 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.

Net interest income was $76.0 million for year ended December, 2013, as compared to $67.5 million for the year ended December 31, 2012, an increase of $8.4 million or 12.5%. The increase resulted primarily from an increase in average earning assets of $118.8 million or 9.0% primarily a result of the EBI acquisition, net organic loan growth, an increase in accretion income on acquired loans and a reduction in our average cost of funds.

The net interest margin (i.e., net interest income divided by average earning assets) increased 16 basis points from 5.13% during the year ended December 31, 2012 to 5.29% during the year ended December 31, 2013, primarily due to a reduction in the yield on our interest bearing deposits. Our cost of funds was approximately 27 basis points for the year ended December 31, 2013, as compared to 41 basis points in 2012, primarily as a result of lower rates on money market and certificate of deposit accounts. Accretion of $22.3 million on acquired loans added approximately 156 basis points to the net interest margin for the year ended December 31, 2013; of this amount, $16.2 million or 113 basis points related to resolved loss share assets and changes in cash flows during the year ended December 31, 2013. This compares to accretion of loan discount of $19.7 million during the year ended December 31, 2012, which added approximately 150 basis points to the December 31, 2012 margin. Of this amount, $10.7 million or 81 basis points related to resolved loss share assets and changes in cash flows during the year ended December 31, 2012.

For the year ended December 31, 2013, average loans represented 71.2% of total average interest-earning assets and 73.4% of total average deposits and customer repurchase agreements, compared to average loans to total average interest-earning assets of 70.71% and average loans to total average deposits and customer repurchase agreements of 72.2% at December 31, 2012.

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Net interest earnings for the years ended December 31, 2012 and 2011 are reflected in the following table:

(Dollars in thousands)  Years ended
   December 31, 2012  December 31, 2011
   Average
Balance
  Interest
Income/
Expense
  Average
Rates
Earned/
Paid
  Average
Balance
  Interest
Income/
Expense
  Average
Rates
Earned/
Paid
Assets                              
Interest-earning assets                              
Loans (a)  $931,807   $66,929    7.18%  $831,830   $55,311    6.65%
Investment securities   216,039    5,106    2.36%   147,608    4,362    2.96%
Federal funds sold and securities purchased under resale agreements   169,909    814    0.48%   156,842    736    0.47%
Total interest earning assets   1,317,755    72,849    5.53%   1,136,280    60,409    5.32%
Non-interest earning assets   225,917              180,407           
Allowance for loan losses   (11,381)             (13,438)          
Total Assets  $1,532,291             $1,303,249           
                               
Liabilities                              
Interest-bearing liabilities                              
NOW accounts  $154,687   $233    0.15%  $125,267   $222    0.18%
Money market accounts   338,242    1,569    0.46%   278,104    2,192    0.79%
Savings accounts   63,736    194    0.30%   44,696    238    0.53%
Certificates of deposit   336,970    3,296    0.98%   297,806    3,339    1.12%
Repos   11,779    14    0.12%   11,998    16    0.13%
Other borrowings   137    7    5.11%   9,053    342    3.78%
Total interest-bearing liabilities   905,551    5,313    0.59%   766,924    6,349    0.83%
Non-interest-bearing liabilities                              
Demand deposit accounts   385,066              325,277           
Other liabilities   8,562              7,187           
Total non-interest-bearing liabilities   393,628              332,464           
                               
Shareholders’ Equity   233,112              203,861           
                               
Total Liabilities and Shareholders’ Equity  $1,532,291             $1,303,249           
Net interest spread       $67,536    4.94%       $54,060    4.49%
Net interest on average earning
assets-Margin (b)
             5.13%             4.76%

 

  (a) Average loans include non-performing loans. Interest on loans includes loan fees of $490,000 in 2012 and $301,000 in 2011.

