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Table of Contents

 

 

U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

 

 

Form 10-Q

 

 

(Mark One)

x Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended March 31, 2011

 

¨ Transition report under Section 13 or 15(d) of the Exchange Act

For the transition period from              to             

Commission file number 000-32017

 

 

CENTERSTATE BANKS, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

Florida   59-3606741

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

42745 U.S. Highway 27

Davenport, Florida 33837

(Address of Principal Executive Offices)

(863) 419-7750

(Issuer’s Telephone Number, Including Area Code)

 

 

Check whether the issuer: (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days:    YES  x    NO  ¨

Check whether the registrant is a large accelerated filer, an accelerated filer, non-accelerated filer or a smaller reporting company.

 

Large accelerated filer   ¨    Accelerated filer   x
Non-accelerated filer   ¨    Smaller reporting company   ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    YES  ¨    NO  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):    YES  ¨    NO  x

State the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

 

Common stock, par value $.01 per share

 

30,035,292 shares

(class)   Outstanding at April 30, 2011

 

 

 


Table of Contents

CENTERSTATE BANKS, INC. AND SUBSIDIARIES

INDEX

 

      Page  

PART I. FINANCIAL INFORMATION

  

Item 1. Financial Statements

  

Condensed consolidated balance sheets at March 31, 2011 (unaudited) and December  31, 2010 (audited)

     2   

Condensed consolidated statements of earnings for the three months ended March  31, 2011 and 2010 (unaudited)

     3   

Condensed consolidated statements of changes in stockholders’ equity for the three months ended March 31, 2011 and 2010 (unaudited)

     5   

Condensed consolidated statements of cash flows for the three months ended March  31, 2011 and 2010 (unaudited)

     6   

Notes to condensed consolidated financial statements (unaudited)

     7   

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

     25   

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     44   

Item 4. Controls and Procedures

     44   

PART II. OTHER INFORMATION

  

Item 1. Legal Proceedings

     45   

Item 1A. Risk Factors

     45   

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

     45   

Item 3. Defaults Upon Senior Securities

     45   

Item 4. [Removed and Reserved]

     45   

Item 5. Other Information

     45   

Item 6. Exhibits

     45   

SIGNATURES

     46   

CERTIFICATIONS

     47   

 

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Table of Contents

CenterState Banks, Inc. and Subsidiaries

CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)

(in thousands of dollars)

 

ASSETS

   As of
March 31, 2011
    As of
December 31, 2010
 

Cash and due from banks

   $ 19,542      $ 23,251   

Federal funds sold and Federal Reserve Bank deposits

     146,275        154,264   
                

Cash and cash equivalents

     165,817        177,515   

Trading securities, at fair value

     2,192        2,225   

Investment securities available for sale, at fair value

     575,098        500,927   

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

     168        673   

Loans covered by FDIC loss share agreements

     189,708        198,285   

Loans, excluding those covered by FDIC loss share agreements

     1,039,311        930,670   

Less allowance for loan losses

     (28,245     (26,267
                

Net Loans

     1,200,774        1,102,688   

Bank premises and equipment, net

     86,652        84,982   

Accrued interest receivable

     6,764        6,570   

Federal Home Loan Bank and Federal Reserve Bank stock

     10,122        10,122   

Goodwill

     38,035        38,035   

Core deposit intangible

     4,582        3,921   

Bank owned life insurance

     27,678        27,440   

Other repossessed real estate owned covered by FDIC loss share agreements

     11,332        11,104   

Other repossessed real estate owned (“OREO”)

     10,222        12,239   

FDIC indemnification asset

     60,122        59,456   

Deferred income taxes, net

     8,263        8,439   

Prepaid expense and other assets

     17,690        16,588   
                

TOTAL ASSETS

   $ 2,225,511      $ 2,062,924   
                

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

Deposits:

    

Demand - non-interest bearing

   $ 378,395      $ 323,224   

Demand - interest bearing

     310,660        282,405   

Savings and money market accounts

     485,419        422,152   

Time deposits

     653,428        657,813   
                

Total deposits

     1,827,902        1,685,594   

Securities sold under agreement to repurchase

     15,522        13,789   

Federal funds purchased

     92,111        68,495   

Federal Home Loan Bank advances

     6,000        15,000   

Corporate debentures

     12,500        12,500   

Accrued interest payable

     1,104        1,148   

Settlement payments due FDIC

     6,247        6,258   

Accounts payables and accrued expenses

     11,138        7,891   
                

Total liabilities

     1,972,524        1,810,675   

Stockholders’ equity:

    

Preferred Stock, $.01 par value; 5,000,000 shares authorized, no shares issued and outstanding at March 31, 2011 and December 31, 2010

     —          —     

Common stock, $.01 par value: 100,000,000 shares authorized; 30,035,292 and 30,004,761 shares issued and outstanding at March 31, 2011 and December 31, 2010, respectively

     300        300   

Additional paid-in capital

     227,845        227,464   

Retained earnings

     21,434        21,569   

Accumulated other comprehensive income

     3,408        2,916   
                

Total stockholders’ equity

     252,987        252,249   
                

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

   $ 2,225,511      $ 2,062,924   
                

See notes to the accompanying condensed consolidated financial statements

 

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CenterState Banks, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (unaudited)

(in thousands of dollars, except per share data)

 

     Three months ended  
     Mar. 31, 2011      Mar. 31, 2010  

Interest income:

     

Loans

   $ 16,327       $ 13,235   

Investment securities available for sale:

     

Taxable

     3,569         4,429   

Tax-exempt

     347         362   

Federal funds sold and other

     134         135   
                 
     20,377         18,161   
                 

Interest expense:

     

Deposits

     3,209         4,047   

Securities sold under agreement to repurchase

     24         24   

Federal funds purchased

     19         35   

Federal Home Loan Bank advances

     48         108   

Corporate debentures

     103         101   
                 
     3,403         4,315   
                 

Net interest income

     16,974         13,846   

Provision for loan losses

     11,276         4,075   
                 

Net interest income after loan loss provision

     5,698         9,771   
                 

Other income:

     

Service charges on deposit accounts

     1,556         1,596   

Income from correspondent banking and bond sales division

     4,470         6,356   

Commissions from sale of mutual funds and annuities

     439         104   

Debit card and ATM fees

     656         402   

Loan related fees

     165         130   

BOLI income

     239         152   

Gain on sale of securities

     9         1,436   

Trading securities revenue

     161         84   

Bargain purchase gain

     11,129         —     

Adjustment to FDIC indemnification asset

     1,136         —     

FDIC indemnification asset accretion

     468         —     

Other non interest revenue and fees

     871         213   
                 

Total other income

     21,299         10,473   
                 

See notes to the accompanying condensed consolidated financial statements.

 

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CenterState Banks, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (unaudited)

(in thousands of dollars, except per share data)

(continued)

 

     Three months ended  
     Mar. 31, 2011     Mar. 31, 2010  

Other expenses:

    

Salaries, wages and employee benefits

     13,506        11,882   

Occupancy expense

     1,814        1,447   

Depreciation of premises and equipment

     999        755   

Supplies, stationary and printing

     312        215   

Marketing expenses

     728        555   

Data processing expense

     1,381        534   

Legal, auditing and other professional fees

     925        632   

Core deposit intangible (CDI) amortization

     190        104   

Postage and delivery

     231        110   

ATM and debit card related expenses

     316        286   

Bank regulatory expenses

     800        614   

Loss on sale of repossessed real estate (“OREO”)

     518        27   

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

     2,035        882   

Loss on repossessed assets other than real estate

     21        107   

Foreclosure related expenses

     987        418   

Other expenses

     2,279        1,157   
                

Total other expenses

     27,042        19,725   

Income (loss) before benefit for income taxes

     (45     519   

(Benefit) provision for income taxes

     (210     126   
                

Net income

   $ 165      $ 393   
                

Earnings per share:

    

Basic

   $ 0.01      $ 0.02   

Diluted

   $ 0.01      $ 0.02   

Common shares used in the calculation of earnings per share:

    

Basic

     30,020,035        25,776,820   

Diluted

     30,047,618        25,975,584   

See notes to the accompanying condensed consolidated financial statements.

 

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CenterState Banks, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

For the three months ended March 31, 2011 and 2010 (unaudited)

(in thousands of dollars)

 

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

Balances at January 1, 2010

     25,773,229       $ 258       $ 193,464       $ 28,623      $ 7,065      $ 229,410   

Comprehensive income:

               

Net income

              393          393   

Unrealized holding loss on available for sale securities, net of deferred income tax benefit of $139

                (223     (223
                     

Total comprehensive income

                  170   

Dividends paid - common ($0.01 per share)

              (258       (258

Stock options exercised, including tax benefit

     5,538            46             46   

Stock based compensation expense

           105             105   
                                                   

Balances at March 31, 2010

     25,778,767       $ 258       $ 193,615       $ 28,758      $ 6,842      $ 229,473   
                                                   

Balances at January 1, 2011

     30,004,761       $ 300       $ 227,464       $ 21,569      $ 2,916      $ 252,249   

Comprehensive income:

               

Net income

              165          165   

Unrealized holding gain on available for sale securities, net of deferred income tax of $297

                492        492   
                     

Total comprehensive income

                  657   

Dividends paid - common ($0.01 per share)

              (300       (300

Stock options exercised, including tax benefit

     14,903            95             95   

Stock grants issued

     15,628            171             171   

Stock based compensation expense

           115             115   
                                                   

Balances at March 31, 2011

     30,035,292       $ 300       $ 227,845       $ 21,434      $ 3,408      $ 252,987   
                                                   

 

Disclosure of reclassification amounts:

   Three month
period ended
Mar 31, 2011
    Three month
period ended
Mar 31, 2010
 

Unrealized holding gain (loss) arising during the period, net of income taxes

   $ 498      $ 669   

Less: reclassified adjustments for gain included in net income, net of income taxes, at March 31, 2011 and 2010 of $3 and $544, respectively

     (6     (892
                

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

   $ 492      $ (223
                

See notes to the accompanying condensed consolidated financial statements

 

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CenterState Banks, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

(in thousands of dollars)

 

     Three months ended Mar 31,  
     2011     2010  

Cash flows from operating activities:

    

Net income

   $ 165      $ 393   

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

    

Provision for loan losses

     11,276        4,075   

Depreciation of premises and equipment

     999        755   

Amortization of purchase accounting adjustments

     (3,707     (4

Net amortization/accretion of investment securities

     1,909        1,078   

Net deferred loan origination fees

     (8     (14

Gain on sale of securities available for sale

     (9     (1,436

Trading securities revenue

     (161     (84

Purchases of trading securities

     (64,549     (21,091

Proceeds from sale of trading securities

     64,743        20,022   

Repossessed real estate owned valuation write down

     2,035        882   

Loss on sale of repossessed real estate owned

     518        27   

Repossessed assets other than real estate valuation write down

     15        —     

Loss on sale of repossessed assets other than real estate

     6        107   

Gain on sale of loans held for sale

     (25     (12

Loans originated and held for sale

     (929     (1,357

Proceeds from sale of loans held for sale

     1,459        796   

Gain on disposal of and or sale of fixed assets

     (27     —     

Deferred income taxes

     (121     (787

Stock based compensation expense

     195        158   

Bank owned life insurance income

     (239     (152

Bargain purchase gain from TD acquisition

     (11,129     —     

Net cash from changes in:

    

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

     (819     (3,040

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

     3,141        2,439   
                

Net cash provided by operating activities

     4,738        2,755   
                

Cash flows from investing activities:

    

Purchases of investment securities available for sale

     (22,753     (118,846

Purchases of mortgage backed securities available for sale

     (135,786     (14,151

Purchases of FHLB and FRB stock

     —          (603

Proceeds from maturities of investment securities available for sale

     244        133   

Proceeds from called investment securities available for sale

     17,900        25,765   

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

     31,764        31,547   

Proceeds from sales of mortgage backed securities available for sale

     33,349        42,018   

Net decrease in loans

     8,704        7,969   

Purchases of premises and equipment, net

     (1,981     (2,191

Proceeds from sale of repossessed real estate

     3,799        623   

Proceeds from insurance claims related to repossessed real estate

     263        —     

Proceeds from sale of fixed assets

     70        —     

Net cash from bank acquisition

     4,349        —     
                

Net cash used in investing activities

     (60,078     (27,736
                

See notes to the accompanying condensed consolidated financial statements.

