XNAS:CSFL Centerstate Banks Inc Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

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Table of Contents

 

 

U.S. SECURTIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

 

 

Form 10-Q

 

 

(Mark One)

x Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended March 31, 2012

 

¨ Transition report under Section 13 or 15(d) of the Exchange Act

For the transition period from              to             

Commission file number 000-32017

 

 

CENTERSTATE BANKS, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

Florida   59-3606741

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

42745 U.S. Highway 27

Davenport, Florida 33837

(Address of Principal Executive Offices)

(863) 419-7750

(Issuer’s Telephone Number, Including Area Code)

 

 

Check whether the issuer: (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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  ¨

Check whether the registrant is a large accelerated filer, an accelerated filer, non-accelerated filer or a smaller reporting company.

 

Large accelerated filer   ¨    Accelerated filer   x
Non-accelerated filer   ¨    Smaller reporting company   ¨

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  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):    YES    ¨    NO  x

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

 

Common stock, par value $.01 per share

 

30,071,127 shares

(class)   Outstanding at April 26, 2012

 

 

 


Table of Contents

CENTERSTATE BANKS, INC. AND SUBSIDIARIES

INDEX

 

           Page  
PART I.   

FINANCIAL INFORMATION

  
Item 1.   

Financial Statements

  
  

Condensed consolidated balance sheets at March 31, 2012 (unaudited) and December 31, 2011

     3   
  

Condensed consolidated statements of earnings and comprehensive income for the three months ended March 31, 2012 and 2011 (unaudited)

     4   
  

Condensed consolidated statements of changes in stockholders’ equity for the three months ended March 31, 2012 and 2011 (unaudited)

     6   
  

Condensed consolidated statements of cash flows for the three months ended March 31, 2012 and 2011 (unaudited)

     7   
  

Notes to condensed consolidated financial statements (unaudited)

     9   
Item 2.   

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     33   
Item 3.   

Quantitative and Qualitative Disclosures About Market Risk

     51   
Item 4.   

Controls and Procedures

     51   
PART II.   

OTHER INFORMATION

  
Item 1.   

Legal Proceedings

     52   
Item 1A.   

Risk Factors

     52   
Item 2.   

Unregistered Sales of Equity Securities and Use of Proceeds

     52   
Item 3.   

Defaults Upon Senior Securities

     52   
Item 4.   

[Removed and Reserved]

     52   
Item 5.   

Other Information

     52   
Item 6.   

Exhibits

     52   
SIGNATURES      53   
CERTIFICATIONS      54   

 

2


Table of Contents

CenterState Banks, Inc. and Subsidiaries

CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)

(in thousands of dollars, except per share data)

 

     As of
March 31, 2012
(unaudited)
    As of
December 31, 2011
 

ASSETS

    

Cash and due from banks

   $ 31,471      $ 17,893   

Federal funds sold and Federal Reserve Bank deposits

     103,427        133,202   
  

 

 

   

 

 

 

Cash and cash equivalents

     134,898        151,095   

Trading securities, at fair value

     552        —     

Investment securities available for sale, at fair value

     545,559        591,164   

Loans held for sale, at lower of cost or fair value

     298        3,741   

Loans covered by FDIC loss share agreements

     347,793        164,051   

Loans, excluding those covered by FDIC loss share agreements

     1,109,005        1,119,715   

Less allowance for loan losses

     (26,010     (27,944
  

 

 

   

 

 

 

Net Loans

     1,430,788        1,255,822   

Bank premises and equipment, net

     97,060        94,358   

Accrued interest receivable

     7,527        6,929   

Federal Home Loan Bank and Federal Reserve Bank stock

     12,598        10,804   

Goodwill

     46,779        38,035   

Core deposit intangible

     6,821        5,203   

Trust intangible

     1,541        —     

Bank owned life insurance

     46,878        36,520   

Other repossessed real estate owned covered by FDIC loss share agreements

     29,934        9,469   

Other repossessed real estate owned (“OREO”)

     6,726        8,712   

FDIC indemnification asset

     142,245        50,642   

Deferred income taxes, net

     3,278        3,451   

Prepaid expense and other assets

     19,621        18,514   
  

 

 

   

 

 

 

TOTAL ASSETS

   $ 2,533,103      $ 2,284,459   
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

Deposits:

    

Demand - non-interest bearing

   $ 500,683      $ 423,128   

Demand - interest bearing

     400,492        344,303   

Savings and money market accounts

     602,327        545,440   

Time deposits

     629,306        606,918   
  

 

 

   

 

 

 

Total deposits

     2,132,808        1,919,789   

Securities sold under agreement to repurchase

     21,175        14,652   

Federal funds purchased

     74,459        54,624   

Note payable

     10,000        —     

Corporate debentures

     16,951        16,945   

Accrued interest payable

     992        778   

Settlement payments due FDIC

     —          2,599   

Accounts payables and accrued expenses

     13,115        12,439   
  

 

 

   

 

 

 

Total liabilities

     2,269,500        2,021,826   

Stockholders’ equity:

    

Common stock, $.01 par value: 100,000,000 shares authorized; 30,071,127 and 30,055,499 shares issued and outstanding at March 31, 2012 and December 31, 2011, respectively

     301        301   

Additional paid-in capital

     228,604        228,342   

Retained earnings

     29,266        28,277   

Accumulated other comprehensive income

     5,432        5,713   
  

 

 

   

 

 

 

Total stockholders’ equity

     263,603        262,633   
  

 

 

   

 

 

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

   $ 2,533,103      $ 2,284,459   
  

 

 

   

 

 

 

See notes to the accompanying condensed consolidated financial statements

 

3


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CenterState Banks, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE INCOME (unaudited)

(in thousands of dollars, except per share data)

 

     Three months ended  
     Mar. 31, 2012     Mar. 31, 2011  

Interest income:

    

Loans

   $ 19,544      $ 16,327   

Investment securities available for sale:

    

Taxable

     3,368        3,569   

Tax-exempt

     351        347   

Federal funds sold and other

     151        134   
  

 

 

   

 

 

 
     23,414        20,377   
  

 

 

   

 

 

 

Interest expense:

    

Deposits

     2,231        3,209   

Securities sold under agreement to repurchase

     20        24   

Federal funds purchased

     8        19   

Federal Home Loan Bank advances and other borrowings

     87        48   

Corporate debentures

     164        103   
  

 

 

   

 

 

 
     2,510        3,403   
  

 

 

   

 

 

 

Net interest income

     20,904        16,974   

Provision for loan losses

     2,732        11,276   
  

 

 

   

 

 

 

Net interest income after loan loss provision

     18,172        5,698   
  

 

 

   

 

 

 

Other income:

    

Service charges on deposit accounts

     1,483        1,556   

Income from correspondent banking and bond sales division

     7,784        4,470   

Commissions from sale of mutual funds and annuities

     660        439   

Debit card and ATM fees

     915        656   

Loan related fees

     200        165   

BOLI income

     358        239   

Gain on sale of securities

     602        9   

Trading securities revenue

     144        161   

Bargain purchase gain

     453        11,129   

FDIC indemnification income

     564        1,136   

FDIC indemnification asset accretion/(amortization)

     (496     468   

Trust fees

     208        —     

Other non interest revenue and fees

     811        478   
  

 

 

   

 

 

 

Total other income

     13,686        20,906   
  

 

 

   

 

 

 

See notes to the accompanying condensed consolidated financial statements.

 

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CenterState Banks, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE INCOME (unaudited)

(in thousands of dollars, except per share data)

 

     Three months ended  
     Mar. 31, 2012     Mar. 31, 2011  

Other expenses:

    

Salaries, wages and employee benefits

     17,461        13,506   

Occupancy expense

     2,061        2,094   

Depreciation of premises and equipment

     1,267        999   

Supplies, stationary and printing

     315        304   

Marketing expenses

     584        728   

Data processing expense

     1,005        1,292   

Legal, auditing and other professional fees

     620        694   

Core deposit intangible (CDI) amortization

     278        190   

Postage and delivery

     323        231   

ATM and debit card related expenses

     262        316   

Bank regulatory expenses

     700        800   

Loss on sale of repossessed real estate (“OREO”)

     272        518   

Valuation write down of repossessed real estate (“OREO”)

     255        2,035   

Loss on repossessed assets other than real estate

     98        21   

Foreclosure related expenses

     942        987   

Merger and acquisition related expenses

     1,868        401   

Other expenses

     1,775        1,533   
  

 

 

   

 

 

 

Total other expenses

     30,086        26,649   

Income (loss) before provision for income taxes

     1,772        (45

Provision (benefit) for income taxes

     483        (210
  

 

 

   

 

 

 

Net income

   $ 1,289      $ 165   
  

 

 

   

 

 

 

Other comprehensive income, net of tax:

    

Change in unrealized holding (loss) gain on available for sale securities, net of reclassifications and deferred income tax of $170 and $259, respectively

     (281     492   
  

 

 

   

 

 

 

Total comprehensive income

   $ 1,008      $ 657   
  

 

 

   

 

 

 

Earnings per share:

    

Basic

   $ 0.04      $ 0.01   

Diluted

   $ 0.04      $ 0.01   

Common shares used in the calculation of earnings per share:

    

Basic

     30,065,631        30,020,035   

Diluted

     30,088,188        30,047,618   

See notes to the accompanying condensed consolidated financial statements.