 

Our net interest income for the year ended December 31, 2012 was positively impacted by an increase in average earning assets of $181.5 million or 16.0% as compared to the year ended December 30, 2011 primarily due to increases in loans acquired in the AFI and Old Harbor acquisitions as well as increases in investments due to net purchases through 2012 and the acquisition of investments from our merger with AFI. Earnings were also positively impacted by the accretion of discounts related to acquired loans of approximately $19.7 million for the year ended December 31, 2012 as compared to $11.8 million for the same period in 2011. Included in the $19.7 million of accretion of discount in 2012 was approximately $10.7 million related to the disposition of assets acquired in the transactions above the discounted purchase price of the asset. For the year ended December 31, 2012, we took a charge of approximately $13.7 million, including $3.4 million related to the resolution of other real estate owned, as an adjustment to the FDIC receivable. This charge was recorded in non-interest income in within the consolidated statements of operations and was substantially related to changes in cash flows of loss share assets.

Included in the $11.8 million of accretion of discount in 2011 was approximately $4.3 million related to the disposition of assets acquired in the transactions above the discounted purchase price of the asset. For the year ended December 31, 2011, we took a charge of approximately $3.8 million related to resolved loans as an adjustment to the FDIC receivable. This charge was recorded in non-interest income in within the consolidated statements of operations and was substantially related to changes in cash flows of loss share assets.

Net interest income was $67.5 million for year ended December, 2012, as compared to $54.1 million for the year ended December 31, 2011, an increase of $13.5 million or 24.9%. The increase resulted primarily from an increase in average earning assets of $181.5 million or 16.0% primarily due to the AFI and Old Harbor acquisitions as well as a reduction in our average cost of funds.

The net interest margin (i.e., net interest income divided by average earning assets) increased 37 basis points from 4.76% during the year ended December 31, 2011 to 5.13% during the year ended December 31, 2012, due to an increase in the yield earned on assets of 21 basis point coupled with a decrease of our cost of funds during the year as well as an increase in accretion income during the year. Our cost of funds was approximately 41 basis points for the year ended December 31, 2012, as compared to 58 basis points in 2011, primarily as a result of lower rates in the renewal of time deposits. Accretion of $19.7 million on acquired loans added approximately 150 basis points to the net interest margin for the year ended December 31, 2012; of this amount, $10.7 million or 81 basis points related to resolved loss share assets and changes in cash flows during the year ended December 31, 2012. This compares to accretion of loan discount of $11.8 million during the year December 31, 2011, which added approximately 104 basis points to the December 31, 2011 margin. Of this amount, $4.3 million or 38 basis points related to resolved loss share assets and changes in cash flows during the year ended December 31, 2011.

For the year ended December 31, 2012, average loans represented 70.71% of total average interest-earning assets and 72.2% of total average deposits and customer repurchase agreements, compared to average loans to total average interest-earning assets of 73.21% and average loans to total average deposits and customer repurchase agreements of 76.80% at December 31, 2011.

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Rate Volume Analysis

The following table sets forth certain information regarding changes in our interest income and interest expense for the year ended December 31, 2013, as compared to the year ended December 31, 2012, and the year ended December 31, 2012 as compared to the year ended December 31, 2011. 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 years ended December 31, 2013 and 2012 were as follows:

(Dollars in thousands)  Years ended
December 31, 2013 and 2012
   Change in
Interest
Income/
Expense
  Variance
Due to
Volume
Changes
  Variance
Due to
Rate
Changes
Assets               
Interest-earning assets               
Loans  $5,019   $6,438   $(1,419)
Investment securities   2,047    2,428    (381)
Federal funds sold and securities purchased under resale agreements   (165)   (492)   327 
Total interest-earning assets  $6,901   $8,374   $(1,473)
                
Liabilities and Shareholders’ Equity               
Interest-bearing liabilities               
NOW accounts  $29   $70   $(41)
Money market accounts   (496)   23    (519)
Savings accounts   (29)   (3)   (26)
Certificates of deposit   (1,116)   (360)   (756)
Federal funds purchased and repos   3    4    (1)
Other borrowings   86    98    (12)
Total interest-bearing liabilities  $(1,523)  $(168)  $(1,355)
                
Net interest spread  $8,424   $8,542   $(118)

 

Changes in interest earnings for the years ended December 31, 2012 and 2011 were as follows:

(Dollars in thousands)  Years ended
December 31, 2012 and 2011
   Change in
Interest
Income/
Expense
  Variance
Due to
Volume
Changes
  Variance
Due to
Rate
Changes
Assets               
Interest-earning assets               
Loans  $11,618   $6,968   $4,650 
Investment securities   744    1,739    (995)
Federal funds sold and securities purchased under resale agreements   78    62    16 
Total interest-earning assets  $12,440   $8,769   $3,671 
                
