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U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form 10-Q
(Mark One)
| x | Quarterly report under Section 13 or 15 (d) of the Securities Exchange Act of 1934 |
For the quarterly period ended September 30, 2007
| ¨ | Transition report under Section 13 or 15 (d) of the Exchange Act |
For the transition period from to
Commission file number 333-95087
CENTERSTATE BANKS OF FLORIDA, 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.) |
1101 First Street South, Suite 202
Winter Haven, Florida 33880
(Address of Principal Executive Offices)
(863) 293-2600
(Issuer’s Telephone Number, Including Area Code)
Check whether the issuer: (1) filed all reports required to be filed by Section 12, 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, or a non-accelerated filer.
Large accelerated filer ¨ Accelerated filer x Non-accelerated filer ¨
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 Equity, as of the latest practicable date:
Common stock, par value $.01 per share | 12,434,029 | |
| (class) | Outstanding at November 2, 2007 |
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CENTERSTATE BANKS OF FLORIDA, INC. AND SUBSIDIARIES
| Page | ||||
PART I. FINANCIAL INFORMATION | ||||
Item 1. | Financial Statements | |||
Condensed consolidated balance sheets – September 30, 2007 and December 31, 2006 (unaudited) | 2 | |||
| 3 | ||||
| 4 | ||||
Notes to condensed consolidated financial statements (unaudited) | 5 | |||
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 9 | ||
Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 26 | ||
Item 4. | Controls and Procedures | 26 | ||
Item 1. | Legal Proceedings | 27 | ||
Item 1a. | Risk Factors | 27 | ||
Item 2. | Unregistered sales of Equity Securities and Use of Proceeds | 27 | ||
Item 3. | Defaults Upon Senior Securities | 27 | ||
Item 4. | Submission of Matters to a Vote of Security Holders | 27 | ||
Item 5. | Other Information | 27 | ||
Item 6. | Exhibits | 27 | ||
| 28 | ||||
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Centerstate Banks of Florida, Inc. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
(in thousands of dollars)
| As of September 30, 2007 | As of December 31, 2006 | |||||||
ASSETS | ||||||||
Cash and due from banks | $ | 32,390 | $ | 40,385 | ||||
Federal funds sold and money market accounts | 33,184 | 79,636 | ||||||
Cash and cash equivalents | 65,574 | 120,021 | ||||||
Investment securities available for sale, at fair value | 217,242 | 235,350 | ||||||
Loans | 840,341 | 657,963 | ||||||
Less allowance for loan losses | (9,903 | ) | (7,355 | ) | ||||
Net Loans | 830,438 | 650,608 | ||||||
Accrued interest receivable | 6,146 | 5,035 | ||||||
Federal Home Loan Bank and Federal Reserve Bank stock | 3,923 | 2,665 | ||||||
Bank premises and equipment, net | 53,999 | 39,879 | ||||||
Deferred income taxes, net | 472 | 1,898 | ||||||
Goodwill | 29,299 | 9,863 | ||||||
Core deposit intangible | 4,955 | 3,083 | ||||||
Bank owned life insurance | 9,637 | 7,320 | ||||||
Other real estate owned | 177 | — | ||||||
Prepaid expense and other assets | 3,724 | 1,380 | ||||||
TOTAL ASSETS | $ | 1,225,586 | $ | 1,077,102 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Deposits: | ||||||||
Demand – non-interest bearing | $ | 183,959 | $ | 223,602 | ||||
Demand – interest bearing | 130,550 | 110,627 | ||||||
Savings and money market accounts | 161,626 | 147,334 | ||||||
Time deposits | 528,291 | 411,243 | ||||||
Total deposits | 1,004,426 | 892,806 | ||||||
Securities sold under agreement to repurchase | 45,340 | 52,792 | ||||||
Corporate debentures | 12,500 | 10,000 | ||||||
Other borrowings | 8,000 | — | ||||||
Accrued interest payable | 2,249 | 993 | ||||||
Accounts payables and accrued expenses | 7,450 | 3,179 | ||||||
Total liabilities | 1,079,965 | 959,770 | ||||||
Stockholders’ equity: | ||||||||
Preferred Stock, $.01 par value; 5,000,000 shares authorized No shares issued or outstanding | — | — | ||||||
Common stock, $.01 par value: 40,000,000 shares authorized; 12,434,029 and 11,129,020 shares issued and outstanding at September 30, 2007 and December 31, 2006 respectively | 124 | 111 | ||||||
Additional paid-in capital | 110,352 | 86,989 | ||||||
Retained earnings | 35,594 | 30,878 | ||||||
Accumulated other comprehensive loss | (449 | ) | (646 | ) | ||||
Total stockholders’ equity | 145,621 | 117,332 | ||||||
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 1,225,586 | $ | 1,077,102 | ||||
See notes to the accompanying condensed consolidated financial statements
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Centerstate Banks of Florida, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (unaudited)
(in thousands of dollars, except per share data)
| Three months ended | Nine months ended | ||||||||||||
| Sept 30, 2007 | Sept 30, 2006 | Sept 30, 2007 | Sept 30, 2006 | ||||||||||
Interest income: | |||||||||||||
Loans | $ | 16,512 | $ | 12,475 | $ | 45,630 | $ | 33,708 | |||||
Investment securities available for sale: | |||||||||||||
Taxable | 2,314 | 2,551 | 7,283 | 6,829 | |||||||||
Tax-exempt | 358 | 77 | 1,001 | 107 | |||||||||
Federal funds sold and other | 655 | 831 | 2,068 | 2,205 | |||||||||
| 19,839 | 15,934 | 55,982 | 42,849 | ||||||||||
Interest expense: | |||||||||||||
Deposits | 7,852 | 5,478 | 20,942 | 13,177 | |||||||||
Securities sold under agreement to repurchase | 666 | 592 | 2,202 | 1,552 | |||||||||
Corporate debenture | 269 | 228 | 755 | 639 | |||||||||
Other borrowings | 151 | — | 340 | — | |||||||||
| 8,938 | 6,298 | 24,239 | 15,368 | ||||||||||
Net interest income | 10,901 | 9,636 | 31,743 | 27,481 | |||||||||
Provision for loan losses | 529 | 129 | 1,187 | 575 | |||||||||
Net interest income after loan loss provision | 10,372 | 9,507 | 30,556 | 26,906 | |||||||||
Other income: | |||||||||||||
Service charges on deposit accounts | 1,150 | 902 | 3,249 | 2,525 | |||||||||
Commissions from mortgage broker activities | 42 | 79 | 156 | 270 | |||||||||
Commissions from sale of mutual funds and annuities | 195 | 142 | 440 | 493 | |||||||||
Debit card and ATM fees | 234 | 138 | 659 | 416 | |||||||||
Loan related fees | 116 | 70 | 278 | 224 | |||||||||
BOLI income | 97 | 74 | 266 | 202 | |||||||||
Gain on sale of securities | 2 | — | 2 | 17 | |||||||||
Loss on sale of other real estate owned | — | — | (5 | ) | — | ||||||||
Other service charges and fees | 125 | 145 | 359 | 405 | |||||||||
| 1,961 | 1,550 | 5,404 | 4,552 | ||||||||||
Other expenses: | |||||||||||||
Salaries, wages and employee benefits | 5,210 | 4,335 | 15,130 | 12,379 | |||||||||
Occupancy expense | 1,131 | 907 | 3,128 | 2,531 | |||||||||
Depreciation of premises and equipment | 609 | 484 | 1,701 | 1,438 | |||||||||
Supplies, stationary and printing | 180 | 141 | 499 | 461 | |||||||||
Marketing expenses | 250 | 98 | 794 | 336 | |||||||||
Data processing expense | 401 | 300 | 1,070 | 825 | |||||||||
Legal, auditing and other professional fees | 254 | 190 | 726 | 486 | |||||||||
Core deposit intangible (CDI) amortization | 235 | 165 | 612 | 348 | |||||||||
Postage and delivery | 77 | 66 | 220 | 211 | |||||||||
ATM related expenses | 134 | 110 | 373 | 340 | |||||||||
Bank regulatory expenses | 113 | 96 | 321 | 233 | |||||||||
Other expenses | 848 | 571 | 2,303 | 1,762 | |||||||||
Total other expenses | 9,442 | 7,463 | 26,877 | 21,350 | |||||||||
Income before provision for income taxes | 2,891 | 3,594 | 9,083 | 10,108 | |||||||||
Provision for income taxes | 939 | 1,343 | 3,043 | 3,840 | |||||||||
Net income | $ | 1,952 | $ | 2,251 | $ | 6,040 | $ | 6,268 | |||||
Earnings per share: | |||||||||||||
Basic | $ | 0.16 | $ | 0.20 | $ | 0.50 | $ | 0.57 | |||||
Diluted | $ | 0.15 | $ | 0.20 | $ | 0.49 | $ | 0.56 | |||||
Common shares used in the calculation of earnings per share: | |||||||||||||
Basic | 12,433,574 | 11,113,648 | 11,998,439 | 10,911,050 | |||||||||
Diluted | 12,618,781 | 11,380,467 | 12,204,158 | 11,164,634 | |||||||||
See notes to the accompanying condensed consolidated financial statements.
