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EX-32.1 - THE CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER'S CERTIFICATION - CenterState Bank Corpd731001dex321.htm
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Table of Contents

 

 

U.S. SECURTIES 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 June 30, 2014

 

¨ 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  x    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

 

45,034,032 shares

(class)   Outstanding at July 31, 2014

 

 

 


Table of Contents

CENTERSTATE BANKS, INC. AND SUBSIDIARIES

INDEX

 

         Page  

PART I.

 

FINANCIAL INFORMATION

  

Item 1.

 

Financial Statements

  

Condensed consolidated balance sheets at June 30, 2014 (unaudited) and December 31, 2013

     3   

Condensed consolidated statements of earnings and comprehensive income for the three and six months ended June 30, 2014 and 2013 (unaudited)

     4   

Condensed consolidated statements of changes in stockholders’ equity for the six months ended June 30, 2014 and 2013 (unaudited)

     6   

Condensed consolidated statements of cash flows for the six months ended June  30, 2014 and 2013 (unaudited)

     7   

Notes to condensed consolidated financial statements (unaudited)

     9   

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     44   

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

     71   

Item 4.

 

Controls and Procedures

     72   

PART II.

 

OTHER INFORMATION

  

Item 1.

 

Legal Proceedings

     73   

Item 1A.

 

Risk Factors

     73   

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

     73   

Item 3.

 

Defaults Upon Senior Securities

     73   

Item 4.

 

[Removed and Reserved]

     73   

Item 5.

 

Other Information

     73   

Item 6.

 

Exhibits

     73   

SIGNATURES

     74   

CERTIFICATIONS

  

 

2


Table of Contents

CenterState Banks, Inc. and Subsidiaries

CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)

(in thousands of dollars, except per share data)

 

     June 30, 2014     December 31, 2013  

ASSETS

    

Cash and due from banks

   $ 25,043      $ 21,581   

Federal funds sold and Federal Reserve Bank deposits

     490,966        153,308   
  

 

 

   

 

 

 

Cash and cash equivalents

     516,009        174,889   

Trading securities, at fair value

     89        —     

Investment securities available for sale, at fair value

     542,149        457,086   

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

     1,596        1,010   

Loans, excluding purchased credit impaired

     2,042,149        1,242,758   

Purchased credit impaired loans

     353,870        231,421   

Allowance for loan losses

     (19,200     (20,454
  

 

 

   

 

 

 

Net Loans

     2,376,819        1,453,725   

Bank premises and equipment, net

     98,623        96,619   

Accrued interest receivable

     8,216        6,337   

Federal Home Loan Bank and Federal Reserve Bank stock, at cost

     17,176        8,189   

Goodwill

     76,981        44,924   

Core deposit intangible

     15,724        4,958   

Trust intangible

     1,070        1,158   

Bank owned life insurance

     57,485        49,285   

Other repossessed real estate owned covered by FDIC loss share agreements

     30,698        19,111   

Other repossessed real estate owned

     12,123        6,409   

FDIC indemnification asset

     61,311        73,877   

Deferred income tax asset, net

     53,175        5,296   

Bank property held for sale

     13,168        1,582   

Prepaid expense and other assets

     19,170        11,556   
  

 

 

   

 

 

 

TOTAL ASSETS

   $ 3,901,582      $ 2,416,011   
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

Deposits:

    

Demand - non-interest bearing

   $ 1,023,285      $ 644,915   

Demand - interest bearing

     589,573        483,842   

Savings and money market accounts

     982,172        542,599   

Time deposits

     526,313        384,875   

Deposits held for sale

     185,646        —     
  

 

 

   

 

 

 

Total deposits

     3,306,989        2,056,231   

Securities sold under agreement to repurchase

     33,619        20,457   

Federal funds purchased

     43,080        29,909   

Corporate debentures

     23,829        16,996   

Accrued interest payable

     411        333   

Payables and accrued expenses

     54,196        18,706   
  

 

 

   

 

 

 

Total liabilities

     3,462,124        2,142,632   

Stockholders’ equity:

    

Common stock, $.01 par value: 100,000,000 shares authorized; 45,022,780 and 30,112,475 shares issued and outstanding at June 30, 2014 and December 31, 2013, respectively

     450        301   

Additional paid-in capital

     388,113        229,544   

Retained earnings

     49,303        48,018   

Accumulated other comprehensive income ( loss)

     1,592        (4,484
  

 

 

   

 

 

 

Total stockholders’ equity

     439,458        273,379   
  

 

 

   

 

 

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

   $ 3,901,582      $ 2,416,011   
  

 

 

   

 

 

 

See notes to the accompanying condensed consolidated financial statements

 

3


Table of Contents

CenterState Banks, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE INCOME (unaudited)

(in thousands of dollars, except per share data)

 

     Three months ended     Six months ended  
     June 30, 2014     June 30, 2013     June 30, 2014     June 30, 2013  

Interest income:

        

Loans

   $ 28,509      $ 21,790      $ 54,238      $ 43,225   

Investment securities available for sale:

        

Taxable

     3,809        2,097        7,286        4,485   

Tax-exempt

     337        372        674        729   

Federal funds sold and other

     424        228        663        426   
  

 

 

   

 

 

   

 

 

   

 

 

 
     33,079        24,487        62,861        48,865   
  

 

 

   

 

 

   

 

 

   

 

 

 

Interest expense:

        

Deposits

     1,523        1,330        2,860        2,713   

Securities sold under agreement to repurchase

     56        21        79        39   

Federal funds purchased

     5        6        11        11   

Corporate debentures

     238        150        461        300   
  

 

 

   

 

 

   

 

 

   

 

 

 
     1,822        1,507        3,411        3,063   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

     31,257        22,980        59,450        45,802   

Provision for loan losses

     (106     1,374        (147     1,014   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income after loan loss provision

     31,363        21,606        59,597        44,788   
  

 

 

   

 

 

   

 

 

   

 

 

 

Non interest income:

        

Income from correspondent bank capital markets division

     4,192        4,904        7,340        11,044   

Other correspondent banking related revenue

     1,093        705        1,876        1,570   

Service charges on deposit accounts

     2,333        2,081        4,595        3,900   

Debit, prepaid, ATM and merchant card related fees

     1,495        1,342        3,001        2,627   

Wealth management related revenue

     1,104        1,130        2,321        2,200   

FDIC indemnification income

     421        1,396        1,689        2,024   

FDIC indemnification asset amortization

     (5,006     (3,272     (10,191     (5,471

Bank owned life insurance income

     356        338        708        677   

Other service charges and fees

     338        231        747        533   

Net gain on sale of securities available for sale

     46        1,008        46        1,038   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other income

     6,372        9,863        12,132        20,142   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

See notes to the accompanying condensed consolidated financial statements.

 

4


Table of Contents

CenterState Banks, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE INCOME (unaudited)

(in thousands of dollars, except per share data)

 

     Three months ended     Six months ended  
     June 30, 2014     June 30, 2013     June 30, 2014     June 30, 2013  

Non interest expense:

    

Salaries, wages and employee benefits

     17,185        15,234        32,866        31,474   

Occupancy expense

     2,479        1,942        4,439        3,834   

Depreciation of premises and equipment

     1,563        1,455        3,041        2,952   

Supplies, stationary and printing

     334        285        561        573   

Marketing expenses

     619        586        1,239        1,114   

Data processing expense

     1,306        912        2,345        1,796   

Legal, audit and other professional fees

     1,376        844        2,151        1,627   

Core deposit intangible (CDI) amortization

     472        250        803        503   

Postage and delivery

     365        267        633        552   

ATM and debit card related expenses

     468        428        942        939   

Bank regulatory expenses

     753        635        1,384        1,216   

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

     379        563        456        562   

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

     885        1,680        1,905        2,667   

Loss on repossessed assets other than real estate

     19        104        17        346   

Foreclosure related expenses

     1,092        787        1,821        1,580   

Merger and acquisition related expenses

     4,897        —          7,244        —     

Branch closure and efficiency initiatives

     29        —          3,187        —     

Other expenses

     1,932        1,401        3,522        2,728   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other expenses

     36,153        27,373        68,556        54,463   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before provision for income taxes

     1,582        4,096        3,173        10,467   

Provision for income taxes

     545        1,338        1,083        3,133   

Net income

   $ 1,037      $ 2,758      $ 2,090      $ 7,334   

Other comprehensive income, net of tax:

        

Unrealized securities holding (loss) gain, net of income taxes

   $ 4,976      $ (6,799   $ 6,104      $ (8,611

Less: reclassified adjustments for gain included in net income, net of income taxes, of $18, $388, $18, and $400, respectively

     (28 )[1]      (620 )[1]      (28 )[1]      (638 )[1] 
  

 

 

   

 

 

   

 

 

   

 

 

 

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

     4,948        (7,419     6,076        (9,249

Total comprehensive income (loss)

   $ 5,985      $ (4,661   $ 8,166      $ (1,915
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per share:

        

Basic

   $ 0.03      $ 0.09      $ 0.06      $ 0.24   

Diluted

   $ 0.03      $ 0.09      $ 0.06      $ 0.24   

Common shares used in the calculation of earnings per share:

        

Basic

     38,665,018        30,098,853        36,576,622        30,094,315   

Diluted

     39,051,230        30,161,241        36,980,234        30,155,780   

 

(1) Amounts are included in net gain on sale of securities available for sale in total non interest income. Provision for income taxes associated with the reclassification adjustment for the three and six month periods ended June 30, 2014 and 2013 was $18, $388, $18, and $400, respectively.

See notes to the accompanying condensed consolidated financial statements

 

5


Table of Contents

CenterState Banks, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

For the six months ended June 30, 2014 and 2013 (unaudited)

(in thousands of dollars, except per share data)

 

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

Balances at January 1, 2013

     30,079,767       $ 301       $ 228,952       $ 36,979      $ 7,299      $ 273,531   

Net income

              7,334          7,334   

Unrealized holding loss on available for sale securities, net of deferred income tax of $5,808

                (9,249     (9,249

Dividends paid - common ($0.02 per share)

              (602       (602

Stock grants issued

     24,503            250             250   

Stock based compensation expense

           152             152   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Balances at June 30, 2013

     30,104,270       $ 301       $ 229,354       $ 43,711      $ (1,950   $ 271,416   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Balances at January 1, 2014

     30,112,475       $ 301       $ 229,544       $ 48,018      $ (4,484   $ 273,379   

Net income

              2,090          2,090   

Unrealized holding gain on available for sale securities, net of deferred income tax of $3,816

                6,076        6,076   

Dividends paid - common ($0.02 per share)

              (805       (805

Stock grants issued

     26,656            274             274   

Stock based compensation expense

           144             144   

Stock options exercised, including tax benefit

     211,684         2         892             894   

Stock issued pursuant to Gulfstream acquisition

     5,195,541         52         53,098             53,150   

Stock options acquired and converted pursuant to Gulfstream acquisition

           3,617             3,617   

Stock issued pursuant to First Southern

acquisition

     9,476,424         95         100,544             100,639   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Balances at June 30, 2014

     45,022,780       $ 450       $ 388,113       $ 49,303      $ 1,592      $ 439,458   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

See notes to the accompanying condensed consolidated financial statements

 

6


Table of Contents

CenterState Banks, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

(in thousands of dollars, except per share data)

 

     Six months ended June 30,  
     2014     2013  

Cash flows from operating activities:

    

Net income

   $ 2,090      $ 7,334   

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

    

Provision for loan losses

     (147     1,014   

Depreciation of premises and equipment

     3,041        2,952   

Accretion of purchase accounting adjustments

     (17,159     (15,866

Net amortization of investment securities

     2,840        3,725   

Net deferred loan origination fees

     (412     (456

Gain on sale of securities available for sale

     (46     (1,038

Trading securities revenue

     (69     (131

Purchases of trading securities

     (65,234     (129,249

Proceeds from sale of trading securities

     65,214        134,428   

Repossessed real estate owned valuation write down

     1,905        2,667   

Loss on sale of repossessed real estate owned

     456        562   

Repossessed assets other than real estate valuation write down

     17        52   

Loss on sale of repossessed assets other than real estate

     —          294   

Gain on sale of loans held for sale

     (183     (170

Loans originated and held for sale

     (10,991     (10,887

Proceeds from sale of loans held for sale

     10,835        12,006   

Gain on disposal of and or sale of fixed assets

     (11     —     

Gain on disposal of bank property held for sale

     —          (31

Impairment on bank property held for sale

     2,506        —     

Deferred income taxes

     (639     2,184   

Stock based compensation expense

     369        289   

Bank owned life insurance income

     (708     (677

Net cash from changes in:

    

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

     2,480        6,905   

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

     179        (680
  

 

 

   

 

 

 

Net cash (used in)/provided by operating activities

     (3,667     15,227   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Purchases of investment securities available for sale

     —          (31,133

Purchases of mortgage backed securities available for sale

     (176,584     (183,002

Purchases of FRB/FHLB stock

     (3,580     —     

Proceeds from maturities of investment securities available for sale

     —          165   

Proceeds from called investment securities available for sale

     1,355        3,670   

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

     39,036        57,515   

Proceeds from sales of investment securities available for sale

     62,111        31,201   

Proceeds from sales of mortgage backed securities available for sale

     261,426        37,691   

Proceeds from sales of FHLB and FRB stock

     1,054        1,570   

Net (increase) decrease in loans

     46,263        (2,589

Cash received from FDIC loss sharing agreements

     7,510        28,371   

Purchases of premises and equipment, net

     1,218        (1,517

Proceeds from sale of repossessed real estate

     14,262        12,095   

Proceeds from sale of fixed assets

     56        13   

Proceeds from sale of bank property held for sale

     —          931   

Net cash from bank acquisitions

     130,497        —     
  

 

 

   

 

 

 

Net cash provided by investing activities

     384,624        (45,019
  

 

 

   

 

 

 

 

See notes to the accompanying condensed consolidated financial statements.

 

7


Table of Contents

CenterState Banks, Inc. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

(in thousands of dollars, except per share data)

(continued)

 

     Six months ended June 30,  
     2014     2013  

Cash flows from financing activities:

    

Net decrease in deposits

     (80,473     (20,239

Net increase in securities sold under agreement to repurchase

     5,586        3,098   

Net increase in federal funds purchased

     13,171        14,342   

Net in other borrowings

     (5,708     —     

Net increase in payable to shareholders for acquisitions

     27,527        —     

Stock options exercised, including tax benefit

     894        —     

Dividends paid

     (805     (602
  

 

 

   

 

 

 

Net cash provided by financing activities

     (39,837     (3,401
  

 

 

   

 

 

 

Net (decrease)increase in cash and cash equivalents

     341,120        (33,193

Cash and cash equivalents, beginning of period

     174,889        136,748   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 516,009      $ 103,555   
  

 

 

   

 

 

 

Transfer of loans to other real estate owned

   $ 8,046      $ 15,667   
  

 

 

   

 

 

 

Transfers of bank property to held for sale

   $ 4,647      $ —     
  

 

 

   

 

 

 

Cash paid during the period for:

    

Interest

   $ 3,824      $ 3,485   
  

 

 

   

 

 

 

Income taxes

   $ 5,462      $ 783   
  

 

 

   

 

 

 

See notes to the accompanying condensed consolidated financial statements.

 

8


Table of Contents

CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, 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 bank, CenterState Bank of Florida, N.A. (“CenterState”), and our non bank subsidiary, R4ALL, Inc. Our subsidiary bank operates through 68 full service banking locations in 21 counties throughout Florida, providing traditional deposit and lending products and services to its commercial and retail customers. Ten of our 68 branches are scheduled to be closed in September 2014. The deposits from 6 and the real estate from 5 have been sold to an unrelated commercial bank. The remaining 4 will be consolidated into existing CenterState branches. R4ALL, Inc. is a separate non bank subsidiary of CSFL. Its purpose is to purchase troubled loans from our subsidiary bank and manage their eventual disposition.

In addition, we also operate a correspondent banking and capital markets division. The division is integrated with and part of our 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 the Southeastern United States.

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 statements 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, 2013. 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 and six month periods ended June 30, 2014 are not necessarily indicative of the results expected for the full year.

Some items in the prior period financial statements were reclassified to conform to the current presentation. Reclassifications had no effect on prior periods net income or shareholders’ equity.

 

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CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

 

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. Average stock options outstanding that were anti dilutive during the three and six month periods ending June 30, 2014 and 2013 were 973,875, 989,105, 1,121,942 and 1,126,478 respectively. The following is a reconciliation of the numerators and denominators of the basic and diluted earnings per share computations for the periods presented.

 

     Three months ended June 30,      Six months ended June 30,  
     2014      2013      2014      2013  

Numerator for basic and diluted earnings per share:

           

Net income

   $ 1,037       $ 2,758       $ 2,090       $ 7,334   

Denominator:

           

Denominator for basic earnings per share - weighted-average shares

     38,665,018         30,098,853         36,576,622         30,094,315   

Effect of dilutive securities:

           

Stock options and stock grants

     386,212         62,388         403,612         61,465   
  

 

 

    

 

 

    

 

 

    

 

 

 

Denominator for diluted earnings per share - adjusted weighted-average shares

     39,051,230         30,161,241         36,980,234         30,155,780   
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic earnings per share

   $ 0.03       $ 0.09       $ 0.06       $ 0.24   

Diluted earnings per share

   $ 0.03       $ 0.09       $ 0.06       $ 0.24   

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.

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 the date of the consolidated balance sheet 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 the date of the consolidated balance sheet, the fair value was determined by broker price indications of similar or same securities.

 

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CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

 

The fair value of derivatives is based on valuation models using observable market data as of the measurement date (Level 2). Assets and liabilities measured at fair value on a recurring basis are summarized below.

 

            Fair value measurements using  
     Carrying
value
     Quoted prices in
active markets for
identical assets
(Level 1)
     Significant
other
observable
inputs
(Level 2)
     Significant
unobservable
inputs
(Level 3)
 

at June 30, 2014

           

Assets:

           

Trading securities

   $ 89         —         $ 89         —     

Available for sale securities

           

U.S. government sponsored entities and agencies

     4         —           4         —     

Mortgage backed securities

     502,590         —           502,590         —     

Municipal securities

     39,555         —           39,555         —     

Interest rate swap derivatives

     3,467         —           3,467         —     

Liabilities:

           

Interest rate swap derivatives

     3,796         —           3,796         —     

at December 31, 2013

           

Assets:

           

Trading securities

   $ —           —         $ —           —     

Available for sale securities

           

U.S. government sponsored entities and agencies

     4         —           4         —     

Mortgage backed securities

     416,881         —           416,881         —     

Municipal securities

     40,201         —           40,201         —     

Interest rate swap derivatives

     2,603         —           2,603         —     

Liabilities:

           

Interest rate swap derivatives

     2,496         —           2,496         —     

The fair value of impaired loans with specific valuation allowance for loan losses and other real estate owned is based on recent real estate appraisals. For residential real estate impaired loans and other real estate owned, appraised values are based on the comparative sales approach. For commercial and commercial real estate impaired loans, and other real estate owned, appraisers may use either a single valuation approach or a combination of approaches such as comparative sales, cost or the income approach. A significant unobservable input in the income approach is the estimated income capitalization rate for a given piece of collateral. At June 30, 2014, the range of capitalization rates utilized to determine the fair value of the underlying collateral ranged from 8% to 11%. Adjustments to appraisals may be made by the appraiser to reflect local market conditions or other economic factors and may result in changes in the fair value of a given asset over time. As such, the fair value of impaired loans and other real estate owned are considered a Level 3 in the fair value hierarchy.

