SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported) November 1, 2011
CENTERSTATE BANKS, INC.
(Exact name of registrant as specified in its charter)
Florida | 000-32017 | 59-3606741 | ||
(State or other jurisdiction of incorporation) |
(Commission file number) |
(IRS employer identification no.) | ||
42745 U.S. Highway 27, Davenport, FL | 33837 | |||
(Address of principal executive offices) | (Zip Code) | |||
Registrants telephone number, including area code: (863) 419-7750
Not Applicable
(Former name or former address, if changed since last report)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):
¨ | Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |
¨ | Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) |
¨ | Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |
¨ | Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) |
Explanatory Note
On November 2, 2011, CenterState Banks, Inc. (the Company or CSFL) furnished a Current Report on Form 8-K to report the November 1, 2011 completion of the its previously announced transaction as described in the Agreement and Plan of Merger (the Agreement) with The Hartford Financial Services Group, Inc. (Hartford), and Federal Trust Corporation (FTC), a wholly owned subsidiary of Hartford, whereby FTC merged with and into the Company. Pursuant to and simultaneously with the merger of FTC with and into the Company, FTCs wholly owned subsidiary bank, Federal Trust Bank (FTB), merged with and into the Companys wholly owned subsidiary bank, CenterState Bank of Florida, N.A. (the Bank).
This Current Report on Form 8-K/A amends and supplements the disclosures provided in Item 2.01 and 9.01 of the Current Report on Form 8-K furnished on November 2, 2011. Except as otherwise provided herein, the other disclosures made in the Current Report furnished on November 2, 2011 remain unchanged. The Company does not anticipate that it will further amend this Current Report.
Statements made in this amendment, other than those concerning historical financial information, may be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and are subject to risks and uncertainties. These forward-looking statements include, without limitation, statements regarding the Companys expectations concerning its financial condition, operating results, cash flows, liquidity and capital resources, including the effects of the FTC and FTB acquisitions and the final determination of the assets and liabilities acquired and their respective valuations. A discussion of risks, uncertainties and other factors that could cause actual results to differ materially from managements expectations is set forth under the captions BusinessNote about Forward-Looking Statements, Risk Factors and Managements Discussion and Analysis of Financial Condition and Results of Operations in the Companys Annual Report on Form 10-K for the year ended December 31, 2010.
Item 2.01. | Completion of Acquisition of Assets |
On November 1, 2011 the Company completed its previously announced transaction as set forth in the Agreement with Hartford, and FTC, whereby FTC merged with and into the Company. Pursuant to and simultaneously with the merger of FTC with and into the Company, FTCs wholly owned subsidiary bank, FTB merged with and into the Bank.
Pursuant to the terms of the Agreement, the Company purchased approximately $161.4 million of selected performing loans. The purchase price of the loans was approximately $118.0 million or 73% of their outstanding unpaid principal balance (UPB). The estimated fair market value of the purchased loans, as of the purchase date was approximately $156.8 million. The Company has the option, for a period of one year beginning November 1, 2011, to put back to Hartford any loan that is 30 days past due or is adversely classified pursuant to bank regulatory guidelines.
The Company acquired five of FTBs 11 banking offices. Four were purchased at market value based on current appraisals, approximately $3.9 million, and the Company assumed the existing lease on the fifth location. The other six offices were closed by FTB immediately prior to the acquisition date.
All of the deposits, approximately $197.2 million, were assumed by the Bank. The majority of the deposits were from the five branches acquired. The Company did not pay a premium for the deposits assumed.
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The Company also assumed a $5 million Trust Preferred Security issued by FTC which qualifies for Tier 1 capital. Interest payments are due quarterly at a rate of LIBOR plus 2.95%. The instrument matures in 2033.
Approximately 40 days subsequent to the acquisition date (December 9, 2011), the five purchased FTB branches were converted to the Companys core processing system and general ledger. Approximately 30 former FTB employees, about 30% of FTBs former work force, were hired by the Bank, primarily to operate the five acquired FTB branches.
During the fourth quarter of 2011, the Company expects to recognize a gain on this acquisition, after merger related expenses, of approximately $40.6 million pre-tax and about $25.3 million after tax. In a large part, this gain is calculated based on the fair values of the assets acquired and liabilities assumed as of the acquisition date. These fair value estimates are based on the information available, and are subject to change for up to one year after the closing date of the acquisition as additional information relative to closing date fair values becomes available.
The foregoing summary is not complete and is qualified in its entirety by reference to the full text of the form of the Agreement, incorporated by reference to Exhibit 2.1 to the Companys Form 8-K dated May 22, 2010.
Item 9.01 | Financial Statements and Exhibits |
(a) Financial Statements of Business Acquired
Discussion
As set forth in Item 2.01 above, on November 1, 2011, the Company acquired certain assets and assumed all of the deposits and certain other liabilities of FTC and FTB pursuant to the Agreement. A narrative description of the anticipated effects of the FTC acquisition (the Acquisition) on the Companys financial condition, liquidity, capital resources and operating results is presented below. This discussion should be read in conjunction with the historical financial statements and the related notes of the Company, which have been filed with the Securities and Exchange Commission (the Commission) and the Audited Statements, which are attached hereto as Exhibits 99.1 and 99.2.
The Acquisition increased the Companys total assets and total deposits by approximately 11.0% and 11.0%, respectively, as compared with the balances at September 30, 2011, and is expected to positively affect the Companys operating results, to the extent the Company earns more from interest earning assets than it pays in interest on its interest bearing liabilities. The ability of the Company to successfully collect interest and principal on loans acquired and collect reimbursement from Hartford on potential put backs of loans during the first year will also impact cash flows and operating results.
The Company estimated the acquisition date fair value of the acquired assets and assumed liabilities in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 805, Business Combinations (ASC Topic 805) and ASC Topic 820, Fair Value Measurements. However, the amount that the Company realizes on these assets may differ materially from these carrying values primarily as a result of changes in the timing and amount of collections on the acquired loans in future periods.
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Financial Condition
In the Acquisition, the Company purchased $156.8 million of loans at fair value, net of $4.6 million, or 2.9%, estimated discount to the outstanding principal balance, representing 13.5% of the Companys total loans at September 30, 2011. The loans were purchased for approximately 73% of the aggregate outstanding principal balance, which was the primary reason for the gain on purchase. The list below summarizes the preliminary estimates of the fair value of the assets purchased and liabilities assumed as of the November 1, 2011 purchase date. Amounts are in thousands of dollars.
Fair Value at Nov 1, 2011 |
||||
Cash and cash items |
$73,228 | |||
Loans |
156,803 | |||
Interest receivable |
647 | |||
Branch real estate |
3,860 | |||
Furniture and fixtures |
140 | |||
FHLB stock |
4,243 | |||
Bank owned life insurance |
8,113 | |||
Prepaid FDIC insurance |
2,287 | |||
Core deposit intangible |
1,235 | |||
Receivable from Hartford |
404 | |||
Other assets |
472 | |||
|
|
|||
Total assets acquired |
$251,432 | |||
|
|
|||
Deposits |
$197,841 | |||
Interest payable |
80 | |||
Official checks outstanding |
1,564 | |||
Escrow deposits |
1,341 | |||
Trust Preferred Security |
4,440 | |||
Other liabilities |
275 | |||
|
|
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Total liabilities assumed |
$205,541 | |||
|
|
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Net assets acquired |
$45,891 | |||
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|
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Deferred tax impact |
$17,269 | |||
|
|
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Net assets acquired, including deferred tax impact |
$28,622 | |||
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|
The following table reconciles the bargain purchase gain (net assets acquired) net of certain merger related expenses. Amounts are in thousands of dollars.