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Centerstate Banks of Florida, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(in thousands of dollars)
| Nine months ended September 30, | ||||||||
| 2007 | 2006 | |||||||
Cash flows from operating activities: | ||||||||
Net Income | $ | 6,040 | $ | 6,268 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Provision for loan losses | 1,187 | 575 | ||||||
Depreciation of premises and equipment | 1,701 | 1,438 | ||||||
Amortization of purchase accounting adjustments | 361 | 313 | ||||||
Net amortization/accretion of investment securities | 82 | 149 | ||||||
Net deferred loan origination fees | (166 | ) | 79 | |||||
Deferred income taxes | (465 | ) | 252 | |||||
Loss on sale of repossessed real estate owned | 5 | — | ||||||
Loss (gain) on disposal of and or sale of fixed assets | 18 | (40 | ) | |||||
Gain on sale of securities available for sale | (2 | ) | — | |||||
Stock based compensation expense | 405 | 458 | ||||||
Bank owned life insurance income | (266 | ) | (202 | ) | ||||
Net cash from changes in: | ||||||||
Net changes in accrued interest receivable, prepaid expenses, and other assets | (2,374 | ) | (1,734 | ) | ||||
Net change in accrued interest payable, accrued expense, and other liabilities | (487 | ) | 40 | |||||
Net cash provided by operating activities | 6,039 | 7,596 | ||||||
Cash flows from investing activities: | ||||||||
Purchases of investment securities available for sale | (16,612 | ) | (47,727 | ) | ||||
Purchases of mortgage backed securities available for sale | (16,819 | ) | (47,493 | ) | ||||
Purchases of FHLB and FRB stock | (361 | ) | (1,163 | ) | ||||
Proceeds from maturities of investment securities available for sale | 31,000 | 62,350 | ||||||
Proceeds from the sale of investment securities available for sale | 6,987 | — | ||||||
Proceeds from pay-downs of mortgage backed securities available for sale | 25,073 | 21,799 | ||||||
Increase in loans, net of repayments | (60,837 | ) | (68,116 | ) | ||||
Purchases of premises and equipment, net | (6,550 | ) | (8,265 | ) | ||||
Proceeds from sale of other real estate owned | 210 | 373 | ||||||
Purchase of bank owned life insurance | — | (1,000 | ) | |||||
Net cash from acquisition of Mid FL bank | — | 13,760 | ||||||
Net cash from acquisition of Valrico State bank | 7,650 | — | ||||||
Net cash used in investing activities | (30,259 | ) | (75,482 | ) | ||||
Cash flows from financing activities: | ||||||||
Net (decrease) increase in deposits | (18,979 | ) | 50,445 | |||||
Net (decrease) increase in securities sold under agreement to repurchase | (7,452 | ) | 7,794 | |||||
Net decrease in other borrowings | (3,000 | ) | (1,000 | ) | ||||
Stock options exercised, including tax benefit | 528 | 462 | ||||||
Dividends paid | (1,324 | ) | (1,146 | ) | ||||
Net cash provided by financing activities | (30,227 | ) | 56,555 | |||||
Net decrease in cash and cash equivalents | (54,447 | ) | (11,331 | ) | ||||
Cash and cash equivalents, beginning of period | 120,021 | 94,926 | ||||||
Cash and cash equivalents, end of period | $ | 65,574 | $ | 83,595 | ||||
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Centerstate Banks of Florida, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(in thousands of dollars)
(continued)
| Nine months ended September 30, | ||||||
| 2007 | 2006 | |||||
Transfer of loans to other real estate owned | $ | 392 | $ | — | ||
Cash paid during the period for: | ||||||
Interest | $ | 23,676 | $ | 15,038 | ||
Income taxes | $ | 3,136 | $ | 5,233 | ||
See notes to the accompanying condensed consolidated financial statements.
CenterState Banks of Florida, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
NOTE 1: Nature of Operations and basis of presentation
Our consolidated financial statements include the accounts of CenterState Banks of Florida, Inc. (the “Parent Company” or “CSFL”), and our wholly owned subsidiary banks and their wholly owned subsidiary, C. S. Processing. Our five subsidiary banks operate through 37 locations in nine Counties throughout Central Florida, providing traditional deposit and lending products and services to their commercial and retail customers.
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. These statements should be read in conjunction with the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2006. 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 nine month period ended September 30, 2007 are not necessarily indicative of the results expected for the full year.
NOTE 2: Common stock outstanding and earnings per share data
Basic earnings per share is based on the weighted average number of common shares outstanding during the periods. Diluted earnings per share includes the weighted average number of common shares outstanding during the periods and the further dilution from stock options using the treasury method. The average number of stock options that were anti dilutive during the four periods for which earnings per share are presented are as follows:
| 2007 | 2006 | |||
During the three month period ending September 30 | 141,500 | 70,500 | ||
During the nine month period ending September 30 | 105,833 | 58,833 |
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The following is a reconciliation of the numerators and denominators of the basic and diluted earnings per share computations for the periods presented (dollars are in thousands, except per share data).
| For the three months ended September 30, | ||||||||||||||||||
| 2007 | 2006 | |||||||||||||||||
| Earnings | Weighted Average Shares | Per Share | Earnings | Weighted Average Shares | Per Share | |||||||||||||
Basic EPS | ||||||||||||||||||
Net earnings available To common Stockholders | $ | 1,952 | 12,433,574 | $ | 0.16 | $ | 2,251 | 11,113,648 | $ | 0.20 | ||||||||
Effect of dilutive securities: | ||||||||||||||||||
Incremental shares from assumed exercise of stock Options | — | 185,207 | (0.01 | ) | — | 266,819 | — | |||||||||||
Diluted EPS | ||||||||||||||||||
Net earnings available to common Stockholders and assumed Conversions | $ | 1,952 | 12,618,781 | $ | 0.15 | $ | 2,251 | 11,380,467 | $ | 0.20 | ||||||||
| For the nine months ended September 30, | ||||||||||||||||||
| 2007 | 2006 | |||||||||||||||||
| Earnings | Weighted Average Shares | Per Share Amount | Earnings | Weighted Average Shares | Per Share Amount | |||||||||||||
Basic EPS | ||||||||||||||||||
Net earnings available to common Stockholders | $ | 6,040 | 11,998,439 | $ | 0.50 | $ | 6,268 | 10,911,050 | $ | 0.57 | ||||||||
Effect of dilutive securities: | ||||||||||||||||||
Incremental shares from assumed exercise of stock Options | — | 205,719 | (0.01 | ) | — | 253,584 | (0.01 | ) | ||||||||||
Diluted EPS | ||||||||||||||||||
Net earnings available to common stockholders and assumed Conversions | $ | 6,040 | 12,204,158 | $ | 0.49 | $ | 6,268 | 11,164,634 | $ | 0.56 | ||||||||
NOTE 3: Comprehensive income
Under Statement of Financial Accounting Standards No. 130, “Reporting Comprehensive Income,” certain transactions and other economic events that bypass our income statement must be displayed as other comprehensive income. Our comprehensive income consists of net earnings and unrealized gains and losses on securities available-for-sale, net of deferred income taxes.
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The table below sets forth our comprehensive income for the periods indicated below (in thousands of dollars).
| Three months ended | Nine months ended | |||||||||||
| Sept 30, 2007 | Sept 30, 2006 | Sept 30, 2007 | Sept 30, 2006 | |||||||||
Net income | $ | 1,952 | $ | 2,251 | $ | 6,040 | $ | 6,268 | ||||
Other comprehensive gain, net of tax: | ||||||||||||
Net unrealized holding gain arising during the period | 1,770 | 1,627 | 197 | 564 | ||||||||
Other comprehensive gain, net of tax | 1,770 | 1,627 | 197 | 564 | ||||||||
Comprehensive income | $ | 3,722 | $ | 3,878 | $ | 6,237 | $ | 6,832 | ||||
The table below sets forth our reclassification of our unrealized holding gains disclosed in the table above (in thousands of dollars).
| Three months ended | Nine months ended | ||||||||||||||
| Sept 30, 2007 | Sept 30, 2006 | Sept 30, 2007 | Sept 30, 2006 | ||||||||||||
Net unrealized gain on securities | $ | 1,771 | $ | 1,627 | $ | 198 | $ | 575 | |||||||
Reclassification adjustments for gain included in net income during the period, net of income taxes of $1 and $0 for the three month periods and $1 and $6 for the nine month periods ending September 30, 2007 and 2006, respectively | (1 | ) | — | (1 | ) | (11 | ) | ||||||||
Unrealized holding gain arising during the period | $ | 1,770 | $ | 1,627 | $ | 197 | $ | 564 | |||||||
NOTE 4: Pending transaction
On June 21, 2007 the Company announced plans to combine two of its five subsidiary banks, CenterState Bank Mid FL (“Mid FL”) and CenterState Bank West Florida, N.A. (“CSWFL”). Subsequently, the Company, the two subsidiary banks, and an out-of-state bank and bank holding company entered into several related agreements. The series of agreements is expected to close on November 30, 2007. As a result of these related transactions, the Company will recognize a gain of $1,000,000 before related expenses. The Company will continue to operate the same locations currently operated by CSWFL and Mid FL, except they will be operating under one charter instead of two. All customer loan and deposit accounts/relationships will be retained by the Company.
