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CSFL > SEC Filings for CSFL > Form 10-Q on 6-May-2014All Recent SEC Filings

Show all filings for CENTERSTATE BANKS, INC.

Form 10-Q for CENTERSTATE BANKS, INC.


6-May-2014

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,

or unless otherwise noted.)

COMPARISON OF BALANCE SHEETS AT MARCH 31, 2014 AND DECEMBER 31, 2013

Overview

Our total assets and liabilities increased between March 31, 2014 and year end 2013 primarily due to the acquisition of Gulfstream Bancshares, Inc. and its banking subsidiary, Gulfstream Business Bank (collectively "Gulfstream"). We issued approximately 5.2 million common shares and acquired the outstanding stock options pursuant to the Gulfstream acquisition which added approximately $56,769 to our shareholders' equity during the quarter. 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 $220,261 at March 31, 2014 (approximately 7.3% of total assets) as compared to $174,889 at December 31, 2013 (approximately 7.2% 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 enterprises and municipal tax exempt securities, were $617,143 at March 31, 2014 (approximately 20.5% of total assets) compared to $457,086 at December 31, 2013 (approximately 18.9% of total assets), an increase of $160,057 or 35.0%. 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 securities in our trading securities portfolio as of March 31, 2014. A list of the activity in this portfolio is summarized below.

                                         Three month         Three month
                                         period ended        period ended
                                         Mar 31, 2014        Mar 31, 2013
           Beginning balance            $           -       $        5,048
           Purchases                            28,809              61,878
           Proceeds from sales                 (28,836 )           (67,072 )
           Net realized gain on sales               27                 146

           Ending balance               $           -       $           -

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, 2014        Mar 31, 2013
           Beginning balance            $        1,010      $        2,709
           Acquired from Gulfstream                247                  -
           Loans originated                      4,610               4,842
           Proceeds from sales                  (4,926 )            (5,507 )
           Net realized gain on sales               76                  87

           Ending balance               $        1,017      $        2,131

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 three months ended March 31, 2014, were $1,764,647, or 70.7% of average earning assets, as compared to $1,420,227, or 70.4% of average earning assets, for the three month period ending March 31, 2013. Total loans at March 31, 2014 and December 31, 2013 were $1,815,634 and $1,474,179, respectively. This represents a loan to total asset ratio of 60.4% and 61.0% and a loan to deposit ratio of 71.0% and 71.7%, at March 31, 2014 and December 31, 2013, respectively.

At March 31, 2014, we have total Purchased Credit Impaired ("PCI") loans of $250,800 and non-PCI loans of $1,564,834. Approximately 88% of our PCI loans, or $219,733, are covered by FDIC loss sharing agreements related to the acquisitions of three failed financial institutions during the third quarter of 2010 and two during the first quarter of 2012. 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 our PCI loans are accounted for pursuant to ASC Topic 310-30.

Total PCI loans increased by $19,379 during the quarter, which included $30,068 of PCI loans acquired on January 17th in the Gulfstream acquisition. Excluding the Gulfstream acquisition, our PCI loans decreased $10,689, or approximately 18.5% on an annualized basis. Of the $250,800 PCI loans outstanding at March 31, 2014 and accounted for pursuant to ASC Topic 310-30, $219,733 are covered by FDIC loss sharing agreements and $31,067 are not. A summary of the current quarters change in PCI loans outstanding is presented in the table below.

          Balance at 12/31/13                                $ 231,421
          Acquisition of PCI loans from Gulfstream 1/17/14      30,068
          Net change in PCI loans during the quarter           (10,689 )

          Balance at 3/31/14                                 $ 250,800

Non-PCI loans increased $322,076 during the quarter, which included $329,515 acquired on January 17th through the Gulfstream acquisition. Excluding the Gulfstream acquisition the Company's non-PCI loans decreased $7,439 or approximately 2.4% on an annualized basis. A summary of the current quarter's change in non-PCI loans outstanding is presented in the table below.

