U. S. SECURTIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form 10-Q
(Mark One)
x | Quarterly report under Section 13 or 15 (d) of the Securities Exchange Act of 1934 |
For the quarterly period ended September 30, 2003
¨ | 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 Small Business Issuer 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 ¨
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 | 3,365,380 | |
(class) | Outstanding at September 30, 2003 |
CENTERSTATE BANKS OF FLORIDA, INC. AND SUBSIDIARIES
Page | ||||
PART I. FINANCIAL INFORMATION |
||||
Item 1. |
Financial Statements | |||
Condensed consolidated balance sheets (unaudited) - September 30, 2003 and December 31, 2002 |
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 | 10 | ||
Item 3. |
Quantitative and qualitative disclosures: Market Risk | 22 | ||
Item 4. |
Disclosure controls and procedures | 22 | ||
PART II. OTHER INFORMATION |
||||
Item 1. |
Legal Proceedings | 23 | ||
Item 2. |
Changes in Securities and Use of Proceeds | 23 | ||
Item 3. |
Defaults Upon Senior Securities | 23 | ||
Item 4. |
Submission of Matters to a Vote of Shareholders | 23 | ||
Item 5. |
Other Information | 23 | ||
Item 6. |
Exhibits and Reports on Form 8-K | 23 | ||
24 | ||||
24 |
1
Centerstate Banks of Florida, Inc. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
(in thousands of dollars)
As of September 30, 2003 |
As of December 31, 2002 |
|||||||
ASSETS |
||||||||
Cash and due from banks |
$ | 22,473 | $ | 22,740 | ||||
Federal funds sold and money market |
51,894 | 61,302 | ||||||
Securities available for sale (at market value) |
79,715 | 51,799 | ||||||
Loans |
397,192 | 333,721 | ||||||
Less allowance for loan losses |
(4,786 | ) | (4,055 | ) | ||||
Net Loans |
392,406 | 329,666 | ||||||
Premises and equipment, net |
21,704 | 20,315 | ||||||
Accrued interest receivable |
1,888 | 1,995 | ||||||
Other real estate owned |
182 | 65 | ||||||
Deferred income taxes, net |
2,077 | 1,528 | ||||||
Goodwill |
4,675 | 4,308 | ||||||
Core deposit intangible |
662 | 739 | ||||||
Other assets |
910 | 343 | ||||||
TOTAL ASSETS |
$ | 578,586 | $ | 494,800 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY |
||||||||
Deposits: |
||||||||
Demand - non-interest bearing |
$ | 103,402 | $ | 80,019 | ||||
Demand - interest bearing |
71,073 | 62,978 | ||||||
Savings and money market accounts |
121,685 | 112,359 | ||||||
Time deposits |
212,135 | 186,106 | ||||||
Total deposits |
508,295 | 441,462 | ||||||
Securities sold under agreement to repurchase |
17,340 | 10,005 | ||||||
Trust preferred security |
10,000 | — | ||||||
Amount payable to shareholders |
65 | 2,400 | ||||||
Accrued expenses and other liabilities |
1,574 | 1,018 | ||||||
Total liabilities |
537,274 | 454,885 | ||||||
Stockholders’ equity: |
||||||||
Preferred Stock, $.01 par value; 5,000,000 shares authorized No shares issued or outstanding |
— | — | ||||||
Common stock, $.01 par value: 20,000,000 shares authorized; 3,365,380 and 3,362,068 shares issued and outstanding at September 30, 2003 and December 31, 2002 respectively |
34 | 34 | ||||||
Additional paid-in capital |
26,447 | 26,036 | ||||||
Retained earnings |
14,858 | 13,523 | ||||||
Accumulated other comprehensive (loss) income |
(27 | ) | 322 | |||||
Total stockholders’ equity |
41,312 | 39,915 | ||||||
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY |
$ | 578,586 | $ | 494,800 | ||||
See notes to the accompanying condensed consolidated financial statements
2
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, 2003 |
Sept 30, 2002 |
Sept 30, 2003 |
Sept 30, 2002 | ||||||||||
Interest income: |
|||||||||||||
Loans |
$ | 5,973 | $ | 4,642 | $ | 17,336 | $ | 13,779 | |||||
Investment securities |
386 | 400 | 1,098 | 1,432 | |||||||||
Federal funds sold and money market |
139 | 197 | 532 | 530 | |||||||||
6,498 | 5,239 | 18,966 | 15,741 | ||||||||||
Interest expense: |
|||||||||||||
Deposits |
1,782 | 1,688 | 5,490 | 5,125 | |||||||||
Securities sold under agreement to repurchase |
17 | 11 | 58 | 32 | |||||||||
Note payable |
15 | — | 18 | — | |||||||||
Trust preferred security |
8 | — | 8 | — | |||||||||
1,822 | 1,699 | 5,574 | 5,157 | ||||||||||
Net interest income |
4,676 | 3,540 | 13,392 | 10,584 | |||||||||
Provision for loan losses |
240 | 145 | 828 | 494 | |||||||||
Net interest income after loan loss provision |
4,436 | 3,395 | 12,564 | 10,090 | |||||||||
Other income: |
|||||||||||||
Service charges on deposit accounts |
724 | 647 | 2,163 | 1,773 | |||||||||
Other service charges and fees |
429 | 285 | 1,339 | 884 | |||||||||
Gain on sale of securities |
— | — | — | 21 | |||||||||
(Loss) gain on sale of fixed asset |
— | (12 | ) | — | 6 | ||||||||
1,153 | 920 | 3,502 | 2,684 | ||||||||||
Other expenses: |
|||||||||||||
Salaries, wages and employee benefits |
2,281 | 1,650 | 6,683 | 4,942 | |||||||||
Occupancy expense |
595 | 435 | 1,719 | 1,298 | |||||||||
Depreciation of premises and equipment |
376 | 293 | 1,133 | 817 | |||||||||
Stationary, printing and supplies |
113 | 94 | 347 | 284 | |||||||||
Marketing expenses |
73 | 33 | 203 | 136 | |||||||||
Data processing expense |
201 | 126 | 598 | 742 | |||||||||
Legal, auditing and other professional fees |
128 | 83 | 383 | 264 | |||||||||
Other expenses |
757 | 535 | 2,006 | 1,553 | |||||||||
Total other expenses |
4,524 | 3,249 | 13,072 | 10,036 | |||||||||
Income before provision for income taxes |
1,065 | 1,066 | 2,994 | 2,738 | |||||||||
Provision for income taxes |
398 | 380 | 1,121 | 1,013 | |||||||||
Net income |
$ | 667 | $ | 686 | $ | 1,873 | $ | 1,725 | |||||
Earnings per share: |
|||||||||||||
Basic |
$ | 0.20 | $ | 0.24 | $ | 0.56 | $ | 0.61 | |||||
Diluted |
$ | 0.19 | $ | 0.24 | $ | 0.55 | $ | 0.60 | |||||
Common shares used in the calculation of earnings per share: |
|||||||||||||
Basic |
3,365,380 | 2,825,758 | 3,364,208 | 2,822,355 | |||||||||
Diluted |
3,431,094 | 2,879,705 | 3,429,420 | 2,879,170 |
See notes to the accompanying condensed consolidated financial statements.
