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CSFL > SEC Filings for CSFL > Form 10-Q on 5-Nov-2012All Recent SEC Filings

Show all filings for CENTERSTATE BANKS, INC. | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for CENTERSTATE BANKS, INC.


5-Nov-2012

Quarterly Report


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 SEPTEMBER 30, 2012 AND DECEMBER 31, 2011

Overview

Our total assets increased approximately 4.1% during the nine month period ending September 30, 2012 primarily due to the acquisitions of Central Florida State Bank in Belleveiw, Florida ("Central FL") and First Guaranty Bank and Trust Company of Jacksonville in Jacksonville, Florida ("FGB") discussed in Note
9. 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 $82,872 at September 30, 2012 (approximately 3.5% of total assets) as compared to $133,202 at December 31, 2011 (approximately 5.8% of total assets). We use our available-for-sale securities portfolio, as well as federal funds sold and Federal Reserve Bank deposits for liquidity management and for investment yields. These accounts, as a group, will fluctuate as a function of loans outstanding, and to some degree the amount of correspondent bank deposits (i.e. federal funds purchased) outstanding.

Investment securities available for sale

Securities available-for-sale, consisting primarily of U.S. government sponsored entities and agency securities and municipal tax exempt securities, were $458,796 at September 30, 2012 (approximately 19% of total assets) compared to $591,164 at December 31, 2011 (approximately 26% of total assets), a decrease of $132,368 or 22%. We use our available-for-sale securities portfolio, as well as federal funds sold and Federal Reserve Bank deposits for liquidity management and for investment yields. These accounts, as a group, will fluctuate as a function of loans outstanding as discussed above, under the caption "Federal funds sold and Federal Reserve Bank deposits." Our securities are carried at fair value. We classify our securities as "available-for-sale" to provide for greater flexibility to respond to changes in interest rates as well as future liquidity needs.

Trading securities

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

                                         Nine month           Nine month
                                        period ended         period ended
                                        Sept 30, 2012        Sept 30, 2011
          Beginning balance            $            -       $         2,225
          Purchases                            272,130              189,880
          Proceeds from sales                 (272,664 )           (192,502 )
          Net realized gain on sales               534                  397
          Mark to market adjustment                 -                    -

          Ending balance               $            -       $            -


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Loans held for sale

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

                                         Nine month           Nine month
                                        period ended         period ended
                                        Sept 30, 2012        Sept 30, 2011
          Beginning balance            $         3,741      $           673
          Loans originated                      11,744                5,271
          Proceeds from sales                  (13,950 )             (5,368 )
          Net realized gain on sales               172                   88

          Ending balance               $         1,707      $           664

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 nine month period ended September 30, 2012, were $1,444,499, or 69% of average earning assets, as compared to $1,198,838, or 63% of average earning assets, for the similar period in 2011. Total loans at September 30, 2012 and December 31, 2011 were $1,444,182 and $1,283,766, respectively, an increase of $160,416, or 12.5%. This represents a loan to total asset ratio of 60.7% and 56.2% and a loan to deposit ratio of 72.3% and 66.9%, at September 30, 2012 and December 31, 2011, respectively.

Our total loans, excluding loans covered by FDIC loss share agreements, increased by $14,724 during the nine month period ending September 30, 2012, an annualized rate of 1.8%. The weak economy in general and the struggling Florida real estate market in particular, have made it difficult to grow our loan portfolio. However, we have seen improvement in our credit metrics over the past three quarters, and did have better loan growth in the second and third quarter. Loans decreased by $10,710 during the first quarter of the year and increased by $19,258 during the second quarter, and by $6,176 during the third quarter.

Total loans covered by FDIC loss share agreements increased by $145,692 during the nine month period ending September 30, 2012. This was due to the acquisitions of Central FL and FGB as described in Note 9.

Approximately 21.4% of our loans, or $309,743, is covered by FDIC loss sharing agreements. Pursuant to and subject to the terms of the loss sharing agreements, the FDIC is obligated to reimburse CenterState for 80% of losses with respect to the covered loans beginning with the first dollar of loss incurred. CenterState will reimburse the FDIC for its share of recoveries with respect to the covered loans. The loss sharing agreements applicable to single family residential mortgage loans provide for FDIC loss sharing and CenterState reimbursement to the FDIC for recoveries for ten years. The loss sharing agreements applicable to commercial loans provide for FDIC loss sharing for five years and CenterState reimbursement to the FDIC for a total of eight years for recoveries. All of the covered loans


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acquired are accounted for pursuant to ASC Topic 310-30. Within the FDIC covered loan portfolio, 52% are collateralized by single family residential real estate and 43% are collateralized by commercial real estate. The remainder is a mix of commercial non real estate loans and land, land development and construction loans.

