10-Q 1 d513398d10q.htm FORM 10-Q Form 10-Q
Table of Contents

 

 

U.S. SECURITIES 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, 2013

 

¨ 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   30,095,520 shares
(class)   Outstanding at April 25, 2013

 

 

 


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, 2013 (unaudited) and December 31, 2012

     3   

Condensed consolidated statements of earnings and comprehensive income for the three months ended March 31, 2013 and 2012 (unaudited)

     4   

Condensed consolidated statements of changes in stockholders’ equity for the three months ended March 31, 2013 and 2012 (unaudited)

     6   

Condensed consolidated statements of cash flows for the three months ended March  31, 2013 and 2012 (unaudited)

     7   

Notes to condensed consolidated financial statements (unaudited)

     9   

Item 2.      Management’s Discussion and Analysis of Financial Condition and Results of Operations

     32   

Item 3.      Quantitative and Qualitative Disclosures About Market Risk

     49   

Item 4.      Controls and Procedures

     49   

PART II. OTHER INFORMATION

  

Item 1.      Legal Proceedings

     50   

Item 1A.  Risk Factors

     50   

Item 2.      Unregistered Sales of Equity Securities and Use of Proceeds

     50   

Item 3.      Defaults Upon Senior Securities

     50   

Item 4.      [Removed and Reserved]

     50   

Item 5.      Other Information

     50   

Item 6.      Exhibits

     50   

SIGNATURES

     51   

CERTIFICATIONS

     52   

 

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CenterState Banks, Inc. and Subsidiaries

CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)

(in thousands of dollars, except per share data)

 

     As of     As of  
     March 31, 2013     December 31, 2012  

ASSETS

    

Cash and due from banks

   $ 20,823      $ 19,160   

Federal funds sold and Federal Reserve Bank deposits

     155,872        117,588   
  

 

 

   

 

 

 

Cash and cash equivalents

     176,695        136,748   

Trading securities, at fair value

     —          5,048   

Investment securities available for sale, at fair value

     460,534        425,758   

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

     2,131        2,709   

Loans covered by FDIC loss share agreements

     277,971        296,295   

Loans, excluding those covered by FDIC loss share agreements

     1,137,015        1,139,568   

Allowance for loan losses

     (25,254     (26,682
  

 

 

   

 

 

 

Net Loans

     1,389,732        1,409,181   

Bank premises and equipment, net

     96,946        97,954   

Accrued interest receivable

     6,590        6,100   

Federal Home Loan Bank and Federal Reserve Bank stock, at cost

     8,470        9,749   

Goodwill

     44,924        44,924   

Core deposit intangible

     5,691        5,944   

Trust intangible

     1,309        1,363   

Bank owned life insurance

     48,296        47,957   

Other repossessed real estate owned covered by FDIC loss share agreements

     29,434        26,783   

Other repossessed real estate owned

     6,186        6,875   

FDIC indemnification asset

     97,958        119,289   

Prepaid expense and other assets

     14,343        16,858   
  

 

 

   

 

 

 

TOTAL ASSETS

   $ 2,389,239      $ 2,363,240   
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

Deposits:

    

Demand - non-interest bearing

   $ 565,404      $ 519,510   

Demand - interest bearing

     459,528        452,961   

Savings and money market accounts

     555,912        549,457   

Time deposits

     432,752        475,304   
  

 

 

   

 

 

 

Total deposits

     2,013,596        1,997,232   

Securities sold under agreement to repurchase

     20,421        18,792   

Federal funds purchased

     45,130        38,932   

Corporate debentures

     16,977        16,970   

Accrued interest payable

     508        579   

Deferred income tax liability, net

     2,110        1,892   

Payables and accrued expenses

     14,272        15,312   
  

 

 

   

 

 

 

Total liabilities

     2,113,014        2,089,709   

Stockholders’ equity:

    

Common stock, $.01 par value: 100,000,000 shares authorized; 30,095,520 and 30,079,767 shares issued and outstanding at March 31, 2013 and December 31, 2012, respectively

     301        301   

Additional paid-in capital

     229,201        228,952   

Retained earnings

     41,254        36,979   

Accumulated other comprehensive income

     5,469        7,299   
  

 

 

   

 

 

 

Total stockholders’ equity

     276,225        273,531   
  

 

 

   

 

 

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

   $ 2,389,239      $ 2,363,240   
  

 

 

   

 

 

 

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, 2013     Mar. 31, 2012  

Interest income:

    

Loans

   $ 21,435      $ 19,620   

Investment securities available for sale:

    

Taxable

     2,388        3,368   

Tax-exempt

     357        351   

Federal funds sold and other

     198        151   
  

 

 

   

 

 

 
     24,378        23,490   
  

 

 

   

 

 

 

Interest expense:

    

Deposits

     1,383        2,231   

Securities sold under agreement to repurchase

     18        20   

Federal funds purchased

     5        8   

Federal Home Loan Bank advances and other borrowings

     —          87   

Corporate debentures

     150        164   
  

 

 

   

 

 

 
     1,556        2,510   
  

 

 

   

 

 

 

Net interest income

     22,822        20,980   

Provision for loan losses

     (360     2,732   
  

 

 

   

 

 

 

Net interest income after loan loss provision

     23,182        18,248   
  

 

 

   

 

 

 

Non interest income:

    

Service charges on deposit accounts

     1,819        1,483   

Income from correspondent banking and bond sales division

     6,140        7,784   

Wealth management related fees

     745        660   

Debit card and ATM fees

     1,066        915   

Loan related fees

     111        200   

Bank owned life insurance income

     339        358   

Net gain on sale of securities

     30        602   

Trading securities revenue

     146        144   

Bargain purchase gain

     —          453   

FDIC indemnification income

     628        564   

FDIC indemnification asset amortization

     (2,199     (537

Trust fees

     325        208   

Other non interest revenue and fees

     1,129        811   
  

 

 

   

 

 

 

Total other income

     10,279        13,645   
  

 

 

   

 

 

 

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, 2013     Mar. 31, 2012  

Non interest expense:

    

Salaries, wages and employee benefits

     16,240        17,461   

Occupancy expense

     1,892        2,061   

Depreciation of premises and equipment

     1,497        1,267   

Supplies, stationary and printing

     288        315   

Marketing expenses

     528        584   

Data processing expense

     884        1,005   

Legal, audit and other professional fees

     783        620   

Core deposit intangible (CDI) amortization

     253        278   

Postage and delivery

     285        323   

ATM and debit card related expenses

     511        262   

Bank regulatory expenses

     581        700   

(Gain) loss on sale of repossessed real estate (“OREO”)

     (1     272   

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

     987        255   

Loss on repossessed assets other than real estate

     242        98   

Foreclosure related expenses

     793        942   

Merger and acquisition related expenses

     —          1,868   

Other expenses

     1,327        1,775   
  

 

 

   

 

 

 

Total other expenses

     27,090        30,086   

Income before provision for income taxes

     6,371        1,807   

Provision for income taxes

     1,795        494   
  

 

 

   

 

 

 

Net income

   $ 4,576      $ 1,313   
  

 

 

   

 