Bargain purchase gain |
$45,891 | |||
Data processing deconversion expense |
(2,909) | |||
Severance payments expense |
(2,052) | |||
Other merger related expenses |
(630) | |||
|
|
|||
Bargain purchase gain, net of merger related expenses |
$40,300 | |||
Deferred tax impact |
15,165 | |||
|
|
|||
Bargain purchase gain, after merger expense, net of tax |
$25,135 |
In terms of a purchase price calculation table, the Company purchased selected performing loans for 73% of the unpaid principal balance outstanding as of the acquisition date. This is the primary factor creating the bargain purchase gain. In addition to the discount, the Company has an option to put back to Hartford any loan that becomes 30 days past due or adversely classified during a one year period beginning with
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the November 1, 2011 acquisition date. The Company purchased four FTB branches at fair value based on current appraisals, and assumed the lease on a fifth FTB branch. FTC closed the remaining six branches not acquired by the Company immediately prior to the close of the transaction and transferred all the deposits from those six branches to the five branches acquired by the Company. The Company did not acquire any investment securities, non-performing assets, OREO or other repossessed assets. The Company assumed all the deposits and did not pay a premium on any of the deposits assumed. The Company did not assume any debt other than a $5 million trust preferred security issued by FTC. The table below summarizes the purchase price calculation. Amounts are in thousands of dollars.
Assets purchased: |
||||
Cash acquired |
$ | 73,228 | ||
Loans acquired |
117,993 | |||
Banking office real estate purchased |
3,860 | |||
FHLB stock purchased |
4,178 | |||
Prepaid FDIC insurance purchased |
2,287 | |||
Bank owned life insurance policies purchased |
8,113 | |||
All other assets purchased |
1,373 | |||
|
|
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Total assets acquired |
$ | 211,032 | ||
|
|
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Liabilities assumed: |
||||
Deposits |
$ | 197,221 | ||
Official checks outstanding |
1,564 | |||
Escrow deposits payable |
1,341 | |||
Trust preferred security |
5,000 | |||
All other liabilities assumed |
5,906 | |||
|
|
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Total liabilities assumed |
$ | 211,032 | ||
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The table below presents information with respect to the fair value of acquired loans and other interest earning assets, as well as their unpaid principal balance (Book Balance) at acquisition date, contractual term and average contractual yield as of the November 1, 2011 acquisition date. Amounts are in thousands of dollars.
book balance | fair value | weighted average months to maturity |
average contractual interest rate |
effective interest rate | ||||||||||
|
| |||||||||||||
Interest bearing deposits at Federal Home Loan Bank |
$ | 1,487 | $ | 1,487 | | 0.02% | 0.02% | |||||||
Interest bearing deposits at Federal Reserve Bank |
62,976 | 62,976 | | 0.25% | 0.25% | |||||||||
Loans: |
||||||||||||||
Single family residential real estate |
153,043 | 148,482 | 270 | 3.56% | 4.26% | |||||||||
Commercial real estate |
7,279 | 7,264 | 56 | 6.90% | 6.94% | |||||||||
Commercial loans |
624 | 569 | 12 | 4.52% | 17.26% | |||||||||
Consumer and other loans |
504 | 488 | 10 | 3.32% | 7.26% | |||||||||
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| |||||||||||||
Total loans |
$ | 161,450 | $ | 156,803 | 259 | 3.72% | 4.44% | |||||||
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| |||||||||||||
Total earning assets |
$ | 225,913 | $ | 221,266 | ||||||||||
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The difference between the fair value of the loans acquired and their related book balance will be accreted into interest income over the life of the related loan. The following table reflects the scheduled maturities of the acquired loans at November 1, 2011. Amounts are in thousands of dollars.
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single family residential real estate |
commercial real estate |
commercial | consumer | total loans |
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Contractual maturities: |
||||||||||||||||||||
1 year or less |
$ | | $ | 245 | $ | 456 | $ | 488 | $ | 1,189 | ||||||||||
1-5 years |
235 | 1,382 | 113 | | 1,730 | |||||||||||||||
After 5 years |
148,247 | 5,637 | | | 153,884 | |||||||||||||||
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Total |
$ | 148,482 | $ | 7,264 | $ | 569 | $ | 488 | $ | 156,803 | ||||||||||
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Rate sensitivity: |
||||||||||||||||||||
Fixed |
$ | 10,084 | $ | 6,705 | $ | 456 | $ | 488 | $ | 17,733 | ||||||||||
Variable |
138,398 | 559 | 113 | | 139,070 | |||||||||||||||
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Total |
$ | 148,482 | $ | 7,264 | $ | 569 | $ | 488 | $ | 156,803 | ||||||||||
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In the acquisition, the Company assumed $197.8 million in deposits at estimated fair value. The amount represents approximately 11% of the Companys total deposits of $1,791.9 million at September 30, 2011. Time deposits comprise about 32% and money market accounts comprise about 51% of the assumed deposits. The remainder is in checking accounts and regular savings accounts. A schedule of the deposits assumed at November 1, 2011 at fair value is listed in the table below. Amounts are in thousands of dollars.
fair value at Nov 1, 2011 |
weighted average interest rate |
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|
|
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Non-interest bearing deposits |
$ | 16,538 | % | |||||
Interest bearing deposits: |
||||||||
Interest bearing demand deposits |
15,062 | 0.23% | ||||||
Savings deposits |
2,452 | 0.26% | ||||||
Money market deposits |
99,681 | 0.51% | ||||||
Time deposits less than $100,000 |
39,926 | 1.62% | ||||||
Time deposits of $100,000 or greater |
24,182 | 2.15% | ||||||
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|
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Total deposits assumed |
$ | 197,841 | 0.87% | |||||
|
|
The following table presents the amount of time deposits assumed at November 1, 2011, maturing during the periods reflected below. Amounts are in thousands of dollars.
Amount | ||||
November 1, 2011 thru October 31, 2012 |
$ | 51,877 | ||
November 1, 2012 thru October 31, 2013 |
6,758 | |||
November 1, 2013 thru October 31, 2014 |
3,386 | |||
November 1, 2014 thru October 31, 2015 |
568 | |||
Thereafter |
1,519 | |||
|
|
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Total |
$ | 64,108 | ||
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|
In its assumption of the deposit liabilities, the Company believed that these deposits have an intangible value. The Company applied ASC Topic 805, which prescribes the accounting for goodwill and other intangible assets such as core deposit intangibles, in a business combination. The Company determined the estimated fair value of the core deposit intangible asset totaled $1.2 million, which will be amortized utilizing an accelerated amortization method over an estimated economic life not to exceed ten years. In
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determining the valuation amount, deposits were analyzed based on factors such as type of deposit, deposit retention, interest rates and age of deposit relationships. The table below presents the estimated amortization expense for each of the next ten years. Amounts are in thousands of dollars.
amount | amount | |||||||||||
year 1 |
$185 | year 6 | $108 | |||||||||
year 2 |
$158 | year 7 | $107 | |||||||||
year 3 |
$134 | year 8 | $107 | |||||||||
year 4 |
$114 | year 8 | $107 | |||||||||
year 5 |
$108 | year 10 | $107 | |||||||||
|
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Total | $1,235 | |||||||||||
|
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Future amortization of this core deposit intangible asset over the estimated life will decrease results of operations, net of any potential tax effect. Since amortization is a non cash item, it will have no effect upon future liquidity and cash flows. For the calculation of regulatory capital, core deposit intangible asset is disallowed and is a reduction to equity capital. The Company expects that disallowing this intangible asset should not materially adversely affect the Companys regulatory capital ratios.
The core deposit intangible asset is subject to significant estimates by management of the Company related to the value and the life of the asset. These estimates could change over time. The Company will review the valuation of this asset periodically to ensure that no impairment has occurred. If any impairment is subsequently determined, the Company will record the impairment as an expense in its consolidated statement of operations.
Non performing loans
The Company has the option to put back any loan that becomes 30 days past due or adversely classified during a one year period beginning with the November 1, 2011 acquisition date. As of the acquisition date there were nine single family residential loans that were more than thirty days past due. The loans had an aggregate principal balance of $1,116 and a fair value of $1,095. The Company expects to put back these loans to Hartford.
Operating results and cash flows
Management has from time to time become aware of acquisition opportunities and has performed various levels of review related to potential acquisitions in the past. The FTC acquisition was attractive to the Company for a variety of reasons including the following:
| attractiveness in the pricing of the acquired selected performing loans including the put back option and strength of the counterparty; |
| ability to increase the Companys market share in central Florida; |
| attractiveness of core deposit customer relationships; |
| opportunities to enhance income and efficiency due to duplications of effort and decentralized processes as the Company expects to enhance income by centralizing some duties and removing duplications of effort. |
Based on these and other factors, including the level of support related to the acquired loans, the Company believes that the FTC acquisition will have an immediate positive impact on its earnings.