Approximately 4.6% of the Company's loans, or $65,937, are subject to a two year put back option, commencing January 20, 2011, with TD Bank, N.A., such that if any of these loans becomes 30 days past due or are adversely classified pursuant to bank regulatory guidelines, we have the option to put back the loan to TD Bank, N.A. Through September 30, 2012, we have put back loans with an aggregate outstanding balance of approximately $12,700, approximately 10% of the initial purchase. When the loans are put back to TD Bank, the Company is reimbursed 90% of the outstanding loan balance (i.e. the original discounted purchase price). The loans were recorded on the Company's books at market value as of the acquisition date. The average fair value as of the acquisition date was approximately 98%. The difference between the reimbursed amount (90% of the loan's outstanding balance) and the carrying value of the loan (approximately 98% of the outstanding balance) is recognized as a credit related expense and is included in credit related expenses in non-interest expense in our Condensed Consolidated Statements of Earnings and Comprehensive Income.

Approximately 9.7% of the Company's loans, or $140,264, are subject to a one year put back option, commencing November 1, 2011, with The Hartford Insurance Group ("Hartford"), such that if any of these loans becomes 30 days past due or are adversely classified pursuant to bank regulatory guidelines, we have the option to put back the loan to Hartford. Through September 30, 2012, we have put back loans with an aggregate outstanding balance of approximately $7,900, approximately 5% of the initial purchase. When the loans are put back to Hartford, we are reimbursed 73% of the outstanding loan balance (i.e. the original discounted purchase price). The loans were recorded on our books at market value as of the acquisition date, approximately 98%. At the acquisition date, we estimated that the loan put back amount could approximate $6,000 and made the appropriate provision. The difference between the reimbursed amount (73% of the loan's outstanding balance) and the carrying value of the loan (approximately 98% of the outstanding balance), first reduces the provision for estimated put backs, then the excess is recognized as a credit related expense and is included in credit related expenses in non-interest expense in our Condensed Consolidated Statements of Earnings and Comprehensive Income.

Approximately 64.3% of the Company's loans, or $928,238, is not covered by FDIC loss sharing agreements or subject to a put back option with TD Bank, N.A. or Hartford.

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

Our total loans, including those with and without loss protection agreements, total $1,444,182 at September 30, 2012. Of this amount approximately 87% are collateralized by real estate, 9% are commercial non real estate loans and the remaining 4% are consumer and other non real estate loans. We have approximately $589,965 of single family residential loans which represents about 41% of our total loan portfolio. Our largest category of loans is commercial real estate which represents approximately 42% of our total loan portfolio.


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

                                                               Sept 30, 2012           Dec 31, 2011
Loans not covered by FDIC loss share agreements (note 2)
Real estate loans
Residential                                                   $       428,138         $      405,923
Commercial                                                            468,261                447,459
Construction, development, land                                        56,454                 89,517

Total real estate                                                     952,853                942,899
Commercial                                                            131,302                126,064
Consumer and other loans (note 1)                                       1,998                  1,392
Consumer and other loans                                               48,808                 49,999

Loans before unearned fees and cost                                 1,134,961              1,120,354
Unearned fees/costs                                                      (522 )                 (639 )
Allowance for loan losses for non covered loans                       (24,019 )              (27,585 )

Total loans not covered by FDIC loss share agreements               1,110,420              1,092,130

Loans covered by FDIC loss share agreements
Real estate loans
Residential                                                           161,827                 99,270
Commercial                                                            133,069                 54,184
Construction, development, land                                         8,473                  8,231

Total real estate                                                     303,369                161,685
Commercial                                                              6,374                  2,366

                                                                      309,743                164,051
Allowance for loan losses for covered loans                            (2,322 )                 (359 )

Net loans covered by FDIC loss share agreements                       307,421                163,692

Total loans                                                         1,417,841         $    1,255,822

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

Note 2: Includes $65,937 of loans that are subject to a two year put back option
with TD Bank, N.A., such that if any of these loans become 30 days past due or are adversely classified pursuant to bank regulatory guidelines, the Company has the option to put back the loan to TD Bank. This put back period ends January 20, 2013. Also includes $140,264 of loans that are subject to a one year put back option with The Hartford Insurance Group, Inc. ("Hartford"), such that if any of these loans become 30 days past due or are adversely classified pursuant to bank regulatory guidelines, the Company has the option to put back the loan to Hartford. This put back period ends November 1, 2012.

Credit quality and allowance for loan losses

Commercial, commercial real estate, construction, land, and land development loans in excess of $500 are monitored and evaluated for impairment on an individual loan basis. Commercial, commercial real estate, construction, land, and land development 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.

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.


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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.

Performing loans purchased pursuant to the January 20, 2011 TD Bank transaction, are performing loans without any specific or implied credit deficiencies. These loans are included in our allowance for loan loss analysis, but do not have any loss factor assigned to them since they are at fair value at the acquisition date and due to the two year put back option in place with TD Bank, as described in Note 8 in our Form 10-Q for the period ending March 31, 2011, filed on May 10, 2011.