 

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CenterState Banks, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

(in thousands of dollars)

(continued)

 

     Three months ended Mar 31,  
     2011     2010  

Cash flows from financing activities:

    

Net increase in deposits

     27,498        35,998   

Net increase (decrease) in securities sold under agreement to repurchase

     1,733        (4,195

Net increase (decrease) increase in federal funds purchased

     23,616        (5,907

Net decrease in FHLB advances

     (9,000     (3,000

Stock options exercised, including tax benefit

     95        46   

Dividends paid

     (300     (258
                

Net cash provided by financing activities

     43,642        22,684   
                

Net decrease in cash and cash equivalents

     (11,698     (2,297

Cash and cash equivalents, beginning of period

     177,515        192,407   
                

Cash and cash equivalents, end of period

   $ 165,817      $ 190,110   
                

Transfer of loans to other real estate owned

   $ 4,826      $ 1,395   
                

Cash paid during the period for:

    

Interest

   $ 3,920      $ 4,534   
                

Income taxes

   $ 25      $ 206   
                

See notes to the accompanying condensed consolidated financial statements.

All dollar amounts presented herein are in thousands, except per share data.

 

NOTE 1: Nature of Operations and basis of presentation

Our consolidated financial statements include the accounts of CenterState Banks, Inc. (the “Parent Company,” “Company” or “CSFL”), and our wholly owned subsidiary banks, CenterState Bank of Florida, N.A. and Valrico State Bank, and our non bank subsidiary, R4ALL, Inc. Our subsidiary banks operate through 52 full service banking locations in 14 counties throughout Central Florida, providing traditional deposit and lending products and services to their commercial and retail customers. R4ALL, Inc. is a separate non bank subsidiary of CSFL. Its purpose is to purchase troubled loans from our two subsidiary banks and manage their eventual disposition.

In addition, we also operate a correspondent banking and bond sales division. The division is integrated with and part of our lead subsidiary bank located in Winter Haven, Florida, although the majority of our bond salesmen, traders and operational personnel are physically housed in leased facilities located in Birmingham, Alabama, Atlanta, Georgia and Winston Salem, North Carolina. The business lines of this division are primarily divided into three inter-related revenue generating activities. The first, and largest, revenue generator is commissions earned on fixed income security sales. The second category includes correspondent bank deposits (i.e. federal funds purchased) and correspondent bank checking account deposits. The third revenue generating category includes fees from safe-keeping activities, bond accounting services for correspondents, asset/liability consulting related activities, international wires, and other clearing and corporate checking account services. The customer base includes small to medium size financial institutions primarily located in Florida, Alabama, Georgia, North Carolina, South Carolina, Tennessee, Virginia and West Virginia.

 

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The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. These statements should be read in conjunction with the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2010. In our opinion, all adjustments, consisting primarily of normal recurring adjustments, necessary for a fair presentation of the results for the interim periods have been made. The results of operations of the three month period ended March 31, 2011 are not necessarily indicative of the results expected for the full year.

 

NOTE 2: Common stock outstanding and earnings per share data

Basic earnings per share is based on the weighted average number of common shares outstanding during the periods. Diluted earnings per share includes the weighted average number of common shares outstanding during the periods and the further dilution from stock options using the treasury method. There were 1,175,000 stock options that were anti dilutive at March 31, 2011 and 2010, respectively. The following is a reconciliation of the numerators and denominators of the basic and diluted earnings per share computations for the periods presented.

 

For the three months ended March 31,

   2011      2010  

Numerator for basic and diluted earnings per share:

     

Net income

   $ 165       $ 393   
                 

Net (loss) income available for common shareholders

   $ 165       $ 393   
                 

Denominator:

     

Denominator for basic earnings per share

     

- weighted-average shares

     30,020,035         25,776,820   

Effect of dilutive securities:

     

Employee stock options and stock grants

     27,583         198,764   

Denominator for diluted earnings per share

     
                 

- adjusted weighted-average shares

     30,047,618         25,975,584   
                 

Basic earnings per share

   $ 0.01       $ 0.02   

Diluted earnings per share

   $ 0.01       $ 0.02   

 

NOTE 3: Fair value

Generally accepted accounting principles establish a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

 

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Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing and asset or liability.

The fair values of securities available for sale are determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs) or matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs).

The fair values of trading securities are determined as follows: (1) for those securities that have traded prior to March 31, 2011 but have not settled (date of sale) until after such date, the sales price is used as the fair value; and, (2) for those securities which have not traded as of March 31, 2011, the fair value was determined by broker price indications of similar or same securities.

All of the mortgaged back securities (“MBSs”) listed below are FNMA, FHLMC, and GNMA MBSs. Assets and liabilities measured at fair value on a recurring basis are summarized below.

 

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

at March 31, 2011

           

Assets:

           

Trading securities

   $ 2,192         —         $ 2,192         —     

Available for sale securities

              —     

U.S. government sponsored entities and agencies

     115,929         —           115,929         —     

Mortgage backed securities

     423,194         —           423,194         —     

Municipal securities

     35,975         —           35,975         —     

at December 31, 2010

           

Assets:

           

Trading securities

   $ 2,225         —         $ 2,225         —     

Available for sale securities

           

U.S. government sponsored entities and agencies

     113,416         —           113,416         —     

Mortgage backed securities

     354,258         —           354,258         —     

Municipal securities

     33,253         —           33,253         —     

 

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Assets and liabilities measured at fair value on a non-recurring basis are summarized below.

 

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

at March 31, 2011

           

Assets:

           

Impaired loans

           

Residential real estate

   $ 1,973         —           —         $ 1,973   

Commercial real estate

     3,330         —           —           3,330   

Construction, land development and land

     5,290         —           —           5,290   

Commercial

     —           —           —           —     

Consumer

     —           —           —           —     

Other real estate owned

           

Residential real estate

   $ 1,600         —           —         $ 1,600   

Commercial real estate

     2,576         —           —           2,576   

Construction, land development and land

     2,900         —           —           2,900   

Commercial

     —           —           —           —     

Consumer

     —           —           —           —     

at December 31, 2010

           

Assets:

           

Impaired loans

           

Residential real estate

   $ 2,000         —           —         $ 2,000   

Commercial real estate

     4,931         —           —           4,931   

Construction, land development and land

     3,949         —           —           3,949   

Commercial

     —           —           —           —     

Consumer

     —           —           —           —     

Other real estate owned

           

Residential real estate

   $ 2,372         —           —         $ 2,372   

Commercial real estate

     6,851         —           —           6,851   

Construction, land development and land

     3,016         —           —           3,016   

Commercial

     —           —           —           —     

Consumer

     —           —           —           —     

Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a carrying amount of $15,085, with a valuation allowance of $4,492, at March 31, 2011, and a carrying amount of $14,074, with a valuation allowance of $3,194, at December 31, 2010. The Company recorded a provision for loan loss expense of $2,176 on these loans during the three month period ending March 31, 2011.

The fair value of impaired loans with specific allocations of the allowance for loan losses is generally based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach.

The fair value of our repossessed real estate (“other real estate owned” or “OREO”) is determined using Level 3 inputs which include current and prior appraisals and estimated costs to sell. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. The decline in fair value of other real estate owned was $2,035 during the three month period ending March 31, 2011. Changes in fair value were recorded directly as an adjustment to current earnings through non interest expense.

 

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Fair Value of Financial Instruments

The methods and assumptions used to estimate fair value are described as follows:

Carrying amount is the estimated fair value for cash and cash equivalents, interest bearing deposits, accrued interest receivable and payable, demand deposits, short-term debt, and variable rate loans or deposits that reprice frequently and fully. Security fair values are based on market prices or dealer quotes, and if no such information is available, on the rate and term of the security and information about the issuer. For fixed rate loans or deposits and for variable rate loans or deposits with infrequent repricing or repricing limits, fair value is based on discounted cash flows using current market rates applied to the estimated life and credit risk. Fair values for impaired loans are estimated using underlying collateral values. For the FDIC indemnification asset, fair value is based on discounted cash flows using current market rates applied to the estimated life. Fair value of debt is based on current rates for similar financing. It was not practicable to determine the fair value of Federal Home Loan Bank stock or Federal Reserve Bank stock due to restrictions placed on its transferability. The fair value of off-balance-sheet items is not considered material.

The following table presents the carry amounts and estimated fair values of the Company’s financial instruments:

 

     Mar 31, 2011      Dec 31, 2010  
     Carrying
Amount
     Fair
Value
     Carrying
Amount
     Fair
Value
 
           

Financial assets:

           

Cash and cash equivalents

   $ 165,817       $ 165,817       $ 177,515       $ 177,515   

Trading securities

     2,192         2,192         2,225         2,225   

Investment securities available for sale

     575,098         575,098         500,927         500,927   

FHLB and FRB stock

     10,122         n/a         10,122         n/a   

Loans held for sale

     168         168         673         673   

Loans, less allowance for loan losses of $28,245 and $26,267, at March 31, 2011 and December 31, 2010, respectively

     1,200,774         1,210,881         1,102,688         1,110,844   

FDIC indemnification asset

     60,122         60,122         59,098         59,098   

Accrued interest receivable

     6,764         6,764         6,570         6,570   

Financial liabilities:

           

Deposits- without stated maturities

   $ 1,174,474       $ 1,174,474       $ 1,027,781       $ 1,027,781   

Deposits- with stated maturities

     653,428         662,653         657,813         667,632   

Securities sold under agreement to repurchase

     15,522         15,522         13,789         13,789   

Federal funds purchased (correspondent bank deposits)

     92,111         92,111         68,495         68,495   

Federal Home Loan Bank advances and other borrowed funds

     6,000         6,072         15,000         15,113   

Corporate debentures

     12,500         6,101         12,500         6,075   

Accrued interest payable

     1,104         1,104         1,148         1,148   

 

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NOTE 4: Reportable segments

The Company’s reportable segments represent the distinct product lines the Company offers and are viewed separately for strategic planning purposes by management. The table below is a reconciliation of the reportable segment revenues, expenses, and profit to the Company’s consolidated total for the three month periods ending March 31, 2011 and 2010.

 

     Three month period ending March 31, 2011              
     Commercial
and retail
banking
    Correspondent
banking and
bond sales
division
    Corporate
overhead

and
administration
    Elimination
entries
    Total  

Interest income

   $ 19,695      $ 682          $ 20,377   

Interest expense

     (3,280     (20     (103       (3,403
                                        

Net interest income

     16,415        662        (103       16,974   

Provision for loan losses

     (11,276     —          —            (11,276

Non interest income

     16,315        4,984        —            21,299   

Non interest expense

     (21,284     (4,978     (780       (27,042
                                        

Net income before taxes

     170        668        (883       (45

Income tax provision (benefit)

     137        (251     324          210   
                                        

Net (loss) income

   $ 307      $ 417      ($ 559     $ 165   
                                        

Total assets

   $ 2,047,968      $ 174,431      $ 267,981      ($ 264,869   $ 2,225,511   
                                        

 

     Three month period ending March 31, 2010              
     Commercial
and retail
banking
    Correspondent
banking and
bond sales
Division
    Corporate
Overhead

And
Administration
    Elimination
entries
    Total  

Interest income

   $ 16,597      $ 1,564          $ 18,161   

Interest expense

     (4,176     (38     (101       (4,315
                                        

Net interest income

     12,421        1,526        (101       13,846   

Provision for loan losses

     (4,075     —          —            (4,075

Non interest income

     3,851        6,622        —            10,473   

Non interest expense

     (12,815     (6,164     (746       (19,725
                                        

Net income before taxes

     (618     1,984        (847       519   

Income tax (benefit)provision

     315        (764     323          (126
                                        

Net (loss) income

   ($ 303   $ 1,220      ($ 524     $ 393   
                                        

Total assets

   $ 1,572,126      $ 208,045      $ 244,523      ($ 248,040   $ 1,776,654   
                                        

Commercial and retail banking: The Company’s primary business is commercial and retail banking. Currently, the Company operates through two subsidiary banks and a non bank subsidiary, R4ALL, with 52 locations in fourteen counties throughout Central Florida providing traditional deposit and lending products and services to its commercial and retail customers.