 

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CenterState Banks, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

For the three months ended March 31, 2012 and 2011 (unaudited)

(in thousands of dollars, except per share data)

 

     Number of
common
shares
     Common
stock
     Additional
paid in
capital
     Retained
earnings
    Accumulated
other
comprehensive
income(loss)
    Total
stockholders’
equity
 

Balances at January 1, 2011

     30,004,761       $ 300       $ 227,464       $ 21,569      $ 2,916      $ 252,249   

Comprehensive income:

               

Net income

              165          165   

Change in unrealized holding gain on available for sale securities, net of deferred income tax of $259

                492        492   
               

 

 

 

Total comprehensive income

                  657   

Dividends paid - common ($0.01 per share)

              (300       (300

Stock options exercised, including tax benefit

     14,903            95             95   

Stock grants issued

     15,628            171             171   

Stock based compensation expense

           115             115   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Balances at March 31, 2011

     30,035,292       $ 300       $ 227,845       $ 21,434      $ 3,408      $ 252,987   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Balances at January 1, 2012

     30,055,499       $ 301       $ 228,342       $ 28,277      $ 5,713      $ 262,633   

Comprehensive income:

               

Net income

              1,289          1,289   

Change in unrealized holding loss on available for sale securities, net of deferred income tax of $170

                (281     (281
               

 

 

 

Total comprehensive income

                  1,008   

Dividends paid - common ($0.01 per share)

              (300       (300

Stock grants issued

     15,628            171             171   

Stock based compensation expense

           91             91   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Balances at March 31, 2012

     30,071,127       $ 301       $ 228,604       $ 29,266      $ 5,432      $ 263,603   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

 

Disclosure of reclassification amounts:

   Three month
period ended
Mar 31, 2012
    Three month
period ended
Mar 31, 2011
 

Unrealized holding gain arising during the period, net of income taxes

   $ 94      $ 498   

Less: reclassified adjustments for gain included in net income, net of income taxes, at March 31, 2012 and 2011 of $227 and $3, respectively

     (375     (6
  

 

 

   

 

 

 

Net unrealized (loss) gain on securities, net of income taxes

   $ (281   $ 492   
  

 

 

   

 

 

 

 

See notes to the accompanying condensed consolidated financial statements

 

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Table of Contents

CenterState Banks, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

(in thousands of dollars)

 

     Three months ended Mar 31,  
     2012     2011  

Cash flows from operating activities:

    

Net income

   $ 1,289      $ 165   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Provision for loan losses

     2,732        11,276   

Depreciation of premises and equipment

     1,267        999   

Amortization of purchase accounting adjustments

     (5,679     (3,707

Net amortization/accretion of investment securities

     2,481        1,909   

Net deferred loan origination fees

     94        (8

Gain on sale of securities available for sale

     (602     (9

Trading securities revenue

     (144     (161

Purchases of trading securities

     (80,588     (64,549

Proceeds from sale of trading securities

     80,180        64,743   

Repossessed real estate owned valuation write down

     255        2,035   

Loss on sale of repossessed real estate owned

     272        518   

Repossessed assets other than real estate valuation write down

     56        15   

Loss on sale of repossessed assets other than real estate

     42        6   

Gain on sale of loans held for sale

     (83     (25

Loans originated and held for sale

     (3,307     (929

Proceeds from sale of loans held for sale

     6,833        1,459   

Gain on disposal of and or sale of fixed assets

     (37     (27

Deferred income taxes

     342        (121

Stock based compensation expense

     160        195   

Bank owned life insurance income

     (358     (239

Bargain purchase gain from acquisition

     (453     (11,129

Net cash from changes in:

    

Net changes in accrued interest receivable, prepaid expenses, and other assets

     (7     (1,780

Net change in accrued interest payable, accrued expense, and other liabilities

     (2,512     3,141   
  

 

 

   

 

 

 

Net cash provided by operating activities

     2,233        3,777   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Purchases of investment securities available for sale

     (10,686     (22,753

Purchases of mortgage backed securities available for sale

     (99,503     (135,786

Proceeds from maturities of investment securities available for sale

     45        244   

Proceeds from called investment securities available for sale

     38,400        17,900   

Proceeds from pay-downs of mortgage backed securities available for sale

     34,878        31,764   

Proceeds from sales of investment securities available for sale

     12,781        —     

Proceeds from sales of mortgage backed securities available for sale

     72,809        33,349   

Net decrease in loans

     25,046        8,704   

Cash received from FDIC loss sharing agreements

     2,033        961   

Purchases of premises and equipment, net

     (2,585     (1,981

Proceeds from sale of repossessed real estate

     5,929        3,799   

Proceeds from insurance claims related to repossessed real estate

     —          263   

Proceeds from sale of fixed assets

     37        70   

Purchase of bank owned life insurance

     (10,000     —     

Net cash from bank acquisitions

     81,061        4,349   
  

 

 

   

 

 

 

Net cash provided (used) in investing activities

     150,245        (59,117
  

 

 

   

 

 

 

See notes to the accompanying condensed consolidated financial statements.

 

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Table of Contents

CenterState Banks, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

(in thousands of dollars)

(continued)

 

     Three months ended Mar 31,  
     2012     2011  

Cash flows from financing activities:

    

Net (decrease) increase in deposits

     (204,733     27,498   

Net increase in securities sold under agreement to repurchase

     6,523        1,733   

Net increase in federal funds purchased

     19,835        23,616   

Net increase (decrease) in other borrowed funds

     10,000        (9,000

Stock options exercised, including tax benefit

     —          95   

Dividends paid

     (300     (300
  

 

 

   

 

 

 

Net cash (used in) provided by financing activities

     (168,675     43,642   
  

 

 

   

 

 

 

Net decrease in cash and cash equivalents

     (16,197     (11,698

Cash and cash equivalents, beginning of period

     151,095        177,515   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 134,898      $ 165,817   
  

 

 

   

 

 

 

Transfer of loans to other real estate owned

   $ 7,270      $ 4,826   
  

 

 

   

 

 

 

Cash paid during the period for:

    

Interest

   $ 2,846      $ 3,920   
  

 

 

   

 

 

 

Income taxes

   $ —        $ 25   
  

 

 

   

 

 

 

See notes to the accompanying condensed consolidated financial statements.

 

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CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

NOTE 1: Nature of Operations and basis of presentation

Our consolidated financial statements include the accounts of CenterState Banks, Inc. (the “Parent Company,” “Company” or “CSFL”), and our wholly owned subsidiary banks, CenterState Bank of Florida, N.A. and Valrico State Bank, and our non bank subsidiary, R4ALL, Inc. Our subsidiary banks operate through 65 full service banking locations in 18 counties throughout Central Florida, providing traditional deposit and lending products and services to their commercial and retail customers. R4ALL, Inc. is a separate non bank subsidiary of CSFL. Its purpose is to purchase troubled loans from our two subsidiary banks and manage their eventual disposition.

In addition, we also operate a correspondent banking and bond sales division. The division is integrated with and part of our lead subsidiary bank located in Winter Haven, Florida, although the majority of our bond salesmen, traders and operational personnel are physically housed in leased facilities located in Birmingham, Alabama, Atlanta, Georgia and Winston Salem, North Carolina. The business lines of this division are primarily divided into three inter-related revenue generating activities. The first, and largest, revenue generator is commissions earned on fixed income security sales. The second category includes correspondent bank deposits (i.e. federal funds purchased) and correspondent bank checking account deposits. The third revenue generating category includes fees from safe-keeping activities, bond accounting services for correspondents, asset/liability consulting related activities, international wires, and other clearing and corporate checking account services. The customer base includes small to medium size financial institutions primarily located in Florida, Alabama, Georgia, North Carolina, South Carolina, Tennessee, Virginia and West Virginia.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. These statements should be read in conjunction with the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2011. In our opinion, all adjustments, consisting primarily of normal recurring adjustments, necessary for a fair presentation of the results for the interim periods have been made. The results of operations of the three month period ended March 31, 2012 are not necessarily indicative of the results expected for the full year.

NOTE 2: Common stock outstanding and earnings per share data

Basic earnings per share is based on the weighted average number of common shares outstanding during the periods. Diluted earnings per share includes the weighted average number of common shares outstanding during the periods and the further dilution from stock options using the treasury method. There were 1,128,304 and 1,175,000 stock options that were anti dilutive at March 31, 2012 and 2011, respectively. The following is a reconciliation of the numerators and denominators of the basic and diluted earnings per share computations for the periods presented.

 

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CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

 

For the three months ended March 31,

   2012      2011  

Numerator for basic and diluted earnings per share:

     

Net income

   $ 1,289       $ 165   

Denominator:

     

Denominator for basic earnings per share

     

- weighted-average shares

     30,065,631         30,020,035   

Effect of dilutive securities:

     

Stock options and stock grants

     22,557         27,583   

Denominator for diluted earnings per share

     
  

 

 

    

 

 

 

- adjusted weighted-average shares

     30,088,188         30,047,618   
  

 

 

    

 

 

 

Basic earnings per share

   $ 0.04       $ 0.01   

Diluted earnings per share

   $ 0.04       $ 0.01   

NOTE 3: Fair value

Generally accepted accounting principles establish a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing and asset or liability.

The fair values of securities available for sale are determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs) or matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs).

The fair values of trading securities are determined as follows: (1) for those securities that have traded prior to March 31, 2012 but have not settled (date of sale) until after such date, the sales price is used as the fair value; and, (2) for those securities which have not traded as of March 31, 2012, the fair value was determined by broker price indications of similar or same securities. Securities purchases for this portfolio are municipal securities.

 

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CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

 

All of the mortgaged back securities (“MBSs”) listed below are FNMA, FHLMC, and GNMA MBSs. Assets and liabilities measured at fair value on a recurring basis are summarized below.