NOTE 5: Effect of new pronouncements
In September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 158,Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans – an amendment of FASB Statements No. 87, 88, 106 and 132(R). This Statement requires an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan (other than a multiemployer plan) as an asset or liability in its balance sheet, beginning with year end 2006, and to recognize changes in the funded status in the year in which the changes occur through comprehensive income beginning in 2007. Additionally, defined benefit plan assets and obligations are to be measured as of the date of the employer’s fiscal year-end, starting in 2008. Adoption had no effect on the Company’s financial statements.
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In February 2006, FASB issued Statement No. 155,Accounting for Certain Hybrid Financial Instruments-an amendment to FASB Statements No. 133 and 140. This Statement permits fair value re-measurement for any hybrid financial instruments, clarifies which instruments are subject to the requirements of Statement No. 133, and establishes a requirement to evaluate interests in securitized financial assets and other items. The new standard is effective for financial assets acquired or issued after the beginning of the entity’s first fiscal year that begins after September 15, 2006. Adoption had no effect on the Company’s financial statements.
In March 2006, the FASB issued Statement No. 156,Accounting for Servicing of Financial Assets-an amendment of FASB Statement No. 140. This Statement provides the following: 1) revised guidance on when a servicing asset and servicing liability should be recognized; 2) requires all separately recognized servicing assets and servicing liabilities to be initially measured at fair value, if practicable; 3) permits an entity to elect to measure servicing assets and servicing liabilities at fair value each reporting date and report changes in fair value in earnings in the period in which the changes occur; 4) upon initial adoption, permits a onetime reclassification of available-for-sale securities to trading securities for securities which are identified as offsetting the entity’s exposure to changes in the fair value of servicing assets or liabilities that a servicer elects to subsequently measure at fair value; and 5) requires separate presentation of servicing assets and servicing liabilities subsequently measured at fair value in the statement of financial position and additional footnote disclosures. This Standard is effective as of the beginning of an entity’s first fiscal year that begins after September 15, 2006 with the effects of initial adoption being reported as a cumulative-effect adjustment to retained earnings. Adoption had no effect on the Company’s financial statements.
In July 2006, the FASB issued FASB Interpretation No. 48,Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109 (FIN 48), which prescribes a recognition threshold and measurement attribute for a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The adoption of FIN 48 had no affect on the Company’s financial statements. The Company has no unrecognized tax benefits and does not anticipate any increase in unrecognized benefits during 2007 relative to any tax positions taken prior to January 1, 2007. Should the accrual of any interest or penalties relative to unrecognized tax benefits be necessary, it is the Company’s policy to record such accruals in its income taxes accounts; no such accruals exist as of January 1, 2007. The Company and its subsidiaries file a consolidated U.S. federal income tax return and corporate income tax return in the State of Florida. These returns are subject to examination by taxing authorities for all years after 2002.
In September 2006, the FASB Emerging Issues Task Force finalized Issue No. 06-5,Accounting for Purchases of Life Insurance—Determining the Amount That Could Be Realized in Accordance with FASB Technical Bulletin No. 85-4 (Accounting for Purchases of Life Insurance).This Issue requires that a policyholder consider contractual terms of a life insurance policy in determining the amount that could be realized under the insurance contract. It also requires that if the contract provides for a greater surrender value if all individual policies in a group are surrendered at the same time, that the surrender value be determined based on the assumption that policies will be surrendered on an individual basis. Lastly, the Issue discusses whether the cash surrender value should be discounted when the policyholder is contractually limited in its ability to surrender a policy. This Issue is effective for fiscal years beginning after December 15, 2006. The adoption of this Issue did not have a material impact on the financial statements.
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Effect of newly issued but not yet effective accounting standards:
In September 2006, the FASB issued Statement No. 157,Fair Value Measurements. This Statement defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. This Statement establishes a fair value hierarchy about the assumptions used to measure fair value and clarifies assumptions about risk and the effect of a restriction on the sale or use of an asset. The Statement is effective for fiscal years beginning after November 15, 2007. The Company has not completed its evaluation of the impact of the adoption of this Statement.
In February 2007, the Financial Accounting Standards Board (FASB) issued SFAS No. 159,The Fair Value Option for Financial Assets and Financial Liabilities.This Statement permits entities to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. This Statement is expected to expand the use of fair value measurement, which is consistent with the Board’s long-term measurement objectives for accounting for financial instruments. This Statement is effective for fiscal years beginning after November 15, 2007. The Company has not completed its evaluation of the impact of the adoption of this Statement.
In September 2006, the FASB Emerging Issues Task Force finalized Issue No. 06-4,Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements. This Issue requires that a liability be recorded during the service period when a split-dollar life insurance agreement continues after participants’ employment or retirement. The required accrued liability will be based on either the post-employment benefit cost for the continuing life insurance or based on the future death benefit depending on the contractual terms of the underlying agreement. This Issue is effective for fiscal years beginning after December 15, 2007. Under the current agreements, adoption of this Issue will have no impact on the Company’s financial statements.
| ITEM 2: | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
COMPARISON OF BALANCE SHEETS AT SEPTEMBER 30, 2007 AND DECEMBER 31, 2006
Overview
Total assets were $1,225,586,000 as of September 30, 2007, compared to $1,077,102,000 at December 31, 2006, an increase of $148,484,000 or 14%. The increase is the result of our April 2, 2007 acquisition of Valrico State Bank discussed in our previous Form 10-Q quarterly report.
Federal funds sold and money market accounts
Federal funds sold and money market accounts were $33,184,000 at September 30, 2007 (approximately 2.7% of total assets) as compared to $79,636,000 at December 31, 2006 (approximately 7.4% of total assets). We use our available-for-sale securities portfolio, as well as federal funds sold and money market accounts for liquidity management and for investment yields. These accounts, as a group, will fluctuate as a function of loans and deposits outstanding.
Investment securities
Securities available-for-sale, consisting primarily of U.S. Treasury, government agency securities and municipal tax exempt securities were $217,242,000 at September 30, 2007 (approximately 18% of
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total assets) compared to $235,350,000 at December 31, 2006 (approximately 22% of total assets), a decrease of $18,108,000 or 7.7%. These 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. We use our available-for-sale securities portfolio, as well as federal funds sold and money market accounts for liquidity management and for investment yields. These accounts, as a group, will fluctuate as a function of loans and deposits outstanding as discussed above, under the caption “Federal funds sold and money market accounts.”
Loans
Lending-related income is the most important component of our net interest income and is a major contributor to profitability. The loan portfolio is the largest component of earning assets, and it therefore generates the largest portion of revenues. The absolute volume of loans and the volume of loans as a percentage of earning assets is an important determinant of net interest margin as loans are expected to produce higher yields than securities and other earning assets. Average loans during the quarter ended September 30, 2007, were $844,316,000, or 76% of average earning assets, as compared to $632,568,000, or 68% of average earning assets, for the quarter ending September 30, 2006. Total loans, net of unearned fees and cost, at September 30, 2007 and December 31, 2006 were $840,341,000 and $657,963,000, respectively, an increase of $182,378,000, or 28%. This represents a loan to total asset ratio of 69% and 61% and a loan to deposit ratio of 84% and 74%, at September 30, 2007 and December 31, 2006, respectively. The increase in loans during this period was primarily due to the April 2, 2007 acquisition of Valrico State Bank, as discussed in our previous Form 10-Q quarterly report, as well as normal business growth. Excluding the loans acquired pursuant to the Valrico transaction, our loan growth for the nine month period ending September 30, 2007 was approximately 9.2% (approximately 12% on an annualized basis).
Total residential real estate loans totaled $202,628,000 or 24% of our total loans as of September 30, 2007. As with all of our loans, these are originated in our geographical market area in central Florida. We do not engage in sub-prime lending. As of this same date, our commercial real estate loans totaled $384,893,000, or 46% of our total loans. Construction, development, and land loans totaled $112,485,000, or 13% of our loans. As a group, all of our real estate collateralized loans represent approximately 83% of our total loans at September 30, 2007. The remaining 17% is comprised of commercial loans (10%) and consumer loans (7%).
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.
