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STBZ > SEC Filings for STBZ > Form 10-Q on 9-Nov-2012All Recent SEC Filings

Show all filings for STATE BANK FINANCIAL CORP

Form 10-Q for STATE BANK FINANCIAL CORP


9-Nov-2012

Quarterly Report


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

Introduction

The following discussion describes our results of operations for the three and nine months ended September 30, 2012 as compared to the three and nine months ended September 30, 2011 and also analyzes our financial condition as of September 30, 2012 as compared to December 31, 2011. This discussion should be read in conjunction with our consolidated financial statements and accompanying footnotes appearing in this report and in conjunction with the financial statements and related notes and disclosures in our 2011 Annual Report on Form 10-K.

Unless the context indicates otherwise, all references to the "Company," "we," "us" and "our" refer to State Bank Financial Corporation and our wholly-owned subsidiary, State Bank and Trust Company, except that if the discussions relate to a period before July 23, 2009, these terms refer solely to State Bank and Trust Company. All references to the "Bank" refer to State Bank and Trust Company.

Overview

On July 23, 2010, the Company became the bank holding company for the Bank under a plan of reorganization and share exchange that was approved by the boards of directors of the Company and the Bank and adopted by the shareholders of the Bank at its annual meeting held on March 11, 2010. The Bank is a Georgia state-chartered bank that opened in October 2005 in Pinehurst, Georgia. From October 2005 until July 23, 2009, the Bank operated as a small community bank with two branch offices located in Dooly County, Georgia with total assets of approximately $33.6 million, total loans receivable of approximately $22.5 million, total deposits of approximately $26.1 million and total shareholders' equity of approximately $5.7 million, all at December 31, 2008.

On July 24, 2009, the Bank raised approximately $292.1 million in gross proceeds (before expenses) from investors in a private offering of its common stock. In connection with the private offering, the FDIC and the Georgia Department of Banking and Finance approved the Interagency Notice of Change in Control application filed by our management team, which took control of the Bank on July 24, 2009. Since that date and through the date of this report, the Bank has acquired approximately $3.9 billion in total assets and assumed approximately $3.6 billion in deposits from the FDIC, as receiver, in twelve different failed bank transactions, including:

•the six bank subsidiaries of Security Bank Corporation, Macon, Georgia on July 24, 2009;
•The Buckhead Community Bank, Atlanta, Georgia on December 4, 2009;
•First Security National Bank, Norcross, Georgia on December 4, 2009;
•NorthWest Bank & Trust, Acworth, Georgia on July 30, 2010;
•United Americas Bank, Atlanta, Georgia on December 17, 2010;
•Piedmont Community Bank, Gray, Georgia on October 14, 2011; and
•Community Capital Bank, Jonesboro, Georgia on October 21, 2011.

Concurrently with each of our acquisitions, we entered into loss share agreements with the FDIC that cover certain of the acquired assets, including 100% of the acquired loans (except consumer loans with respect to the NorthWest Bank & Trust, United Americas Bank, Piedmont Community Bank and Community Capital Bank acquisitions) and other real estate owned. Where applicable, we refer to loans subject to loss share agreements with the FDIC as "covered loans" and loans that are not subject to loss share agreements with the FDIC as "noncovered loans."

As a result of our failed bank acquisitions, the Bank has been transformed from a small community bank in Pinehurst, Georgia to a much larger commercial bank now operating 22 full service branches throughout middle Georgia and metropolitan Atlanta. We offer a variety of community banking services to individuals and businesses within our markets. Our product lines include loans to small and medium-sized businesses, residential and commercial construction and development loans, commercial real estate loans, farmland and agricultural production loans, residential mortgage loans, home equity loans, consumer loans and a variety of commercial and consumer demand, savings and time deposit products. We also offer online banking and bill payment services, online cash management, safe deposit box rentals, debit card and ATM card services and the availability of a network of ATMs for our customers.


Table of Contents

Financial Summary

The following table provides unaudited selected financial data for the periods
presented.  This data should be read in conjunction with the consolidated
financial statements and the notes thereto and the information contained in this
Item 2.