 

            Fair value measurements using  
            Quoted prices in
active markets for
identical assets

(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
unobservable
inputs
(Level 3)
 

at March 31, 2012

           

Assets:

           

Trading securities

   $ 552         —         $ 552         —     

Available for sale securities

           

U.S. government sponsored entities and agencies

     43,508         —           43,508         —     

Mortgage backed securities

     461,050         —           461,050         —     

Municipal securities

     41,001         —           41,001         —     

at December 31, 2011

           

Assets:

           

Trading securities

   $ —           —         $ —           —     

Available for sale securities

           

U.S. government sponsored entities and agencies

     78,877         —           78,877         —     

Mortgage backed securities

     470,994         —           470,994         —     

Municipal securities

     41,293         —           41,293         —     

The fair value of impaired loans with specific valuation allowance for loan losses and other real estate owned is based on recent real estate appraisals less estimated costs of sale. For residential real estate impaired loans and other real estate owned, appraised values are based on the comparative sales approach. For commercial and commercial real estate impaired loans and other real estate owned, appraisers may use either a single valuation approach or a combination of approaches such as comparative sales, cost or the income approach. A significant unobservable input in the income approach is the estimated income capitalization rate for a given piece of collateral. At March 31, 2012, the range of capitalization rates utilized to determine the fair value of the underlying collateral ranged from 8% to 11%. Adjustments to comparable sales may be made by the appraiser to reflect local market conditions or other economic factors and may result in changes in the fair value of a given asset over time. As such, the fair value of impaired loans and other real estate owned are considered a Level III in the fair value hierarchy.

 

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CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

 

Assets and liabilities measured at fair value on a non-recurring basis are summarized below.

 

            Fair value measurements using  
            Quoted prices
in active markets for
identical assets

(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
unobservable
inputs

(Level  3)
 

at March 31, 2012

           

Assets:

           

Impaired loans

           

Residential real estate

   $ 6,024         —           —         $ 6,024   

Commercial real estate

     270         —           —           270   

Land, land development and construction

     788         —           —           788   

Commercial

     10         —           —           10   

Consumer

     439         —           —           439   

Other real estate owned

           

Residential real estate

   $ 797         —           —         $ 797   

Commercial real estate

     1,339         —           —           1,339   

Land, land development and construction

     3,895         —           —           3,895   

at December 31, 2011

           

Assets:

           

Impaired loans

           

Residential real estate

   $ 6,462         —           —         $ 6,462   

Commercial real estate

     171         —           —           171   

Land, land development and construction

     2,775         —           —           2,775   

Commercial

     11         —           —           11   

Consumer

     480         —           —           480   

Other real estate owned

           

Residential real estate

   $ 1,733         —           —         $ 1,733   

Commercial real estate

     2,948         —           —           2,948   

Land, land development and construction

     2,767         —           —           2,767   

Impaired loans with specific valuation allowances had a recorded investment of $8,564, with a valuation allowance of $1,033, at March 31, 2012, and a recorded investment of $13,203, with a valuation allowance of $3,304, at December 31, 2011. The Company recorded a provision for loan loss expense of $398 on these loans during the three month period ending March 31, 2012.

Other real estate owned had a decline in fair value of $255 and $2,035 during the three month periods ending March 31, 2012 and 2011, respectively. Changes in fair value were recorded directly as an adjustment to current earnings through non interest expense.

 

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CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

 

Fair Value of Financial Instruments

The methods and assumptions, not previously presented, used to estimate fair value are described as follows:

Cash and Cash Equivalents: The carrying amounts of cash and cash equivalents approximate fair values and are classified as Level 1.

FHLB and FRB Stock: It is not practical to determine the fair value of FHLB and FRB stock due to restrictions placed on their transferability.

Loans held for sale: The fair value of loans held for sale is estimated based upon binding contracts from third party investors resulting in a Level 2 classification.

Loans, net: Fair values of loans, excluding loans held for sale, are estimated as follows: For variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values resulting in a Level 3 classification. Fair values for other loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality resulting in a Level 3 classification. Impaired loans are valued at the lower of cost or fair value as described previously. The methods utilized to estimate the fair value of loans do not necessarily represent an exit price.

FDIC Indemnification Asset: It is not practical to determine the fair value of the FDIC indemnification asset due to restrictions placed on its transferability.

Accrued Interest Receivable: The carrying amount of accrued interest receivable approximates fair value and is classified as Level 3.

Deposits: The fair values disclosed for demand deposits (e.g., interest and non-interest checking, savings, and money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amount) resulting in Level 1 classification. Fair values for fixed rate certificates of deposit are estimated using a discounted cash flows calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits resulting in a Level 2 classification.

Short-term Borrowings: The carrying amounts of federal funds purchased, borrowings under repurchase agreements, and other short-term borrowings (note payable), generally maturing within ninety days, approximate their fair values resulting in a Level 2 classification.

Corporate Debentures: The fair values of the Company’s corporate debentures are estimated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements resulting in a Level 3 classification.

Accrued Interest Payable: The carrying amount of accrued interest payable approximates fair value resulting in a Level 2 classification.

 

13


Table of Contents

CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

 

Off-balance Sheet Instruments: The fair value of off-balance-sheet items is not considered material.

The following table presents the carry amounts and estimated fair values of the Company’s financial instruments:

 

            Fair value measurements         

at March 31, 2012

   Carrying amount      Level 1      Level 2      Level 3      Total  

Financial assets:

              

Cash and cash equivalents

   $ 134,898       $ 134,898       $ —         $ —         $ 134,898   

Trading securities

     552         —           552         —           552   

Investment securities available for sale

     545,559         —           545,559         —           545,559   

FHLB and FRB stock

     12,598         —           —           —           n/a   

Loans held for sale

     298         —           298         —           298   

Loans, less allowance for loan losses of $26,010

     1,430,788         —           —           1,431,819         1,431,819   

FDIC indemnification asset

     142,245         —           —           —           n/a   

Accrued interest receivable

     7,527         —           —           7,527         7,527   

Financial liabilities:

              

Deposits- without stated maturities

   $ 1,503,502       $ 1,503,502       $ —         $ —         $ 1,503,502   

Deposits- with stated maturities

     629,306         —           639,113         —           639,113   

Securities sold under agreement to repurchase

     21,175         —           21,175         —           21,175   

Federal funds purchased (correspondent bank deposits)

     74,459         —           74,459         —           74,459   

Note payable

     10,000         —           10,000         —           10,000   

Corporate debentures

     16,951         —           —          
8,496
  
     8,496   

Accrued interest payable

     992         —           992         —           992   

 

at December 31, 2011

   Carrying
amount
     Fair
value
 

Financial assets:

     

Cash and cash equivalents

   $ 151,095       $ 151,095   

Trading securities

     —           —     

Investment securities available for sale

     591,164         591,164   

FHLB and FRB stock

     10,804         n/a   

Loans held for sale

     3,741         3,741   

Loans, less allowance for loan losses of $27,944

     1,255,822         1,185,089   

FDIC indemnification asset

     50,642         50,642   

Accrued interest receivable

     6,929         6,929   

Financial liabilities:

     

Deposits- without stated maturities

   $ 1,312,871       $ 1,312,871   

Deposits- with stated maturities

     606,918         616,238   

Securities sold under agreement to repurchase

     14,652         14,652   

Federal funds purchased (correspondent bank deposits)

     54,624         54,624   

Note payable

     —           —     

Corporate debentures

     16,945         8,367   

Accrued interest payable

     778         778   

 

14


Table of Contents

CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

 

NOTE 4: Reportable segments

The Company’s reportable segments represent the distinct product lines the Company offers and are viewed separately for strategic planning purposes by management. The table below is a reconciliation of the reportable segment revenues, expenses, and profit to the Company’s consolidated total for the three month periods ending March 31, 2012 and 2011.

Three month period ending March 31, 2012

 

     Commercial
and retail
banking
    Correspondent
banking and
bond sales
division
    Corporate
overhead

and
administration
    Elimination
entries
    Total  

Interest income

   $ 22,228      $ 1,186          $ 23,414   

Interest expense

     (2,255     (8     (247       (2,510
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

     19,973        1,178        (247       20,904   

Provision for loan losses

     (2,732     —          —            (2,732

Non interest income

     5,332        8,354        —            13,686   

Non interest expense

     (22,322     (6,968     (796       (30,086
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income before taxes

     251        2,564        (1,043       1,772   

Income tax (provision) benefit

     90        (965     392          (483
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ 341      $ 1,599      ($ 651     $ 1,289   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

   $ 2,358,711      $ 177,707      $ 293,859      ($ 297,174   $ 2,533,103   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Three month period ending March 31, 2011

 

     Commercial
and retail
banking
    Correspondent
banking and
bond sales
division
    Corporate
overhead

and
administration
    Elimination
entries
    Total  

Interest income

   $ 19,695      $ 682          $ 20,377   

Interest expense

     (3,280     (20     (103       (3,403
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

     16,415        662        (103       16,974   

Provision for loan losses

     (11,276     —          —            (11,276

Non interest income

     15,922        4,984        —            20,906   

Non interest expense

     (20,891     (4,978     (780       (26,649
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income before taxes

     170        668        (883       (45

Income tax (provision) benefit

     137        (251     324          210   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ 307      $ 417      ($ 559     $ 165   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

   $ 2,047,968      $ 174,431      $ 267,981      ($ 264,869   $ 2,225,511   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Commercial and retail banking: The Company’s primary business is commercial and retail banking. Currently, the Company operates through two subsidiary banks and a non bank subsidiary, R4ALL, with 66 full service banking locations in 18 counties throughout Florida providing traditional deposit and lending products and services to its commercial and retail customers.

Corresponding banking and bond sales division: Operating as a division of our largest subsidiary bank, its primary revenue generating activities are as follows: 1) the first, and largest, revenue generator is commissions earned on fixed income security sales; 2) the second category includes spread income earned on correspondent bank deposits (i.e. federal funds purchased) and service fees on correspondent

 

15


Table of Contents

CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

 

bank checking accounts; and, 3) the third revenue generating category, includes fees from safe-keeping activities, bond accounting services for correspondents, asset/liability consulting related activities, international wires, and other clearing and corporate checking account services. The customer base includes small to medium size financial institutions primarily located in Florida, Alabama, Georgia, North Carolina, South Carolina, Tennessee, Virginia and West Virginia.