Liabilities and Shareholders’ Equity               
Interest-bearing liabilities               
NOW accounts  $11   $47   $(36)
Money market accounts   (623)   407    (1,030)
Savings accounts   (44)   80    (124)
Certificates of deposit   (43)   411    (454)
Federal funds purchased and repos   (2)   —      (2)
Other borrowings   (335)   (424)   89 
Total interest-bearing liabilities  $(1,036)  $521   $(1,557)
                
Net interest spread  $13,476   $8,248   $5,228 

 

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Provision for Loan Losses

The provision for loan losses is charged to earnings to bring the allowance for loan losses to a level deemed adequate by management and is based upon anticipated experience, the volume and type of lending conducted by us, the amounts of past due and non-performing loans, general economic conditions, particularly as they relate to our market area, and other factors related to the collectability of our loan portfolio. For the year ended December 31, 2013, the provision for loan losses was $3.5 million as compared to $6.4 million for the year ended December 31, 2012 and $7.0 million for the year ended December 31, 2011. The decrease in the provision for loan losses between the years ended December 31, 2013 and 2012 was due to a reduction in charge-offs as a result of a decrease in impaired and classified loans period-over-period and continued stabilization in changes in the fair values on the underlying collateral on impaired loans. Total charge-offs for the year ended December 31, 2013 were $3.8 million as compared to $9.8 million for the year ended December 31, 2012. During the year ended December 31, 2012, the Company strategically resolved an $11.4 million non-performing loan collateralized by 15 gas stations through acceptance of a bulk sale offer at below appraised values. The resolution resulted in a $5.4 million charge-off during the year.

The decrease in the provision for loan losses between the years ended December 31, 2012 and December 31, 2011 was due to a decrease in special mention loans of $13.9 million since December 31, 2011 which have a higher allocation of general reserve, coupled with the improvement in the historic loss factor associated with construction and land development loans. Total charge-offs for the year ended December 31, 2012 were $9.8 million as compared to $7.4 million for the year ended December 31, 2011.

As of December 31, 2013 and 2012, the allowance for loan losses was 0.85% and 1.07%, respectively, of total loans. As of December 31, 2013 and 2012, the allowance for loan losses to non-accrual loans was 60.9% and 45.9%, respectively. The change in the allowance as a percentage of non-accrual loans over the prior year is primarily due to the continued timely charge-off of specific assets and resolution of impaired loans. The Company obtains new appraisals annually for all non-accruing loans and provides specific reserves when values less disposal costs are less than the carrying value of the loans. Specific reserves are generally charged off at the earlier of resolution or within one year.

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Non-Interest Income

The following is a schedule of non-interest income for the years ended December 31, 2013, 2012, and 2011:

(Dollars in thousands)  Years ended
December 31,
   2013  2012  2011
Service charges and fees on deposit accounts  $3,332   $3,451   $3,581 
Net gains (losses) on sales of other real estate owned   1,133    3,278    (264)
Net gains on sales of securities   824    1,673    364 
Net gains on sales of loans held for sale   58    106    58 
Increase in cash surrender value of Company owned life insurance   618    498    151 
Adjustment to FDIC loss share receivable   (15,250)   (12,488)   (3,236)
Other   1,035    816    1,085 
   $(8,250)  $(2,666)  $1,739 

 

Year Ended December 31, 2013, compared to Year Ended December 31, 2012

Non-interest income includes service charges and fees on deposit accounts, net gains on the sales of securities available for sale and other real estate owned and all other items of income, other than interest, resulting from our business activities.

Non-interest income decreased to a net charge of $8.3 million for the year ended December 31, 2013 from a net charge of $2.7 million for the year ended December 31, 2012. The change was due to an increase in adjustments to reduce the FDIC loss share receivable during the year ended December 31, 2013 as compared to the same period in 2012 due to increased resolutions, including sales, payoffs and transfers to other real estate owned, of acquired assets in excess of fair value and changes in cash flows of loss share assets, reduced gains on the sales of other real estate owned and securities available for sale offset by an increase in the earnings on Company owned life insurance.

