1st United Bancorp Inc. (NASDAQ:FUBC)
Q4 2013 Earnings Conference Call
February 11, 2014 11:00 AM ET
Warren Orlando – Chairman
Rudy Schupp – Chief Executive Officer
John Marino – President and Chief Financial Officer
Josh Cohen – FBR Capital Markets
Brady Gailey – KBW SS Management
John Rodis – FIG Partners
Michael Rose – Raymond James
Welcome and thank you for standing by. At this time, all participants are in a listen-only mode until the question-and-answer session of today's call. (Operator Instructions) I'd also like to inform you of whom all parties that today's call is being recorded. If you have any objections, you may disconnect at this time.
Now I'd like to turn the call over to Mr. Warren. Chairman, Warren Orlando. Thank you, you may begin.
Thank you, Charles and good morning. As Charles said, I am Warren Orlando, Chairman of 1st United. I want to welcome you to our conference call this morning. I’m joined today by Rudy Schupp, our Chief Executive Officer, and John Marino, our President and Chief Financial Officer. At the conclusion of our remarks, we will ask the operator to set up a queue for your questions. And we will endeavor to conclude the meeting today by no later than 12 noon.
Today we are going to review for our Fourth Quarter Earnings and Year End 2013 Results and also update you on the status of the company. To begin with, let me refer you to our forward-looking statements recitation of our 12/31/13 SEC Form10-K, which is in effect in our discussion today.
1st United is currently a $1.8 billion asset enterprise. We operate through a strategically placed 21-office networks, stretching from Downtown Miami to Vero Beach, Florida on the Southeast cost and from the Gulf Coast to the key Central Florida markets of Tampa and Orlando.
Today we will tell you about a number of important developments at 1st United during the first quarter of fiscal 2013, which will include our strong earnings for the quarter, our continued net organic loan growth, our improving classified assets, the declaration of a special year-end $0.10 per share dividend and a fourth quarter quarterly dividend of $0.02 per share.
And lastly our sense of the improving banking conditions in Florida. So let me turn it over now to Rudy Schupp, our Chief Executive Officer to make some additional overview remarks. Rudy?
Yes, thanks Warren and good morning, everyone. Let's talk about Q4 earnings briefly and John will expand for the fourth quarter ended December 31, 2013 we reported net income of $2.6 million or $0.08 per share which is an increase of over 50% for the same period last year.
Our pretax earnings for the quarter were approximately $4.2 million and included a one-time charge associated with the disposal of some computer equipment for $178,000 and write-downs to other real estate owned due to updated appraisals of $359,000.
Excluding these expenses, we would have recorded pretax earnings for the quarter of approximately $4.7 million. On the deposit front, our core deposit story continues to remain among the finest in Florida and the nation. Of our $1.548 billion deposit portfolio at December 31, 2013 approximately 34% is comprised of non-interest bearing deposits.
Total deposits increased by $21 million since September 30, 2013 excluding the approximate $128 million received from a customer right at year end in December which was withdrawn early in January, so somewhat of distortion at the end of the year.
The quality of our core deposits is resulted in the cost of funds of just 26 basis points for the quarter ended December 31, 2013. Our low cost of funds helps drive our current and historically strong margin of over 4%. In our continuing and ongoing effort to reduce occupancy expense, we closed our Coral Ridge Banking Center, which is located Broward County on January 10, 2014.
We learned that, we could retain the majority of the high value accounts at this office in relationship and bank them frankly at the nearby Fort Lauderdale office. We really determined that the location was not profitable enough knowing that we could bank these customers at our Fort Lauderdale office. So we took a charge of approximately $228,000 during the third quarter for lease termination, fixed asset write-offs and severance.
We anticipate on the upside annualized cost savings of approximately $400,000 from this branch closure beginning in the first quarter here of 2014. And frankly we continue evaluate opportunities to reduce our overall expense in this area and John, maybe you might talk for a moment about our broad base program for revenue enhancement and cost saves.
Sure and this branch closing was really in addition to the closing, we had in October which we anticipated a similar kind of annual savings as well. We have a team that led us continually looking at expense reduction for the company as well as revenue opportunities.