Corresponding banking and bond sales division: Operating as a division of our largest subsidiary bank, its primary revenue generating activities are as follows: 1) the first, and largest, revenue generator is commissions earned on fixed income security sales; 2) the second category includes spread income earned on correspondent bank deposits (i.e. federal funds purchased) and service fees on correspondent bank checking accounts; and, 3) the third revenue generating category, includes fees from safe-keeping activities, bond accounting services for correspondents, asset/liability consulting related activities, international wires, and other clearing and corporate checking account services. The customer base includes small to medium size financial institutions primarily located in Florida, Alabama, Georgia, North Carolina, South Carolina, Tennessee, Virginia and West Virginia.

 

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Table of Contents

Corporate overhead and administration: Corporate overhead and administration is comprised primarily of compensation and benefits for certain members of management, interest on parent company debt, office occupancy and depreciation of parent company facilities, merger related costs and other expenses.

 

NOTE 5: Investment Securities Available for Sale

All of the mortgaged back securities listed below are FNMA, FHLMC, and GNMA MBSs. The fair value of available for sale securities and the related gross unrealized gains and losses recognized in accumulated other comprehensive income (loss) were as follows:

 

     March 31, 2011  
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair
Value
 

Obligations of U.S. government sponsored entities and agencies

   $ 115,993       $ 546       $ 610       $ 115,929   

Mortgage backed securities

     417,673         6,250         729         423,194   

Municipal securities

     35,968         433         426         35,975   
                                   

Total

   $ 569,634       $ 7,229       $ 1,765       $ 575,098   
                                   
     December 31, 2010  
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair Value  

Obligations of U.S. government sponsored entities and agencies

   $ 113,183       $ 732       $ 499       $ 113,416   

Mortgage backed securities

     348,990         6,563         1,295         354,258   

Municipal securities

     34,079         259         1,085         33,253   
                                   

Total

   $ 496,252       $ 7,554       $ 2,879       $ 500,927   
                                   

The cost of securities sold is determined using the specific identification method. Sales of available for sale securities were as follows:

 

For the three months ended:

   Mar 31,
2011
     Mar 31,
2010
 

Proceeds

   $ 33,349       $ 42,018   

Gross gains

     140         1,436   

Gross losses

     131         —     

The tax provision related to these net realized gains was $3 and $544, respectively.

The fair value of available for sale securities at March 31, 2011 by contractual maturity were as follows. Securities not due at a single maturity date, primarily mortgage-backed securities, are shown separately.

 

Investment securities available for sale    Fair
Value
     Amortized
Cost
 

Due in one year or less

   $ 10,796       $ 10,785   

Due after one year through five years

     20,967         20,854   

Due after five years through ten years

     59,302         59,239   

Due after ten years through thirty years

     60,839         61,083   

Mortgage backed securities

     423,194         417,673   
                 
   $ 575,098       $ 569,634   
                 

 

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Table of Contents

Securities pledged at March 31, 2011 and December 31, 2010 had a carrying amount (estimated fair value) of $173,549 and $157,087 respectively. These securities were pledged primarily to secure public deposits and repurchase agreements.

At March 31, 2011 and December 31, 2010, there were no holdings of securities of any one issuer, other than the U.S. Government sponsored entities and agencies, in an amount greater than 10% of stockholders’ equity.

The following tables show the Company’s investments’ gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at March 31, 2011 and December 31, 2010.

 

     March 31, 2011  
     Less than 12 months      12 months or more      Total  
     Fair Value      Unrealized
Losses
     Fair Value      Unrealized
Losses
     Fair Value      Unrealized
Losses
 

Obligations of U.S. government sponsored entities and agencies

   $ 33,733       $ 610       $ —         $ —         $ 33,733       $ 610   

Mortgage backed securities

     171,919         729         —           —           171,919         729   

Municipal securities

     11,588         287         1,312         139         12,900         426   
                                                     

Total temporarily impaired securities

   $ 217,240       $ 1,626       $ 1,312       $ 139       $ 218,552       $ 1,765   
                                                     
     December 31, 2010  
     Less than 12 months      12 months or more      Total  
     Fair Value      Unrealized
Losses
     Fair Value      Unrealized
Losses
     Fair Value      Unrealized
Losses
 

Obligations of U.S. government sponsored entities and agencies

   $ 14,501       $ 499       $ —         $ —         $ 14,501       $ 499   

Mortgage backed securities

     130,937         1,295         —           —           130,937         1,295   

Municipal securities

     19,135         880         1,246         205         20,381         1,085   
                                                     

Total temporarily impaired securities

   $ 164,573       $ 2,674       $ 1,246       $ 205       $ 165,819       $ 2,879   
                                                     

Mortgage-backed securities: At March 31, 2011, 100% of the mortgage-backed securities held by the Company were issued by U.S. government-sponsored entities and agencies, primarily Fannie Mae, Freddie Mac, and Ginnie Mae, institutions which the government has affirmed its commitment to support. Because the decline in fair value is attributable to changes in interest rates and illiquidity, and not credit quality, and because the Company does not have the intent to sell these mortgage-backed securities and it is likely that it will not be required to sell the securities before their anticipated recovery, the Company does not consider these securities to be other-than-temporarily impaired at March 31, 2011

Municipal securities: Unrealized losses on municipal securities have not been recognized into income because the issuers bonds are of high quality, and because management does not intend to sell these investments or more likely than not will not be required to sell these investments before their anticipated recovery. The fair value is expected to recover as the securities approach maturity.

 

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Table of Contents
NOTE 6: Loans

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

 

     Mar 31, 2011     Dec 31, 2010  

Loans not covered by FDIC loss share agreements (note 2)

    

Real estate loans

    

Residential

   $ 259,327      $ 255,571   

Commercial

     500,512        410,162   

Construction, development, land

     107,179        109,380   
                

Total real estate

     867,018        775,113   

Commercial

     116,424        100,906   

Consumer and other loans, at fair value (note 1)

     2,599        3,264   

Consumer and other

     53,990        52,115   
                

Loans before unearned fees and cost

     1,040,031        931,398   

Unearned fees/costs

     (720     (728
                

Total loans not covered by FDIC loss share agreements

     1,039,311        930,670   
                

Loans covered by FDIC loss share agreements

    

Real estate loans

    

Residential

     106,655        110,586   

Commercial

     65,975        68,286   

Construction, development, land

     12,217        13,653   
                

Total real estate

     184,847        192,525   

Commercial

     4,861        5,760   
                

Total loans covered by FDIC loss share agreements

     189,708        198,285   
                

Total loans

     1,229,019        1,128,955   

Allowance for loan losses

     (28,245     (26,267
                

Total loans, net of allowance for loan losses

   $ 1,200,774      $ 1,102,688   
                

 

Note 1: Consumer loans acquired pursuant to three FDIC assisted transactions of failed financial institutions during the third quarter of 2010. 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 $114,737 of loans that are subject to a two year put back option with TD Bank, N.A., so 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.

 

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Table of Contents

The table below sets forth the activity in the allowance for loan losses for the periods presented, in thousands of dollars.

 

     Three month
period ended
Mar 31, 2011
 

Allowance at beginning of period

   $ 26,267   

Charge-offs

  

Residential real estate loans

     (2,772

Commercial real estate loans

     (3,977

Construction, development and land loans

     (2,101

Non real estate commercial loans

     (257

Non real estate consumer and other loans

     (351
        

Total charge-offs

     (9,458

Recoveries

  

Residential real estate loans

     108   

Commercial real estate loans

     12   

Construction, development and land loans

     2   

Non real estate commercial loans

     11   

Non real estate consumer and other loans

     27   
        

Total recoveries

     160   

Net charge-offs

     (9,298

Provision for loan losses

  

Residential real estate loans

     2,416   

Commercial real estate loans

     5,528   

Construction, development and land loans

     3,275   

Non real estate commercial loans

     (275

Non real estate consumer and other loans

     332   
        

Total provision for loan losses

     11,276   

Allowance at end of period

   $ 28,245   
        

The following tables present the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of March 31, 2011 and December 31, 2010, excluding loans purchased from the FDIC with evidence of credit deterioration and covered by FDIC loss share agreements (in thousands of dollars). Accrued interest receivable is not included in the recorded investment because it is not material.

 

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Table of Contents
     Real Estate Loans                       

As of March 31, 2011

   Residential      Commercial      Constr.,
develop.,
land
     Comm. &
industrial
     Consumer
& other
     Total  

Allowance for loan losses:

                 

Ending allowance balance attributable to loans:

                 

Individually evaluated for impairment

   $ 679       $ 1,984       $ 1,829         —           —         $ 4,492   

Collectively evaluated for impairment

     6,777         8,166         6,240         1,661         909         23,753   

Acquired with deteriorated credit quality

     —           —           —           —           —           —     
                                                     

Total ending allowance balance

     7,456         10,150         8,069         1,661         909         28,245   
                                                     

Loans, excluding loans covered by FDIC loss share:

                 

Loans individually evaluated for impairment

     14,207         46,651         16,765         5,500         679         83,802   

Loans collectively evaluated for impairment (1)

     245,120         453,861         90,414         110,924         53,311         953,630   

Loans acquired with deteriorated credit quality

     —           —           —           —           2,599         2,599   
                                                     

Total ending loans balance

   $ 259,327       $ 500,512       $ 107,179       $ 116,424       $ 56,589       $ 1,040,031   
                                                     

 

(1) Includes $114,737 of loans purchased from TD Bank during the first quarter of 2011. The loans purchased are all performing loans with a two year put back option. This segment of the loan portfolio has no allocation of the allowance for loan loss.

 

     Real Estate Loans                       

As of December 31, 2010

   Residential      Commercial      Constr.,
develop.,
land
     Comm. &
industrial
     Consumer
& other
     Total  

Allowance for loan losses:

                 

Ending allowance balance attributable to loans:

                 

Individually evaluated for impairment

   $ 679       $ 1,981       $ 534         —           —         $ 3,194   

Collectively evaluated for impairment

     7,025         6,606         6,359         2,182         901         23,073   

Acquired with deteriorated credit quality

     —           —           —           —           —           —     
                                                     

Total ending allowance balance

   $ 7,704       $ 8,587       $ 6,893       $ 2,182       $ 901       $ 26,267   
                                                     

Loans, excluding loans covered by FDIC loss share:

                 

Loans individually evaluated for impairment

     14,856         49,427         16,298         5,712         684         86,977   

Loans collectively evaluated for impairment

     240,715         360,735         93,082         95,194         51,431         841,157   

Loans acquired with deteriorated credit quality

     —           —           —           —           4,343         4,343   
                                                     

Total ending loans balance

     255,571         410,162         109,380         100,906         56,458         932,477   
                                                     

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

 

     Mar 31,
2011
     Dec 31,
2010
 

Impaired loans with a specific valuation allowance

   $ 15,085       $ 72,903   

Impaired loans without a specific valuation allowance

     68,717         14,074   
                 

Total impaired loans

   $ 83,802       $ 86,977   

Amount of allowance for loan losses allocated to impaired loans

     4,492       $ 3,194   

Performing TDRs

   $ 8,659       $ 10,591   

Non performing TDRs, included in NPLs

     12,517         11,731   
                 

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

   $ 21,176       $ 22,322   

Impaired loans that are not TDRs

     62,626         64,655   
                 

Total impaired loans

   $ 83,802       $ 86,977   

The following tables present loans individually evaluated for impairment by class of loans as of March 31, 2011 and December 31, 2010. The recorded investment is less than the unpaid principal balance due to partial charge-offs.

