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1st United Bancorp Inc. (FUBC)

Q1 2013 Earnings Call

April 22, 2013 10:00 am ET

Executives

Warren Orlando - Chairman

Rudy Schupp – Chief Executive Officer

John Marino – President, Chief Operating Officer

Analysts

Brady Gailey – KBW

Michael Rose – Raymond James

Peyton Green – Sterne Agee

Operator

Welcome to the first quarter 2013 earnings conference call. All participants are in a listen-only mode until the question and answer session. At that time, to ask your questions please press star then one on your phone. Today’s conference is being recorded. If you have any objections, you may disconnect your line at this time.

I would now like to turn the call over to your host. We have Mr. Warren Orlando, Chairman. Sir, you may begin.

Warren Orlando

Thank you, Lori, and good morning. I’m Warren Orlando, Chairman of 1st United, and we’d like to welcome you all to our conference call this morning. I’m joined by Rudy Schupp, our Chief Executive Officer, and John Marino, our President and Chief Financial Officer. As we always do, at the conclusion of our remarks this morning, we will ask Lori to set up a queue for your questions. We will endeavor to conclude the meeting today no later than about 10:45.

Today’s conference call is to review our first quarter earnings results and update you on the status of our company. Allow me to read the forward-looking statement, please. Of course, we need to disclose that we will be offering you more than just an historical perspective on 1st United today, and what we will discuss will include forward-looking statements, including statements about future results. These statements are subject to uncertainties and risks. Actual results may differ materially from projections and could be affected by a variety of factors, including factors beyond our control. For a discussion of some of these factors, we refer you specifically to our SEC Form 10-K for the fiscal year ended December 31, 2012 and Form 10-Q for the period ending March 31, 2013. Forward-looking statements discussed today speak only as of today and we assume no obligation to update forward-looking statements or the reasons why actual results could differ. You can find a copy of our Form 10-K and 10-Q on the Investor Relations section of our website, 1stunitedbankfl.com.

Let me take a breath. To start off this morning, let me give you a general overview of the quarter. We continue to be very pleased with our balance sheet strength and our market position. In addition, during the quarter we announced our entering into a definitive agreement to acquire and merge with Enterprise Bancorp and its wholly owned subsidiary, Enterprise Bank, which we anticipate closing later this year. We believe there are many other expansion opportunities here in Florida’s major markets coming from potential whole bank acquisitions and natural growth.

1st United is currently a $1.6 billion asset enterprise. We operate through a strategically placed 22-office network from downtown Miami to Vero Beach, Florida, and from the Gulf Coast to the key central Florida markets of Tampa and Orlando. This merger with Enterprise is an in-market acquisition and will expand our footprint in the Palm Beach County market.

In addition to discussing Enterprise, we also look for to telling you about further developments at 1st United during the first quarter of fiscal 2013. Those will include our earnings during the quarter, our improved classified assets, our announcement of the start of quarterly dividends, and our sense of continued improving banking conditions in Florida.

Let me now turn this over to Rudy Schupp, our Chief Executive Officer, to make some additional overview remarks. Rudy?

Rudy Schupp

Yes, thank you Warren and good morning everybody. For the quarter ended March 31, we reported net income of 1.6 million or $0.05 a share. We had a very good quarter but our focus continues to be drive per-share earnings, leverage the balance sheet, leverage the excess capital, reduce overall expenses and keep reducing provisioning. And of course, we are very excited about our pending acquisition of Enterprise because it really helps us to nail a number of these imperatives, so we’ll go over that more in just a moment.

Our deposit story continues to be terrific, among the finest in Florida and probably the nation. Of our $1.3 billion deposit portfolio, 34% is comprised of non-interest bearing deposits at March 31, 2013, and this gives rise to a cost of money of just 30 basis points for the quarter ended March 31, 2013 as compared to 34 basis points for the quarter ending December 31, 2012. Our low cost of funds, of course, helps drive our current and historically very strong margin of over 4%; and as long as we’ve been in this business, John and Warren, I’m not sure I remember a lower cost of money derived from a core deposit portfolio – no wholesale in there and so on, so we’re pretty pleased.