So we are in no way done with the process that's going to be a process to last well into 2014 and we are kind of excited about the early results on the expense save.
Our view on this is anyway we can rationalize in terms of expense and find revenue enhancements, so much the better and frankly customer use patterns here at the bank like most bank I think, are changing.
We find that, so many with remote deposit capture, online banking and alike don't visit quite as much. So and it changed their habits as to when and where they do visit. Let me move on now to new loan production in our loan portfolio, since December 31, 2012 our total loan portfolio increased by $221 million including $159 million in Enterprise Bank loans that's the bank that we acquired in the fall.
In net, organic loan growth of some $61.3 million. Since December 31, 2012 we've originated loans and funded advances of $336 million which is a record for us in origination offset by payoff resolution and principal payments of some $275 million. You know that $336 million of originations and advances relates to about $136 million last year, so it was a remarkable year for us and our top line new loan originations.
For the fourth quarter, loans grew about $12.1 million net, our fourth consecutive quarter however of net organic loan growth which we're excited about overcoming loss share loan and legacy loan, payoffs, pay downs and resolutions.
During the quarter, we closed and funded $90 million in new loans and extended advances on existing loans. Our new loan production was partially offset by resolutions, pay offs, principal reductions and transfers to ORE of non-performing loans of approximately $78.5 million comprised of just to break it down between covered and uncovered $25 million of covered and $53 million of uncovered loans during the quarter.
The total pipeline as of December 31, 2013 was $78.5 million which is consistent with what we see for fourth quarters, when a lot gets cleaned down and few will [ph] and then they begin rebuilding pipe.
In fact, as we look today we are over $90 million in our pipe and so on so, we are really blank [ph] about that. Having said that included in that at the end of the year that $78.5 million pipe. Our loans of $45 million which have been approved and are pending closing and $33 million in loans in underwriting, but briskly the team is filling up that pipe. So we have good things to think about from our perspective here in Q1.
Talk for a moment about loan quality, we are pleased as you can imagine that 1st United's problem asset ratios continue to be well below the Florida bank averages. We also see continued improvements in our loan classifications.
We still believe that slight ups and downs and NPA statistics can occur between quarters-of-quarters. With an overall expectation that 1st United will maintain low legacy NPA's and enjoy extra strong credit safety through the loss share agreements for several years to come. In fact, John will go through the vitals and all things assets quality that will show you another wonderful quarter for us in terms of improvement.
We emphasize at approximately 22% of our entire loan portfolio represents covered assets under loss sharing agreements with the FDIC. So I'll come back later, but let me kick it to John.
Thank you, Rudy. And I will focus on Q4, for the quarter ended December 31. We reported net income of $2.6 million or $0.08 per share. We are beginning to see the effect of our cost savings efforts and the accretion to earning of the Enterprise transaction.
Our earnings for the quarter were also impacted by various one-time charges including disposable of computer equipment of about $180,000 and OREO write-downs of about $360,000.
Our net interest margin for the quarter ended December 31 was 5.42% compared to 4.88% for the quarter ended September 30, excluding the $5 million of accretion during the quarter ended December 31, related to the changes in cash flows and disposition of acquired assets above the discounted purchase price, our margin was still strong 4.13% during the quarter, which compares to about 4.15% for the length quarter in September.
We had net gains on the sale of other real estate during the quarter of about $120,000 and assets for the carrying value of $968,000. Within that, was about $639,000 of legacy OREO or non-covered other real estate.
The gain was substantially offset though by a charge to the loss share receivable of $102,000 during the quarter. As a result of increase an estimated cash flow received on loss share assets, which is about $5 million of income during the quarter. We did record an approximately $4.7 million charge to other income for the reduction in the indemnification asset for the quarter ended December 31.
As Rudy indicated, we are definitely seeing improvement in non-performing assets. Our non-performing asset ratio excluding loss share assets is now under 1% at 0.91% including the loss share assets we are above 1.87% that was a decrease of about $3.8 million when compared to September 30.