 

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Table of Contents

As of March 31, 2011

   Unpaid
principal
balance
     Recorded
investment
     Allowance for
loan losses
allocated
 

With no related allowance recorded:

        

Residential real estate

   $ 12,918       $ 11,555       $ —     

Commercial real estate

     47,183         41,337         —     

Construction, development, land

     14,552         9,646         —     

Commercial

     5,624         5,500         —     

Consumer, other

     737         679         —     

With an allowance recorded:

        

Residential real estate

     2,652         2,652         679   

Commercial real estate

     5,817         5,314         1,984   

Construction, development, land

     8,154         7,119         1,829   

Commercial

     —           —           —     

Consumer, other

     —           —           —     
                          

Total

   $ 97,637       $ 83,802       $ 4,492   
                          

As of December 31, 2010

   Unpaid
principal
balance
     Recorded
investment
     Allowance for
loan losses
allocated
 

With no related allowance recorded:

        

Residential real estate

   $ 13,313       $ 12,177       $ —     

Commercial real estate

     46,616         42,515         —     

Construction, development, land

     15,539         11,815         —     

Commercial

     5,712         5,712         —     

Consumer, other

     684         684         —     

With an allowance recorded:

        

Residential real estate

     2,679         2,679         679   

Commercial real estate

     7,123         6,912         1,981   

Construction, development, land

     4,483         4,483         534   

Commercial

     —           —           —     

Consumer, other

     —           —           —     
                          

Total

   $ 96,149       $ 86,977       $ 3,194   
                          

 

As of March, 31, 2011

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

Real estate loans:

        

Residential

   $ 14,531       $ 27       $ —     

Commercial

     48,039         197         —     

Construction, development, land

     16,532         11         —     
                          

Total real estate loans

     79,102         235         —     

Commercial loans

     5,606         62         —     

Consumer and other loans

     681         0         —     
                          

Total

   $ 85,389       $ 297       $ —     
                          

 

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Table of Contents

As of March 31, 2010

      

Average impaired loans during the year

   $ 80,851   

Interest income recognized during impairment

     575   

Cash-basis interest income recognized

     551   

Nonperforming loans include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans.

 

Nonperforming loans were as follows:

      
     Mar 31, 2011      Dec 31, 2010  

Non accrual loans

   $ 71,631       $ 62,553   

Loans past due over 90 days and still accruing interest

     —           3,200   
                 

Total non performing loans

   $ 71,631       $ 65,753   
                 

The following table presents the recorded investment in nonaccrual loans and loans past due over 90 days still on accrual by class of loans as of March 31, 2011 and December 31, 2010, excluding loans acquired from the FDIC with evidence of credit deterioration:

 

As of March 31, 2011

   Nonaccrual      Loans past due
over 90 days
still accruing
 

Residential real estate

   $ 17,940       $ —     

Commercial real estate

     33,529         —     

Construction, development, land

     18,730         —     

Commercial

     808         —     

Consumer, other

     624         —     
                 

Total

   $ 71,631       $ —     
                 

As of December 31, 2010

   Nonaccrual      Loans past due
over 90 days
still accruing
 

Residential real estate

   $ 17,282       $ 1,820   

Commercial real estate

     28,364         869   

Construction, development, land

     15,546         366   

Commercial

     615         83   

Consumer, other

     746         62   
                 

Total

   $ 62,553       $ 3,200   
                 

The following table presents the aging of the recorded investment in past due loans as of March 31, 2011 and December 31, 2010, excluding loans acquired from the FDIC with evidence of credit deterioration:

 

     Accruing Loans         

As of March 31, 2010

   Total      30 - 59
days past
due
     60 - 89
days past
due
     Greater
than 90
days past
due
     Total
Past Due
     Loans Not
Past Due
     Nonaccrual
Loans
 

Residential Real Estate

   $ 259,327       $ 5,431       $ 164       $ —         $ 5,595       $ 235,792       $ 17,940   

Commercial Real Estate

     500,512         7,001         2,185         —           9,186         457,797         33,529   

Construction/Dev/Land

     107,179         1,741         214         —           1,955         86,494         18,730   

Commercial

     116,424         197         54         —           251         115,365         808   

Consumer

     53,660         259         13         —           272         53,094         624   
                                                              
   $ 1,037,432       $ 14,629       $ 2,630       $ —         $ 17,259       $ 948,542       $ 71,631   

 

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Table of Contents
     Accruing Loans         

As of December 31, 2010

   Total      30 - 59
days past
due
     60 - 89
days past
due
     Greater
than 90
days past
due
     Total
Past Due
     Loans Not
Past Due
     Nonaccrual
Loans
 

Residential Real Estate

   $ 255,571       $ 4,901       $ 800       $ 1,820       $ 7,521       $ 230,768       $ 17,282   

Commercial Real Estate

     410,162         4,093         1,945         869         6,907         374,891         28,364   

Construction/Dev/Land

     109,380         2,575         619         366         3,560         90,274         15,546   

Commercial

     100,906         1,293         627         83         2,003         98,288         615   

Consumer

     52,115         710         236         62         1,008         50,361         746   
                                                              
   $ 928,134       $ 13,572       $ 4,227       $ 3,200       $ 20,999       $ 844,582       $ 62,553   

Credit Quality Indicators:

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. This analysis includes loans with an outstanding balance greater than $500 and non-homogeneous loans, such as commercial and commercial real estate loans. This analysis is performed on at least an annual basis. The Company uses the following definitions for risk ratings:

Special Mention: Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.

Substandard: Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful: Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

 

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Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans. Loans listed as not rated are either less than $500 or are included in groups of homogeneous loans. As of March 31, 2011 and December 31, 2010, and based on the most recent analysis performed, the risk category of loans by class of loans, excluding loans with evidence of deterioration of credit quality purchased from the FDIC, is as follows:

 

     As of March 31, 2011  

Loan Category

   Pass      Special
Mention
     Substandard      Doubtful  

Residential Real Estate

   $ 241,349       $ 7,765       $ 29,897       $ —     

Commercial Real Estate

     522,870         25,892         57,381         —     

Construction/Dev/Land

     100,477         6,659         20,378         —     

Commercial

     108,197         2,816         9,148         —     

Consumer

     54,006         776         1,376         —     
                                   
   $ 1,026,899       $ 43,908       $ 118,180       $ —     

 

     As of December 31, 2010  

Loan Category

   Pass      Special
Mention
     Substandard      Doubtful  

Residential Real Estate

   $ 216,164       $ 8,555       $ 30,852       $ —     

Commercial Real Estate

     336,869         19,300         53,993         —     

Construction/Dev/Land

     77,811         8,001         23,568         —     

Commercial

     88,290         2,806         9,810         —     

Consumer

     49,586         838         1,691         —     
                                   
   $ 768,720       $ 39,500       $ 119,914       $ —     

The Company considers the performance of the loan portfolio and its impact on the allowance for loan losses. For residential and consumer loan classes, the Company also evaluates credit quality based on the aging status of the loan, which was previously presented, and by payment activity. The following table presents the recorded investment in residential and consumer loans, excluding loans with evidence of deterioration of credit quality purchased from the FDIC, based on payment activity as of March 31, 2011:

 

     Residential      Consumer  

Performing

   $ 241,387       $ 53,366   

Nonperforming

     17,940         624   
                 

Total

   $ 259,327       $ 53,990   
                 

Loans purchased from the FDIC:

Income recognized on loans we purchased from the FDIC is recognized pursuant to ASC Topic 310-30. A portion of the fair value discount has been ascribed as an accretable yield that is accreted into interest income over the estimated remaining life of the loans. The remaining non-accretable difference represents cash flows not expected to be collected. Accretable yield, or interest income expected to be collected is as follows:

 

Balance at December 31, 2010

   $ 39,051   

Accretion of interest income

     (3,248

Reclassification from non-accretable difference

     —     
        

Balance at March 31, 2011

   $ 35,803   
        

 

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The table below summarizes the total contractually required principal and interest cash payments, management’s estimate of expected total cash payments and carrying value of the loans as of March 31, 2011.

 

     Balance at
Mar 31, 2011
 

Contractually required principal and interest

   $ 322,149   

Non-accretable difference

     (94,039
        

Cash flows expected to be collected

     228,110   

Accretable yield

     (35,803
        

Carrying value of acquired loans

   $ 192,307   
        

 

NOTE 7: FDIC indemnification asset

The activity in the FDIC loss share indemnification asset which resulted from the July 16, 2010 acquisition of Olde Cypress Community Bank and the August 20, 2010 acquisitions of the Community National Bank of Bartow and Independent National Bank in Ocala loss share agreements is as follows:

 

     Three months
period ended
Mar 31, 2011
    Twelve months
period ended
Dec 31, 2010
 

Beginning of the year

   $ 59,456      $ —     

Effect of acquisitions

     —          58,309   

Discount accretion

     468        598   

Indemnification revenue

     1,136        549   

Proceeds from FDIC

     (938     —     

Impairment

     —          —     
                

End of the year

   $ 60,122      $ 59,456   
                

 

NOTE 8: Acquisition of certain assets and liabilities

On January 20, 2011 the Company completed its previously announced transaction as described in the Purchase and Assumption Agreement dated as of August 8, 2010 by and among CenterState, Carolina First Bank and, to the extent provided therein, The South Financial Group, Inc. and TD Bank, National Association (the “P&A Agreement). The reason for this transaction is as follows. The seller had recently entered into several acquisition transactions and pursuant to certain concentration of deposit regulations, was required to divest a certain amount of deposit liabilities in Putnam County, Florida. CenterState (purchaser) was in a position to assist them with this divesture, if the seller was willing to sell performing loans, selected by CenterState, and to sell them at a discount with a put back option.

Pursuant to the P&A Agreement, CenterState acquired deposits with an estimated fair value of approximately $115,283, two branch offices and assumed the leases on an additional two branch offices within Putnam County, Florida. CenterState did not pay a premium for the deposits and purchased the two owned branches for approximately $700. In addition, CenterState purchased performing loans with an estimated fair value of approximately $119,387 previously selected by CenterState and located within CenterState’s fourteen County market areas within Central Florida. CenterState purchased the performing loans for 90% of their face value amount, plus accrued and unpaid interest. During the two year period following the closing of this transaction and subject to the terms of the P&A Agreement, CenterState may put back to TD Bank N.A. (“TD”) any acquired loan that (1) becomes more than 30 days delinquent or (2) becomes classified as “nonaccrual,” “substandard,” “doubtful,” or “loss” in accordance with applicable regulatory standards for loss classification.

 

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Table of Contents

The loans acquired pursuant to this transaction are not being accounted for pursuant to ASC Topic 310-30. We arrived at this conclusion because none of these loans have specifically identifiable or implied credit deficiencies associated with them. We base this on the results of our due diligence team who reviewed and selected only qualified performing loans rejecting approximately 80% of the potential loan pool offered in terms of dollars. That is, our team looked at a total loan population of approximately $800 million in order to identify enough qualified loans to fill the $120 million target amount. In addition, the Company has the option during a two year period to put back any loan that becomes 30 days past due or becomes adversely classified, as discussed previously. This transaction has a different fact pattern than the three FDIC fail banks we purchased during the third quarter of 2010. The loans we purchased pursuant to the FDIC failed bank transactions are being accounted for pursuant to ASC Topic 310-30 because we acquired all the loans in those troubled loan portfolios. These loans had either specifically identifiable credit deficiencies factors or implied factors such that we believed there to be an element of elevated risk as to whether all contractual cash flows will eventually be received. In this case, the loans were not hand selected from fourteen counties within Central Florida, but acquired as an entire portfolio in a single county. This is a combined loan portfolio of three failed financial institutions, which implies potentially deficient, or at least questionable, credit underwriting.

The following table summarizes the fair values of the assets acquired and liabilities assumed at the date of acquisition:

 

Assets:

  

Cash

   $ 724   

Cash due from seller

     3,624   

Loans, net

     119,388   

Interest receivable

     357   

Premises and equipment

     731   

Put back option

     876   

CDI

     851   

Other assets

     3   
        

Total assets acquired

   $ 126,554   
        

Liabilities:

  

Deposits

   $ 115,283   

Interest payable

     131   

Other liabilities

     11   
        

Total assets assumed

   $ 115,425   
        

Net assets acquired

   $ 11,129   
        

Deferred tax impact

     4,188   
        

Net assets acquired, including deferred tax impact

   $ 6,941   
        

 

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Table of Contents
NOTE 9: Measurement period adjustments

On July 16, 2010 the Company acquired substantially all the assets and assumed substantially all the deposits of Olde Cypress Community Bank through a purchase and assumption agreement, including loss sharing with the Federal Deposit Insurance Corporation (“FDIC”). As previously disclosed, the fair values initially assigned to the assets acquired and liabilities assumed were preliminary and subject to refinement for up to one year after the closing date of the acquisition as new information relative to closing date fair values became available. Preliminary valuation and purchase price allocation adjustments are reflected in the table below.