 

 

Other comprehensive income, net of tax:

    

Unrealized holding (loss) gain, net of income taxes

   $ (1,812   $ 94   

Less: reclassified adjustments for gain included in net income, net of income taxes, at March 31, 2013 and 2012 of $12 and $227, respectively

     (18     (375
  

 

 

   

 

 

 

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

     (1,830     (281

Total comprehensive income

   $ 2,746      $ 1,032   
  

 

 

   

 

 

 

Earnings per share:

    

Basic

   $ 0.15      $ 0.04   

Diluted

   $ 0.15      $ 0.04   

Common shares used in the calculation of earnings per share:

    

Basic

     30,089,726        30,065,631   

Diluted

     30,159,188        30,088,188   

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, 2013 and 2012 (unaudited)

(in thousands of dollars, except per share data)

 

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

Balances at January 1, 2012

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

Net income

              1,313          1,313   

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

                (281     (281

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       $ 29,290      $ 5,432      $ 263,627   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Balances at January 1, 2013

     30,079,767       $ 301       $ 228,952       $ 36,979      $ 7,299      $ 273,531   

Net income

              4,576          4,576   

Change in unrealized holding loss on available for sale securities, net of deferred income tax of $1,132

                (1,830     (1,830

Dividends paid - common ($0.01 per share)

              (301       (301

Stock grants issued

     15,753            171             171   

Stock based compensation expense

           78             78   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Balances at March 31, 2013

     30,095,520       $ 301       $ 229,201       $ 41,254      $ 5,469      $ 276,225   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

See notes to the accompanying condensed consolidated financial statements

 

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CenterState Banks, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

(in thousands of dollars, except per share data)

 

     Three months ended Mar 31,  
     2013     2012  

Cash flows from operating activities:

    

Net income

   $ 4,576      $ 1,313   

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

    

Provision for loan losses

     (360     2,732   

Depreciation of premises and equipment

     1,497        1,267   

Accretion of purchase accounting adjustments

     (7,858     (5,755

Net amortization of investment securities

     1,899        2,481   

Net deferred loan origination fees

     (241     94   

Gain on sale of securities available for sale

     (30     (602

Trading securities revenue

     (146     (144

Purchases of trading securities

     (61,878     (80,588

Proceeds from sale of trading securities

     67,072        80,180   

Repossessed real estate owned valuation write down

     987        255   

(Gain) loss on sale of repossessed real estate owned

     (1     272   

Repossessed assets other than real estate valuation write down

     47        56   

Loss on sale of repossessed assets other than real estate

     195        42   

Gain on sale of loans held for sale

     (87     (83

Loans originated and held for sale

     (4,842     (3,307

Proceeds from sale of loans held for sale

     5,507        6,833   

Gain on disposal of and or sale of fixed assets

     (5     (37

Gain on disposal of bank property held for sale

     (31     —     

Deferred income taxes

     1,188        342   

Stock based compensation expense

     146        160   

Bank owned life insurance income

     (339     (358

Bargain purchase gain from acquisition

     —          (453

Net cash from changes in:

    

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

     1,484        34   

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

     (1,008     (2,501
  

 

 

   

 

 

 

Net cash provided by operating activities

     7,772        2,233   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Purchases of investment securities available for sale

     (31,133     (10,686

Purchases of mortgage backed securities available for sale

     (50,737     (99,503

Proceeds from maturities of investment securities available for sale

     165        45   

Proceeds from called investment securities available for sale

     3,200        38,400   

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

     29,271        34,878   

Proceeds from sales of investment securities available for sale

     —          12,781   

Proceeds from sales of mortgage backed securities available for sale

     9,789        72,809   

Proceeds from sales of FHLB and FRB stock

     1,279        —     

Net decrease in loans

     19,139        25,046   

Cash received from FDIC loss sharing agreements

     20,694        2,033   

Purchases of premises and equipment, net

     (489     (2,585

Proceeds from sale of repossessed real estate

     5,992        5,929   

Proceeds from sale of fixed assets

     5        37   

Proceeds from sale of bank property held for sale

     931        —     

Purchase of bank owned life insurance

     —          (10,000

Net cash from bank acquisitions

     —          81,061   
  

 

 

   

 

 

 

Net cash provided in investing activities

     8,106        150,245   
  

 

 

   

 

 

 

See notes to the accompanying condensed consolidated financial statements.

 

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CenterState Banks, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

(in thousands of dollars, except per share data)

(continued)

 

     Three months ended Mar 31,  
     2013     2012  

Cash flows from financing activities:

    

Net increase (decrease) in deposits

     16,543        (204,733

Net increase in securities sold under agreement to repurchase

     1,629        6,523   

Net increase in federal funds purchased

     6,198        19,835   

Net increase in other borrowed funds

     —          10,000   

Dividends paid

     (301     (300
  

 

 

   

 

 

 

Net cash (used in) provided by financing activities

     24,069        (168,675
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     39,947        (16,197

Cash and cash equivalents, beginning of period

     136,748        151,095   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 176,695      $ 134,898   
  

 

 

   

 

 

 

Transfer of loans to other real estate owned

   $ 8,940      $ 7,270   
  

 

 

   

 

 

 

Cash paid during the period for:

    

Interest

   $ 1,799      $ 2,846   
  

 

 

   

 

 

 

Income taxes

   $ 185      $ —     
  

 

 

   

 

 

 

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 bank, CenterState Bank of Florida, N.A. (“CenterState”), and our non bank subsidiary, R4ALL, Inc. Our subsidiary bank operates through 55 full service banking locations in 18 counties throughout Central Florida, providing traditional deposit and lending products and services to its commercial and retail customers. R4ALL, Inc. is a separate non bank subsidiary of CSFL. Its purpose is to purchase troubled loans from our subsidiary bank 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 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 the Southeastern United States.

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 statements 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, 2012. 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, 2013 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 1,121,942 and 1,128,304 stock options that were anti dilutive at March 31, 2013 and 2012, 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,

   2013      2012  

Numerator for basic and diluted earnings per share:

     

Net income

   $ 4,576       $ 1,313   

Denominator:

     

Denominator for basic earnings per share

     

- weighted-average shares

     30,089,726         30,065,631   

Effect of dilutive securities:

     

Stock options and stock grants

     69,462         22,557   

Denominator for diluted earnings per share

     
  

 

 

    

 

 

 

- adjusted weighted-average shares

     30,159,188         30,088,188   
  

 

 

    

 

 

 

Basic earnings per share

   $ 0.15       $ 0.04   

Diluted earnings per share

   $ 0.15       $ 0.04   

 

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 the date of the consolidated balance sheet 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 the date of the consolidated balance sheet, the fair value was determined by broker price indications of similar or same 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)

 

The fair value of derivatives is based on valuation models using observable market data as of the measurement date (Level 2). Assets and liabilities measured at fair value on a recurring basis are summarized below.