3
Centerstate Banks of Florida, Inc. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(in thousands of dollars)
Nine months ended September 30, |
||||||||
2003 |
2002 |
|||||||
Cash flows from operating activities: |
||||||||
Net Income |
$ | 1,873 | $ | 1,725 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
Provision for loan losses |
828 | 494 | ||||||
Depreciation of premises and equipment |
1,133 | 817 | ||||||
Amortization of purchase accounting adjustments related to the CSB merger |
(138 | ) | — | |||||
Net amortization/accretion of investments securities |
477 | 89 | ||||||
Net deferred origination fees |
45 | 63 | ||||||
Gain on sale of fixed asset |
— | (6 | ) | |||||
Deferred income taxes |
(346 | ) | — | |||||
Realized gain on sale of available for sale securities |
— | (21 | ) | |||||
Tax deduction in excess of book deduction on options exercised |
— | 9 | ||||||
Cash provided by (used in) changes in: |
||||||||
Net changes in accrued interest receivable |
107 | 509 | ||||||
Net change in other assets |
(567 | ) | 150 | |||||
Net change in accrued expenses and other liabilities |
556 | 56 | ||||||
Net cash provided by operating activities |
3,968 | 3,885 | ||||||
Cash flows from investing activities: |
||||||||
Proceeds from maturities of investment securities available for sale |
16,000 | 23,500 | ||||||
Proceeds from callable investment securities available for sale |
13,000 | 2,155 | ||||||
Proceeds from sales of investment securities available for sale |
— | 5,049 | ||||||
Purchases of investment securities available for sale |
(38,155 | ) | (17,227 | ) | ||||
Purchases of mortgage back securities available for sale |
(25,283 | ) | (4,074 | ) | ||||
Proceeds from pay-downs of mortgage backed securities available for sale |
5,493 | 1,266 | ||||||
Proceeds from maturities of investment securities held to maturity |
— | 1,500 | ||||||
Increase in loans, net of repayments |
(63,777 | ) | (26,435 | ) | ||||
Purchases of premises and equipment |
(2,522 | ) | (1,125 | ) | ||||
Proceeds from sale of fixed asset |
— | 81 | ||||||
Proceeds from sale of other real estate owned |
47 | — | ||||||
Decrease in amounts payable to shareholders |
(2,335 | ) | — | |||||
Increase in goodwill due to cash payments for fractional shares related to CSB merger |
(5 | ) | — | |||||
Net cash used in investing activities |
(97,537 | ) | (15,310 | ) | ||||
Cash flows from financing activities: |
||||||||
Net increase in demand and savings deposits |
67,048 | 37,623 | ||||||
Net increase (decrease) in other borrowings |
7,335 | (508 | ) | |||||
Net increase in Trust Preferred Security |
10,000 | — | ||||||
Stock options exercised |
49 | 38 | ||||||
Net increase in minority interest of subsidiary |
— | 20 | ||||||
Dividends paid |
(538 | ) | (423 | ) | ||||
Net cash provided by financing activities |
83,894 | 36,750 | ||||||
Net (decrease) increase in cash and cash equivalents |
(9,675 | ) | 25,325 | |||||
Cash and cash equivalents, beginning of period |
84,042 | 36,348 | ||||||
Cash and cash equivalents, end of period |
$ | 74,367 | $ | 61,673 | ||||
Supplemental schedule of noncash transactions: |
||||||||
Market value adjustment- securities available-for-sale |
||||||||
Market value adjustments- securities |
$ | (552 | ) | $ | (325 | ) | ||
Deferred income tax asset |
203 | 121 | ||||||
Unrealized loss on securities available-for-sale |
$ | (349 | ) | $ | (204 | ) | ||
Transfer of loan to other real estate owned |
$ | 164 | $ | 65 | ||||
Purchase price adjustment related to CSB acquisition |
$ | 362 | — | |||||
Cash paid during the period for: |
||||||||
Interest |
$ | 5,573 | $ | 5,182 | ||||
Income taxes |
$ | 1,330 | $ | 1,268 | ||||
See notes to the accompanying condensed consolidated financial statements.
4
CenterState Banks of Florida, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
NOTE 1: Holding company and subsidiaries background information
CenterState Banks of Florida, Inc (the “Company”) is a multi-bank holding company. The Company was formed on June 30, 2000, as part of the merger of First National Bank of Osceola County (“FNB/Osceola”), Community National Bank of Pasco County (“CNB/Pasco”) and First National Bank of Polk County (“FNB/Polk”), which were three previously independent banks in Central Florida. The business combination was accounted for using the pooling-of-interest accounting method. All historical financial information has been restated to reflect the merger.
The Company acquired CenterState Bank of Florida (“CSB”) on December 31, 2002 in a stock and cash transaction. This transaction was accounted for using the purchase method of accounting. The excess of the purchase price over the fair market value of the tangible assets, core deposit intangible ($739,000) and liabilities was approximately $4.7 million. This amount was recognized and recorded as goodwill.
FNB/Osceola is a national bank charted in September 1989. It operates from three full service locations within Osceola County and two full service locations in Orange County, a contiguous county. CNB/Pasco is a national bank charted in November 1989. It operates from nine full service locations within Pasco, Lake, Sumter, Hernando and Citrus Counties. FNB/Polk is a national bank charted in February 1992. It operates from four full service locations within eastern Polk County. CSB is a state bank charted in April 2000. It operates from three full service and two specialty locations within western Polk County. C. S. Processing, Inc. (“CSP”) is a wholly owned subsidiary, equally owned by the Company’s four subsidiary banks. CSP was formed in 2001. It performs item processing and check rendering services for the Company’s four subsidiary banks.
The Company, through its subsidiary banks, provides traditional deposit and lending products and services to its retail and commercial customers.
5
NOTE 2: Basis of presentation
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 the Company’s Annual Report on Form 10-K for the year ended December 31, 2002. In the opinion of management, all adjustments, consisting primarily of normal recurring adjustments, necessary for a fair presentation of the results for the interim periods have been made. The results of operations of the three and nine month periods ended September 30, 2003 are not necessarily indicative of the results expected for the full year.