 

     July 16, 2010
(as initially  reported)
     Preliminary
measurement
period
adjustments
    July 16, 2010
(as adjusted)
 

Cash due from banks and Federal Reserve Bank, net

   $ 18,643       $ —        $ 18,643   

Investment securities available for sale

     8,509           8,509   

Loans

     93,360         (991     92,369   

Other repossessed real estate owned (“OREO”)

     6,388           6,388   

FDIC indemnification asset

     26,637         358        26,995   

FHLB stock

     305           305   

Core deposit intangible

     714           714   

Other assets

     1,159           1,159   
                         

Total assets acquired

   $ 155,715       $ (633   $ 155,082   
                         

Deposits

   $ 152,264         $ 152,264   

Escrow accounts

     1,308           1,308   

Interest payable on deposits

     132           132   

other liabilities

     1           1   
                         

Total liabilities assumed

   $ 153,705       $ —        $ 153,705   
                         

Net assets acquired

   $ 2,010       $ (633   $ 1,377   

Deferred tax impact

   $ 775       $ (238   $ 537   

Net assets acquired, including deferred tax impact

   $ 1,235       $ (395   $ 840   

 

NOTE 10: Effect of new pronouncements

In April 2011, the FASB amended existing guidance for assisting a creditor in determining whether a restructuring is a troubled debt restructuring. The amendments clarify the guidance for a creditor’s evaluation of whether it has granted a concession and whether a debtor is experiencing financial difficulties. This guidance is effective for interim and annual reporting periods beginning after June 15, 2011, and should be applied retrospectively to the beginning of the annual period of adoption. For purposes of measuring impairment on newly identified troubled debt restructurings, the amendments should be applied prospectively for the first interim or annual period beginning on or after June 15, 2011. The Company has not determined the impact, if any, upon adoption of this standard.

 

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Table of Contents
ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

COMPARISON OF BALANCE SHEETS AT MARCH 31, 2011 AND DECEMBER 31, 2010

Overview

Our total assets increased approximately 7.9% during the three month period ending March 31, 2011 primarily due to the TD Bank transaction discussed in Note 8, as well as organic growth in deposits and in federal funds purchased related to our correspondent banking customers. 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 $146,275 at March 31, 2011 (approximately 6.6% of total assets) as compared to $154,264 at December 31, 2010 (approximately 7.5% 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 $575,098 at March 31, 2011 (approximately 26% of total assets) compared to $500,927 at December 31, 2010 (approximately 24% of total assets), an increase of $74,171 or 15%. 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. At March 31, 2011 our trading securities had a fair market value of $2,192, which were two municipal securities. A list of the activity in this portfolio is summarized below.

 

     Three month
period ended
Mar 31, 2011
    Three month
period ended
Mar 31, 2010
 

Beginning balance

   $ 2,225      $ —     

Purchases

     64,549        21,091   

Proceeds from sales

     (64,743     (20,022

Net realized gain on sales

     159        91   

Mark to market adjustment

     2        (7
                

Ending balance

   $ 2,192      $ 1,153   
                

 

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Table of Contents

Loans held for sale

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

 

     Three month
period ended
Mar 31, 2011
    Three month
period ended
Mar 31, 2010
 

Beginning balance

   $ 673      $ —     

Loans originated

     929        1,357   

Proceeds from sales

     (1,459     (796

Net realized gain on sales

     25        12   
                

Ending balance

   $ 168      $ 573   
                

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, 2011, were $1,212,512, or 64% of average earning assets, as compared to $951,009, or 59% of average earning assets, for the quarter ending March 31, 2010. Total loans at March 31, 2011 and December 31, 2010 were $1,229,019 and $1,130,034, respectively, an increase of $98,985, or 8.8%. This represents a loan to total asset ratio of 55% and 55% and a loan to deposit ratio of 67% and 67%, at March 31, 2011 and December 31, 2010, respectively.

The current weak economy in general and the struggling Florida real estate market in particular, have made it difficult to grow our loan portfolio. Although our loans increased by $98,985, or 8.8% as indicated above, this was primarily due to the TD Bank transaction described in Note 8. Excluding these purchased loans (outstanding balance of $114,737 at March 31, 2011), our loan portfolio decreased by $15,752, or 1.4% during the three month period ending March 31, 2011. Part of this decrease was due to charge-offs (approximately $9,298), and transfers out of loans into OREO and repossessed assets other than real estate (approximately $4,826 and $286, respectively). Excluding these components, loans deceased $1,342 which is a net amount comprised of new loan originations less maturities, pay-offs and normal amortization.

Approximately 15.4% of our loans, or $189,708, 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 acquired are accounted for pursuant to ASC Topic 310-30. Within the FDIC covered loan portfolio, ninety-seven percent (97%) is collateralized by real estate, of which single family loans represent the largest component at $106,655 or 56% of total covered real estate loans.

 

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Table of Contents

In addition to the loans covered by FDIC loss share agreements discussed above, approximately 9.3% of our total loans, or $114,737, are subject to a two year put back option with TD Bank, whereas if any of these loans become 30 days past due or are adversely classified pursuant to bank regulatory guidelines, we have the option to put back these loans to TD Bank subject to the terms of our agreement with TD Bank. We have no allowance for loan losses set aside for either the FDIC covered loans or the loans subject to the put back options discussed above. There is a total of approximately $924,574, or 75.3% of our total loans, that are not subject to either of these agreements of which we have set aside a total allowance for loan losses of $28,245 or 3.05%.

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 $1,229,019 at March 31, 2011. Of this amount approximately 86% are collateralized by real estate, 10% are commercial non real estate loans and the remaining 4% are consumer and other non real estate loans. We have approximately $365,982 of single family residential loans which represents about 30% of our total loan portfolio. As with all of our loans, these are originated in our geographical market area in central Florida. Our largest category of loans is commercial real estate which represents approximately 46% 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, 2011     Dec 31, 2010  

Loans not covered by FDIC loss share agreements (note 2)

    

Real estate loans

    

Residential

   $ 259,327      $ 255,571   

Commercial

     500,512        410,162   

Construction, development, land

     107,179        109,380   
                

Total real estate

     867,018        775,113   

Commercial

     116,424        100,906   

Consumer and other loans, at fair value (note 1)

     2,599        3,264   

Consumer and other

     53,990        52,115   
                

Loans before unearned fees and cost

     1,040,031        931,398   

Unearned fees/costs

     (720     (728
                

Total loans not covered by FDIC loss share agreements

     1,039,311        930,670   
                

Loans covered by FDIC loss share agreements

    

Real estate loans

    

Residential

     106,655        110,586   

Commercial

     65,975        68,286   

Construction, development, land

     12,217        13,653   
                

Total real estate

     184,847        192,525   

Commercial

     4,861        5,760   
                

Total loans covered by FDIC loss share agreements

     189,708        198,285   
                

Total loans

   $ 1,229,019      $ 1,128,955   
                

 

Note 1: Consumer loans acquired pursuant to three FDIC assisted transactions of failed financial institutions during the third quarter of 2010. 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.

 

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Note 2: Includes $114,737 of loans that are subject to a two year put back option with TD Bank, N.A., so 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.

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.

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 TD Bank transaction described in Note 8, 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 and due to the two year put back option in place with TD Bank as described in Note 8. We believe that our total loans are adequately recorded to absorb probable 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.

The allowance consists of two 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.

 

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The second component is a general allowance on all of the Company’s loans other than those identified as impaired. We group these loans into five general categories with similar characteristics, and then apply an adjusted loss factor to each group of loans to determine the total amount of this second component of our allowance for loan losses. The adjusted loss factor for each category of loans is a derivative of our historical loss factor for that category, adjusted for current internal and external environmental factors, as well as for certain loan grading factors.

In the table below we have shown the two components, as discussed above, of our allowance for loan losses at March 31, 2011 and December 31, 2010. The data in the table below excludes loans covered by FDIC loss share agreement.

 

     Mar 31, 2011     Dec 31, 2010     Increase
(decrease)
 

Impaired loans

   $ 83,802      $ 86,977      ($ 3,175

Component 1 (specific allowance)

     4,492        3,194        1,298   

Specific allowance as percentage of impaired loans

     5.36     3.67     169 bps   

Performing loans purchased from TD Bank and subject to put back option

     114,737        —          114,737   

Component 2 (general allowance)

     —          —          —     

General allowance as percentage of purchased loans

     —          —          —     

Total loans other than impaired loans

     840,772        843,693        (2,921

Component 2 (general allowance)

     23,753        23,073        680   

General allowance as percentage of non impaired loans

     2.83     2.73     10 bps   

Total loans, excluding loans covered by FDIC loss share agreements

     1,039,311        930,670        108,641   

Total allowance for loan losses

     28,245        26,267        1,978   

Allowance for loan losses as percentage of non covered loans

     2.72     2.82     (10 bps

Allowance for loan losses as percentage of non covered loans excluding loans purchased from TD Bank and subject to put back option

     3.05     2.82     23 bps   

As shown in the table above, our allowance for loan losses (“ALLL”) as a percentage of total loans not covered by FDIC loss share agreements outstanding was 2.72% (3.05% excluding loans purchased from TD Bank and subject to put back option) at March 31, 2011 compared to 2.82% at December 31, 2010. Our ALLL increased by a net amount of $1,978 during this three month period. Component 2 (general allowance) increased by $680 during the period. This increase is primarily due to changes in our historical charge-off rates and changes in our current environmental factors.

Component 1 (specific allowance) increased by $1,298. This Component is the result of a specific allowance analysis prepared for each of our impaired loans excluding loans covered by FDIC loss share agreements. Our specific allowance is the aggregate of the results of individual analysis prepared for each one of these impaired loans on a loan by loan basis. The increase in our specific allowance is the result of charge-offs taken during the period, as well as the change in mix and evaluation of impaired loans.

 

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The table below sets forth the activity in the allowance for loan losses for the periods presented, in thousands of dollars.

 

     Three month period
ended Mar 31,
 
     2011     2010  

Allowance at beginning of period

   $ 26,267      $ 23,289   

Charge-offs

    

Residential real estate loans

     (2,772     (767

Commercial real estate loans

     (3,977     (1,195

Construction, development and land loans

     (2,101     (832

Non real estate commercial loans

     (257     (361

Non real estate consumer and other loans

     (351     (155
                

Total charge-offs

     (9,458     (3,310

Recoveries

    

Residential real estate loans

     108        3   

Commercial real estate loans

     12        13   

Construction, development and land loans

     2        5   

Non real estate commercial loans

     11        —     

Non real estate consumer and other loans

     27        13   
                

Total recoveries

     160        34   

Net charge-offs

     (9,298     (3,276

Provision for loan losses

     11,276        4,075   
                

Allowance at end of period

   $ 28,245      $ 24,088   
                

Our charge-offs increased during the current quarter compared to the same quarter from the previous year as indicated in the table above. This is consistent with the continued degradation of real estate values in Florida and the poor economic environment in general.

We acquired three FDIC failed financial institutions during the third quarter of 2010, including loans covered by FDIC loss share agreements. All of the loans acquired are being accounted for pursuant to ASC Topic 310-30. We arrived at this conclusion as follows.

First, we segregated all acquired loans with specifically identified credit deficiency factor(s). The factors we used were all acquired loans that were non-accrual, 60 days or more past due, designated as Trouble Debt Restructured (“TDR”), graded “special mention” or “substandard,” had more than five 30 day past due notices or had any 60 day or 90 day past due notices during the loan term. For this disclosure purpose, we refer to these loans as Type A loans. As required by generally accepted accounting principles, we are accounting for these loans pursuant to ASC Topic 310-30.