 

            Fair value measurements using  
     Carrying
value
     Quoted prices in
active markets for
identical assets
(Level 1)
     Significant
Other
observable
inputs
(Level 2)
     Significant
unobservable
inputs
(Level 3)
 

at March 31, 2013

           

Assets:

           

Available for sale securities

           

U.S. government sponsored entities and agencies

   $ 26,249         —         $ 26,249         —     

Mortgage backed securities

     390,634         —           390,634         —     

Municipal securities

     43,651         —           43,651         —     

Interest rate swap derivatives

     1,025         —           1,025         —     

Liabilities:

           

Interest rate swap derivatives

     1,694         —           1,694         —     

at December 31, 2012

           

Assets:

           

Trading securities

   $ 5,048         —         $ 5,048         —     

Available for sale securities

           

U.S. government sponsored entities and agencies

     7,546         —           7,546         —     

Mortgage backed securities

     373,190         —           373,190         —     

Municipal securities

     45,022         —           45,022         —     

Interest rate swap derivatives

     1,131         —           1,131         —     

Liabilities:

           

Interest rate swap derivatives

     2,014         —           2,014         —     

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. 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, 2013, the range of capitalization rates utilized to determine the fair value of the underlying collateral ranged from 8% to 11%. Adjustments to appraisals 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  
     Carrying
value
     Quoted prices in
active markets for
identical assets
(Level 1)
     Significant
Other
observable
inputs
(Level 2)
     Significant
unobservable
inputs
(Level 3)
 

at March 31, 2013

           

Assets:

           

Impaired loans

           

Residential real estate

   $ 1,184         —           —         $ 1,184   

Commercial real estate

     5,473         —           —           5,473   

Land, land development and construction

     1,090         —           —           1,090   

Commercial

     883         —           —           883   

Consumer

     84         —           —           84   

Other real estate owned

           

Residential real estate

   $ 235         —           —         $ 235   

Commercial real estate

     7,300         —           —           7,300   

Land, land development and construction

     3,538         —           —           3,538   

Bank owned real estate held for sale

     1,582         —           —           1,582   

at December 31, 2012

           

Assets:

           

Impaired loans

           

Residential real estate

   $ 837         —           —         $ 837   

Commercial real estate

     8,379         —           —           8,379   

Land, land development and construction

     1,103         —           —           1,103   

Commercial

     905         —           —           905   

Consumer

     84         —           —           84   

Other real estate owned

           

Residential real estate

   $ 582         —           —         $ 582   

Commercial real estate

     5,933         —           —           5,933   

Land, land development and construction

     4,445         —           —           4,445   

Bank owned real estate held for sale

     2,482         —           —           2,482   

Impaired loans with specific valuation allowances and/or partial charge-offs had recorded investment of $9,116, with a valuation allowance of $402, at March 31, 2013, and a recorded investment of $11,678, with a valuation allowance of $370, at December 31, 2012. The Company recorded a provision for loan loss expense of $35 on these loans during the three month period ending March 31, 2013.

Other real estate owned had a decline in fair value of $987 and $255 during the three month periods ending March 31, 2013 and 2012, respectively. Changes in fair value were recorded directly to current earnings through non interest expense.

Bank owned real estate held for sale represents certain branch office buildings which the Company has closed and consolidated to other existing branches. The real estate was transferred out of the Bank Premises and Equipment category into bank owned property held for sale and included in Prepaid and

 

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CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

 

Other Assets category in the Company’s Condensed Consolidated Balance Sheet during 2012. The real estate was transferred at the lower of amortized cost or fair value less estimated costs to sell. During the current quarter, one of the properties was sold. The net proceeds from the sale was $931 resulting in a gain on the sale of $31, which was included in other non interest revenue and fees in the Company’s Condensed Consolidated Statements of Earnings and Comprehensive Income. There were no related impairment charges recognized during the three month periods ending March 31, 2013 and 2012, respectively.

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 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.

 

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CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

 

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 2 classification.

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

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, 2013

   Carrying amount      Level 1      Level 2      Level 3      Total  

Financial assets:

              

Cash and cash equivalents

   $ 176,695       $ 176,695       $ —         $ —         $ 176,695   

Investment securities available for sale

     460,534         —           460,534         —           460,534   

FHLB and FRB stock

     8,470         —           —           —           n/a   

Loans held for sale

     2,131         —           2,131         —           2,131   

Loans, less allowance for loan losses of $25,254

     1,389,732         —           —           1,306,348         1,306,348   

FDIC indemnification asset

     97,958         —           —           —           n/a   

Interest rate swap derivatives

     1,025         —           1,025         —           1,025   

Accrued interest receivable

     6,590         —           —           6,590         6,590   

Financial liabilities:

              

Deposits - without stated maturities

   $ 1,580,844       $ 1,580,844       $ —         $ —         $ 1,580,844   

Deposits - with stated maturities

     432,752         —           439,286         —           439,286   

Securities sold under agreement to repurchase

     20,421         —           20,421         —           20,421   

Federal funds purchased

     45,130         —           45,130         —           45,130   

Corporate debentures

     16,977         —           8,494         —           8,494   

Interest rate swap derivatives

     1,694         —           1,694         —           1,694   

Accrued interest payable

     508         —           508         —           508   

 

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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 measurements         

at December 31, 2012

   Carrying amount      Level 1      Level 2      Level 3      Total  

Financial assets:

              

Cash and cash equivalents

   $ 136,748       $ 136,748       $ —         $ —         $ 136,748   

Trading securities

     5,048         —           5,048         —           5,048   

Investment securities available for sale

     425,758         —           425,758         —           425,758   

FHLB and FRB stock

     9,749         —           —           —           n/a   

Loans held for sale

     2,709         —           2,709         —           2,709   

Loans, less allowance for loan losses of $26,682

     1,409,181         —           —           1,324,630         1,324,630   

FDIC indemnification asset

     119,289         —           —           —           n/a   

Interest rate swap derivatives

     1,131         —           1,131         —           —     

Accrued interest receivable

     6,100         —           —           6,100         6,100   

Financial liabilities:

              

Deposits - without stated maturities

   $ 1,521,928       $ 1,521,928       $ —         $ —         $ 1,521,928   

Deposits - with stated maturities

     475,304         —           483,220         —           483,220   

Securities sold under agreement to repurchase

     18,792         —           18,792         —           18,792   

Federal funds purchased

     38,932         —           38,932         —           38,932   

Corporate debentures

     16,970         —           —           8,477         8,477   

Interest rate swap derivatives

     2,014         —           2,014         —           2,014   

Accrued interest payable

     579         —           579         —           579   

 

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, 2013 and 2012.