                                                             2012                                       2011                   Nine Months Ended September 30
(dollars in thousands,                                                          First          Fourth           Third
except per share amounts)             Third Quarter      Second Quarter        Quarter         Quarter         Quarter             2012                 2011

Selected Results of Operations:
Interest income                      $       36,434     $        48,940     $    38,329     $    45,048     $    50,074     $        123,703       $    121,953
Interest expense                              2,235               2,566           2,852           3,595           4,603                7,653             18,178
Net interest income                          34,199              46,374          35,477          41,453          45,471              116,050            103,775
Provision for loan losses                     6,491               5,027             252          19,636           3,875               11,770              6,880
Noninterest income                           (3,254 )            (1,243 )        (3,778 )        18,783           6,689               (8,275 )           22,588
Noninterest expense                          19,835              22,426          23,213          27,227          21,789               65,474             66,322
Income before income taxes                    4,619              17,678           8,234          13,373          26,496               30,531             53,161
Income taxes                                  1,261               6,647           3,096           4,284           9,392               11,004             19,244
Net income                           $        3,358     $        11,031     $     5,138     $     9,089     $    17,104     $         19,527       $     33,917

Selected Average Balances:
Total assets                         $    2,705,134     $     2,691,432     $ 2,660,418     $ 2,857,643     $ 2,711,296     $      2,696,316       $  2,720,363
Investment securities                       292,695             305,147         343,860         376,655         365,249              313,713            387,533
Loans                                     1,526,869           1,547,701       1,529,416       1,527,972       1,370,488            1,534,610          1,335,344
Interest-earning assets                   2,153,446           2,111,026       2,032,225       2,166,480       2,124,750            2,099,300          2,060,815
Total deposits                            2,182,834           2,190,364       2,203,564       2,404,501       2,298,343            2,202,150          2,307,390
Interest-bearing liabilities              1,803,514           1,865,185       1,908,961       2,109,292       2,044,172            1,858,834          2,069,066
Shareholders' equity                        430,279             420,321         407,101         396,496         379,177              419,318            371,667

Per Common Share Data:
Basic earnings                       $          .11     $           .35     $       .16     $       .29     $       .54     $            .62       $       1.07
Diluted earnings                                .10                 .34             .16             .28             .53                  .60               1.04
Tangible book value                  $        13.18     $         12.99     $     12.62     $     12.26     $     12.00     $          13.18       $      12.00
Weighted average shares outstanding:
Basic                                        31,654              31,614          31,612          31,612          31,612               31,627             31,611
Diluted                                      32,809              32,777          32,795          32,586          32,413               32,793             32,619


Table of Contents

                                                                                             Nine Months Ended
                                           2012                            2011                September 30
(dollars in thousands,                        Second      First      Fourth     Third
except per share amounts)  Third Quarter     Quarter     Quarter    Quarter    Quarter       2012          2011

Performance Ratios:
Return on average assets          .50 %       1.65 %        .78 %     1.26 %     2.50 %      .97 %         1.67 %
Return on average equity         3.14 %      10.56 %       5.08 %     9.09 %    17.90 %     6.22 %        12.20 %
Net interest margin(1)(2)        6.33 %       8.85 %       7.03 %     7.70 %     8.50 %     7.40 %         6.74 %
Efficiency ratio(3)             64.10 %      49.63 %      73.10 %    45.15 %    41.73 %    60.75 %        52.49 %

Capital Ratios:
Average equity to average
assets                          15.91 %      15.62 %      15.30 %    13.87 %    13.99 %    15.55 %        13.66 %
Leverage ratio                  15.44 %      15.24 %      15.06 %    13.76 %    14.16 %    15.44 %        14.16 %
Tier 1 risk-based capital
ratio                           29.95 %      31.45 %      32.92 %    33.84 %    33.78 %    29.95 %        33.62 %
Total risk-based capital
ratio                           31.23 %      32.77 %      34.22 %    35.15 %    35.03 %    31.23 %        34.54 %

(1) Net interest income divided by average interest-earning assets.

(2) Calculated on a fully tax-equivalent basis.

(3) Noninterest expenses divided by net interest income and noninterest income.


Table of Contents

Critical Accounting Policies

There have been no changes to the Company's critical accounting policies subsequent to year end 2011. The reader should also refer to the notes in the Company's Annual Report on Form 10-K for the year ended December 31, 2011.