As to lending, our total loan portfolio increased, we’re happy to say, by 14.9 million from December 31, 2012 despite fierce payoffs during the quarter. Net loan growth has been a key goal for the company, as you all know, and we are excited to begin to see it realized in the first quarter. During the quarter, we closed $66.3 million of new loans, of which 56 million are funded. That’s in addition to advances on existing to advances on existing loans of 15.8 million. The total pipeline is probably even more astonishing at March 31, 2013 as it was $186 million when compared to 107.8 million at December 31, 2012; so when we look at the pipeline at the end of March, we had 50.8 million in loans that have already been approved and are pending closing then. This compares to approximately 19.2 million of loans that were approved and pending closing as of December 31, 2012. So we’ve got a darn good start here in the period.

Loan production has been increasing really for us due to our markets that we’ve chosen, our expansion to central Florida specifically, and the addition of new loan officers and business bankers. Our new loan production was partially offset by resolutions, payoffs, principal reductions and transfers to ORE of non-performing loans of approximately 56.4 million, comprised of 16.3 million in covered loans and 40.1 million in uncovered loans during the quarter. When we look at the uncovered loan piece, what we see is that it was comprised of principal reductions which were getting big enough now that they’re meaningful, payoffs that we either didn’t want to recapture or a few that always get away, and I think a modicum of ORE.

John Marino

Yeah, a small amount of ORE, and the payoffs were about 24 million of that 40 million, so the actual principal payments are actually kind of robust now as a company.

Rudy Schupp

So I think all of you who stay so close and talk to us, we’ve achieved overcoming of the induced crush or resolutions that we make with respect to our loss share assets, and again, we will always have some reduction associated with the non-covered assets, as we just referenced.

Briefly about loan classifications, we want to celebrate again – we are continuing to see improvement in classified and impaired assets. During the quarter, we again saw a decrease in classified loans which include substandard and special mention loans of 17.9 million or 20% - that’s nice. Total non-performing assets reflected a slight decrease by approximately $276,000 since the end of the year, December 31, 2012. Total loans past due – the 30 to 80 day range – decreased by approximately 5.9 million from 9.8 million at December 31, 2012 to 3.9 million at March 31, 2013, due primarily to the renewal of $4.8 million of matured loans during the quarter.

We are very pleased with 1st United’s problem asset ratios because they continue to be well below Florida averages, and we continue to express the view that slight us and downs in NPA statistics can occur between quarters with an overall expectation that 1st United will maintain low legacy NPAs and enjoy extra-strong credit safety through loss share agreements for several years to come.

John Marino

Yeah Rudy, I think the story there is that we’re not seeing a backfill on our classified assets, obviously our substandard and special mention that decreased December to March. I think fortunately we—and it’s really been consistent quarter over quarter, we’ve seen some improvement, and the backfill is just not happening, which is a good thing for us.

Rudy Schupp

And we should emphasize here since I referenced the loss share portfolio, that that portfolio represents about 34% of our entire loan portfolio, that is to say, covered assets under loss share agreements with the FDIC.

So let me spend a second on the Enterprise merger and acquisition. We are very, very excited about this because it strikes right at the heart of a number of our strategic imperatives and that of our board. On March 22, we were pleased to announce our pending merger and acquisition of Enterprise Bancorp and its wholly owned subsidiary, the Enterprise Bank. We’re very excited about this in-market opportunity. They currently have three banking centers in northern Palm Beach County that we are evaluating along with our own banking centers to see if there is opportunity for consolidation.

At December 31, 2012, Enterprise had total assets of $234.8 million, net loans of 170.3 million, and total equity – they were well capitalized, that’s for sure – of $37.5 million. John will review the structure in a moment of the transaction because it’s interesting and very beneficial for everyone, but it is important to note that of the $170.3 million in loans, approximately 23 million representing all the Enterprise non-performing loans, all loans classified as substandard, and certain other loans will not – and I emphasize will not – be acquired by 1st United.