Performing loans purchased pursuant to the November 1, 2011 acquisition of Federal Trust Corporation ("FTC"), are performing loans without any specific or implied credit deficiencies. These loans are included in our allowance for loan loss analysis, but do not have any loss factor assigned to them since they are at fair value at the acquisition date and due to the one year put back option in place with The Hartford Insurance Group, Inc. ("Hartford"), as described in Note 26 in our Form 10-K for the period ending December 31, 2011, filed on March 13, 2012.

We expect to provide an allowance for loan losses for the FTC purchased loans and for the TD Bank purchased loans, however, because these were selected performing loans and because we have the option to put back any loan that becomes 30 days past due or is adversely classified, the initial allowance for loan losses related to these two groups of loans are not expected to be material.

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


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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.

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 September 30, 2012 and December 31, 2011.

                                          Sept 30, 2012                            Dec 31, 2011                           increase (decrease)
                                  loan           ALLL                      loan           ALLL                     loan           ALLL
                                 balance       balance        %           balance       balance        %          balance       balance
Impaired loans                 $    44,811     $    949       2.12 %    $    53,668     $  3,304       6.16 %    $  (8,857 )    $ (2,355 )      -404bps
Non impaired loans                 883,427       23,070       2.61 %        819,767       24,281       2.96 %       63,660        (1,211 )       -35bps
TD loans (note 1)                   65,937           -                       90,457           -                    (24,520 )          -
FTC loans (note 2)                 140,264           -                      155,823           -                    (15,559 )          -

Loans (note 3)                   1,134,439       24,019       2.12 %      1,119,715       27,585       2.46 %       14,724        (3,566 )       -34bps
Covered loans (note 4)             309,743        2,322                     164,051          359                   145,692         1,963

Total loans                    $ 1,444,182     $ 26,341       1.82 %    $ 1,283,766     $ 27,944       2.18 %    $ 160,416      $ (1,603 )       -36bps

Note 1: Performing loans purchased from TD Bank subject to a two year put back
option commencing on January 20, 2011, such that if any of these loans become 30 days past due or are adversely classified pursuant to bank regulatory guidelines, the Company has the option to put back the loans to TD Bank.

Note 2: Performing loans purchased from Hartford's then wholly owned bank, FTC,
subject to a one year put back option commencing on November 1, 2011, such that if any of these loans become 30 days past due or are adversely classified pursuant to bank regulatory guidelines, the Company has the option to put back the loans to Hartford.

Note 3: Total loans not covered by FDIC loss share agreements.

Note 4: Loans covered by FDIC loss share agreements. Eighty percent of any losses
in this portfolio will be reimbursed by the FDIC and recognized as FDIC Indemnification income and included in non-interest income within the Company's condensed consolidated statement of operations.

The general loan loss allowance (non-impaired loans) decreased by $1,211, or 35 bps to 2.61% of the non-impaired loan balance outstanding as of the end of the current period as compared to 2.96% at December 31, 2011. This is a result of changes in historical charge off rates, changes in environmental factors and changes in the loan portfolio mix. All of our significant credit metrics have been improving over the past three quarters, with the exception of a small increase in 30-89 day past due loans increasing from 0.61% to 0.87% during the current quarter. However, there was one large loan that was considered past due because it matured. This loan has subsequently been repaid. Also, two large loans which were


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past due 30 days are now current. Excluding these three loans, our 30-89 day past due loan ratio is approximately the same as the prior quarter. We expect the general loan loss allowance as a percentage of non-impaired loans, as presented above, to continue to decrease. However, we expect to establish a general loan loss allowance on the FTC purchased loans, once the put back option terminates in the fourth quarter of 2012, and on the TD purchased loans, once that put back option terminates in the first quarter of 2013. Currently, there is no general loan loss allowance associated with the performing loans purchased from TD Bank and for the FTC performing loans purchased from Hartford for the reasons described in notes 1 and 2 above.

The specific loan loss allowance (impaired loans) is the aggregate of the results of individual analyses prepared for each one of the impaired loans not covered by an FDIC loss sharing agreement on a loan by loan basis. We recorded partial charge offs in lieu of specific allowance for a number of the impaired loans. The Company's impaired loans have been written down by $5,533 to $44,811 ($43,862 when the $949 specific allowance is considered) from their legal unpaid principal balance outstanding of $50,344. As such, in the aggregate, our total impaired loans have been written down to approximately 87% of their legal unpaid principal balance.

Any losses in loans covered by FDIC loss share agreements, as described in note 3 above, are reimbursable from the FDIC to the extent of 80% of any losses. These loans are being accounted for pursuant to ASC Topic 310-30. 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.

The allowance is increased by the provision for loan losses, which is a charge to current period earnings and decreased by loan charge-offs net of recoveries of prior period loan charge-offs. Loans are charged against the allowance when . . .

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