 

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CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

 

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

 

            Fair value measurements using  
     Carrying
value
     Quoted prices in
active markets for
identical assets
(Level 1)
     Significant
other
observable
inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
 

at June 30, 2014

           

Assets:

           

Impaired loans

           

Residential real estate

   $ 3,184         —           —         $ 3,184   

Commercial real estate

     6,058         —           —           6,058   

Land, land development and construction

     1,248         —           —           1,248   

Commercial

     683         —           —           683   

Consumer

     150         —           —           150   

Other real estate owned

           

Residential real estate

   $ 1,599         —           —         $ 1,599   

Commercial real estate

     3,741         —           —           3,741   

Land, land development and construction

     1,913         —           —           1,913   

Bank property held for sale

     6,049         —           —           6,049   

at December 31, 2013

           

Assets:

           

Impaired loans

           

Residential real estate

   $ 3,191         —           —         $ 3,191   

Commercial real estate

     7,515         —           —           7,515   

Land, land development and construction

     290         —           —           290   

Commercial

     731         —           —           731   

Consumer

     157         —           —           157   

Other real estate owned

           

Residential real estate

   $ 27         —           —         $ 27   

Commercial real estate

     3,837         —           —           3,837   

Land, land development and construction

     3,949         —           —           3,949   

Bank owned real estate held for sale

     1,582         —           —           1,582   

Impaired loans with specific valuation allowances and/or partial charge-offs had a recorded investment of $12,796 with a valuation allowance of $1,473, at June 30, 2014, and a recorded investment of $13,528, with a valuation allowance of $1,644, at December 31, 2013. The Company recorded a provision for loan loss expense of $181 and $359 on these loans during the three and six month periods ending June 30, 2014.

Other real estate owned had a decline in fair value of $885, $1,905, $1,680 and $2,667 during the three and six month periods ending June 30, 2014 and 2013, respectively. Changes in fair value were recorded directly to current earnings through non interest expense.

 

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CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

 

Bank property held for sale represents certain branch office buildings which the Company has closed and consolidated to other existing branches. The real estate was transferred out of the Bank Premises and Equipment category into bank owned property held for sale. The real estate was transferred at the lower of amortized cost or fair value less estimated costs to sell. The fair values were based upon comparative sales data provided by real estate brokers. The Company closed eight bank branch offices in April 2014, seven owned by the Company and one leased. Five of the properties owned by the Company were transferred to held-for-sale, the remaining two are being used as loan production offices, back office support staff offices and a portion of the second floor of one of the buildings is leased to an existing tenant. The Company recognized an impairment charge of $-0- and $2,326 during the three and six month periods ending June 30, 2014 related to the transfer to held-for-sale. Also during the first quarter of 2014, the Company recognized an additional impairment of $180 on a property previously transferred to held-for-sale in 2012.

Fair Value of Financial Instruments

The methods and assumptions, not previously presented, used to estimate fair value are described as follows:

Cash and Cash Equivalents: The carrying amounts of cash and cash equivalents approximate fair values and are classified as Level 1.

FHLB and FRB Stock: It is not practical to determine the fair value of FHLB and FRB stock due to restrictions placed on their transferability.

Loans held for sale: The fair value of loans held for sale is estimated based upon binding contracts from third party investors resulting in a Level 2 classification.

Loans, net: Fair values of loans, excluding loans held for sale, are estimated as follows: For variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values resulting in a Level 3 classification. Fair values for other loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality resulting in a Level 3 classification. Impaired loans are valued as described previously. The methods utilized to estimate the fair value of loans do not necessarily represent an exit price.

FDIC Indemnification Asset: It is not practical to determine the fair value of the FDIC indemnification asset due to restrictions placed on its transferability.

Accrued Interest Receivable: The carrying amount of accrued interest receivable approximates fair value and is classified as Level 3.

Deposits: The fair values disclosed for demand deposits (e.g., interest and non-interest checking, savings, and money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amount) resulting in Level 1 classification. Fair values for fixed rate certificates of deposit are estimated using a discounted cash flows calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits resulting in a Level 2 classification.

 

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CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

 

Deposits held for sale: The fair value disclosed is based on the contracted price for the sale of these deposits resulting in a Level 2 classification.

Short-term Borrowings: The carrying amounts of federal funds purchased, borrowings under repurchase agreements, and other short-term borrowings, generally maturing within ninety days, approximate their fair values resulting in a Level 2 classification.

Corporate Debentures: The fair values of the Company’s corporate debentures are estimated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements resulting in a Level 3 classification.

Accrued Interest Payable: The carrying amount of accrued interest payable approximates fair value resulting in a Level 2 classification.

Off-balance Sheet Instruments: 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:

 

            Fair value measurements         

at June 30, 2014

   Carrying amount      Level 1      Level 2      Level 3      Total  

Financial assets:

              

Cash and cash equivalents

   $ 516,009       $ 516,009       $ —         $ —         $ 516,009   

Trading securities

     89         —           89         —           89   

Investment securities available for sale

     542,149         —           542,149         —           542,149   

FHLB and FRB stock

     17,176         —           —           —           n/a   

Loans held for sale

     1,596         —           1,596         —           1,596   

Loans, less allowance for loan losses of $19,200

     2,376,819         —           —           2,383,572         2,383,572   

FDIC indemnification asset

     61,311         —           —           —           n/a   

Interest rate swap derivatives

     3,467         —           3,467         —           3,467   

Accrued interest receivable

     8,216         —           —           8,216         8,216   

Financial liabilities:

              

Deposits- without stated maturities

   $ 2,595,030       $ 2,595,030       $ —         $ —         $ 2,595,030   

Deposits- with stated maturities

     526,313         —           529,428         —           529,428   

Deposits held for sale

     185,646         —           185,646         —           185,646   

Securities sold under agreement to repurchase

     33,619         —           33,619         —           33,619   

Federal funds purchased

     43,080         —           43,080         —           43,080   

Corporate debentures

     23,829         —           —           19,888         19,888   

Interest rate swap derivatives

     3,796         —           3,796         —           3,796   

Accrued interest payable

     411         —           411         —           411   

 

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CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

 

            Fair value measurements         

at December 31, 2013

   Carrying amount      Level 1      Level 2      Level 3      Total  

Financial assets:

              

Cash and cash equivalents

   $ 174,889       $ 174,889       $ —         $ —         $ 174,889   

Trading securities

     —           —           —           —           —     

Investment securities available for sale

     457,086         —           457,086         —           457,086   

FHLB and FRB stock

     8,189         —           —           —           n/a   

Loans held for sale

     1,010         —           1,010         —           1,010   

Loans, less allowance for loan losses of $20,454

     1,453,725         —           —           1,456,295         1,456,295   

FDIC indemnification asset

     73,433         —           —           —           n/a   

Interest rate swap derivatives

     2,603         —           2,603         —           2,603   

Accrued interest receivable

     6,337         —           —           6,337         6,337   

Financial liabilities:

              

Deposits- without stated maturities

   $ 1,671,356       $ 1,671,356       $ —         $ —         $ 1,671,356   

Deposits- with stated maturities

     384,875         —           389,115         —           389,115   

Securities sold under agreement to repurchase

     20,457         —           20,457         —           20,457   

Federal funds purchased

     29,909         —           29,909         —           29,909   

Corporate debentures

     16,996         —           —           11,091         11,091   

Interest rate swap derivatives

     2,496         —           2,496         —           2,496   

Accrued interest payable

     333         —           333         —           333   

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 and six month periods ending June 30, 2014 and 2013.

Three month period ending June 30, 2014

 

     Commercial
and retail
banking
    Correspondent
banking and
capital markets
division
    Corporate
overhead and
administration
    Elimination
entries
    Total  

Interest income

   $ 32,333      $ 746      $ —          $ 33,079   

Interest expense

     (1,578     (6     (238       (1,822
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income (expense)

     30,755        740        (238       31,257   

Recovery of prior loan loss provision

     106        —          —            106   

Non interest income

     1,087        5,285        —            6,372   

Non interest expense

     (30,215     (5,063     (875       (36,153
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) before taxes

     1,733        962        (1,113       1,582   

Income tax (provision) benefit

     (589     (371     415          (545
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ 1,144      $ 591      $ (698     $ 1,037   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

   $ 3,716,281      $ 173,516      $ 495,677      $ (483,892   $ 3,901,582   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

 

Six month period ending June 30, 2014

 

     Commercial
and retail
banking
    Correspondent
banking and
capital markets
division
    Corporate
overhead and
administration
    Elimination
entries
    Total  

Interest income

   $ 61,403      $ 1,458      $ —          $ 62,861   

Interest expense

     (2,939     (11     (461       (3,411
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income (expense)

     58,464        1,447        (461       59,450   

Recovery of prior loan loss provision

     147        —          —            147   

Non interest income

     2,916        9,216        —            12,132   

Non interest expense

     (57,382     (9,441     (1,733       (68,556
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) before taxes

     4,145        1,222        (2,194       3,173   

Income tax (provision) benefit

     (1,438     (471     826          (1,083
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ 2,707      $ 751      $ (1,368     $ 2,090   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

   $ 3,716,281      $ 173,516      $ 495,677      $ (483,892   $ 3,901,582   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Three month period ending June 30, 2013

 

     Commercial
and retail
banking
    Correspondent
banking and
capital markets
division
    Corporate
overhead and
administration
    Elimination
entries
    Total  

Interest income

   $ 23,875      $ 612      $ —          —        $ 24,487   

Interest expense

     (1,352     (5     (150     —          (1,507
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income (expense)

     22,523        607        (150     —          22,980   

Provision for loan losses

     (1,374     —          —          —          (1,374

Non interest income

     4,254        5,609        —          —          9,863   

Non interest expense

     (21,212     (5,363     (798     —          (27,373
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income before taxes

     4,191        853        (948     —          4,096   

Income tax (provision) benefit

     (1,368     (329     359        —          (1,338
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ 2,823      $ 524      $ (589     —        $ 2,758   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

   $ 2,201,379      $ 150,679      $ 293,127      $ (289,832   $ 2,355,353   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Six month period ending June 30, 2013

 

     Commercial
and retail
banking
    Correspondent
banking and
capital markets
division
    Corporate
overhead and
administration
    Elimination
entries
    Total  

Interest income

   $ 47,473      $ 1,392      $ —          —        $ 48,865   

Interest expense

     (2,752     (11     (300     —          (3,063
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

     44,721        1,381        (300     —          45,802   

Provision for loan losses

     (1,014     —          —          —          (1,014

Non interest income

     7,528        12,614        —          —          20,142   

Non interest expense

     (41,297     (11,438     (1,728     —          (54,463
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income before taxes

     9,938        2,557        (2,028     —          10,467   

Income tax (provision) benefit

     (3,066     (986     919        —          (3,133
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ 6,872      $ 1,571      $ (1,109     —        $ 7,334   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

   $ 2,201,379      $ 150,679      $ 293,127      $ (289,832   $ 2,355,353   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

 

Commercial and retail banking: The Company’s primary business is commercial and retail banking. Currently, the Company operates through its subsidiary bank and a non bank subsidiary, R4ALL, with 68 full service banking locations in 21 counties throughout Florida providing traditional deposit and lending products and services to its commercial and retail customers.

Correspondent banking and capital markets division: Operating as a division of our subsidiary bank, its primary revenue generating activities are related to the capital markets division which includes commissions earned on fixed income security sales, fees from hedging services, loan brokerage fees and consulting fees for services related to these activities. Income generated related to the correspondent banking services includes spread income earned on correspondent bank deposits (i.e. federal funds purchased) and fees generated from safe-keeping activities, bond accounting services, asset/liability consulting services, international wires, clearing and corporate checking account services and other correspondent banking related services. The fees derived from the correspondent banking services are less volatile than those generated through the capital markets group. The customer base includes small to medium size financial institutions primarily located in Southeastern United States.

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, certain merger related costs and other expenses.

 

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Table of Contents

CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

 

NOTE 5: Investment Securities Available for Sale

All of the mortgage backed securities listed below 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. 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:

 

     June 30, 2014  
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair
Value
 

Obligations of U.S. government sponsored entities and agencies

   $ 4       $ —         $ —         $ 4   

Mortgage backed securities

     501,286         6,494         5,190         502,590   

Municipal securities

     38,267         1,428         140         39,555   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 539,557       $ 7,922       $ 5,330       $ 542,149   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     December 31, 2013  
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair
Value
 

Obligations of U.S. government sponsored entities and agencies

   $ 4       $ —         $ —         $ 4   

Mortgage backed securities

     424,654         4,623         12,396         416,881   

Municipal securities

     39,728         921         448         40,201   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 464,386       $ 5,544       $ 12,844       $ 457,086   
  

 

 

    

 

 

    

 

 

    

 

 

 

The cost of securities sold is determined using the specific identification method. The securities sold during the first quarter of 2014 were securities acquired through the Gulfstream acquisition and the securities sold during the second quarter of 2014 included the securities acquired through the First Southern acquisition. These acquired securities were marked to fair value and subsequently sold after the acquisition date, therefore no gain or loss was recognized from the sale of these securities. Sales of available for sale securities for the six months ended June 30, 2014 and 2013 were as follows:

 

For the six months ended:

   June 30, 2014      June 30, 2013  

Proceeds

   $ 323,542       $ 68,892   

Gross gains

     1,175         1,038   

Gross losses

     1,129         —     

The tax provision related to these net realized gains was $18 and $400, respectively.

 

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Table of Contents

CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

 

The fair value of available for sale securities at June 30, 2014 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

   $ 584       $ 579   

Due after one year through five years

     2,129         2,017   

Due after five years through ten years

     14,358         13,878   

Due after ten years through thirty years

     22,488         21,797   

Mortgage backed securities

     502,590         501,286   
  

 

 

    

 

 

 

Total

   $ 542,149       $ 539,557   
  

 

 

    

 

 

 

Securities pledged at June 30, 2014 and December 31, 2013 had a carrying amount (estimated fair value) of $145,760 and $108,528 respectively. These securities were pledged primarily to secure public deposits and repurchase agreements.

At June 30, 2014 and December 31, 2013, there were no holdings of securities of any one issuer, other than mortgage backed securities issued by 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 June 30, 2014 and December 31, 2013.

 

     June 30, 2014  
     Less than 12 months      12 months or more      Total  
     Fair Value      Unrealized
Losses
     Fair Value      Unrealized
Losses
     Fair Value      Unrealized
Losses
 

Mortgage backed securities

   $ 16,877       $ 115       $ 144,279       $ 5,075       $ 161,156       $ 5,190   

Municipal securities

     —           —           3,845         140         3,845         140   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily impaired securities

   $ 16,877       $ 115       $ 148,124       $ 5,215       $ 165,001       $ 5,330   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     December 31, 2013  
     Less than 12 months      12 months or more      Total  
     Fair Value      Unrealized
Losses
     Fair Value      Unrealized
Losses
     Fair Value      Unrealized
Losses
 

Mortgage backed securities

   $ 239,641       $ 10,221       $ 18,793       $ 2,175       $ 258,434       $ 12,396   

Municipal securities

     7,603         333         1,010         115         8,613         448   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily impaired securities

   $ 247,244       $ 10,554       $ 19,803       $ 2,290       $ 267,047       $ 12,844   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

19


Table of Contents

CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

 

At June 30, 2014, 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 June 30, 2014.

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.

NOTE 6: Loans

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

 

     June 30, 2014     Dec 31, 2013  

Total loans that are not PCI loans

    

Real estate loans

    

Residential

   $ 563,293      $ 458,331   

Commercial

     1,091,660        528,710   

Land, development and construction

     78,444        62,503   
  

 

 

   

 

 

 

Total real estate

     1,733,397        1,049,544   

Commercial

     251,741        143,263   

Consumer and other loans

     56,191        49,547   
  

 

 

   

 

 

 

Loans before unearned fees and deferred cost

     2,041,329        1,242,354   

Net unearned fees and costs

     820        404   
  

 

 

   

 

 

 

Total loans that are not PCI loans

     2,042,149        1,242,758   
  

 

 

   

 

 

 

Total PCI loans (note 1)

    

Real estate loans

    

Residential

     119,005        120,030   

Commercial

     195,157        100,012   

Land, development and construction

     27,885        6,381   
  

 

 

   

 

 

 

Total real estate

     342,047        226,423   

Commercial

     10,759        3,850   

Consumer and other loans

     1,064        1,148   
  

 

 

   

 

 

 

Total PCI loans

     353,870        231,421   
  

 

 

   

 

 

 

Allowance for loan losses for loans that are not PCI loans

     (18,240     (19,694

Allowance for loan losses for PCI loans

     (960     (760
  

 

 

   

 

 

 

Total loans, net of allowance for loan losses

   $ 2,376,819      $ 1,453,725   
  

 

 

   

 

 

 

note 1: Purchased credit impaired (“PCI”) loans are being accounted for pursuant to ASC Topic 310-30.

 

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Table of Contents

CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

 

The following sets forth the covered FDIC loans included in the table above.

 

     June 30, 2014     Dec 31, 2013  

FDIC covered loans that are not PCI loans

    

Real estate loans

    

Residential

   $ 6,457      $ —     

Commercial

     35,668        —     

Land, development and construction

     857        —     
  

 

 

   

 

 

 

Total real estate

     42,982        —     

Commercial

     459        —     

Consumer and other loans

     —          —     
  

 

 

   

 

 

 

FDIC covered loans, excluding PCI loans

     43,441        —     
  

 

 

   

 

 

 

FDIC covered PCI loans (note 1)

    

Real estate loans

    

Residential

     115,306        120,030   

Commercial

     166,932        100,012   

Land, development and construction

     20,509        6,381   
  

 

 

   

 

 

 

Total real estate

     302,747        226,423   

Commercial

     5,184        3,850   

Consumer and other loans

     —          —     
  

 

 

   

 

 

 

Total FDIC covered PCI loans

     307,931        230,273   
  

 

 

   

 

 

 

Allowance for loan losses for FDIC covered loans that are not PCI loans

     —          —     

Allowance for loans losses for FDIC covered PCI loans

     (960     (760
  

 

 

   

 

 

 

Total covered loans, net of allowance for loan losses

   $ 350,412      $ 229,513   
  

 

 

   

 

 

 

note 1: Purchased credit impaired (“PCI”) loans are being accounted for pursuant to ASC Topic 310-30.

The Company acquired FDIC covered loans that are not PCI loans pursuant to the acquisition of FSB on June 1, 2014. Prior to the FSB acquisition, the Company’s FDIC covered loans were all PCI loans.

 

21


Table of Contents

CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

 

The table below set forth the activity in the allowance for loan losses for the periods presented.

