CenterState Banks, Inc. Announces Second Quarter 2010 Operating Results

DAVENPORT, Fla., July 21 /PRNewswire-FirstCall/ -- CenterState Banks, Inc. (Nasdaq: CSFL) reported net income for the second quarter 2010 of $904,000 ($0.03 per share) compared to $393,000 ($0.02 per share) for the previous quarter, and a net loss of $732,000 ($0.09 per share) for the same quarter in 2009. The loan loss provision during the current quarter was $4,045,000 compared to $4,075,000 in the previous quarter, and $4,125,000 for the same quarter in 2009.

A summary of second quarter highlights are as follows:

• The Company continues to maintain healthy capital levels with a Tier 1 Leverage Capital ratio of 11.3% and a Tangible Common Equity ratio of 11.1%.
• Strong earnings excluding credit costs – pre-tax pre-provision and credit cost earnings (see table and notes below) was $6,010,000 during the current quarter compared to $6,028,000 during the previous quarter, and compared to $3,882,000 during the same quarter last year.
• Current quarter net interest margin ("NIM") decreased 21 basis points ("bps") to 3.33% and the net interest spread decreased 23bps to 3.03% compared to the previous quarter. The contraction was driven primarily by declines in the yields on interest earning assets. Additional margin discussion is provided below.
• Credit metrics – the Company's non performing loan ("NPL") ratio increased to 5.53% from 5.15% reported in the previous quarter, the non performing asset ("NPA") ratio also increased to 3.51% from 3.35%, and the allowance for loan losses as a percentage of total loans increased to 2.57% compared to last quarter's 2.55%. Allowance for loan losses as a percentage of NPLs was 46% compared to 49% reported for the previous quarter. The Company reported net charge-offs of $3,942,000 and a loan loss provision of $4,045,000 during the current quarter, compared to net charge-offs of $3,276,000 and a loan loss provision of $4,075,000 during the previous quarter.
• The correspondent banking division (a reportable segment) continues to add incremental revenue – it reported $7,372,000 of gross revenue from bond sales compared to $6,356,000 reported in the first quarter of 2010, and contributed approximately $1,437,000 ($0.055 per share) of after tax earnings during the current quarter, compared to $1,220,000 ($0.047 per share) during the previous quarter, and $1,726,000 ($0.138 per share) in the second quarter of 2009.
• FDIC-assisted transactions – as previously reported by the FDIC, on July 16, 2010, the Company acquired a $168 million bank with four offices in Hendry and Polk Counties through a FDIC-assisted transaction, and is continuing to monitor and evaluate FDIC-assisted bank acquisition opportunities within Florida. The Company seeks to be a successful bidder to the FDIC on one or more additional targeted failed depository institutions within Florida, although there is no assurance that the Company will be the winning bidder on other FDIC-assisted transactions.

All per share data is presented herein on a diluted basis, unless otherwise stated. Quarterly condensed consolidated income statements (unaudited) are shown below for the periods indicated.

Net Interest Margin ("NIM")

The Company's current quarter NIM decreased 21bps to 3.33% and net interest spread decreased 23bps to 3.03% compared to the previous quarter, as indicated in the table below. The primary reason for the decrease was related to the lower yields and the change in mix of interest earning assets. The earning asset mix changed whereby loans, which are higher yielding than securities, decreased from 59.1% of earning assets in the previous quarter to 56.7% in the current quarter. In addition to the lower relative balance of loans, the overall yield on loans also decreased 12bps to 5.54%. The yield on taxable securities decreased 56bps to 3.32% and the average securities balance increased in actual dollars and as a percentage of total earning assets. These were the primary factors causing the yield on total earning assets to decrease 29bps to 4.34%. With regard to the interest bearing liabilities, the rates paid on interest bearing deposits continued to decrease another 10bps this quarter to 1.42%. This was primarily due to the change in the mix of time deposits as a percentage of total interest bearing deposits, as well as repricing maturing time deposits downward. Overall the current quarter's cost of interest bearing liabilities decreased 6bps to 1.31% as shown in the table below. The table below details the Company's interest earning assets and interest bearing liabilities by major component on a tax equivalent basis for the current quarter, the previous quarter and the same quarter last year. Amounts are in thousands of dollars.

Loan portfolio mix, credit quality and allowance for loan losses

Management continues to aggressively monitor credit risks and potential losses in the Company's loan portfolio in light of the current real estate environment in Florida. During the current quarter, the Company took a charge of $4,045,000 to loan loss provision (expense) and charged-off (net of recoveries) $3,942,000, or 0.42% of average loans outstanding during the quarter (1.68% of average loans on an annualized basis). The Company's allowance for loan losses was $24,191,000 at June 30, 2010 compared to $24,088,000 at March 31, 2010, an increase of $103,000 ($4,045,000 charge to loan loss expense less $3,942,000 net charge-offs equals $103,000 loan loss allowance increase during the second quarter 2010). This increase is the result of an $1,234,000 increase in general loan loss allowance less a $1,131,000 decrease in specific loan loss allowance. The increase in our general allowance is primarily due to changes in our historical charge-off rates, changes in our current environmental factors, and changes in the loan portfolio mix, less the decrease in the amount of our loan portfolio. Our specific allowance is the aggregate of the results of individual analyses prepared for each one of our impaired loans on a loan by loan basis.

The allowance for loan losses as a percentage of loans outstanding was 2.57% as of June 30, 2010 compared to 2.55% as of March 31, 2010. Management believes the Company's allowance for loan losses was adequate at June 30, 2010. 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.

