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CSFL > SEC Filings for CSFL > Form 10-Q on 6-May-2013All 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.


6-May-2013

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

                                           Mar 31, 2013                             Dec 31, 2012                           increase (decrease)
                                   loan           ALLL                      loan           ALLL                     loan           ALLL
                                  balance       balance        %           Balance       balance        %          balance       balance
Impaired loans                  $    40,104     $    990       2.47 %    $    48,179     $  1,022       2.12 %    $  (8,075 )    $    (32 )       35bps
Non impaired loans                1,096,911       21,641       1.97 %      1,091,389       23,011       2.11 %        5,522        (1,370 )      -14bps

Loans (note 1)                    1,137,015       22,631       1.99 %      1,139,568       24,033       2.11 %       (2,553 )      (1,402 )      -12bps
Covered loans (note 2)              277,971        2,623                     296,295        2,649                   (18,324 )         (26 )

Total loans                     $ 1,414,986     $ 25,254       1.78 %    $ 1,435,863     $ 26,682       1.86 %    $ (20,877 )    $ (1,428 )       -8bps

note 1: Total loans not covered by FDIC loss share agreements.

note 2: 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. Six loan pools with an aggregate carrying value of $29,701 are impaired at March 31, 2013, and have a specific allowance of $2,623. The aggregate carrying value of $29,701 represents approximately 76% of the underlying loan balances outstanding.

The general loan loss allowance (non-impaired loans) decreased by $1,370 due to the continued improvement in our credit metrics. Prior to the current quarter end, management evaluated the purchased loans from Federal Trust Bank as a separate segment because they were selected performing loans as of the November 1, 2011 purchase date and because management had the option to put back any loan that became 30 days past due or adversely classified for a one year period which expired on November 1, 2012. We evaluated this loan portfolio segment during the current quarter ended March 31, 2013 and concluded that these loans no longer needed to be analyzed as a separate loan portfolio segment when estimating the allowance for loan losses. The difference between evaluating these loans as a separate segment versus including them in our historical classifications was not material.

Prior to March 31, 2013 there was no general loan loss allowance associated with the performing loans purchased from TD Bank because they were selected performing loans as of the purchase date and because management had the option to put back any loan that became 30 days past due or adversely classified for a two year period which expired in January 2013. Effective March 31, 2013, these loans are included in the Company's historical loan categories for general loan loss allowance analysis and calculation purposes.

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 $3,597 to $40,104 ($39,114


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when the $990 specific allowance is considered) from their legal unpaid principal balance outstanding of $43,701. In the aggregate, total impaired loans have been written down to approximately 90% of their legal unpaid principal balance, and non-performing impaired loans have been written down to approximately 71% of their legal unpaid principal balance. The Company's total non-performing loans (non-accrual loans plus loans past due greater than 90 days and still accruing, $24,772 at March 31, 2013) have been written down to approximately 78% of their legal unpaid principal balance.

Any losses in loans covered by FDIC loss share agreements, as described in note 2 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, management 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 management believes collection of the principal is unlikely. We believe our allowance for loan losses was adequate at March 31, 2013. However, we recognize that many factors can adversely impact various segments of the Company's market and customers, and therefore there is no assurance as to the amount of losses or probable losses which may develop in the future. The tables below summarize the changes in allowance for loan losses during the periods presented.

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

Nonperforming loans and nonperforming assets

Non performing loans, excluding loans covered by FDIC loss share agreements, are defined as non accrual loans plus loans past due 90 days or more and still accruing interest. Generally we place loans on non accrual status when they are past due 90 days and management believes the borrower's financial condition, after giving consideration to economic conditions and collection efforts, is such that


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collection of interest is doubtful. When we place a loan on non accrual status, interest accruals cease and uncollected interest is reversed and charged against current income. Interest received on such loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. Non performing loans, excluding loans covered by FDIC loss share agreements, as a percentage of total loans, excluding loans covered by FDIC loss share agreements, were 2.18% at March 31, 2013, compared to 2.26% at December 31, 2012.

Non performing assets, excluding assets covered by FDIC loss share agreements, (which we define as non performing loans, as defined above, plus (a) OREO (i.e., real estate acquired through foreclosure, in substance foreclosure, or deed in lieu of foreclosure); and (b) other repossessed assets that are not real estate), were $31,338 at March 31, 2013, compared to $33,386 at December 31, 2012. Non performing assets as a percentage of total assets were 1.31% at March 31, 2013, compared to 1.41% at December 31, 2012.

The following table sets forth information regarding the components of nonperforming assets at the dates indicated.

                                                               Mar 31,          Dec 31,
                                                                 2013             2012
Non-accrual loans (note 1)                                     $ 24,456         $ 25,448
Past due loans 90 days or more and still accruing
interest (note 1)                                                   316              293

Total non-performing loans (NPLs) (note 1)                       24,772           25,741

Other real estate owned (OREO) (note 1)                           6,186            6,875
Repossessed assets other than real estate (note 1)                  380              770

Total non-performing assets (NPAs) (note 1)                    $ 31,338         $ 33,386


Total NPLs as a percentage of total loans (note 1)                 2.18 %           2.26 %
Total NPAs as a percentage of total assets (note 1)                1.31 %           1.41 %
Loans past due between 30 and 89 days and accruing
interest as a percentage of total loans (note 1)                   1.06 %           0.65 %
Allowance for loan losses, excluding FDIC covered loans        $ 22,631         $ 24,033
Allowance for loan losses as a percentage of NPLs (note
1)                                                                   91 %             93 %

. . .

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