At December 31, 2012, Enterprise had total deposits of 171.4 million with approximately 14% non-interest bearing content, 62% in interest-bearing transaction accounts, and only 24% in time deposits, which we like. Their bankers have really done a terrific job in growing this franchise and their focus on customer service mirrors our own, so we think it’s a really good fit. We’ve filed the regulatory applications and we anticipate closing on the merger in the third quarter. We believe this application and the merger significantly helps leverage our balance sheet and liquidity and is consistent with the goals as a company, and John will allude to those in just a moment.

So without further ado, let me hand things over to John. John?

John Marino

Thank you Rudy. First as it relates to Enterprise, we do think we came up with a unique structure in this transaction that makes sense really for our shareholders as well as the Enterprise shareholders. As to the total consideration 1st United will pay, we’ll pay 125% of the first 10% of adjustable tangible equity of Enterprise, and then we’ll pay dollar for dollar for adjustable tangible equity above 10%. Now, tangible equity is really just adjusted for such things as deal cost and Enterprise contractual change control payments, those kinds of things. Based on the December 31, 2012 equity of Enterprise, we estimate total consideration to be about $43.9 million.

In substance, though, the total consideration paid to the Enterprise shareholders will be as follows: as Rudy indicated, a little over $23 million of Enterprise non-performing loans, their substandard loans, and certain loans that have been identified, so about $23 million of their loans will go back to the shareholders. All of their other real estate will go back to their shareholders – there was about 800,000 I think, Rudy, at the end of the year.

Rudy Schupp

That’s right.

John Marino

And then they have some non-investment grade investments of a little over $14 million, and that includes about 6 million in non-performing investments. They will get that as well, and then finally they will get almost $6 million in cash. So that aggregate consideration gets us to almost the 44 million.

Now they have 90%-plus shareholder who will be taking the assets as part of his consideration, while the minority shareholders will actually get cash. We anticipate booking about $9 million in goodwill on the transaction. That’s our current estimate, with around a three-year earn back. One-time integration-related costs are anticipated to be somewhere a million and $1.5 million spread over two quarters.

Now as to the quarter, for the quarter ended March 31 we reported net income of $1.6 million or about $0.05 a share. Earnings were impacted by a $650,000 loan provision during the quarter. Our net interest margin for the quarter was a strong 5.09% compared to 5.21 for the quarter ending December 31. Excluding the $3 million of accretion during the quarter related to the changes in cash flows and disposition of assets acquired in the FDIC-assisted transactions above the discounted purchase price, our margin was 4.18% during the quarter which compares to the 4.2 that we recorded at the end of December.

We had net gains on other real estate during the quarter of approximately 441,000 on assets with carrying value of $2.2 million, but we also took a charge of about 464,000 on OREO properties for which we got updated appraisals. This charge is included in other expense, so it’s not in the other income, it’s not netted against the gains. It’s below the line in our other expense. As a result, the increase in estimated cash flows on loss share assets, which really resulted in about $3.4 million of income because the other real estate that we booked a gain on as well as the $3 million of accretion above the line in the margin, that totaled to $3.4 million of additional cash flow and as a result, we booked a charge to other income of about $3.1 million. So on one side we had income of about 3.4, and on the other side we had this charge that you all have seen comes through in the quarter in other income of about $3.1 million.

During the quarter, we did take the opportunity to purchase about $80 million in security, which was partially offset by payoffs and maturities. Our investment portfolio currently has unrealized gains of approximately $2.7 million. We still have approximately $100 million in excess liquidity earning just 25 basis points at March 31.

While we achieved our goal of using some of our excess liquidity due to the net loan growth, due to the investments that we purchased, we are continuing to evaluate other alternatives for this excess cash. We do believe, though, the remaining excess liquidity will benefit us in our pending acquisition of Enterprise and as we continue to look at other acquisition opportunities.

As we indicated in previous quarters, we continue to work on expense reduction. It’s a priority for this company. I think we’ve talked about it at least the last three or four quarters. It’s still something that’s very much on our plate, and we certainly continue to evaluate areas to improve our efficiencies in all areas of our operations. We did see some positive impacts of this in the first quarter. If you exclude the other real estate charges that I had indicated, we saw about 181,000 in reduction in expenses in the linked quarter, the December quarter, compared to the March quarter. We certainly saw—I think we announced in the fourth quarter an improvement from fourth quarter to third quarter – Rudy, that number?