 

     Allowance for
loan losses for
loans that are
not PCI loans
    Allowance for
loan losses on
PCI loans
    Total  

Three months ended June 30, 2014

      

Balance at beginning of period

   $ 18,913      $ 1,183      $ 20,096   

Loans charged-off

     (902     —          (902

Recoveries of loans previously charged-off

     112        —          112   
  

 

 

   

 

 

   

 

 

 

Net charge-offs

     (790     —          (790

Provision for loan losses

     117        (223     (106
  

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 18,240      $ 960      $ 19,200   
  

 

 

   

 

 

   

 

 

 

Three months ended June 30, 2013

      

Balance at beginning of period

   $ 22,631      $ 2,623      $ 25,254   

Loans charged-off

     (2,603     (515     (3,118

Recoveries of loans previously charged-off

     310        —          310   
  

 

 

   

 

 

   

 

 

 

Net charge-offs

     (2,293     (515     (2,808

Provision for loan losses

     1,462        (88     1,374   
  

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 21,800      $ 2,020      $ 23,820   
  

 

 

   

 

 

   

 

 

 
     Allowance for
loan losses for
loans that are
not PCI loans
    Allowance for
loan losses on
PCI loans
    Total  

Six months ended June 30, 2014

      

Balance at beginning of period

   $ 19,694      $ 760      $ 20,454   

Loans charged-off

     (2,062     —          (2,062

Recoveries of loans previously charged-off

     955        —          955   
  

 

 

   

 

 

   

 

 

 

Net charge-offs

     (1,107     —          (1,107

Provision for loan losses

     (347     200        (147
  

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 18,240      $ 960      $ 19,200   
  

 

 

   

 

 

   

 

 

 

Six months ended June 30, 2013

      

Balance at beginning of period

   $ 24,033      $ 2,649      $ 26,682   

Loans charged-off

     (3,834     (515     (4,349

Recoveries of loans previously charged-off

     473        —          473   
  

 

 

   

 

 

   

 

 

 

Net charge-offs

     (3,361     (515     (3,876

Provision for loan losses

     1,128        (114     1,014   
  

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 21,800      $ 2,020      $ 23,820   
  

 

 

   

 

 

   

 

 

 

 

22


Table of Contents

CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

 

The following tables present the activity in the allowance for loan losses by portfolio segment for the periods presented.

 

     Real Estate Loans                    
     Residential     Commercial     Land,
develop.,
constr.
    Comm. &
industrial
    Consumer
& other
    Total  

Allowance for loan losses for loan that are not PCI loans:

            

Three months ended June 30, 2014

            

Beginning of the period

   $ 7,812      $ 7,338      $ 1,788      $ 956      $ 1,019      $ 18,913   

Charge-offs

     (228     (299     (23     (67     (285     (902

Recoveries

     (20     61        25        3        43        112   

Provision for loan losses

     255        444        (1,156     208        366        117   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 7,819      $ 7,544      $ 634      $ 1,100      $ 1,143      $ 18,240   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Three months ended June 30, 2013

            

Beginning of the period

   $ 8,100      $ 7,093      $ 5,326      $ 1,224      $ 888      $ 22,631   

Charge-offs

     (1,569     (650     (144     (7     (233     (2,603

Recoveries

     153        13        106        11        27        310   

Provision for loan losses

     3,107        (430     (1,217     (164     166        1,462   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 9,791      $ 6,026      $ 4,071      $ 1,064      $ 848      $ 21,800   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     Real Estate Loans                    
     Residential     Commercial     Land,
develop.,
constr.
    Comm. &
industrial
    Consumer
& other
    Total  

Allowance for loan losses on PCI loans:

            

Three months ended June 30, 2014

            

Beginning of the period

   $ —        $ 623      $ 89      $ 471      $ —        $ 1,183   

Charge-offs

     —          —          —          —          —          —     

Recoveries

     —          —          —          —          —          —     

Provision for loan losses

     —          (101     (12     (110     —          (223
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ —        $ 522      $ 77      $ 361      $ —        $ 960   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Three months ended June 30, 2013

            

Beginning of the period

   $ —        $ 2,310      $ —        $ 313      $ —        $ 2,623   

Charge-offs

     —          (515     —          —          —          (515

Recoveries

     —          —          —          —          —          —     

Provision for loan losses

     —          (218     130        —          —          (88
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ —        $ 1,577      $ 130      $ 313      $ —        $ 2,020   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

23


Table of Contents

CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

 

Allowance for loan losses for loan that are not PCI loans:

            

Six months ended June 30, 2014

            

Beginning of the period

   $ 8,785      $ 6,441      $ 3,069      $ 510      $ 889      $ 19,694   

Charge-offs

     (915     (315     (100     (267     (465     (2,062

Recoveries

     435        375        48        4        93        955   

Provision for loan losses

     (486     1,043        (2,383     853        626        (347
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 7,819      $ 7,544      $ 634      $ 1,100      $ 1,143      $ 18,240   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Six months ended June 30, 2013

            

Beginning of the period

   $ 6,831      $ 8,272      $ 6,211      $ 1,745      $ 974      $ 24,033   

Charge-offs

     (2,181     (1,074     (183     (59     (337     (3,834

Recoveries

     233        40        120        21        59        473   

Provision for loan losses

     4,908        (1,212     (2,077     (643     152        1,128   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 9,791      $ 6,026      $ 4,071      $ 1,064      $ 848      $ 21,800   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Allowance for loan losses on PCI loans:

            

Six months ended June 30, 2014

            

Beginning of the period

   $ —        $ 138      $ 89      $ 533      $ —        $ 760   

Charge-offs

     —          —          —          —          —          —     

Recoveries

     —          —          —          —          —          —     

Provision for loan losses

     —          384        (12     (172     —          200   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ —        $ 522      $ 77      $ 361      $ —        $ 960   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Six months ended June 30, 2013

            

Beginning of the period

   $ —        $ 2,335      $ —        $ 314      $ —        $ 2,649   

Charge-offs

     —          (515     —          —          —          (515

Recoveries

     —          —          —          —          —          —     

Provision for loan losses

     —          (243     130        (1     —          (114
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ —        $ 1,577      $ 130      $ 313      $ —        $ 2,020   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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 June 30, 2014 and December 31, 2013. Accrued interest receivable and unearned loan fees and costs are not included in the recorded investment because they are not material.

 

     Real Estate Loans                       

As of June 30, 2014

   Residential      Commercial      Land,
develop.,
constr.
     Comm. &
industrial
     Consumer
& other
     Total  

Allowance for loan losses:

                 

Ending allowance balance attributable to loans:

                 

Individually evaluated for impairment

   $ 559       $ 1,262       $ 6       $ 10       $ 20       $ 1,857   

Collectively evaluated for impairment

     7,260         6,282         628         1,090         1,123         16,383   

Purchased credit impaired

     0         522         77         361         0         960   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending allowance balance

   $ 7,819       $ 8,066       $ 711       $ 1,461       $ 1,143       $ 19,200   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans:

                 

Loans individually evaluated for impairment

   $ 9,725       $ 13,028       $ 2,068       $ 2,127       $ 315       $ 27,263   

Loans collectively evaluated for impairment

     553,568         1,078,632         76,376         249,614         55,876         2,014,066   

Purchased credit impaired loans

     119,005         195,157         27,885         10,759         1,064         353,870   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending loan balances

   $ 682,298       $ 1,286,817       $ 106,329       $ 262,500       $ 57,255       $ 2,395,199   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

 

     Real Estate Loans                       

As of December 31, 2013

   Residential      Commercial      Land,
develop.,
constr.
     Comm. &
industrial
     Consumer
& other
     Total  

Allowance for loan losses:

                 

Ending allowance balance attributable to loans:

                 

Individually evaluated for impairment

   $ 395       $ 1,377       $ 16       $ 2       $ 21       $ 1,811   

Collectively evaluated for impairment

     8,390         5,064         3,053         508         868         17,883   

Purchased credit impaired

     —           138         89         533         —           760   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending allowance balance

   $ 8,785       $ 6,579       $ 3,158       $ 1,043       $ 889       $ 20,454   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans:

                 

Loans individually evaluated for impairment

   $ 8,610       $ 12,564       $ 1,307       $ 1,297       $ 332       $ 24,110   

Loans collectively evaluated for impairment

     449,721         516,146         61,196         141,966         49,215         1,218,244   

Purchased credit impaired loans

     120,030         100,012         6,381         3,850         1,148         231,421   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending loan balance

   $ 578,361       $ 628,722       $ 68,884       $ 147,113       $ 50,695       $ 1,473,775   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans collectively evaluated for impairment reported at June 30, 2014 include loans acquired from FSB on June 1, 2014 and from Gulfstream on January 17, 2014. The acquired loans were recorded at estimated fair value at acquisition; therefore, no allowance for loan losses was recorded for these loans at June 30, 2014.

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

 

     June 30, 2014      Dec 31, 2014  

Performing TDRs (these are not included in NPLs)

   $ 12,659       $ 10,763   

Non performing TDRs (these are included in NPLs)

     2,281         4,684   
  

 

 

    

 

 

 

Total TDRs (these are included in impaired loans)

   $ 14,940       $ 15,447   

Impaired loans that are not TDRs

     12,323         8,663   
  

 

 

    

 

 

 

Total impaired loans

   $ 27,263       $ 24,110   
  

 

 

    

 

 

 

In certain situations 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 real estate market. When the terms of a loan have been modified, usually the monthly payment and/or interest rate is reduced for generally twelve to twenty-four months. Material principal amounts on any loan modifications have not been forgiven to date.

 

25


Table of Contents

CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

 

TDRs as of June 30, 2014 and December 31, 2013 quantified by loan type classified separately as accrual (performing loans) and non-accrual (non performing loans) are presented in the tables below.

 

As of June 30, 2014

   Accruing      Non Accrual      Total  

Real estate loans:

        

Residential

   $ 7,932       $ 806       $ 8,738   

Commercial

     3,247         1,292         4,539   

Land, development, construction

     569         43         612   
  

 

 

    

 

 

    

 

 

 

Total real estate loans

     11,748         2,141         13,889   

Commercial

     699         37         736   

Consumer and other

     212         103         315   
  

 

 

    

 

 

    

 

 

 

Total TDRs

   $ 12,659       $ 2,281       $ 14,940   
  

 

 

    

 

 

    

 

 

 

As of December 31, 2013

   Accruing      Non-Accrual      Total  

Real estate loans:

        

Residential

   $ 7,221       $ 1,389       $ 8,610   

Commercial

     2,169         3,077         5,246   

Land, development, construction

     608         47         655   
  

 

 

    

 

 

    

 

 

 

Total real estate loans

     9,998         4,513         14,511   

Commercial

     555         49         604   

Consumer and other

     210         122         332   
  

 

 

    

 

 

    

 

 

 

Total TDRs

   $ 10,763       $ 4,684       $ 15,447   
  

 

 

    

 

 

    

 

 

 

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. The Company recorded a provision for loan loss expense of $339 and $398 and partial charge offs of $40 and $96 on the TDR loans described above during the three and six month periods ending June 30, 2014.

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. We may also extend maturities, convert balloon loans to longer term amortizing loans, or vice versa, or change interest rates between variable and fixed rate. Each borrower and situation is unique and we try to accommodate the borrower and minimize the Company’s potential losses. Approximately 85% of our TDRs are current pursuant to their modified terms, and $2,281, or approximately 15% of our total TDRs are not performing pursuant to their modified terms. There does not appear to be any significant difference in success rates with one type of concession versus another.

 

26


Table of Contents

CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

 

The following table presents loans by class modified and for which there was a payment default within twelve months following the modification during the period ending June 30, 2014 and December 31, 2013.

 

     Period ending
June 30, 2014
     Year ending
December 31, 2013
 
     Number
of loans
     Recorded
investment
     Number
of loans
     Recorded
investment
 

Residential

     —         $ —           3       $ 553   

Commercial real estate

     1         196         6         2,244   

Land, development, construction

     —           —           —           —     

Commercial and Industrial

     —           —           2         34   

Consumer and other

     —           —           1         17   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     1       $ 196         12       $ 2,848   
  

 

 

    

 

 

    

 

 

    

 

 

 

The Company recorded a provision for loan loss expense of $18 and $30 and partial charge offs of $-0- and $4 on TDR loans that subsequently defaulted as described above during the three and six month periods ending June 30, 2014.

The following tables present loans individually evaluated for impairment by class of loans as of June 30, 2014 and December 31, 2013, excluding purchased credit impaired loans accounted for pursuant to ASC Topic 310-30. The recorded investment is less than the unpaid principal balance due to partial charge-offs.

 

As of June 30, 2014

   Unpaid
principal
balance
     Recorded
investment
     Allowance
for loan
losses
allocated
 

With no related allowance recorded:

        

Residential real estate

   $ 7,253       $ 6,992       $ —     

Commercial real estate

     6,920         6,812         —     

Land, development, construction

     2,550         1,938         —     

Commercial and industrial

     2,055         1,922         —     

Consumer, other

     —           —           —     

With an allowance recorded:

        

Residential real estate

     2,885         2,733         559   

Commercial real estate

     6,459         6,216         1,262   

Land, development, construction

     138         130         6   

Commercial and industrial

     251         205         10   

Consumer, other

     330         315         20   
  

 

 

    

 

 

    

 

 

 

Total

   $ 28,841       $ 27,263       $ 1,857   
  

 

 

    

 

 

    

 

 

 

 

27


Table of Contents

CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

 

As of December 31, 2013

   Unpaid
principal
balance
     Recorded
investment
     Allowance
for loan
losses
allocated
 

With no related allowance recorded:

        

Residential real estate

   $ 5,052       $ 4,803       $ —     

Commercial real estate

     9,330         7,439         —     

Land, development, construction

     1,377         1,168         —     

Commercial and industrial

     1,330         1,241         —     

Consumer, other

     5         5         —     

With an allowance recorded:

        

Residential real estate

     3,942         3,807         395   

Commercial real estate

     5,257         5,125         1,377   

Land, development, construction

     147         139         16   

Commercial and industrial

     102         56         2   

Consumer, other

     340         327         21   
  

 

 

    

 

 

    

 

 

 

Total

   $ 26,882       $ 24,110       $ 1,811   
  

 

 

    

 

 

    

 

 

 

Three month period ending June, 30, 2014

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

Real estate loans:

        

Residential

   $ 9,635       $ 87       $ —     

Commercial

     12,858         43         —     

Land, development, construction

     1,764         10         —     
  

 

 

    

 

 

    

 

 

 

Total real estate loans

     24,257         140         —     

Commercial and industrial

     2,332         18         —     

Consumer and other loans

     320         3         —     
  

 

 

    

 

 

    

 

 

 

Total

   $ 26,909       $ 161       $ —     
  

 

 

    

 

 

    

 

 

 

Six month period ending June, 30, 2014

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

Real estate loans:

        

Residential

   $ 9,358       $ 164       $ —     

Commercial

     12,742         71         —     

Land, development, construction

     1,575         19         —     
  

 

 

    

 

 

    

 

 

 

Total real estate loans

     23,675         254         —     

Commercial and industrial

     2,126         39         —     

Consumer and other loans

     324         6         —     
  

 

 

    

 

 

    

 

 

 

Total

   $ 26,125       $ 299       $ —     
  

 

 

    

 

 

    

 

 

 

 

28


Table of Contents

CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

 

Three month period ending June, 30, 2013

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

Real estate loans:

        

Residential

   $ 8,777       $ 70       $ —     

Commercial

     27,192         288         —     

Land, development, construction

     1,407         6         —     
  

 

 

    

 

 

    

 

 

 

Total real estate loans

     37,376         364         —     

Commercial and industrial

     1,656         8         —     

Consumer and other loans

     366         3         —     
  

 

 

    

 

 

    

 

 

 

Total

   $ 39,398       $ 375       $ —     
  

 

 

    

 

 

    

 

 

 

Six month period ending June, 30, 2013

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

Real estate loans:

        

Residential

   $ 9,108       $ 143       $ —     

Commercial

     28,730         545         —     

Land, development, construction

     1,417         8         —     
  

 

 

    

 

 

    

 

 

 

Total real estate loans

     39,255         696         —     

Commercial and industrial

     2,124         16         —     

Consumer and other loans

     378         6         —     
  

 

 

    

 

 

    

 

 

 

Total

   $ 41,757       $ 718       $ —     
  

 

 

    

 

 

    

 

 

 

Nonperforming loans include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans, excluding purchased credit impaired loans accounted for pursuant to ASC Topic 310-30.

 

Nonperforming loans were as follows:

   June 30, 2014      Dec 31, 2013  

Non accrual loans

   $ 29,667       $ 27,077   

Loans past due over 90 days and still accruing interest

     —           —     
  

 

 

    

 

 

 

Total non performing loans

   $ 29,667       $ 27,077   
  

 

 

    

 

 

 

 

29


Table of Contents

CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

 

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 June 30, 2014 and December 31, 2013, excluding purchased credit impaired loans:

 

As of June 30, 2014

   Nonaccrual      Loans past due
over 90 days
still accruing
 

Residential real estate

   $ 11,292       $ —     

Commercial real estate

     13,991         —     

Land, development, construction

     1,900         —     

Commercial

     2,216         —     

Consumer, other

     268         —     
  

 

 

    

 

 

 

Total

   $ 29,667       $ —     
  

 

 

    

 

 

 

As of December 31, 2013

   Nonaccrual      Loans past due
over 90 days
still accruing
 

Residential real estate

   $ 10,162       $ —     

Commercial real estate

     13,925         —     

Land, development, construction

     1,099         —     

Commercial

     1,582         —     

Consumer, other

     309         —     
  

 

 

    

 

 

 

Total

   $ 27,077       $ —     
  

 

 

    

 

 

 

The following table presents the aging of the recorded investment in past due loans as of June 30, 2014 and December 31, 2013, excluding purchased credit impaired loans:

 

     Accruing Loans         

As of June 30, 2014

   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

   $ 563,293       $ 2,402       $ 1,892       $ —         $ 4,294       $ 547,707       $ 11,292   

Commercial real estate

     1,091,660         3,001         473         —           3,474         1,074,195         13,991   

Land/dev/construction

     78,444         1,866         254         —           2,120         74,424         1,900   

Commercial

     251,741         1,909         1,048         —           2,957         246,568         2,216   

Consumer

     56,191         225         80         —           305         55,618         268   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 2,041,329       $ 9,403       $ 3,747       $ —         $ 13,150       $ 1,998,512       $ 29,667   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     Accruing Loans         

As of December 31, 2013

   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

   $ 458,331       $ 2,801       $ 1,942       $ —         $ 4,743       $ 443,426       $ 10,162   

Commercial real estate

     528,710         2,420         1,941         —           4,361         510,424         13,925   

Land/dev/construction

     62,503         136         241         —           377         61,027         1,099   

Commercial

     143,263         491         1         —           492         141,189         1,582   

Consumer

     49,547         295         240         —           535         48,703         309   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 1,242,354       $ 6,143       $ 4,365       $ —         $ 10,508       $ 1,204,769       $ 27,077   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

30


Table of Contents

CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

 

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 that are non-homogeneous loans, such as commercial, commercial real estate, land, land development and construction 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.