Total OREO which is included in the NPA ratio at December 31 was $18.6 million, which was an uptick from the $16.5 million at September 30. The increase was primarily related to loss share assets going into other real estate. Of the total $18.6 million at December 31, $10.8 million are covered under the loss share agreements and that compares to $9.4 million at September 30.
At December 31, we have about $1.1 million of other real estate under contract, which are anticipated to close this quarter, the current quarter that we are in. At December 31, our troubled debt restructurings were $18.6 million which compares to $9.2 million at September 30.
Modifications are evaluated of course on a loan-by-loan basis and we expect that the balance of TDRs will move up and down between quarters, as Florida continues to achieve a full economic recovery.
Our current yield on our TDRs is about 4.4%. We took loan provisioning during the quarter of $780,000 related primarily to charge-offs, changes in appraisals and changes in cash flows on loans. We did record about a $1 million of charge-offs during the quarter.
Our allowance is a percentage of non-covered loans was about $1.09% at December 31. We excluded the acquired Enterprise loans which were of course reported at their fair value, the ratio would be about 1.3% and that compares to the 1.16% at September 30.
Past due loans excluding non-accrual loans decreased to $3.8 million at December 31, as compared to $4 million at September 30. As Rudy indicated, we continue to see improvement in our classified assets. Classified assets decreased to $59.5 million at December 31 as compared to $64.7 million at September 30 included in those classified asset, a special mentioned loans of [Audio Gap]
December is reflected in our capital as a reduction as of December 31 and of course this morning we announced that our quarterly dividend was increased to $0.02 a share. And with that, Rudy I will kick it back to you.
A few takeaway remarks and perhaps some comments from Warren as a close, before we take your questions. Our net interest margin of 5.29% is extraordinary from our perspective. Our core would be [indiscernible] on 3% when we excluded the impact of the resolution purchase loans above their discounted acquiring value that for the quarter ended December 31, 2013.
We are successful during the quarter in producing net organic growth within our loan portfolio originating and funding loans of $91 million and $337 million for the three months and one year ended December 31, 2013 respectively.
Net growth generated net loans of approximately $12 million during the quarter and for the year ended December 31 over $61 million excluding the Enterprise acquisition. Our pipeline continues to be strong at $93 million today with over $40 million approved [ph] and pending closing and closed.
We have an ongoing project as John mentioned to reduce operating expenses and enhanced earnings power to ensure we are positioned for the future. We continue to reap the benefits of these initiatives and anticipate continued and steady improvement through 2014.
Our priorities for 2014 continue to be produce prudent but strong net growth in the loan portfolio. Explore opportunities to leverage our capital and excess cash and reduce operating expenses and loan loss provisioning as appropriate.
We believe that the state of banking in Florida is improving and that 1st United occupies the position of strength among the small handful of the $1 billion plus Florida headquartered publicly held banks. So Warren with that.
Thank you Rudy and just to add to Rudy's remarks and maybe a little bit repetitive but we think it's really important. We do continue to be encouraged by the improving Florida banking environment and we are very pleased with our acquisition and successful integration of Enterprise Bank.
We are particularly enthused about our standing in the five major Florida banking markets and we are well position to take advantage of future opportunities. As a final thought, along with our emphasis on earnings, growth and expense reduction as well as our constant dedication to safety and soundness, this should result in elevating our franchise value for our shareholders.
Thanks again for your support of an interest in 1st United and now Charles; we'll take questions from the audience.
We will now begin the question-and-answer session. (Operator Instructions). Our first question comes from Scott Valentine from FBR Capital Markets. Your line is now open.
Josh Cohen – FBR Capital Markets
This is, Josh Cohen in for Scott. Thanks for taking our questions. Can you describe the dynamics of the quarter-to-quarter change in your core and interest margin and specifically the new production loan yields versus the current portfolio yield?
Sure. This is John Marino; I'll cover the length quarter as it relates to margin because really the margin was relatively consistent quarter-over-quarter. We are at 4.15% at the September quarter and we are at 4.13% in the fourth quarter as it relates to core margin, when you back out the lack of a better word. The noise associated with cash flow changes, in gains and so forth on assets and Rudy, I don't know if you want to touch on a little bit, what we are seeing on yields on the loan side?