Three month period ending March 31, 2013

 

           Correspondent     Corporate              
     Commercial     banking and     overhead              
     and retail     bond sales     and     Elimination        
     banking     division     administration     entries     Total  

Interest income

   $ 23,598      $ 780        —          —        $ 24,378   

Interest expense

     (1,400     (6     (150     —          (1,556
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

     22,198        774        (150     —          22,822   

Provision for loan losses

     360        —          —          —          360   

Non interest income

     3,274        7,005        —          —          10,279   

Non interest expense

     (20,085     (6,075     (930     —          (27,090
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income before taxes

     5,747        1,704        (1,080     —          6,371   

Income tax (provision) benefit

     (1,698     (657     560        —          (1,795
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ 4,049      $ 1,047      ($ 520     —        $ 4,576   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

   $ 2,224,471      $ 159,342      $ 297,826      ($ 292,400   $ 2,389,239   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

 

Three month period ending March 31, 2012

 

           Correspondent     Corporate              
     Commercial     banking and     overhead              
     and retail     bond sales     and     Elimination        
     banking     division     administration     entries     Total  

Interest income

   $ 22,304      $ 1,186        —          —        $ 23,490   

Interest expense

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

     20,049        1,178        (247     —          20,980   

Provision for loan losses

     (2,732     —          —          —          (2,732

Non interest income

     5,291        8,354        —          —          13,645   

Non interest expense

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income before taxes

     286        2,564        (1,043     —          1,807   

Income tax (provision) benefit

     79        (965     392        —          (494
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ 365      $ 1,599      ($ 651     —        $ 1,313   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

   $ 2,358,746      $ 177,707      $ 293,859      ($ 297,174   $ 2,533,138   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Commercial and retail banking: The Company’s primary business is commercial and retail banking. Currently, the Company operates through its subsidiary banks and a non bank subsidiary, R4ALL, with 55 full service banking locations in 18 counties throughout Florida providing traditional deposit and lending products and services to its commercial and retail customers.

Correspondent banking and bond sales division: Operating as a division of our 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 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 Southeastern United States.

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, certain merger related costs and other expenses.

 

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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 5: Investment Securities Available for Sale

All of the mortgaged backed securities listed below 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. 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, 2013  
            Gross      Gross         
     Amortized      Unrealized      Unrealized      Fair  
     Cost      Gains      Losses      Value  

Obligations of U.S. government sponsored entities and agencies

   $ 26,363       $ 38       $ 152       $ 26,249   

Mortgage backed securities

     383,592         8,056         1,014         390,634   

Municipal securities

     41,669         2,071         89         43,651   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 451,624       $ 10,165       $ 1,255       $ 460,534   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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

Obligations of U.S. government sponsored entities and agencies

   $ 7,465       $ 81       $ —         $ 7,546   

Mortgage backed securities

     364,014         9,247         71         373,190   

Municipal securities

     42,570         2,504         52         45,022   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 414,049       $ 11,832       $    123       $ 425,758   
  

 

 

    

 

 

    

 

 

    

 

 

 

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,
2013
     Mar 31,
2012
 

Proceeds

   $ 9,789       $ 85,590   

Gross gains

     30         885   

Gross losses

     —           283   

The tax provision related to these net realized gains was $12 and $227, respectively.

 

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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, 2013 by contractual maturity were as follows. Securities not due at a single maturity date, primarily mortgage-backed securities, are shown separately.

 

     Fair      Amortized  
Investment securities available for sale    Value      Cost  

Due in one year or less

   $ 471       $ 470   

Due after one year through five years

     1,666         1,518   

Due after five years through ten years

     15,430         14,851   

Due after ten years through thirty years

     52,333         51,193   

Mortgage backed securities

     390,634         383,592   
  

 

 

    

 

 

 
   $ 460,534       $ 451,624   
  

 

 

    

 

 

 

Securities pledged at March 31, 2013 and December 31, 2012 had a carrying amount (estimated fair value) of $98,725 and $108,737 respectively. These securities were pledged primarily to secure public deposits and repurchase agreements.

At March 31, 2013 and December 31, 2012, 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, 2013 and December 31, 2012.

 

     March 31, 2013  
     Less than 12 months      12 months or more      Total  
            Unrealized             Unrealized             Unrealized  
     Fair Value      Losses      Fair Value      Losses      Fair Value      Losses  

Obligations of U.S. government sponsored entities and agencies

   $ 21,148       $ 152       $ —         $ —         $ 21,148       $ 152   

Mortgage backed securities

     63,478         1,014         —           —           63,478         1,014   

Municipal securities

     5,195         89         —           —           5,195         89   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily impaired securities

   $ 89,821       $ 1,255       $ —         $ —         $ 89,821       $ 1,255   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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

Obligations of U.S. government sponsored entities and agencies

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

Mortgage backed securities

     30,840         71         —           —           30,840         71   

Municipal securities

     2,180         52         —           —           2,180         52   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily impaired securities

   $ 33,020       $    123       $ —         $ —         $ 33,020       $    123   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

 

At March 31, 2013, 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. 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, 2013.

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, 2013     Dec 31, 2012  

Loans not covered by FDIC loss share agreements

    

Real estate loans

    

Residential

   $ 432,892      $ 428,554   

Commercial

     478,790        480,494   

Land, development and construction

     59,524        55,474   
  

 

 

   

 

 

 

Total real estate

     971,206        964,522   

Commercial

     115,217        124,225   

Consumer and other loans (note 1)

     2,818        2,732   

Consumer and other loans

     47,991        48,547   
  

 

 

   

 

 

 

Loans before unearned fees and cost

     1,137,232        1,140,026   

Net unearned fees and costs

     (217     (458

Allowance for loan losses for noncovered loans

     (22,631     (24,033
  

 

 

   

 

 

 

Net loans not covered by FDIC loss share agreements

     1,114,384        1,115,535   
  

 

 

   

 

 

 

Loans covered by FDIC loss share agreements

    

Real estate loans

    

Residential

     135,068        142,480   

Commercial

     130,549        134,413   

Land, development and construction

     7,777        13,259   
  

 

 

   

 

 

 

Total real estate

     273,394        290,152   

Commercial

     4,577        6,143   
  

 

 

   

 

 

 
     277,971        296,295   

Allowance for loan losses for covered loans

     (2,623     (2,649
  

 

 

   

 

 

 

Net loans covered by FDIC loss share agreements

     275,348        293,646   
  

 

 

   

 

 

 

Total loans, net of allowance for loan losses

   $ 1,389,732      $ 1,409,181   
  

 

 

   

 

 

 

 

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 are being accounted for pursuant to ASC Topic 310-30.

 

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CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

 

The tables below set forth the activity in the allowance for loan losses for the periods presented.

 

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

Three months ended March 31, 2013

      

Balance at beginning of period

   $ 24,033      $ 2,649      $ 26,682   

Loans charged-off

     (1,231     —          (1,231

Recoveries of loans previously charged-off

     163        —          163   
  

 

 

   

 

 

   

 

 

 

Net charge-offs

     (1,068     —          (1,068

Provision for loan losses

     (334     (26     (360
  

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 22,631      $ 2,623      $ 25,254   
  

 

 

   

 

 

   

 

 

 

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 losses

     2,650        82        2,732   
  

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 25,569      $ 441      $ 26,010   
  

 

 

   

 

 

   

 

 

 

 

     Real Estate Loans                    
     Residential     Commercial     Land,
develop.,
constr.
    Comm. &
industrial
    Consumer
& other
    Total  

Loans not covered by FDIC loss share agreements:

            

Three months ended March 31, 2013

            

