Exhibit 99.1

 

FOR IMMEDIATE RELEASE            

July 22, 2015                                                  

 

CenterState Banks, Inc. Announces

Second Quarter 2015 Operating Results

 

 

DAVENPORT, FL. – July 22, 2015 - CenterState Banks, Inc. (NASDAQ: CSFL) reported earnings per share of $0.21 ($0.22 per share net operating income, a non-gaap measurement described below) on net income of $9,878 for the second quarter of 2015, compared to $0.20 per share on net income of $9,148 reported during the prior quarter.  All amounts are in thousands, except per share information, and all earnings per share amounts are reported on a diluted basis unless otherwise noted.  

 

A comparison of current quarter earnings and prior quarter is presented in the table below:

 

 

Net operating income is a non-gaap financial measurement used by management to evaluate and monitor financial results of operations excluding certain items.  Net operating income for the second and first quarter of 2015 excluded certain items net of tax of ($10) and $28, respectively.  See the reconciliation table and description of items on page 19, Explanation of Certain Unaudited Non-GAAP Financial Measures.  

 

 

Current quarter highlights

 

 

 

 

 

 

 

 

 

 

 

 

  

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Quarterly condensed consolidated income statements (unaudited) are shown below for the periods indicated.  See notes 1 and 2 below for a discussion related to FDIC revenue and amortization (negative accretion) included in non-interest income.

 

Quarterly Condensed Consolidated Statements of Operations (unaudited)

 

 

note 1: On the date of an FDIC acquisition (with loss share), the Company estimates expected future losses and the timing of those losses by loan pool.  The related reimbursements from the FDIC, pursuant to the specific loss share agreement, of those losses are recorded as a receivable from the FDIC, referred to as indemnification asset or “IA.”  The Company 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 prior expected future losses, management adjusts its estimates of future expected cash flows and this increase is accreted to interest income over the remaining life of those specific loan pools, increasing the yield on loans.  Because management no longer expects these incremental future losses on the loan pool(s), then the expected future reimbursements from the FDIC for the related percentage of loss share are also reduced.  Instead of immediately charging down the IA for expected future FDIC reimbursements, the IA is written down over the shorter of the loss share period or the life of the related loan pool(s) by negative accretion (amortization) in this line item.

 

note 2: Two FDIC related revenue items are included in this line item.  The first item is FDIC reimbursement income from the sale of OREO.  When OREO (those covered by loss share agreements) is sold for a loss, the FDIC covered portion of the loss is recognized as income and included in this line item per the coverage breakdown in the table on page 11, Selected Credit Quality Ratios.  

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Second, when a loan pool (with loss share) is impaired, the impairment expense is included in provision for loan losses, and the percentage of the loss that is reimbursable from the FDIC is recognized as income from FDIC reimbursement, and included in this line item as well.

 

note 3: This non-gaap metric represents gaap net income excluding certain income and expense items net of the effective tax rate for the period presented.  Items excluded are gains on sales of securities held for sale, acquisition and merger related expenses and one time charges related to the Company’s efficiency and profitability initiatives announced in January 2014, which include impairment charges on the real estate of several of the branches closed during April 2014, divided by the average diluted common shares outstanding.  A reconciliation table is presented on page 19, Explanation of Certain Unaudited Non-GAAP Financial Measures.  

 

The condensed quarterly results of the Company’s correspondent banking and capital markets segment are presented below.

 

 

 

note 1: The primary component in this line item is gross commissions earned on bond sales, fees from hedging services, loan brokering fees and related consulting fees which were $7,334, $5,694, $4,876, $4,184 and $4,192 for 2Q15, 1Q15, 4Q14, 3Q14 and 2Q14, respectively.  The fee income in this category is based on sales volume in any particular period and is therefore volatile between comparable periods.  The remaining non interest income items in this category, which are less volatile, include fees from safe-keeping activities, bond accounting services, asset/liability consulting related activities, international wires, clearing and corporate checking account services, and other correspondent banking related revenue and fees.  

 

note 2:  A significant portion of these expenses are variable in nature and are a derivative of the income from bond sales, hedging services, brokering loans sales and related consulting services identified in note 1 above.  The variable expenses related to these fees identified in note 1 above were $3,461, $2,938, $2,149, $2,336 and $2,308 for 2Q15, 1Q15, 4Q14, 3Q14 and 2Q14, respectively.   Expenses in this line item do not include any indirect support allocation costs.  

 

note 3: A portion of the cost of the Company’s indirect departments such as human resources, accounting, deposit operations, item processing, information technology, compliance and others have been allocated to the correspondent banking and capital markets division based on management’s estimates.  In addition, an inter-company earnings credit is allocated to the segment for services provided to the commercial bank segment, also based on management’s estimates and judgment.      