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The following table sets forth information concerning the loan portfolio by collateral types as of the dates indicated (dollars are in thousands).
| Sept 30, 2007 | Dec 31, 2006 | |||||||
Real estate loans | ||||||||
Residential | $ | 202,628 | $ | 180,869 | ||||
Commercial | 384,893 | 291,536 | ||||||
Construction, development, land (note 1) | 112,485 | 60,950 | ||||||
Total real estate | 700,006 | 533,355 | ||||||
Commercial | 79,906 | 68,948 | ||||||
Consumer and other | 61,497 | 56,684 | ||||||
Gross loans | 841,409 | 658,987 | ||||||
Unearned fees/costs | (1,068 | ) | (1,024 | ) | ||||
Total loans net of unearned fees | 840,341 | 657,963 | ||||||
Allowance for loan losses | (9,903 | ) | (7,355 | ) | ||||
Total loans net of unearned fees and allowance for loan losses | $ | 830,438 | $ | 650,608 | ||||
| Note 1: | The increase in this category was due to the acquisition of Valrico State Bank and certain reclassifications from the Commercial Real Estate Loan category to Construction, Development and Land Loan category. |
Construction (exclusive of single family construction), Acquisition & Development and Land loans approximate 75% of regulatory capital which compares favorably to regulatory guidelines of 100% of regulatory capital. Commercial Real Estate loans (exclusive of owner occupied) plus the loans described in note 2 above approximate 240% of regulatory capital which is below regulatory guidelines of 300% of regulatory capital.
Credit quality and allowance for loan losses
We maintain an allowance for loan losses that we believe is adequate to absorb probable losses inherent in our loan portfolio. The allowance is increased by the provision for loan losses, which is a charge to current period earnings and decreased by loan charge-offs net of recoveries of prior period loan charge-offs. Loans are charged against the allowance when management believes collection of the principal is unlikely.
The allowance consists of two components. The first component is an allocation for impaired loans, as defined by Statement of Financial Accounting Standard No. 114. Impaired loans are those loans that management has estimated will not repay as agreed upon. 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 repay as agreed), but may be sufficiently collateralized such that we expect to recover all principal and interest eventually, and therefore no specific allowance is warranted.
The second component is a general allowance on all of the Company’s loans other than those identified as impaired. We group these loans into five general categories with similar characteristics, then apply an adjusted loss factor to each group of loans to determine the total amount of this second component of our allowance for loan losses. The adjusted loss factor for each category of loans is a derivative of our historical loss factor for that category, adjusted for current internal and external environmental factors, as well as for certain loan grading factors.
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In the table below we have shown the two components, as discussed above, of our allowance for loan losses at September 30, 2007 and December 31, 2006.
(amounts are in thousands of dollars) | Sept 30, 2007 | Dec 31, 2006 | Increase (decrease) | ||||||||
Impaired loans | $ | 10,577 | $ | 4,986 | $ | 5,591 | |||||
Component 1 (specific allowance) | 758 | 372 | 386 | ||||||||
Specific allowance as percentage of impaired loans | 7.17 | % | 7.46 | % | |||||||
Total loans other than impaired loans | 829,764 | 652,977 | 176,787 | ||||||||
Component 2 (general allowance) | 9,145 | 6,983 | 2,162 | ||||||||
General allowance as percentage of non impaired loans | 1.10 | % | 1.07 | % | |||||||
Total loans | 840,341 | 657,963 | 182,378 | ||||||||
Total allowance for loan losses | 9,903 | 7,355 | 2,548 | ||||||||
Allowance for loan losses as percentage of total loans | 1.18 | % | 1.12 | % | |||||||
As shown in the table above, our allowance for loan losses (“ALLL”) as a percentage of total loans outstanding was 1.18% at September 30, 2007 and 1.12% at December 31, 2006. Our ALLL increased by $2,548,000 during this nine month period. Of this amount, $2,162,000 relates to an increase in our Component 2, or general allowance, of which $1,617,000 relates to the acquisition of VSB and $545,000 is due to the growth in the loan portfolio, change in the loan mix and/or change in current internal or external environmental factor. The remaining $386,000 increase is due to an increase in our Component 1, or specific allowance. This Component is the result of specific allowance analyses prepared for each of our impaired loans.
The following table sets forth information concerning the activity in the allowance for loan losses during the periods indicated (in thousands of dollars).
| Three month period ended September 30, | Nine month period ended September 30, | |||||||||||||||
| 2007 | 2006 | 2007 | 2006 | |||||||||||||
Allowance at beginning of period | $ | 9,519 | $ | 7,310 | $ | 7,355 | $ | 6,491 | ||||||||
Charge-offs | ||||||||||||||||
Commercial loans | — | (33 | ) | — | (353 | ) | ||||||||||
Real estate loans | (30 | ) | — | (45 | ) | — | ||||||||||
Consumer and other loans | (130 | ) | (63 | ) | (259 | ) | (79 | ) | ||||||||
Total charge-offs | (160 | ) | (96 | ) | (304 | ) | (432 | ) | ||||||||
Recoveries | ||||||||||||||||
Commercial loans | — | 33 | 1 | 45 | ||||||||||||
Real estate loans | 3 | (13 | ) | 13 | 6 | |||||||||||
Consumer and other loans | 12 | 4 | 34 | 35 | ||||||||||||
Total recoveries | 15 | 24 | 48 | 86 | ||||||||||||
Net charge-offs | (145 | ) | (72 | ) | (256 | ) | (346 | ) | ||||||||
Provision for loan losses | 529 | 129 | 1,187 | 575 | ||||||||||||
Adjustment relating to Mid FL merger | — | — | — | 647 | ||||||||||||
Adjustment relating to Valrico merger | — | — | 1,617 | — | ||||||||||||
Allowance at end of period | $ | 9,903 | $ | 7,367 | $ | 9,903 | $ | 7,367 | ||||||||
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Nonperforming assets
Non-performing loans consist of non-accrual loans and loans past due 90 days or more and still accruing interest. Non-performing assets consist of non-performing loans plus other real estate owned (“OREO”) and repossessed assets other than real estate. 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. Subsequent collections reduce the principal balance of the loan until the loan is returned to accrual status.
The following table sets forth information regarding the components of nonperforming assets at the dates indicated (in thousands of dollars).
| Sept 30, 2007 | Dec. 31 2006 | |||||||
Non-accrual loans | $ | 4,610 | $ | 448 | ||||
Past due loans 90 days or more and still accruing interest | 327 | 162 | ||||||
Total non-performing loans | 4,937 | 610 | ||||||
Other real estate owned | 177 | — | ||||||
Repossessed assets other than real estate | 133 | 35 | ||||||
Total non-performing assets | $ | 5,247 | $ | 645 | ||||
Total non-performing loans as a percentage of total loans | 0.59 | % | 0.09 | % | ||||
Total non-performing assets as a percentage of total assets | 0.43 | % | 0.06 | % | ||||
Allowance for loan losses | $ | 9,903 | $ | 7,355 | ||||
Allowance for loan losses as a percentage of non-performing loans | 201 | % | 1,206 | % | ||||
Non-accrual loans for each of the previous four quarter ends are listed below (in thousands of dollars).
| $448,000 | at December 31, 2006 | |
| $1,196,000 | at March 31, 2007 | |
| $1,997,000 | at June 30, 2007 | |
| $4,610,000 | at September 30, 2007 |
Subsequent to September 30, 2007 one loan relationship (approximating $730,000) paid off during October, thereby reducing our non-accrual loans by that amount. Management believes that we have adequate reserves (allowance for loan losses) on the remaining amounts.
Our OREO of $177,000 is one house in Osceola County, which has just recently been repossessed. The $133,000 listed above as repossessed assets other than real estate represents three mobile homes, one RV motor home and two automobiles.
In light of the current real estate environment in Florida, we have been diligently analyzing our loan portfolio. Our CEO and other members of our senior management team are holding meetings with the subsidiary bank Presidents and their chief lending officers as a group. Each bank reports on its current loan watch list and discusses their loan portfolio in general and any specific individual loan they feel a need to talk about. We expect to continue to aggressively monitor credit risk and are committed to early recognition of troubled loans. Although non accrual loans have been increasing over the past several months due to the Company’s normal identification systems in place, this increasingly aggressive attitude of senior management toward problem loan identification has probably contributed to the rising dollar amount of loans identified as non accrual at September 30, 2007.
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Approximately 13% ($112,485,000) of our loan portfolio is in a category that includes construction loans, acquisition and development loans and land loans. There are no construction or development loans to national builders. Although we do not have any loans with national home builders, management is focusing its attention on the trickle down effect, if any. That is, our exposure, if any, to the sub-contractors and suppliers to the home building industry (i.e. plumbers, sod farmers, framers, roofers, cabinet makers, etc.). We do business with local builders and developers that have typically been long time customers, of which there are no material amount of these loans included in our non accrual portfolio. We see no significant problems with loans in this category as of this time. However, management recognizes that many factors can adversely impact various segments of our market and customers, and therefore there is no assurance that losses or potential losses may develop in the future.
As of September 30, 2007, management has identified $4,610,000 of non accrual loans, of which most, but not all, are collateralized by either commercial real estate or single family real estate. The Company expensed $529,000 as a provision for loan losses during the third quarter compared to $376,000 in the second quarter and compared to $129,000 in the third quarter of last year. The allowance for loan losses was $9,903,000 at September 30, 2007, or 1.18% of outstanding loans, compared to 1.12% at December 31, 2006. Although non-accrual loans have been trending upwards, as noted in the table above, management believes, that as of September 30, 2007, the allowance for loan losses was adequate. However, as indicated above, many factors can adversely impact our market and customers, and therefore there is no assurance that losses or potential losses may develop in the future.