       Balance at 12/31/13                                    $ 1,242,758
       Acquisition of non-PCI loans from Gulfstream 1/17/14       329,515
       Net change in non-PCI loans during the quarter              (7,439 )

       Balance at 3/31/14                                     $ 1,564,834

Total new loans originated during the quarter approximated $76.5 million, of which $58.6 million were funded. The weighted average interest rate on funded loans was approximately 4.54%. The graph below summarizes total loan production and funded loan production over the past nine quarters.

[[Image Removed: LOGO]]

Although the production was lower in the first quarter of 2014 compared to the fourth quarter of 2013, the pipeline is $140 million at March 31, 2014 compared to $114 million at December 31, 2013.


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.

Prior to allowance for loan losses, our total loans at March 31, 2014 is equal to $1,815,634. Of this amount, approximately 85% are collateralized by real estate, 12% are commercial non real estate loans and the remaining 3% are consumer and other non real estate loans. We have approximately $613,329 of single family residential loans which represents about 34% of our total loan portfolio. Our largest category of loans is commercial real estate which represents approximately 47% 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, 2014        Dec 31, 2013
Loans, excluding PCI loans
Real estate loans
Residential                                       $      495,450      $      458,331
Commercial                                               736,406             528,710
Land, development and construction                        60,726              62,503

Total real estate                                      1,292,582           1,049,544
Commercial                                               217,482             143,263
Consumer and other loans                                  54,205              49,547

Loans before unearned fees and deferred cost           1,564,269           1,242,354
Net unearned fees and costs                                  565                 404

Total non-PCI loans                                    1,564,834           1,242,758
Allowance for loan losses                                (18,913 )           (19,694 )

Non-PCI loans, net of allowance for loan losses        1,545,921           1,223,064

PCI loans (note 1)
Real estate loans
Residential                                              117,879             120,030
Commercial                                               112,558             100,012
Land, development and construction                        11,144               6,381

Total real estate                                        241,581             226,423
Commercial                                                 8,118               3,850
Consumer and other loans                                   1,101               1,148

Total PCI loans                                          250,800             231,421
Allowance for loan losses                                 (1,183 )              (760 )

PCI loans, net of allowance for loan losses              249,617             230,661

Total loans, net of allowance for loan losses     $    1,795,538      $    1,453,725

note 1: Purchased credit impaired loans accounted for pursuant to ASC Topic 310-30.


Included in our total PCI loans listed above, are loans covered by FDIC loss share agreements. The following table sets forth information concerning the loan portfolio by collateral types which are covered by FDIC loss sharing agreements and are included in total PCI loans above.

FDIC covered loans (note 1)                               Mar 31, 2014          Dec 31, 2013
Real estate loans
Residential                                              $      113,418        $      120,030
Commercial                                                       95,942               100,012
Land, development and construction                                6,824                 6,381

Total real estate                                               216,184               226,423
Commercial                                                        3,549                 3,850

Total FDIC covered loans                                        219,733               230,273
Allowance for loan losses                                        (1,183 )                (760 )

FDIC covered loans, net of allowance for loan losses     $      218,550        $      229,513

note 1: FDIC covered loans included in our total PCI loans in the previous table above.

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.

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 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 PCI loans have been marked to fair value at their respective 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 PCI loans and 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, or qualitative, 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 PCI 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, 2014 and December 31, 2013.