 

 

 

 

 

 

 

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Loan production

 

Loans excluding PCI loans increased $82,232 during the current quarter, an annualized growth rate of approximately 15% and $130,868 during the six month period ending June 30, 2015, an annualized growth rate of approximately 12%.  Total new loans originated during the quarter approximated $208.6 million, of which $166.4 million were funded.  About 53% of funded loan origination was commercial real estate (“CRE”), 13% commercial and industrial (“C&I”), 22% single family residential, 6% land, development & construction and 6% were all other.

 

Approximately 56% of the funded loan production was a combination of floating and variable rate, and the remaining 44% was fixed rate.  In the aggregate, the funded loan production for the current quarter is expected to result in an estimated duration of approximately 2.3 years.  The loan origination pipeline is approximately $298 million at June 30, 2015 compared to $308 million at March 31, 2015.  The graph below summarizes total loan production and funded loan production over the past nine quarters.

 

 

Loan portfolio mix, PCI loans, FDIC covered loans and the related Indemnification Asset (“IA”)

Total PCI loans at June 30, 2015 is equal to $247,529 of which $210,788 (85%) are covered by FDIC loss sharing agreements.  The Company acquired both covered and non-covered PCI loans in its June 1, 2014 acquisition of First Southern Bank (“FSB”).  It also acquired FDIC covered loans that are not included in the PCI loan portfolio.  In addition, the Company also acquired non-covered PCI loans from the January 17, 2014 Gulfstream Business Bank (“GSB”) acquisition.  The table below compares the Company’s total FDIC covered loans and its PCI loan portfolio at June 30, 2015.

 

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The table below summarizes the Company’s total PCI loans, both covered and not covered by FDIC loss share arrangements.  It also shows the difference between the unpaid principal balance and the carrying balance (book balance) at June 30, 2015.  

 

 

The table below summarizes the Company’s total loans covered by FDIC loss share arrangements, both PCI loans and non-PCI loans.  It also shows the difference between the unpaid principal balance and the carrying balance (book balance) at June 30, 2015.

 

 

The Company has fourteen loss share agreements with the FDIC.  Seven have ten year terms and generally include single family residential loans and the other seven have five year terms and generally include non-single family residential loans.  The table below summarizes the covered loans by acquired bank and by term of the related loss share period at June 30, 2015.

 

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As shown in the table above, the Company’s total IA at June 30, 2015 was $36,157 of which $10,963 represents a receivable from the FDIC for estimated future loss reimbursements, and $25,194 represents previously estimated loss reimbursements that are no longer expected.  This amount is now expected to be paid (and/or has been paid) by the borrower (or realized upon the sale of OREO) instead of a reimbursement from the FDIC. At June 30, 2015, the $25,194 previously estimated reimbursements from the FDIC is expected to be written off as amortization expense (negative accretion) in the Company’s non-interest income as summarized below.      

 

 

The table above is based on the Company’s most recent quarterly updated projections of estimated future losses, cash flows and timing of cash flows.  The above amounts are subject to change, and have changed in past quarters, primarily due to the FDIC covered loan pools performing better than previously estimated. A summary of the activity in the Company’s IA account during the six month period ending June 30, 2015 is presented in the table below.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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The table below summarizes the Company’s loan mix over the most recent five quarter ends.

 

     Loan mix (unaudited)

 

note 1: Included in the $2,283,627 Non-PCI loans at June 30, 2015 are $37,757 that are covered by FDIC loss sharing agreements the Company acquired pursuant to its June 1, 2014 acquisition of FSB.

note 2: Included in the $247,529 PCI loans at June 30, 2015 are $210,788 of loans that are covered by FDIC loss sharing agreements and $36,741 are not covered.    

  

 

Credit quality and allowance for loan losses

 

During the quarter, excluding PCI loans, the Company recorded a loan loss provision expense of $2,330 and charge-offs net of recoveries of $354, resulting in an increase in the allowance for loan losses (excluding PCI loans) of $1,976 as shown in the table below.

 

With regard to PCI loans, the Company recorded a negative loan loss provision of $22 resulting in a decrease in the allowance for loan losses on PCI loans of $22.  See the table “Allowance for loan losses” for additional information.

 

The allowance for loan losses (“ALLL") was $22,934 at June 30, 2015 compared to $20,980 at March 31, 2015, an increase of $1,954.  This increase is the result of the aggregate effect of a $1,241 increase in general loan loss allowance, a $735 increase in the specific loan loss allowance related to impaired loans and a $22 decrease in the loan loss allowance related to PCI loans accounted for pursuant to ASC Topic 310-30. The changes in the Company’s ALLL components between June 30, 2015 and March 31, 2015 are summarized in the table below.