Second, all remaining acquired loans, those without specifically identified credit deficiency factors, we refer to as Type B loans for disclosure purposes, were then grouped into pools with common risk characteristics. These loans were then evaluated to determine estimated fair values as of the acquisition date. Although no specific credit deficiencies were identifiable, we believe there is an element of risk as to whether all contractual cash flows will be eventually received. Factors that were considered included the poor economic environment both nationally and locally as well as the unfavorable real estate market particularly in Florida. In addition, these loans were acquired from three failed financial institutions, which implies potentially deficient, or at least questionable, credit underwriting. Based on management’s estimate of fair value, each of these pools was assigned a discount credit mark. We have applied ASC Topic 310-30 accounting treatment by analogy to Type B loans. The result is that all loans acquired from these three failed financial institutions will be accounted for under ASC Topic 310-30.

 

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The carrying amount of the loans we acquired from the FDIC, both Type A and Type B, as we defined in the two preceding paragraphs, are summarized as follows:

 

     Mar 31, 2011      Dec 31, 2010  

Real estate loans

     

Residential

   $ 106,655       $ 110,586   

Commercial

     65,975         68,286   

Construction, development, land

     12,217         13,653   
                 

Total real estate loans

     184,847         192,525   

Commercial

     4,861         5,760   
                 

Total loans covered by FDIC loss share agreements

     189,708         198,285   

Consumer

     2,599         3,264   
                 

Total loans purchased from the FDIC

   $ 192,307       $ 201,549   
                 

Income recognized on loans we purchased from the FDIC is recognized pursuant to ASC Topic 310-30. A portion of the fair value discount has been ascribed as an accretable yield that is accreted into interest income over the estimated remaining life of the loans. The remaining non-accretable difference represents cash flows not expected to be collected. Accretable yield, or interest income expected to be collected is as follows:

 

Balance at December 31, 2010

   $ 39,051   

Accretion of interest income

     (3,248

Reclassification from non-accretable difference

     —     
        

Balance at March 31, 2011

   $ 35,803   
        

The table below summarizes the total contractually required principal and interest cash payments, management’s estimate of expected total cash payments and carrying value of the loans as of the respective acquisition dates during the third quarter of 2010 and as of March 31, 2011.

 

     at
acquisition
    activity during the
three month periods ending
    Balance at  
     dates     Sep 30, 2010     Dec 31, 2010     Mar 31, 2011     Mar 31, 2011  

Contractually required principal and interest

   $ 357,946      $ (6,477   $ (16,830   $ (12,490   $ 322,149   

Non-accretable difference

     (94,039           (94,039
                                        

Cash flows expected to be collected

     263,907        (6,477     (16,830     (12,490     228,110   

Accretable yield

     (43,334     1,696        2,587        3,248        (35,803
                                        

Carry value of acquired loans

   $ 220,573      $ (4,781   $ (14,243   $ (9,242   $ 192,307   
                                        

 

 

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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 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 6.89% at March 31, 2011, compared to 7.07% at December 31, 2010.

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 $82,334 at March 31, 2011, compared to $78,524 at December 31, 2010. Non performing assets as a percentage of total assets were 3.70% at March 31, 2011, compared to 3.81% at December 31, 2010.

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

 

     Mar 31,
2011
    Dec 31,
2010
 

Non-accrual loans (note 1)

   $ 71,631      $ 62,553   

Past due loans 90 days or more and still accruing interest (note 1)

     —          3,200   
                

Total non-performing loans (NPLs) (note 1)

     71,631        65,753   

Other real estate owned (OREO) (note 1)

     10,222        12,239   

Repossessed assets other than real estate (note 1)

     481        532   
                

Total non-performing assets (NPAs) (note 1)

   $ 82,334      $ 78,524   
                

Total NPLs as a percentage of total loans (note 1)

     6.89     7.07

Total NPAs as a percentage of total assets (note 1)

     3.70     3.81

Loans past due between 30 and 89 days and accruing interest as a percentage of total loans (note 1)

     1.66     1.96

Allowance for loan losses

   $ 28,245      $ 26,267   

Allowance for loan losses as a percentage of NPLs (note 1)

     39     40

 

Note 1: Excludes loans, OREO and other repossessed assets covered by FDIC loss share agreements.

As shown in the table above, the largest component of non performing loans excluding loans covered by FDIC loss share agreements is non accrual loans. As of March 31, 2011 the Company had reported a total of 319 non accrual loans with an aggregate book value of $71,631, compared to December 31, 2010 when 268 non accrual loans with an aggregate book value of $62,553 were reported. All but one of the five categories increased over the three month period, with the largest increases occurring in commercial real estate (approximately $5,165 net increase) followed by land related loans (approximately $3,184).

 

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This amount is further delineated by collateral category and number of loans in the table below.

 

Collateral category

   Total amount
in thousands
of dollars
     Percentage
of total

non accrual
loans
    Number of
non accrual
loans in
category
 

Residential real estate loans

   $ 17,940         25     128   

Commercial real estate loans

     33,529         47     76   

Construction, development and land loans

     18,730         26     67   

Non real estate commercial loans

     808         1     21   

Non real estate consumer and other loans

     624         1     27   
                         

Total non accrual loans at March 31, 2010

   $ 71,631         100     319   
                         

There are no construction or development loans with national builders. The Company has historically done business with local builders and developers that have typically been long time customers. However, the Company believes that this category (i.e. construction, development and land) is the loan category where the most risk is present. On the positive side, the category only represents about 10% of the total loan portfolio excluding loans covered by FDIC loss share agreements. Evidencing the riskier nature of the category, it represents a disproportionate 26% of the Company’s total non accrual loans and approximately 22% of the Company’s total OREO, excluding OREO covered by FDIC loss share agreements.

As indicated above, non accrual construction, development, and land loans totaled $18,730 at March 31, 2011. Most of this relates to land, either developed or not developed, commercial and residential. About $710 is single family residential construction and $466 is commercial construction.

During the first three months of the current year, the Company charged off, net of recoveries, approximately $2,099 of its construction, development and land loans, about 23% of the total net charge offs. During the year ending December 31, 2010, the Company had total charge offs, net of recoveries, of $26,646. About 18% ($4,827) came from this same category.

The second largest component of non performing assets after non accrual loans is OREO, excluding OREO covered by FDIC loss share agreements. At March 31, 2011, total OREO was $21,554. Of this amount, $11,332 is covered by FDIC loss sharing agreements. Pursuant and subject to the terms of the loss sharing agreements, the FDIC is obligated to reimburse the Company for 80% of losses with respect to the covered OREO beginning with the first dollar of loss incurred. The Company will reimburse the FDIC for its share of recoveries with respect to the covered OREO. The loss sharing agreements applicable to single family residential mortgage loans provide for FDIC loss sharing and the Company reimbursement to the FDIC for recoveries for ten years. The loss sharing agreements applicable to commercial loans provides for FDIC loss sharing for five years and Company reimbursement to the FDIC for a total of eight years for recoveries.

 

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OREO not covered by FDIC loss share agreements is $10,222 at March 31, 2011. OREO is carried at the lower of cost or market less the estimated cost to sell. Further declines in real estate values can affect the market value of these assets. Any further decline in market value beyond its cost basis is recorded as a current expense in the Company’s Statement of Operations. OREO is further delineated in the table below.

 

(unaudited)

Description of repossessed real estate

   carrying amount
at Mar 31, 2011
 

29 single family homes

   $ 2,482   

6 mobile homes with land

     74   

48 residential building lots

     848   

18 commercial buildings

     5,431   

Land / various acreages

     1,387   
        

Total, excluding OREO covered by FDIC loss share agreements

   $ 10,222   

In this current depressed real estate environment that the Nation in general and Florida in particular has been experiencing, it has become more common to restructure or modify the terms of certain loans under certain conditions (i.e. troubled debt restructure or “TDRs”). In those circumstances it may be beneficial to restructure the terms of a loan and work with the borrower for the benefit of both parties, versus forcing the property into foreclosure and having to dispose of it in an unfavorable and depressed real estate market. When we have modified the terms of a loan, we usually either reduce the monthly payment and/or interest rate for generally about twelve months. We have not forgiven any material principal amounts on any loan modifications to date. We have approximately $21,176 of TDRs. Of this amount $8,659 are performing pursuant to their modified terms, and $12,517 are not performing and have been placed on non accrual status and included in our non performing loans (“NPLs”). Current accounting standards generally require TDRs to be included in our impaired loans, whether they are performing or not performing. Only non performing TDRs are included in our NPLs.

 

Troubled debt restructured loans (“TDRs”):    Mar 31,      Dec 31,  

(in thousands of dollars)

   2011      2010  

Performing TDRs

   $ 8,659       $ 10,591   

Non performing TDRs, included in NPLs above

     12,517         11,731   
                 

Total TDRs

   $ 21,176       $ 22,322   
                 

TDRs as of March 31, 2011 quantified by loan type classified separately as accrual (performing loans) and non-accrual (non performing loans) are presented in the table below.

 

TDRs

   Accruing      Non Accrual      Total  

Real estate loans:

        

Residential

   $ 5,521       $ 5,725       $ 11,246   

Commercial

     1,862         6,065         7,927   

Construction, development, land

     459         466         925   
                          

Total real estate loans

     7,842         12,256         20,098   

Commercial

     349         50         399   

Consumer and other

     468         211         679   
                          

Total TDRs

   $ 8,659       $ 12,517       $ 21,176   
                          

Our policy is to return non accrual TDR loans to accrual status when all the principal and interest amounts contractually due, pursuant to its modified terms, are brought current and future payments are reasonably assured. Our policy also considers the payment history of the borrower, but is not dependent upon a specific number of payments.

 

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Loans are modified to minimize loan losses when we believe the modification will improve the borrower’s financial condition and ability to repay the loan. We typically do not forgive principal. We generally either reduce interest rates or decrease monthly payments for a temporary period of time and those reductions of cash flows are capitalized into the loan balance. A summary of the types of concessions made are presented in the table below.

 

     Mar 31, 2011  

3 months interest only

   $ 270   

6 months interest only

     2,538   

7 months interest only

     50   

9 months interest only

     307   

12 months interest only

     10,256   

18 months interest only

     191   

payment reduction for 12 months

     4,425   

all other

     3,139   
        

Total TDRs

   $ 21,176   
        

It is still early in our experience with these types of activities, but approximately 41% of our TDRs are current pursuant to their modified terms, and about $12,517, or approximately 59% of our total TDRs are not performing pursuant to their modified terms. Long-term success with our performing TDRs is an unknown, and will depend to a great extent on the future of our economy and our local real estate markets. Thus far, there does not appear to be any significant difference in success rates with one type of concession versus another. Non performing TDRs average approximately nineteen months in age from their modification date through March 31, 2011. Performing TDRs average approximately fourteen months in age from their modification date through March 31, 2011.

Impaired loans are defined as loans that management has concluded will not repay as agreed. (Small balance homogeneous loans are not considered for impairment purposes.) Once management has determined a loan is impaired, we perform a specific reserve analysis to determine if it is probable that we will eventually collect all contractual cash flows. If management determines that a shortfall is probable, then a specific valuation allowance is placed against the loan. This loan is then placed on non accrual basis, even if the borrower is current with his/her contractual payments, and will remain on non accrual until payments collected reduce the loan balance such that it eliminates the specific valuation allowance or other economic conditions change. At March 31, 2011 we have identified a total of $83,802 impaired loans, excluding loans covered by FDIC loss share agreements. A specific valuation allowance of $4,492 has been attached to $15,085 of the total identified impaired loans.

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

 

     Mar 31,
2011
     Dec 31,
2010
 

Impaired loans with a specific valuation allowance

   $ 15,085       $ 72,903   

Impaired loans without a specific valuation allowance

     68,717         14,074   
                 

Total impaired loans

   $ 83,802       $ 86,977   

Amount of allowance for loan losses allocated to impaired loans

     4,492       $ 3,194   

Performing TDRs

   $ 8,659       $ 10,591   

Non performing TDRs, included in NPLs

     12,517         11,731   
                 

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

   $ 21,176       $ 22,322   

Impaired loans that are not TDRs

     62,626         64,655   
                 

Total impaired loans

   $ 83,802       $ 86,977   

We continually analyze our loan portfolio in an effort to recognize and resolve problem assets as quickly and efficiently as possible. As of March 31, 2011, we believe the allowance for loan losses was adequate. However, we recognize that many factors can adversely impact various segments of the market. Accordingly, there is no assurance that losses in excess of such allowance will not be incurred.