Bank premises and equipment
Bank premises and equipment was $53,999,000 at September 30, 2007 compared to $39,879,000 at December 31, 2006, an increase of $14,120,000 or 35%. Of this amount, $9,289,000 represents the purchase of premises and equipment pursuant to the April 2, 2007 acquisition of Valrico State Bank as discussed in Note 4 of the Notes to the Condensed Consolidated Financial Statements in our June 30, 2007 Form 10-Q quarterly report. The remaining amount of the increase ($4,831,000) is the result of purchases and construction costs totaling $6,532,000 less $1,701,000 of depreciation expense. Most of these costs relate to the construction of the two branch offices completed in the first half of 2007 (Ashton in Osceola County and FishHawk in Hillsborough County) and two branch offices currently under construction (Deer Creek in Polk County and Crystal River in Citrus County.)
Deposits
Total deposits were $1,004,426,000 at September 30, 2007, compared to $892,806,000 at December 31, 2006, an increase of $111,620,000 or 12.5%. We acquired $130,614,000 of deposits as a result of our acquisition of Valrico State Bank on April 2, 2007. As such, total deposits decreased $18,994,000, or 2.1%, exclusive of the Valrico deposits acquired, during the nine month period ending September 30, 2007. Deposit growth, especially in core deposits (i.e. non time deposit accounts) continues to be a challenge. Our subsidiary Presidents have initiated various incentive programs throughout their Banks as well as other marketing efforts targeted at deposit growth. We believe there are several forces causing this slow down in deposit growth, including the interest rate environment which may have enticed customers to shift from lower yielding accounts to higher yielding time deposits and the slow down in real estate activity in Florida, which translates into less transactions which equates to lower balances held in title company accounts and other real estate related accounts.
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The table below sets forth our deposits by type and as a percentage to total deposits at September 30, 2007 and December 31, 2006 (amounts shown in the table are in thousands of dollars).
| Sept 30, 2007 | % of Total | Dec 31, 2006 | % of total | |||||||||
Demand – non-interest bearing | $ | 183,959 | 18 | % | $ | 223,602 | 25 | % | ||||
Demand – interest bearing | 130,550 | 13 | % | 110,627 | 12 | % | ||||||
Savings and money market accounts | 161,626 | 16 | % | 147,334 | 17 | % | ||||||
Time deposits | 528,291 | 53 | % | 411,243 | 46 | % | ||||||
Total deposits | $ | 1,004,426 | 100 | % | $ | 892,806 | 100 | % | ||||
Securities sold under agreement to repurchase
Our subsidiary banks enter into borrowing arrangements with our retail business customers by agreements to repurchase (“securities sold under agreements to repurchase”) under which the banks pledge investment securities owned and under their control as collateral against the one-day borrowing arrangement. These short-term borrowings totaled $45,340,000 at September 30, 2007 compared to $52,792,000 at December 31, 2006, resulting in a decrease of $7,452,000, or 14%.
Corporate debentures
In September 2003, we formed CenterState Banks of Florida Statutory Trust I (the “Trust”) for the purpose of issuing trust preferred securities. On September 22, 2003, we issued a floating rate corporate debenture in the amount of $10,000,000. 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 305 basis points). The corporate debenture and the trust preferred security each have 30-year lives. The trust preferred security and the corporate debenture are callable by us or the Trust, at their respective option after five years, and sooner in specific events, subject to prior approval by the Federal Reserve, if then required. Related loan origination costs of $188,000 were capitalized and are being amortized to interest expense over a five year period ending September 2008. We have 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 $2,500,000. 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 270 basis points). The corporate debenture and the trust preferred security each have 30-year lives. The trust preferred security and the corporate debenture are callable by VBI or the Valrico Trust, at their respective option after five years, and sooner in specific events, subject to prior approval by the Federal Reserve, if then required. On April 2, 2007, we 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. We have treated the trust preferred security as Tier 1 capital up to the maximum amount allowed under the Federal Reserve guidelines for federal regulatory purposes.
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Other borrowings
At September 30, 2007, other borrowings consisted of the following Federal Home Loan Bank advances: $3,000,000 due in November 2007, $3,000,000 due in December 2007 and $2,000,000 due in March 2008. These short-term borrowings are used for liquidity management along with federal funds sold and investment securities available-for-sale discussed earlier in this document.
Stockholders’ equity
Stockholders’ equity at September 30, 2007, was $145,621,000, or 11.9% of total assets, compared to $117,332,000, or 10.9% of total assets at December 31, 2006. The increase in stockholders’ equity was due to the following items:
| $117,332,000 | Total stockholders’ equity at December 31, 2006 | |
| 6,040,000 | Net income during the period | |
| (1,324,000) | Dividends declared and paid ($0.11 per share) | |
| 197,000 | Net increase in market value of securities available for sale, net of deferred taxes | |
| 528,000 | Employee stock options exercised | |
| 405,000 | Employee stock option expense consistent with SFAS #123(R) | |
| 22,443,000 | Stock issued pursuant to acquisition of VBI | |
| $145,621,000 | Total stockholders’ equity at September 30, 2007 | |
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 September 30, 2007, each of our five subsidiary banks exceeded the minimum capital levels to be considered “well capitalized” under the terms of the guidelines.
Selected consolidated capital ratios at September 30, 2007 and December 31, 2006 are presented in the table below.
| Actual | Well capitalized | Excess | |||||||||||||
| Amount | Ratio | Amount | Ratio | Amount | |||||||||||
September 30, 2007 | |||||||||||||||
Total capital (to risk weighted assets) | $ | 134,219 | 14.6 | % | $ | 91,763 | > 10 | % | $ | 42,456 | |||||
Tier 1 capital (to risk weighted assets) | 124,316 | 13.5 | % | 55,058 | > 6 | % | 69,258 | ||||||||
Tier 1 capital (to average assets) | 124,316 | 10.3 | % | 60,276 | > 5 | % | 64,040 | ||||||||
December 31, 2006 | |||||||||||||||
Total capital (to risk weighted assets) | $ | 122,387 | 16.6 | % | $ | 73,716 | > 10 | % | $ | 48,671 | |||||
Tier 1 capital (to risk weighted assets) | 115,032 | 15.6 | % | 44,230 | > 6 | % | 70,802 | ||||||||
Tier 1 capital (to average assets) | 115,032 | 11.2 | % | 51,236 | > 5 | % | 63,796 | ||||||||
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COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTH PERIODS ENDED SEPTEMBER 30, 2007 AND 2006
Overview
Net income for the three months ended September 30, 2007 was $1,952,000 or $0.16 per share basic and $0.15 per share diluted, compared to $2,251,000 or $0.20 per share basic and diluted for the same period in 2006.
The return on average equity (“ROE”) and the return on average assets (“ROA”), calculated on an annualized basis, for the three month period ended September 30, 2007 was 5.36% and 0.62%, respectively, as compared to 7.87% and 0.87%, respectively, for the same period in 2006.
Net interest income/margin
Net interest income increased $1,265,000 or 13% to $10,901,000 during the three month period ended September 30, 2007 compared to $9,636,000 for the same period in 2006. The $1,265,000 increase was the result of a $3,905,000 increase in interest income less a $2,640,000 increase in interest expense.
Interest earning assets averaged $1,117,402,000 during the three month period ended September 30, 2007 as compared to $933,414,000 for the same period in 2006, an increase of $183,988,000, or 20%. The yield on average interest earning assets increased 27bps to 7.04% (31bps to 7.10% tax equivalent basis) during the three month period ended September 30, 2007, compared to 6.77% (6.79% tax equivalent basis) for the same period in 2006. The combined effects of the $183,988,000 increase in average interest earning assets and the 27bps (31bps tax equivalent basis) increase in yield on average interest earning assets resulted in the $3,905,000 ($4,002,000 tax equivalent basis) increase in interest income between the two periods.