Service charges on deposit accounts decreased by $119,000 or 3.4% for the year ended December 31, 2013, as compared to the year ended December 31, 2012. This decrease was due to the change in the mix and level of transactions on customer accounts year-over-year.

For the year ending December 31, 2013, the Bank sold OREO properties with a carrying value of $8.2 million and recorded net gains on the disposition of $1.1 million as compared to sales of OREO with a carrying value of $24.1 million for net gains of $3.3 million for the year ended December 31, 2012. Net gains related to the resolution of OREO covered under Loss Sharing Agreements was $1.1 million and $3.4 million for the years ended December 31, 2013 and 2012, respectively. Of this amount, approximately $1.0 million was recorded as an adjustment to FDIC loss share receivable due to the changes in estimated cash flows at December 31, 2013 as compared to $3.4 million at December 31, 2012.

During the year ended December 31, 2013, we sold approximately $33.7 million of securities resulting in a net gain of $824,000 as compared to 2012 when we sold $102.5 million of securities for a net gain of $1.7 million.

The increase in earnings on the cash surrender value of Company owned life insurance of $120,000 for the year ended December 31, 2013 as compared to the prior year was due to the purchase of $3.0 million in policies in 2013.

The adjustment to the FDIC loss share receivable during the years ended December 31, 2013 and 2012 represented $15.8 million and $13.7 million of expense, respectively, related to changes in cash flows on assets covered by Loss Sharing Agreement and the resolution of other real estate owned property which reduces the FDIC receivable. These amounts were partially offset by interest income earned on the FDIC receivable of $574,000 and $1.2 million during the years ended December 31, 2013 and 2012, respectively.

Year Ended December 31, 2012, compared to Year Ended December 31, 2011

Non-interest income decreased to a net charge of $2.7 million for the year ended December 31, 2012 from $1.7 million for the year ended December 31, 2011. The change was due to an increase in adjustments to reduce the FDIC loss share receivable during the year ended December 31, 2012 as compared to the same period in 2011 due to the resolution, including sales, payoffs and transfers to other real estate owned, of acquired in excess of fair value and changes in cash flows of loss share assets offset by an increase in gains on the sales of securities and resolution of OREO and an increase in the interest income received on Company owned life insurance.

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Service charges on deposit accounts decreased by $130,000 or 3.6% for the year ended December 31, 2012, as compared to the year ended December 31, 2011. This decrease was primarily due to the change in the mix and level of individual customer accounts year-over-year offset by an increase in average deposits of 19.4% in 2012 as compared to 2011 due to the acquisition of $161.0 million in deposits from the AFI merger.

For the year ending December 31, 2012, the Bank sold OREO properties with a carrying value of $24.1 million and recorded net gains on the disposition of $3.3 million as compared to sales of OREO with a carrying value of $6.1 million for a net loss of $264,000 for the year ended December 31, 2011. Net gains related to the resolution of OREO covered under Loss Sharing Agreements was $3.4 million and $0 for the years ended December 31, 2012 and 2011, respectively. Of this amount, approximately $3.4 million was recorded as an adjustment to FDIC loss share receivable due to the changes in estimated cash flows.

During the year ended December 31, 2012, we sold approximately $102.5 million of securities resulting in a net gain of $1.7 million as compared to 2011 when we sold $20.3 million of securities for a net gain of $364,000.

The increase in earnings on the cash surrender value of Company owned life insurance of $347,000 for the year ended December 31, 2012 as compared to the prior year was due to the purchase of $15.5 million in policies in 2012.

The adjustment to the FDIC loss share receivable during the years ended December 31, 2012 and 2011 represented a $13.7 million and $3.8 million expense, respectively, related to increases in cash flows on assets covered by Loss Sharing Agreement which reduces the FDIC receivable. The $13.7 million for the year ended December 31, 2012 includes $3.2 million related to resolved OREO covered by loss share assets during the year and the related charges in estimated cash flows. This amount was partially offset by interest income earned on the FDIC receivable of $1.2 million and $566,000 during the years ended December 31, 2012 and 2011, respectively.