NOTE 3: 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 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, | ||||||||||||||||
2003 |
2002 | |||||||||||||||
Earnings |
Weighted Average Shares |
Per Share Amount |
Earnings |
Weighted Average Shares |
Per Share Amount | |||||||||||
Basic EPS |
||||||||||||||||
Net earnings available to common shareholders |
$ | 667 | 3,365,380 | $ | 0.20 | $ | 686 | 2,825,758 | $ | 0.24 | ||||||
Effect of dilutive securities: |
||||||||||||||||
Incremental shares from assumed exercise of stock options |
$ | 0 | 65,714 | $ | 0 | 53,947 | ||||||||||
Diluted EPS |
||||||||||||||||
Net earnings available to common shareholders and assumed conversions |
$ | 667 | 3,431,094 | $ | 0.19 | $ | 686 | 2,879,705 | $ | 0.24 | ||||||
6
For the nine months ended September 30, | ||||||||||||||||
2003 |
2002 | |||||||||||||||
Earnings |
Weighted Average Shares |
Per Share Amount |
Earnings |
Weighted Average Shares |
Per Share Amount | |||||||||||
Basic EPS |
||||||||||||||||
Net earnings available to common shareholders |
$ | 1,873 | 3,364,208 | $ | 0.56 | $ | 1,725 | 2,822,355 | $ | 0.61 | ||||||
Effect of dilutive securities: |
||||||||||||||||
Incremental shares from assumed exercise of stock options |
$ | 0 | 65,212 | $ | 0 | 56,815 | ||||||||||
Diluted EPS |
||||||||||||||||
Net earnings available to common shareholders and assumed conversions |
$ | 1,873 | 3,429,420 | $ | 0.55 | $ | 1,725 | 2,879,170 | $ | 0.60 | ||||||
NOTE 4: Comprehensive income
Under Statement of Financial Accounting Standards No. 130, “Reporting Comprehensive Income,” certain transactions and other economic events that bypass the income statement must be displayed as other comprehensive income. The Company’s comprehensive income consists of net earnings and unrealized gains and losses on securities available-for-sale, net of deferred income taxes.
The table below sets forth the Company’s comprehensive income for the periods indicated below (in thousands of dollars).
Three months ended |
Nine months ended |
|||||||||||||||
Sep 30, 2003 |
Sep 30, 2002 |
Sep 30, 2003 |
Sep 30, 2002 |
|||||||||||||
Net income |
$ | 667 | $ | 686 | $ | 1,873 | $ | 1,725 | ||||||||
Other comprehensive income, net of tax: |
||||||||||||||||
Unrealized holding loss arising during the period |
(314 | ) | (17 | ) | (349 | ) | (217 | ) | ||||||||
Add: reclassified adjustments for gains included in net income, net of income taxes of $8 for the nine month period ended September 30, 2002 |
— | — | — | 13 | ||||||||||||
Other comprehensive loss, net of tax |
(314 | ) | (17 | ) | (349 | ) | (204 | ) | ||||||||
Comprehensive income |
$ | 353 | $ | 669 | $ | 1,524 | $ | 1,521 | ||||||||
NOTE 5: Compensation programs
Substantially all of the Company’s employees are covered under the Company’s employee benefit plan. The expenses of providing these benefit plans are charged to income in the period the expenses are incurred. In addition, certain directors and key employees are covered under the Company’s stock option plans.
7
The Company applies Accounting Principle Board Opinion No. 25 and related interpretations in accounting for its stock option plans. Accordingly, no compensation cost has been recognized for its stock option plans. Had compensation cost for the Company’s stock-based compensation plan been determined consistent with Statement of Financial Accounting Standards (“SFAS”) No. 123, the Company’s net income would have been reduced to the pro forma amounts indicated below (amounts are in thousands of dollars except for per share data):
Three month period ending September 30, |
Nine month period ending September 30, | |||||||||||
2003 |
2002 |
2003 |
2002 | |||||||||
Net Income |
||||||||||||
As reported |
$ | 667 | $ | 686 | $ | 1,873 | $ | 1,725 | ||||
Pro forma |
643 | 662 | 1,783 | 1,662 | ||||||||
Diluted earnings per share |
||||||||||||
As reported |
$ | 0.19 | $ | 0.24 | $ | 0.55 | $ | 0.60 | ||||
Pro forma |
0.19 | 0.23 | 0.52 | 0.58 |
NOTE 6: Trust preferred security
On September 22, 2003, the Company issued a floating rate trust preferred security in the amount of $10,000,000. The Company formed CenterState Banks of Florida Statutory Trust I (the “Trust”) a wholly owned statutory trust subsidiary for the purpose of issuing trust preferred securities. The Trust used the proceeds from the issuance of the trust preferred security to acquire a junior subordinated note of the Company. The trust preferred security essentially mirrors the debt security, carrying a cumulative preferred dividend at a variable rate equal to the interest rate on the debt security (three month LIBOR plus 305 basis points). The initial rate in effect at the time of issuance was 4.19% and is subject to change quarterly. The debt security and the trust preferred security each have 30-year lives. The trust preferred security and the debt security are callable by the Company or the Trust, at their respective option after five years, and sooner in specific events, subject to prior approval by the Federal Reserve Board, if then required. The Company has treated the trust preferred security as Tier 1 capital up to the maximum amount allowed, and the remainder as Tier 2 capital for federal regulatory purposes.
NOTE 7: Effect of new pronouncements
In June 2001, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 143, “Accounting for Asset Retirement Obligations.” This Statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. This Statement applies to all entities that have legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development or normal use of the asset. As used in this Statement, a legal obligation results from existing law, statute, ordinance, written or oral contract, or by legal construction of a contract under the doctrine of promissory estoppel. The Company is required to adopt SFAS No. 143 for the fiscal year beginning January 1, 2003. Adoption of this Statement did not have a significant impact on the financial position or results of operations of the Company.
In June 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” This Statement addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, “Liability
8
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” The provisions of this Statement are effective for exit or disposal activities that are initiated after December 31, 2002, with early application encouraged. Adoption of this Statement did not have a significant impact on the financial position or results of operations of the Company.
In October 2002, the FASB issued SFAS No. 147, “Acquisitions of Certain Financial Institutions an amendment of FASB Statements No. 72 and 144 and FASB Interpretation No. 9.” Except for transactions between two or more mutual enterprises, this Statement removes acquisitions of financial institutions from the scope of both Statement 72 and Interpretation 9 and requires that those transactions be accounted for in accordance with SFAS No. 141, and SFAS No. 142. In addition, this Statement amends SFAS No. 144 to include in its scope long-term customer-relationship intangible assets of financial institutions such as depositor- and borrower-relationship intangible assets and credit cardholder intangible assets. The provisions of this Statement are effective on or after October 1, 2002. The adoption of SFAS No. 147 did not have an impact on the financial position or results of operations.