7
The FTC acquisition had an immediate accretive impact to the Companys financial results as the Company recognized a closing date pre-tax gain upon acquisition of $40.3 million after merger related expenses of approximately $5.6 million. The transaction resulted in an after merger related expenses, after-tax expense, gain of approximately $25.1 million. The total assets acquired, approximately $235.6 million including the net deferred tax liability, represented approximately 11% of the Companys $2,153.8 million of total assets as of September 30, 2011, and total deposits assumed, approximately $197.8 million, represented approximately 11% of the Companys $1,791.9 million of total deposits reported as of September 30, 2011. The Company believes that the transaction will improve net interest income, as the Company earns more from interest earned on its loans and investments than it pays in interest on deposits.
Liquidity and capital resources
The FTC acquisition enhanced the liquidity position of the Company. The Company acquired $73.2 million of cash and cash equivalents. This addition to the Companys balance sheet represents additional support for the Companys liquidity needs.
Deposits with an estimated fair value of $197.8 million were also assumed. Of this amount approximately 51% is in time deposits, 32% is in money market accounts and the remainder is in checking accounts and regular savings accounts.
In the FTC acquisition, the Company also assumed a $5 million Trust Preferred Security issued by FTC that qualifies for Tier 1 capital. The security pays interest on a quarterly basis at a rate of LIBOR plus 2.95% and matures in 2033. The Company estimated the fair value of this instrument to approximate $4.4 million at the November 1, 2011 acquisition date.
At September 30, 2011 the Company and the Bank were considered well-capitalized based on calculations of relevant regulatory ratios. The Company and the Bank had the following capital ratios at September 30, 2011.
Regulatory guideline amounts |
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to be considered | Actual at Sept 30, 2011 | |||||
well capitalized | Company | CSB | ||||
|
| |||||
Tier 1 leverage ratio |
5.0% | 10.3% | 8.0% | |||
Tier 1 risk base ratio |
6.0% | 17.4% | 14.2% | |||
Total risk base ratio |
10.0% | 18.7% | 15.5% |
The FTC acquisition was self-capitalizing because the $25.1 million after tax gain was more than enough to support the $235.6 million of assets acquired.
Financial Statements
Attached hereto as Exhibit 99.1 and incorporated by reference into this Item 9.01(a) is an audited consolidated financial statement for FTC for the nine month period ending September 30, 2011. Attached hereto as Exhibit 99.2 and incorporated by reference into this Item 9.01(a) is an audited consolidated financial statement for FTC for the one year period ending December 31, 2010.
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(b) | Pro Forma Financial Statements |
The pro forma consolidated condensed balance sheet presented below assumes the transaction occurred at September 30, 2011. Adjusting entries are explained below. All amounts are in thousands of dollars.
CSFL Actual |
FTC Actual 9/30/11 |
Debit | Credit | ProForma 9/30/11 |
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Cash and cash equivalents |
$182,864 | $54,794 | 44,113 | d | $281,771 | |||||||||||||||||||||||
Securities available for sale |
557,129 | | 557,129 | |||||||||||||||||||||||||
Loans |
1,162,918 | 171,341 | 4,647 | e | 1,329,612 | |||||||||||||||||||||||
Allowance for loan losses |
(26,192) | (15,183) | (41,375) | |||||||||||||||||||||||||
Bank premises and equipment |
88,995 | 8,478 | 97,473 | |||||||||||||||||||||||||
Goodwill and CDI |
42,222 | 2,363 | 1,235 | b | 45,820 | |||||||||||||||||||||||
BOLI |
28,141 | 8,617 | 36,758 | |||||||||||||||||||||||||
OREO |
21,695 | 2,257 | m | 23,952 | ||||||||||||||||||||||||
FDIC indemnification asset |
53,820 | | 53,820 | |||||||||||||||||||||||||
Deferred tax asset (liability) |
10,302 | 60,966 | 15,402 | h | 55,866 | |||||||||||||||||||||||
All other assets |
31,911 | 32,569 | 290 | a | 64,770 | |||||||||||||||||||||||
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|
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Total assets |
$2,153,805 | $326,202 | $2,505,596 | |||||||||||||||||||||||||
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Deposits |
$1,791,938 | $202,279 | $620 | f | $1,994,837 | |||||||||||||||||||||||
Other borrowed funds |
91,325 | 30,000 | 560 | c | 120,765 | |||||||||||||||||||||||
All other liabilities |
20,506 | 8,123 | 28,629 | |||||||||||||||||||||||||
Stockholders equity |
250,036 | 85,800 | 25,529 | g | 361,365 | |||||||||||||||||||||||
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Total liabilities & stockholders equity |
$2,153,805 | $326,202 | $2,505,596 | |||||||||||||||||||||||||
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Adjusting entries:
debit | credit | |||||||
|
|
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a Put back option |
$ | 290 | ||||||
b Core deposit intangible |
1,235 | |||||||
c Fair value adjustment- Trust preferred security |
560 | |||||||
d Net cash receivable from Hartford |
44,113 | |||||||
e Fair value adjustment- loans |
4,647 | |||||||
f Fair value adjustment- time deposits |
620 | |||||||
g Bargain purchase gain, net of merger and tax expense |
25,529 | |||||||
h Deferred tax liability |
15,402 |
a. | Estimated fair value as of the acquisition date of the Banks option agreement to put back any purchased loan that becomes thirty days past due or is adversely classified. |
b. | Estimated fair value of the Bankss core deposit intangible. |
c. | Amount to adjust the acquired Trust Preferred Security to fair value. |
d. | Cash received from Hartford that is primarily attributable to the difference between the carrying amount of loans and the price paid to acquire the loans, which was 73% of the carrying value. |
e. | Estimated fair value adjustment to loans purchase as determined by independent valuation firm. |
f. | Estimated fair value adjustment to time deposits assumed as internally calculated. |
g. | Bargain purchase gain, net of deferred tax, as calculated and explained in Item 9.01(a). |
h. | Deferred tax related to gross bargain purchase gain. |
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The pro forma consolidated condensed income statements for the nine month period ending September 30, 2011 and the twelve month period ending December 31, 2010 presented below assume the transaction occurred at the beginning of the earliest period presented. Adjusting entries are explained below. All amounts are in thousands of dollars.