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans. As of June 30, 2014 and December 31, 2013, and based on the most recent analysis performed, the risk category of loans by class of loans, excluding purchased credit impaired loans accounted for pursuant to ASC Topic 310-30:

 

     As of June 30, 2014  

Loan Category

   Pass      Special
Mention
     Substandard      Doubtful  

Residential real estate

   $ 534,622       $ 5,313       $ 23,358       $ —     

Commercial real estate

     1,012,363         39,951         39,346         —     

Land/dev/construction

     66,080         8,637         3,727         —     

Commercial

     243,632         2,586         5,523         —     

Consumer

     55,491         274         426         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,912,188       $ 56,761       $ 72,380       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

 

31


Table of Contents

CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

 

     As of December 31, 2013  

Loan Category

   Pass      Special
Mention
     Substandard      Doubtful  

Residential real estate

   $ 428,671       $ 6,438       $ 23,222       $ —     

Commercial real estate

     448,762         46,427         33,521         —     

Land/dev/construction

     50,164         9,566         2,773         —     

Commercial

     134,901         4,490         3,872         —     

Consumer

     49,448         526         573         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,110,946       $ 67,447       $ 63,961       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

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 purchased credit impaired loans, based on payment activity as of June 30, 2014 and December 31, 2013:

 

As of June 30, 2014

   Residential      Consumer  

Performing

   $ 552,001       $ 55,923   

Nonperforming

     11,292         268   
  

 

 

    

 

 

 

Total

   $ 563,293       $ 56,191   
  

 

 

    

 

 

 

As of December 31, 2013

   Residential      Consumer  

Performing

   $ 448,169       $ 49,238   

Nonperforming

     10,162         309   
  

 

 

    

 

 

 

Total

   $ 458,331       $ 49,547   
  

 

 

    

 

 

 

Purchased Credit Impaired (“PCI”) loans:

Income is recognized on PCI loans 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.

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 June 30, 2014 and December 31, 2013. Contractually required principal and interest payments have been adjusted for estimated prepayments.

 

     Jun 30, 2014     Dec 31, 2013  

Contractually required principal and interest

   $ 566,948      $ 389,537   

Non-accretable difference

     (79,985     (55,304
  

 

 

   

 

 

 

Cash flows expected to be collected

     486,963        334,233   

Accretable yield

     (133,093     (102,812
  

 

 

   

 

 

 

Carrying value of acquired loans

   $ 353,870      $ 231,421   

Allowance for loan losses

     (960     (760
  

 

 

   

 

 

 

Carrying value less allowance for loan losses

   $ 352,910      $ 230,661   
  

 

 

   

 

 

 

 

32


Table of Contents

CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

 

We adjusted our estimates of future expected losses, cash flows and renewal assumptions during the current quarter. These adjustments resulted in an increase in expected cash flows and accretable yield, and a decrease in the non-accretable difference. We reclassified approximately $7,946 and $15,240 from non-accretable difference to accretable yield during the three and six month periods ending June 30, 2014, respectively, to reflect our adjusted estimates of future expected cash flows. The table below summarizes the changes in total contractually required principal and interest cash payments, management’s estimate of expected total cash payments and carrying value of the loans during the three and six month periods ending June 30, 2014 and 2013.

 

Activity during the three month period ending June 30, 2014

   Mar 31, 2014     Effect of
acquisitions
    income
accretion
     all other
adjustments
    June 30, 2014  

Contractually required principal and interest

   $ 414,385      $ 180,960      $ —         $ (28,397   $ 566,948   

Non-accretable difference

     (56,062     (33,527     —           9,604        (79,985
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Cash flows expected to be collected

     358,323        147,433        —           (18,793     486,963   

Accretable yield

     (107,523     (25,749     8,231         (8,052     (133,093
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Carry value of acquired loans

   $ 250,800        121,684        8,231       $ (26,845   $ 353,870   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Activity during the six month period ending June 30, 2014

   Dec 31, 2013     Effect of
acquisitions
    income
accretion
     all other
adjustments
    June 30, 2014  

Contractually required principal and interest

   $ 389,537      $ 229,249      $ —         $ (51,838   $ 566,948   

Non-accretable difference

     (55,304     (45,293     —           20,612        (79,985
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Cash flows expected to be collected

     334,233        183,956        —           (31,226     486,963   

Accretable yield

     (102,812     (32,204     16,462         (14,539     (133,093
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Carry value of acquired loans

   $ 231,421        151,752        16,462         (45,765   $ 353,870   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

Activity during the three month period ending June 30, 2013

   Mar 31, 2013     income
accretion
     all other
adjustments
    June 30, 2013  

Contractually required principal and interest

   $ 486,531        —         $ (37,385   $ 449,146   

Non-accretable difference

     (110,243     —           20,183        (90,060
  

 

 

   

 

 

    

 

 

   

 

 

 

Cash flows expected to be collected

     376,288        —           (17,202     359,086   

Accretable yield

     (95,499     8,020         (11,928     (99,407
  

 

 

   

 

 

    

 

 

   

 

 

 

Carry value of acquired loans

   $ 280,789      $ 8,020       $ (29,130   $ 259,679   
  

 

 

   

 

 

    

 

 

   

 

 

 

Activity during the six month period ending June 30, 2013

   Dec 31, 2012     income
accretion
     all other
adjustments
    June 30, 2013  

Contractually required principal and interest

   $ 534,989        —         $ (85,843   $ 449,146   

Non-accretable difference

     (142,855     —           52,795        (90,060
  

 

 

   

 

 

    

 

 

   

 

 

 

Cash flows expected to be collected

     392,134        —           (33,048     359,086   

Accretable yield

     (93,107     15,847         (22,147     (99,407
  

 

 

   

 

 

    

 

 

   

 

 

 

Carry value of acquired loans

   $ 299,027      $ 15,847       $ (55,195   $ 259,679   
  

 

 

   

 

 

    

 

 

   

 

 

 

 

33


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CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

 

NOTE 7: FDIC indemnification asset

The FDIC indemnification asset represents the estimated amounts due from the FDIC pursuant to the Loss Share Agreements related to the acquisition of the three failed banks acquired in 2010, the acquisition of two failed banks in 2012 and the assumption of Loss Share Agreements of two failed banks assumed by the Company pursuant to its acquisition of First Southern Bank in June 2014. The activity in the FDIC loss share indemnification asset is as follows (certain items related to true-up payment liabilities per the FDIC agreements, which had previously been netted with the FDIC indemnification asset, have been reclassified as a separate liability):

 

     Six month
period ended
June 30, 2014
    Twelve month
period ended
Dec 31, 2013
 

Beginning of the year

   $ 73,877      $ 119,691   

Effect of acquisition

     2,636        —     

Amortization, net

     (10,161     (13,765

Indemnification revenue

     1,529        6,055   

Indemnification of foreclosure expense

     780        4,413   

Proceeds from FDIC

     (7,510     (42,004

Impairment (recovery) of loan pool

     160        (513
  

 

 

   

 

 

 

Period end balance

   $ 61,311      $ 73,877   
  

 

 

   

 

 

 

The FDIC agreements allow for the recovery of some payments made for loss share reimbursements under certain conditions based on the actual performance of the portfolios acquired. This true-up payment is estimated and accrued for as part of the overall FDIC indemnification asset analysis and is reflected as a separate liability. The accrual for this liability is reflected as additional amortization income or expense in noninterest income. The activity in the true-up payment liability is as follows:

 

     Six month
period ended
June 30, 2014
     Twelve month
period ended
Dec 31, 2013
 

Beginning of the year

   $ 444       $ 402   

Effect of acquisition

     682         —     

True-up liability accrual

     30         42   
  

 

 

    

 

 

 

Period end balance

   $ 1,156       $ 444   
  

 

 

    

 

 

 

Impairment of loan pools

When a loan pool (with loss share) is impaired, the impairment expense is included in provision for loan losses, and the percentage of that loss to be reimbursed by the FDIC is recognized as income from FDIC reimbursement, and included in this line item. During the six month period ended June 30, 2014, the estimated amount of impairment increased, which resulted in an additional $160 of indemnification income recognition.

Indemnification revenue

Indemnification revenue represents the percentage of the cost incurred that is reimbursable by the FDIC pursuant to the related Loss Share Agreement for expenses related to the repossession process and losses incurred on the sale of OREO, or writedown of OREO values to current fair value.

 

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Table of Contents

CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

 

Amortization, net

On the date of an FDIC acquisition, the Company estimates the amount and the timing of expected future losses that will be covered by the FDIC loss sharing agreements. The FDIC indemnification asset is initially recorded as the discounted value of the reimbursement of losses from the FDIC. Discount accretion is recognized over the estimated period of losses. The Company also updates its estimate of future losses and the timing of the losses each quarter. To the extent management estimates that future losses are less than initial estimate of future losses, management adjusts its estimates of future expected reimbursements and any decrease in the expected future reimbursements is amortized over the shorter of the loss share period or the life of the related loan by amortization in this line item. Based upon the most recent estimate of future losses, the Company expects less reimbursements from the FDIC and is amortizing the estimated reduction as described in the previous sentence.

Indemnification of foreclosure expense

Indemnification of foreclosure expense represents the percentage of foreclosure related expenses incurred and reimbursable from the FDIC. Foreclosure expense is included in non interest expense. The amount of the reimbursable portion of the expense reduces foreclosure expense included in non interest expense.

NOTE 8: Business Combinations

Acquisition of Gulfstream Bancshares, Inc.

On January 17, 2014, the Company completed its previously announced acquisition of Gulfstream Bancshares, Inc. (“Gulfstream”) as set forth in the Agreement and Plan of Merger (“Agreement”) whereby Gulfstream merged with and into the Company. Pursuant to and simultaneously with the merger of Gulfstream with and into the Company, Gulfstream’s wholly owned subsidiary bank, Gulfstream Business Bank (“GSB”), merged with and into the Company’s subsidiary bank, CenterState Bank of Florida, N.A.

The Company’s primary reasons for the transaction were to further solidify its market share in the southeast Florida market and expand its customer base to enhance deposit fee income and leverage operating cost through economies of scale. The acquisition increased the Company’s total assets and total deposits by approximately 23% and 23%, respectively, as compared with the balances at December 31, 2013, and is expected to positively affect the Company’s operating results to the extent the Company earns more from interest earning assets than it pays in interest on its interest bearing liabilities.

The acquisition was accounted for under the acquisition method of accounting in accordance with ASC Topic 805, Business Combinations. The Company recognized goodwill on this acquisition of $31,516, after consideration of a measurement period adjustment discussed below, which is nondeductible for tax purposes as this acquisition is a nontaxable transaction. The goodwill is calculated based on the fair values of the assets acquired and liabilities assumed as of the acquisition date. Fair value estimates are based on the information available, and are subject to change for up to one year after the closing date of the acquisition as additional information relative to closing date fair values becomes available. Fair values are preliminary estimates due to pending appraisals on loans and other real estate owned.

 

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Table of Contents

CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

 

The Company acquired 100% of the outstanding common stock of Gulfstream. The purchase price consisted of both cash and stock. Each share of Gulfstream common stock was exchanged for $14.65 cash and 3.012 shares of the Company’s common stock. Based on the closing price of the Company’s common stock on January 16, 2014, the resulting purchase price was $82,040. The table below summarizes the purchase price calculation.

 

Number of shares of Gulfstream common stock outstanding at January 16, 2014

     1,569,364   

Gulfstream preferred shares that convert to Gulfstream common shares upon a change in control

     155,629   
  

 

 

 

Total Gulfstream common shares including conversion of preferred shares

     1,724,993   

Per share exchange ratio

     3.012   
  

 

 

 

Number of shares of CenterState common stock less 138 of fractional shares

     5,195,541   

Multiplied by CenterState common stock price per share on January 16, 2014

   $ 10.23   
  

 

 

 

Fair value of CenterState common stock issued

   $ 53,150   
  

 

 

 

Total Gulfstream common shares including conversion of preferred shares

     1,724,993   

Multiplied by the cash consideration each Gulfstream share is entitled to receive

   $ 14.65   
  

 

 

 

Total Cash Consideration, not including cash for fractional shares

   $ 25,271   
  

 

 

 

Total Stock Consideration

   $ 53,150   

Total Cash Consideration plus $2 for 138 of fractional shares

     25,273   
  

 

 

 

Total consideration to be paid to Gulfstream common shareholders

   $ 78,423   

Fair value of current Gulfstream stock options to be converted to CenterState stock options

     3,617   
  

 

 

 

Total purchase price

   $ 82,040   
  

 

 

 

 

36


Table of Contents

CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

 

The list below summarizes the preliminary estimates of the fair value of the assets purchased, including goodwill, and liabilities assumed as of the January 17, 2014 purchase date.

 

     Jan 17, 2014  

Assets:

  

Cash and cash equivalents

   $ 102,278   

Loans, held for investment

     329,515   

Purchased credit impaired loans

     30,068   

Loans held for sale

     247   

Investments

     60,816   

Interest receivable

     1,087   

Branch real estate

     5,519   

Furniture and fixtures

     262   

FHLB stock

     885   

Bank owned life insurance

     4,939   

Other repossessed real estate owned

     2,694   

Core deposit intangible

     4,173   

Goodwill

     31,516   

Other assets

     11,261   
  

 

 

 

Total assets acquired

   $ 585,260   
  

 

 

 

Liabilities:

  

Deposits

   $ 478,999   

Federal Home loan advances

     5,708   

Repurchase agreements

     7,576   

Interest payable

     125   

Official checks outstanding

     826   

Corporate debentures

     6,745   

Other liabilities

     3,241   
  

 

 

 

Total liabilities assumed

   $ 503,220   
  

 

 

 

In the acquisition, the Company purchased $359,583 of loans at fair value, net of $18,267, or 4.8%, estimated discount to the outstanding principal balance, representing 24.4% of the Company’s total loans at December 31, 2013. Of the total loans acquired, management identified $30,068 with credit deficiencies. All loans that were on non-accrual status and all loan relationships that were greater than $500 and identified as impaired as of the acquisition date were considered by management to be credit impaired and are accounted for pursuant to ASC Topic 310-30. The table below summarizes the total contractually required principal and interest cash payments, management’s estimate of expected total cash payments and fair value of the loans as of January 17, 2014 for purchased credit impaired loans. Contractually required principal and interest payments have been adjusted for estimated prepayments.

 

Contractually required principal and interest

   $ 48,289   

Non-accretable difference

     (11,766
  

 

 

 

Cash flows expected to be collected

     36,523   

Accretable yield

     (6,455
  

 

 

 

Total purchased credit-impaired loans acquired

   $ 30,068   
  

 

 

 

 

37


Table of Contents

CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

 

The table below presents information with respect to the fair value of acquired loans, as well as their unpaid principal balance (“Book Balance”) at acquisition date.

 

     Book
balance
     Fair
value
 

Loans:

     

Single family residential real estate

     33,506         32,319   

Commercial real estate

     185,250         183,189   

Construction/development/land

     30,387         27,704   

Commercial loans

     85,940         84,203   

Consumer and other loans

     2,112         2,100   

Purchased credit-impaired

     40,655         30,068   
  

 

 

    

 

 

 

Total earning assets

   $ 377,850       $ 359,583   
  

 

 

    

 

 

 

In its assumption of the deposit liabilities, the Company believed the deposits assumed from the acquisition have an intangible value. The Company applied ASC Topic 805, which prescribes the accounting for goodwill and other intangible assets such as core deposit intangibles, in a business combination. The Company determined the estimated fair value of the core deposit intangible asset totaled $4,173, which will be amortized utilizing an accelerated amortization method over an estimated economic life not to exceed ten years. In determining the valuation amount, deposits were analyzed based on factors such as type of deposit, deposit retention, interest rates and age of deposit relationships.

 

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Table of Contents

CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

 

Measurement period adjustments

On January 17, 2014 the Company purchased Gulfstream. 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. Based on appraisals received subsequent to the acquisition date, the Company adjusted its initial fair value estimates of certain other real estate owned acquired.

 

     Jan 17, 2014 (as
initially reported)
     measurement
period
adjustments
    Jan 17, 2014
(as adjusted)
 

Assets:

       

Cash and cash equivalents

   $ 102,278       $ —        $ 102,278   

Loans, held for investment

     329,515           329,515   

Purchased credit impaired loans

     30,068           30,068   

Loans held for sale

     247           247   

Investments

     60,816           60,816   

Interest receivable

     1,087           1,087   

Branch real estate

     5,519           5,519   

Furniture and fixtures

     262           262   

FHLB stock

     885           885   

Bank owned life insurance

     4,939           4,939   

Other repossessed real estate owned

     3,365         (671     2,694   

Core deposit intangible

     4,173           4,173   

Goodwill

     31,104         412        31,516   

Other assets

     11,002         259        11,261   
  

 

 

    

 

 

   

 

 

 

Total assets acquired

   $ 585,260       $ —        $ 585,260   
  

 

 

    

 

 

   

 

 

 

Liabilities:

       

Deposits

   $ 478,999       $ —        $ 478,999   

Federal Home loan advances

     5,708           5,708   

Repurchase agreements

     7,576           7,576   

Interest payable

     125           125   

Official checks outstanding

     826           826   

Trust Preferred Security

     6,745           6,745   

Other liabilities

     3,241           3,241   
  

 

 

    

 

 

   

 

 

 

Total liabilities assumed

   $ 503,220       $ —        $ 503,220   
  

 

 

    

 

 

   

 

 

 

 

39


Table of Contents

CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

 

Acquisition of First Southern Bancorp, Inc.

On June 1, 2014, the Company completed its previously announced acquisition of First Southern Bancorp, Inc. (“FSB”) as set forth in the Agreement and Plan of Merger (“Agreement”) whereby FSB merged with and into the Company. Pursuant to and simultaneously with the merger of FSB with and into the Company, FSB’s subsidiary bank, First Southern Bank, merged with and into the Company’s subsidiary bank, CenterState Bank of Florida, N.A.

The Company’s primary reasons for the transaction were to further solidify its market share in the southeast Florida market as well as in central and northeastern Florida and expand its customer base to enhance deposit fee income and leverage operating cost through economies of scale. The acquisition increased the Company’s total assets and total deposits by approximately 32% and 33%, respectively, as compared with the balances at March 31, 2014, and is expected to positively affect the Company’s operating results to the extent the Company earns more from interest earning assets than it pays in interest on its interest bearing liabilities.

The acquisition was accounted for under the acquisition method of accounting in accordance with ASC Topic 805, Business Combinations. The Company recognized goodwill on this acquisition of $541, which is nondeductible for tax purposes as this acquisition is a nontaxable transaction. The goodwill is calculated based on the fair values of the assets acquired and liabilities assumed as of the acquisition date. Fair value estimates are based on the information available, and are subject to change for up to one year after the closing date of the acquisition as additional information relative to closing date fair values becomes available. Fair values are preliminary estimates due to pending appraisals on loans and other real estate owned.

The Company acquired 100% of the outstanding common stock of FSB. The purchase price consisted of both cash and stock. Each share of FSB common stock was exchanged for $3.00 cash and 0.30 shares of the Company’s common stock. Based on the closing price of the Company’s common stock on May 30, 2014 (the last trading day prior to the June 1, 2014 acquisition date), the resulting purchase price was $195,404. The table below summarizes the purchase price calculation.