Rudy Schupp

Yeah, that’s right. And I think just to say it here, we measure ourselves, of course, like others against our public benchmark groups in the region, and we stack up really very well. Nonetheless, we’re never satisfied and our teams are focused in groups on cost savings as we just can’t count on rate relief, frankly, as we see it.

John Marino

That’s right. And again, the fourth quarter compared to the third quarter, we saw about 236,000 on a run rate basis come in in the fourth quarter as a reduction. On top of that is this other 181,000, so we do anticipate seeing some additional positive impacts as we get through the year.

Our other real estate at March 31 was $19.1 million compared to 19.5 million at December 31. The 19.1 million does include 11.4 million in assets covered by loss share. We do have about 1.8 million of those other real estate properties under contract, which we do anticipate to close here in the second quarter.

Non-performing assets decreased by about 300,000 to 42.9 million, and total NPAs are about 2.73% at March 31, which compares about the same number at the end of December. Our uncovered NPA ratio at March 31 was 1.2% - again, that compares to about what we had at the end of December. We think those ratios are still below the Florida averages.

At March 31, our troubled debt restructurings were 18.9 million as compared to 24.3 million at the end of December. Modifications are evaluated on a loan-by-loan basis and we expected the balance of TDRs will continue to move up and down between quarters as Florida continues to get to its full recovery. As we’ve indicated in our past, our TDRs are earning a decent yield – they are about 4.4% as of the end of March.

We did record about a million dollars of charge-offs during the quarter. About $900,000 of that was specifically reserved at the end of December and it related to a resolved substandard asset during the quarter. Our allowance as a percentage of non-covered loans was about 1.6% at March 31 compared to 1.67 at the end of December. Rudy did indicate we saw about $18 million in our overall classified reduce quarter over quarter, so our classifieds now, which include special mention and substandard and include some covered loans as well, was about $73.4 million at the end of March.

Rudy Schupp

And with the reduction of about 6 million past dues, again just to talk about backfill, we are feeling very comfortable that that backfill is not taking place.

John Marino

That’s right. Our indemnification asset is less then 13% of the book value of covered assets as of March 31. We believe this ratio compares favorably to other banks with similar loss share agreements. During the quarter, the asset was reduced by about $6 million or 12% due to cash received and reductions due to changes in cash flows. We had adopted the new standard related to the accounting of the indemnification asset effective October 1, 2012, so that was last year we actually adopted that standard. It did not have a significant impact on the fourth quarter or the indemnification asset. Consistent with past practice, we do evaluate the collectability of our indemnification asset on a quarterly basis.

Capital – from a capital perspective, our leverage ratio was 11.6% at the end of March with total risk base of over 21% and Tier 1 capital of over 20%. We continue to believe that that 11.6% is generous and important as we look at our acquisition of Enterprise, and frankly as we look at other acquisitions as well. We have book value and tangible book value of $6.94 for book value, $5.15 for tangible book at the end of March. We also this morning, we declared our first quarterly dividend of $0.01 per share, which is anticipated to be paid in May of this year.

With that, Rudy, I’ll turn it back to you.

Rudy Schupp

Okay. There are some takeaways we’d like to highlight for the quarter. Our pre-tax earnings for the quarter were $2.6 million, which includes again the $650,000 of loan provision and the $464,000 in reductions in ORE property valuations. This compares again to a loan provision of $900,000 for the quarter ending December 31, 2012. But for the appraisal-induced reductions of ORE, we’re feeling pretty doggone good that we’re starting to chew into the loan provisioning and so on, which of course will release earnings.

Our net margin of 5.1% - now, it’s 4.18% if we exclude the impact of the resolution of purchase loans above their discounted carrying value for the quarter ended March 31, 2013, so that margin at 5.1% continues to be quite strong. We were successful in the quarter of producing net organic growth with our loan portfolio, growing our net loans again by almost $15 million. Our pipeline continues to be strong at 186 million, and you remember not too long ago we talked about a $90 million pipeline, so we’re thrilled about this, that 186 million at March 31, 2013, and over 50.8 million already approved and pending closing at that time.