Beginning of the period

   $ 6,831      $ 8,272      $ 6,211      $ 1,745      $ 974      $ 24,033   

Charge-offs

     (612     (424     (39     (52     (104     (1,231

Recoveries

     80        27        14        10        32        163   

Provision for loan losses

     1,801        (782     (860     (479     (14     (334
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 8,100      $ 7,093      $ 5,326      $ 1,224      $ 888      $ 22,631   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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   

Provision for loan losses

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

20


Table of Contents

CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

 

     Real Estate Loans                      
     Residential      Commercial     Land,
develop.,
constr.
     Comm. &
industrial
    Consumer
& other
     Total  

Loans covered by FDIC loss share agreements:

               

Three months ended March 31, 2013

               

Beginning of the period

   $ —         $ 2,335      $ —         $ 314      $ —         $ 2,649   

Charge-offs

     —           —          —           —          —           —     

Recoveries

     —           —          —           —          —           —     

Provision for loan losses

     —           (25     —           (1     —           (26
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Balance at end of period

   $ —         $ 2,310      $ —         $ 313      $ —         $ 2,623   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Three months ended March 31, 2012

               

Beginning of the period

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

Charge-offs

     —           —          —           —          —           —     

Recoveries

     —           —          —           —          —           —     

Provision for loan losses

     —           69        —           13        —           82   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Balance at end of period

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

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

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, 2013 and December 31, 2012. Accrued interest receivable and unearned loan fees and costs are not included in the recorded investment because they are not material.

 

    Real Estate Loans                    

As of March 31, 2013

  Residential     Commercial     Land,
develop.,
constr.
    Comm. &
industrial
    Consumer
& other
    Total  

Allowance for loan losses:

           

Ending allowance balance attributable to loans:

           

Individually evaluated for impairment

  $ 611      $ 250      $ 100      $ 1      $ 28      $ 990   

Collectively evaluated for impairment

    7,489        6,843        5,226        1,223        860        21,641   

Acquired with deteriorated credit quality

    —          2,310        —          313        —          2,623   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total ending allowance balance

  $ 8,100      $ 9,403      $ 5,326      $ 1,537      $ 888      $ 25,254   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans:

           

Loans individually evaluated for impairment

  $ 8,948      $ 27,711      $ 1,335      $ 1,723      $ 387      $ 40,104   

Loans collectively evaluated for impairment

    423,944        451,079        58,189        113,494        47,604        1,094,310   

Loans acquired with deteriorated credit quality

    135,068        130,549        7,777        4,577        2,818        280,789   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total ending loan balances

  $ 567,960      $ 609,339      $ 67,301      $ 119,794      $ 50,809      $ 1,415,203   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

21


Table of Contents

CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

 

    Real Estate Loans                    

As of December 31, 2012

  Residential     Commercial     Land,
develop.,
constr.
    Comm. &
industrial
    Consumer
& other
    Total  

Allowance for loan losses:

           

Ending allowance balance attributable to loans:

           

Individually evaluated for impairment

  $ 610      $ 277      $ 107      $ 1      $ 27      $ 1,022   

Collectively evaluated for impairment

    6,221        7,995        6,104        1,744        947        23,011   

Acquired with deteriorated credit quality

    —          2,335        —          314        —          2,649   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total ending allowance balance

  $ 6,831      $ 10,607      $ 6,211      $ 2,059      $ 974      $ 26,682   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans:

           

Loans individually evaluated for impairment

  $ 9,936      $ 32,860      $ 1,520      $ 3,470      $ 393      $ 48,179   

Loans collectively evaluated for impairment

    418,618        447,634        53,954        120,755        48,154        1,089,115   

Loans acquired with deteriorated credit quality

    142,480        134,413        13,259        6,143        2,732        299,027   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total ending loan balance

  $ 571,034      $ 614,907      $ 68,733      $ 130,368      $ 51,279      $ 1,436,321   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

 

     Mar 31,
2013
     Dec 31,
2012
 

Impaired loans with a specific valuation allowance

   $ 10,163       $ 10,744   

Impaired loans without a specific valuation allowance

     29,941         37,435   
  

 

 

    

 

 

 

Total impaired loans

   $ 40,104       $ 48,179   

Amount of allowance for loan losses allocated to impaired loans

   $ 990       $ 1,022   

Performing TDRs

   $ 9,568       $ 8,841   

Non performing TDRs, included in NPLs

     4,505         5,819   
  

 

 

    

 

 

 

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

   $ 14,073       $ 14,660   

Impaired loans that are not TDRs

     26,031         33,519   
  

 

 

    

 

 

 

Total impaired loans

   $ 40,104       $ 48,179   
  

 

 

    

 

 

 

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 twelve to twenty-four months. We have not forgiven any material principal amounts on any loan modifications to date. We have approximately $14,073 of TDRs. Of this amount $9,568 are performing pursuant to their modified terms, and $4,505 are not performing and have been placed on non accrual status and included in our non performing loans (“NPLs”).

 

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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)

 

TDRs as of March 31, 2013 and December 31, 2012 quantified by loan type classified separately as accrual (performing loans) and non-accrual (non performing loans) are presented in the tables below.

 

As of March 31, 2013

   Accruing      Non Accrual      Total  

Real estate loans:

        

Residential

   $ 6,197       $ 1,829       $ 8,026   

Commercial

     2,634         2,339         4,973   

Land, development, construction

     157         211         368   
  

 

 

    

 

 

    

 

 

 

Total real estate loans

     8,988         4,379         13,367   

Commercial

     314         5         319   

Consumer and other

     266         121         387   
  

 

 

    

 

 

    

 

 

 

Total TDRs

   $ 9,568       $ 4,505       $ 14,073   
  

 

 

    

 

 

    

 

 

 

 

As of December 31, 2012

   Accruing      Non-Accrual      Total  

Real estate loans:

        

Residential

   $ 6,446       $ 1,778       $ 8,224   

Commercial

     1,589         3,701         5,290   

Land, development, construction

     202         231         433   
  

 

 

    

 

 

    

 

 

 

Total real estate loans

     8,237         5,710         13,947   

Commercial

     315         5         320   

Consumer and other

     289         104         393   
  

 

 

    

 

 

    

 

 

 

Total TDRs

   $ 8,841       $ 5,819       $ 14,660   
  

 

 

    

 

 

    

 

 

 

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 $55 and partial charge offs of $35 on the TDR loans described above during the three month period ending March 31, 2013.

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. We may also extend maturities, convert balloon loans to longer term amortizing loans, or vice versa, or change interest rates between variable and fixed rate. Each borrower and situation is unique and we try to accommodate the borrower and minimize the Company’s potential losses. Approximately 68% of our TDRs are current pursuant to their modified terms, and about $4,505, or approximately 32% of our total TDRs are not performing pursuant to their modified terms. There does not appear to be any significant difference in success rates with one type of concession versus another.

 

23


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 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, 2013 and December 31, 2012.

 

     Year ending      Year ending  
     March 31, 2013      December 31, 2012  
     Number      Recorded      Number      Recorded  
     of loans      investment      of loans      investment  

Residential

     8       $ 1,010         10       $ 758   

Commercial real estate

     2         1,209         4         2,567   

Land, development, construction

     1         55         4         156   

Consumer and other

     1         45         1         45   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     12       $ 2,319         19       $ 3,526   
  

 

 

    

 

 

    

 

 

    

 

 

 

The Company recorded a provision for loan loss expense of $32 and partial charge offs of $27 on TDR loans that subsequently defaulted as described above during the three month period ending March 31, 2013.