Corporate overhead and administration: Corporate overhead and administration is comprised primarily of compensation and benefits for certain members of management, interest on parent company debt, office occupancy and depreciation of parent company facilities, merger related costs and other expenses.

NOTE 5: Investment Securities Available for Sale

All of the mortgaged back securities listed below are FNMA, FHLMC, and GNMA MBSs. The fair value of available for sale securities and the related gross unrealized gains and losses recognized in accumulated other comprehensive income (loss) were as follows:

 

     March 31, 2012  
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair
Value
 

Obligations of U.S. government sponsored entities and agencies

   $ 43,426       $ 229       $ 147       $ 43,508   

Mortgage backed securities

     454,260         7,072         282         461,050   

Municipal securities

     39,163         1,935         97         41,001   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 536,849       $ 9,236       $ 526       $ 545,559   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     December 31, 2011  
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair
Value
 

Obligations of U.S. government sponsored entities and agencies

   $ 78,455       $ 422       $ —         $ 78,877   

Mortgage backed securities

     464,237         7,309         552         470,994   

Municipal securities

     39,312         2,141         160         41,293   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 582,004       $ 9,872       $ 712       $ 591,164   
  

 

 

    

 

 

    

 

 

    

 

 

 

The cost of securities sold is determined using the specific identification method. Sales of available for sale securities were as follows:

 

For the three months ended:

   Mar 31,
2012
     Mar 31,
2011
 

Proceeds

   $ 85,590       $ 33,349   

Gross gains

     885         140   

Gross losses

     283         131   

The tax provision related to these net realized gains was $227 and $3, respectively.

 

16


Table of Contents

CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

 

The fair value of available for sale securities at March 31, 2012 by contractual maturity were as follows. Securities not due at a single maturity date, primarily mortgage-backed securities, are shown separately.

 

Investment securities available for sale    Fair
Value
     Amortized
Cost
 

Due in one year or less

   $ 6,162       $ 6,154   

Due after one year through five years

     1,950         1,826   

Due after five years through ten years

     23,383         22,772   

Due after ten years through thirty years

     53,014         51,836   

Mortgage backed securities

     461,050         454,261   
  

 

 

    

 

 

 
   $ 545,559       $ 536,849   
  

 

 

    

 

 

 

Securities pledged at March 31, 2012 and December 31, 2011 had a carrying amount (estimated fair value) of $144,639 and $147,620 respectively. These securities were pledged primarily to secure public deposits and repurchase agreements.

At March 31, 2012 and December 31, 2011, there were no holdings of securities of any one issuer, other than the U.S. Government sponsored entities and agencies, in an amount greater than 10% of stockholders’ equity.

The following tables show the Company’s investments’ gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at March 31, 2012 and December 31, 2011.

 

     March 31, 2012  
     Less than 12 months      12 months or more      Total  
     Fair Value      Unrealized
Losses
     Fair Value      Unrealized
Losses
     Fair Value      Unrealized
Losses
 

Obligations of U.S. government sponsored entities and agencies

   $ 12,389       $ 147       $ —         $ —         $ 12,389       $ 147   

Mortgage backed securities

     100,788         282         —           —           100,788         282   

Municipal securities

     5,339         96         160         1         5,499         97   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily impaired securities

   $ 118,516       $ 525       $ 160       $ 1       $ 118,676       $ 526   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     December 31, 2011  
     Less than 12 months      12 months or more      Total  
     Fair Value      Unrealized
Losses
     Fair Value      Unrealized
Losses
     Fair Value      Unrealized
Losses
 

Obligations of U.S. government sponsored entities and agencies

   $ —         $ —         $ —         $ —         $ —         $ —     

Mortgage backed securities

     96,004         552         —           —           96,004         552   

Municipal securities

     4,426         152         597         8         5,023         160   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily impaired securities

   $ 100,430       $ 704       $ 597       $ 8       $ 101,027       $ 712   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Mortgage-backed securities: At March 31, 2012, 100% of the mortgage-backed securities held by the Company were issued by U.S. government-sponsored entities and agencies, primarily Fannie Mae, Freddie Mac, and Ginnie Mae, institutions which the government has affirmed its commitment to support.

 

17


Table of Contents

CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

 

Because the decline in fair value is attributable to changes in interest rates and illiquidity, and not credit quality, and because the Company does not have the intent to sell these mortgage-backed securities and it is likely that it will not be required to sell the securities before their anticipated recovery, the Company does not consider these securities to be other-than-temporarily impaired at March 31, 2012

Municipal securities: Unrealized losses on municipal securities have not been recognized into income because the issuers bonds are of high quality, and because management does not intend to sell these investments or more likely than not will not be required to sell these investments before their anticipated recovery. The fair value is expected to recover as the securities approach maturity.

NOTE 6: Loans

The following table sets forth information concerning the loan portfolio by collateral types as of the dates indicated.

 

     Mar 31, 2012     Dec 31, 2011  

Loans not covered by FDIC loss share agreements (note 2)

    

Real estate loans

    

Residential

   $ 413,626      $ 405,923   

Commercial

     440,183        447,459   

Land, development and construction

     80,295        89,517   
  

 

 

   

 

 

 

Total real estate

     934,104        942,899   

Commercial

     125,752        126,064   

Consumer and other loans (note 1)

     1,759        1,392   

Consumer and other loans

     48,122        49,999   
  

 

 

   

 

 

 

Loans before unearned fees and cost

     1,109,737        1,120,354   

Unearned fees/costs

     (732     (639

Allowance for loan losses for noncovered loans

     (25,569     (27,585
  

 

 

   

 

 

 

Net loans not covered by FDIC loss share agreements

     1,083,436        1,092,130   
  

 

 

   

 

 

 

Loans covered by FDIC loss share agreements

    

Real estate loans

    

Residential

     157,601        99,270   

Commercial

     159,324        54,184   

Land, development and construction

     20,557        8,231   
  

 

 

   

 

 

 

Total real estate

     337,482        161,685   

Commercial

     10,311        2,366   
  

 

 

   

 

 

 
     347,793        164,051   

Allowance for loan losses for covered loans

     (441     (359
  

 

 

   

 

 

 

Net loans covered by FDIC loss share agreements

     347,352        163,692   
  

 

 

   

 

 

 

Total loans, net of allowance for loan losses

   $ 1,430,788      $ 1,255,822   
  

 

 

   

 

 

 

 

Note 1: Consumer loans acquired pursuant to three FDIC assisted transactions of failed financial institutions during the third quarter of 2010 and two in the first quarter of 2012. These loans are not covered by an FDIC loss share agreement. The loans have been written down to estimated fair value and are being accounted for pursuant to ASC Topic 310-30.

 

Note 2: Includes $81,189 of loans that are subject to a two year put back option with TD Bank, N.A., such that if any of these loans become 30 days past due or are adversely classified pursuant to bank regulatory guidelines, the Company has the option to put back the loan to TD Bank. This put back period ends January 20, 2013. Also includes $152,723 of loans that are subject to a one year put back option with The Hartford Insurance Group, Inc. (“Hartford”), such that if any of these loans become 30 days past due or are adversely classified pursuant to bank regulatory guidelines, the Company has the option to put back the loan to Hartford. This put back period ends November 1, 2012.

 

18


Table of Contents

CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

 

The table below sets forth the activity in the allowance for loan losses for the periods presented, in thousands of dollars.

 

     Loans not
covered by
FDIC loss
share
agreements
    Loans
covered by
FDIC loss
share
agreements
     Total  

Three months ended March 31, 2012

       

Balance at beginning of period

   $ 27,585      $ 359       $ 27,944   

Loans charged-off

     (4,826     —           (4,826

Recoveries of loans previously charged-off

     160        —           160   
  

 

 

   

 

 

    

 

 

 

Net charge-offs

     (4,666     —           (4,666

Provision for loan loss

     2,650        82         2,732   
  

 

 

   

 

 

    

 

 

 

Balance at end of period

   $ 25,569      $ 441       $ 26,010   
  

 

 

   

 

 

    

 

 

 

Three months ended March 31, 2011

       

Balance at beginning of period

   $ 26,267      $ —         $ 26,267   

Loans charged-off

     (9,458     —           (9,458

Recoveries of loans previously charged-off

     160        —           160   
  

 

 

   

 

 

    

 

 

 

Net charge-offs

     (9,298     —           (9,298

Provision for loan losses

     11,276        —           11,276   
  

 

 

   

 

 

    

 

 

 

Balance at end of period

   $ 28,245      $ —         $ 28,245   
  

 

 

   

 

 

    

 

 

 

 

     Real Estate Loans                    
     Residential     Commercial     Constr.,
develop., land
    Comm. &
industrial
    Consumer
& other
    Total  

Loans not covered by FDIC loss share agreements:

            
            

Three months ended March 31, 2012

            
            

Beginning of the period

   $ 6,700      $ 8,825      $ 9,098      $ 1,984      $ 978      $ 27,585   

Charge-offs

     (1,295     (1,088     (2,108     (44     (291     (4,826

Recoveries

     21        3        64        4        68        160   

Provisions

     207        (146     2,683        (369     275        2,650   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at March 31, 2012

   $ 5,633      $ 7,594      $ 9,737      $ 1,575      $ 1,030      $ 25,569   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Three months ended March 31, 2011

            
            

Beginning of the period

   $ 7,704      $ 8,587      $ 6,893      $ 2,182      $ 901      $ 26,267   

Charge-offs

     (2,772     (3,977     (2,101     (257     (351     (9,458

Recoveries

     108        12        2        11        27        160   

Provisions

     2,416        5,528        3,275        (275     332        11,276   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at March 31, 2011

   $ 7,456      $ 10,150      $ 8,069      $ 1,661      $ 909      $ 28,245   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

     Real Estate Loans                       
     Residential      Commercial      Constr.,
develop., land
     Comm. &
industrial
     Consumer
& other
     Total  

Loans covered by FDIC loss share agreements:

                 
                 

Three months ended March 31, 2012

                 
                 

Beginning of the period

   $ 82       $ 223       $ 40       $ 14       $ —         $ 359   

Charge-offs

     —           —           —           —           —           —     

Recoveries

     —           —           —           —           —           —     

Provisions

     —           69         —           13         —           82   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Balance at March 31, 2012

   $ 82       $ 292       $ 40       $ 27       $ —         $ 441   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

19


Table of Contents

CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

 

The following tables present the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of March 31, 2012 and December 31, 2011. Accrued interest receivable is not included in the recorded investment because it is not material.