Non-Interest Expenses

The following is a schedule of non-interest expense for years ended December 31, 2013, 2012 and 2011:

(Dollars in thousands)  Years ended
December 31,
   2013  2012  2011
Salaries and employee benefits  $25,023   $24,303   $20,186 
Occupancy and equipment   8,100    7,958    7,732 
Data processing   3,903    3,686    3,481 
Telephone   899    917    814 
Stationary and supplies   382    480    387 
Amortization of intangibles   745    684    514 
Professional fees   1,675    1,631    1,131 
Advertising   263    258    293 
Merger reorganization expense   1,745    1,784    1,076 
Disposal of banking centers and equipment   828    —      —   
Regulatory assessment   1,595    1,482    1,395 
Other real estate owned expense   2,040    1,245    323 
Loan expense   1,448    2,307    1,900 
Other   4,626    4,249    3,613 
   $53,272   $50,984   $42,845 

 

Year Ended December 31, 2013, compared to Year Ended December 31, 2012

Non-interest expense is comprised of salaries and employee benefits, occupancy and equipment expense, and other operating expenses incurred in supporting our various business activities. During the year ended December 31, 2013, non-interest expense increased to $53.3 million compared to $51.0 million for the year ended December 31, 2012, an increase of $2.3 million or 4.5%. The increase was primarily due to the strategic decision to close two banking centers and the write-off of obsolete equipment as well as an increase in the write-downs to other real estate owned due to updated appraisals received during the year.

Salary and employee benefit costs were $25.0 million for the year ended December 31, 2013, an increase of $720,000 or 3.0%.The change was due primarily to the addition of 14 new employees related to the acquisition of EBI.

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Occupancy and equipment increased by $142,000 or 1.8%. The increase was due to the addition of two new banking centers acquired from EBI offset by closures of two legacy banking centers. Of the two banking centers closed, one was located in South Florida and closed in January 2014 and the other was located on the west coast of Florida and closed in the third quarter of 2013. The total estimated annualized occupancy savings due to the closure of these banking centers is approximately $1.0 million per year.

Data processing increased $217,000 or 5.9% from $3.7 million for the year ended December 31, 2012 to $3.9 million for the year ended December 31, 2013 due to increased transactions related to the acquisition of EBI in July 2013.

Merger reorganization expenses were consistent year-over-year. The $1.7 million of expense for the year ended December 31, 2013 was due to the merger and integration of EBI which was completed during the third quarter of 2013. Merger reorganization expense for the year ended December 31, 2012 related to the integration of Old Harbor as well as the merger and integration of AFI. Merger reorganization expenses include legal and professional, IT integration and conversion, severance and lease termination expense.

Disposal of banking centers and equipment relates to the decision to strategically close one banking center in South Florida and close one banking center on the west coast of Florida. The Company recorded an expense of $632,000 for the remaining facility lease, write-off of leasehold improvements and other fixed assets and severance costs. Additionally, the Company disposed of computer storage related equipment which was determined to be obsolete during the quarter ended December 31, 2013 and recorded a charge of $178,000 related to the write-off of these fixed assets.

OREO expense increased by $795,000 to $2.0 million for the year ended December 31, 2013, as compared to $1.2 million for the year ended December 31, 2012. The change was due to an increase in write downs on OREO due to changes in estimated fair values during the year ended December 31, 2013 of $1.1 million as compared to $340,000 for the year ended December 31, 2012.

Loan expenses primarily include the costs associated with the collection of legacy as well as loss sharing assets. Loan expenses decreased by $859,000 from $2.3 million for the year ended December 31, 2012 compared to $1.4 million for the year ended December 31, 2013. The change was primarily due to a reduction in impaired and classified loans period-over-period and a reduction in loans covered under loss sharing agreements.

The increase in other non-interest expenses of $377,000 was due to the EBI Merger.

Year Ended December 31, 2012, compared to Year Ended December 31, 2011

Non-interest expense is comprised of salaries and employee benefits, occupancy and equipment expense, and other operating expenses incurred in supporting our various business activities. During the year ended December 31, 2012, non-interest expense increased to $51.0 million compared to $42.8 million for the year ended December 31, 2011, an increase of $8.1 million or 19.0%. A substantial portion of the increase in non-interest expense was due to the acquisition of Old Harbor in October 2011 as well as the AFI Acquisition in April 2012.