                                           Mar 31, 2014                              Dec 31, 2013                            increase (decrease)
                                   loan           ALLL                       loan           ALLL                     loan           ALLL
                                  balance       balance        %            balance       balance        %          balance        balance
Non impaired loans              $ 1,218,614     $ 16,994       1.39 %     $ 1,218,648     $ 17,883       1.47 %    $     (34 )    $    (889 )       -8 bps
Gulfstream loans (note 1)           319,665           -          -  %              -                       -  %      319,665             -
Impaired loans                       26,555        1,919       7.23 %          24,110        1,811       7.51 %        2,445            108        -28 bps

Non-PCI loans                     1,564,834       18,913       1.21 %       1,242,758       19,694       1.58 %      322,076           (781 )      -37 bps
PCI loans (note 2)                  250,800        1,183                      231,421          760                    19,379            423

Total loans                     $ 1,815,634     $ 20,096       1.11 %*    $ 1,474,179     $ 20,454       1.39 %    $ 341,455      $    (358 )      -28 bps

* The significant decrease in this ratio compared to the prior quarter end is primarily due to the addition of the Gulfstream loans.

note 1: Loans acquired pursuant to the Company's January 17, 2014 acquisition of Gulfstream Business Bank that are not PCI loans. These are performing loans recorded at estimated fair value at the acquisition date. The fair value adjustment at the acquisition date was approximately $7,680, or approximately 2.3% of the outstanding aggregate loan balances. This amount is accreted into interest income over the remaining lives of the related loans on a level yield basis. Because these loans were recorded at estimated fair value on January 17, 2014, no provision for loan loss was recorded related to these loans at March 31, 2014.


note 2: Included in the $250,800 PCI loans at March 31, 2014 are $219,733 of loans that are covered by FDIC loss sharing arrangements. Of the remaining PCI loan amount, $29,966 were acquired pursuant to the Company's January 17, 2014 acquisition of Gulfstream Business Bank and $1,101 are consumer loans acquired pursuant to FDIC assisted transactions of failed financial institutions that are not covered by FDIC loss sharing agreements.

The general loan loss allowance (non-impaired loans) decreased by a net amount of $889. This decrease was primarily due to the continued improvement in the local economy and real estate market, and the continued decline in the Company's two year charge-off history. The Company's other credit metrics, such as the levels of and trends in the Company's non-performing loans, past-due loans and impaired loans were also considered when adjusting its qualitative factors, which ultimately increased the current two year historical loss factor ratios.

The specific loan loss allowance (impaired loans) is the aggregate of the results of individual analyses prepared for each one of the impaired loans, excluding PCI loans. The Company 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 $1,454 to $26,555 ($24,636 when the $1,919 specific allowance is considered) from their legal unpaid principal balance outstanding of $28,009. In the aggregate, total impaired loans have been written down to approximately 88% of their legal unpaid principal balance, and non-performing impaired loans have been written down to approximately 78% 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, $30,689 at March 31, 2014) have been written down to approximately 82% of their legal unpaid principal balance.

Approximately $14,740 of the Company's impaired loans (56%) are accruing performing loans. This group of impaired loans is not included in the Company's non-performing loans or non-performing assets categories.

PCI loans, including those covered by FDIC loss sharing agreements, are accounted for pursuant to ASC Topic 310-30. PCI loan pools are evaluated for impairment each quarter. If a pool is impaired, an allowance for loan loss is recorded.

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, 2014. 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,
                                               excluding        Purchased
                                               purchased         credit
                                                credit          impaired
                                               impaired           loans          Total
 Three months ended March 31, 2014
 Balance at beginning of period               $    19,694      $       760      $ 20,454
 Loans charged-off                                 (1,160 )             -         (1,160 )
 Recoveries of loans previously charged-off           843               -            843

 Net charge-offs                                     (317 )             -           (317 )
 (Recovery) provision for loan loss                  (464 )            423           (41 )

 Balance at end of period                     $    18,913      $     1,183      $ 20,096

 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

Nonperforming loans and nonperforming assets

Non performing loans exclude PCI loans and 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 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, as defined above, as a percentage of total non-PCI loans, were 1.96% at March 31, 2014, compared to 2.18% at December 31, 2013.

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 $40,719 at March 31, 2014, compared to $33,636 at December 31, 2013. Non performing assets as a percentage of total assets were 1.35% at March 31, 2014, compared to 1.39% at December 31, 2013.

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

                                                               Mar 31,          Dec 31,
. . .
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