Interest bearing liabilities averaged $902,692,000 during the three month period ended September 30, 2007 as compared to $714,495,000 for the same period in 2006, an increase of $188,197,000, or 26%. The cost of average interest bearing liabilities increased 43bps to 3.93% during the three month period ended September 30, 2007, compared to 3.50% for the same period in 2006. The combined effects of the $188,197,000 increase in average interest bearing liabilities and the 43bps increase in cost on average interest bearing liabilities resulted in the $2,640,000 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 three month periods ended September 30, 2007 and 2006 on a tax equivalent basis (in thousands of dollars).
| Three months ended September 30, | ||||||||||||||||||||
| 2007 | 2006 | |||||||||||||||||||
| Average Balance | Interest Inc / Exp | Average Rate | Average Balance | Interest Inc / Exp | Average Rate | |||||||||||||||
Loans (1) (2) (9) | $ | 844,316 | $ | 16,537 | 7.77 | % | $ | 632,568 | $ | 12,495 | 7.84 | % | ||||||||
Securities- taxable (3) (9) | 237,412 | 2,969 | 4.96 | % | 293,033 | 3,382 | 4.58 | % | ||||||||||||
Securities- tax exempt (9) | 35,674 | 479 | 5.33 | % | 7,813 | 106 | 5.38 | % | ||||||||||||
Total earning assets | 1,117,402 | 19,985 | 7.10 | % | 933,414 | 15,983 | 6.79 | % | ||||||||||||
Allowance for loan losses | (9,663 | ) | (7,371 | ) | ||||||||||||||||
All other assets | 132,032 | 97,844 | ||||||||||||||||||
Total assets | $ | 1,239,771 | $ | 1,023,887 | ||||||||||||||||
Deposits (4) | 822,417 | 7,852 | 3.79 | % | 654,009 | 5,478 | 3.32 | % | ||||||||||||
Borrowings (5) | 67,775 | 817 | 4.78 | % | 50,486 | 592 | 4.65 | % | ||||||||||||
Corporate debenture (6) | 12,500 | 269 | 8.54 | % | 10,000 | 228 | 9.05 | % | ||||||||||||
Total interest bearing Liabilities | 902,692 | 8,938 | 3.93 | % | 714,495 | 6,298 | 3.50 | % | ||||||||||||
Demand deposits | 182,529 | 191,057 | ||||||||||||||||||
Other liabilities | 10,013 | 4,825 | ||||||||||||||||||
Stockholders’ equity | 144,537 | 113,510 | ||||||||||||||||||
Total liabilities and Stockholders’ equity | $ | 1,239,771 | $ | 1,023,887 | ||||||||||||||||
Net interest spread (tax equivalent basis) (7) | 3.17 | % | 3.29 | % | ||||||||||||||||
Net interest income (tax equivalent basis) | $ | 11,047 | $ | 9,685 | ||||||||||||||||
Net interest margin (tax equivalent basis) (8) | 3.92 | % | 4.12 | % | ||||||||||||||||
| Note 1: | Loan balances are net of deferred origination fees and costs. |
| Note 2: | Interest income on average loans includes loan fee recognition of $120,000 and $143,000 for the three month periods ended September 30, 2007 and 2006. |
| Note 3: | Includes securities available-for-sale, federal funds sold and money market 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. |
| Note 5: | Includes securities sold under agreements to repurchase, Federal Home Loan Bank advances and federal funds purchased. |
| Note 6: | Includes net amortization of origination costs and amortization of purchase accounting adjustment of $2,000 and $9,000 for the three month periods ended September 30, 2007 and 2006. |
| Note 7: | Represents the average rate earned on interest earning assets minus the average rate paid on interest bearing liabilities. |
| Note 8: | Represents net interest income divided by total interest earning assets. |
| Note 9: | 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. |
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Provision for loan losses
The provision for loan losses increased $400,000, or 310%, to $529,000 during the three month period ending September 30, 2007 compared to $129,000 for the comparable period in 2006. Our policy is to maintain the allowance for loan losses at a level sufficient to absorb probable incurred losses inherent in the loan portfolio. The allowance is increased by the provision for loan losses, which is a charge to current period earnings, and is decreased by charge-offs, net of recoveries on prior loan charge-offs. Therefore, the provision for loan losses (Income Statement effect) is a residual of management’s determination of allowance for loan losses (Balance Sheet approach). In determining the adequacy of the allowance for loan losses, we consider those levels maintained by conditions of individual borrowers, the historical loan loss experience, the general economic environment, the overall portfolio composition, and other information. As these factors change, the level of loan loss provision changes. See “credit quality and allowance for loan losses” regarding the allowance for loan losses for additional information.
Non-interest income
Non-interest income for the three months ended September 30, 2007 was $1,961,000 compared to $1,550,000 for the comparable period in 2006. This increase was the result of the following components listed in the table below (amounts listed are in thousands of dollars).
Three month period ending: (in thousands of dollars) | Sept 30, 2007 | Sept 30, 2006 | $ increase | % Increase (decrease) | |||||||||
Service charges on deposit accounts | $ | 1,150 | $ | 902 | $ | 248 | 27.5 | % | |||||
Commissions from mortgage broker activities | 42 | 79 | (37 | ) | (46.8 | %) | |||||||
Commissions from sale of mutual funds and annuities | 195 | 142 | 53 | 37.3 | % | ||||||||
Debit card and ATM fees | 234 | 138 | 96 | 69.6 | % | ||||||||
Loan related fees | 116 | 70 | 46 | 65.7 | % | ||||||||
BOLI income | 97 | 74 | 23 | 31.1 | % | ||||||||
Other service charges and fees | 127 | 145 | (18 | ) | (12.4 | %) | |||||||
Total non-interest income | $ | 1,961 | $ | 1,550 | $ | 411 | 26.5 | % | |||||
We acquired Valrico State Bank (“VSB”) on April 2, 2007. As such, non-interest income in the third quarter 2007 includes VSB ($217,000), but VSB is not included in the comparable quarter in 2006.
The largest component of non-interest income is “Service charges on deposit accounts” which increased by $248,000. Most of this increase is the result of the acquisition of VSB ($135,000) and the remaining increase is primarily due to increases in number of accounts and a greater effort placed on deposit related fee generation.
Commissions from mortgage broker activities are dependent on market place forces including supply and demand of single family residential property in our local markets. Commissions from the sale of mutual funds and annuities are also dependent on market place forces including the successful efforts of our investment sales representatives.
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Non-interest expense
Non-interest expense for the three months ended September 30, 2007 increased $1,979,000, or 26.5%, to $9,442,000, compared to $7,463,000 for the same period in 2006. Components of our non-interest expenses are listed in the table below. Amounts are in thousands of dollars.
Three month period ending: (in thousands of dollars) | Sept 30, 2007 | Sept 30, 2006 | $ increase | % Increase (decrease) | |||||||||||
Employee salaries and wages | $ | 3,861 | $ | 3,116 | $ | 745 | 23.9 | % | |||||||
Employee incentive/bonus compensation | 382 | 515 | (133 | ) | (25.8 | )% | |||||||||
Employee stock option expense | 137 | 147 | (10 | ) | (6.8 | )% | |||||||||
Health insurance and other employee benefits | 600 | 432 | 168 | 38.9 | % | ||||||||||
Payroll taxes | 268 | 214 | 54 | 25.2 | % | ||||||||||
Other employee related expenses | 215 | 159 | 56 | 35.2 | % | ||||||||||
Incremental direct cost of loan origination | (253 | ) | (248 | ) | (5 | ) | (2.0 | )% | |||||||
Total salaries, wages and employee benefits | $ | 5,210 | $ | 4,335 | $ | 875 | 20.2 | % | |||||||
Occupancy expense | 1,131 | 907 | 224 | 24.7 | % | ||||||||||
Depreciation of premises and equipment | 609 | 484 | 125 | 25.8 | % | ||||||||||
Supplies, stationary and printing | 180 | 141 | 39 | 27.7 | % | ||||||||||
Marketing expenses | �� | 250 | 98 | 152 | 155.1 | % | |||||||||
Data processing expense | 401 | 300 | 101 | 33.7 | % | ||||||||||
Legal, auditing and other professional fees | 254 | 190 | 64 | 33.7 | % | ||||||||||
Core deposit intangible (CDI) amortization | 235 | 165 | 70 | 42.4 | % | ||||||||||
Postage and delivery | 77 | 66 | 11 | 16.7 | % | ||||||||||
ATM related expenses | 134 | 110 | 24 | 21.8 | % | ||||||||||
Bank regulatory related expenses | 113 | 96 | 17 | 17.7 | % | ||||||||||
Other expenses | 848 | 571 | 277 | 48.5 | % | ||||||||||
Total non-interest expense | $ | 9,442 | $ | 7,463 | $ | 1,979 | 26.5 | % | |||||||
Overall, the most significant component to consider when comparing these two quarters is the April 2, 2007 acquisition of VSB. Their non-interest expense is included in the current quarter but not in the comparable quarter in 2006. Their total non-interest expense during the current quarter was $1,356,000. Excluding VSB, our net increase would adjust from $1,979,000 to $623,000, or from 26.5% to 8.3%.
Our largest non-interest expense is employee and employee related expenses. Total salaries, wages and employee benefits for the three months ended September 30, 2007 ($5,210,000) accounted for 55% of our total non-interest expense, compared to 58% for the same period last year. Looking at the table above, employee salaries and wages increased by 23.9% to $3,861,000 for the three month period ending September 30, 2007 (“current quarter”), compared to $3,116,000 for the same period last year. Our average FTEs for the current quarter was approximately 379 compared to 318 FTEs for the comparable quarter last year. Most of the FTE increase relates to the acquisition of VSB discussed above, as well as from opening new branches and general business growth.
The lower employee incentive and bonus compensation expense in the current quarter as compared to the same quarter last year is a reflection of the earnings and balance sheet growth results year to date and expectations for the current year compared to performance targets set at the beginning of the year. Generally, bonus and incentive compensation is accrued during the year and paid after year end.
The increase in employee health insurance is partially the result of the VSB acquisition ($58,000) which was included in the current quarter, but was not part of the Company in the same quarter last year.