Salary and employee benefit costs were $24.3 million for the year ended December 31, 2012, an increase of $4.1 million or 20.4%. The increase was primarily a result of the salaries added in the acquisition of Old Harbor in October 2011 as well as the AFI Acquisition in April 2012.

Occupancy and equipment increased by $226,000 or 2.9% year-over-year. The Company integrated and closed four banking centers in May 2011, which were added as part of the TBOM acquisition in 2010. This cost was partially offset by the seven banking centers added from the AFI Acquisition in April 2012 and Old Harbor acquisition in October 2011.

Data processing costs were $3.7 million for the year ended December 31, 2012 or an increase of $205,000 compared to 2011, due to the increase in the number of transactions processed as a result of the acquisitions of Old Harbor in October of 2011 and AFI in April of 2012.

Professional fees were $1.6 million, or an increase of $500,000 compared to 2011 due to an increase in professional services related to audits and computer consulting due to the expansion of operations period-over-period.

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Merger reorganization expenses increased by $708,000 to $1.8 million for the year ended December 31, 2012 as compared to $1.1 million for the year ended December 31, 2011, as a result of the integration of Old Harbor and the merger and integration of AFI during the year ended December 31, 2012. The $1.1 million of expense for the year ended December 31, 2011 was the result of the integration of TBOM. Costs include legal and professional, IT integration and conversion, severance and lease termination fees.

OREO expense increased by $922,000 to $1.2 million for the year ended December 31, 2012, as compared to $323,000 for the year ended December 31, 2011. The increase is due to an increase in the number of OREO properties (primarily a result of ORE acquired from the Old Harbor transaction in October 2011) period-over-period and the write down of properties held within the portfolio by $340,000 during the year ended December 31, 2012 to market values during the year.

Loan expenses primarily include the costs associated with the collection of legacy as well as loss sharing assets. Loan expenses increased by $407,000 from $1.9 million for the year ended December 31, 2011 to $2.3 million for the year ended December 31, 2012. The change was primarily due to foreclosure related expenses associated with the increase in loss share assets as a result of the Old Harbor acquisition.

Increases in other non-interest expenses of $636,000 were primarily due to the AFI merger and the acquisition of Old Harbor.

Income Tax Expense (Benefit)

During the year ended December 31, 2013, we recognized income tax expense of $4.1 million due to pre-tax earnings of $11.0 million. During the year ended December 31, 2012, we recognized income tax expense of $2.8 million due to pre-tax earnings of $7.5 million. During the year ended December 31, 2011, we recognized income tax expense of $2.3 million due to pre-tax earnings of $6.0 million. The effective tax rate for the years ended December 31, 2013 and 2012 was 37.3% and 38.1% for the year ended December 31, 2011.

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

Results of Operations

We recorded net earnings of $2.6 million for the quarter ended December 31, 2013, compared to net earnings of $1.7 million for the quarter ended December 31, 2012. Income for the quarter ended December 31, 2013 was positively impacted by the EBI acquisition in July 2013, an increase in interest income due to net loan growth and purchases of securities available for sale and a reduction in the provision for loan losses quarter over quarter offset by an increase in non-interest expense due to the write-off of computer equipment and write-downs to our other real estate owned portfolio due to updated appraisals received.

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).

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Net interest earnings for the three-month periods ended December 31, 2013 and 2012 are reflected in the following table:

   December 31, 2013  December 31, 2012
(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  $1,132,668   $19,682    6.89%  $924,306   $17,321    7.43%
Investment securities   337,525    2,125    2.52%   224,747    1,070    1.90%
Federal funds sold and securities purchased under resale agreements   65,825    157    0.95%   182,199    221    0.48%
Total interest-earning assets   1,536,018    21,964    5.67%   1,331,252    18,612    5.55%
Non interest-earning assets   236,583              232,102           
Allowance for loan losses   (10,068)             (9,618)          
Total assets  $1,762,533             $1,553,736           
                               