 

 

 

 

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note 1: Loans acquired in the Company’s January 17, 2014 acquisition of GSB that are not PCI loans.  These are performing loans recorded at estimated fair value at the acquisition date.  The fair value adjustment at the acquisition date was approximately $7,680, or approximately 2.3% of the outstanding aggregate loan balances.  This amount is accreted into interest income over the remaining lives of the related loans on a level yield basis.  During the current quarter, management evaluated the performance of this group of loans over the period subsequent to the acquisition date and based on this evaluation has estimated a probable incurred loss amount at June 30, 2015 as listed in the table above.  

 

note 2: Loans acquired in the Company’s 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% 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.  During the current quarter, management evaluated the performance of this group of loans over the period subsequent to the acquisition date and based on this evaluation has estimated a probable incurred loss amount at June 30, 2015 as listed in the table above.

 

note 3: Included in the $247,529 PCI loans at June 30, 2015 are $210,788 of loans that are covered by FDIC loss sharing agreements.  

 

The general loan loss allowance (non-impaired loans, which includes GSB and FSB acquired loans) increased by $1,241.  Excluding GSB and FSB loans, the general loan loss allowance increased by $647 resulting primarily from an increase in loans outstanding less a decrease in the loss factors 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.   

 

As of the end of the current quarter, the Company has a 17 month history with the performing loans acquired from GSB as discussed in note 1 above.  Management evaluated the performance of this group of loans over the period subsequent to the acquisition date and based on this evaluation has estimated a probable incurred loss amount at June 30, 2015 as listed in the table above.  Management considered the levels of and trends in non-performing loans, past-due loans, adverse loan grade classification changes, net charge-offs and impaired loans in arriving at its estimate.  

 

As of the end of the current quarter, the Company has a 13 month history with the performing loans acquired from FSB as discussed in note 2 above. Management evaluated the performance of this group of loans over the period subsequent to the acquisition date and based on this evaluation has estimated a probable incurred loss amount at June 30, 2015 as listed in the table above.  Management considered the levels of and trends in non-performing loans, past-due loans, adverse loan grade classification changes, net charge-offs, impaired loans, and those loans that were covered by FDIC loss share agreements and those loans guaranteed by the California State University System in arriving at its estimate.  

 

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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.  Total impaired loans at June 30, 2015 are equal to $22,846.  Approximately $13,288 of the Company’s impaired loans (58%) are accruing performing loans.  This group of impaired loans is not included in the Company’s non-performing loans or non-performing assets categories.  

 

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

Management believes the Company’s allowance for loan losses is adequate at June 30, 2015.  However, management recognizes that many factors can adversely impact various segments of the Company’s market and customers, and therefore there is no assurance as to the amount of losses or probable losses which may develop in the future.  The table below summarizes the changes in allowance for loan losses during the previous five quarters.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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The following table summarizes the Company’s loan portfolio and related allowance for loan losses as a percentage of the loan portfolio segment presented as of the end of the previous five quarters.

(unaudited)

 

note 1:  The Company has approximately $15,659 of TDRs.  Of this amount $10,293 are performing pursuant to their modified terms, and $5,366 are not performing and have been placed on non-accrual status and included in non performing loans (“NPLs”).  Current accounting standards require TDRs to be included in our impaired loans, whether they are performing or not performing.  Only non performing TDRs are included in NPLs.

 

note 2:  Excludes PCI loans.

 

The Company defines non-performing loans (“NPLs”) as non-accrual loans plus loans past due 90 days or more and still accruing interest.  NPLs do not include PCI loans.  PCI loans are accounted for pursuant to ASC Topic 310-30.  NPLs as a percentage of total Non-PCI loans were 1.10% at June 30, 2015 compared to 1.22% at March 31, 2015.    

 

Non-performing assets (“NPAs”) (which the Company defines as NPLs, as defined above, plus (a) OREO (i.e. real estate acquired through foreclosure, in-substance foreclosure, or deed in lieu of foreclosure), excluding OREO covered by FDIC loss share agreement; and (b) other repossessed assets that are not real estate, and are not covered by FDIC loss share agreement, were $29,891 at June 30, 2015, compared to $34,582 at March 31, 2015.  NPAs as a percentage of total assets was 0.77% at June 30, 2015 compared to 0.89% at March 31, 2015.  NPAs as a percentage of loans plus OREO and other repossessed assets, excluding PCI loans and OREO covered by FDIC loss share agreements, was 1.31% at June 30, 2015 compared to 1.57% at March 31, 2015.  