 

Number of shares of FSB common stock outstanding at May 30, 2014

     31,539,698   

FSB preferred shares that convert to FSB common shares upon a change in control

     48,375   
  

 

 

 

Total FSB common shares including conversion of preferred shares

     31,588,073   

Per share exchange ratio

     0.3   
  

 

 

 

Number of shares of CenterState common stock

     9,476,424   

Multiplied by CenterState common stock price per share on May 30, 2014

   $ 10.62   
  

 

 

 

Fair value of CenterState common stock issued

   $ 100,639   
  

 

 

 

Total FSB common shares including conversion of preferred shares

     31,588,073   

Multiplied by the cash consideration each FSB share is entitled to receive

   $ 3.00   
  

 

 

 

Total Cash Consideration

   $ 94,765   
  

 

 

 

Total Stock Consideration

   $ 100,639   

Total Cash Consideration

     94,765   
  

 

 

 

Total purchase price

   $ 195,404   
  

 

 

 

 

40


Table of Contents

CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

 

The list below summarizes the preliminary estimates of the fair value of the assets purchased, including goodwill, and liabilities assumed as of the June 1, 2014 purchase date.

 

     June 1, 2014  

Assets:

  

Cash and cash equivalents

   $ 148,257   

Loans, excluding purchased credit impaired loans

     477,841   

Purchased credit impaired loans

     121,684   

Investments

     204,723   

Interest receivable

     2,007   

Branch real estate

     1,594   

Furniture and fixtures

     1,282   

Bank property held for sale

     7,119   

Federal Reserve Bank and Federal Home Loan Bank stock

     5,576   

Bank owned life insurance

     2,555   

Other repossessed real estate owned covered by FDIC loss share agreements

     22,731   

Other repossessed real estate owned

    
454
  

Core deposit intangible

     7,396   

Goodwill

     541   

Deferred tax asset

     43,889   

Other assets

     4,581   
  

 

 

 

Total assets acquired

   $ 1,052,230   
  

 

 

 

Liabilities:

  

Deposits

   $ 662,959   

Deposits held for sale

     189,674   

Interest payable

     58   

Other liabilities

     4,135   
  

 

 

 

Total liabilities assumed

   $ 856,826   
  

 

 

 

In the acquisition, the Company purchased $599,525 of loans at fair value, net of $30,811, or 4.9%, estimated discount to the outstanding principal balance, representing 33% of the Company’s total loans at March 31, 2014. Of the total loans acquired, management identified $121,684 with credit deficiencies. All loans that were on non-accrual status, all TDRs, all impaired loans, all loans previously identified by FSB with credit deficiencies and any other loan identified by the Company with a probable credit deficiency were considered by management to be credit impaired and are accounted for pursuant to ASC Topic 310-30. The table below summarizes the total contractually required principal and interest cash payments, management’s estimate of expected total cash payments and fair value of the loans as of June 1, 2014 for purchased credit impaired loans. Contractually required principal and interest payments have been adjusted for estimated prepayments.

 

Contractually required principal and interest

   $  180,960   

Non-accretable difference

     (33,527
  

 

 

 

Cash flows expected to be collected

     147,433   

Accretable yield

     (25,749
  

 

 

 

Total purchased credit-impaired loans acquired

   $ 121,684   
  

 

 

 

 

41


Table of Contents

CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

 

The table below presents information with respect to the fair value of acquired loans, as well as their unpaid principal balance (“Book Balance”) at acquisition date.

 

     Book
balance
     Fair
value
 

Loans:

     

Single family residential real estate

   $ 60,332       $ 57,693   

Commercial real estate

     387,589         382,162   

Construction/development/land

     17,238         15,942   

Commercial loans

     20,267         19,906   

Consumer and other loans

     2,496         2,138   

Purchased credit-impaired

     142,414         121,684   
  

 

 

    

 

 

 

Total earning assets

   $ 630,336       $ 599,525   
  

 

 

    

 

 

 

In its assumption of the deposit liabilities, the Company believed the deposits assumed from the acquisition have an intangible value. The Company applied ASC Topic 805, which prescribes the accounting for goodwill and other intangible assets such as core deposit intangibles, in a business combination. The Company determined the estimated fair value of the core deposit intangible asset totaled $7,396, which will be amortized utilizing an accelerated amortization method over an estimated economic life not to exceed ten years. In determining the valuation amount, deposits were analyzed based on factors such as type of deposit, deposit retention, interest rates and age of deposit relationships.

Pro-forma information

Pro-forma data for the three and six month periods ending June 30, 2013 listed in the table below presents pro-forma information as if the Gulfstream and FSB acquisitions occurred at the beginning of 2013. The pro-forma information for the three and six month periods ending June 30, 2014 assumes the FSB acquisition occurred at the beginning of 2013. Because the Gulfstream transaction closed on January 17, 2014 and their actual results are included in the Company’s actual operating results for 2014, their actual results were used in the table below for the three and six month periods ending June 30, 2014 instead of a pro-forma amount.

 

     Three months ended June 30,      Six months ended June 30,  
     2013      2014      2013      2014  

Net interest income

   $ 37,252       $ 37,617       $ 74,835       $ 75,434   

Net income available to common shareholders

     5,129         5,277         11,525         8,524   

EPS - basic

   $ 0.11       $ 0.12       $ 0.26       $ 0.19   

EPS - diluted

   $ 0.11       $ 0.12       $ 0.26       $ 0.19   

Disposition of certain branches acquired pursuant to the FSB acquisition.

On June 4, 2014, the Company entered into a Purchase and Assumption Agreement (“P&A Agreement”) with an unrelated bank (“Buyer”) whereby Buyer agreed to purchase and the Company agreed to sell five branch offices acquired by the Company pursuant to its June 1, 2014 acquisition of FSB, as described above. Under the terms of the P&A Agreement, the Buyer will assume substantially all of the customer deposits at the five branches. In addition, Buyer will assume substantially all of the customer deposits of a sixth branch but will not assume the branch lease. The deposits will be moved by Buyer to a new branch office located nearby, and the Company will close the existing leased branch office.

 

42


Table of Contents

CenterState Banks, Inc. and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(in thousands of dollars, except per share data)

 

The purchase price will be approximately $6.5 million for the five branch offices and a premium of 1.5% for the approximately $200 million deposit balances to be assumed by the Buyer from all six branch offices. The Company is not selling, and the Buyer is not purchasing, any loans in the transaction. The consummation of the transaction is subject to customary regulatory approval and is expected to close in September 2014. The June 4, 2014 sales prices were used as the June 1, 2014 acquisition date fair values, therefore, the Company did not recognize an accounting gain or loss on the transaction.

In addition to the disposition of 6 of the acquired branches from FSB, the Company is closing and consolidating 4 additional acquired branches from FSB. Two of the branches are in leased facilities and the other two are owned by the Company as a result of its acquisition of FSB. The real estate, as well as the furniture, fixtures and equipment have been transferred to held-for-sale during June 2014 at estimated fair value less disposition expenses. The required customer notifications have been sent and the offices are expected to close on September 19, 2014, the same date the Company has scheduled to convert FSB’s core IT system to the Company’s core system.

In September, the Company will have 3 leased branch buildings that will no longer be in use. In addition, it will also have several other leased facilities used by FSB for loan operations, deposit operations and IT that will no longer be used as these functions will be consolidated into the Company’s backroom operations. The Company will either negotiate a lease termination with its related counterparty or accrue the remaining lease obligations. Once a written lease termination is recognized, the liability will be recognized in the Company’s financial statements. If there is no termination agreement, the remaining lease obligations will be recognized in the Company’s financial statement at the cease-use date, which is when the premise is completely vacated and the Company expects to derive no future economic benefit from the obligation. As such, no lease related expenses were included in the merger related expenses recognized during the quarter ended June 30, 2014. The Company expects to recognize approximately $1.8 million of expenses related to the termination or accrual of these lease obligations in the third and fourth quarter of the current year, with the majority of the expenses occurring in the third quarter.

NOTE 9: Recently Issued Accounting Standards

ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” was a joint project initiated by the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) to clarify the principles for recognizing revenue and to develop a common revenue standard and disclosures for U.S. and international accounting standards that would: (1) remove inconsistencies and weaknesses in revenue requirements; (2) provide a more robust framework for addressing revenue issues; (3) improve comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets; (4) provide more useful information to users of financial statements through improved disclosure requirements and (5) simplify the preparation of financial statements by reducing the number of requirements to which an entity must refer. The guidance affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets. The core principle is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance provides steps to follow to achieve the core principle. An entity should disclose sufficient information to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. Qualitative and quantitative information is required about contracts with customers, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract. This ASU is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early application is not permitted. The Company is currently evaluating the effects of this guidance on its financial statements and disclosures, if any.

 

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

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

or unless otherwise noted.)

COMPARISON OF BALANCE SHEETS AT JUNE 30, 2014 AND DECEMBER 31, 2013

Overview

Our total assets and liabilities increased between year end 2013 and June 30, 2014 primarily due to the January 17, 2014 acquisition of Gulfstream Bancshares, Inc. and its banking subsidiary, Gulfstream Business Bank (collectively “Gulfstream”) and our June 1, 2014 acquisition of First Southern Bancorp, Inc. and its banking subsidiary, First Southern Bank (collectively “FSB”).

The Gulfstream acquisition added approximately $585,260 of assets and $503,220 of liabilities to our consolidated balance sheet as of the acquisition date. We issued approximately 5.2 million common shares and acquired the outstanding options pursuant to the Gulfstream acquisition agreement which added approximately $56,767 to our consolidated shareholders’ equity at the transaction date. Gulfstream’s core processing system was converted to our core system on February 14, 2014.

The FSB acquisition added approximately $1,052,230 of assets and $856,826 of liabilities to our consolidated balance sheet as of the acquisition date. We issued approximately 9.5 million common shares which added approximately $100,639 to our consolidated shareholders’ equity at the transaction date.

On June 4, 2014 we entered into an agreement to sell five of the 17 branch offices we acquired from FSB and approximately $200 million of deposits, which includes the closing of a sixth branch office that was leased. Of the 17 branch offices acquired from FSB, our plan was to consolidate and close 10, and operate the remaining 7 as CenterState branches. The 6 branches sold or closed were included in the 10. The sale and closing of the branches is expected to close in September 2014. The consolidation and closing of the remaining 4 (total of 10 branches to be sold or closed) is also expected to occur on September 19, 2014, the date scheduled for the conversion of FSB’s core processing system into our core processing system.

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 $490,966 at June 30, 2014 (approximately 12.6% of total assets) as compared to $153,308 at December 31, 2013 (approximately 6.3% 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. We are holding more liquidity than we historically do in anticipation of transferring about $185,000 of cash to the buyer of our FSB branches and deposits referred to above in September 2014.

 

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Investment securities available for sale

Securities available-for-sale, consisting primarily of U.S. government sponsored enterprises and municipal tax exempt securities, were $542,149 at June 30, 2014 (approximately 13.9% of total assets) compared to $457,086 at December 31, 2013 (approximately 18.9% of total assets), an increase of $85,063 or 18.6%. We use our available-for-sale securities portfolio, as well as federal funds sold and Federal Reserve Bank deposits for liquidity management and for investment yields. These accounts, as a group, will fluctuate as a function of loans outstanding as discussed above, under the caption “Federal funds sold and Federal Reserve Bank deposits.” Our securities are carried at fair value. We classify our securities as “available-for-sale” to provide for greater flexibility to respond to changes in interest rates as well as future liquidity needs.

Trading securities

We also have a trading securities portfolio. Realized and unrealized gains and losses are included in trading securities revenue, a component of our non interest income, in our Condensed Consolidated Statement of Earnings and Comprehensive Income. Securities purchased for this portfolio have primarily been various municipal securities. We held $89 in our trading securities portfolio as of June 30, 2014. A list of the activity in this portfolio is summarized below.

 

     six month
period ended
June 30, 2014
    six month
period ended
June 30, 2013
 

Beginning balance

   $ —        $ 5,048   

Purchases

     65,234        129,249   

Proceeds from sales

     (65,214     (134,428

Net realized gain on sales

     69        131   
  

 

 

   

 

 

 

Ending balance

   $ 89      $ —     
  

 

 

   

 

 

 

Loans held for sale

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

 

     six month
period ended
June 30, 2014
    six month
period ended
June 30, 2013
 

Beginning balance

   $ 1,010      $ 2,709   

Acquired from Gulfstream

     247        —     

Loans originated

     10,991        10,887   

Proceeds from sales

     (10,835     (12,006

Net realized gain on sales

     183        170   
  

 

 

   

 

 

 

Ending balance

   $ 1,596      $ 1,760   
  

 

 

   

 

 

 

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 six months

 

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ended June 30, 2014, were $1,887,253 or 69.9% of average earning assets, as compared to $1,420,367, or 70.0% of average earning assets, for the six month period ending June 30, 2013. Total loans at June 30, 2014 and December 31, 2013 were $2,396,019 and $1,474,179, respectively. This represents a loan to total asset ratio of 61.4% and 61.0% and a loan to deposit ratio of 72.4% and 71.7%, at June 30, 2014 and December 31, 2013, respectively.

PCI loans

At June 30, 2014, we have total Purchased Credit Impaired (“PCI”) loans of $353,870 of which approximately $307,931 are covered by FDIC loss share agreements. Of the $307,931 FDIC covered loans, $207,350 relate to our acquisitions of three failed financial institutions during the third quarter of 2010 and two during the first quarter of 2012. The FDIC is generally obligated to reimburse us for 80% of losses beginning with the first dollar of loss. We acquired the remaining $100,581 of covered PCI loans pursuant to our June 1, 2014 acquisition of FSB. FSB had previously acquired two failed financial institutions with FDIC loss sharing agreements. Those agreements transferred to us as part of the acquisition transaction. These loss share agreements were similar to ours except that the reimbursable loss percentages vary based on certain amounts of losses incurred. See page 47 for a summary of loss share tranches with their respective coverage percentage loss limits. In addition to FDIC covered loans, we have $45,939 of PCI loans without loss share that we acquired from our January 17, 2014 acquisition of Gulfstream, our June 1, 2014 acquisition of FSB and certain loans acquired from our five acquisitions of failed financial institutions that are not covered by loss share agreements. The table below summarizes our PCI loans at June 30, 2014.

 

$ 207,350      

covered by FDIC loss share- 80% of losses reimbursable beginning with first dollar of loss

  100,581      

covered by FDIC loss share- range of 0% to 75% — see page 47 for summary of tranches

  45,939      

not covered by FDIC loss share agreements

 

 

    
$ 353,870      

total PCI loans at June 30, 2014

 

 

    

Non-PCI loans

At June 30, 2014, we have total Non-PCI loans of $2,042,149 of which approximately $43,441 are covered by FDIC loss share agreements. The covered loans were acquired from our June 1, 2014 acquisition of FSB and the related transfer of their FDIC loss share agreements to us. Total new loans originated during the six month period ended June 30, 2014 approximated $176 million, of which $138 million were funded. The weighted average interest rate on funded loans was approximately 4.47%. The graph below summarizes total loan production and funded loan production over the past ten quarters.

 

LOGO

In addition to the increase in production between sequential quarters, our loan origination pipeline increased from $140 million at March 31, 2014 to approximately $238 million at June 30, 2014.

 

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With the acquisition of FSB and assumption of its FDIC loss share agreements we now have FDIC covered loans in our PCI portfolio and our non PCI portfolio. The table below summarizes our FDIC covered loans by PCI and Non-PCI portfolios at June 30, 2014.

 

     PCI loans      Non-PCI      Total loans  

FDIC covered

   $ 307,931       $ 43,441       $ 351,372   

not covered

     45,939         1,998,708         2,044,647   
  

 

 

    

 

 

    

 

 

 

Total

   $ 353,870       $ 2,042,149       $ 2,396,019   
  

 

 

    

 

 

    

 

 

 

At June 30, 2014, $144,022 of the $351,372 FDIC covered loans was acquired pursuant to our acquisition of FSB and the related assumption of FSB’s loss share agreements with the FDIC. These loss share agreements are similar to our current FDIC agreements except that the reimbursable loss percentages vary based on certain amounts of losses incurred. The following table summarizes the loss share tranches with their respective coverage percentage loss limits.

 

     Haven Trust Bank of Florida  
     Single Family Residential Loans     Non-Single Family Residential Loans  
     range of losses    loss share
percentage
    range of losses    loss share
percentage
 

1st Tranche

   $0 — $1,292      70   $0 — $28,574      70

2nd Tranche

   $1,293 — $1,878      0   $28,575 — $38,169      0

3rd Tranche

   $1,879 — unlimited      70   $38,170 — unlimited      70
     First Commercial Bank of Florida  
     Single Family Residential Loans     Non-Single Family Residential Loans  
     range of losses    loss share
percentage
    range of losses    loss share
percentage
 

1st Tranche

   $0 — $5,905      70   $0 — $95,792      70

2nd Tranche

   $5,906 — $9,902      30   $95,793 — $160,396      30

3rd Tranche

   $9,903 — unlimited      75   $160,397 — unlimited      75

As of the last loss certificate filed, the Company is in the following loss share Tranche:

 

     Haven Trust Bank of Florida      First Commercial Bank of Florida  
     Current Tranche (1)     Remaining (2)      Current Tranche (1)     Remaining (2)  

Single Family Residential Loans

     1st Tranche (70 %)    $ 500         3rd Tranche (75 %)      unlimited   

Non-Single Family Residential Loans

     2nd Tranche (0 %)    $ 8,900         2nd Tranche (30 %)    $ 29,000   

note 1: The current Tranche as of the last loss share certificate filed with the FDIC and the related loss share percentage.

note 2: The approximate amount of losses eligible for reimbursement remaining in the current Tranche.

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.

Total loans at June 30, 2014 are equal to $2,396,019. Of this amount, approximately 86.6% are collateralized by real estate, 11.0% are commercial non real estate loans and the remaining 2.4% are consumer and other non real estate loans. We have approximately $682,298 of single family residential loans which represents about 29% of our total loan portfolio. Our largest category of loans is commercial real estate which represents approximately 54% of our total loan portfolio.

 

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

 

     June 30, 2014     Dec 31, 2013  

Total loans, excluding PCI loans

    

Real estate loans

    

Residential

   $ 563,293      $ 458,331   

Commercial

     1,091,660        528,710   

Land, development and construction

     78,444        62,503   
  

 

 

   

 

 

 

Total real estate

     1,733,397        1,049,544   

Commercial

     251,741        143,263   

Consumer and other loans

     56,191        49,547   
  

 

 

   

 

 

 

Loans before unearned fees and deferred cost

     2,041,329        1,242,354   

Net unearned fees and costs

     820        404   
  

 

 

   

 

 

 

Total loans, excluding PCI loans

     2,042,149        1,242,758   
  

 

 

   

 

 

 

Total PCI loans (note 1)

    

Real estate loans

    

Residential

     119,005        120,030   

Commercial

     195,157        100,012   

Land, development and construction

     27,885        6,381   
  

 

 

   

 

 

 

Total real estate

     342,047        226,423   

Commercial

     10,759        3,850   

Consumer and other loans

     1,064        1,148   
  

 

 

   

 

 

 

Total PCI loans

     353,870        231,421   
  

 

 

   

 

 

 

Total loans

     2,396,019        1,474,179   

Allowance for loan losses for loans that are not PCI loans

     (18,240     (19,694

Allowance for loan losses for PCI loans

     (960     (760
  

 

 

   

 

 

 

Total loans, net of allowance for loan losses

   $ 2,376,819      $ 1,453,725   
  

 

 

   

 

 

 

note 1: PCI accounted for pursuant to ASC Topic 310-30.