You know as you could tell, our pace of lending is up materially from 2012. The mix, tends to be significant, it's all commercial purpose for us of meaning and you would see that we are generating between 20% and 25% CNI, which tend to carry higher yields and heavily into commercial real estate where the good chunk of that being owner occupied which is a good 60% if you will and then when you have some consumer, and we are finding that on the margin as we originate for example commercial real estate loans that our interest rates have been centering around 4.5% for example and we find that we have similar floors on our revolving loans that are in the CNI portfolio.
In addition, some of our CNI loans derive from our HOA\POA practice. Homeowner and Property Owner practice that practice. The yields on those loans which tend to deal with roof replacement, balcony work and other forgetting the lines, revolving lines of credits. These would be the non-revolvers installment-based tend to be again in the 4.5% and 4.75% range.
So those yields of course are above our core margin that we expressed to a short while ago and hopefully that goes to your question.
Josh Cohen – FBR Capital Markets
Yes, thanks that's good color and then my other question is. How much of the accretion yield would you say the run rate going into 2014, not the sort of lumpier credit resolution?
Sure and we don't put out frankly those kind of prospective numbers, but I will tell you can look in the quarter when you get an opportunity look at the 10-K. you will see in the quarter, what that kind of core accretion was and how much it meant to the margin. And we are seeing at certainly some consistency as we go into 2014 and we really as a company have continue to focus on that and recognize that we need loan growth which fortunately we are pretty not in the books to really replace that yield as it comes off.
Our next question comes from Brady Gailey from KBW SS Management. Your line is now open.
Brady Gailey – KBW SS Management
I guess, [indiscernible] you talked a little bit about M&A but with the improvement you're seeing locally in your economy how is that changing your M&A conversation. You're sellers looking to get more now or just in general. In M&A do you think that, I've heard kind of nationwide activity is picking up more so in certain pockets but do you think you'll active on the M&A front in 2014?
You know a couple of comments to that Brady, I'd say we are likewise we are finding in Florida that there is a fair amount of folks banks that we would categorize as not sellers by interest and I would say to that. It wouldn't surprise you to know that we believe they have a high value. For instance expectations or high addition [ph] as well and you're absolutely right, what we believe is that our organic growth will be meaningful enough in 2014, but the very smallest bank acquisition certainly something under $150 million or under is probably not going to be something you would see because for all that work, we feel organically we ought to be able to generate asset generate superior and more efficiently organically.
Above that level, whether we could ever find another Enterprise transaction that was as wonderful as we believe it was, which was just in worth of $200 million categories, is not the question. We are also like many taking, raising our sights and looking at everything from transformative, to in between that $200 million shop in a transformative transaction, but we are finding that there is, I think increase tightened interest.
I think, it stems from a view. You know the recession was brought on some fatigue. On the other hand, I think everyone is seeing a brighter outcome. So there's mixed emotions, I think on the part of some of these sellers, there's fatigue we've been invest at time. Let's explore on the other hand, we think we can grow the institution as well, but I would say and I don't mean to be wordy.
I think the on slot [ph] of re-regulation in the industry is been a deterrent for the go-forward strategies as well. So hopefully that goes to your question.
I think Brady, I'll just add that I think consistent with our past performance. We are not going to greedy, we are not going to do anything that doesn't make sense for the bottom line and for our shareholders.
Brady Gailey – KBW SS Management
And then when we recently saw another bank in your backyard, sell to another Florida bank. How what opportunities does that create for you all or does that change your business at all having that somewhat of a dislocation, their locally?
Just so all of you know, I don't think there's a thing we are not invited to, so we are well aware of that transaction and feel very informed about it, we'll put it that way. And I think that, we are selfish enough to hate to see, sizable transactions go to a competitor that we know we could handle, if we liked it. So I don't think we feel dislocated. We would admit Florida doesn't have as many large institutions that might be in that seller and you get to look at, but there are some.