 

 

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The table below summarizes selected credit quality data for the periods indicated.  

 

 

note 1:  Excludes PCI loans.

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

 

 

 

 

 

 

 

 

 

 

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Net Interest Margin (“NIM”)

 

The Company’s NIM increased from 4.53% in 1Q15 to 4.72% in 2Q15.  The primary reason for this increase results from the favorable yields of the PCI loans, which increased from 14.85% in 1Q15 to 17.75% in 2Q15.    

 

The PCI loans historically have performed better than previously expected.  Initial loss expectations have been adjusted downward during subsequent quarterly estimates of future cash flows.  The results have been higher yields over the remaining life of the related loan pools.  In addition, during the current quarter, several PCI loans have paid off in full resulting in cash payments to the Company in excess of the related pools’ carrying balances.  The excess cash payments (approximately $969) were included in interest income immediately and contributed approximately 1.51% to the 17.75% yield on PCI loans for the current quarter.      

 

If the PCI loans were producing a yield similar to the Company’s non-PCI loans, the NIM during the current quarter would have been approximately 3.73% compared to 3.71% during the previous quarter.  However, total PCI loans have a legal balance outstanding equal to $323,032 and a book balance equal to $247,529 resulting in a difference, or discount, of approximately $75,503, or 23%.  The estimated remaining life of the expected cash flows is approximately 3.7 years at June 30, 2015.  As such, management expects several years of favorable yield, albeit balances will be decreasing over time.      

 

The Company’s yield on loans, excluding PCI loans, increased from 4.57% in 1Q15 to 4.59% in 2Q15, yet the average interest rate on new loan production during the current quarter was 3.7%.  The primary reason for the increase was due to payoffs of acquired purchased loans that were not PCI loans, and the resulting remaining unamortized fair value mark was recognized as interest income in the current period.  If this had not occurred, the yield for the current quarter would have been approximately 4.51%, a decrease of 6bps from the prior quarter, which was due primarily to lower yielding new loan production.

  

The table below summarizes yields and costs by various interest earning asset and interest bearing liability account types for the current quarter, the previous calendar quarter and the same quarter last year.  

 

 

Yield and cost table (unaudited)    

*TEY = tax equivalent yield

 

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The table below summarizes the Company’s yields on interest earning assets and costs of interest bearing liabilities over the prior five quarters.

 

 

*TEY = tax equivalent yield

 

The table below summarizes selected financial ratios over the prior five quarters.

 

 

note 1:   Numerator equals non-interest expense less non-recurring expenses (e.g. merger costs, bank property impairment, etc.) less intangible amortization (both CDI and Trust intangible) less credit related expenses. Denominator equals net interest income on a taxable equivalent yield basis (“TEY”) before the provision for loan losses plus non-interest income less non-recurring income (e.g. gain on sale of securities available for sale, etc.) less FDIC income related to losses on the sales of covered OREO properties and impairment of loan pool(s) covered by FDIC loss share arrangements.

note 2:  Numerator starts with the same numerator as in “note 1”, less correspondent bank non-interest expense, including indirect expense allocations. Denominator starts with the same denominator as in “note 1”, less correspondent bank net interest income and less correspondent bank non-interest income.

 

 

 

 

 

 

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Deposit activity

 

During the quarter, the Company’s total deposits decreased by $12,857.  Time deposits decreased by $18,759 and non-time deposits increased by $5,902.  The increase in non-time deposits was due to the $15,309 increase in non-interest bearing checking accounts offset by the $9,407 decrease in the remaining non-time deposit accounts.

 

The cost of interest bearing deposits in the current quarter decreased by 2bps to 27bps compared to the prior quarter.  The overall cost of total deposits (i.e. includes non-interest bearing checking accounts) was 0.17% for the current quarter compared to 0.19% in the prior quarter.  The table below summarizes the Company’s deposit mix over the periods indicated.    

 

 

Deposit mix (unaudited)    

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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Presented below are condensed consolidated balance sheets and average balance sheets for the periods indicated.

 

 

 

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Condensed Consolidated Earnings Statement (unaudited)

 

 

 

 

 

 

 

 

 

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Non interest income and non interest expense

 

The table below summarizes the Company’s non-interest income for the periods indicated.  

 

 

note 1:  Includes gross commissions earned on bond sales, fees from hedging services, loan brokering fees and related consulting fees.  The fee income in this category is based on sales volume in any particular period and is therefore volatile between comparable periods.       

note 2: Includes fees from safe-keeping activities, bond accounting services, asset/liability consulting services, international wires, clearing and corporate checking account services and other correspondent banking related revenue and fees.  The fees included in this category are less volatile than those described above in note 1.  