CSFL Actual |
FTC Actual |
Debit | Credit | ProForma nine months ended Sept 30, 2011 |
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|
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Interest income- loans |
$48,745 | $12,084 | $217 | d | $61,046 | |||||||||||||||||||||||
Interest income- all other |
12,174 | 655 | 12,829 | |||||||||||||||||||||||||
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|
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Total interest income |
60,919 | 12,739 | 73,875 | |||||||||||||||||||||||||
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|
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|
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Interest expense- deposits |
8,922 | 1,745 | 370 | c | 10,297 | |||||||||||||||||||||||
Interest expense- all other |
528 | 660 | $19 | e | 1,207 | |||||||||||||||||||||||
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|
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Total interest expense |
9,450 | 2,405 | 11,504 | |||||||||||||||||||||||||
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|
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Net interest income |
51,469 | 10,334 | 62,371 | |||||||||||||||||||||||||
Provision for loan losses |
27,926 | 22,050 | 49,976 | |||||||||||||||||||||||||
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Net interest income (expense) after loan loss provision |
23,543 | (11,716) | 12,395 | |||||||||||||||||||||||||
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Bond sales commissions |
18,228 | | 18,228 | |||||||||||||||||||||||||
Bargain purchase gain |
11,129 | | 11,129 | |||||||||||||||||||||||||
Gain on sales of securities |
3,334 | 716 | 4,050 | |||||||||||||||||||||||||
All other non interest income |
13,678 | 530 | 355 | a,b | 13,853 | |||||||||||||||||||||||
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Total non interest income |
46,369 | 1,246 | 47,260 | |||||||||||||||||||||||||
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Compensation and related expense |
42,270 | 5,053 | 47,323 | |||||||||||||||||||||||||
Occupancy expense |
9,255 | 1,828 | 11,083 | |||||||||||||||||||||||||
Data processing expense |
3,765 | 789 | 4,554 | |||||||||||||||||||||||||
Credit related expenses |
9,390 | 14,218 | 23,608 | |||||||||||||||||||||||||
All other non interest expense |
15,285 | 9,724 | 25,009 | |||||||||||||||||||||||||
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|
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Total non interest expense |
79,965 | 31,612 | 111,577 | |||||||||||||||||||||||||
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|||||||||||||||||||||||||
Loss before income taxes |
(10,053) | (42,082) | 213 | f | (51,922) | |||||||||||||||||||||||
Benefit for income taxes |
(3,880) | (14,850) | 80 | f | (18,650) | |||||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||||||
Net loss |
(6,173) | (27,232) | (33,272) | |||||||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||||||
average shares outstanding |
30,032 | 30,032 | ||||||||||||||||||||||||||
EPS- basic |
($0.21) | ($1.11) | ||||||||||||||||||||||||||
EPS- diluted |
($0.21) | ($1.11) |
10
CSFL Actual |
FTC Actual |
Debit | Credit | ProForma twelve months ended Dec 31, 2010 |
||||||||||||||||||||||||
|
|
|||||||||||||||||||||||||||
Interest income- loans |
$55,697 | $25,472 | $269 | d | $81,438 | |||||||||||||||||||||||
Interest income- all other |
18,883 | 903 | 19,786 | |||||||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||||||
Total interest income |
74,580 | 26,375 | 101,224 | |||||||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||||||
Interest expense- deposits |
15,722 | 3,410 | 493 | c | 18,639 | |||||||||||||||||||||||
Interest expense- all other |
1,020 | 2,251 | $26 | e | 3,297 | |||||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||||||
Total interest expense |
16,742 | 5,661 | 21,936 | |||||||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||||||
Net interest income |
57,838 | 20,714 | 79,288 | |||||||||||||||||||||||||
Provision for loan losses |
29,624 | 3,019 | 32,643 | |||||||||||||||||||||||||
|
|
|||||||||||||||||||||||||||
Net interest income after loan loss provision |
28,214 | 17,695 | 46,645 | |||||||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||||||
Bond sales commissions |
32,696 | | 32,696 | |||||||||||||||||||||||||
Bargain purchase gain |
1,377 | | 1,377 | |||||||||||||||||||||||||
Gain on sales of securities |
7,034 | 42 | 7,076 | |||||||||||||||||||||||||
All other non interest income |
13,826 | 934 | 475 | a,b | 14,285 | |||||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||||||
Total non interest income |
54,933 | 976 | 55,434 | |||||||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||||||
Compensation and related expense |
55,033 | 6,916 | 61,949 | |||||||||||||||||||||||||
Occupancy expense |
10,002 | 2,477 | 12,479 | |||||||||||||||||||||||||
Data processing expense |
2,789 | 1,033 | 2,789 | |||||||||||||||||||||||||
Credit related expenses |
6,278 | 7,725 | 14,003 | |||||||||||||||||||||||||
Impairment of goodwill |
| 174,562 | 174,562 | |||||||||||||||||||||||||
All other non interest expense |
19,223 | 8,779 | 29,035 | |||||||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||||||
Total non interest expense |
93,325 | 201,492 | 294,817 | |||||||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||||||
Loss before income taxes |
(10,178) | (182,821) | 261 | f | (192,738) | |||||||||||||||||||||||
Benefit for income taxes |
(4,240) | (62,201) | 98 | f | (66,343) | |||||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||||||
Net loss |
(5,938) | (120,620) | (126,395) | |||||||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||||||
average shares outstanding |
27,608 | 27,608 | ||||||||||||||||||||||||||
EPS- basic |
($0.22) | ($4.58) | ||||||||||||||||||||||||||
EPS- diluted |
($0.22) | ($4.58) |
a. | Represents nine months of amortization expense of the $1.2 million core deposit intangible. The intangible is amortized on an accelerated basis over a ten year period. A ten year amortization schedule is included in Item 9.01(a). |
b. | The Company has a one year put back option agreement, whereby for a period of one year beginning at the acquisition date, it has the option to put back to Hartford any loan that becomes thirty days past due or becomes adversely classified. The fair value of this option as of the acquisition date was estimated to be $290,000. This amount is being amortized on a straight line basis over the one year option period. |
c. | The Company has estimated the fair value adjustment to the assumed time deposits to be $620,000 as of the acquisition date. This amount is being amortized into interest expense (reduction of interest expense) over the maturity period of the related time deposit. |
d. | The fair value adjustment was approximately $4.6 million and is being accreted into interest income over the life of the related loans. |
e. | The Company assumed a $5 million Trust Preferred security pursuant to the FTC acquisition, and estimated the fair value adjustment of this instrument to approximate $560,000. The fair value adjustment is being amortized into interest expense (increase to interest expense) over its remaining term. The instrument matures in August 2033. The amortization expense is $2,136 per month. |
f. | Represents the effect on net income before income taxes and the estimated income tax provision. |
11
(d) | Exhibits |
2.1 | Agreement and Plan of Merger by and among CenterState Banks, Inc., Federal Trust Corporation and The Harford Financial Services Group, Inc., dated as of May 22, 2011. Incorporated by reference to Exhibit 2.1 to the Companys Form 8-K dated May 22, 2010. |
99.1 | Report of Independent Registered Public Accounting Firm, Federal Trust Corporation Consolidated Financial Statements for the nine month period ending September 30, 2011, and Notes to the Consolidated Financial Statements |
99.2 | Report of Independent Registered Public Accounting Firm, Federal Trust Corporation Consolidated Financial Statements for the one year period ending December 31, 2010, and Notes to the Consolidated Financial Statements |
12
SIGNATURE
Pursuant to 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 hereunto duly authorized.
CENTERSTATE BANKS, INC. | ||||||
By: | /s/ James J. Antal | |||||
James J. Antal | ||||||
Senior Vice President and | ||||||
Chief Financial Officer |
Date: January 13, 2012
13
Exhibit 99.1
Federal Trust Corporation
Consolidated financial statements as of September 30, 2011
and for the nine months ended September 30, 2011
FEDERAL TRUST CORPORATION
TABLE OF CONTENTS
Page | ||||
INDEPENDENT AUDITORS REPORT | 3 | |||
CONSOLIDATED FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2011 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2011. | ||||
Consolidated Balance Sheet |
4 | |||
Consolidated Statement of Operations |
5 | |||
Consolidated Statement of Stockholders Equity |
6 | |||
Consolidated Statement of Cash Flows |
7 | |||
Notes to Consolidated Financial Statements |
8-25 |
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Federal Trust Corporation
Sanford, Florida
We have audited the accompanying consolidated balance sheet of Federal Trust Corporation as of September 30, 2011, and the related consolidated statements of operations and stockholders equity and cash flows for the nine month period then ended. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Federal Trust Corporation as of September 30, 2011, and the results of its operations and its cash flows for the nine month period then ended in conformity with accounting principles generally accepted in the United States of America.
As discussed in Note 16 to the consolidated financial statements, on November 1, 2011, Federal Trust Corporation was sold to and merged into CenterState Banks, Inc. Pursuant to and simultaneously with the merger into CenterState Banks, Inc., Federal Trusts wholly owned subsidiary bank, Federal Trust Bank, was merged into CenterState Bank of Florida, N.A.