I think the story there is that during the recession when the Florida market would not provide organic growth of meaning, this company raised capital and turned to acquisition of failed banks punctuated by the acquisition of a healthy bank, and now yet another announcement of a healthy bank. And now, we are thrilled because we have the other strong growth machine here, which is organic growth, returning; so very excited about that.

We also previously mentioned that given this period of persistent low interest rates, we have an ongoing project to reduce operating expenses and enhance our earnings power to ensure that we are positioned of the future because we just can’t count on interest rate relief. We continue to reap the benefits of these initiatives and anticipate continued and steady improvement throughout 2013 doing it the right way.

Our priorities for fiscal 2013 do include prudent strong net growth in the loan portfolio, leveraging our capital and our excess cash, reducing operating expenses and loan loss provisioning as appropriate. So to facilitate this growth in 2013, we’ve doubled our commercial lending team by the conclusion of 2012 because we saw that organic growth opportunity had indeed finally spun up in the totality of the markets that we serve both in central and south Florida, driving the increase in net loans for the quarter and a continued strong loan pipeline. We developed a new small business lending initiative and mapped a group of business bankers to this operation throughout the state. We also renewed our emphasis on residential portfolio lending because we have unique opportunities, we think, in the markets we serve; and of course, we announced the pending merger with Enterprise in what we think is a clever for both sides structure, but certainly unusual.

So in conclusion, we believe that the state of Florida’s economy is improving and that 1st United occupies, as Warren said, a position of strength among a small handful of billion dollar-plus Florida headquartered publicly held banks.

So with that said, Warren, would you wrap up?

Warren Orlando

Thanks Rudy, and let me just add if I might a few closing comments. We are, as was said before, very encouraged by the improving Florida banking environment and are very excited about our pending merger with Enterprise. We are particularly enthused about our standing in the five major Florida banking markets and we remain positioned to take advantage of future opportunities.

As many of you have heard me say before, we are committed and focused on increasing earnings, continuing to grow organically and through acquisitions, maintaining our regulatory reputation while always focusing on safety and soundness, and as a result elevate our franchise value for our shareholders.

We sincerely appreciate your support of and interest in 1st United, and now we’re ready, Lori, to take questions from the audience.

Question and Answer Session

Operator

Thank you so much. [Operator instructions]

We do have a question standing by from Brady Gailey of KBW. Your line is open, Brady.

Brady Gailey – KBW

Thanks, good morning guys. I guess my first question is on cost savings in the expense base. You’ve made a little progress over the last year or so. When you look at it going forward, the cost savings that you expect to continue to take out of the franchise, are those compensation-heavy? Is it out of your branch network? What are some of the drivers to how you’re going to get the expense base a little trimmer?

John Marino

Sure. Brady, this is John. Probably the most significant thing we’ve done and continue to do is renegotiate all of our contracts. We are in a position now as a company that gives us a degree of coming from a position of strength, so that would be the first thing, and that includes leases, by the way.

The other thing we’re continuing to do is obviously evaluate all of our leases, all of our fixed costs as it relates to occupancy. Occupancy is probably the one area we as a company are higher than our peers. From a compensation perspective, we continue to make actually good progress there. Now, that’s been offset by, and I think Rudy’s talked in the past, by the number of lenders we’ve hired in the past couple of quarters as well which is really driving the loan growth and the pipeline. We will still see us not backfill in spots where we lose folks, but in general I think it’s going to be coming from our other type expenses as we look forward.

Rudy Schupp

Yeah, I would say the several million dollars that we unlocked last year on a run rate basis in cost saves included probably more of the low hanging fruit type expense saves, Brady. Our aggregate comp is below our peers, so it’s not about being excessive in that sense. Nonetheless, what we’re doing is we’re looking at some of the even harder choices where we say, look, in a world of persistent low rates and margin compression, we can’t risk the profitability and the quality of the company over maybe some positions that could be considered more nice than necessary. But I emphasize our total comp is largely below our peers.