 

 

The FDIC indemnification asset (“IA”) is producing amortization (versus accretion) due to reductions in the estimated losses in the FDIC covered PCI loan portfolio.  To the extent current projected losses in the covered PCI loan portfolio are less than originally projected losses, the related projected reimbursements from the FDIC contemplated in the IA are less, which produces a negative income accretion in non-interest income.  This event generally corresponds to the increase in yields in the FDIC covered PCI loan portfolio, although there is not perfect correlation.  Higher expected cash flows (i.e. less expected future losses) on the loan side of the equation is accreted into interest income over the life of the related loan pool.  The lower expected reimbursement from the FDIC is amortized over the lesser of the remaining life of the related loan pool(s) or the remaining term of the loss share period.   

 

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 reimbursement for the respective loss share percentage is recorded as FDIC indemnification income and included in non-interest income.  In addition, the FDIC loss share reimbursement percentage of any related loan pool impairments also are reflected in this non-interest income account.  

 

 

 

 

 

 

 

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The table below summarizes the Company’s non-interest expense for the periods indicated.

 

 

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.

 

 

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Explanation of Certain Unaudited Non-GAAP Financial Measures

 

This press release contains financial information determined by methods other than Generally Accepted Accounting Principles (“GAAP”). The financial highlights provide reconciliations between GAAP interest income, net interest income and tax equivalent basis interest income and net interest income, as well as total stockholders’ equity and tangible common equity. It also reconciles net income and net operating income.  Management uses these non-GAAP financial measures in its analysis of the Company’s performance and believes these presentations provide useful supplemental information, and a clearer understanding of the Company’s performance.  The Company believes the non-GAAP measures enhance investors’ understanding of the Company’s business and performance. These measures are also useful in understanding performance trends and facilitate comparisons with the performance of other financial institutions. The limitations associated with operating measures are the risk that persons might disagree as to the appropriateness of items comprising these measures and that different companies might calculate these measures differently. The Company provides reconciliations between GAAP and these non-GAAP measures. These disclosures should not be considered an alternative to GAAP.
 
Reconciliation of GAAP to non-GAAP Measures.  All amounts are in thousands except per share data (unaudited):

 

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About CenterState Banks, Inc.

 

The Company, headquartered in Davenport, Florida, between Orlando and Tampa, is a financial holding company whose single subsidiary bank operates 58 full service branch banking locations in 20 counties throughout Florida.  Its subsidiary bank provides a range of consumer and commercial banking services to individuals, businesses and industries.  

 

In addition to providing traditional deposit and lending products and services to its commercial and retail customers, the Company also operates a correspondent banking and bond sales division.  The division is integrated with and part of the Company’s subsidiary bank located in Winter Haven, Florida, although the majority of the bond salesmen, traders and operations personnel are physically housed in leased facilities located in Birmingham, Alabama, Atlanta, Georgia and Winston-Salem, North Carolina.  The customer base includes small to medium size financial institutions primarily located in southeastern United States.

 

For additional information contact Ernest S. Pinner, Chairman, John C. Corbett, CEO, or James J. Antal, CFO, at 863-419-7750.

 

“Safe Harbor” Statement under the Private Securities Litigation Reform Act of 1995:

 

Some of the statements in this report constitute forward-looking statements, within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934. These statements related to future events, other future financial and operating performance, costs, revenues, economic conditions in our markets, loan performance, credit risks, collateral values and credit conditions, or business strategies, including expansion and acquisition activities and may be identified by terminology such as “may,” “will,” “should,” “expects,” “scheduled,” “plans,” “intends,” “anticipates,” “believes,” “estimates,” “potential,” or “continue” or the negative of such terms or other comparable terminology. Actual events or results may differ materially. In evaluating these statements, you should specifically consider the factors described throughout this report. We cannot assure you that future results, levels of activity, performance or goals will be achieved, and actual results may differ from those set forth in the forward looking statements.

 

Forward-looking statements, with respect to our beliefs, plans, objectives, goals, expectations, anticipations, estimates and intentions, involve known and unknown risks, uncertainties and other factors, which may be beyond our control, and which may cause the actual results, performance or achievements of the Company or the Bank to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. You should not expect us to update any forward-looking statements. All written or oral forward-looking statements attributable to us are expressly qualified in their entirety by this cautionary notice, including, without limitation, those risks and uncertainties described in our annual report on Form 10-K for the year ended December 31, 2014, and otherwise in our SEC reports and filings.

 

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