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The remaining increases are due to the increase in other FTEs (from opening additional branches and general growth in our business) and the increase in health insurance premiums levied on us by the health insurance industry. We are currently working on strategies to try to control our increasing employee health insurance expenses including negotiations with providers, changing networks, investigating consumer driven plans and considering high deductible health savings accounts as an alternative.
Incremental direct cost of loan origination, represents direct incremental cost of originating loans for our portfolio (successful efforts) that are required to be capitalized and amortized to interest income over the life of the related loan pursuant to Statement of Financial Accounting Standard No. 91. The amount that we capitalize is dependent on not just the cost, but the volume of loans successfully originated.
The increase in marketing expenses relates to the checking account marketing campaign currently in place at one of our banks. This campaign started during the fourth quarter of 2006.
The CDI amortization increase between the two quarters is due to the April 2, 2007 acquisition of VSB.
We opened a temporary branch in September 2006 and another in October 2006. These two branches are operating out of temporary locations until the construction of their permanent facilities are completed. We also opened four additional branches in permanent locations in October 2006, February 2007, May 2007, and August 2007. As discussed above, this activity also is responsible for adding additional FTEs along with the VSB acquisition. This branching activity, as well as the continual growth of our business, resulted in the increase in the remainder of our non-interest expenses.
Provision for income taxes
The income tax provision for the three months ended September 30, 2007 was $939,000 (an effective rate of 32.5%) compared to $1,343,000 (an effective rate of 37.4%) for the same period in 2006. The primary reason for the decrease in our effective tax rate was due to the increase in our tax exempt securities and loans.
COMPARISON OF RESULTS OF OPERATIONS FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 2007 AND 2006
Overview
Net income for the nine months ended September 30, 2007 was $6,040,000 or $0.50 per share basic and $0.49 per share diluted, compared to $6,268,000 or $0.57 per share basic and $0.56 per share diluted for the same period in 2006.
ROE and ROA, calculated on an annualized basis, for the nine month period ended September 30, 2007 was 5.97% and 0.68%, respectively, as compared to 7.79% and 0.87%, respectively, for the same period in 2006.
Net interest income/margin
Net interest income increased $4,262,000 or 16% to $31,743,000 during the nine month period ended September 30, 2007 compared to $27,481,000 for the same period in 2006. The increase was the result of a $13,133,000 increase in interest income less a $8,871,000 increase in interest expense.
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Interest earning assets averaged $1,062,829,000 during the nine month period ended September 30, 2007 as compared to $877,525,000 for the same period in 2006, an increase of $185,304,000, or 21%. The yield on average interest earning assets increased 51bps to 7.04% (55bps to 7.09% tax equivalent basis) during the nine month period ended September 30, 2007, compared to 6.53% (6.54% tax equivalent basis) for the same period in 2006. The combined net effects of the $185,304,000 increase in average interest earning assets and the 51bps (55bps tax equivalent basis) increase in yield on average interest earning assets resulted in the $13,133,000 ($13,445,000 tax equivalent basis) increase in interest income between the two periods.
Interest bearing liabilities averaged $845,779,000 during the nine month period ended September 30, 2007 as compared to $654,065,000 for the same period in 2006, an increase of $191,714,000, or 29%. The cost of average interest bearing liabilities increased 69bps to 3.83% during the nine month period ended September 30, 2007, compared to 3.14% for the same period in 2006. The combined net effects of the $191,714,000 increase in average interest bearing liabilities and the 69bps increase in cost of average interest bearing liabilities resulted in the $8,871,000 increase in interest expense between the two periods.
The table below summarizes, the analysis of changes in interest income and interest expense for the nine month periods ended September 30, 2007 and 2006 (in thousands of dollars).
| Nine months ended September 30, | ||||||||||||||||||||
| 2007 | 2006 | |||||||||||||||||||
| Average Balance | Interest Inc / Exp | Average Rate | Average Balance | Interest Inc / Exp | Average Rate | |||||||||||||||
Loans (1) (2) (9) | $ | 775,749 | $ | 45,704 | 7.88 | % | $ | 591,947 | $ | 33,766 | 7.63 | % | ||||||||
Securities- taxable (3) (9) | 251,970 | 9,351 | 4.96 | % | 281,890 | 9,034 | 4.28 | % | ||||||||||||
Securities- tax exempt (9) | 35,110 | 1,338 | 5.10 | % | 3,688 | 148 | 5.37 | % | ||||||||||||
Total earning assets | 1,062,829 | 56,393 | 7.09 | % | 877,525 | 42,948 | 6.54 | % | ||||||||||||
Allowance for loan losses | (8,818 | ) | (7,040 | ) | ||||||||||||||||
All other assets | 127,435 | 92,478 | ||||||||||||||||||
Total assets | $ | 1,181,446 | $ | 962,963 | ||||||||||||||||
Deposits (4) | 761,812 | 20,942 | 3.68 | % | 595,098 | 13,177 | 2.96 | % | ||||||||||||
Borrowings (5) | 72,300 | 2,542 | 4.70 | % | 48,967 | 1,552 | 4.24 | % | ||||||||||||
Corporate debenture (6) | 11,667 | 755 | 8.65 | % | 10,000 | 639 | 8.54 | % | ||||||||||||
Total interest bearing Liabilities | 845,779 | 24,239 | 3.83 | % | 654,065 | 15,368 | 3.14 | % | ||||||||||||
Demand deposits | 191,879 | 196,955 | ||||||||||||||||||
Other liabilities | 8,439 | 4,397 | ||||||||||||||||||
Stockholders’ equity | 135,349 | 107,546 | ||||||||||||||||||
Total liabilities and Stockholders’ equity | $ | 1,181,446 | $ | 962,963 | ||||||||||||||||
Net interest spread (tax equivalent basis) (7) | 3.26 | % | 3.40 | % | ||||||||||||||||
Net interest income (tax equivalent basis) | $ | 32,154 | $ | 27,580 | ||||||||||||||||
Net interest margin (tax equivalent basis) (8) | 4.04 | % | 4.20 | % | ||||||||||||||||
| Note 1: | Loan balances are net of deferred origination fees and costs. |
| Note 2: | Interest income on average loans includes loan fee recognition of $421,000 and $380,000 for the nine month periods ended September 30, 2007 and 2006. |
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| Note 3: | Includes securities available-for-sale, federal funds sold and money market 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. |
| Note 5: | Includes securities sold under agreements to repurchase, Federal Home Loan Bank advances and federal funds purchased. |
| Note 6: | Includes net amortization of origination costs and amortization of purchase accounting adjustment of $14,000 and $28,000 for the nine month periods ended September 30, 2007 and 2006. |
| Note 7: | Represents the average rate earned on interest earning assets minus the average rate paid on interest bearing liabilities. |
| Note 8: | Represents net interest income divided by total interest earning assets. |
| Note 9: | Interest income and rates include the effects of a tax equivalent adjustment using applicable statutory tax rates to adjust tax exempt interest income on tax exempt investment securities and loans to a fully taxable basis. |
Provision for loan losses
The provision for loan losses increased $612,000, or 106%, to $1,187,000 during the nine month period ending September 30, 2007 compared to $575,000 for the comparable period in 2006. Our policy is to maintain the allowance for loan losses at a level sufficient to absorb probable incurred losses inherent in the loan portfolio. The allowance is increased by the provision for loan losses, which is a charge to current period earnings, and is decreased by charge-offs, net of recoveries on prior loan charge-offs. Therefore, the provision for loan losses (Income Statement effect) is a residual of management’s determination of allowance for loan losses (Balance Sheet approach). In determining the adequacy of the allowance for loan losses, we consider those levels maintained by conditions of individual borrowers, the historical loan loss experience, the general economic environment, the overall portfolio composition, and other information. As these factors change, the level of loan loss provision changes. See “credit quality and allowance for loan losses” regarding the allowance for loan losses for additional information.
Non-interest income
Non-interest income for the nine months ended September 30, 2007 was $5,404,000 compared to $4,552,000 for the comparable period in 2006, resulting in an increase of $852,000, or 18.7%. This increase was the result of the following components listed in the table below. Amounts listed are in thousands of dollars.
Nine month period ending: (in thousands of dollars) | September 30, 2007 | September 30, 2006 | $ Increase (decrease) | % increase (decrease) | |||||||||
Service charges on deposit accounts | $ | 3,249 | $ | 2,525 | $ | 724 | 28.7 | % | |||||
Commissions from mortgage broker activities | 156 | 270 | (114 | ) | (42.2 | )% | |||||||
Commissions from sale of mutual funds and annuities | 440 | 493 | (53 | ) | (10.8 | )% | |||||||
Debit card and ATM fees | 659 | 416 | 243 | 58.4 | % | ||||||||
Loan related fees | 278 | 224 | 54 | 24.1 | % | ||||||||
BOLI income | 266 | 202 | 64 | 31.7 | % | ||||||||
Other service charges and fees | 356 | 422 | (66 | ) | (15.6 | )% | |||||||
Total non-interest income | $ | 5,404 | $ | 4,552 | $ | 852 | 18.7 | % | |||||
We acquired Valrico State Bank (“VSB”) on April 2, 2007. As such, six months of non-interest income from VSB ($432,000) was included in the nine month period ending September 30, 2007, compared to zero in the comparable period in 2006. In addition, we acquired Mid FL on March 31, 2006. As such, nine months of Mid FL ($261,000) was included during the nine month period ending September 30, 2007 versus only six months ($142,000) during the comparable nine month period in 2006.