/s/ Crowe Horwth LLP |
Crowe Horwth LLP |
Ft. Lauderdale, Florida
January 13, 2012
FEDERAL TRUST CORPORATION
CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 30, 2011
(Dollars in thousands, except par value)
As of September 30, 2011 |
||||
ASSETS |
||||
INTEREST-EARNING ASSETS: |
||||
Cash and due from banks |
$ | 4,394 | ||
Interest earning deposits |
50,400 | |||
|
|
|||
Total cash and cash equivalents |
54,794 | |||
Loans held for sale |
25,948 | |||
Loans net |
130,210 | |||
OTHER ASSETS: |
||||
Accrued interest receivable |
827 | |||
Due from parent |
23,437 | |||
Premises and equipment - net |
8,478 | |||
Foreclosed assets - net |
2,257 | |||
Federal Home Loan Bank of Atlanta stock |
4,178 | |||
Deferred tax asset - net |
60,966 | |||
Other assets |
15,107 | |||
|
|
|||
TOTAL |
$ | 326,202 | ||
|
|
|||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||
LIABILITIES: |
||||
Noninterest-bearing demand deposits |
$ | 11,949 | ||
Interest-bearing demand deposits |
13,616 | |||
Money-market deposits |
106,700 | |||
Savings deposits |
2,886 | |||
Time deposits |
67,128 | |||
|
|
|||
Total deposits |
202,279 | |||
Federal Home Loan Bank of Atlanta advances |
25,000 | |||
Subordinated debentures |
5,155 | |||
Accrued expenses and other liabilities |
7,968 | |||
|
|
|||
Total liabilities |
240,402 | |||
|
|
|||
COMMITMENTS AND CONTINGENCIES (Notes 9 and 15) |
||||
STOCKHOLDERS EQUITY: |
||||
Common stock $0.01 par value, (100 shares authorized; 100 issued and outstanding) |
- | |||
Additional paid-in capital |
236,195 | |||
Accumulated deficit |
(150,395 | ) | ||
|
|
|||
Total stockholders equity |
85,800 | |||
|
|
|||
TOTAL |
$ | 326,202 | ||
|
|
See notes to consolidated financial statements.
- 4 -
FEDERAL TRUST CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2011
(Dollars in thousands)
For the nine months ended September 30, 2011 |
||||
INTEREST INCOME: |
||||
Loans |
$ | 12,084 | ||
Securities |
563 | |||
Other |
92 | |||
|
|
|||
Total interest income |
12,739 | |||
|
|
|||
INTEREST EXPENSE: |
||||
Deposits |
1,745 | |||
Borrowings |
660 | |||
|
|
|||
Total interest expense |
2,405 | |||
|
|
|||
Net interest income |
10,334 | |||
|
|
|||
Provision for loan losses |
22,050 | |||
|
|
|||
Net interest (expense) after provision for loan losses |
(11,716 | ) | ||
|
|
|||
OTHER INCOME: |
||||
Service charges and fees |
265 | |||
Gain on sale of securities |
716 | |||
Rental income |
107 | |||
Other |
158 | |||
|
|
|||
Total other income |
1,246 | |||
|
|
|||
OTHER EXPENSE: |
||||
Salary and employee benefits |
5,053 | |||
Occupancy and equipment |
1,828 | |||
Foreclosure expenses |
2,133 | |||
Impairment charge on foreclosed assets |
8,751 | |||
Impairment charge on premises and equipment |
4,888 | |||
Lease termination expense |
2,373 | |||
Data processing expense |
789 | |||
Loss on sale of foreclosed assets |
3,334 | |||
General and administrative |
2,463 | |||
|
|
|||
Total other expense |
31,612 | |||
|
|
|||
LOSS BEFORE INCOME TAXES |
(42,082 | ) | ||
INCOME TAX BENEFIT |
(14,850 | ) | ||
|
|
|||
NET LOSS |
$ | (27,232 | ) | |
|
|
See notes to consolidated financial statements.
- 5 -
FEDERAL TRUST CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2011
(Dollars in thousands)
Common Stock |
Additional Paid-In Capital |
Accumulated Deficit |
Accumulated Other Comprehensive Income |
Total Stockholders Equity |
||||||||||||||||
Balance at January 1, 2011 |
$ | $ | 210,627 | $ | (123,163 | ) | $ | 238 | $ | 87,702 | ||||||||||
Capital contributions |
- | 25,568 | - | - | 25,568 | |||||||||||||||
Comprehensive loss: |
||||||||||||||||||||
Net loss |
- | - | (27,232 | ) | - | (27,232 | ) | |||||||||||||
Change in net unrealized gain on securities available for sale net of tax |
- | - | - | (238 | ) | (238 | ) | |||||||||||||
|
|
|||||||||||||||||||
Comprehensive loss |
- | - | - | - | (27,470 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Balance at September 30, 2011 |
$ |
- |
|
$ | 236,195 | $ | (150,395 | ) | $ | - | $ | 85,800 | ||||||||
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
- 6 -
FEDERAL TRUST CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2011
(Dollars in thousands)
For the nine months ended September 30, 2011 |
||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
||||
Net loss |
$ | (27,232 | ) | |
Adjustments to reconcile net loss to net cash provided by operating activities: |
||||
Impairment charge on premises and equipment |
4,888 | |||
Depreciation and amortization |
1,056 | |||
Provision for loan losses |
22,050 | |||
Fair value accretion on deposits and advances |
(360 | ) | ||
Impairment charge on foreclosed assets |
8,751 | |||
Net loss on sale of foreclosed assets |
3,334 | |||
Increase in cash surrender value of bank-owned life insurance |
(193 | ) | ||
Gain on sale securities available for sale |
(716 | ) | ||
Deferred income taxes |
(5,426 | ) | ||
Proceeds from sales of loans held for sale |
1,716 | |||
Loans originated for resale |
(2,302 | ) | ||
Gain on sale of loans held for sale |
(32 | ) | ||
Gain on sale of premises and equipment |
(78 | ) | ||
Cash provided by (used in) resulting from changes in: |
||||
Accrued interest receivable |
380 | |||
Income tax receivable |
(6,504 | ) | ||
Other assets |
805 | |||
Accrued expenses and other liabilities |
3,032 | |||
|
|
|||
Net cash provided by operating activities |
3,169 | |||
|
|
|||
CASH FLOWS FROM INVESTING ACTIVITIES: |
||||
Decrease in loans, net of repayments |
15,079 | |||
Proceeds from sales of loans |
4,866 | |||
Proceeds from principal repayments and sales of securities available for sale |
25,880 | |||
Proceeds from the sale of foreclosed assets |
9,423 | |||
Redemption of Federal Home Loan Bank Stock |
2,688 | |||
Purchase of premises and equipment |
(298 | ) | ||
Sale of premises and equipment |
830 | |||
|
|
|||
Net cash provided by investing activities |
58,468 | |||
|
|
|||
CASH FLOWS FROM FINANCING ACTIVITIES: |
||||
Net decrease in deposits |
(30,217 | ) | ||
Capital contributions |
9,452 | |||
|
|
|||
Net cash used in financing activities |
(20,765 | ) | ||
|
|
|||
NET INCREASE IN CASH AND CASH EQUIVALENTS |
40,872 | |||
CASH AND CASH EQUIVALENTS Beginning of period |
13,922 | |||
|
|
|||
CASH AND CASH EQUIVALENTS End of period |
$ | 54,794 | ||
|
|
|||
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION |
||||
Cash paid for interest |
$ | 2,044 | ||
Income tax payments received from parent |
$ | 3,523 | ||
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITY |
||||
Foreclosed assets acquired in settlement of loans |
$ | 7,683 | ||
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITY |
||||
Capital contributions due from parent |
$ | 16,116 | ||
Transfer of loans to held for sale |
$ | 25,948 |
See notes to consolidated financial statements.
- 7 -
FEDERAL TRUST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2011, AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2011
(DOLLARS IN THOUSANDS)
1. | ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
Organization Federal Trust Corporation (FTC) is a wholly owned subsidiary of The Hartford Financial Services Group, Inc. (Hartford) and is the sole shareholder of Federal Trust Bank. Federal Trust Bank (the Bank) is federally-chartered as a stock savings bank. FTC operates as a unitary savings and loan holding company. FTCs business activities primarily include the operation of the Bank. The Banks deposits are insured up to applicable limits by the Federal Deposit Insurance Corporation. The Bank provides a wide range of banking services to individual and corporate customers through its 11 offices located in Seminole, Orange, Volusia, Lake and Flagler Counties, Florida. The consolidated financial statements include FTC and the Bank. Intercompany transactions and balances between FTC and the Bank are eliminated in consolidation.
Sale of Federal Trust Corporation On May 23, 2011, Hartford and FTC announced that it had entered into an Agreement and Plan of Merger (the Agreement) with CenterState Banks, Inc. (CenterState), whereby FTC merges with and into CenterState. This transaction closed on November 1, 2011. Pursuant to and simultaneously with the merger of FTC with and into CenterState, FTCs wholly owned subsidiary bank, FTB merged with and into CenterStates wholly owned subsidiary bank, CenterState Bank of Florida, N.A. With the closing of this transaction, CenterState assumed all of the deposits, approximately $197,200, and purchased selected performing loans with unpaid principal balances totaling approximately $162,600 and $19,400 of other assets of Federal Trust Bank. CenterState did not pay a premium to assume the deposits and received a 27% discount on the selected performing loans unpaid principal balances. CenterState also has the option to put back to Hartford any purchased loan for up to one year after closing that becomes 30 days past due or becomes adversely classified by applicable regulatory standards.