 

     Real Estate Loans                       

As of March 31, 2012

   Residential      Commercial      Constr.,
develop.,
land
     Comm. &
industrial
     Consumer
& other
     Total  

Allowance for loan losses:

                 

Ending allowance balance attributable to loans:

                 

Individually evaluated for impairment

   $ 547       $ 193       $ 253       $ 1       $ 39       $ 1,033   

Collectively evaluated for impairment

     5,086         7,401         9,484         1,574         965         24,510   

Acquired with deteriorated credit quality

     82         292         40         27         26         467   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending allowance balance

     5,715         7,886         9,777         1,602         1,030         26,010   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans:

                 

Loans individually evaluated for impairment

     9,626         31,349         5,884         6,368         478         53,705   

Loans collectively evaluated for impairment (note 1)

     404,000         408,834         74,411         119,384         47,644         1,054,273   

Loans acquired with deteriorated credit quality

     157,601         159,324         20,557         10,311         1,759         349,552   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending loans balance

   $ 571,227       $ 599,507       $ 100,852       $ 136,063       $ 49,881       $ 1,457,530   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Includes $81,189 of loans that are subject to a two year put back option with TD Bank, N.A., such that if any of these loans become 30 days past due or are adversely classified pursuant to bank regulatory guidelines, the Company has the option to put back the loan to TD Bank. This put back period ends January 20, 2013. Also includes $152,723 of loans that are subject to a one year put back option with The Hartford Insurance Group, Inc. (“Hartford”), such that if any of these loans become 30 days past due or are adversely classified pursuant to bank regulatory guidelines, the Company has the option to put back the loan to Hartford. This put back period ends November 1, 2012.

 

     Real Estate Loans                       

As of December 31, 2011

   Residential      Commercial      Constr.,
develop.,
land
     Comm. &
industrial
     Consumer
& other
     Total  

Allowance for loan losses:

                 

Ending allowance balance attributable to loans:

                 

Individually evaluated for impairment

   $ 783       $ 188       $ 2,292       $ 1       $ 40       $ 3,304   

Collectively evaluated for impairment

     5,917         8,637         6,806         1,983         912         24,255   

Acquired with deteriorated credit quality

     82         223         40         14         26         385   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending allowance balance

   $ 6,782       $ 9,048       $ 9,138       $ 1,998       $ 978       $ 27,944   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans:

                 

Loans individually evaluated for impairment

     10,647         24,213         11,955         6,333         520         53,668   

Loans collectively evaluated for impairment

     395,276         423,246         77,562         119,731         49,479         1,065,294   

Loans acquired with deteriorated credit quality

     99,270         54,184         8,231         2,366         1,392         165,443   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending loans balance

   $ 505,193       $ 501,643       $ 97,748       $ 128,430       $ 51,391         1,284,405   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

20


Table of Contents

CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

 

The table below summarizes impaired loan data for the periods presented.

 

     Mar 31,
2012
     Dec 31,
2011
 

Impaired loans with a specific valuation allowance

   $ 8,564       $ 13,203   

Impaired loans without a specific valuation allowance

     45,141         40,465   
  

 

 

    

 

 

 

Total impaired loans

   $ 53,705       $ 53,668   

Amount of allowance for loan losses allocated to impaired loans

     1,033       $ 3,304   

Performing TDRs

   $ 6,726       $ 6,554   

Non performing TDRs, included in NPLs

     4,940         5,807   
  

 

 

    

 

 

 

Total TDRs (TDRs are required to be included in impaired loans)

   $ 11,666       $ 12,361   

Impaired loans that are not TDRs

     42,039         41,307   
  

 

 

    

 

 

 

Total impaired loans

   $ 53,705       $ 53,668   
  

 

 

    

 

 

 

In this current real estate environment it has become more common to restructure or modify the terms of certain loans under certain conditions (i.e. troubled debt restructure or “TDRs”). In those circumstances it may be beneficial to restructure the terms of a loan and work with the borrower for the benefit of both parties, versus forcing the property into foreclosure and having to dispose of it in an unfavorable real estate market. When we have modified the terms of a loan, we usually either reduce the monthly payment and/or interest rate for generally about twelve months. We have not forgiven any material principal amounts on any loan modifications to date. We have approximately $11,666 of TDRs. Of this amount $6,726 are performing pursuant to their modified terms, and $4,940 are not performing and have been placed on non accrual status and included in our non performing loans (“NPLs”).

 

     March 31,      Dec 31,  

Troubled debt restructured loans (“TDRs”):

   2012      2011  

Performing TDRs

   $ 6,726       $ 6,554   

Non performing TDRs

     4,940         5,807   
  

 

 

    

 

 

 

Total TDRs

   $ 11,666       $ 12,361   
  

 

 

    

 

 

 

TDRs as of March 31, 2012 quantified by loan type classified separately as accrual (performing loans) and non-accrual (non performing loans) are presented in the table below.

 

TDRs

   Accruing      Non Accrual      Total  

Real estate loans:

        

Residential

   $ 4,951       $ 3,492       $ 8,443   

Commercial

     793         1,200         1,993   

Construction, development, land

     206         207         413   
  

 

 

    

 

 

    

 

 

 

Total real estate loans

     5,950         4,899         10,849   

Commercial

     339         —           339   

Consumer and other

     437         41         478   
  

 

 

    

 

 

    

 

 

 

Total TDRs

   $ 6,726       $ 4,940       $ 11,666   
  

 

 

    

 

 

    

 

 

 

Our policy is to return non accrual TDR loans to accrual status when all the principal and interest amounts contractually due, pursuant to its modified terms, are brought current and future payments are reasonably assured. Our policy also considers the payment history of the borrower, but is not dependent upon a specific number of payments. The Company recorded a provision for loan loss expense of $282 and partial charge offs of $287 on the TDR loans described above during the three month period ending March 31, 2012.

 

21


Table of Contents

CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

 

Loans are modified to minimize loan losses when we believe the modification will improve the borrower’s financial condition and ability to repay the loan. We typically do not forgive principal. We generally either reduce interest rates or decrease monthly payments for a temporary period of time and those reductions of cash flows are capitalized into the loan balance. A summary of the types of concessions made are presented in the table below.

 

     March 31, 2012  

3 months interest only

   $ 134   

6 months interest only

     1,375   

12 months interest only

     3,157   

18 months interest only

     188   

payment reduction for 12 months

     2,252   

all other

     4,560   
  

 

 

 

Total TDRs

   $ 11,666   
  

 

 

 

While we do not have long-term experience with these types of activities, approximately 58% of our TDRs are current pursuant to their modified terms, and about $4,940, or approximately 42% of our total TDRs are not performing pursuant to their modified terms. Long-term success with our performing TDRs is an unknown, and will depend to a great extent on the future of our economy and our local real estate markets. Thus far, there does not appear to be any significant difference in success rates with one type of concession versus another. However, it appears that the longer the period from the loan modification date, the higher the probability of the loan will become non-performing pursuant to its modified terms. Non performing TDRs average approximately twenty-four months in age from their modification date through March 31, 2012. Performing TDRs average approximately eighteen months in age from their modification date through March 31, 2012.

The following table presents loans by class modified as for which there was a payment default within twelve months following the modification during the period ending March 31, 2012.

 

     Number of
Loans
     Recorded
Investment
 

Residential

     3       $ 309   

Commercial real estate

     —           —     

Construction, development, land

     —           —     

Commercial

     —           —     

Consumer and other

     —           —     
  

 

 

    

 

 

 

Total

     3       $ 309   
  

 

 

    

 

 

 

The Company recorded a provision for loan loss expense of $1 and partial charge offs of $6 on TDR loans that subsequently defaulted as described above during the three month period ending March 31, 2012.

 

22


Table of Contents

CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

 

The following tables present loans individually evaluated for impairment by class of loans as of March 31, 2012 and December 31, 2011. The recorded investment is less than the unpaid principal balance due to partial charge-offs.