In November 2002, the FASB issued Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others, and interpretation of FASB Statements No. 5, 57 and 107 and a rescission of FASB Interpretation No. 34. This interpretation elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under guarantees issued. The Interpretation also clarifies that a guarantor is required to recognize, at inception of a guarantee, a liability for the fair value of the obligation undertaken. The initial recognition and measurement provisions of the Interpretation are applicable to guarantees issued or modified after December 31, 2002 and did not have a material effect on the Company’s consolidated financial statements. The Company has made the required disclosures in the notes of the consolidated financial statements.
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation – Transition and Disclosure, an amendment of FASB Statement No. 123. This statement amends FASB Statement No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of Statement No. 123 to require prominent disclosures in both annual and interim financial statements. Certain disclosure modifications are required for fiscal years ending after December 15, 2002 and are included in the notes to these consolidated financial statements.
In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51 (“FIN 46”). This Interpretation addresses the consolidation by business enterprises of variable interest entities as defined in the Interpretation. The Interpretation applies immediately to interests in variable interest entities created after January 31, 2003. For public enterprises, such as the Company, with a variable interest in a variable interest entity created before February 1, 2003, the Interpretation is applied to the enterprise beginning December 15, 2003. The application of this Interpretation requires certain disclosures in financial statements issued after January 31, 2003 if it is reasonably possible that the Company will consolidate or disclose information about variable interest entities when the Interpretation becomes effective.
FIN 46 may have an impact on the accounting treatment of the trust preferred securities issued and the ability for those instruments to provide Tier 1 capital. The accounting standard setters are currently evaluating the impact of FIN 46 with regard to whether the Trust should continue to be consolidated. The Banking regulators are currently evaluating what impact, if any, will the accounting community’s eventual decision regarding consolidation versus deconsolidation, have with
9
regard to the instruments inclusion as Tier 1 capital. The Federal Reserve has issued regulations which allow for the inclusion of these instruments in Tier 1 capital regardless of the FIN 46 interpretation, although such a determination could potentially be changed at a later date. Assuming no change in the Federal Reserve regulation, the adoption of FIN 46 is not expected to have any additional material impact on the Company’s financial condition or operating results.
In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. This Statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities. This Statement is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. The adoption of this Statement did not have a material effect on the financial statements of the Company.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. This Statement improves the accounting for certain financial instruments that, under previous guidance, issuers could account for as equity. The new Statement requires that those instruments be classified as liabilities in statements of financial position. Most of the guidance in Statement 150 is effective for all financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. Adoption of this Statement did not have a significant impact on the financial position or results of operations of the Company.
NOTE 8: Merger
The Company acquired CSB (a non publicly traded commercial bank) on December 31, 2002 for a combination of stock and cash. Shareholders of CSB received $2.40 cash and .53631 share of the Company’s common stock for each share of common stock of CSB. The Company recorded this transaction using the purchase method of accounting. As allowed under SFAS No. 141, the Company completed its purchase price allocation review during the quarter ended June 30, 2003 and recorded an increase in goodwill and additional paid in capital related to the exchange of employee stock options from CSB to the Company in the amount of $362,000.
ITEM 2: | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Some of the statements in this report constitute forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995 and the Securities Exchange Act of 1934. These statements related to future events, other future financial performance or business strategies, 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. These statements are only predictions. Actual events or results may differ materially. In evaluating these statements, you should specifically consider the factors described throughout this report. We cannot be assured that future results, levels of activity, performance or goals will be achieved.
As discussed in other sections, the Company acquired a commercial bank, CSB, on December 31, 2002. As such, CSB’s financial position and results of operations are included in the Company’s results for the three month and nine month periods ending September 30, 2003, but are not included in the results for the three month and nine month periods ending September 30, 2002. Therefore, the reader should consider this when comparing balance sheets as well as income and expense items between these periods.
10
COMPARISON OF BALANCE SHEETS AT SEPTEMBER 30, 2003 AND DECEMBER 31, 2002
Overview
Total assets of the Company were $578.6 million as of September 30, 2003, compared to $494.8 million at December 31, 2002, an increase of $83.8 million or 16.9%. This increase was primarily the result of the Company’s internally generated loan growth funded by an increase in deposits.
Federal funds sold and money market
Federal funds sold and money market was $51.9 million at September 30, 2003, or approximately 9.0% of total assets, as compared to $61.3 million at December 31, 2002, or approximately 12.4% of total assets, a decrease of $9.4 million or 15.3%. The Company has decreased federal funds sold and money market in total dollars and as a percent of total assets outstanding, and increased investment securities, as part of its investment and liquidity management goals and objectives.
Investment securities
Securities available-for-sale, consisting primarily of U.S. Treasury and government agency securities, were $79.7 million at September 30, 2003, or approximately 13.8% of total assets, compared to $51.8 million at December 31, 2002, or approximately 10.5% of total assets, an increase of $27.9 million or 53.9%. The Company has increased investment securities in total dollars and as a percent of total assets outstanding, and decreased federal funds sold and money market, as part of its investment and liquidity management goals and objectives. These securities have been recorded at market value. The Company classifies its securities as “available-for-sale” to provide for greater flexibility to respond to changes in interest rates.
Loans
Total gross loans were $397.7 million at September 30, 2003, compared to $334.2 million at December 31, 2002, an increase of $63.5 million or 19%. For the same period, real estate loans increased by $50.5 million or 19.8%, commercial loans increased by $11.1 million or 25.5%, and all other loans including consumer loans increased by $1.9 million or 5.3%. Total loans net of unearned fees were $397.2 million at September 30, 2003, compared to $333.7 million at December 31, 2002, an increase of $63.5 million or 19%. The Company hired a senior lender in the third quarter of last year and three senior lenders in the fourth quarter, which was the primary reason for the increase in loans outstanding at September 30, 2003 compared to December 31, 2002. The Company also opened two new full service branches in October 2002, two “mini” branches in January 2003, and two additional “mini” branches in June 2003. The “mini” branches are small branches that are opened for limited hours located in gated residential “active adult” communities in Florida. These branches are located in small offices inside the communities’ club-houses or other community facility and cater to the residents. During the three-year period ending December 31, 2002, the Company’s loan portfolio has grown at an average annual rate of approximately 16.9% per year. The largest annual growth rate was 18.2% and the smallest was 16.0%.