Basis of Financial Statement Presentation The accounting and reporting policies of FTC conform to U.S. generally accepted accounting principles and prevailing practices within the banking industry. The following summarizes the more significant of these policies and practices.
Use of Estimates The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. The most significant estimates made by management that are particularly susceptible to significant change in the near term relate to the estimates of future cash flows on the acquired credit impaired loan portfolio, valuation of assets acquired through foreclosure, valuation of deferred tax assets and determination of the adequacy of the allowance for loan losses.
Cash and Cash Equivalents Cash and cash equivalents includes cash and due from banks and interest-earning deposits with maturities at the time of purchase of three months or less. Interest-earning deposits as of September 30, 2011 include $48,579 held with the Federal Reserve Bank. The Federal Reserve Bank did not require the Bank to have a reserve balance at September 30, 2011.
- 8 -
FEDERAL TRUST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2011, AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2011
(DOLLARS IN THOUSANDS)
Securities FTC may classify its securities as either trading, held to maturity or available for sale. Trading securities are held principally for resale and recorded at their fair values. Unrealized gains and losses on trading securities are included immediately in operations. FTC did not hold any securities for trading for the period ended September 30, 2011. Held-to-maturity securities are those which FTC has the positive intent and ability to hold to maturity and are reported at amortized cost. Available-for-sale securities consist of securities not classified as trading securities or as held-to-maturity securities. Unrealized holding gains and losses, net of tax, on available-for-sale securities are excluded from the statement of operations and reported in accumulated other comprehensive income. A security is considered impaired if its fair value is less than its accumulated cost. FTC considers the extent and duration of the unrealized loss, and the financial condition and near-term prospects of the issuer. FTC also assesses whether it intends to sell, or it is more likely than not that it will be required to sell, a security in an unrealized loss position before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the entire difference between amortized cost and fair value is recognized as impairment through earnings. For debt securities that do not meet the aforementioned criteria, the amount of impairment is split into two components as follows: 1) OTTI related to credit loss, which must be recognized in the income statement and 2) other-than-temporary impairment (OTTI) related to other factors, which is recognized in other comprehensive income. The credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis. For equity securities, the entire amount of impairment is recognized through earnings. For the nine month period ended September 30, 2011, FTC did not incur any other-than-temporary losses. Gains and losses on the sale of available-for-sale securities are recorded on the trade date and determined using the specific-identification method. Premiums and discounts on securities available for sale are recognized in interest income using the interest method over the period to maturity.
Purchased Credit-Impaired Loans In connection with the acquisition of the Bank by Hartford in 2009, all loans at acquisition were determined to be credit impaired. Additionally, substantially all of the loans at September 30, 2011 are accounted for as purchased credit impaired loans. These loans are being accounted for on a pooled basis. Purchased credit-impaired (PCI) loans were determined to be credit impaired based on specific risk characteristics of the loan, including product type, domicile of the borrower, past due status, owner occupancy status, geographic location of the collateral, and loan to value ratios. Purchasers are permitted to aggregate credit impaired loans acquired in the same fiscal quarter into one or more pools, provided that the loans have common risk characteristics. A pool is then accounted for as a single asset with a single composite interest rate and an aggregate expectation of cash flows. The Bank aggregated the commercial, consumer, and residential loans into nineteen pools of loans with common risk characteristics. These acquired loans were recorded at fair value, and after acquisition, losses are recognized by an increase in the allowance for loan losses. The Bank estimates the amount and timing of expected cash flows for each acquired loan pool and the expected cash flows in excess of the amount paid is recorded as interest income over the remaining life of the loan pools. If the present value of expected cash flows is less than the carrying amount, a loss is recorded. If the present value of expected cash flows is greater than the carrying amount, it is recognized as part of future interest income.
On a quarterly basis, the Bank updates the amount of loan principal and interest cash flows expected to be collected, incorporating assumptions regarding default rates, loss severities, the amounts and timing of prepayments and other factors that are reflective of current market conditions. Probable decreases in expected loan principal cash flows trigger the recognition of impairment, which is then measured as the present value of the expected principal loss plus any related foregone interest cash flows discounted at the pools effective interest rate. Impairments that occur after the acquisition date are recognized through the provision for loan losses. Probable and significant increases in expected principal cash flows would first reverse any previously recorded allowance for loan losses; any remaining increases are recognized prospectively as interest income. The impacts of (i) prepayments, (ii) changes in variable interest rates, and (iii) any other changes in the timing of expected cash flows are recognized prospectively as adjustments to interest income. Disposals of loans, which may include sales of loans, receipt of payments in full by the borrower, or foreclosure, result in removal of the loan from the purchased credit impaired portfolio.
- 9 -
FEDERAL TRUST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2011, AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2011
(DOLLARS IN THOUSANDS)
Purchased credit impaired loans are also being modified in the Banks loss mitigation programs. For these loans, the impact of the modification is incorporated into the Banks quarterly assessment of whether a probable and/or significant change in estimated future cash flows has occurred, and the loans continue to be accounted for as and reported as purchased credit impaired loans.
Loans Loans that management has the intent and FTC has the ability to hold until maturity or payoff, are reported at their outstanding unpaid principal balance, adjusted for premiums or discounts on loans purchased, charge-offs and recoveries, the allowance for loan losses and deferred fees and costs on originated loans. Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income using the level yield method without anticipating prepayments.
Loans are placed on nonaccrual status when the loan becomes 90 days past due as to interest or principal. When a loan is placed on nonaccrual status, the accrued and unpaid interest receivable is written off and the loan is accounted for on the cash or cost recovery method thereafter, until qualifying for return to accrual status.
FTC considers a loan to be impaired when it is probable that FTC will be unable to collect all amounts due, both principal and interest, according to the contractual terms of the loan agreement. When a loan is impaired, FTC may measure impairment based on (a) the present value of the expected future cash flows of the impaired loan discounted at the loans original effective interest rate, (b) the observable market price of the impaired loan, or (c) the fair value of the collateral of a collateral-dependent loan. FTC selects the measurement method on a loan-by-loan basis, except for collateral-dependent loans for which foreclosure is probable, are measured at the fair value of the collateral less costs to sell. In a troubled debt restructuring involving a restructured loan, FTC measures impairment by discounting the total expected future cash flows at the loans original effective rate of interest.
Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, FTC does not separately identify individual consumer and residential loans for impairment disclosures.
Allowance for Loan Losses A number of factors are considered when establishing the allowance for loan losses. For loan loss purposes, the loan portfolio is segregated by collateral type. A general allowance for losses is then provided for each collateral type, which consists of two components. General loss percentages are calculated based upon historical analyses. A supplemental portion of the allowance is calculated for inherent losses which probably exist as of the evaluation date even though they might not have been identified by the more objective processes used for the portion of the allowance described above. This portion of the allowance is particularly subjective and requires judgments based on qualitative factors which do not lend themselves to exact mathematical calculations such as: trends in delinquencies and nonaccruals; trends in volume, terms, and portfolio mix; new credit products, changes in the geographic distribution of those products; changes in lending policies and procedures; collection practices; examination results from bank regulatory agencies; external loan reviews, and our internal credit review function; changes in the outlook for local, regional and national economic conditions; concentrations of credit; and peer group comparisons.
- 10 -
FEDERAL TRUST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2011, AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2011
(DOLLARS IN THOUSANDS)
Large commercial loans that exhibit probable or observed credit weaknesses are subject to individual review. Where appropriate, loss allowances are allocated to individual loans based on our estimate of the borrowers ability to repay the loan given the availability of collateral, other sources of cash flows, and available legal options. Any specific valuation allowance for impaired loans are measured based on the fair market value of the underlying collateral. We evaluate the collectibility of both principal and interest when assessing the need for a specific valuation allowance. Specific valuation allowances on individual loans and historical loss rates are reviewed throughout the year and adjusted as necessary based on changing borrower and collateral conditions and actual collection and charge-off experience. Historical loss rates are applied to other commercial loans not subject to specific valuation allowance allocations.