And I think from a competitive perspective in market, when we look at that particular transaction. I think it's a very worthy buyer, who will do, I'm sure a wonderful job in that acquisition. We feel pretty powerful for who we are inside that footprint, both in Central and South Florida.
So we're, we don't feel certainly at any disadvantage whatsoever for competing against if you will new co in that transaction.
(Operator Instructions) our next question comes from John Rodis from FIG Partners. Your line is now open.
John Rodis – FIG Partners
A quick question on the loan growth you had during the quarter in the non-covered portfolio. I did notice that, the construction loans were down about $15 million, was that just due to payoffs or did some of that go into more permanent financing on the commercial real estate side?
Yes, it's a great question very discerning. We had a, we do very few participations and we happen to do one substantial one, which is for some student housing in Central Florida related to UCF, the University of Central Florida and that project, it was construction only facility and we honestly thought it would mature more in the late Q1 timeframe but they actually got ahead of it and it matured right at the end of the year.
So it was a little bit of surprise only in the sense that we knew, that it would evaporate, it would pay off, but just a little earlier than we thought that really accounts for the line share but otherwise, we do have just normal pay downs of construction facilities and again most of our construction facilities are extended to large deal condominium associations, property owner associations for work and so on.
John Rodis – FIG Partners
Okay so that's but again that was the vast majority of?
That was a vast majority, it was a large project.
John Rodis – FIG Partners
Okay and then if we just take a look at operating expenses for the quarter. If you sort of, is the right way to look at it you started $12.8 million you back out the write-off with a computer equipment and then you sort of back out the other real estate write-downs that sort of gets you to roughly $12.2 million quarterly run rate, is that sort of a good number to start from going forward for 2014.
Yes, you know we are obviously have a significant amount of effort to make that number below the $12.2 million but as a starting point, it is and I think we had mentioned in the September call. As a base that fourth quarter, when you back out the noise is probably good base as we get into 2014.
Our next question comes from Michael Rose from Raymond James.
Michael Rose – Raymond James
Just wanted to get a sense back to the expenses and I know the question was kind of just asked, but how much of the sequential decline this quarter had to do with lower pension expenses, which I picked up in the 10-K and how much was really the branch cost that came out from the conversion in the closure?
I think when you talk about the length quarter, Michael fourth quarter versus third quarter. I think the largest piece of it, really is the efficiency starting to be realized from the Enterprise transaction that deal we converted the end of September. So the branches that were closed, are closed. The personnel decisions that were needed to be made, were made. Those kind of things were all in third quarter, in the normal operating expenses forgetting the one-time charge that we booked in the third quarter. They were still spread out in the other expense categories.
So I think, it really becomes the efficiency related to the Enterprise transactions our ongoing efforts on expense control is probably the bigger drivers than just any change in the pension expense.
Michael Rose – Raymond James
Okay, that's helpful and then just switching I guess, I'm sorry I got on a little bit late. As it relates to your outlook for M&A there's been couple deals in Miami area more recently just wanted to get your thoughts on what you're seeing in terms of activity, how should we think about [indiscernible]?
There's a lot of it, we are being, well we suspect its lot of it. We are being pretty disciplined which I know, all of you expect from us and frankly when we get under the hood on these transactions, we get to inspect portfolios. If it doesn't work from a quality perspective the way we think it ought to and we are risk takers. Then we tend to pass, so we've looked at. I would argue that we look at more deals in most anybody in Florida because our range is pretty significant from let's say $200 million shops to much larger.
And so we continue to hunt, it's hard to predict when we are going to find something that's worthy which is why we stepped on the pedal of organic growth starting Q4, 2012 obviously through 2013 and we see good things there. So we are going to get our growth one way or the other. We love to have that extra stepwise growth from a good acquisition to so, I don't think there's any parties we haven't been invited to though.
So we look at them.
Okay, there are no further questions at this time.
Well, thank you Charles, appreciated. We appreciate everybody being on the call. You all have a great day.
That concludes today's conference. Thank you for participating. You may disconnect at this time.
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