 

As of March 31, 2012

   Unpaid
principal
balance
     Recorded
investment
     Allowance for
loan losses
allocated
 

With no related allowance recorded:

        

Residential real estate

   $ 3,839       $ 3,055       $ —     

Commercial real estate

     33,824         30,886         —     

Construction, development, land

     8,423         4,843         —     

Commercial

     6,477         6,357         —     

Consumer, other

     —           —           —     

With an allowance recorded:

        

Residential real estate

     6,854         6,571         547   

Commercial real estate

     509         463         193   

Construction, development, land

     1,461         1,041         253   

Commercial

     11         11         1   

Consumer, other

     483         478         39   
  

 

 

    

 

 

    

 

 

 

Total

   $ 61,881       $ 53,705       $ 1,033   
  

 

 

    

 

 

    

 

 

 

 

As of December 31, 2011

   Unpaid
principal
balance
     Recorded
investment
     Allowance for
loan losses
allocated
 

With no related allowance recorded:

        

Residential real estate

   $ 4,314       $ 3,402       $ —     

Commercial real estate

     26,966         23,854         —     

Construction, development, land

     11,665         6,888         —     

Commercial

     6,409         6,321         —     

Consumer, other

     —           —           —     

With an allowance recorded:

        

Residential real estate

     7,733         7,245         783   

Commercial real estate

     404         359         188   

Construction, development, land

     5,713         5,067         2,292   

Commercial

     12         12         1   

Consumer, other

     545         520         40   
  

 

 

    

 

 

    

 

 

 

Total

   $ 63,761       $ 53,668       $ 3,304   
  

 

 

    

 

 

    

 

 

 

 

23


Table of Contents

CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

 

For the three months ended March, 31, 2012

   Average of
impaired
loans
     Interest
income
recognized
during
impairment
     Cash basis
interest
income
recognized
 

Real estate loans:

        

Residential

   $ 10,137       $ 62       $ —     

Commercial

     27,781         325         —     

Construction, development, land

     8,919         9         —     
  

 

 

    

 

 

    

 

 

 

Total real estate loans

     46,837         396         —     

Commercial loans

     6,351         16         —     

Consumer and other loans

     499         5         —     
  

 

 

    

 

 

    

 

 

 

Total

   $ 53,687       $ 417       $ —     
  

 

 

    

 

 

    

 

 

 

 

For the three months ended March, 31, 2011

   Average of
impaired
loans
     Interest
income
recognized
during
impairment
     Cash basis
interest
income
recognized
 

Real estate loans:

        

Residential

   $ 14,531       $ 27       $ —     

Commercial

     48,039         197         —     

Construction, development, land

     16,532         11         —     

Total real estate loans

     79,102         235         —     

Commercial loans

     5,606         62         —     

Consumer and other loans

     681         —           —     
  

 

 

    

 

 

    

 

 

 

Total

   $ 85,389       $ 297       $ —     
  

 

 

    

 

 

    

 

 

 

Nonperforming loans include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans.

 

Nonperforming loans were as follows:

      
     Mar 31, 2012      Dec 31, 2011  

Non accrual loans

   $ 42,598       $ 38,858   

Loans past due over 90 days and still accruing interest

     127         120   
  

 

 

    

 

 

 

Total non performing loans

   $ 42,725       $ 38,978   
  

 

 

    

 

 

 

The following table presents the recorded investment in nonaccrual loans and loans past due over 90 days still on accrual by class of loans as of March 31, 2012 and December 31, 2011, excluding loans acquired from the FDIC with evidence of credit deterioration:

 

As of March 31, 2012

   Nonaccrual      Loans past due
over 90 days
still accruing
 

Residential real estate

   $ 14,652       $ —     

Commercial real estate

     13,701         —     

Construction, development, land

     8,077         —     

Commercial

     5,713         —     

Consumer, other

     455         127   
  

 

 

    

 

 

 

Total

   $ 42,598       $ 127   
  

 

 

    

 

 

 

 

24


Table of Contents

CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

 

As of December 31, 2011

   Nonaccrual      Loans past due
over 90 days
still accruing
 

Residential real estate

   $ 14,810       $ —     

Commercial real estate

     11,637         —     

Construction, development, land

     10,482         —     

Commercial

     1,464         —     

Consumer, other

     465         120   
  

 

 

    

 

 

 

Total

   $ 38,858       $ 120   
  

 

 

    

 

 

 

The following table presents the aging of the recorded investment in past due loans as of March 31, 2012 and December 31, 2011, excluding loans acquired from the FDIC with evidence of credit deterioration:

 

     Accruing Loans         

As of March 31, 2012

   Total      30 - 59
days past
due
     60 - 89
days past
due
     Greater
than 90
days past
due
     Total Past
Due
     Loans Not
Past Due
     Nonaccrual
Loans
 

Residential real estate

   $ 413,626       $ 2,124       $ 513       $ —         $ 2,637       $ 396,337       $ 14,652   

Commercial real estate

     440,183         1,552         1,332         —           2,883         423,599         13,701   

Construction/dev/land

     80,295         328         37         —           365         71,853         8,077   

Commercial

     125,752         1,149         162         —           1,311         118,728         5,713   

Consumer

     49,881         308         15         127         451         48,975         455   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 1,109,737       $ 5,461       $ 2,059       $ 127       $ 7,647       $ 1,059,492       $ 42,598   

 

     Accruing Loans         

As of December 31, 2011

   Total      30 - 59
days past
due
     60 - 89
days past
due
     Greater
than 90
days past
due
     Total Past
Due
     Loans Not
Past Due
     Nonaccrual
Loans
 

Residential real estate

   $ 405,923       $ 5,551       $ 2,228       $ —         $ 7,779       $ 383,334       $ 14,810   

Commercial real estate

     447,459         4,479         1,037         —           5,516         430,306         11,637   

Construction/dev/land

     89,517         1,018         216         —           1,234         77,801         10,482   

Commercial

     126,064         781         119         —           900         123,700         1,464   

Consumer

     51,391         636         192         120         948         49,978         465   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 1,120,354       $ 12,465       $ 3,792       $ 120       $ 16,377         1,065,119       $ 38,858   

Credit Quality Indicators:

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. This analysis includes loans with an outstanding balance greater than $500 and non-homogeneous loans, such as commercial and commercial real estate loans. This analysis is performed on at least an annual basis. The Company uses the following definitions for risk ratings:

Special Mention: Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.

 

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Table of Contents

CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

 

Substandard: Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful: Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans. Loans listed as not rated are either less than $500 or are included in groups of homogeneous loans. As of March 31, 2012 and December 31, 2011, and based on the most recent analysis performed, the risk category of loans by class of loans, excluding loans with evidence of deterioration of credit quality purchased from the FDIC, is as follows:

 

     As of March 31, 2012  

Loan Category

   Pass      Special
Mention
     Substandard      Doubtful  

Residential real estate

   $ 381,024       $ 6,522       $ 26,080       $ —     

Commercial real estate

     353,887         46,022         40,274         —     

Construction/dev/land

     53,196         14,529         12,570         —     

Commercial

     109,989         5,725         10,038         —     

Consumer

     48,221         663         997         —     
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 946,317       $ 73,461       $ 89,959       $ —     

 

     As of December 31, 2011  

Loan Category

   Pass      Special
Mention
     Substandard      Doubtful  

Residential real estate

   $ 373,833       $ 6,723       $ 25,367       $ —     

Commercial real estate

     363,376         52,161         31,922         —     

Construction/dev/land

     61,854         13,070         14,593         —     

Commercial

     111,782         4,314         9,968         —     

Consumer

     49,693         689         1,009         —     
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 960,538       $ 76,957       $ 82,859       $ —     

The Company considers the performance of the loan portfolio and its impact on the allowance for loan losses. For residential and consumer loan classes, the Company also evaluates credit quality based

 

26


Table of Contents

CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

 

on the aging status of the loan, which was previously presented, and by payment activity. The following table presents the recorded investment in residential and consumer loans, excluding loans with evidence of deterioration of credit quality purchased from the FDIC, based on payment activity as of March 31, 2012:

 

     Residential      Consumer  

Performing

   $ 398,974       $ 49,299   

Nonperforming

     14,652         582   
  

 

 

    

 

 

 

Total

   $ 413,626       $ 49,881   
  

 

 

    

 

 

 

Loans purchased from the FDIC:

Income recognized on loans we purchased from the FDIC is recognized pursuant to ASC Topic 310-30. A portion of the fair value discount has been ascribed as an accretable yield that is accreted into interest income over the estimated remaining life of the loans. The remaining non-accretable difference represents cash flows not expected to be collected.

The table below summarizes the total contractually required principal and interest cash payments, management’s estimate of expected total cash payments and carrying value of the loans as of March 31, 2012 and December 31, 2011. Contractually required principal and interest payments have been adjusted for estimated prepayments.

 

     Mar 31, 2012     Dec 31, 2011  

Contractually required principal and interest

   $ 625,538      $ 291,531   

Non-accretable difference

     (171,282     (51,536
  

 

 

   

 

 

 

Cash flows expected to be collected

     454,256        239,995   

Accretable yield

     (104,704     (74,552
  

 

 

   

 

 

 

Carrying value of acquired loans

   $ 349,552      $ 165,443   

Allowance for loan losses

     (467     (385
  

 

 

   

 

 

 

Carrying value less allowance for loan losses

   $ 349,085      $ 165,058   
  

 

 

   

 

 

 

The Company adjusted its estimates of future expected losses, cash flows and renewal assumptions during the current quarter. These adjustments resulted in an increase in expected cash flows and accretable yield, and a decrease in the non-accretable difference. The Company reclassified approximately $2,768 from non-accretable difference to accretable yield during the current quarter to reflect our adjusted estimates of future expected cash flows. The table below summarizes the changes in total contractually required principal and interest cash payments, management’s estimate of expected total cash payments and carrying value of the loans during the three month period ending March 31, 2012.