 

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

 

     June 30, 2014     Dec 31, 2013  

FDIC covered loans that are not PCI loans

    

Real estate loans

    

Residential

   $ 6,457      $ —     

Commercial

     35,668        —     

Land, development and construction

     857        —     
  

 

 

   

 

 

 

Total real estate

     42,982        —     

Commercial

     459        —     

Consumer and other loans

     —          —     
  

 

 

   

 

 

 

FDIC covered loans, excluding PCI loans

     43,441        —     
  

 

 

   

 

 

 

FDIC covered PCI loans (note 1)

    

Real estate loans

    

Residential

     115,306        120,030   

Commercial

     166,932        100,012   

Land, development and construction

     20,509        6,381   
  

 

 

   

 

 

 

Total real estate

     302,747        226,423   

Commercial

     5,184        3,850   

Consumer and other loans

     —          —     
  

 

 

   

 

 

 

Total FDIC covered PCI loans

     307,931        230,273   
  

 

 

   

 

 

 

Total FDIC covered loans

     351,372        230,273   

Allowance for loan losses for FDIC covered loans that are not PCI loans

     —          —     

Allowance for loans losses for FDIC covered PCI loans

     (960     (760
  

 

 

   

 

 

 

Total covered loans, net of allowance for loan losses

   $ 350,412      $ 229,513   
  

 

 

   

 

 

 

note 1: PCI loans are accounted for pursuant to ASC Topic 310-30.

Credit quality and allowance for loan losses

We maintain an allowance for loan losses that we believe is adequate to absorb probable losses incurred in our loan portfolio.

The allowance consists of three components. The first component is an allocation for impaired loans, as defined by generally accepted accounting principles. Impaired loans are those loans whereby management has arrived at a determination that the Company will not be repaid according to the original terms of the loan agreement. Each of these loans is required to have a written analysis supporting the amount of specific allowance allocated to the particular loan, if any. That is to say, a loan may be impaired (i.e., not expected to be repaid as agreed), but may be sufficiently collateralized such that we expect to recover all principal and interest eventually, and therefore no specific allowance is warranted.

Commercial, commercial real estate, land, land development and construction loans in excess of $500 are monitored and evaluated for impairment on an individual loan basis. Commercial, commercial real estate, land, land development and construction loans less than $500 are evaluated for impairment on a pool basis. All consumer and single family residential loans are evaluated for impairment on a pool basis.

 

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On at least a quarterly basis, management reviews each impaired loan to determine whether it should have a specific reserve or partial charge-off. Management relies on appraisals to help make this determination. Updated appraisals are obtained for collateral dependent loans when a loan is scheduled for renewal or refinance. In addition, if the classification of the loan is downgraded to substandard, identified as impaired, or placed on non accrual status (collectively “Problem Loans”), an updated appraisal is obtained if the loan amount is greater than $500 and individually evaluated for impairment.

After an updated appraisal is obtained for a Problem Loan, as described above, an additional updated appraisal will be obtained on at least an annual basis. Thus, current appraisals for Problem Loans in excess of $500 will not be older than one year.

After the initial updated appraisal is obtained for a Problem Loan and before its next annual appraisal update is due, management considers the need for a downward adjustment to the current appraisal amount to reflect current market conditions, based on management’s analysis, judgment and experience. In an extremely volatile market, we may update the appraisal prior to the one year anniversary date.

The second component is a general allowance on all of the Company’s loans other than PCI loans and those identified as impaired. The general component covers non-impaired loans and is based on historical loss experience adjusted for current factors. The historical loss experience is determined by portfolio segment and is based on the actual loss history experienced by the Company over the most recent two years. The portfolio segments identified by the Company are residential loans, commercial real estate loans, construction and land development loans, commercial and industrial and consumer and other. This actual loss experience is supplemented with other economic factors based on the risks present for each portfolio segment. These economic, or qualitative, factors include consideration of the following: levels of and trends in delinquencies and impaired loans; levels of and trends in charge-offs and recoveries; trends in volume and terms of loans; effects of any changes in risk selection and underwriting standards; other changes in lending policies, procedures, and practices; experience, ability, and depth of lending management and other relevant staff; national and local economic trends and conditions; industry conditions; and effects of changes in credit concentrations.

The third component consists of amounts reserved for purchased credit impaired loans. On a quarterly basis, the Company updates the amount of loan principal and interest cash flows expected to be collected, incorporating assumptions regarding default rates, loss severities, the amounts and timing of prepayments and other factors that are reflective of current market conditions. Probable decreases in expected loan principal cash flows trigger the recognition of impairment, which is then measured as the present value of the expected principal loss plus any related foregone interest cash flows discounted at the pool’s effective interest rate. Impairments that occur after the acquisition date are recognized through the provision for loan losses. Probable and significant increases in expected principal cash flows would first reverse any previously recorded allowance for loan losses; any remaining increases are recognized prospectively as interest income. The impacts of (i) prepayments, (ii) changes in variable interest rates, and (iii) any other changes in the timing of expected cash flows are recognized prospectively as adjustments to interest income. Disposals of loans, which may include sales of loans, receipt of payments in full by the borrower, or foreclosure, result in removal of the loan from the PCI portfolio. The aggregate of these three components results in our total allowance for loan losses.

 

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Table of Contents

In the table below we have shown the components, as discussed above, of our allowance for loan losses at June 30, 2014 and December 31, 2013.

 

     June 30, 2014     Dec 31, 2013     increase (decrease)  
     loan      ALLL            loan      ALLL            loan      ALLL        
     balance      balance      %     balance      balance      %     balance      balance        

Non impaired loans

   $ 1,240,084       $ 16,383         1.32   $ 1,218,648       $ 17,883         1.47   $ 21,436       $ (1,500     -15 bps   

Gulfstream loans (note 1)

     299,823         —           —       —           —           —       299,823         —       

FSB loans (note 2)

     474,979         —           —       —           —           —       474,979         —       

Impaired loans

     27,263         1,857         6.81     24,110         1,811         7.51     3,153         46        -70 bps   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Non-PCI loans

     2,042,149         18,240         0.89     1,242,758         19,694         1.58     799,391         (1,454     -69 bps   

PCI loans (note 3)

     353,870         960           231,421         760           122,449         200     
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total loans

   $ 2,396,019       $ 19,200         0.80 %*    $ 1,474,179       $ 20,454         1.39   $ 921,840       $ (1,254     -59 bps   

 

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

 

note 1: Loans acquired pursuant to the January 17, 2014 acquisition of Gulfstream that are not PCI loans. These are performing loans recorded at estimated fair value at the acquisition date. The fair value adjustment at the acquisition date was approximately $7,680, or approximately 2.3% of the outstanding aggregate loan balances. These amounts are accreted into interest income over the remaining lives of the related loans on a level yield basis. Because these loans were recorded at estimated fair value on January 17, 2014, no allowance for loan loss was recorded related to these loans at June 30, 2014.
note 2: Loans acquired pursuant to the June 1, 2014 acquisition of FSB that are not PCI loans. These are performing loans recorded at estimated fair value at the acquisition date. The fair value adjustment at the acquisition date was approximately $10,081, or approximately 2.0% of the outstanding aggregate loan balances. This amount is accreted into interest income over the remaining lives of the related loans on a level yield basis. Because these loans were recorded at estimated fair value on June 1, 2014, no allowance for loan loss was recorded related to these loans at June 30, 2014. Included in the $474,979 of FSB non-PCI loans are $43,441 of loans that are covered by FDIC loss sharing agreements.
note 3: Included in the $353,870 PCI loans at June 30, 2014 are $307,931 of loans that are covered by FDIC loss sharing agreements.

The general loan loss allowance (non-impaired loans) decreased by a net amount of $1,500. This decrease was primarily due to the continued improvement in the local economy and real estate market, and the continued decline in the Company’s two year charge-off history. The Company’s other credit metrics, such as the levels of and trends in the Company’s non-performing loans, past-due loans and impaired loans were also considered when adjusting its qualitative factors, which ultimately increased the current two year historical loss factor ratios.

The specific loan loss allowance (impaired loans) is the aggregate of the results of individual analyses prepared for each one of the impaired loans, excluding PCI loans. The Company recorded partial charge offs in lieu of specific allowance for a number of the impaired loans. The Company’s impaired loans have been written down by $1,578 to $27,263 ($25,406 when the $1,857 specific allowance is considered) from their legal unpaid principal balance outstanding of $28,841. In the aggregate, total impaired loans have been written down to approximately 88% of their legal unpaid principal balance, and non-performing impaired loans have been written down to approximately 81% of their legal unpaid principal balance. The Company’s total non-performing loans (non-accrual loans plus loans past due greater than 90 days and still accruing, $29,667 at June 30, 2014) have been written down to approximately 81% of their legal unpaid principal balance.

Approximately $14,738 of the Company’s impaired loans (54%) are accruing performing loans. This group of impaired loans is not included in the Company’s non-performing loans or non-performing assets categories.

 

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

The allowance is increased by the provision for loan losses, which is a charge to current period earnings and decreased by loan charge-offs net of recoveries of prior period loan charge-offs. Loans are charged against the allowance when management believes collection of the principal is unlikely. We believe our allowance for loan losses was adequate at June 30, 2014. However, we recognize that many factors can adversely impact various segments of the Company’s markets and customers, and therefore there is no assurance as to the amount of losses or probable losses which may develop in the future. The tables below summarize the changes in allowance for loan losses during the periods presented.

 

     Allowance for
loan losses for
loans that are
not PCI loans
    Allowance for
loan losses on
PCI loans
    Total  

Three months ended June 30, 2014

      

Balance at beginning of period

   $ 18,913      $ 1,183      $ 20,096   

Loans charged-off

     (902     —          (902

Recoveries of loans previously charged-off

     112        —          112   
  

 

 

   

 

 

   

 

 

 

Net charge-offs

     (790     —          (790

Provision (recovery) for loan loss

     117        (223     (106
  

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 18,240      $ 960      $ 19,200   
  

 

 

   

 

 

   

 

 

 

Three months ended June 30, 2013

      

Balance at beginning of period

   $ 22,631      $ 2,623      $ 25,254   

Loans charged-off

     (2,603     (515     (3,118

Recoveries of loans previously charged-off

     310        —          310   
  

 

 

   

 

 

   

 

 

 

Net charge-offs

     (2,293     (515     (2,808

Provision (recovery) for loan losses

     1,462        (88     1,374   
  

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 21,800      $ 2,020      $ 23,820   
  

 

 

   

 

 

   

 

 

 

Six months ended June 30, 2014

      

Balance at beginning of period

   $ 19,694      $ 760      $ 20,454   

Loans charged-off

     (2,062     —          (2,062

Recoveries of loans previously charged-off

     955        —          955   
  

 

 

   

 

 

   

 

 

 

Net charge-offs

     (1,107     —          (1,107

Recovery for loan loss

     (347     200        (147
  

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 18,240      $ 960      $ 19,200   
  

 

 

   

 

 

   

 

 

 

Six months ended June 30, 2013

      

Balance at beginning of period

   $ 24,033      $ 2,649      $ 26,682   

Loans charged-off

     (3,834     (515     (4,349

Recoveries of loans previously charged-off

     473        —          473   
  

 

 

   

 

 

   

 

 

 

Net charge-offs

     (3,361     (515     (3,876

Provision (recovery) for loan losses

     1,128        (114     1,014   
  

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 21,800      $ 2,020      $ 23,820   
  

 

 

   

 

 

   

 

 

 

 

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Nonperforming loans and nonperforming assets

Non performing loans exclude PCI loans and are defined as non accrual loans plus loans past due 90 days or more and still accruing interest. Generally, we place loans on non accrual status when they are past due 90 days and management believes the borrower’s financial condition, after giving consideration to economic conditions and collection efforts, is such that collection of interest is doubtful. When we place a loan on non accrual status, interest accruals cease and uncollected interest is reversed and charged against current income. Interest received on such loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. Non performing loans, as defined above, as a percentage of total non-PCI loans, were 1.45% at June 30, 2014, compared to 2.18% at December 31, 2013. The decrease in the ratio was due to the acquisition of non-PCI loans from Gulfstream and FSB during the six month period ending June 30, 2014.

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 $41,923 at June 30, 2014, compared to $33,636 at December 31, 2013. Non performing assets as a percentage of total assets were 1.07% at June 30, 2014, compared to 1.39% at December 31, 2013. The table below summarizes selected credit quality data at the dates indicated. The June 30, 2014 ratios were impacted by the FSB acquisition and the Gulfstream acquisition.

 

     6/30/14     12/31/13  

Non-accrual loans (note 1)

   $ 29,667      $ 27,077   

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

     —          —     
  

 

 

   

 

 

 

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

     29,667        27,077   

Other real estate owned (“OREO”) (note 2)

     12,123        6,409   

Repossessed assets other than real estate (note 1)

     133        150   
  

 

 

   

 

 

 

Total non-performing assets (“NPAs”) (note 2)

   $ 41,923      $ 33,636   

OREO covered by FDIC loss share agreements:

    

80% covered

     10,423        19,111   

75% covered

     1,052        —     

30% covered

     16,349        —     

0% covered

     2,874        —     
  

 

 

   

 

 

 

Total non-performing assets including FDIC covered OREO

   $ 72,621      $ 52,747   

Non-performing loans as percentage of total loans excluding PCI loans

     1.45     2.18

Non-performing assets as percentage of total assets

    

Excluding FDIC covered OREO

     1.07     1.39

Including FDIC covered OREO

     1.86     2.18

Non-performing assets as percentage of loans and OREO plus other repossessed assets (note 1)

    

Excluding FDIC covered OREO

     2.04     2.69

Including FDIC covered OREO

     3.48     4.16

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

     0.64     0.85

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

     61     73

note 1: Excludes PCI loans.

note 2: Excludes OREO covered by FDIC loss share agreements.

 

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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 June 30, 2014 the Company had reported a total of 186 non accrual loans with an aggregate carrying value of $29,667 compared to December 31, 2013 when 191 non accrual loans with an aggregate book value of $27,077 were reported. 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

   $ 11,292         38     81   

Commercial real estate

     13,991         48     42   

Land, development, construction

     1,900         6     14   

Commercial

     2,216         7     26   

Consumer, other

     268         1     23   
  

 

 

    

 

 

   

 

 

 

Total non accrual loans at June 30, 2014

   $ 29,667         100     186   
  

 

 

    

 

 

   

 

 

 

The second largest component of non performing assets after non accrual loans is OREO, excluding OREO covered by FDIC loss share agreements. At June 30, 2014, total OREO was $42,821. Of this amount, $30,698 is covered by FDIC loss sharing agreements. OREO not covered by FDIC loss share agreements is $12,123 at June 30, 2014. 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 Condensed Consolidated Statement of Earnings and Comprehensive Income. OREO is further delineated in the table below.

 

Description of repossessed real estate

   carrying amount
at June 30, 2014
 

13 single family homes

   $ 3,538   

5 residential building lots

     751   

10 commercial buildings

     4,092   

Land / various acreages

     3,742   
  

 

 

 

Total, excluding OREO covered by FDIC loss share agreements

   $ 12,123   

Impaired loans are defined as loans that management has determined will not repay as agreed pursuant to the terms of the related loan agreement. 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 equivalent partial charge-down or other economic conditions change. At June 30, 2014 we have identified a total of $27,263 impaired loans, excluding PCI loans. A specific valuation allowance of $1,857 has been attached to $9,599 of impaired loans included in the total $27,263 of impaired loans identified. It should also be noted that the total carrying balance of the impaired loans, or $27,263, has been partially charged down by $1,578 from their aggregate legal unpaid balance of $28,841. The table below summarizes impaired loan data for the periods presented.

 

     June 30, 2014      Dec. 31,2013  

Impaired loans with a specific valuation allowance

   $ 9,599       $ 9,454   

Impaired loans without a specific valuation allowance

     17,664         14,656   
  

 

 

    

 

 

 

Total impaired loans

   $ 27,263       $ 24,110   

Amount of allowance for loan losses allocated to impaired loans

   $ 1,857       $ 1,811   

Performing TDRs (these are not included in NPLs)

   $ 12,659       $ 10,763   

Non performing TDRs (these are included in NPLs)

     2,281         4,684   
  

 

 

    

 

 

 

Total TDRs (these are included in impaired loans)

     14,940         15,447   

Impaired loans that are not TDRs

     12,323         8,663   
  

 

 

    

 

 

 

Total impaired loans

   $ 27,263       $ 24,110   
  

 

 

    

 

 

 

 

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We continually analyze our loan portfolio in an effort to recognize and resolve problem assets as quickly and efficiently as possible. As of June 30, 2014, 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.

Bank premises and equipment

Bank premises and equipment was $98,623 at June 30, 2014 compared to $96,619 at December 31, 2013, an increase of $2,004 or 2.1%. This amount is the result of branch real estate transferred to held for sale of $6,973 prior to impairment charges of $2,326, $5,781 of bank premises and equipment acquired from the Gulfstream acquisition, $2,877 of bank premises and equipment acquired from the FSB acquisition, and construction in progress along with other purchases net of disposals of $3,360 less $3,041 of depreciation expense.

A summary of our bank premises and equipment for the period end indicated is presented in the table below.

 

     June 30, 2014      Dec. 31, 2013  

Land

   $ 32,960       $ 32,591   

Land improvements

     898         864   

Buildings

     55,733         56,651   

Leasehold improvements

     3,515         2,450   

Furniture, fixtures and equipment

     28,020         26,749   

Construction in progress

     8,156         5,828   
  

 

 

    

 

 

 

Subtotal

     129,282         125,133   

Less: accumulated depreciation

     30,659         28,514   
  

 

 

    

 

 

 

Total

   $ 98,623       $ 96,619   
  

 

 

    

 

 

 

We have transferred branch real estate that is no longer in use to held for sale at estimated fair value less estimated cost to sell. Our branch real estate held for sale at June 30, 2014 and December 31, 2013 was $13,168 and $1,582, respectively. The increase was due to the seven branches and a stand-alone drive thru facility we consolidated and closed in April 2014 as part of our previously announced efficiency and enhanced profitability initiatives and certain branches we acquired from our FSB transaction that are scheduled to be sold and/or closed in September 2014. We have an agreement to sell five of these branches aggregating $6,332 which is expected to close in September 2014.

 

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Deposits

During the six month period ended June 30, 2014, we assumed deposits of $478,999 pursuant to the acquisition of Gulfstream on January 17, 2014 and $852,633 (including $189,674 of deposits held for sale) pursuant to the acquisition of First Southern on June 1, 2014. The acquisition of these deposits included approximately $84,995 and $218,057 of time deposits, respectively. During this period, our total deposits, excluding deposits held for sale, increased by $1,065,112 (time deposits increased by $141,438 and non-time deposits increased by $923,674). The cost of interest bearing deposits in the current quarter decreased by 1basis point (“bp”) to 32bps compared to the prior quarter. The overall cost of total deposits (i.e. includes non-interest bearing checking accounts) in the current quarter remained the same at 0.22% as in the prior quarter. The table below summarizes the Company’s deposit mix over the dates indicated, excluding the deposits held for sale.