The following tables present loans individually evaluated for impairment by class of loans as of March 31, 2013 and December 31, 2012. The recorded investment is less than the unpaid principal balance due to partial charge-offs.

 

As of March 31, 2013

   Unpaid
principal
balance
     Recorded
investment
     Allowance for
loan losses
allocated
 

With no related allowance recorded:

        

Residential real estate

   $ 922       $ 922       $ —     

Commercial real estate

     28,444         26,334         —     

Land, development, construction

     1,921         966         —     

Commercial

     1,816         1,719         —     

With an allowance recorded:

        

Residential real estate

     8,340         8,026         611   

Commercial real estate

     1,432         1,377         250   

Land, development, construction

     426         368         100   

Commercial

     5         5         1   

Consumer, other

     395         387         28   
  

 

 

    

 

 

    

 

 

 

Total

   $ 43,701       $ 40,104       $ 990   
  

 

 

    

 

 

    

 

 

 

 

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, 2012

   Unpaid
principal
balance
     Recorded
investment
     Allowance for
loan losses
allocated
 

With no related allowance recorded:

        

Residential real estate

   $ 1,712       $ 1,712       $ —     

Commercial real estate

     33,789         31,171         —     

Land, development, construction

     2,042         1,087         —     

Commercial

     3,556         3,465         —     

With an allowance recorded:

        

Residential real estate

     8,624         8,224         610   

Commercial real estate

     1,742         1,689         277   

Land, development, construction

     664         433         107   

Commercial

     5         5         1   

Consumer, other

     395         393         27   
  

 

 

    

 

 

    

 

 

 

Total

   $ 52,529       $ 48,179       $ 1,022   
  

 

 

    

 

 

    

 

 

 

 

As of March, 31, 2013

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

Real estate loans:

        

Residential

   $ 9,442       $ 74       $ —     

Commercial

     30,285         257         —     

Land, development, construction

     1,427         2         —     
  

 

 

    

 

 

    

 

 

 

Total real estate loans

     41,154         333         —     

Commercial loans

     2,597         8         —     

Consumer and other loans

     390         3         —     
  

 

 

    

 

 

    

 

 

 

Total

   $ 44,141       $ 344       $ —     
  

 

 

    

 

 

    

 

 

 

 

As of 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         —     

Land, development, construction

     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       $ —     
  

 

 

    

 

 

    

 

 

 

 

25


Table of Contents

CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

 

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, 2013      Dec 31, 2012  

Non accrual loans

   $ 24,456       $ 25,448   

Loans past due over 90 days and still accruing interest

     316         293   
  

 

 

    

 

 

 

Total non performing loans

   $ 24,772       $ 25,741   
  

 

 

    

 

 

 

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, 2013 and December 31, 2012, excluding loans acquired from the FDIC with evidence of credit deterioration and covered by FDIC loss share agreements:

 

As of March 31, 2013

   Nonaccrual      Loans past due
over 90 days
still accruing
 

Residential real estate

   $ 11,014       $ —     

Commercial real estate

     9,223         —     

Land, development, construction

     2,284         —     

Commercial

     1,561         —     

Consumer, other

     374         316   
  

 

 

    

 

 

 

Total

   $ 24,456       $ 316   
  

 

 

    

 

 

 

 

As of December 31, 2012

   Nonaccrual      Loans past due
over 90 days
still accruing
 

Residential real estate

   $ 9,993       $ —     

Commercial real estate

     11,459         —     

Land, development, construction

     2,032         —     

Commercial

     1,650         —     

Consumer, other

     314         293   
  

 

 

    

 

 

 

Total

   $ 25,448       $ 293   
  

 

 

    

 

 

 

The following table presents the aging of the recorded investment in past due loans as of March 31, 2013 and December 31, 2012, excluding loans acquired from the FDIC with evidence of credit deterioration and covered by FDIC loss share agreements:

 

     Accruing Loans  

As of March 31, 2013

   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

   $ 432,892       $ 4,836       $ 2,162       $ —         $ 6,998       $ 414,880       $ 11,014   

Commercial real estate

     478,790         2,821         314         —           3,135         466,432         9,223   

Land/dev/construction

     59,524         522         125         —           647         56,593         2,284   

Commercial

     115,217         527         3         —           530         113,126         1,561   

Consumer

     50,809         255         522         316         1,093         49,342         374   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 1,137,232       $ 8,961       $ 3,126       $ 316       $ 12,403       $ 1,100,373       $ 24,456   

 

26


Table of Contents

CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

 

     Accruing Loans  

As of December 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

   $ 428,554       $ 1,632       $ 677       $ —         $ 2,309       $ 416,252       $ 9,993   

Commercial real estate

     480,494         1,663         1,147         —           2,810         466,225         11,459   

Land/dev/construction

     55,474         115         624         —           739         52,703         2,032   

Commercial

     124,225         203         416         —           619         121,956         1,650   

Consumer

     51,279         456         489         293         1,238         49,727         314   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 1,140,026       $ 4,069       $ 3,353       $ 293       $ 7,715         1,106,863       $ 25,448   

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.

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.

 

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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)

 

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, 2013 and December 31, 2012, 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 and covered by FDIC loss share agreements, is as follows:

 

     As of March 31, 2013  

Loan Category

   Pass      Special
Mention
     Substandard      Doubtful  

Residential real estate

   $ 410,438       $ 5,383       $ 17,071       $ —     

Commercial real estate

     391,646         54,445         32,699         —     

Land/dev/construction

     43,629         11,948         3,947         —     

Commercial

     105,652         5,482         4,083         —     

Consumer

     49,659         579         571         —     
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 1,001,024       $ 77,837       $ 58,371       $ —     

 

     As of December 31, 2012  

Loan Category

   Pass      Special
Mention
     Substandard      Doubtful  

Residential real estate

   $ 400,244       $ 4,797       $ 23,513       $ —     

Commercial real estate

     394,238         44,933         41,323         —     

Land/dev/construction

     39,650         11,994         3,830         —     

Commercial

     114,067         3,978         6,180         —     

Consumer

     49,894         613         772         —     
  

 

 

    

 

 

    

 

 

    

 

 

 
   $    998,093       $ 66,315       $ 75,618       $ —     

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 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 and covered by FDIC loss share agreements, based on payment activity as of March 31, 2013:

 

     Residential      Consumer  

Performing

   $ 421,878       $ 50,119   

Nonperforming

     11,014         690   
  

 

 

    

 

 

 

Total

   $ 432,892       $ 50,809   
  

 

 

    

 

 

 

Purchased Credit Impaired Loans:

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, 2013 and December 31, 2012. Contractually required principal and interest payments have been adjusted for estimated prepayments.