Homogenous loans, such as installment and residential mortgage loans are not individually reviewed by management except in the case of delinquencies. Loss allowances are established for each pool of loans based on the expected net charge-offs. Loss rates are based on the average net charge-off history and an analysis of the risks and trend information by loan category.
Historical loss rates for loans may be adjusted for significant factors that, in managements judgment, reflect the impact of any current conditions or loss recognition. Based on these procedures, management believes that the allowance for loan losses is adequate to absorb estimated probable loan losses associated with the loan portfolio as of September 30, 2011. Actual results could differ from these estimates. However, since the allowance is affected by managements judgments and uncertainties, there is the possibility that materially different amounts would be reported under different conditions or assumptions. To the extent that real estate values and the general economy, collateral values, loss factors, or the nature and volume of problem loans change, we may need to adjust the provision for loan losses. In addition, federal regulatory agencies, as an integral part of the examination process, periodically review our allowance for loan losses. Such agencies may require us to recognize additions to the allowance level based upon their judgment of the information available to them at the time of their examination. Material additions to our provision for loan losses would result in an increase in net losses and a decrease in capital.
Loans Held for Sale Loans originated that are intended to be sold in the secondary market are carried at the lower of cost or estimated fair value in the aggregate. Net unrealized losses are recognized through a valuation allowance by charges to operations. Gains and losses on sales of mortgage loans are based on the difference between the selling price and the carrying value of the loans sold. Loan origination fees are deferred and direct loan origination costs are capitalized until the related loan is sold, at which time the net fees are included in the gain on sale of loans held for sale in the statements of operations.
Derivative Financial Instruments ASC 815-10, Derivatives and Hedging requires an entity to recognize all derivative instruments as either assets or liabilities in the balance sheet and measure those instruments at fair value. FTC does not hold any derivatives as of September 30, 2011.
Premises and Equipment Land is stated at cost. Premises and equipment and leasehold improvements are stated at cost less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets. Amortization of leasehold improvements is computed using the straight-line method over the lesser of the estimated useful lives or the respective lease terms, including renewal options expected to be exercised. FTC reviews premises and equipment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. An impairment loss is recognized when the sum of the undiscounted future net cash flows expected to result from the use of the asset and its eventual disposal is less than its carrying amount.
- 11 -
FEDERAL TRUST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2011, AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2011
(DOLLARS IN THOUSANDS)
Foreclosed Assets Assets acquired in the settlement of loans are initially recorded at the lower of cost (principal balance of the former loan plus costs of obtaining title and possession) or estimated fair value (less costs to sell) at the date of acquisition, establishing a new cost basis. Subsequently, such assets acquired are carried at the lower of cost or fair value less estimated costs to sell. If fair value declines subsequent to foreclosure, a valuation allowance is recorded through expense. Costs relating to development and improvement of foreclosed assets are capitalized, whereas costs relating to holding the foreclosed assets are charged to operations.
Other Intangible Assets Other intangible assets consist of a core deposit intangible (CDI) asset arising from the Bank purchase and is amortized on an accelerated method over the estimated useful life of 7 years. As of September 30, 2011 the CDI has a gross carrying amount of $4,104 with accumulated amortization of $1,741. Amortization expense recognized during the nine month period ended was $516. Future amortization of expense will not be material given the subsequent sale of the Banks deposits.
Federal Home Loan Bank of Atlanta Stock Federal Home Loan Bank of Atlanta (FHLB) stock is carried at cost, which represents redemption value. The Bank is a member of the FHLB. The required investment in the common stock is based upon a certain percentage of the Banks assets and advances.
Bank Owned Life Insurance Bank owned life insurance is recorded at the amount that can be realized under the insurance contract at September 30, 2011, which is the cash surrender value adjusted for other charges or other amounts due that are probable at settlement.
Income Taxes FTC is included in the Hartfords consolidated Federal income tax return. FTC and the Hartford have entered into a tax sharing agreement under which each member in the consolidated U.S. Federal income tax return will make payments between them such that, with respect to any period, the amount of taxes to be paid or benefit received by the member, subject to certain tax adjustments, is consistent with the parent down approach. Under this approach, FTCs deferred tax assets and tax attributes are considered realized by it so long as the group is able to recognize (or currently use) the related deferred tax asset or attribute. Thus the need for a valuation allowance against deferred tax assets is determined at the consolidated return level rather than at the level of the individual entities comprising the consolidated group. Included in the amount due from parent at September 30, 2011 is $7,321, which represents the amount owed to FTC in accordance with the tax sharing agreement
Impairment of Long-Lived Assets All long-lived assets are reviewed for impairment upon the occurrence of events or changes in circumstances that would indicate that the carrying value of the assets may not be recoverable. An impairment loss may be recognized when estimated undiscounted future cash flows expected to result from the use of the asset, including disposition, are less than the carrying value of the asset. FTC recorded an impairment loss of approximately $4.9 million associated with premises and equipment not assumed by CenterState in conjunction with the merger Agreement.
The measurement of the impairment loss to be recognized is based upon the difference between the fair value and the carrying amounts of the assets. Fair value is generally determined based upon a discounted cash flow analysis. In order to determine if an asset has been impaired, assets are grouped and tested at the lowest level for which identifiable, independent cash flows are available (reporting units).
- 12 -
FEDERAL TRUST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2011, AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2011
(DOLLARS IN THOUSANDS)
Comprehensive Income Comprehensive income consists of net income and other comprehensive income. Other comprehensive income includes unrealized gains and losses on securities available for sale which are also recognized as separate components of equity.
Off-Balance Sheet Financial Instruments In the ordinary course of business, FTC has entered into off-balance-sheet financial instruments consisting of commitments to extend credit, unused lines of credit and standby letters of credit. Such financial instruments are recorded in the financial statements when they are funded.
Loss Contingencies Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated.
Fair Value of Financial Instruments Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in Note 8. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect the estimates.
Recent Accounting Pronouncements In January 2010, the FASB issued Accounting Standards Update (ASU) 2010-06, Improving Disclosures about Fair Value Measurements. ASU 2010-06 requires additional disclosures about fair value measurements including transfers in and out of Levels 1 and 2 and a higher level of disaggregation for the different types of financial instruments. For Level 3 fair value measurements, information about purchases, sales, issuances and settlements are presented separately. This standard was effective for reporting periods beginning after December 15, 2009, with the exception of revised Level 3 disclosure requirements which are effective for reporting periods beginning after December 15, 2010. Comparative disclosures are not required in the year of adoption. FTC adopted the provisions of the standard on January 1, 2010, except for those effective in 2011. The adoption did not have a material impact on the financial statement disclosures of FTC.
In April 2010, the FASB issued guidance which is now part of ASC 310, Receivables, which amends the accounting guidance related to loans that are accounted for within a pool under ASC 310-30. The new guidance clarifies that modifications of such loans do not result in the removal of those loans from the pool even if the modification of those loans would otherwise be considered a troubled debt restructuring (TDR). The amended guidance continues to require that an entity consider whether the pool of assets in which the loan is included is impaired if expected cash flows for the pool change. No additional disclosures are required as a result of the new guidance. The guidance is effective for modifications of loans accounted for under ASC 310-30 occurring in the first interim or annual period ending on or after July 15, 2010. FTCs accounting for acquired credit impaired loans within pools is consistent with the new guidance.
- 13 -
FEDERAL TRUST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2011, AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2011
(DOLLARS IN THOUSANDS)
In July 2010, the FASB issued ASU 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. ASU 2010-20 requires additional information about credit risk exposure for financing receivables and the related allowance for loan losses including an allowance rollforward on a portfolio segment basis, the recorded investment in financing receivables on a portfolio segment basis, the nonaccrual status of financing receivables by class, impaired financing receivables by class, aging of past due receivables by class, credit quality indicators by class, troubled debt restructurings information by class, and significant purchases and sales of financing receivables. ASU 2010-20 defines portfolio segment as the level at which an entity develops and documents a systematic method for determining its allowance for loan losses. Classes of financing receivables generally are a disaggregation of portfolio segments. For nonpublic entities, the disclosures are effective for annual reporting periods ending on or after December 15, 2011. In January 2011, the FASB issued ASU 2011-01 Deferral of the Effective Date of Disclosures about Troubled Debt Restructuring in Update 2010-20. ASU 2011-01 delays the disclosures related to troubled debt restructurings until interim and annual periods ending after June 30, 2011. FTC has not determined the impact that adoption will have on its financial statements.