 

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Table of Contents

Bank premises and equipment

Bank premises and equipment was $86,652 at March 31, 2011 compared to $84,982 at December 31, 2010, an increase of $1,670 or 2%. This amount is the result of purchases and construction in process of $2,669 less $999 of depreciation expense. The $2,669 of purchases and construction cost can be further delineated as follows: approximately $887 for purchases of buildings, land and construction costs; approximately $378 in capitalization of certain software development costs related to our correspondent banking division; and, the remaining $1,404 is a combination of purchases of equipment, furniture and software, net of disposals.

Deposits

During the three month period ending March 31, 2011, time deposits decreased by $4,385 and non time deposits increased by $146,693. In these two sequential quarters, cost of deposits decreased in each deposit category, but the category affecting the overall decrease the most was time deposits. In addition to repricing maturing time deposits to current market rates, time deposits as a percentage of total deposits decreased from 39% to 36%. During the same time, core deposits (non time deposits) as a percentage of total deposits increased, both in terms of actual dollars and as a percentage of total deposits. A summary of our deposit mix over the previous five quarters is presented in the table below.

 

     Mar 31, 2011      % of
total
    Dec 31, 2010      % of
total
 

Demand - non-interest bearing

   $ 378,395         21   $ 323,224         19

Demand - interest bearing

     310,660         17     282,405         17

Savings deposits

     209,690         11     198,428         12

Money market accounts

     275,729         15     223,724         13

Time deposits

     653,428         36     657,813         39
                                  

Total deposits

   $ 1,827,902         100   $ 1,685,594         100

Securities sold under agreement to repurchase

Our subsidiary banks enter into borrowing arrangements with our retail business customers by agreements to repurchase (“securities sold under agreements to repurchase”) under which the banks pledge investment securities owned and under their control as collateral against the one-day borrowing arrangement. These short-term borrowings totaled $15,522 at March 31, 2011 compared to $13,789 at December 31, 2010.

Federal funds purchased

Federal funds purchased are overnight deposits from correspondent banks. Federal funds purchased acquired from other than our correspondent bank deposits are included with Federal Home Loan Bank advances and other borrowed funds as described below, if any. At March 31, 2011 we had $92,111 of correspondent bank deposits or federal funds purchased, compared to $68,495 at December 31, 2010.

 

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Table of Contents

Federal Home Loan Bank advances and other borrowed funds

From time to time, we borrow either through Federal Home Loan Bank advances or Federal Funds Purchased, other than correspondent bank deposits (i.e. federal funds purchased) listed above. At March 31, 2011 and December 31, 2010, advances from the Federal Home Loan Bank were as follows.

 

     Mar 31, 2011      Dec 31, 2010  

Matures January 7, 2011, interest rate is fixed at 3.63%

   $ —         $ 3,000   

Matures January 10, 2011, interest rate is fixed at 1.84%

     —           3,000   

Matures January 11, 2011, interest rate is fixed at 0.61%

     —           3,000   

Matures June 27, 2011, interest rate is fixed at 3.93%

     3,000         3,000   

Matures December 30, 2011, interest rate is fixed at 2.30%

     3,000         3,000   
                 

Total

   $ 6,000       $ 15,000   
                 

Corporate debentures

We formed CenterState Banks of Florida Statutory Trust I (the “Trust”) for the purpose of issuing trust preferred securities. On September 22, 2003, we issued a floating rate corporate debenture in the amount of $10,000. The Trust used the proceeds from the issuance of a trust preferred security to acquire the corporate debenture of the Company. The trust preferred security essentially mirrors the corporate debenture, carrying a cumulative preferred dividend at a variable rate equal to the interest rate on the corporate debenture (three month LIBOR plus 305 basis points). The corporate debenture and the trust preferred security each have 30-year lives. The trust preferred security and the corporate debenture are callable by the Company or the Trust, at their respective option, subject to prior approval by the Federal Reserve Board, if then required. The Company has treated the trust preferred security as Tier 1 capital up to the maximum amount allowed under the Federal Reserve guidelines for federal regulatory purposes.

In September 2004, Valrico Bancorp Inc. (“VBI”) formed Valrico Capital Statutory Trust (“Valrico Trust”) for the purpose of issuing trust preferred securities. On September 9, 2004, VBI issued a floating rate corporate debenture in the amount of $2,500. The Trust used the proceeds from the issuance of a trust preferred security to acquire the corporate debenture. On April 2, 2007, the Company acquired all the assets and assumed all the liabilities of VBI pursuant to the merger agreement, including VBI’s corporate debenture and related trust preferred security discussed above. The trust preferred security essentially mirrors the corporate debenture, carrying a cumulative preferred dividend at a variable rate equal to the interest rate on the corporate debenture (three month LIBOR plus 270 basis points). The corporate debenture and the trust preferred security each have 30-year lives. The trust preferred security and the corporate debenture are callable by the Company or the Valrico Trust, at their respective option, subject to prior approval by the Federal Reserve, if then required. The Company has treated the trust preferred security as Tier 1 capital up to the maximum amount allowed under the Federal Reserve guidelines for federal regulatory purposes.

 

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Stockholders’ equity

Stockholders’ equity at March 31, 2011, was $252,987, or 11.4% of total assets, compared to $252,249, or 12.2% of total assets at December 31, 2010. The increase in stockholders’ equity was due to the following items:

 

$252,249    Total stockholders’ equity at December 31, 2010
165    Net income during the period
(300)    Dividends paid on common shares, $0.01 per common share
492    Net increase in market value of securities available for sale, net of deferred taxes
95    Employee stock options exercised
286    Employee equity based compensation
    
$252,987    Total stockholders’ equity at March 31, 2011

The federal bank regulatory agencies have established risk-based capital requirements for banks. These guidelines are intended to provide an additional measure of a bank’s capital adequacy by assigning weighted levels of risk to asset categories. Banks are also required to systematically maintain capital against such “off- balance sheet” activities as loans sold with recourse, loan commitments, guarantees and standby letters of credit. These guidelines are intended to strengthen the quality of capital by increasing the emphasis on common equity and restricting the amount of loan loss reserves and other forms of equity such as preferred stock that may be included in capital. As of March 31, 2011, each of our subsidiary banks exceeded the minimum capital levels to be considered “well capitalized” under the terms of the guidelines.

Selected consolidated capital ratios at March 31, 2011 and December 31, 2010 are presented in the table below.

 

     Actual     Well capitalized     Excess  
     Amount      Ratio     Amount      Ratio     Amount  

March 31, 2011

            

Total capital (to risk weighted assets)

   $ 227,136         18.0   $ 126,269         > 10   $ 100,867   

Tier 1 capital (to risk weighted assets)

     211,199         16.7     75,761         > 6     135,438   

Tier 1 capital (to average assets)

     211,199         10.0     105,704         > 5     105,495   

December 31, 2010

            

Total capital (to risk weighted assets)

   $ 227,907         19.3   $ 118,230         > 10   $ 109,677   

Tier 1 capital (to risk weighted assets)

     212,986         18.0     70,938         > 6     142,048   

Tier 1 capital (to average assets)

     212,986         10.3     103,053         > 5     109,933   

 

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COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTH PERIODS ENDED MARCH 31, 2011 AND 2010

Overview

We recognized net income of $165 or $0.01 per share basic and diluted for the three month period ended March 31, 2011, compared to net income of $393 or $0.02 per share basic and diluted for the same period in 2010.

Although the net income amounts were similar between these two quarters, there were significant differences in the components, including:

 

   

increase in net interest income due to the acquisition of three failed financial institutions from the FDIC during the third quarter of 2010 and from the purchase of loans and deposits from TD Bank, N.A. during January 2011; these acquisitions were also a primary contributing factor causing the increase in operating expenses;

 

   

significant increase in loan loss provision which is reflective of the deteriorating real estate market in Central Florida;

 

   

offsetting the increase in credit related expenses during the current quarter was a significant bargain purchase gain related to the acquisition and assumption of certain assets and liabilities from TD Bank, N.A. as discussed in Note 8; and

 

   

commission revenue from bond sales at our correspondent banking division was lower primarily due to the interest rate environment.

Each of the above referenced income and expense categories, along with other items are discussed and analyzed in greater detail below.

Net interest income/margin

Net interest income increased $3,128 or 23% to $16,974 during the three month period ended March 31, 2011 compared to $13,846 for the same period in 2010. The $3,128 increase was the result of a $2,216 increase in interest income and a $912 decrease in interest expense.

Interest earning assets averaged $1,896,577 during the three month period ended March 31, 2011 as compared to $1,608,823 for the same period in 2010, an increase of $287,754, or 18%. The yield on average interest earning assets decreased 22bps to 4.36% (22bps to 4.41% tax equivalent basis) during the three month period ended March 31, 2011, compared to 4.58% (4.63% tax equivalent basis) for the same period in 2010. The combined effects of the $287,754 increase in average interest earning assets and the 22bps (22bps tax equivalent basis) decrease in yield on average interest earning assets resulted in the $2,216 ($2,249 tax equivalent basis) increase in interest income between the two periods.

Interest bearing liabilities averaged $1,537,416 during the three month period ended March 31, 2011 as compared to $1,275,676 for the same period in 2010, an increase of $261,740, or 21%. The cost of average interest bearing liabilities decreased 47bps to 0.90% during the three month period ended March 31, 2011, compared to 1.37% for the same period in 2010. The combined effects of the $261,740 increase in average interest bearing liabilities and the 47bps decrease in cost of average interest bearing liabilities resulted in the $912 decrease in interest expense between the two periods.

 

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The table below summarizes the analysis of changes in interest income and interest expense for the three month periods ended March 31, 2011 and 2010 on a tax equivalent basis.

 

     Three months ended March 31,  
     2011     2010  
     Average
Balance
    Interest
Inc / Exp
     Average
Rate
    Average
Balance
    Interest
Inc / Exp
     Average
Rate
 

Loans (1) (2) (8)

   $ 1,212,512      $ 16,393         5.48   $ 951,009      $ 13,261         5.66

Securities- taxable

     506,699        3,569         2.86     463,128        4,429         3.88

Securities- tax exempt (8)

     33,902        509         6.09     35,833        531         6.01

Fed funds sold and other (3)

     143,464        134         0.38     158,853        135         0.34
                                                  

Total interest earning assets

     1,896,577        20,605         4.41     1,608,823        18,356         4.63

Allowance for loan losses

     (26,614          (23,731     

All other assets

     294,991             174,697        
                          

Total assets

   $ 2,164,954           $ 1,759,789        
                          

Interest bearing deposits (4)

     1,422,934        3,209         0.91   $ 1,077,922        4,047         1.52

Fed funds purchased

     77,311        19         0.10     140,595        35         0.10

Other borrowings (5)

     24,671        72         1.18     44,659        132         1.20

Corporate debenture

     12,500        103         3.34     12,500        101         3.28
                                                  

Total interest bearing liabilities

     1,537,416        3,403         0.90     1,275,676        4,315         1.37

Demand deposits

     354,036             242,490        

Other liabilities

     21,814             11,536        

Stockholders’ equity

     251,688             230,087        
                          

Total liabilities and stockholders’ equity

   $ 2,164,954           $ 1,759,789        
                          

Net interest spread (tax equivalent basis) (6)

          3.51          3.26
                          

Net interest income (tax equivalent basis)

     $ 17,202           $ 14,041      
                          

Net interest margin (tax equivalent basis) (7)

          3.68          3.54
                          

 

Note 1: Loan balances are net of deferred origination fees and costs.
Note 2: Interest income on average loans includes amortization of loan fee recognition of $64 and $76 for the three month periods ended March 31, 2011 and 2010.
Note 3: Includes federal funds sold, interest earned on deposits at the Federal Reserve Bank and earnings on Federal Reserve Bank stock and Federal Home Loan Bank stock.
Note 4: Includes interest bearing deposits only. Non-interest bearing checking accounts are included in the demand deposits listed above. Also, includes net amortization of fair market value adjustments related to various acquisitions of time deposits of ($473) and ($96) for the three month periods ended March 31, 2011 and 2010.
Note 5: Includes securities sold under agreements to repurchase and Federal Home Loan Bank advances.
Note 6: Represents the average rate earned on interest earning assets minus the average rate paid on interest bearing liabilities.
Note 7: Represents net interest income divided by total interest earning assets.
Note 8: Interest income and rates include the effects of a tax equivalent adjustment using applicable statutory tax rates to adjust tax exempt interest income on tax exempt investment securities and loans to a fully taxable basis.