Liabilities and Shareholders’ Equity                              
Interest-bearing liabilities                              
NOW accounts  $249,135   $75    0.12%  $165,117   $57    0.14%
Money market accounts   354,508    265    0.30%   335,112    293    0.35%
Savings accounts   62,472    43    0.27%   64,069    42    0.26%
Certificates of deposit   291,623    546    0.74%   320,394    725    0.90%
Fed funds purchased and repurchase agreements   15,180    4    0.13%   15,794    6    0.15%
Federal Home Loan Bank advances and
other borrowings
   35,400    48    0.54%   —      —      —  %
Total interest-bearing liabilities   1,008,318    981    0.39%   900,486    1,123    0.49%
                               
Non-interest bearing liabilities                              
Demand deposit accounts   507,960              405,857           
Other liabilities   10,541              7,115           
Total non-interest-bearing liabilities   518,501              412,972           
Shareholders’ equity   235,714              240,278           
Total liabilities and shareholders’ equity  $1,762,533             $1,553,736           
Net interest spread       $20,983    5.29%       $17,489    5.06%
                               
Net interest on average earning assets - Margin             5.42%             5.21%

 

Our net interest income for the three months ended December 31, 2013 was impacted by an increase in total average earning assets of $204.8 million or 15.4% offset by an increase of $107.8 million or 12.0% in interest bearing liabilities as compared to the three months ended December 31, 2012. The increases were primarily due to the acquisition of EBI in July 2013.

Interest earnings for the current quarter were positively impacted by the accretion of discounts related to acquired loans of approximately $6.2 million as compared to $5.6 million for the same period in 2012. Included in the $6.2 million of accretion of discount for the quarter ended December 31, 2013 was approximately $5.0 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 December 31, 2013, we took a charge of approximately $4.7 million, including $102,000 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 $5.6 million of accretion discount for the quarter ended December 31, 2012 was approximately $3.4 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 December 31, 2012, we took a charge of approximately $3.6 million, including $297,000 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 substantially related to changes in cash flows of loss share assets.

Net interest income was $21.0 million for the three months ended December 31, 2013, as compared to $17.5 million for the three months ended December 31, 2012, an increase of $3.5 million, or 20.0%. The change resulted from an increase in total average earning assets of $204.8 million offset by an increase of $107.8 million in interest bearing liabilities, an increase in accretion on acquired loans and a reduction in cost of funds.

The net interest margin (i.e., net interest income divided by average earning assets) increased 21 basis points from 5.21% during the three months ended December 31, 2012 to 5.42% during the three months ended December 31, 2013. Accretion of $6.2 million on acquired loans added approximately 159 basis points to the quarter ended December 31, 2013 net interest margin. Of the 159 basis points, 129 basis points related to resolved loss share assets and changes in cash flows during the quarter. This compares to accretion of loan discount of $5.6 million during the three months ended December 31, 2012, which added approximately 166 basis points to the December 31, 2012 margin. Of the 166 basis points for the quarter ended December 31, 2012, 101 basis points related to resolved loss share assets and changes in cash flows.

For the three months ended December 31, 2013, average loans represented 73.7% of total average interest-earnings assets and 76.5% of total average deposits and customer repurchase agreements, compared to average loans of 69.4% of total average interest-earning assets and average loans of 70.8% to total average deposits and customer repurchase agreements at December 31, 2012. Our cost of funds was approximately 8 basis points lower for the three months ended December 31, 2013, as compared to December 31, 2012, primarily as a result of lower rates offered on our deposit products.

Rate Volume Analysis

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

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

   December 31, 2013 and 2012 
(Dollars in thousands)  Change
in
Interest
Income/
Expense 
   Variance
Due to
Volume
Changes
   Variance
Due to
Rate
Changes
 
Assets               
Interest-earning assets               
Loans  $2,361   $3,690   $(1,329)
Investment securities   1,055    642    413 
Federal funds sold and securities purchased under resale agreements   (64)   (195)   131 
                
Total interest-earning assets  $3,352   $4,137   $(785)
Liabilities               
Interest-bearing liabilities               
NOW accounts  $18   $26   $(8)
Money market accounts   (28)   16    (44)
Savings accounts   1    (1)   2 
Certificates of deposit   (179)   (61)   (118)
Fed funds purchased and repurchase agreements   (1)   —      (1)