Balance Sheet Review

General

At September 30, 2012, we had total assets of approximately $2.6 billion, consisting principally of $1.4 billion in net loans, $311.3 million in investment securities, $355.7 million in FDIC receivable, $58.5 million in other real estate owned and $352.9 million in cash and cash equivalents. Our liabilities at September 30, 2012 totaled $2.2 billion, consisting principally of $2.1 billion in deposits. At September 30, 2012, our shareholders' equity was $428.2 million.

At December 31, 2011, we had total assets of $2.8 billion, consisting principally of $1.4 billion in net loans, $349.9 million in investment securities, $529.4 million in FDIC receivable, $85.7 million in other real estate owned and $220.5 million in cash and cash equivalents. Our liabilities at December 31, 2011 totaled $2.4 billion, consisting principally of $2.3 billion in deposits. At December 31, 2011, our shareholders' equity was $397.3 million.

Investments

The composition of our investment securities portfolio reflects our investment strategy of maintaining an appropriate level of liquidity while providing a relatively stable source of revenue. The investment securities portfolio also provides a balance to interest rate risk, while providing a vehicle for the investment of available funds, furnishing liquidity and supplying securities to pledge as required collateral. At September 30, 2012, we had $311.3 million in our available-for-sale investment securities portfolio representing approximately 11.8% of our total assets, compared to $349.9 million, or 12.6% of total assets, at December 31, 2011. Investment securities were down $38.6 million, or 11.0%, compared to December 31, 2011. The decreased investment in securities reflects management's current loan growth projections, our inability to invest in liquid short-term securities with meaningful yields and our unwillingness to lengthen the duration of the portfolio during this extended low rate environment.

At September 30, 2012, $51.6 million, or 16.6%, of our available-for-sale securities were invested in U.S. government agencies, compared to $78.3 million, or 22.4%, as of December 31, 2011. At September 30, 2012, $103.7 million, or 33.3%, of our available-for-sale securities were invested in agency mortgage-backed securities, compared to $124.2 million, or 35.5%, as of December 31, 2011. At September 30, 2012, $143.4 million, or 46.1% of our available-for-sale securities were invested in nonagency mortgage-backed securities, compared to $135.9 million, or 38.8%, as of December 31, 2011. Early in 2012, we reinvested the proceeds of maturing fixed rate mortgage-backed securities and U.S. government agencies into floating rate nonagency mortgage-backed securities. However, due to the limited supply and price appreciation of this asset class, we have been unable to increase our investment in nonagency mortgage-backed securities. Such nonagency mortgage-backed securities were purchased at significant market discounts compared to par value. This has allowed us to shorten the effective duration of the portfolio which helps position our balance sheet for a potential rising rate environment and it achieves a better mix of earning assets. Effective duration is a measure of price sensitivity of a bond portfolio to an immediate change in market interest rates, taking into consideration embedded options. The underlying collateral of our nonagency portfolio consists of mortgages originated prior to 2006 with the majority being 2004 and earlier. None of the collateral is subprime and we own the senior tranche of each bond.

Over the longer term, the size and composition of the investment portfolio will reflect balance sheet trends and our overall liquidity and interest rate risk management objectives. Accordingly, the size and composition of the investment portfolio could change meaningfully over time.


Table of Contents

Following is a summary of our available-for-sale investment portfolio for the periods presented.

                                                  September 30, 2012                  December 31, 2011
                                                                                 Amortized
(in thousands)                              Amortized Cost       Fair Value         Cost         Fair Value
U.S. Government securities                $         50,235     $     51,610     $   76,976     $     78,270
States and political subdivisions                   11,752           12,180         10,740           11,096
Residential mortgage-backed securities -
nonagency                                          135,028          143,401        145,768          135,943
Residential mortgage-backed securities -
agency                                              37,581           39,162         30,031           31,454
Collateralized mortgage obligations                 62,346           64,578         90,159           92,794
Corporate securities                                   392              392            372              372
Total                                     $        297,334     $    311,323     $  354,046     $    349,929

The following table shows contractual maturities and yields on our investments at September 30, 2012. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