 

     June 30, 2014      % of
total
    Dec 31, 2013      % of
total
 

Demand - non-interest bearing

   $ 1,023,285         33   $ 644,915         31

Demand - interest bearing

     589,573         19     483,842         24

Savings deposits

     234,492         7     232,942         11

Money market accounts

     747,680         24     309,657         15

Time deposits

     526,313         17     384,875         19
  

 

 

    

 

 

   

 

 

    

 

 

 

Total deposits, excluding deposits held for sale

   $ 3,121,343         100   $ 2,056,231         100

Deposits held for sale

     185,646           —        
  

 

 

      

 

 

    

Total deposits

   $ 3,306,989         $ 2,056,231      
  

 

 

      

 

 

    

Securities sold under agreement to repurchase

Our subsidiary bank enters into borrowing arrangements with our retail business customers by agreements to repurchase (“securities sold under agreements to repurchase”) under which the bank pledges investment securities owned and under their control as collateral against the one-day borrowing arrangement. These short-term borrowings totaled $33,619 at June 30, 2014 compared to $20,457 at December 31, 2013.

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 June 30, 2014 we had $43,080 of correspondent bank deposits or federal funds purchased, compared to $29,909 at December 31, 2013.

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 June 30, 2014 and December 31, 2013, there were no outstanding advances from the Federal Home Loan Bank.

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

 

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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 bps). 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 bps). 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.

In November 2011, we acquired certain assets and assumed certain liabilities of Federal Trust Corporation (“FTC”) from The Hartford Financial Services Group, Inc. (“Hartford”) pursuant to an acquisition agreement, including FTC’s corporate debenture and related trust preferred security issued through FTC’s finance subsidiary Federal Trust Statutory Trust (“FTC Trust) in the amount of $5,000. 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 295 bps). The corporate debenture and the trust preferred security each have 30-year lives maturing in 2033. The trust preferred security and the corporate debenture are callable by the Company or the FTC Trust, at their respective option after five years, and sooner in specific events, subject to prior approval by the Federal Reserve, if then required. The Company has treated the corporate debenture as Tier 1 capital up to the maximum amount allowed under the Federal Reserve guidelines for federal regulatory purposes. The Company is not considered the primary beneficiary of this Trust (variable interest entity), therefore the trust is not consolidated in the Company’s financial statements, but rather the subordinated debentures are shown as a liability.

In January 2005, Gulfstream Bancshares, Inc. (“GBI”) formed Gulfstream Bancshares Capital Trust I (“GBI Trust I”) for the purpose of issuing trust preferred securities. On January 18, 2005, GBI issued a floating rate corporate debenture in the amount of $7,000. The Trust used the proceeds from the issuance of a trust preferred security to acquire the corporate debenture. 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 190 bps). The rate is subject to change quarterly. 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 GBI Trust I, at their respective option, subject to prior approval by the Federal Reserve, if then required. On January 17, 2014, the Company acquired all the assets and assumed all the liabilities of GBI by merger, including GBI’s corporate debenture and related trust preferred security discussed above. The Company has treated the corporate debenture as Tier 1 capital up to the maximum amount allowed under the Federal Reserve guidelines for federal regulatory purposes.

 

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In March 2007, GBI formed Gulfstream Bancshares Capital Trust II (“GBI Trust II”) for the purpose of issuing trust preferred securities. On March 6, 2007, GBI issued a floating rate corporate debenture in the amount of $3,000. The Trust used the proceeds from the issuance of a trust preferred security to acquire the corporate debenture. 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 170 bps). The rate is subject to change quarterly. 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 GBI Trust II, at their respective option, subject to prior approval by the Federal Reserve, if then required. On January 17, 2014, the Company acquired all the assets and assumed all the liabilities of GBI by merger, including GBI’s corporate debenture and related trust preferred security discussed above. The Company has treated the corporate debenture as Tier 1 capital up to the maximum amount allowed under the Federal Reserve guidelines for federal regulatory purposes.

Stockholders’ equity

Stockholders’ equity at June 30, 2014, was $439,458, or 11.3% of total assets, compared to $273,379, or 11.3% of total assets at December 31, 2013. The increase in stockholders’ equity was due to the following items:

 

$ 273,379     

Total stockholders’ equity at December 31, 2013

  53,150     

Common stock issued pursuant to the Gulfstream acquisition

  3,617     

Gulfstream stock options converted to CenterState stock options

  100,639     

Common stock issued pursuant to the FSB acquisition

  2,090     

Net income during the period

  (805  

Dividends paid on common shares, $0.02 per common share

  6,076     

Net increase in market value of securities available for sale, net of deferred taxes

  894     

Stock options exercised, including tax benefit

  418     

Employee equity based compensation

 

 

   
$ 439,458     

Total stockholders’ equity at June 30, 2014

 

 

   

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 June 30, 2014, our subsidiary bank exceeded the minimum capital levels to be considered “well capitalized” under the terms of the guidelines.

 

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Selected consolidated capital ratios at June 30, 2014 and December 31, 2013 for the Company and for the Company’s subsidiary bank, CenterState Bank of Florida, N.A., are presented in the tables below. There is no threshold for “well-capitalized” status for bank holding companies.

 

CenterState Banks, Inc. (the Company)

   Actual     Capital Adequacy     Excess  
     Amount      Ratio     Amount      Ratio     Amount  

June 30, 2014

            

Total capital (to risk weighted assets)

   $ 360,345         15.1   $ 190,924         > 8   $ 169,421   

Tier 1 capital (to risk weighted assets)

     341,145         14.3     95,462         > 4     245,683   

Tier 1 capital (to average assets)

     341,145         10.8     125,858         > 4     215,287   

December 31, 2013

            

Total capital (to risk weighted assets)

   $ 262,701         17.9   $ 117,450         > 8   $ 145,251   

Tier 1 capital (to risk weighted assets)

     244,323         16.6     58,725         > 4     185,598   

Tier 1 capital (to average assets)

     244,323         10.4     94,182         > 4     150,141   

CenterState Bank of Florida, N.A.

   Actual     Well capitalized     Excess  
     Amount      Ratio     Amount      Ratio     Amount  

June 30, 2014

            

Total capital (to risk weighted assets)

   $ 333,653         14.0   $ 238,800         > 10   $ 94,853   

Tier 1 capital (to risk weighted assets)

     314,461         13.2     143,280         > 6     171,181   

Tier 1 capital (to average assets)

     314,461         9.9     158,917         > 5     155,544   

December 31, 2013

            

Total capital (to risk weighted assets)

   $ 213,744         14.6   $ 146,277         > 10   $ 67,467   

Tier 1 capital (to risk weighted assets)

     195,434         13.4     87,766         > 6     107,668   

Tier 1 capital (to average assets)

     195,434         8.3     117,444         > 5     77,990   

In July 2013, the two federal banking regulatory agencies that have authority to regulate the Company’s capital resources and capital structure (the Board of Governors of the Federal Reserve System (FRB) and Federal Deposit Insurance Corporation (FDIC)) took action to finalize the application to the United States banking industry of new regulatory capital requirements that are established by the international banking framework commonly referred to as “Basel III” and to implement certain other changes required by the Dodd-Frank Wall Street Reform and Consumer Protection Act. As anticipated by management of the Company (see the related discussion included in Item 1 of the Company’s annual report on Form 10-K for the year 2013 filed in March 2014), these rules make significant changes to the U.S. bank regulatory capital framework, and generally increase capital requirements for banking organizations. However, in response to concerns expressed by community banks such as the Company, the final rules addressed previous concerns of community banks about the proposed rules’ regulatory capital treatment of trust preferred securities, unrealized gains and losses on available-for-sale securities in accumulated other comprehensive income (“AOCI”) and mortgage risk weights. Therefore, although the Company has not yet had the opportunity to analyze the final rules in detail in order to determine their likely impact upon the Company, and although management does continue to believe that such requirements will in general increase the amount of capital that the Company and the Bank may be required to maintain under these new standards, the Company believes that its prior concerns regarding volatility and trust preferred securities have been favorably addressed by the final rules. The Company does not presently expect that any materially burdensome compliance efforts with these final capital rules will be required of us prior to January 1, 2015.

 

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COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTH PERIODS ENDED June 30, 2014 AND 2013

Overview

We recognized net income of $1,037 or $0.03 per share basic and diluted for the three month period ended June 30, 2014, compared to net income of $2,758 or $0.09 per share basic and diluted for the same period in 2013. A summary of the differences are listed in the table below.

 

     3 months ended
June 30, 2014
    3 months ended
June 30, 2013
    increase
(decrease)
 

Net interest income

   $ 31,257      $ 22,980      $ 8,277   

Provision for loan losses

     (106     1,374        (1,480
  

 

 

   

 

 

   

 

 

 

Net interest income after loan loss provision

     31,363        21,606        9,757   

Correspondent banking and capital markets division

     5,285        5,609        (324

Gain on sale of available for sale securities

     46        1,008        (962

Indemnification Asset (“IA”) amortization

     (5,006     (3,272     (1,734

FDIC revenue

     421        1,396        (975

All other non interest income

     5,626        5,122        504   
  

 

 

   

 

 

   

 

 

 

Total non interest income

     6,372        9,863        (3,491

Correspondent banking and capital markets division

     5,063        5,363        (300

Credit related expenses

     2,375        3,134        (759

All other non interest expense

     23,789        18,876        4,913   

Merger related expenses

     4,897        —          4,897   

Branch closure and efficiency initiatives

     29        —          29   
  

 

 

   

 

 

   

 

 

 

Total non interest expense

     36,153        27,373        8,780   

Net income before provision for income taxes

     1,582        4,096        (2,514

Provision for income taxes

     545        1,338        (793
  

 

 

   

 

 

   

 

 

 

Net income

   $ 1,037      $ 2,758      ($ 1,721
  

 

 

   

 

 

   

 

 

 

The primary differences between the two quarters presented above relate to our January 17, 2014 acquisition of Gulfstream and our June 1, 2014 acquisition of FSB. The increase in our net interest income relates primarily to the increase in our average interest earning assets as a result of these acquisitions. The increase in our non interest expense, which is basically the operating expenses of our commercial/retail banking segment, is also primarily due to these acquisitions. The other significant difference is the FSB merger related expenses. The Gulfstream merger related expenses were recognized in the first quarter of the year. These items along with others are discussed and analyzed below.

Net interest income/margin

Net interest income increased $8,277 or 36% to $31,257 during the three month period ended June 30, 2014 compared to $22,980 for the same period in 2013. The $8,277 increase was the result of an $8,592 increase in interest income and a $315 increase in interest expense.

Interest earning assets averaged $2,904,332 during the three month period ended June 30, 2014 as compared to $2,038,303 for the same period in 2013, an increase of $866,029, or 42.5%. The yield on average interest earning assets decreased 25bps to 4.57% (27bps to 4.62% tax equivalent basis) during the three month period ended June 30, 2014, compared to 4.82% (4.89% tax equivalent basis) for the same period in 2013. The combined effects of the $866,029 increase in average interest earning assets and the 25bps (27bps tax equivalent basis) decrease in yield on average interest earning assets resulted in the $8,592 ($8,654 tax equivalent basis) increase in interest income between the two periods.

 

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Interest bearing liabilities averaged $1,985,055 during the three month period ended June 30, 2014 as compared to $1,510,237 for the same period in 2013, an increase of $474,818 or 31.4%. The cost of average interest bearing liabilities decreased 3bps to 0.37% during the three month period ended June 30, 2014, compared to 0.40% for the same period in 2013. The combined effects of the $474,818 increase in average interest bearing liabilities and the 3bps decrease in cost of average interest bearing liabilities resulted in the $315 increase in interest expense between the two periods.

The table below summarizes the analysis of changes in interest income and interest expense for the three month periods ended June 30, 2014 and 2013 on a tax equivalent basis.

 

     Three months ended June 30,  
     2014     2013  
     Average     Interest      Average     Average     Interest      Average  
     balance     inc / exp      rate     balance     inc / exp      rate  

Loans (notes 1, 2, 8)

   $ 1,723,242      $ 20,507         4.77   $ 1,153,194      $ 13,918         4.84

PCI loans (note 9)

     285,270        8,231         11.57     267,312        8,020         12.03

Securities- taxable

     571,813        3,809         2.67     392,974        2,097         2.14

Securities- tax exempt (note 8)

     39,112        512         5.25     44,841        566         5.06

Fed funds sold and other (note 3)

     284,895        424         0.60     179,982        228         0.51
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total interest earning assets

     2,904,332        33,483         4.62     2,038,303        24,829         4.89

Allowance for loan losses

     (20,052          (23,962     

All other assets

     386,383             367,969        
  

 

 

        

 

 

      

Total assets

   $ 3,270,663           $ 2,382,310        
  

 

 

        

 

 

      

Interest bearing deposits (note 4)

     1,882,384        1,523         0.32     1,433,806        1,330         0.37

Fed funds purchased

     46,426        5         0.04     35,619        6         0.07

Other borrowings (note 5)

     32,384        56         0.69     23,831        21         0.35

Corporate debenture (note 10)

     23,861        238         4.00     16,981        150         3.54
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total interest bearing liabilities

     1,985,055        1,822         0.37     1,510,237        1,507         0.40

Demand deposits

     906,746             574,345        

Other liabilities

     25,040             22,135        

Stockholders’ equity

     353,822             275,593        
  

 

 

        

 

 

      

Total liabilities and stockholders’ equity

   $ 3,270,663           $ 2,382,310        
  

 

 

        

 

 

      

Net interest spread (tax equivalent basis) (note 6)

          4.25          4.49
       

 

 

        

 

 

 

Net interest income (tax equivalent basis)

     $ 31,661           $ 23,322      
    

 

 

        

 

 

    

Net interest margin (tax equivalent basis) (note 7)

          4.37          4.59
       

 

 

        

 

 

 

 

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 $100 and $190 for the three month periods ended June 30, 2014 and 2013.
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 ($247) and ($122) for the three month periods ended June 30, 2014 and 2013.
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.
note 9: PCI loans are accounted for pursuant to ASC 310-30.
note 10: Includes amortization of fair value adjustments related to various acquisitions of corporate debentures of $44 and $7 for the three month periods ended June 30, 2014 and 2013.

 

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Provision for loan losses

The provision for loan losses decreased $1,480 to $(106) during the three month period ending June 30, 2014 compared to a provision of $1,374 for the comparable period in 2013. Our policy is to maintain the allowance for loan losses at a level sufficient to absorb probable incurred losses 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. Our loss factors associated with our general allowance for loan losses is the primary reason causing the decrease in our provision expense due to our continued improvement in substantially all of our credit metrics, in particular our historical loss factors which is a derivative of our historical charge-off rates. See “Credit quality and allowance for loan losses” for additional information regarding the allowance for loan losses.

Non-interest income

Non-interest income for the three months ended June 30, 2014 was $6,372 compared to $9,863 for the comparable period in 2013. This decrease was the result of the following components listed in the table below.

 

Three month period ending:

   June 30,
2014
    June 30,
2013
    $ increase
(decrease)
    % increase
(decrease)
 

Income from correspondent banking capital markets division

   $ 4,192      $ 4,904      $ (712     (14.5 %) 

Other correspondent banking related revenue

     1,093        705        388        55.0

Wealth management related revenue

     1,104        1,130        (26     (2.3 %) 

Service charges on deposit accounts

     2,333        2,081        252        12.1

Debit, prepaid, ATM and merchant card related fees

     1,495        1,342        153        11.4

BOLI income

     356        338        18        5.3

Other service charges and fees

     338        231        107        46.3

Gain on sale of securities

     46        1,008        (962     (95.4 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal

   $ 10,957      $ 11,739      $ (782     (6.7 %) 

FDIC indemnification asset-amortization(see explanation below)

     (5,006     (3,272     (1,734     53.0

FDIC indemnification income

     421        1,396        (975     (69.8 %) 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total non-interest income

   $ 6,372      $ 9,863      $ (3,491     (35.4 %) 
  

 

 

   

 

 

   

 

 

   

 

 

 

When the estimate of future losses in our FDIC covered loans decrease (i.e. future cash flows increase), this increase in cash flows is accreted into interest income, increasing yields, over the remaining life of the related loan pool. The indemnification asset (“IA”) represents the amount that is expected to be collected from the FDIC for reimbursement of a percentage, as set forth in each of the individual agreements, of the estimated losses in the covered pools. When management decreases its estimate of future losses, the expected reimbursement from the FDIC, or IA, is decreased by this related covered percentage. The decrease in estimated reimbursements is expensed (negative accretion) over the lesser of the remaining expected life of the related loan pool(s) or the remaining term of the related loss share agreement(s), and is included in non-interest income as a negative amount.

At June 30, 2014, the total IA on our Condensed Consolidated Balance Sheet was $61,311. Of this amount, we expect to receive reimbursements from the FDIC of approximately $28,898 related to

 

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future estimated losses, and expect to write-off approximately $32,413 for previously estimated losses that are no longer expected. The $32,413 is now expected to be paid by the borrower (or realized upon the sale of OREO) instead of a reimbursement from the FDIC. At June 30, 2014, the $32,413 previously estimated reimbursements from the FDIC will be written off as expense (negative accretion) included in our non-interest income category of our Condensed Consolidated Statement of Earnings and Comprehensive Income as summarized below.

 

Year

            

Year

      

2014 (6 months)

     27.0    

2018

     6.2

2015

     29.1    

2019

     5.4

2016

     19.3    

2020 thru 2022

     4.9
         

 

 

 

2017

     8.1    

Total

     100.0
         

 

 

 

When a FDIC covered OREO property is sold at a loss, the loss is included in non-interest expense as loss on sale of OREO, and the percentage of the loss that is covered by the FDIC is recorded as FDIC OREO indemnification income and included in non-interest income. When a FDIC covered loan pool is impaired, the impairment expense is included in loan loss provision expense, and the percentage of the impairment expense that is covered by the FDIC is recorded as FDIC pool impairment indemnification income and included in non-interest income.

Income from correspondent banking and capital markets division means commissions earned on fixed income security sales, fees from hedging services, loan brokerage fees and related consulting fees. This line item is volatile and will vary period to period based on sales volume.

Other correspondent banking related revenue means fees generated from safe-keeping activities, bond accounting services, asset/liability consulting fees, international wires, clearing and corporate checking account services and other correspondent banking related services.

 

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Non-interest expense

Non-interest expense for the three months ended June 30, 2014 increased $8,780, or 32.1%, to $36,153, compared to $27,373 for the same period in 2013. Components of our non-interest expenses are listed in the table below.