 

Activity during the three month period ending March 31, 2012

   Dec 31, 2011     Effect of
acquisitions
    income
accretion
     all other
adjustments
    Mar 31, 2012  

Contractually required principal and interest

   $ 291,531      $ 363,130         $ (29,123   $ 625,538   

Non-accretable difference

     (51,536     (125,630     —           5,884        (171,282
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Cash flows expected to be collected

     239,995        237,500           (23,239     454,256   

Accretable yield

     (74,552     (32,975     5,282         (2,459     (104,704
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Carry value of acquired loans

   $ 165,443      $ 204,525      $ 5,282       $ (25,698   $ 349,552   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

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CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

 

NOTE 7: FDIC indemnification asset

The FDIC Indemnification Asset represents the estimated amounts due from the FDIC pursuant to the Loss Share Agreements related to the acquisition of the three failed banks acquired in 2010 and the acquisition of two failed banks in 2012. The activity in the FDIC loss share indemnification asset is as follows:

 

     Three months
period ended
Mar 31, 2012
    Three months
period ended
Mar 31, 2011
 

Beginning of the year

   $ 50,642      $ 59,456   

Effect of acquisitions

     93,166        —     

Discount accretion (amortization)

     (496     468   

Indemnification income - ORE

     498        1,136   

Indemnification of foreclosure expense

     402        —     

Proceeds from FDIC

     (2,033     (938

Impairment of loan pool

     66        —     
  

 

 

   

 

 

 

Period end balance

   $ 142,245      $ 60,122   
  

 

 

   

 

 

 

Impairment of loan pools

Loan pools covered by FDIC loss share agreements were impaired by $82 which was an expense included in our loan loss provision expense. The 80% FDIC reimbursable amount of this expense ($66) was included in the Company’s non interest income and as an increase in the Company’s FDIC indemnification asset.

Indemnification Revenue

Indemnification Revenue represents approximately 80% of the cost incurred pursuant to the repossession process and losses incurred on the sale of OREO, or writedown of OREO values to current fair value. These costs are reimbursable from the FDIC.

Discount Accretion (Amortization)

If expected cash flows from loan pools are greater than previously expected, the accretable yield increases and is accreted into interest income over the remaining lives of the related loan pools. The increase in future accretable income may result in less reimbursements from the FDIC (i.e. if the expected losses decrease, then the expected reimbursements from the FDIC decrease). The expected decrease in FDIC reimbursements is amortized over the period of the related increase in accretable yield from the related loan pools.

NOTE 8: Note payable

On January 25, 2012, the Company borrowed $10,000 on a short term basis at the holding company level to help facilitate the acquisition of Central FL and FGB during January 2012 by the Company’s lead subsidiary bank. The Company invested those funds in the lead subsidiary bank such that the bank would have sufficient capital to support the initial balance sheets of the two acquired banks. Subsequent to the acquisitions, the Company exercised its option to reprice approximately $127,856 of internet time deposits assumed pursuant to the acquisition of FGB to current market interest rates. Subsequently, all of these deposits were withdrawn

 

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CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

 

prior to maturity without penalty. By shrinking the balance sheet of the lead subsidiary bank, it frees up excess capital at the lead bank level which will be returned to the holding company in the form of a dividend. The holding company will then use these funds to repay the note which is due in July 2012. The interest rate is 90 day LIBOR plus 400 bps.

NOTE 9: Business combinations

The Company, through its lead bank headquartered in Winter Haven, Florida, purchased two failed financial institutions from the Federal Deposit Insurance Corporation (“FDIC”). On January 20, 2012 it purchased Central Florida State Bank in Belleview, Florida (“Central FL”). On January 27, it purchased First Guaranty Bank and Trust Company of Jacksonville in Jacksonville, Florida (“FGB”). As a result of these acquisitions, the Company expects to further solidify its market share in the Florida market, expand its customer base to enhance deposit fee income, and reduce operating costs through economies of scale.

The Company exercised its option, pursuant to the FDIC purchase and assumption agreement, not to purchase Central FL’s branch real estate. During the first quarter of 2012, the Company consolidated three of the four Central FL branches into nearby existing CenterState branches. The fourth branch is expected to be consolidated into a nearby CenterState existing branch during the second quarter of 2012.

The Company also expects to exercise its option, pursuant to the FDIC purchase and assumption agreement, not to purchase six of the eight branch real estate locations of FGB. The six branches will be consolidated into the remaining two existing branches, which have approximately 75% of FGB’s deposits as of the acquisition date. The Company expects to purchase the real estate of the remaining two branches at fair market value as determined by a current appraisal pursuant to the FDIC purchase and assumption agreement during the second quarter of 2012.

 

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CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

 

All of the goodwill and other intangibles listed below is tax deductible over a 15 year period on a straight line basis. The following table summarizes the fair values of the assets acquired and liabilities assumed at the date of acquisition.

 

Acquired institution Date of acquisition

   Central FL
Jan 20, 2012
    FGB
Jan 27, 2012
 

Assets:

    

Cash due from banks, Federal Reserve Bank (“FRB”) and Federal Home Loan Bank (“FHLB”)

   $ 4,870      $ 77,642   

Federal funds sold

     8,550        —     

Securities available for sale

     1,942        3,500   

Loans covered by FDIC loss share agreements

     31,376        171,949   

Loans not covered by FDIC loss share agreements

     239        961   

Covered repossessed real estate owned (“OREO”)

     2,347        15,318   

FDIC indemnification asset

     15,018        78,148   

FHLB stock and FRB stock

     168        1,627   

Goodwill

     —          8,745   

Core deposit intangible

     375        1,521   

Trust intangible

     —          1,580   

Other assets

     1,109        2,742   
  

 

 

   

 

 

 

Total assets acquired

   $ 65,994      $ 363,733   
  

 

 

   

 

 

 

Liabilities:

    

Deposits

   $ 65,209      $ 353,099   

FHLB advances

     —          10,060   

Other liabilities

     332        574   
  

 

 

   

 

 

 

Total liabilities assumed

   $ 65,541      $ 363,733   
  

 

 

   

 

 

 

Net assets acquired (bargain purchase gain)

   $ 453     
  

 

 

   

Deferred tax impact

     (170  
  

 

 

   

Net assets acquired, including deferred tax impact

   $ 283     
  

 

 

   

The Company entered into loss share agreements with the FDIC that collectively cover legal unpaid balances of substantially all the loans acquired (except those loans identified above as not covered by FDIC loss share) and all the OREO acquired (collectively, the “Covered Assets”). Pursuant to the terms of the loss sharing agreements, the FDIC’s obligation to reimburse the Company for losses with respect to Covered Assets begins with the first dollar of loss incurred. The FDIC will reimburse the Company for 80% of losses with respect to the Covered Assets. The Company will reimburse the FDIC for its share of recoveries with respect to losses for which the FDIC paid the Company a reimbursement under the loss sharing agreements. The loss share agreements applicable to single family residential mortgage loans provide for FDIC loss sharing and Company reimbursement to the FDIC for recoveries for ten years. The loss share agreements applicable to commercial loans and other Covered Assets provides for FDIC loss sharing for five years and Company reimbursement to the FDIC for a total of eight years for recoveries.

The acquisitions were accounted for under the acquisition method of accounting in accordance with ASC Topic 805, Business Combinations. Both the purchased assets and liabilities assumed are recorded at their respective acquisition date fair values. Determining the fair values of assets and liabilities, especially the loan portfolio and foreclosed real estate, is a complicated process involving significant judgment regarding methods and assumptions used to calculate estimated fair values. Fair values are preliminary and subject to refinement for up to one year after the closing date of the acquisition as additional information regarding the closing date fair values become available.

 

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CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

 

All of the loans acquired are being accounted for pursuant to ASC Topic 310-30. The Company arrived at this conclusion as follows.

First, the Company segregated all acquired loans with specifically identified credit deficiency factor(s). The factors the Company used were all acquired loans that were non-accrual, 60 days or more past due, designated as Trouble Debt Restructured (“TDR”), graded “special mention” or “substandard,” had more than five 30 day past due notices or had any 60 day or 90 day past due notices during the loan term. For this disclosure purpose, the Company refers to these loans as Type A loans. As required by generally accepted accounting principles, the Company is accounting for these loans pursuant to ASC Topic 310-30. Second, all remaining acquired loans, those without specifically identified credit deficiency factors, the company refers to as Type B loans for disclosure purposes, were then grouped into pools with common risk characteristics. These loans were then evaluated to determine estimated fair values as of the acquisition date. Although no specific credit deficiencies were identifiable, the Company believes there is an element of risk as to whether all contractual cash flows will be eventually received. Factors that were considered included the poor economic environment both nationally and locally as well as the unfavorable real estate market particularly in Florida. In addition, these loans were acquired from two failed financial institutions, which implies potentially deficient, or at least questionable, credit underwriting. Based on management’s estimate of fair value, each of these pools was assigned a discount credit mark. The Company has applied ASC Topic 310-30 accounting treatment by analogy to Type B loans. The result is that all loans acquired from these two failed financial institutions will be accounted for under ASC Topic 310-30.

The table below summarizes the total contractually required principal and interest cash payments, management’s estimate of expected total cash payments and fair value of the loans as of the respective acquisition dates. Contractually required principal and interest payments have been adjusted for estimated prepayments.

 

     at acquisition dates  
     Type A     Type B        
     loans     loans     Total  

Contractually required principal and interest

   $ 118,393      $ 244,737      $ 363,130   

Non-accretable difference

     (68,097     (57,533     (125,630
  

 

 

   

 

 

   

 

 

 

Cash flows expected to be collected

     50,296        187,204        237,500   

Accretable yield

     (2,418     (30,557     (32,975
  

 

 

   

 

 

   

 

 

 

Total acquired loans

   $ 47,878      $ 156,647      $ 204,525   
  

 

 

   

 

 

   

 

 

 

Type A loans:  acquired loans with specifically identified credit deficiency factor(s).

Type B loans:  all other acquired loans.

Income on acquired loans, whether Type As or Type Bs, is recognized in the same manner pursuant to ASC Topic 310-30. A portion of the fair value discount has been ascribed as an accretable yield that is accreted into interest income over the estimated remaining life of the loans. The remaining non-accretable difference represents cash flows not expected to be collected.