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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, 2003 |
Dec 31, 2002 |
|||||||
Real Estate Loans |
||||||||
Residential |
$ | 136,339 | $ | 114,183 | ||||
Commercial |
149,079 | 117,964 | ||||||
Construction |
19,741 | 22,544 | ||||||
Total Real Estate |
305,159 | 254,691 | ||||||
Commercial |
54,713 | 43,607 | ||||||
Other |
37,848 | 35,906 | ||||||
Gross Loans |
397,720 | 334,204 | ||||||
Unearned fees |
(528 | ) | (483 | ) | ||||
Total loans net of unearned fees |
397,192 | 333,721 | ||||||
Allowance for loan losses |
(4,786 | ) | (4,055 | ) | ||||
Total loans net of unearned fees And allowance for loan losses |
$ | 392,406 | $ | 329,666 | ||||
Credit quality and allowance for loan losses
The Company’s allowance for loan losses represents management’s estimate of an amount adequate to provide for potential losses within the existing loan portfolio. Loans are charged against the allowance when management believes collection of the principal is unlikely. The allowance consists of amounts established for specific loans and is also based on historical loan loss experience. The specific reserve element is the result of a regular analysis of all loans and commitments based on credit rating classifications and other factors. Management also weighs general economic conditions based on knowledge of specific factors that may affect the collectibility of loans. At September 30, 2003, the allowance for loan losses was $4.8 million or 1.21% of total loans outstanding, compared to $4.1 million or 1.22%, at December 31, 2002.
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The following table sets forth information concerning the activity in the allowance for loan losses during the periods indicated (in thousands of dollars).
Nine month period end Sept 30, | ||||||
2003 |
2002 | |||||
Allowance at beginning of period |
$ | 4,055 | $ | 3,076 | ||
Charge-offs |
||||||
Commercial loans |
56 | 21 | ||||
Real Estate loans |
48 | 128 | ||||
Consumer loans |
36 | 58 | ||||
Total charge-offs |
140 | 207 | ||||
Recoveries |
||||||
Commercial loans |
— | 1 | ||||
Real Estate loans |
19 | 3 | ||||
Consumer loans |
24 | 20 | ||||
Total recoveries |
43 | 24 | ||||
Net charge-offs |
97 | 183 | ||||
Provision for loan losses |
828 | 494 | ||||
Allowance at end of period |
$ | 4,786 | $ | 3,387 | ||
Nonperforming assets
Nonperforming assets include (1) non-accrual loans; (2) accruing loans that are 90 days or more delinquent that are deemed by management to be adequately secured and in the process of collection; (3) OREO (i.e. real estate acquired through foreclosure or deed in lieu of foreclosure); and (4) other repossessed assets (not real estate). All delinquent loans are reviewed on a regular basis and are placed on non-accrual status when, in the opinion of management, the possibility of collecting additional interest is deemed insufficient to warrant further accrual. As a matter of policy, interest is not accrued on loans past due 90 days or more unless the loan is both well secured and in the process of collection. When a loan is placed on non-accrual status, interest accruals cease and uncollected accrued interest is reversed and charged against current income. Additional interest income on such loans is recognized only when received.
The following table sets forth information regarding the components of nonperforming assets at the dates indicated (in thousands of dollars).
Sept 30 2003 |
Dec 31 2002 |
|||||||
Non-accrual loans |
$ | 1,314 | $ | 402 | ||||
Accruing loans past due over 90 days |
158 | 996 | ||||||
Other real estate owned |
182 | 65 | ||||||
Repossessed assets other than real estate |
4 | 19 | ||||||
Total non-performing assets |
$ | 1,658 | $ | 1,482 | ||||
As a percent of total assets |
0.29 | % | 0.30 | % | ||||
Allowance for loan losses |
$ | 4,786 | $ | 4,055 | ||||
Allowance for loan losses to non performing loans |
289 | % | 274 | % | ||||
Management is continually analyzing its loan portfolio in an effort to recognize and resolve its problem assets as quickly and efficiently as possible. As of September 30, 2003, management believes
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that its allowance for loan losses was adequate. However, management recognizes that many factors can adversely impact various segments of its market. Accordingly, there is no assurance that losses in excess of such reserves will not be incurred.
Bank premises and equipment
Bank premises and equipment was $21.7 million at September 30, 2003 compared to $20.3 million at December 31, 2002, an increase of $1.4 million or 6.9%. The increase was a result of purchases aggregating $2,522,000, which includes the purchase of land (approximately $1 million) for two future branch sites, less depreciation of $1,133,000.
Deposits
Total deposits were $508.3 million at September 30, 2003, compared to $441.5 million at December 31, 2002, an increase of $66.8 million or 15.1%. During the nine month period ended September 30, 2003, demand deposits increased by $23.4 million (29.3%), NOW deposits increased by $8.1 million (12.9%), savings and money market accounts increased by $9.3 million (8.3%), and time deposits increased by $26.0 million (14.0%). The Company hired a senior lender in the third quarter of last year and three senior lenders in the fourth quarter, which was the primary reason for the increase in deposits outstanding during the nine month period ending September 30, 2003. The senior lenders are customer relationship managers, and as such, they will attract the deposit relationship along with the lending relationship. In addition, two new full service branches opened during October 2002, two “mini” branches opened in January 2003, and two additional “mini” branches opened in June 2003. The “mini” branches are small branches that are opened for two to three days a week in gated residential “active adult” communities in Florida. The branches are located in small offices inside the communities’ club-houses or other community facility and cater to the residents.
Repurchase agreements
The Company enters into agreements to repurchase securities under which the Company pledges investment securities owned and under its control as collateral against borrowed funds. These short-term (generally overnight) borrowing arrangements are primarily executed with business customers of the Company’s subsidiary banks. These customers have selected a repurchase transaction relationship as opposed to a conventional deposit account, such as a money market account, generally because they may hold deposits in excess of the FDIC insurance limits and may also require access to the funds multiple times during any given month in excess of the maximum number of transactions allowed with insured money market accounts. These short-term borrowings totaled $17.3 million at September 30, 2003 compared to $10.0 million at December 31, 2002, an increase of $7.3 million, or 73%. The primary reason for the increase was due to the additional business developed by the additional senior lenders (relationship managers) discussed earlier under “Deposits” and “Loans.” That is, along with the new lending relationship the lending officers acquire, a deposit relationship is also generally developed with the business customer, which may include repurchase agreements.
Note payable
During the quarter ended June 30, 2003, the Company entered into an unsecured borrowing facility with a large regional bank. The facility is a two year $2.4 million line of credit with a floating interest rate of LIBOR +1.75%. At September 30, 2003, the balance outstanding was $100 compared to the outstanding balance of $2,150,000 at June 30, 2003. The facility was paid down using funds from the issuance of trust preferred securities issued on September 22, 2003 described below.