We have branch rationalization work that John alluded to throughout our system because it’s not like the old days. I think we look at our offices not just of course from a profitability point of view but also from an expandability perspective, and so you’ll see some clever, we think, decisions that could take place there that make sense. I think John also said we’ve got teams of people that we’ve brought together on this to look at every third party contract, really, that we have in the company with opportunity to do it better, do it more affordably without compromising quality, so big commitment there.

And as I say, when we look at aggregate non-interest expense, we stack up well against benchmark groups. Fortunately the industry is very transparent on that, but that’s just not enough. From our perspective, we’re in a rate environment and a compression environment that we can’t strategically say goes away soon enough.

John Marino

And I think the other thing that we’d probably say is we’ll see some efficiencies come through with the Enterprise transaction. When that’s net-net, the net incremental cost side or expense side is going to be nowhere like our current ratio now, so we will see certainly improvement as we continue to leverage up the balance sheet.

Rudy Schupp

Our goal remains to be in the high 60s, and I know you all know that our top line efficiency ratio that everyone calculates is misleading really because of the offset charge that we put through the non-interest income category associated with resolutions in loss share accounting. So the true net is something we often talk about.

Great question.

Brady Gailey – KBW

Okay. And then the OREO write-downs of 460,000 on the updated appraisals, is that something that is more of an annual thing that you get done in Q1 each year, or is this something that happens quarter to quarter and 1Q just happened to be a little larger than the average quarter?

Rudy Schupp

Well, everything gets looked at more than annually in OREO, and certainly when we take it in we refresh that look. It’s interesting that we’ve actually been seeing a lot of stabilization, John—

John Marino

That’s right.

Rudy Schupp

--in values and so on. This particular quarter, and believe me we have people all over appraisal review here to make sure that it makes sense, not just vis-à-vis reg but does it just make good common sense. So we haven’t seen as much of this in recent periods, but it can happen.

Brady Gailey – KBW

Thank you.

Operator

Your next question is from Michael Rose of Raymond James. Your line is open, Michael.

Michael Rose – Raymond James

Hey, good morning guys. How are you?

Rudy Schupp

Good morning Michael.

Michael Rose – Raymond James

I wanted to start off digging a little bit behind the core margin this quarter. It looks like it was only down 2 basis points, but if I’m looking at this right, it looks like securities balances were up about 50 million quarter-to-quarter. Can you kind of break out what happened on the core loan side with yields ex-the covered loans, and then also what you had in securities this quarter?

John Marino

Yeah, one of the comments I would say is the averages both on the investment side and the loan side, they are kind of front quarter-ended, if you will, so we saw some increases. Most of the increases happened in March from a purchases perspective and so forth, so that would be the first comment. But that helps, frankly, stabilize the quarter-over-quarter margin.

We think we’re a company as we use our liquidity, we’ll see an improving margin. Obviously our cost of funds is very, very low, but as we begin to leverage and as we see increased loan growth, I think Rudy said we had about $15 million net loan growth at the end of the quarter. We need to see—as we see continued loan growth, I think we’re going to actually see our margin improve.

So the reason it was really stable, frankly, is because quarter-over-quarter the averages really just didn’t change that much.

Michael Rose – Raymond James

Okay, and then just getting a little more color behind the loan pipeline, seems like it increased pretty nicely and we actually saw—you know, a lot of banks this quarter saw a dip early in the quarter and rebuild toward the bank end of the quarter. A, did that happen; and then B, how much of the pipeline is now coming from the Tampa market as opposed to kind of your legacy markets? Thanks.

Rudy Schupp

Yeah, it’s really interesting. I think S&L, I think, carried articles about large banks signaling what is likely to happen for everybody in lending, suggesting that pipes were actually reduced in recent periods for them. I think from this point of view, and I don’t have a crystal ball, as Warren often says, but the pipeline is one that’s a qualified pipeline, so we have—you know, some believe that these loans can pass muster.

A couple things – one, of course commercial real estate nationally to some extent is probably a popular emphasis here because it’s really existing properties that are nailing the dismount n NOI – net operating income – and work that the nation’s banks are refinancing, of course because the operators want to take advantage of today’s interest rates. That’s not all, but it’s certainly an emphasis in these pipelines, though in our case we also see a fair amount of C&I and just a modicum of resi.