                    U.S. Government              States and              Mortgage-backed
                      Securities           Political Subdivisions           Securities             Other Investments
(dollars in
thousands)         Amount       Yield         Amount         Yield       Amount       Yield         Amount         Yield
Maturity:
One year or less $  10,004       .39 %   $          847      1.53 %   $        -         - %   $       -              - %
After one year
through five
years               23,075      1.25 %            3,968       .66 %            -         - %         392          17.03 %
After five years
through 10 years     7,493      2.52 %              999      4.44 %       13,270      1.87 %           -              - %
After 10 years      11,038      1.56 %            6,366      6.92 %      233,871      3.33 %           -              - %
Total            $  51,610      1.32 %   $       12,180      4.22 %   $  247,141      3.25 %   $     392          17.03 %

Loans

Total loans outstanding at September 30, 2012 and December 31, 2011 were approximately $1.4 billion as of each date, net of any allowance for loan losses, unamortized loan origination fees and applicable discounts.

Loans secured by real estate mortgages are the principal component of our loan portfolio. Most of our real estate loans are secured by residential or commercial property. We do not generally originate traditional long-term residential mortgages for our portfolio, but we do originate and hold traditional second mortgage residential real estate loans and home equity lines of credit. We obtain a security interest in real estate whenever possible, in addition to any other available collateral, to increase the likelihood of the ultimate repayment of the loan.

As seen below, during the nine months ended September 30, 2012, our noncovered loans increased by $236.3 million, or 33.7%, and our covered loans decreased by $259.1 million, or 31.9%, from December 31, 2011. We have planned for and expect these trends to continue. The covered loans will decrease as they are collected or charged-off or the underlying collateral is foreclosed on and sold. Our covered loans may increase in the future if we acquire more banks from the FDIC with loss share agreements. Our noncovered loans will increase as we originate and purchase well-underwritten loans. Due to the current economic environment, covered loans may decrease faster than noncovered loans increase, thereby resulting in a net decrease in loans receivable.


Table of Contents

The following table summarizes the composition of our loan portfolio for the periods presented.

                                            September 30, 2012                                            December 31, 2011
                                                                              % of                                                       % of
                                              Covered                        Gross      Noncovered       Covered                        Gross
(dollars in thousands)  Noncovered Loans       Loans        Total Amount     Total         Loans          Loans        Total Amount     Total
Construction, land &
land development       $        249,739     $   98,546     $    348,285       23.4 %   $   162,382     $  190,110     $    352,492       23.3 %
Other commercial real
estate                          411,574        165,148          576,722       38.7 %       307,814        233,575          541,389       35.8 %
Total commercial real
estate                          661,313        263,694          925,007       62.1 %       470,196        423,685          893,881       59.1 %
Commercial &
industrial                       33,817         21,281           55,098        3.7 %        35,817         38,174           73,991        4.9 %
Owner-occupied real
estate                          163,327        100,151          263,478       17.7 %       139,128        143,523          282,651       18.7 %
Total commercial &
industrial                      197,144        121,432          318,576       21.4 %       174,945        181,697          356,642       23.6 %
Residential real
estate                           41,514        156,368          197,882       13.2 %        33,738        189,109          222,847       14.7 %
Consumer & other                 37,360         11,512           48,872        3.3 %        22,150         17,663           39,813        2.6 %
Total gross loans
receivable, net of
deferred fees                   937,331        553,006        1,490,337      100.0 %       701,029        812,154        1,513,183      100.0 %
Less - allowance for
loan losses                     (14,330 )      (46,411 )        (60,741 )                  (10,207 )      (59,277 )        (69,484 )
Total loans, net       $        923,001     $  506,595     $  1,429,596                $   690,822     $  752,877     $  1,443,699

FDIC Receivable for Loss Share Agreements and Clawback Liability

As of September 30, 2012, 37.1% of our outstanding principal balance of loans and 98.5% of our other real estate assets were covered under loss share agreements with the FDIC in which the FDIC has agreed to reimburse us for between 80% and 95% of all losses incurred in connection with those assets. We estimated the FDIC reimbursement that will result from losses incurred as we dispose of covered loans and other real estate assets, and we recorded the estimate as a receivable from the FDIC. The FDIC receivable for loss share agreements was $355.7 million as of September 30, 2012 and $529.4 million as of December 31, 2011. The decline in the amount of FDIC receivable is largely attributable to cash proceeds we received from the FDIC related to our realized losses on covered assets. The balance of the FDIC receivable is also reduced or increased as a result of changes in estimated cash flows to be received from the FDIC from transactions in the covered assets. When these transactions are recorded, we also record an offsetting amount in our consolidated statements of income.