 

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CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

 

 

     Mar 31, 2013     Dec 31, 2012  

Contractually required principal and interest

   $ 486,531      $ 534,989   

Non-accretable difference

     (110,243     (142,855
  

 

 

   

 

 

 

Cash flows expected to be collected

     376,288        392,134   

Accretable yield

     (95,499     (93,107
  

 

 

   

 

 

 

Carrying value of acquired loans

   $ 280,789      $ 299,027   

Allowance for loan losses

     (2,623     (2,649
  

 

 

   

 

 

 

Carrying value less allowance for loan losses

   $ 278,166      $ 296,378   
  

 

 

   

 

 

 

We adjusted our 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. We reclassified approximately $5,405 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, 2013.

 

Activity during the three month period ending March 31, 2013

   Dec 31, 2012     income
accretion
     all other
adjustments
    Mar 31, 2013  

Contractually required principal and interest

   $ 534,989         $ (48,458   $ 486,531   

Non-accretable difference

     (142,855     —           32,612        (110,243
  

 

 

   

 

 

    

 

 

   

 

 

 

Cash flows expected to be collected

     392,134           (15,846     376,288   

Accretable yield

     (93,107     7,827         (10,219     (95,499
  

 

 

   

 

 

    

 

 

   

 

 

 

Carry value of acquired loans

   $ 299,027      $ 7,827       $ (26,065   $ 280,789   
  

 

 

   

 

 

    

 

 

   

 

 

 

 

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, 2013
    Twelve months
period ended
Dec 31, 2012
 

Beginning of the year

   $ 119,289      $ 50,642   

Effect of acquisitions

     —          85,088   

Amortization, net

     (2,199     (3,096

Indemnification income - ORE

     649        4,185   

Indemnification of foreclosure expense

     934        2,425   

Proceeds from FDIC

     (20,694     (21,787

Impairment of loan pool

     (21     1,832   
  

 

 

   

 

 

 

Period end balance

   $ 97,958      $ 119,289   
  

 

 

   

 

 

 

 

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CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

 

Impairment of loan pools

When a loan pool (with loss share) is impaired, the impairment expense is included in provision for loan losses, and 80% of that loss is recognized as income from FDIC reimbursement, and included in this line item. During the quarter ended March 31, 2013, the estimated amount of impairment declined, which resulted in a reversal of $21 of income previously recognized.

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.

Amortization , net

On the date of an FDIC acquisition, the Company estimates the amount and the timing of expected future losses that will be covered by the FDIC loss sharing agreements. The FDIC indemnification asset is initially recorded as the discounted value of the reimbursement of losses from the FDIC. Discount accretion is recognized over the estimated period of losses, and the Company updates its estimate of future losses and the timing of the losses each quarter. To the extent management estimates that future losses are less than initial estimate of future losses, management adjusts its estimates of future expected reimbursements and any decrease in the expected future reimbursements is amortized over the shorter of the loss share period or the life of the related loan by amortization in this line item. Based upon the most recent estimate of future losses, the Company expects less reimbursements from the FDIC and is amortizing the estimated reduction as described in the previous sentence.

Indemnification of foreclosure expense

Indemnification of foreclosure expense represents approximately 80% of the foreclosure related expenses incurred and reimbursable from the FDIC. Foreclosure expense is included in non interest expense. The amount of the reimbursable portion of the expense reduces foreclosure expense included in non interest expense.

 

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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)

 

NOTE 8: Subsequent events

On April 25, 2013, the Company’s shareholders approved the CenterState 2013 Equity Incentive Plan (the “2013 Plan”) for directors and employees. The 2013 Plan authorizes the issuance of up to 1,600,000 shares of the Company’s stock which may be awarded through the 2023 expiration of the plan. Of this amount, 1,525,000 shares are allocated to employees, all of which may be issued as Incentive Stock Options, and 75,000 shares allocated to directors.

 

NOTE 9: Effect of new pronouncements

In October 2012, the Financial Accounting Standards Board (“FASB”) issued guidance on the subsequent accounting for an indemnification asset recognized at the acquisition date as a result of a government assisted acquisition of a financial institution. When an entity recognizes such an indemnification asset and subsequently a change in the cash flows expected to be collected on the indemnification asset occurs as a result of a change in the cash flows expected to be collected on the indemnified asset, the guidance requires the entity to recognize the change in the measurement of the indemnification asset on the same basis as the indemnified assets. Any amortization of changes in value of the indemnification asset should be limited to the lesser of the term of the indemnification agreement and the remaining life of the indemnified assets. The amendments are effective for fiscal years beginning on or after December 15, 2012 and early adoption is permitted. The amendments are to be applied prospectively to any new indemnification assets acquired after the date of adoption and to indemnification assets existing as of the date of adoption arising from a government-assisted acquisition of a financial institution. The impact of this amendment on the consolidated financial statements had no effect.

 

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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, 2013 AND DECEMBER 31, 2012

Overview

Our total assets increased slightly between March 31, 2013 and year end 2012 primarily due to increases in total deposits, repurchase agreements and federal funds purchased. The cash received from the increase in these liabilities, along with the decrease in our net loans outstanding, were the primary reasons for the increases in our investment securities and federal funds sold and Federal Reserve deposits. 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 $155,872 at March 31, 2013 (approximately 6.5% of total assets) as compared to $117,588 at December 31, 2012 (approximately 5.0% 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 $460,534 at March 31, 2013 (approximately 19.3% of total assets) compared to $425,758 at December 31, 2012 (approximately 18.0% of total assets), an increase of $34,776 or 8.2%. 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 and Comprehensive Income. Securities purchased for this portfolio have primarily been various municipal securities. We held no trading securities as of March 31, 2013. A list of the activity in this portfolio is summarized below.

 

     Three month
period ended
Mar 31, 2013
    Three month
period ended
Mar 31, 2012
 

Beginning balance

   $ 5,048      $ —     

Purchases

     61,878        80,588   

Proceeds from sales

     (67,072     (80,180

Net realized gain on sales

     146        144   
  

 

 

   

 

 

 

Ending balance

   $ —        $ 552   
  

 

 

   

 

 

 

 

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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 and Comprehensive Income. A list of the activity in this portfolio is summarized below.

 

     Three month
period  ended
Mar 31, 2013
    Three month
period ended
Mar 31, 2012
 

Beginning balance

   $ 2,709      $ 3,741   

Loans originated

     4,842        3,307   

Proceeds from sales

     (5,507     (6,833

Net realized gain on sales

     87        83   
  

 

 

   

 

 

 

Ending balance

   $ 2,131      $ 298   
  

 

 

   

 

 

 

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, 2013, were $1,420,227, or 70.4% of average earning assets, as compared to $1,433,225, or 67.3% of average earning assets, for the quarter ending March 31, 2012. Total loans at March 31, 2013 and December 31, 2012 were $1,414,986 and $1,435,863, respectively, a decrease of $20,877, or 1.5%. This represents a loan to total asset ratio of 59.2% and 60.8% and a loan to deposit ratio of 70.3% and 71.9%, at March 31, 2013 and December 31, 2012, respectively.

Approximately 19.6% of our loans, or $277,971, are 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-nine percent (49%) are collateralized by single family residential real estate and forty-seven percent (47%) are collateralized by commercial real estate. The remainder of our covered loans included land, land development, and non-real estate commercial loans.