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The largest component of non-interest income is “Service charges on deposit accounts” which increased by $724,000. Part of this increase is the result of the acquisition of VSB ($263,000) and the acquisition of Mid FL ($65,000) and the remaining increase is due to increases in number of accounts and a greater effort placed on deposit related fee generation.
Commissions from mortgage broker activities are dependent on market place forces including supply and demand of single family residential property in our local markets. Commissions from the sale of mutual funds and annuities are also dependent on market place forces including the successful efforts of our investment sales representatives.
Non-interest expense
Non-interest expense for the nine months ended September 30, 2007 increased $5,527,000, or 25.9%, to $26,877,000, compared to $21,350,000 for the same period in 2006. Components of our non-interest expenses are listed in the table below. Amounts are in thousands of dollars.
Nine month period ending: (in thousands of dollars) | Sept 30, 2007 | Sept 30, 2006 | $ increase | % increase (decrease) | |||||||||||
Employee salaries and wages | $ | 10,944 | $ | 8,864 | $ | 2,080 | 23.5 | % | |||||||
Employee incentive/bonus compensation | 1,403 | 1,476 | (73 | ) | (4.9 | )% | |||||||||
Employee stock option expense | 405 | 458 | (53 | ) | (11.6 | )% | |||||||||
Health insurance and other employee benefits | 1,716 | 1,223 | 493 | 40.3 | % | ||||||||||
Payroll taxes | 858 | 723 | 135 | 18.7 | % | ||||||||||
Other employee related expenses | 614 | 455 | 159 | 34.9 | % | ||||||||||
Incremental direct cost of loan origination | (810 | ) | (820 | ) | 10 | 1.2 | % | ||||||||
Total salaries, wages and employee benefits | $ | 15,130 | $ | 12,379 | $ | 2,751 | 22.2 | % | |||||||
Occupancy expense | 3,128 | 2,531 | 597 | 23.6 | % | ||||||||||
Depreciation of premises and equipment | 1,701 | 1,438 | 263 | 18.3 | % | ||||||||||
Supplies, stationary and printing | 499 | 461 | 38 | 8.2 | % | ||||||||||
Marketing expenses | 794 | 336 | 458 | 136.3 | % | ||||||||||
Data processing expense | 1,070 | 825 | 245 | 29.7 | % | ||||||||||
Legal, auditing and other professional fees | 726 | 486 | 240 | 49.4 | % | ||||||||||
Core deposit intangible (CDI) amortization | 612 | 348 | 264 | 75.9 | % | ||||||||||
Postage and delivery | 220 | 211 | 9 | 4.3 | % | ||||||||||
ATM related expenses | 373 | 340 | 33 | 9.7 | % | ||||||||||
Bank regulatory related expenses | 321 | 233 | 88 | 37.8 | % | ||||||||||
Other expenses | 2,303 | 1,762 | 541 | 30.7 | % | ||||||||||
Total non-interest expense | $ | 26,877 | 21,350 | $ | 5,527 | 25.9 | % | ||||||||
The most significant components to consider when comparing these two periods are the April 2, 2007 acquisition of VSB and the March 31, 2006 acquisition of Mid FL. VSB contributed $2,798,000 of non-interest expense in 2007 versus zero in 2006. Mid FL contributed $2,448,000 of non-interest expense in 2007 versus $1,514,000 for the six out of nine months it was part of our Company during the comparable nine month period in 2006. Excluding VSB and Mid FL, our net increase in non-interest expense would adjust from $5,527,000 to $1,795,000, or from 25.9% to 9%.
Our largest non-interest expense is employee and employee related expenses. Total salaries, wages and employee benefits for the nine months ended September 30, 2007 ($15,130,000) accounted for
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56% of our total non-interest expense, compared to 58% for the same period last year. Looking at the table above, employee salaries and wages increased by 23.5% to $10,944,000 for the nine month period ending September 30, 2007 (“current period”), compared to $8,864,000 for the same period last year. Our average FTEs for the current period was approximately 358 compared to 299 FTEs for the comparable period last year. Most of the FTE increase relates to the acquisition of VSB and Mid FL discussed above, as well as from opening new branches and general business growth.
The increase in employee health insurance is partially the result of the April 2, 2007 VSB acquisition ($117,000) which was included in the current period, but was not part of the Company last year, and the March 31, 2006 Mid FL acquisition ($75,000) which was part of our Company all of the nine month period ending September 30, 2007, but only for six of the nine month period ending September 30, 2006. The remaining increases are due to the increase in other FTEs (from opening additional branches and general growth in our business) and the increase in health insurance premiums levied on us by the health insurance industry. We are currently working on strategies to try to control our increasing employee health insurance expenses including negotiations with providers, changing networks, investigating consumer driven plans and considering high deductible health savings accounts as an alternative.
Incremental direct cost of loan origination, represents direct incremental cost of originating loans for our portfolio (successful efforts) that are required to be capitalized and amortized to interest income over the life of the related loan pursuant to Statement of Financial Accounting Standard No. 91. The amount that we capitalize is dependent on not just the cost, but the volume of loans successfully originated.
The increase in marketing expenses relates to the checking account marketing campaign currently in place at one of our banks. This campaign started during the fourth quarter of 2006.
The CDI amortization increase between the two periods is due to the April 2, 2007 acquisition of VSB and the March 31, 2006 acquisition of Mid FL.
We opened a temporary branch in September 2006 and another in October 2006. These two branches are operating out of temporary locations until the construction of their permanent facilities are completed. We also opened four additional branches in permanent locations in October 2006, February 2007, May 2007, and August 2007. As discussed above, this activity also is responsible for adding additional FTEs along with the VSB and Mid FL acquisitions. This branching activity, as well as the continual growth of our business, resulted in the increase in the remainder of our non-interest expenses.
Provision for income taxes
The income tax provision for the nine months ended September 30, 2007 was $3,043,000 (an effective rate of 33.5%) compared to $3,840,000 (an effective rate of 38.0%) for the same period in 2006. The primary reason for the decrease in our effective tax rate was due to the increase in our tax exempt securities and loans.
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.
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Each of our subsidiary banks regularly assesses the amount and likelihood of projected funding requirements through a review of factors such as historical deposit volatility and funding patterns, present and forecasted market and economic conditions, individual client funding needs, and existing and planned business activities. Each of our subsidiary bank’s asset/liability committee (ALCO) provides oversight to the liquidity management process and recommends guidelines, subject to board of director’s approval, 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.
| ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES: MARKET RISK |
Market risk
We believe interest rate risk is the most significant market risk impacting us. Each of our subsidiary banks monitors and manages its interest rate risk using interest rate sensitivity “gap” analysis to measure the impact of market interest rate changes on net interest income. See our 2006 annual report on Form 10-K for disclosure of the quantitative and qualitative information regarding the interest rate risk inherent in interest rate risk sensitive instruments as of December 31, 2006. There have been no changes in the assumptions used in monitoring interest rate risk as of September 30, 2007. The impact of other types of market risk, such as foreign currency exchange risk and equity price risk, is deemed immaterial. We do not maintain a portfolio of trading securities and do not intend to engage in such activities in the immediate future.
| ITEM 4. | CONTROLS AND PROCEDURES |
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 were no changes 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 have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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| Item 1. | Legal Proceedings |
None.
| Item 1a. | Risk Factors |
There has been no material changes in our risk factors from our disclosure in Item 7a of our December 31, 2006 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. | Submission of Matters to a Vote of Security Holders |
None.
| Item 5. | Other Information |
None.
| Item 6. | Exhibits |
| Exhibit 31.1 | The Chairman, President and Chief Executive Officer’s certification required under section 302 of the Sarbanes-Oxley Act of 2002 | |
| Exhibit 31.2 | The Chief Financial Officer’s certification required under section 302 of the Sarbanes-Oxley Act of 2002 | |
| Exhibit 32.1 | The Chairman, President and Chief Executive Officer’s certification required under section 906 of the Sarbanes-Oxley Act of 2002 | |
| Exhibit 32.2 | The Chief Financial Officer’s certification required under section 906 of the Sarbanes-Oxley Act of 2002 | |
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CENTERSTATE BANKS OF FLORIDA, INC.
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 OF FLORIDA, INC.
(Registrant)
| Date: November 7, 2007 | By: | /s/Ernest S. Pinner | ||
| Ernest S. Pinner | ||||
| Chairman, President and Chief Executive Officer | ||||
| Date: November 7, 2007 | By: | /s/James J. Antal | ||
| James J. Antal | ||||
| Senior Vice President and Chief Financial Officer | ||||
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