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Trust preferred security
On September 22, 2003, the Company issued a floating rate trust preferred security in the amount of $10,000,000. The Company formed CenterState Banks of Florida Statutory Trust I (the “Trust”) a wholly owned statutory trust subsidiary for the purpose of issuing trust preferred securities. The Trust used the proceeds from the issuance of the trust preferred security to acquire a junior subordinated note of the Company. The trust preferred security essentially mirrors the debt security, carrying a cumulative preferred dividend at a variable rate equal to the interest rate on the debt securities (three month LIBOR plus 305 basis points). The initial rate in effect at the time of issuance was 4.19% and is subject to change quarterly. The debt security and the trust preferred security each have 30-year lives. The trust preferred security and the debt security are callable by the Company or the Trust, at their respective option after five years, and sooner in specific events, subject to prior approval by the Federal Reserve Board, if then required. The Company has treated the trust preferred security as Tier 1 capital up to the maximum amount allowed, and the remainder as Tier 2 capital for federal regulatory purposes.
The Company used a portion of the $10,000,000 of capital received to pay down a $2,150,000 short-term borrowing facility. The Company intends to use the remainder to capitalize the future growth of its subsidiary banks and/or possible future acquisitions.
Stockholders’ equity
Shareholders’ equity at September 30, 2003, was $41.312 million, or 7.1% of total assets, compared to $39.915 million, or 8.1% of total assets at December 31, 2002. The increase in stockholders’ equity was due to year-to-date net income ($1.873 million), stock options exercised ($49 thousand), an increase in paid in capital ($362 thousand) related to the conversion of stock options discussed in “Note 7: Merger,” less dividends paid ($538 thousand), and a net decrease in the market value of securities available for sale, net of deferred taxes ($349 thousand). The Company paid quarterly dividends during the current year as follows:
dividend amount |
record date |
payment date | ||
$0.06 |
Sept 15, 2003 | Sept 30, 2003 | ||
$0.05 |
June 13, 2003 | June 30, 2003 | ||
$0.05 |
Mar 14, 2003 | Mar 31, 2003 |
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, 2003, each of the Company’s four subsidiary banks exceeded the minimum capital levels to be considered “Well Capitalized” under the terms of the guidelines.
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Selected consolidated capital ratios at September 30, 2003 and December 31, 2002 are presented in the table below.
Actual |
Well capitalized |
Excess | |||||||||||||
Amount |
Ratio |
Amount |
Ratio |
Amount | |||||||||||
September 30, 2003 |
|||||||||||||||
Total capital (to risk weighted assets) |
$ | 50,453 | 12.9 | % | $ | 39,182 | > 10 | % | $ | 11,271 | |||||
Tier 1 capital (to risk weighted assets) |
45,667 | 11.7 | % | 23,509 | > 6 | % | 22,158 | ||||||||
Tier 1 capital (to average assets) |
45,667 | 8.2 | % | 27,791 | > 5 | % | 17,876 | ||||||||
December 31, 2002 |
|||||||||||||||
Total capital (to risk weighted assets) |
$ | 37,646 | 11.2 | % | $ | 33,743 | > 10 | % | $ | 3,903 | |||||
Tier 1 capital (to risk weighted assets) |
33,591 | 10.0 | % | 20,246 | > 6 | % | 13,345 | ||||||||
Tier 1 capital (to average assets) |
33,591 | 8.5 | % | 19,677 | > 5 | % | 13,914 |
COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTH PERIODS ENDED SEPTEMBER 30, 2003 AND 2002
Overview
Net income for the three months ended September 30, 2003 was $667 thousand or $0.20 per share basic and $0.19 per share diluted, compared to $686 thousand or $0.24 per share basic and diluted for the same period in 2002.
The return on average equity (“ROE”), calculated on an annualized basis, for the three month period ended September 30, 2003 was 6.47%, as compared to 9.53% for the same period in 2002.
Net interest income/margin
As discussed in other sections, the Company acquired a commercial bank, CSB, on December 31, 2002. As such, CSB’s average interest earning assets and interest bearing liabilities are included in the Company’s results for the three month period ended September 30, 2003, but are not included in the results for the period ended September 30, 2002. Therefore, the reader should consider this when comparing average balances and resulting interest income and expense between the two periods.
Net interest income increased $1.136 million or 32% to $4.676 million during the three month period ended September 30, 2003 compared to $3.540 million for the same period in 2002. The $1.136 million increase was the result of a $1.259 million increase in interest income less a $123 thousand increase in interest expense.
Interest earning assets averaged $513.4 million during the three month period ended September 30, 2003 as compared to $344.2 million for the same period in 2002, an increase of $169.2 million, or 49%. The yield on average interest earning assets decreased 1.03% to 5.06% during the three month period ended September 30, 2003, compared to 6.09% for the same period in 2002. The combined net effects of the $169.2 million increase in average interest earning assets and the 1.03% decrease in yield on average interest earning assets resulted in the $1.259 million increase in interest income between the two periods.
Interest bearing liabilities averaged $419.2 million during the three month period ended September 30, 2003 as compared to $279.1 million for the same period in 2002, an increase of $140.1
16
million, or 50%. The cost of average interest bearing liabilities decreased 0.70% to 1.74% during the three month period ended September 30, 2003, compared to 2.44% for the same period in 2002. The combined net effects of the $140.1 million increase in average interest bearing liabilities and the 0.70% decrease in cost on average interest bearing liabilities resulted in the $123 thousand increase in interest expense between the two periods.
The table below summarizes, the analysis of changes in interest income and interest expense for the three month periods ended September 30, 2003 and 2002 (in thousands of dollars).
