FUBC: Attractive FL-Based Bank With Solid Core Deposit Base; Initiating Coverage With An “Outperform” Rating And $8.50 Target.

FUBC Initiation

We are initiating coverage of FUBC- 1st United Bancorp with an “Outperform” rating. Our 12-month price target is $8.50/share representing potential upside of ~ 17%. On a YTD-basis, FUBC shares have increased ~ 16% vs. the peer group median increase of ~ 21%. Our earnings estimates for 2013, 2014 and 2015 are $0.23, $0.37 and $0.48/share, respectively. Our 3Q13 operating estimate is $0.06 vs. the consensus estimate of $0.04/share.

FUBC has shown relatively strong balance sheet growth over the last few years primarily driven by strategic acquisitions. Since 2005, the Company has completed seven bank acquisitions in Florida including three FDIC-assisted transactions. As a result, the Company has now built an attractive Florida-based franchise with ~ 26 branches throughout the South and Central part of the state.

Room for More Organic Growth and Strategic Acquisitions: With projected TCE of ~ 10%, FUBC remains well positioned to do additional acquisitions if the situation is right. Based on our assumptions FUBC could add another $300-400 Million in assets before issuing additional shares. Assuming FUBC could earn a 1.0% ROA on the acquired assets this could improve the Company’s earnings power by ~ $0.10/share based on the current share count.

Improving Core Profitability: As in any “roll-up” story sometimes the balance sheet growth gets ahead of the Company’s core profitability. FUBC’s 2Q13 ROA was 0.45% which is below the Company’s peer group median of 0.75%. Over the next few years we expect FUBC’s core profitability to improve as management continues to integrated recent acquisitions, improve operating leverage and grow the core loan portfolio/improve the earning asset mix.

Strong Core Deposit Base Helps Drive NIM: Non-interest bearing deposits account for ~ 35% of total deposits. This helps keep FUBC’s funding cost relatively low. The Company’s total cost of funds was 0.27% in 2Q13 vs. the peer group median of 0.60%. FUBC’s core margin was ~ 4.20% vs. the peer median of 3.78%. The reported margin was 5.79% and includes added yield accretion from the covered portfolio.

Core Loan Trends Continue to Improve: Core/non-covered loans are up ~ 8% since YE12. This included a 3.7% rise in 2Q13. The growth has primarily been driven by commercial real estate credits (up ~ 15% YTD) as well as C&I loans (up ~ 4%). Excluding acquired loans, we are modeling core/non-covered loan growth of ~ 2-3% for the next few quarters.