Provision for loan losses

The provision for loan losses increased $7,201, or 177%, to $11,276 during the three month period ending March 31, 2011 compared to $4,075 for the comparable period in 2010. Our policy is to maintain the allowance for loan losses at a level sufficient to absorb probable incurred losses inherent in the loan portfolio. The allowance is increased by the provision for loan losses, which is a charge to current period earnings, and is decreased by charge-offs, net of recoveries on prior loan charge-offs. Therefore, the provision for loan losses (Income Statement effect) is a residual of management’s determination of allowance for loan losses (Balance Sheet approach). In determining the adequacy of the allowance for loan losses, we consider the conditions of individual borrowers, the historical loan loss experience, the general economic environment, the overall portfolio composition, and other information. As these factors change, the level of loan loss provision changes. See “Credit quality and allowance for loan losses” for additional information regarding the allowance for loan losses.

 

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Non-interest income

Non-interest income for the three months ended March 31, 2011 was $21,299 compared to $10,473 for the comparable period in 2010. This increase was the result of the following components listed in the table below.

 

Three month period ending:

   Mar 31,
2011
     Mar 31,
2010
     $
increase
(decrease)
    %
increase
(decrease)
 

Service charges on deposit accounts

   $ 1,556       $ 1,596       $ (40     (2.5 %) 

Income from correspondent banking and bond sales division

     4,470         6,356         (1,886     (29.7 %) 

Correspondent banking division – other fees

     339         135         204        151.1

Commissions from sale of mutual funds and annuities

     439         104         335        322.1

Debit card and ATM fees

     656         402         254        63.2

Loan related fees

     190         130         60        46.2

BOLI income

     239         152         87        57.2

Trading securities revenue

     161         84         77        91.7

FDIC indemnification asset- accretion of discount rate

     468         —           468        n/a   

FDIC OREO indemnification income

     1,136         —           1,136        n/a   

Other service charges and fees

     507         78         429        550.0

Gain on sale of securities

     9         1,436         (1,427     (99.4 %) 
                                  

Subtotal

   $ 10,170       $ 10,473       $ (303     (2.9 %) 

Bargain purchase gain

     11,129         —           11,129        n/a   
                                  

Total non-interest income

   $ 21,299       $ 10,473       $ 10,826        103.4
                                  

The increase in non-interest income between the two quarters presented above was primarily due to the bargain purchase gain recognized pursuant to the TD Bank, N.A. transaction discussed in Note 8.

We recognized revenue of approximately $1,136 relating to FDIC OREO indemnification during the current quarter. This relates to the acquisition of three failed financial institutions we acquired during the third quarter of 2010. To the extent we recognize further degradation of value related to these OREO properties, the loss or charge-down is recognized as non interest expense, and approximately 80% of the recognized loss is recognized as income in our non interest income, pursuant to the loss sharing agreements we have with the FDIC.

We also recognized accretion income relating to our FDIC indemnification asset of approximately $468. This also relates to the acquisition of three failed financial institutions we acquired during the third quarter of 2010. We make estimates of expected losses on the loans we purchased from the FDIC and we estimate the time period we expect those losses to occur. Pursuant to our loss share agreements (indemnification agreements) with the FDIC, we expect to be reimbursed for those expected future losses during those expected future periods. The present value of these expected future reimbursements is the estimated value of our indemnification asset carried on our balance sheet. Over time, we accrete non interest income based on the discount factor(s) we used to present value our expected future reimbursements. During the current quarter, this accretion was $468.

Commissions earned on bond sales (“Income from correspondent banking and bond sales division”) was lower this quarter due to lower volume of bond sales which was management believes is related to the current interest rate environment. Our customers our small to medium size financial institutions primarily located in the southeast. When interest rates are falling, these institutions generate significant unrealized gains in their security portfolios, some of which they will lock in by selling bonds, and reinvesting. That type of interest rate environment will generally increase volume, which will increase our commission revenue. When interest rates are low, with the propensity to increase, volume tends to slow, which will tend to generally decrease our revenue from bond sales commissions.

 

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Non-interest expense

Non-interest expense for the three months ended March 31, 2011 increased $7,317, or 37.1%, to $27,042, compared to $19,725 for the same period in 2010. Components of our non-interest expenses are listed in the table below.

 

Three month period ending:

   Mar 31,
2011
    Mar 31,
2010
    $
increase
(decrease)
    %
increase
(decrease)
 

Employee salaries and wages

   $ 10,572      $ 9,250      $ 1,322        14.3

Employee incentive/bonus compensation

     612        708        (96     (13.6 %) 

Employee stock based compensation

     195        158        37        23.4

Employer 401K matching contributions

     279        170        109        64.1

Deferred compensation expense

     116        67        49        73.1

Health insurance and other employee benefits

     833        840        (7     (0.8 %) 

Payroll taxes

     933        687        246        35.8

Other employee related expenses

     92        129        (37     (28.7 %) 

Incremental direct cost of loan origination

     (126     (127     1        0.8
                                

Total salaries, wages and employee benefits

   $ 13,506      $ 11,882      $ 1,624        13.7

Occupancy expense

     2,106        1,447        659        45.5

Depreciation of premises and equipment

     999        755        244        32.3

Supplies, stationary and printing

     312        215        97        45.1

Marketing expenses

     728        555        173        31.2

Data processing expense

     1,381        534        847        158.6

Legal, auditing and other professional fees

     925        632        293        46.4

Bank regulatory related expenses

     800        614        186        30.3

Postage and delivery

     231        110        121        110.0

ATM and debit card related expenses

     316        286        30        10.5

CDI amortization

     190        104        86        82.7

Loss on sale of repossessed real estate (“OREO”)

     518        27        491        1818.5

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

     2,035        882        1,153        130.7

Loss on repossessed assets other than real estate

     21        107        (86     (80.4 %) 

Foreclosure related expenses

     987        418        569        136.1

Internet and telephone banking

     185        134        51        38.1

Put-back option amortization

     73        —          73        n/a   

Visa/Mastercard processing and prepaid card expenses

     389        47        342        727.7

Operational write-offs and losses

     121        40        81        202.5

Correspondent accounts and Federal Reserve charges

     118        72        46        63.9

Conferences/Seminars/Education/Training

     74        155        (81     (52.3 %) 

Director fees

     68        95        (27     (28.4 %) 

Travel expenses

     37        114        (77     (67.5 %) 

Other expenses

     922        453        469        103.5
                                

Total non-interest expense

   $ 27,042      $ 19,725      $ 7,317        37.1
                                

We continue the integration process of the three failed institutions acquired from the FDIC during the third quarter. These institutions continue to operate on their legacy core processing systems. Conversion is scheduled for summer and early fall 2011. We will not fully realize the expected operating efficiencies from these acquisitions until that time. In addition, several seasoned bank management teams were hired last year and two new offices were opened. The teams are growing and developing business in the new markets rapidly and are expected to eventually add significant contributions to the Company’s profitability, but at the present time they have added additional overhead expenses. The Company has conversion teams in place for the upcoming three FDIC bank conversions and the merger of the remaining subsidiary bank not yet merged into the lead bank. This team has contributed to the elevated operating expenses, as well as the due diligence team used for evaluating potential FDIC and other acquisition transactions, and a large special asset disposition department that is charged with the task of resolving the Company’s NPAs and OREO. All of these activities have elevated the Company’s operating expenses, but much of this added expense is temporary in nature.

 

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Benefit for income taxes

We recognized an income tax benefit for the three months ended March 31, 2011 of $210 on pre-tax loss of $45 (an effective tax rate of 467%) compared to an income tax provision of $126 on pre-tax earnings of $519 (an effective tax rate of 24.3%) for the comparable quarter in 2010. Net tax exempt income generally decreases a company’s effective tax rate (compared to statutory rates) when the company reports earnings. When there is a loss, the same net tax exempt income will generally produce higher effective tax rates. In addition, we had more tax exempt income during the current quarter compared to the same quarter last year.

Liquidity

Liquidity is defined as the ability to meet anticipated customer demands for funds under credit commitments and deposit withdrawals at a reasonable cost and on a timely basis. We measure liquidity position by giving consideration to both on- and off-balance sheet sources of and demands for funds on a daily and weekly basis.

Each of our subsidiary banks regularly assesses the amount and likelihood of projected funding requirements through a review of factors such as historical deposit volatility and funding patterns, present and forecasted market and economic conditions, individual client funding needs, and existing and planned business activities. Each subsidiary bank’s asset/liability committee (ALCO) provides oversight to the liquidity management process and recommends guidelines, subject to the approval of its board of directors, and courses of action to address actual and projected liquidity needs.

Short term sources of funding and liquidity include cash and cash equivalents, net of federal requirements to maintain reserves against deposit liabilities; investment securities eligible for pledging to secure borrowings from customers pursuant to securities sold under repurchase agreements; loan repayments; deposits and certain interest rate-sensitive deposits; and borrowings under overnight federal fund lines available from correspondent banks. In addition to interest rate-sensitive deposits, the primary demand for liquidity is anticipated fundings under credit commitments to customers.

Off-Balance Sheet Arrangements

We do not currently have any off-balance sheet arrangements, other than approved and unfunded loans and letters of credit to our customers in the ordinary course of business.

 

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES: MARKET RISK

Market risk

We believe interest rate risk is the most significant market risk impacting us. Each of our subsidiary banks monitors and manages its interest rate risk using interest rate sensitivity “gap” analysis to measure the impact of market interest rate changes on net interest income. See our Annual Report on Form 10-K for the fiscal year ended December 31, 2010 for disclosure of the quantitative and qualitative information regarding the interest rate risk inherent in interest rate risk sensitive instruments as of December 31, 2010. There have been no changes in the assumptions used in monitoring interest rate risk as of March 31, 2011. The impact of other types of market risk, such as foreign currency exchange risk and equity price risk, is deemed immaterial. We do not maintain a portfolio of trading securities and do not intend to engage in such activities in the immediate future.

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

As of the end of the period covered by this report, an evaluation was carried out under the supervision and with the participation of our management, including the Chief Executive Officer (CEO) and Chief Financial Officer (CFO), of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e)). Based on that evaluation and the identification of the material weakness in our internal control over financial reporting as described below, the CEO and CFO have concluded that our disclosure controls and procedures were not effective to ensure that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934 are recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.

Changes in Internal Control over Financial Reporting

As reported in our 2010 Annual Report, management conducted a thorough and methodical evaluation and testing of our internal controls over financial reporting as of December 31, 2010, which resulted in the identification of one material control weakness. Management continues their ongoing efforts to correct and revise the existing processes surrounding this material weakness and additional changes will be implemented as determined necessary.

Allowance for Loan Losses

During the fourth quarter of 2010, management determined that we did not maintain effective internal control over specific reserves on impaired loans. Specifically, management identified a material weakness in our internal controls related to the timing of specific reserve recognition on our impaired loans.

 

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

None.

Item 1a. Risk Factors

There has been no material changes in our risk factors from our disclosure in Item 1A of our December 31, 2010 annual report on Form 10-K.

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

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. [Removed and Reserved]

Item 5. Other Information

None.

Item 6. Exhibits

 

Exhibit 31.1    The Chairman, President and Chief Executive Officer’s certification required under section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 31.2    The Chief Financial Officer’s certification required under section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 32.1    The Chairman, President and Chief Executive Officer’s certification required under section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 32.2    The Chief Financial Officer’s certification required under section 906 of the Sarbanes-Oxley Act of 2002

 

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CENTERSTATE BANKS, INC.

SIGNATURES

In accordance with the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

CENTERSTATE BANKS, INC.

(Registrant)

 

Date: May 10, 2011       By:  

/s/ Ernest S. Pinner

    Ernest S. Pinner
    Chairman, President and Chief
    Executive Officer
Date: May 10, 2011       By:  

/s/ James J. Antal

    James J. Antal
    Senior Vice President
    and Chief Financial Officer

 

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