I think that from a market perspective, we’re very pleased with what’s happened in central Florida. Orlando is hitting on all cylinders. Tampa/Pinellas County are hitting on all cylinders – really pleased. And now, we saw this last quarter and it just happens to be true that every one of our southeast markets, every one of our central Florida markets were all represented on the pipelines and in closings. So we’re very excited about that.

We’re being very picky about our lenders. We have very few that were kicked out of the nest, so to speak. Our team is very committed. They like our brand of banking and they’re getting it done so far, so we hope this sustains itself. We think that this significant commercial refinance market is sustained enough, could give way to the new business formation and business expansion market that historically has followed to some degree because opportunity begets new business. We look forward to that, because then we’re working with growing the universe, if you will, of business here in Florida.

Warren Orlando

Michael, just one further note on that. I think it’s important to state that as over this period of difficulties, we’ve never reduced our credit standards, our principles of lending, or gotten involved in pricing wars or credit quality issues. So we are very pleased and comfortable that we have maintained our high quality credit standards throughout this period.

Lori, are you with us?

Operator

Yes sir, and we do have one more question in the queue from Peyton Green of Sterne Agee. Peyton, your line is open.

Peyton Green – Sterne Agee

Yes, good morning. Congratulations on a solid quarter. I was just wondering maybe if you could talk about the improving economy and maybe what the effect of an improving market and real estate conditions might be on payoffs going forward. Do you think you are past the point where that is really negative at the margin—I mean, the production hires really can generate strong net growth going forward?

Rudy Schupp

Peyton, thanks for dialing in, first off. We’d tell you that it’s very interesting – as predicted, a number of these lenders are bringing legacy clients of theirs, of course, to us, and we’re also benefiting from being of a size now where we have identity and we have referrals, and not just from historical referral sources.

It’s interesting again here in Florida in the sense that what we’re seeing is more of a refinance market. You’ve just go to say it because that’s what it is at the moment, but that is sort of punctuated by, again, transactions that I’ve mentioned before where we have professional groups that are doing sort of lease-buy decisions, and it’s a buy and then we finance that building. But it’s not new builds, so I would tell you that the new builds in my opinion – commercial, residential – while coming is really focused on just a few markets when we think about real estate style lending. The Miami Dade market clearly is chief among those that we operate in for new builds, and then I think it’s spotty, frankly, in the others. The residential market – and I know you hear this all the time, but the real estate firms we continue to work with tell us that they’re having a very difficult time finding inventory, so it’s got to be turning to a seller’s market and we do see, again, spot evidence of new building. But I wouldn’t—I don’t want to overstate that yet.

So I think the markets that we serve are absolutely improving. They’re not perfect, but they are darn healthy compared to anything we’ve seen over the last several years. And our lenders, we spend so much time with them in the recruiting process last year, for example, being sure they understand our pricing, our mentality of relationship banking, the discouraged loan types, the encouraged loan types, so that hopefully we don’t have a mismatch at any point in time.

But the one thing that is vexing – I know you all know this – the one thing that is really vexing for us in this industry is the pricing of these loans. We’re seeing intermediate term fixed unhedged offerings, and they are being led by the very largest – BB&T, E&C, two other institutions. So this is not the community banking business attempting to stimulate growth by inducing or introducing this kind of pricing, so I think a concern for the industry that’s been written about is all things interest rate risk related because so many companies don’t have 34% DDA that’s core like 1st United. So how sustainable that pricing is seems to me to be limited at some point.

But I’d tell you that it is a refreshing environment now here in Florida to see growth; and again, you go to certain markets like Miami Dade and you can see that it’s really, honesty, on fire, grabbing attention nationally. That is our major metro market, though, after all, so I hope that helps.

Peyton Green – Sterne Agee

Right, thank you.

Rudy Schupp

Thank you, Peyton.

Operator

And there are no further questions in the queue, sir, at this time.

Warren Orlando

Well thank you very much, Lori, and thank you all for attending our conference, and you all have a great day.

Operator

This does conclude today’s conference call. Thank you for joining and you may disconnect your lines at this time.

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