Three months ended September 30, |
||||||||||||||||||||
2003 |
2002 |
|||||||||||||||||||
Average Balance |
Interest Inc / Exp |
Average Rate |
Average Balance |
Interest Inc / Exp |
Average Rate |
|||||||||||||||
Loans (1) (2) |
$ | 381,838 | $ | 5,973 | 6.26 | % | $ | 264,860 | $ | 4,642 | 7.01 | % | ||||||||
Securities (3) |
131,558 | 525 | 1.60 | % | 79,346 | 597 | 3.01 | % | ||||||||||||
Total Earning Assets |
513,396 | 6,498 | 5.06 | % | 344,206 | 5,239 | 6.09 | % | ||||||||||||
Allowance for loan losses |
(4,699 | ) | (3,311 | ) | ||||||||||||||||
All other assets |
52,797 | 31,533 | ||||||||||||||||||
Total Assets |
$ | 561,494 | $ | 372,428 | ||||||||||||||||
Deposits (4) |
398,304 | 1,782 | 1.79 | % | 274,665 | 1,688 | 2.46 | % | ||||||||||||
Borrowings (5) |
20,934 | 40 | 0.76 | % | 4,408 | 11 | 1.00 | % | ||||||||||||
Total Interest Bearing Liabilities |
419,238 | 1,822 | 1.74 | % | 279,073 | 1,699 | 2.44 | % | ||||||||||||
Demand deposits |
98,174 | 63,506 | ||||||||||||||||||
Other liabilities |
2,826 | 959 | ||||||||||||||||||
Minority shareholder interest |
— | 111 | ||||||||||||||||||
Shareholders’ Equity |
41,256 | 28,779 | ||||||||||||||||||
Total Liabilities and Shareholders’ Equity |
$ | 561,494 | $ | 372,428 | ||||||||||||||||
Net Interest Spread (6) |
3.32 | % | 3.65 | % | ||||||||||||||||
Net Interest Income |
$ | 4,676 | $ | 3,540 | ||||||||||||||||
Net Interest Margin (7) |
3.64 | % | 4.11 | % | ||||||||||||||||
Note 1: | Loan balances are net of deferred origination fees and costs. |
Note 2: | Interest income on average loans includes loan fee recognition of $50 thousand and $43 thousand for the three month periods ended September 30, 2003 and 2002. |
Note 3: | Includes securities available-for-sale, federal funds sold and money market. |
Note 4: | Includes interest bearing deposits only. Non-interest bearing checking accounts are included in the demand deposits listed above. |
Note 5: | Includes repurchase agreements, note payable and trust preferred security. |
Note 6: | Represents the average rate earned on interest earning assets minus the average rate paid on interest bearing liabilities. |
Note 7: | Represents net interest income divided by total interest earning assets. |
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Provision for loan losses
The provision for loan losses is charged to earnings to bring the total loan loss allowance to a level deemed appropriate by management and is based upon historical experience, the volume and type of lending conducted by the Company, the amount of nonperforming loans, general economic conditions, particularly as they relate to the Company’s market areas, and other factors related to the collectibility of the Company’s loan portfolio. As these factors change, the level of loan loss allowance changes. The allowance for loan loss account is then adjusted by the amount of the provision for loan losses charged to earnings. The provision was $240 thousand for the three month period ended September 30, 2003 compared to $145 thousand for the same period in 2002. The increase was due to the increase in the loan portfolio, including the addition of CSB operations, and the loan mix of the Company’s loan portfolio.
Non-interest income
Non-interest income for the three months ended September 30, 2003 increased $233 thousand, or 25%, to $1.153 million, compared to $920 thousand for the same period in 2002, primarily due to the December 31, 2002 acquisition of CSB. The largest portion of the increase ($119 thousand) was related to loan related fees, primarily commissions earned on brokering single family fixed rate loans, late payment charges and other non loan origination related fees. Service charges on deposit accounts increased $77 thousand, and all other service charges, fees and other non-interest income combined produced a net increase of $37 thousand. Non-interest income (annualized) as a percentage of total average assets was 0.82% for the three months ended September 30, 2003, compared to 0.99% for the same period in 2002.
Non-interest expense
Non-interest expense for the three months ended September 30, 2003 increased $1.275 million, or 39%, to $4.524 million, compared to $3.249 million for the same period in 2002, primarily due to the December 31, 2002 acquisition of CSB. In addition, two new full service branches were opened in October 2002 and two “mini” branches were opened in January 2003 and two in June 2003. As with CSB, the operating expenses related to these two new additional branches are included in the three month period ending September 30, 2003 and not during the same period in 2002.
The largest portion of the increase ($631 thousand) is due to the increase in salaries, wages and employee benefits. Occupancy expenses, including depreciation, increased $243 thousand. Data processing expense increased $75 thousand. All other operating expenses combined produced a net increase of $326 thousand
Provision for income taxes
The income tax provision for the three months ended September 30, 2003 was $398 thousand (an effective rate of 37.4%) compared to $380 thousand (an effective rate of 35.6%) for the same period in 2002.
18
COMPARISON OF RESULTS OF OPERATIONS FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 2003 AND 2002
Overview
Net income for the nine months ended September 30, 2003 was $1.873 million or $0.56 per share basic and $0.55 per share diluted, compared to $1.725 million or $0.61 per share basic and $0.60 per share diluted for the same period in 2002.
Data processing conversion expenses of approximately $296 thousand (approximately $185 thousand net of tax), or approximately $0.07 per share basic and $0.06 per share diluted, was recognized during the nine month period ending September 30, 2002. Data processing conversion expense is discussed below under the topic of non interest expenses.
The return on average equity (“ROE”), calculated on an annualized basis, for the nine month period ended September 30, 2003 was 6.14%, as compared to 8.13% for the same period in 2002.
Net interest income/margin
As discussed in other sections, the Company acquired a commercial bank, CSB, on December 31, 2002. As such, CSB’s average interest earning assets and interest bearing liabilities are included in the Company’s results for the nine month period ended September 30, 2003, but are not included in the results for the period ended September 30, 2002. Therefore, the reader should consider this when comparing average balances and resulting interest income and expense between the two periods.
Net interest income increased $2.808 million or 27% to $13.392 million during the nine month period ended September 30, 2003 compared to $10.584 million for the same period in 2002. The $2.808 million increase was the result of a $3.225 million increase in interest income and a $417 thousand increase in interest expense.
Interest earning assets averaged $488.8 million during the nine month period ended September 30, 2003 as compared to $335.2 million for the same period in 2002, an increase of $153.6 million, or 46%. The yield on average interest earning assets decreased 1.09% to 5.17% during the nine month period ended September 30, 2003, compared to 6.26% for the same period in 2002. The combined net effects of the $153.6 million increase in average interest earning assets and the 1.09% decrease in yield on average interest earning assets resulted in the $3.225 million increase in interest income between the two periods.
Interest bearing liabilities averaged $401.6 million during the nine month period ended September 30, 2003 as compared to $275.2 million for the same period in 2002, an increase of $126.4 million, or 46%. The cost of average interest bearing liabilities decreased 0.65% to 1.85% during the nine month period ended September 30, 2003, compared to 2.50% for the same period in 2002. The combined net effects of the $126.4 million increase in average interest bearing liabilities and the 0.65% decrease in cost on average interest bearing liabilities resulted in the $417 thousand increase in interest expense between the two periods.
19
The table below summarizes, the analysis of changes in interest income and interest expense for the nine month periods ended September 30, 2003 and 2002 (in thousands of dollars).