Within 45 days of the end of each of the loss share agreements with the FDIC, with the exception of the six bank subsidiaries of Security Bank Corporation, we may be required to reimburse the FDIC in the event that losses on covered assets do not reach original expected losses, based on the initial discount received less cumulative servicing amounts for the covered assets acquired. As of September 30, 2012 we have recorded a $763,000 liability to the FDIC related to the NorthWest Bank & Trust acquisition, which is included in other liabilities in our consolidated statements of financial condition.


Table of Contents

Allowance for Loan Losses (ALL)

The ALL represents the amount that management believes is necessary to absorb probable losses inherent in the loan portfolio at the balance sheet date and involves a high degree of judgment and complexity. The ALL is critical to the portrayal and understanding of our financial condition, liquidity and results of operations. The determination and application of the ALL accounting policy involves judgments, estimates and uncertainties that are subject to change. Changes in these assumptions, estimates or the conditions surrounding them may have a material impact on our financial condition, liquidity and results of operations.

The ALL on our noncovered loan portfolio is determined based on factors such as changes in the nature and volume of the portfolio, overall portfolio quality, delinquency trends, adequacy of collateral, loan concentrations, specific problem loans and economic conditions that may affect the borrower's ability to pay. The ALL for noncovered loans consists of specific and general components. The specific component relates to loans that are individually classified as impaired. The general component covers nonimpaired loans and is based on historical loss experience adjusted for current economic factors. Historical losses are adjusted by a qualitative analysis that reflects several key economic indicators such as gross domestic product, unemployment and core inflation as well as asset quality trends, rate risk and unusual events or significant changes in personnel, policies or procedures. The qualitative analysis requires judgment by management and is subject to continuous validation.

The ALL on our covered loan portfolio is determined based on expected future cash flows. We record acquired loans at their acquisition date fair values, which are based on expected future cash flows and include an estimate for future loan losses. On the date of acquisition, management determines which covered loans are placed in homogeneous risk pools or reviewed specifically as part of the periodic cash flow re-estimation process. If a loan is placed in a pool, the overall performance of the pool will determine if any future ALL is required.

The covered loan ALL analysis represents management's estimate of the potential impairment of the acquired loan portfolio over time. Typically, decreased cash flows result in impairment, while increased cash flows result in a full or partial reversal of previously recorded impairment and potentially the calculation of a higher effective yield. If our actual losses exceed the estimated losses, we will record a provision for loan losses on covered loans as an expense on our consolidated statement of income. We also record an amount that will be recovered by us, under the related FDIC loss share agreements, as a reduction of the provision for loan losses on our consolidated statement of income.

At September 30, 2012, our total ALL for noncovered and covered loans was $60.7 million, a decrease of $8.7 million compared to December 31, 2011. The ALL at September 30, 2012 reflected net charge-offs of $48.8 million on noncovered and covered loans and total provisions for loan losses of $11.8 million for the nine months ended September 30, 2012, net of $28.3 million recorded through the FDIC loss-share receivable.

Our noncovered ALL increased $4.1 million to $14.3 million at September 30, 2012, compared to $10.2 million at December 31, 2011. The provision for loan losses charged to expense was $4.7 million for the nine months ended September 30, 2012 compared to $3.6 million for the same period in 2011. The increase in our noncovered ALL during 2012 is due to loan growth and management's further evaluation and refinement of loans specifically reviewed for losses. The noncovered ALL to total noncovered loans held for investment was 1.53% at September 30, 2012, compared to 1.46% at December 31, 2011.

Our covered ALL decreased $12.9 million to $46.4 million at September 30, 2012, compared to $59.3 million at December 31, 2011. During 2011, we established the covered ALL due to evidence of additional credit deterioration in our covered portfolio subsequent to initial fair valuation. During the nine months ended September 30, 2012, the review of performance of the loan pools as well as specifically reviewed loans resulted in an increase in the overall loss expectation by $35.3 million, which resulted in a net provision for loan losses of $7.1 million for the nine months ended September 30, 2012. The increase in the covered ALL was primarily due to deterioration in the underlying credit support for certain loan pools as well as specifically reviewed loans.

The overall covered loan portfolio continues to perform in excess of our initial . . .

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