 

Three month period ending:

   June 30,
2014
    June 30,
2013
    $ increase
(decrease)
    % increase
(decrease)
 

Salaries and wages

   $ 13,234      $ 12,142      $ 1,092        9.0

Incentive/bonus compensation

     1,276        1,171        105        9.0

Stock based compensation

     182        143        39        27.3

Employer 401K matching contributions

     374        308        66        21.4

Deferred compensation expense

     160        134        26        19.4

Health insurance and other employee benefits

     1,180        796        384        48.2

Payroll taxes

     913        733        180        24.6

Other employee related expenses

     401        344        57        16.6

Incremental direct cost of loan origination

     (535     (537     2        (0.4 %) 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total salaries, wages and employee benefits

     17,185        15,234        1,951        12.8
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss on sale of OREO

     58        177        (119     (67.2 %) 

Loss on sale of FDIC covered OREO

     321        386        (65     (16.8 %) 

Valuation write down of OREO

     445        295        150        50.9

Valuation write down of FDIC covered OREO

     440        1,385        (945     (68.2 %) 

Loss on repossessed assets other than real estate

     19        104        (85     (81.7 %) 

Foreclosure and repossession related expenses

     717        438        279        63.7

Foreclosure and repo expense, FDIC (note 1)

     375        349        26        7.5
  

 

 

   

 

 

   

 

 

   

 

 

 

Total credit related expenses

     2,375        3,134        (759     (24.2 %) 
  

 

 

   

 

 

   

 

 

   

 

 

 

Occupancy expense

     2,479        1,942        537        27.6

Depreciation of premises and equipment

     1,563        1,455        108        7.4

Supplies, stationary and printing

     334        285        49        17.2

Marketing expenses

     619        586        33        5.6

Data processing expense

     1,306        912        394        43.2

Legal, auditing and other professional fees

     1,376        844        532        63.0

Bank regulatory related expenses

     753        635        118        18.6

Postage and delivery

     365        267        98        36.7

Debit, prepaid, ATM and merchant card related expenses

     468        427        41        9.6

CDI and Trust intangible amortization

     515        302        213        70.5

Internet and telephone banking

     415        239        176        73.6

Operational write-offs and losses

     55        14        41        292.9

Correspondent accounts and Federal Reserve charges

     152        120        32        26.7

Conferences/Seminars/Education/Training

     98        138        (40     (29.0 %) 

Director fees

     95        102        (7     (6.9 %) 

Travel expenses

     106        104        2        1.9

Other expenses

     968        633        335        52.9
  

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal

     31,227        27,373        3,854        14.1

Merger related expenses

     4,897        —          4,897        100.0

Branch closure and efficiency initiatives

     29        —          29        100.0
  

 

 

   

 

 

   

 

 

   

 

 

 

Total non-interest expense

   $ 36,153      $ 27,373      $ 8,780        32.1
  

 

 

   

 

 

   

 

 

   

 

 

 

 

note 1: These are foreclosure and repossession related expenses related to FDIC covered assets, and are shown net of FDIC reimbursable amounts pursuant to FDIC loss share agreements.

The overall increase in our non interest expense is primarily due to our January 17, 2014 acquisition of Gulfstream and our June 1, 2014 acquisition of FSB. The merger related expenses relate to the FSB acquisition. The majority of the Gulfstream merger related expenses were recognized during the first quarter of 2014.

 

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Provision for income taxes

We recognized an income tax provision for the three months ended June 30, 2014 of $545 on pre-tax income of $1,582 (an effective tax rate of 34.5%) compared to an income tax provision of $1,338 on pre-tax income of $4,096 (an effective tax rate of 32.7%) for the comparable quarter in 2013.

COMPARISON OF RESULTS OF OPERATIONS FOR THE SIX MONTH PERIODS ENDED June 30, 2014 AND 2013

Overview

We recognized net income of $2,090 or $0.06 per share basic and diluted for the six month period ended June 30, 2014, compared to net income of $7,334 or $0.24 per share basic and diluted for the same period in 2013. A summary of the differences are listed in the table below.

 

     6 months ended
June 30, 2014
    6 months ended
June 30, 2013
    increase
(decrease)
 

Net interest income

   $ 59,450      $ 45,802      $ 13,648   

Provision for loan losses

     (147     1,014        (1,161
  

 

 

   

 

 

   

 

 

 

Net interest income after loan loss provision

     59,597        44,788        14,809   

Correspondent banking and capital markets division

     9,216        12,614        (3,398

Gain on sale of available for sale securities

     46        1,038        (992

Indemnification Asset (“IA”) amortization

     (10,191     (5,471     (4,720

FDIC revenue

     1,689        2,024        (335

All other non interest income

     11,372        9,937        1,435   
  

 

 

   

 

 

   

 

 

 

Total non interest income

     12,132        20,142        (8,010

Correspondent banking and capital markets division

     9,441        11,438        (1,997

Credit related expenses

     4,199        5,155        (956

All other non interest expense

     44,485        37,870        6,615   

Merger related expenses

     7,244        —          7,244   

Branch closure and efficiency initiatives

     3,187        —          3,187   
  

 

 

   

 

 

   

 

 

 

Total non interest expense

     68,556        54,463        14,093   

Net income before provision for income taxes

     3,173        10,467        (7,294

Provision for income taxes

     1,083        3,133        (2,050
  

 

 

   

 

 

   

 

 

 

Net income

   $ 2,090      $ 7,334      ($ 5,244
  

 

 

   

 

 

   

 

 

 

The primary differences between the two periods presented above relate to our January 17, 2014 acquisition of Gulfstream and our June 1, 2014 acquisition of FSB. The increase in our net interest income relates primarily to the increase in our average interest earning assets as a result of these acquisitions. The increase in our non interest expense, which is basically the operating expenses of our commercial/retail banking segment, is also primarily due to these acquisitions.

Other significant differences between the two periods are merger related expense from our two acquisitions in 2014 and one time charges related to our efficiency and enhanced profitability initiatives we announced in January 2014 which included impairment charges on branch real estate transferred to held for sale and severance payments related to our reduction in force.

 

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Another significant difference between the two periods, that is unrelated to our two acquisitions, is the increase in IA amortization which is due to our FDIC covered loans performing better than previously expected. Each calendar quarter we reforecast estimated expected future cash flows in our FDIC covered loans included in our PCI loan portfolio. As our estimates of future losses decrease, the estimates of future reimbursements from the FDIC included in our IA decreases resulting in writing down the previously expected reimbursements over the shorter of the remaining life of the related loan pool(s) or the remaining term of the related loss share agreement. These items along with others are discussed and analyzed below.

Net interest income/margin

Net interest income increased $13,648 or 30% to $59,450 during the six month period ended June 30, 2014 compared to $45,802 for the same period in 2013. The $13,648 increase was the result of a $13,996 increase in interest income and a $348 increase in interest expense.

Interest earning assets averaged $2,700,601 during the six month period ended June 30, 2014 as compared to $2,028,322 for the same period in 2013, an increase of $672,279, or 33.1%. The yield on average interest earning assets decreased 17bps to 4.69% (17bps to 4.75% tax equivalent basis) during the six month period ended June 30, 2014, compared to 4.86% (4.92% tax equivalent basis) for the same period in 2013. The combined effects of the $672,279 increase in average interest earning assets and the 17bps (17bps tax equivalent basis) decrease in yield on average interest earning assets resulted in the $13,996 ($14,168 tax equivalent basis) increase in interest income between the two periods.

Interest bearing liabilities averaged $1,867,254 during the six month period ended June 30, 2014 as compared to $1,527,288 for the same period in 2013, an increase of $339,966, or 22.3%. The cost of average interest bearing liabilities decreased 3bps to 0.37% during the six month period ended June 30, 2014, compared to 0.40% for the same period in 2013. The combined effects of the $339,966 increase in average interest bearing liabilities and the 3bps decrease in cost of average interest bearing liabilities resulted in the $348 increase 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 six month periods ended June 30, 2014 and 2013 on a tax equivalent basis.

 

     Six months ended June 30,  
     2014     2013  
     Average
balance
    Interest
inc / exp
     Average
rate
    Average
balance
    Interest
inc / exp
     Average
rate
 

Loans (notes 1, 2, 8)

   $ 1,618,732      $ 38,234         4.76   $ 1,143,175      $ 27,635         4.87

PCI loans (note 9)

     268,521        16,462         12.36     277,192        15,847         11.53

Securities- taxable

     532,507        7,286         2.76     405,017        4,485         2.23

Securities- tax exempt (note 8)

     39,196        1,024         5.27     43,942        1,108         5.08

Fed funds sold and other (note 3)

     241,645        663         0.55     158,996        426         0.54
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total interest earning assets

     2,700,601        63,669         4.75     2,028,322        49,501         4.92

Allowance for loan losses

     (20,508          (25,364     

All other assets

     391,226             383,068        
  

 

 

        

 

 

      

Total assets

   $ 3,071,319           $ 2,386,026        
  

 

 

        

 

 

      

Interest bearing deposits (note 4)

     1,768,726        2,860         0.33     1,448,079        2,713         0.38

Fed funds purchased

     44,224        11         0.05     40,115        11         0.06

Other borrowings (note 5)

     31,083        79         0.51     22,116        39         0.36

Corporate debenture (note 10)

     23,221        461         4.00     16,978        300         3.56
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total interest bearing liabilities

     1,867,254        3,411         0.37     1,527,288        3,063         0.40

Demand deposits

     837,720             560,041        

Other liabilities

     27,700             23,660        

Stockholders’ equity

     338,645             275,037        
  

 

 

        

 

 

      

Total liabilities and stockholders’ equity

   $ 3,071,319           $ 2,386,026        
  

 

 

        

 

 

      

Net interest spread (tax equivalent basis) (note 6)

          4.38          4.52
       

 

 

        

 

 

 

Net interest income (tax equivalent basis)

     $ 60,258           $ 46,438      
    

 

 

        

 

 

    

Net interest margin (tax equivalent basis) (note 7)

          4.50          4.62
       

 

 

        

 

 

 

 

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 $143 and $236 for the six month periods ended June 30, 2014 and 2013.
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 ($402) and ($301) for the six month periods ended June 30, 2014 and 2013.
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.
note 9: PCI loans are accounted for pursuant to ASC 310-30.
note 10: Includes amortization of fair value adjustments related to various acquisitions of corporate debentures of $88 and $13 for the six month periods ended June 30, 2014 and 2013.

Provision for loan losses

The provision for loan losses decreased $1,161 to $(147) during the six month period ending June 30, 2014 compared to a provision of $1,014 for the comparable period in 2013. Our policy is to maintain the allowance for loan losses at a level sufficient to absorb probable incurred losses 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

 

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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. Our loss factors associated with our general allowance for loan losses is the primary reason causing the decrease in our provision expense due to our continued improvement in substantially all of our credit metrics, in particular our historical loss factors which is a derivative of our historical charge-off rates. See “Credit quality and allowance for loan losses” for additional information regarding the allowance for loan losses.

Non-interest income

Non-interest income for the six months ended June 30, 2014 was $12,132 compared to $20,142 for the comparable period in 2013. This decrease was the result of the following components listed in the table below.

 

Six month period ending:

   June 30,
2014
    June 30,
2013
    $ increase
(decrease)
    % increase
(decrease)
 

Income from correspondent banking capital markets division

   $ 7,340      $ 11,044      $ (3,704     (33.5 %) 

Other correspondent banking related revenue

     1,876        1,570        306        19.5

Wealth management related revenue

     2,321        2,200        121        5.5

Service charges on deposit accounts

     4,595        3,900        695        17.8

Debit, prepaid, ATM and merchant card related fees

     3,001        2,627        374        14.2

BOLI income

     708        677        31        4.6

Other service charges and fees

     747        533        214        40.2

Gain on sale of securities

     46        1,038        (992     (95.6 %) 
  

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal

   $ 20,634        23,589      $ (2,955     (12.5 %) 

FDIC indemnification asset-amortization(see explanation below)

     (10,191     (5,471     (4,720     86.3

FDIC indemnification income

     1,689        2,024        (335     (16.6 %) 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total non-interest income

   $ 12,132      $ 20,142      $ (8,010     (39.8 %) 
  

 

 

   

 

 

   

 

 

   

 

 

 

When the estimate of future losses in our FDIC covered loans decrease (i.e. future cash flows increase), this increase in cash flows is accreted into interest income, increasing yields, over the remaining life of the related loan pool. The indemnification asset (“IA”) represents the amount that is expected to be collected from the FDIC for reimbursement of a percentage, as set forth in each of the individual agreements, of the estimated losses in the covered pools. When management decreases its estimate of future losses, the expected reimbursement from the FDIC, or IA, is decreased by this related covered percentage. The decrease in estimated reimbursements is expensed (negative accretion) over the lesser of the remaining expected life of the related loan pool(s) or the remaining term of the related loss share agreement(s), and is included in non-interest income as a negative amount.

 

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At June 30, 2014, the total IA on our Condensed Consolidated Balance Sheet was $61,311. Of this amount, we expect to receive reimbursements from the FDIC of approximately $28,898 related to future estimated losses, and expect to write-off approximately $32,413 for previously estimated losses that are no longer expected. The $32,413 is now expected to be paid by the borrower (or realized upon the sale of OREO) instead of a reimbursement from the FDIC. At June 30, 2014, the $32,413 previously estimated reimbursements from the FDIC will be written off as expense (negative accretion) included in our non-interest income category of our Condensed Consolidated Statement of Earnings and Comprehensive Income as summarized below.

 

Year

            

Year

      

2014 (6 months)

     27.0    

2018

     6.2

2015

     29.1    

2019

     5.4

2016

     19.3    

2020 thru 2022

     4.9
         

 

 

 

2017

     8.1    

Total

     100.0
         

 

 

 

When a FDIC covered OREO property is sold at a loss, the loss is included in non-interest expense as loss on sale of OREO, and the percentage of the loss that is covered by the FDIC is recorded as FDIC OREO indemnification income and included in non-interest income. When a FDIC covered loan pool is impaired, the impairment expense is included in loan loss provision expense, and the percentage of the impairment expense that is covered by the FDIC is recorded as FDIC pool impairment indemnification income and included in non-interest income.

Income from correspondent banking and capital markets division means commissions earned on fixed income security sales, fees from hedging services, loan brokerage fees and related consulting fees. This line item is volatile and will vary period to period based on sales volume.

Other correspondent banking related revenue means fees generated from safe-keeping activities, bond accounting services, asset/liability consulting fees, international wires, clearing and corporate checking account services and other correspondent banking related services.

 

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Non-interest expense

Non-interest expense for the six months ended June 30, 2014 increased $14,093, or 25.9%, to $68,556, compared to $54,463 for the same period in 2013. Components of our non-interest expenses are listed in the table below.

 

Six month period ending:

   June 30,
2014
    June 30,
2013
    $ increase
(decrease)
    % increase
(decrease)
 

Salaries and wages

   $ 25,107      $ 24,807      $ 300        1.2

Incentive/bonus compensation

     2,514        2,265        249        11.0

Stock based compensation

     369        289        80        27.7

Employer 401K matching contributions

     734        675        59        8.7

Deferred compensation expense

     267        275        (8     (2.9 %) 

Health insurance and other employee benefits

     2,167        1,747        420        24.0

Payroll taxes

     2,033        1,750        283        16.2

Other employee related expenses

     659        640        19        3.0

Incremental direct cost of loan origination

     (984     (974     (10     1.0
  

 

 

   

 

 

   

 

 

   

 

 

 

Total salaries, wages and employee benefits

     32,866        31,474        1,392        4.4
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss on sale of OREO

     28        253        (225     (88.9 %) 

Loss on sale of FDIC covered OREO

     428        309        119        38.5

Valuation write down of OREO

     515        637        (122     (19.2 %) 

Valuation write down of FDIC covered OREO

     1,390        2,030        (640     (31.5 %) 

Loss on repossessed assets other than real estate

     17        346        (329     (95.1 %) 

Loan put back expense

     —          4        (4     (100.0 %) 

Foreclosure and repossession related expenses

     1,202        879        323        36.7

Foreclosure and repo expense, FDIC (note 1)

     619        697        (78     (11.2 %) 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total credit related expenses

     4,199        5,155        (956     (18.5 %) 
  

 

 

   

 

 

   

 

 

   

 

 

 

Occupancy expense

     4.439        3,834        605        15.8

Depreciation of premises and equipment

     3,041        2,952        89        3.0

Supplies, stationary and printing

     561        573        (12     (2.1 %) 

Marketing expenses

     1,239        1,114        125        11.2

Data processing expense

     2,345        1,796        549        30.6

Legal, auditing and other professional fees

     2,151        1,627        524        32.2

Bank regulatory related expenses

     1,384        1,216        168        13.8

Postage and delivery

     633        552        81        14.7

Debit, prepaid, ATM and merchant card related expenses

     942        953        (11     (1.2 %) 

CDI and Trust intangible amortization

     891        607        284        46.8

Internet and telephone banking

     793        463        330        71.3

Put-back option amortization

     —          37        (37     (100.0 %) 

Operational write-offs and losses

     91        30        61        203.3

Correspondent accounts and Federal Reserve charges

     287        229        58        25.3

Conferences/Seminars/Education/Training

     198        291        (93     (32.0 %) 

Director fees

     210        204        6        2.9

Travel expenses

     171        178        (7     (3.9 %) 

Other expenses

     1,684        1,178        506        43.0
  

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal

     58,125        54,463        3,662        6.7

Merger related expenses

     7,244        —          7,244        100.0

Branch closure and efficiency initiatives

     3,187        —          3,187        100.0
  

 

 

   

 

 

   

 

 

   

 

 

 

Total non-interest expense

   $ 68,556      $ 54,463      $ 14,093        25.9
  

 

 

   

 

 

   

 

 

   

 

 

 

 

note 1: These are foreclosure and repossession related expenses related to FDIC covered assets, and are shown net of FDIC reimbursable amounts pursuant to FDIC loss share agreements.

The overall increase in our non interest expense is primarily due to our January 17, 2014 acquisition of Gulfstream and our June 1, 2014 acquisition of FSB. The merger related expenses relate to both of these acquisitions. The branch closure and efficiency initiatives expense relates to one-time charges including impairment expenses on closed branch property transferred to held for sale and severance payments from our reduction in force.

 

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Provision for income taxes

We recognized an income tax provision for the six months ended June 30, 2014 of $1,083 on pre-tax income of $3,173 (an effective tax rate of 34.1%) compared to an income tax provision of $3,133 on pre-tax income of $10,467 (an effective tax rate of 29.9%) for the comparable quarter in 2013

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.

Our subsidiary bank 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. The 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 have any material off-balance sheet arrangements except for approved and unfunded loans and letters of credit to our customers in the ordinary course of business.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES: MARKET RISK

Market risk

We believe interest rate risk is the most significant market risk impacting us. We monitor and manage 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, 2013 for disclosure of the quantitative and qualitative information regarding the interest rate risk inherent in interest rate risk sensitive instruments as of December 31, 2013. There have been no changes in the assumptions used in monitoring interest rate risk as of June 30, 2014. The impact of other types of market risk, such as foreign currency exchange risk and equity price risk, is deemed immaterial.

 

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ITEM 4. 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, the CEO and CFO have concluded that our disclosure controls and procedures are 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. There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) or 15d-15(f)) during the quarter covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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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, 2013 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

Merger Related Litigation

As disclosed in Form 10-Q filed on May 6, 2014, a class action complaint was filed on April 24, 2014 in the Circuit Court of the 15th Judicial Circuit in and for Palm Beach County, Florida against First Southern Bancorp, Inc. (“First Southern”), its directors and CenterState challenging the merger of First Southern with CenterState. The complaint was subsequently withdrawn.

 

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

Exhibit 101.1

   Interactive Data File

101.INS

   XBRL Instance Document

101.SCH

   XBRL Schema Document

101.CAL

   XBRL Calculation Linkbase Document

101.DEF

   XBRL Definition Linkbase Document

101.LAB

   XBRL Label Linkbase Document

101.PRE

   XBRL Presentation Linkbase Document

 

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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:  

August 5, 2014

    By:  

/s/ Ernest S. Pinner

        Ernest S. Pinner
        Chairman, President and Chief Executive Officer
Date:  

August 5, 2014

    By:  

/s/ James J. Antal

        James J. Antal
        Senior Vice President and Chief Financial Officer

 

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