The operating results of the Company for the three month period ended March 31, 2012 include the operating results of the acquired assets and assumed liabilities since the acquisition date of January 20, 2012 for Central FL and January 27, 2012 for FGB. Due primarily to the significant amount of fair value adjustments and the Loss Share Agreements now in place, historical results of Central FL and FGB are not believed to be relevant to the Company’s results, and thus no pro forma information is presented.

 

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CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

 

NOTE 9: Effect of new pronouncements

In May, 2011, the FASB issued an amendment to achieve common fair value measurement and disclosure requirements between U.S. and International accounting principles. Overall, the guidance is consistent with existing U.S. accounting principles; however, there are some amendments that change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. The amendments in this guidance are effective during interim and annual periods beginning after December 15, 2011. The effect of adopting this new guidance was not material.

In June 2011, the FASB amended existing guidance and eliminated the option to present the components of other comprehensive income as part of the statement of changes in shareholder’s equity. The amendment requires that comprehensive income be presented in either a single continuous statement or in two separate consecutive statements. The amendments in this guidance are effective as of the beginning of a fiscal reporting year, and interim periods within that year, that begins after December 15, 2011. The adoption of this amendment has changed the presentation of the components of comprehensive income for the Company as part of the consolidated statement of shareholder’s equity, and the consolidated statement of earnings.

In September 2011, the FASB amended guidance on the annual goodwill impairment test performed by the Company. Under the amended guidance, the Company will have the option to first assess qualitative factors to determine whether it is necessary to perform a two-step impairment test. If the Company believes, as a result of the qualitative assessment, that it is more likely than not that the fair value of a reporting unit is less than the carrying value, the quantitative impairment test is required. If the Company believes the fair value of a reporting unit is greater than the carrying value, no further testing is required. A company can choose to perform the qualitative assessment on some or none of its reporting entities. The amended guidance includes examples of events and circumstances that might indicate that a reporting unit’s fair value is less than its carrying amount. These include macro-economic conditions such as deterioration in the entity’s operating environment, entity-specific events such as declining financial performance, and other events such as an expectation that a reporting unit will be sold. The amended guidance is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The Company is currently evaluating the impact of this amendment on the consolidated financial statements.

 

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Table of Contents
ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

All dollar amounts presented herein are in thousands, except per share data.

COMPARISON OF BALANCE SHEETS AT MARCH 31, 2012 AND DECEMBER 31, 2011

Overview

Our total assets increased approximately 10.9% during the three month period ending March 31, 2012 primarily due to the acquisitions of Central Florida State Bank in Belleveiw, Florida (“Central FL”) and First Guaranty Bank and Trust Company of Jacksonville in Jacksonville, Florida (“FGB”) discussed in Note 8. These changes are discussed and analyzed below and on the following pages.

Federal funds sold and Federal Reserve Bank deposits

Federal funds sold and Federal Reserve Bank deposits were $103,427 at March 31, 2012 (approximately 4.1% of total assets) as compared to $133,202 at December 31, 2011 (approximately 5.8% of total assets). We use our available-for-sale securities portfolio, as well as federal funds sold and Federal Reserve Bank deposits for liquidity management and for investment yields. These accounts, as a group, will fluctuate as a function of loans outstanding, and to some degree the amount of correspondent bank deposits (i.e. federal funds purchased) outstanding.

Investment securities available for sale

Securities available-for-sale, consisting primarily of U.S. government agency securities and municipal tax exempt securities, were $545,559 at March 31, 2012 (approximately 22% of total assets) compared to $591,164 at December 31, 2011 (approximately 26% of total assets), a decrease of $45,605 or 7.7%. We use our available-for-sale securities portfolio, as well as federal funds sold and Federal Reserve Bank deposits for liquidity management and for investment yields. These accounts, as a group, will fluctuate as a function of loans outstanding as discussed above, under the caption “Federal funds sold and Federal Reserve Bank deposits.” Our securities are carried at fair value. We classify our securities as “available-for-sale” to provide for greater flexibility to respond to changes in interest rates as well as future liquidity needs.

Trading securities

We also have a trading securities portfolio. Realized and unrealized gains and losses are included in trading securities revenue, a component of our non interest income, in our Condensed Consolidated Statement of Earnings. Securities purchased for this portfolio have primarily been various municipal securities. At March 31, 2012 our trading securities had a fair market value of $552. A list of the activity in this portfolio is summarized below.

 

     Three month
period ended
Mar 31, 2012
    Three month
period ended
Mar 31, 2011
 

Beginning balance

   $ —        $ 2,225   

Purchases

     80,588        64,549   

Proceeds from sales

     (80,180     (64,743

Net realized gain on sales

     144        159   

Mark to market adjustment

     —          2   
  

 

 

   

 

 

 

Ending balance

   $ 552      $ 2,192   
  

 

 

   

 

 

 

 

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Table of Contents

Loans held for sale

We also have a loans held for sale portfolio, whereby we originate single family home loans and sell those mortgages into the secondary market, servicing released. These loans are recorded at the lower of cost or market. Gains and losses on the sale of loans held for sale are included as a component of non interest income in our Condensed Consolidated Statement of Earnings. A list of the activity in this portfolio is summarized below.

 

     Three month
period ended

Mar 31, 2012
    Three month
period ended
Mar 31, 2011
 

Beginning balance

   $ 3,741      $ 673   

Loans originated

     3,307        929   

Proceeds from sales

     (6,833     (1,459

Net realized gain on sales

     83        25   
  

 

 

   

 

 

 

Ending balance

   $ 298      $ 168   
  

 

 

   

 

 

 

Loans

Lending-related income is the most important component of our net interest income and is a major contributor to profitability. The loan portfolio is the largest component of earning assets, and it therefore generates the largest portion of revenues. The absolute volume of loans and the volume of loans as a percentage of earning assets is an important determinant of net interest margin as loans are expected to produce higher yields than securities and other earning assets. Average loans during the quarter ended March 31, 2012, were $1,426,239, or 67.2% of average earning assets, as compared to $1,212,512, or 63.9% of average earning assets, for the quarter ending March 31, 2011. Total loans at March 31, 2012 and December 31, 2011 were $1,456,798 and $1,283,766, respectively, an increase of $173,032, or 13.5%. This represents a loan to total asset ratio of 57.5% and 56.2 and a loan to deposit ratio of 68.3% and 66.9%, at March 31, 2012 and December 31, 2011, respectively.

The current weak economy in general and the struggling Florida real estate market in particular, have made it difficult to grow our loan portfolio. Although our loans increased by $173,032, or 13.5% as indicated above, this was primarily due to the acquisitions of Central FL and FGB as described in Note 8. Excluding these purchased loans (carrying balance of $196,661 at March 31, 2012), our loan portfolio decreased by $23,629, or 1.8% during the three month period ending March 31, 2012. This decrease was primarily related to the decrease in loans acquired from the FDIC excluding the loans purchased during the current quarter (approximately $12,552) and decrease in loans purchased from TD Bank and Hartford (approximately $12,368). Our remaining loans (loans that we originate versus purchase) increased approximately $1,291 net of charge-offs, transfers to OREO and principal repayments during the current quarter.

Approximately 23.9% of our loans, or $347,793, is covered by FDIC loss sharing agreements. Pursuant to and subject to the terms of the loss sharing agreements, the FDIC is obligated to reimburse CenterState for 80% of losses with respect to the covered loans beginning with the first dollar of loss incurred. CenterState will reimburse the FDIC for its share of recoveries with respect to the covered loans. The loss sharing agreements applicable to single family residential mortgage loans provide for FDIC loss sharing and CenterState reimbursement to the FDIC for recoveries for ten years. The loss sharing agreements applicable to commercial loans provide for FDIC loss sharing for five years and CenterState reimbursement to the FDIC for a total of eight years for recoveries. All of the covered loans acquired are accounted for pursuant to ASC Topic 310-30. Within the FDIC covered loan portfolio, forty-five percent (45%) are collateralized by single family residential real estate and forty-six percent (46%) are collateralized by commercial real estate.

 

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Table of Contents

Approximately 5.6% of the Company’s loans, or $81,189, are subject to a two year put back option, commencing January 20, 2011, with TD Bank, N.A., such that if any of these loans become 30 days past due or are adversely classified pursuant to bank regulatory guidelines, the Company has the option to put back the loan to TD Bank.

Approximately 10.5% of the Company’s loans, or $152,723, are subject to a one year put back option, commencing November 1, 2011, with Hartford Insurance Group (“Hartford”), such that if any of these loans become 30 days past due or are adversely classified pursuant to bank regulatory guidelines, the Company has the option to put back the loan to Hartford.

Approximately 60% of the Company’s loans, or $875,093, is not covered by FDIC loss sharing agreements or subject to a put back option with TD Bank, N.A. or Hartford.

Loan concentrations are considered to exist where there are amounts loaned to multiple borrowers engaged in similar activities, which collectively could be similarly impacted by economic or other conditions and when the total of such amounts would exceed 25% of total capital. Due to the lack of diversified industry and the relative proximity of markets served, the Company has concentrations in geographic as well as in types of loans funded.

Our total loans, including those with and without loss protection agreements, total $1,456,798 at March 31, 2012. Of this amount approximately 88% are collateralized by real estate, 9% are commercial non real estate loans and the remaining 3% are consumer and other non real estate loans. We have approximately $571,227 of single family residential loans which represents about 39% of our total loan portfolio. Our largest category of loans is commercial real estate which represents approximately 41% of our total loan portfolio.

 

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Table of Contents

The following table sets forth information concerning the loan portfolio by collateral types as of the dates indicated.

 

     Mar 31, 2012     Dec 31, 2011  

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