Eighty-five percent (85%) of the Company's loans are collateralized by real estate, 9% are commercial non real estate loans and the remaining 6% are consumer and other non real estate loans. The table below summarizes the Company's loan mix over the most recent five quarter ends.

The table below describes the composition of the Company's commercial real estate portfolio at June 30, 2010, of which approximately 55% are owner occupied.  Amounts are in thousands of dollars.

The table below describes the composition of the Company's construction, development and land loan portfolio at June 30, 2010. Amounts are in thousands of dollars.

The Company defines non performing loans as non accrual loans plus loans past due 90 days or more and still accruing interest. Non performing loans as a percentage of total loans were 5.53% at June 30, 2010 compared to 5.15% at March 31, 2010.

Non performing assets (which the Company defines 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 $63,843,000 at June 30, 2010, compared to $59,540,000 at March 31, 2010. Non performing assets as a percentage of total assets were 3.51% at June 30, 2010 compared to 3.35% at March 31, 2010.

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

Note 1:  In this current real estate crisis the Nation in general and Florida in particular has been experiencing, it has become more common to restructure or modify the terms of certain loans under certain conditions (i.e. troubled debt restructure or "TDRs"). In those circumstances it may be beneficial to restructure the terms of a loan and work with the borrower for the benefit of both parties, versus forcing the property into foreclosure and having to dispose of it in an unfavorable and depressed real estate market. When we have modified the terms of a loan, we usually either reduce the monthly payment and/or interest rate for generally about twelve months. We have not forgiven any material principal amounts on any loan modifications to date. We have approximately $29,863 of TDRs. Of this amount $15,246 are performing pursuant to their modified terms, and $14,617 are not performing and have been placed on non accrual status and included in our 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 our NPLs.

As shown in the table above, the largest component of non performing loans is non accrual loans. As of June 30, 2010 the Company had reported a total of 230 non accrual loans with an aggregate book value of $51,468,000, compared to March 31, 2010 when 205 non accrual loans with an aggregate book value of $48,753,000 was reported. Residential real estate category increased by $3,570,000 and construction, development and land loan category decreased by $1,146,000. The changes in the other categories were not material between quarters. This amount is further delineated by collateral category and number of loans in the table below (in thousands of dollars).

There are no construction or development loans with national builders. The Company has historically done business with local builders and developers that have typically been long time customers. However, the Company believes that this category (i.e. construction, development and land) is the loan category where the most risk is present. On the positive side, the category only represents about 11% of the total loan portfolio. Evidencing the riskier nature of the category, it represents a disproportionate 22% of the Company's total non accrual loans and approximately 31% of the Company's total repossessed real estate ("OREO").

As indicated above, non accrual construction, development, and land loans totaled $11,401,000 at June 30, 2010. Most of this amount relates to land, either developed or not developed, commercial and residential. There are three single family homes and one multi family project where construction is either completed or not yet completed, but in either case the homes are not sold. This mix is consistent with the performing loans in this category, where the mix is approximately 90% land related, either developed lots or not developed, both commercial and residential, and approximately 10% of the category represents vertical construction and the majority of that is commercial.

During the first six months of the current year, the Company charged off, net of recoveries, approximately $2,925,000 of its construction, development and land loans, about 41% of the total net charge offs. During the year ending December 31, 2009, the Company had total charge offs, net of recoveries, of $13,942,000. Almost half ($6,414,000) came from this same category.

The second largest component of non performing assets after non accrual loans is repossessed real estate, or OREO. OREO is carried at the lower of cost or market less the estimated cost to sell. Further declines in real estate values can affect the market value of these assets. Any further decline in market value beyond its cost basis is recorded as a current expense in the Company's Statement of Operations. At June 30, 2010, OREO was $11,144,000, which is further delineated in the table below (in thousands of dollars).

Deposit activity

During the current quarter, total deposits increased by $86,476,000, or 6.4%. Time deposits increased by $4,367,000, or 0.8%, and non time deposits (i.e., core deposits) increased by $82,109,000, or 10.8%. The majority of the core deposit increase was a result of the $76,064,000, or 32.8% increase in non interest bearing checking accounts. Most of the increase in non interest bearing checking accounts was the result of the $47,413,000 increase in commercial checking accounts held by our correspondent bank customers. In addition to federal funds received from the correspondent banking customers, the correspondents also generally keep a commercial checking account with the Company as well. These accounts have grown in number and balances.

Non interest income and non interest expense

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 attached 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. 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.

About CenterState Banks, Inc.

The Company, headquartered in Davenport, Florida, between Orlando and Tampa, is a multi bank holding company that was formed in June 2000 as part of a merger of three independent commercial banks. Currently, the Company operates through its four subsidiary banks with 39 branch banking locations in eleven counties throughout central Florida. Through its subsidiary banks, the Company provides a range of consumer and commercial banking services to individuals, businesses and industries. The Company operates under a decentralized organizational structure. Each of its subsidiary banks is managed by its own bank president, who has the primary responsibility for the profitability and growth of the individual business unit. Each bank has its own charter, management team and board of directors, although most of the Company's directors are also board members of one or more of its subsidiary banks, and the Company's Chairman is either the chairman or at least a board member of all the subsidiary banks.

In addition to providing traditional deposit and lending products and services to its commercial and retail customers through its 39 locations in central Florida, the Company also operates a correspondent banking and bond sales division. The division is integrated with and part of the lead 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 Florida, Alabama, Georgia, North Carolina, South Carolina, Tennessee, Virginia and West Virginia.

"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, 2009, and otherwise in our SEC reports and filings.

SOURCE CenterState Banks, Inc.