Nine months ended September 30, |
||||||||||||||||||||
2003 |
2002 |
|||||||||||||||||||
Average Balance |
Interest Inc / Exp |
Average Rate |
Average Balance |
Interest Inc / Exp |
Average Rate |
|||||||||||||||
Loans (1) (2) |
$ | 363,306 | $ | 17,336 | 6.36 | % | $ | 256,016 | $ | 13,779 | 7.18 | % | ||||||||
Securities (3) |
125,541 | 1,630 | 1.73 | % | 79,173 | 1,962 | 3.30 | % | ||||||||||||
Total Earning Assets |
488,847 | 18,966 | 5.17 | % | 335,189 | 15,741 | 6.26 | % | ||||||||||||
Allowance for loan losses |
(4,445 | ) | (3,247 | ) | ||||||||||||||||
All other assets |
51,411 | 33,557 | ||||||||||||||||||
Total Assets |
$ | 535,813 | $ | 365,499 | ||||||||||||||||
Deposits (4) |
385,528 | 5,490 | 1.90 | % | 270,969 | 5,125 | 2.52 | % | ||||||||||||
Borrowings (5) |
16,117 | 84 | 0.69 | % | 4,237 | 32 | 1.01 | % | ||||||||||||
Total Interest Bearing Liabilities |
401,645 | 5,574 | 1.85 | % | 275,206 | 5,157 | 2.50 | % | ||||||||||||
Demand deposits |
91,254 | 60,826 | ||||||||||||||||||
Other liabilities |
2,239 | 1,060 | ||||||||||||||||||
Minority shareholder interest |
— | 107 | ||||||||||||||||||
Shareholders’ Equity |
40,675 | 28,300 | ||||||||||||||||||
Total Liabilities and Shareholders’ Equity |
$ | 535,813 | $ | 365,499 | ||||||||||||||||
Net Interest Spread (6) |
3.32 | % | 3.76 | % | ||||||||||||||||
Net Interest Income |
$ | 13,392 | $ | 10,584 | ||||||||||||||||
Net Interest Margin (7) |
3.65 | % | 4.21 | % | ||||||||||||||||
Note 1: | Loan balances are net of deferred origination fees and costs. |
Note 2: | Interest income on average loans includes loan fee recognition of $115 thousand and $277 thousand for the nine month periods ended September 30, 2003 and 2002. |
Note 3: | Includes securities available-for-sale, federal funds sold and money market. |
Note 4: | Includes interest bearing deposits only. Non-interest bearing checking accounts are included in the demand deposits listed above. |
Note 5: | Includes repurchase agreements, note payable and trust preferred security. |
Note 6: | Represents the average rate earned on interest earning assets minus the average rate paid on interest bearing liabilities. |
Note 7: | Represents net interest income divided by total interest earning assets. |
Provision for loan losses
The provision for loan losses is charged to earnings to bring the total loan loss allowance to a level deemed appropriate by management and is based upon historical experience, the volume and type of lending conducted by the Company, the amount of nonperforming loans, general economic conditions, particularly as they relate to the Company’s market areas, and other factors related to the collectibility of the Company’s loan portfolio. As these factors change, the level of loan loss allowance changes. The allowance for loan loss account is then adjusted by the amount of the provision for loan losses charged to earnings. The provision was $828 thousand for the nine month period ended September 30, 2003 compared to $494 thousand for the same period in 2002. The increase was due to the increase in the loan portfolio, including the addition of CSB operations, and the loan growth during the current year.
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Non-interest income
Non-interest income for the nine months ended September 30, 2003 increased $818 thousand, or 30%, to $3.502 million, compared to $2.684 million for the same period in 2002, primarily due to the December 31, 2002 acquisition of CSB. Service charges on deposit accounts increased $390 thousand. Loan related fees, primarily commissions earned on brokering single family fixed rate loans, late payment charges and other non loan origination related fees, increased $390 thousand. All other service charges, fees and other non-interest income combined produced a net increase of $38 thousand. Non-interest income (annualized) as a percentage of total average assets was 0.87% for the nine months ended September 30, 2003, compared to 0.98% for the same period in 2002.
Non-interest expense
Non-interest expense for the nine months ended September 30, 2003 increased $3.036 million, or 30%, to $13.072 million, compared to $10.036 million for the same period in 2002, primarily due to the December 31, 2002 acquisition of CSB.
Salaries and employee benefits increased by $1.741 million (35%), occupancy and depreciation expenses increased by $737 thousand (35%), data processing expenses (includes item processing and conversion expenses) decreased by $144 thousand (19%), and all remaining expenses together resulted in an increase of $702 thousand (31%).
Although the primary reason for the increase in non-interest expense was the December 31, 2002 acquisition of CSB, other contributing factors involved included the following.
Two new branches were opened during October 2002. Two “mini” branches were opened in January 2003 and two in June 2003. The expenses related to these branches were included in the nine month period ending September 30, 2003 but not in the corresponding period in 2002.
The FNB/Osceola bank and the CNB/Pasco bank converted their data processing to a new service bureau during the first half of 2002, as well as converted their item processing from an outsourcing firm to an in-house process. The conversion expenses (approximately $296 thousand) recognized in the first half of 2002, increased data processing expenses for the nine month period ending September 30, 2002.
Provision for income taxes
The income tax provision for the nine months ended September 30, 2003 was $1.121 million (an effective rate of 37.4%) compared to $1.013 million (an effective rate of 37.0%) for the same period in 2002.
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. Management measures the 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 the Company’s subsidiary banks regularly assesses the amount and likelihood of projected funding requirements through a review of factors such as historical deposit volatility and funding patterns, present and forecasted market and economic conditions, individual client funding needs, and existing and planned business activities. Each subsidiary bank’s asset/liability committee (ALCO) provides oversight to the liquidity management process and recommends guidelines, subject to 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 dealers and 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. The Company does not use off balance sheet financing.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES: MARKET RISK
Market risk
Interest rate risk is the most significant market risk impacting the Company. Each subsidiary bank 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 the Company’s 2002 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, 2002. There have been no changes in the assumptions used in monitoring interest rate risk as of September 30, 2003. The impact of other types of market risk, such as foreign currency exchange risk and equity price risk, is deemed immaterial. The Company does not maintain a portfolio of trading securities and does not intend to engage in such activities in the immediate future.
ITEM 4. DISCLOSURE CONTROLS AND PROCEDURES
As of the end of the period covered by this report, an evaluation was carried out under the supervision and with the participation of the Company’s 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 the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Securities and 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 the Company’s 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 effected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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PART II. OTHER INFORMATION
None.
Item 2. Changes in Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Shareholders
None.
None.
Item 6. Exhibits and Reports on Form 8-K
Exhibit 31.1 | The 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 President and Chief Executive Officer’s certification required under section 906 of the Sarbanes-Oxley Act of 2002 | |
Exhibit 32.2 | The Chief Financial Officer’s certification required under section 906 of the Sarbanes-Oxley Act of 2002 | |
Exhibit 99.1 | Earnings press release for quarter ending June 30, 2003. |
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CENTERSTATE BANKS OF FLORIDA, INC.
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Each of the undersigned do hereby certify that this report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that the information contained in the report fairly presents, in all material respects, the financial condition and results of operation of the Issuer.
CENTERSTATE BANKS OF FLORIDA, INC.
(Registrant)
Date: November 6, 2003 |
By: |
/s/ Ernest S. Pinner | ||
Ernest S. Pinner | ||||
President and Chief Executive Officer | ||||
Date: November 6, 2003 |
By: |
/s/ James J. Antal | ||
James J. Antal | ||||
Senior Vice President and Chief Financial Officer |
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