Our loans that are not covered by FDIC loss sharing agreements at March 31, 2013 and December 31, 2012 were $1,137,015 and $1,139,568, respectively, a decrease of $2,553, or 0.2%. After five consecutive quarters of increasing loan production (originations), new loan originations (actual funded) during the current quarter was down slightly at $43,607. New loan origination (funded during the quarter of origination) for the current quarter compared to the prior five quarters is presented in the table below:

 

(unaudited)

   1Q13     4Q12     3Q12     2Q12     1Q12  

New loan production (funded)

   $ 43,607      $ 54,819      $ 51,519      $ 48,357      $ 43,056   

Average yield

     4.27     4.31     4.40     4.43     4.34

 

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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 sharing agreements, total $1,414,986 at March 31, 2013. Of this amount approximately 88% are collateralized by real estate, 8% are commercial non real estate loans and the remaining 4% are consumer and other non real estate loans. We have approximately $567,960 of single family residential loans which represents about 40% of our total loan portfolio. Our largest category of loans is commercial real estate which represents approximately 43% of our total loan portfolio.

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

 

     Mar 31, 2013     Dec 31, 2012  

Loans not covered by FDIC loss share agreements

    

Real estate loans

    

Residential

   $ 432,892      $ 428,554   

Commercial

     478,790        480,494   

Land, development, construction

     59,524        55,474   
  

 

 

   

 

 

 

Total real estate

     971,206        964,522   

Commercial

     115,217        124,225   

Consumer and other loans (note 1)

     2,818        2,732   

Consumer and other

     47,991        48,547   
  

 

 

   

 

 

 

Loans before unearned fees and cost

     1,137,232        1,140,026   

Unearned fees/costs

     (217     (458

Allowance for loan losses for noncovered loans

     (22,631     (24,033
  

 

 

   

 

 

 

Net loans not covered by FDIC loss share agreements

     1,114,384        1,115,535   
  

 

 

   

 

 

 

Loans covered by FDIC loss share agreements

    

Real estate loans

    

Residential

     135,068        142,480   

Commercial

     130,549        134,413   

Land, development, construction

     7,777        13,259   
  

 

 

   

 

 

 

Total real estate

     273,394        290,152   

Commercial

     4,577        6,143   
  

 

 

   

 

 

 
     277,971        296,295   

Allowance for loan losses for covered loans

     (2,623     (2.649
  

 

 

   

 

 

 

Net loans covered by FDIC loss share agreements

     275,348        293,646   
  

 

 

   

 

 

 

Total loans, net of allowance for loan losses

   $ 1,389,732      $ 1,409,181   
  

 

 

   

 

 

 

 

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 are being accounted for pursuant to ASC Topic 310-30.

Credit quality and allowance for loan losses

Commercial, commercial real estate, land, land development and construction loans in excess of $500 are monitored and evaluated for impairment on an individual loan basis. Commercial, commercial real estate, land, land development and construction loans less than $500 are evaluated for impairment on a pool basis. All consumer and single family residential loans are evaluated for impairment on a pool basis.

 

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Table of Contents

On at least a quarterly basis, management reviews each impaired loan to determine whether it should have a specific reserve or partial charge-off. Management relies on appraisals to help make this determination. Updated appraisals are obtained for collateral dependent loans when a loan is scheduled for renewal or refinance. In addition, if the classification of the loan is downgraded to substandard, identified as impaired, or placed on non accrual status (collectively “Problem Loans”), an updated appraisal is obtained if the loan amount is greater than $500 and individually evaluated for impairment.

After an updated appraisal is obtained for a Problem Loan, as described above, an additional updated appraisal will be obtained on at least an annual basis. Thus, current appraisals for Problem Loans in excess of $500 will not be older than one year.

After the initial updated appraisal is obtained for a Problem Loan and before its next annual appraisal update is due, management considers the need for a downward adjustment to the current appraisal amount to reflect current market conditions, based on management’s analysis, judgment and experience. In an extremely volatile market, management may update the appraisal prior to the one year anniversary date.

We maintain an allowance for loan losses that we believe is adequate to absorb probable losses incurred in our non covered loan portfolio. The FDIC is obligated to reimburse us for 80% of losses incurred in our covered loan portfolio subject to the terms of our loss share agreements with the FDIC. Our covered loan portfolio, loans purchased from the FDIC with specific identified credit deficiencies and those with implied credit deficiencies, has been marked to fair value at the acquisition date, which considers an estimate of probable losses, and is evaluated for impairment on a pool basis on a quarterly basis, pursuant to ASC Topic 310-30.

The allowance consists of three components. The first component is an allocation for impaired loans, as defined by generally accepted accounting principles. Impaired loans are those loans whereby management has arrived at a determination that the Company will not be repaid according to the original terms of the loan agreement. Each of these loans is required to have a written analysis supporting the amount of specific allowance allocated to the particular loan, if any. That is to say, a loan may be impaired (i.e., not expected to be repaid as agreed), but may be sufficiently collateralized such that we expect to recover all principal and interest eventually, and therefore no specific allowance is warranted.

The second component is a general allowance on all of the Company’s loans other than those identified as impaired. The general component covers non-impaired loans and is based on historical loss experience adjusted for current factors. The historical loss experience is determined by portfolio segment and is based on the actual loss history experienced by the Company over the most recent two years. The portfolio segments identified by the Company are residential loans, commercial real estate loans, construction and land development loans, commercial and industrial and consumer and other. This actual loss experience is supplemented with other economic factors based on the risks present for each portfolio segment. These economic factors include consideration of the following: levels of and trends in delinquencies and impaired loans; levels of and trends in charge-offs and recoveries; trends in volume and terms of loans; effects of any changes in risk selection and underwriting standards; other changes in lending policies, procedures, and practices; experience, ability, and depth of lending management and other relevant staff; national and local economic trends and conditions; industry conditions; and effects of changes in credit concentrations.

 

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Table of Contents

The third component consists of amounts reserved for purchased credit impaired loans. On a quarterly basis, the Company updates the amount of loan principal and interest cash flows expected to be collected, incorporating assumptions regarding default rates, loss severities, the amounts and timing of prepayments and other factors that are reflective of current market conditions. Probable decreases in expected loan principal cash flows trigger the recognition of impairment, which is then measured as the present value of the expected principal loss plus any related foregone interest cash flows discounted at the pool’s effective interest rate. Impairments that occur after the acquisition date are recognized through the provision for loan losses. Probable and significant increases in expected principal cash flows would first reverse any previously recorded allowance for loan losses; any remaining increases are recognized prospectively as interest income. The impacts of (i) prepayments, (ii) changes in variable interest rates, and (iii) any other changes in the timing of expected cash flows are recognized prospectively as adjustments to interest income. Disposals of loans, which may include sales of loans, receipt of payments in full by the borrower, or foreclosure, result in removal of the loan from the purchased credit impaired portfolio. The aggregate of these three components results in our total allowance for loan losses.

In the table below we have shown the components, as discussed above, of our allowance for loan losses at March 31, 2013 and December 31, 2012.

 

&nb