2. | SECURITIES AVAILABLE FOR SALE |
In conjunction with the merger Agreement, the Bank disposed of all investment securities available for sale during the period ended September 30, 2011.
For the period ended September 30, 2011, the following summarizes sales of securities:
Proceeds from sales |
$ | 22,715 | ||
|
|
|||
Gross gains from sales |
$ | 776 | ||
Gross losses from sales |
(60 | ) | ||
|
|
|||
Net gains |
$ | 716 | ||
|
|
3. | LOANS |
In connection with the acquisition of the Bank in June of 2009 by HIG, it was determined that is was probable, at acquisition, that all contractually required payments would not be collected. The carrying amount of those loans as of September 30, 2011 is as follows:
Commercial | Residential Real Estate |
Home Equity |
Total | |||||||||||||||
Carrying value (a) |
$ | 7,685 | $ | 115,067 | $ | 7,458 | $ | 130,210 | ||||||||||
Related allowance for loan losses (b) |
25 | 896 | 415 | 1,336 | ||||||||||||||
Unpaid principal balance |
8,386 | 145,552 | 9,751 | 163,689 |
(a) Carrying value includes the effect of fair value adjustments that were applied to the PCI portfolio at the date of acquisition and is net of the allowance for loan loss.
(b) Management concluded as part of the Banks regular assessment of the PCI loan pools that it was probable that higher expected principal credit losses would result in a decrease in expected cash flows. As a result, an allowance for loan losses for impairment of these pools has been recognized.
- 14 -
FEDERAL TRUST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2011, AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2011
(DOLLARS IN THOUSANDS)
The accretable yield represents the excess of cash flows expected to be collected over the carrying value of the purchased credit impaired loans. This amount is not reported on the Banks balance sheet but is accreted into interest income at a level rate of return over the expected lives of the underlying pools of loans. For variable rate loans, expected future cash flows were initially based on the rate in effect at acquisition; expected future cash flows are recalculated as rates change over the lives of the loans.
The table below sets forth the accretable yield activity for these loans for the nine months ended September 30, 2011.
Accretable Yield Activity
Balance, Beginning of period |
$ | 111,582 | ||||
Accretion into interest income |
(12,084 | ) | ||||
Other changes in expected cash flows (a) |
(14,557 | ) | ||||
|
|
|||||
Balance, September 30 |
$ | 84,941 | ||||
|
|
(a) Other changes in expected cash flows may vary from period to period as the Bank continues to refine its cash flow model and periodically updates model assumptions. For the nine months ended September 30, 2011, other changes in expected cash flows were principally driven by changes in impairment adjustments as well as reclassification to the nonaccretable difference.
Originated Loans Originated loans that management has the intent and ability to hold for the foreseeable future are reported at their outstanding principal balances net of any unearned income, charge-offs, unamortized fees and costs. The net amount of nonrefundable loan origination fees and certain direct costs associated with the lending process are deferred and amortized to interest income over the contractual lives of the loans using methods which approximate the interest method.
The Bank originated an immaterial amount of new loans for the nine months ended September 30, 2011 in the normal course of business.
Loans Held for Sale In connection with the sale of FTC to CenterState, all loans not selected by CenterState to be acquired, were reported as held for sale at September 30, 2011, and these loans were sold or paid off prior to the closing of the sale of FTC on November 1, 2011. As discussed in Note 14, most loans held for sale at September 30, 2011 were transferred to and sold by an affiliated entity in October of 2011. The affiliated entity paid the Bank more than the carrying amount for these loans, which resulted in a capital contribution and capital contribution receiving of $9.619 at September 30, 2011. The table on the following page presents the loans sold during the period ended September 30, 2011.
- 15 -
FEDERAL TRUST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2011, AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2011
(DOLLARS IN THOUSANDS)
During the nine month period ended September 30, 2011 |
||||||
Unpaid principal balance sold |
$ | 18,687 | ||||
|
|
|||||
Carrying value of loans sold |
$ | 4,866 | ||||
Proceeds received |
(14,233 | ) | ||||
Amount recorded as a capital contribution |
9,367 | |||||
|
|
|||||
Loss on sale |
$ | - | ||||
|
|
ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses for the nine months ended September 30, 2011 are as follows:
Commercial | Residential Real Estate |
Home Equity | Total | |||||||||||||||
Balance, beginning of year |
$ | 421 | $ | 2,020 | $ | 578 | $ | 3,019 | ||||||||||
Provision for loan losses |
8,844 | 13,369 | (163 | ) | 22,050 | |||||||||||||
Charge-offs |
(702 | ) | (9,184 | ) | - | (9,886 | ) | |||||||||||
Recoveries |
- | - | - | - | ||||||||||||||
Transfer to held for sale |
(8,538 | ) | (5,309 | ) | - | (13,847 | ) | |||||||||||
|
|
|
|
|
|
|
|
|||||||||||
Balance, end of year |
25 | 896 | 415 | 1,336 | ||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||
Allowance for loan losses |
||||||||||||||||||
Non PCI loans |
25 | - | - | 25 | ||||||||||||||
PCI loans |
- | 896 | 415 | 1,311 | ||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||
Total allowance for loan losses |
25 | 896 | 415 | 1,336 | ||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||
Loans carrying value |
||||||||||||||||||
Non PCI loans |
1,845 | - | - | 1,845 | ||||||||||||||
PCI loans |
5,840 | 115,067 | 7,458 | 128,365 | ||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||
Total loans carrrying value |
$ | 7,685 | $ | 115,067 | $ | 7,458 | $ | 130,210 | ||||||||||
|
|
|
|
|
|
|
|
- 16 -
FEDERAL TRUST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2011, AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2011
(DOLLARS IN THOUSANDS)
4. | PREMISES AND EQUIPMENT NET |
Premises and equipment consists of the following:
Land |
$ | 2,673 | ||||
Buildings and improvements |
5,844 | |||||
Furniture, fixtures, and equipment |
1,202 | |||||
|
|
|||||
Total |
9,719 | |||||
Accumulated depreciation |
(1,241 | ) | ||||
|
|
|||||
Premises and equipment net |
$ | 8,478 | ||||
|
|
FTC leases the office space for one branch office, and has ground leases for the Lake Mary and Palm Coast branches. Each of these leases is accounted for as operating leases. The terms of these branch and land leases are for up to 20 years and the leases contain escalation clauses and renewal options. Rent expense under operating leases was approximately $479 for the period ended September 30, 2011.
In conjunction with the previously announced merger Agreement, the Bank was required to dispose of all premises and equipment not specifically identified in the Agreement to be acquired by CenterState. As such, the Bank reviewed for impairment all premises and equipment not acquired by CenterState and recorded an impairment loss of $4,888 during the period ended September 30, 2011. In addition, the Bank recorded a lease termination liability of $2,373 associated with ground leases on two branch sites that were not acquired by CenterState and closed on November 1, 2011, the merger date.
At September 30, 2011, future minimum payments under operating leases are as follows:
Years Ending | ||||
December 31 | Amount | |||
2011 |
$ | 121 | ||
2012 |
487 | |||
2013 |
492 | |||
2014 |
497 | |||
2015 |
502 | |||
Thereafter |
5,404 | |||
|
|
|||
$ | 7,503 | |||
|
|
- 17 -
FEDERAL TRUST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2011, AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2011
(DOLLARS IN THOUSANDS)
5. | DEPOSITS |
Time deposits of $100 or more were approximately $25,000 and as of September 30, 2011. The scheduled maturities of all time deposits as of September 30, 2011, are as follows:
2011 |
$ | 20,131 | ||
2012 |
37,525 | |||
2013 |
5,526 | |||
2014 |
2,234 | |||
2015 |
761 | |||
Thereafter |
951 | |||
|
|
|||
$ | 67,128 | |||
|
|
Interest expense on deposits for the period ended September 30, 2011, is as follows:
Interest-bearing demand deposits |
$ | 43 | ||||
Money-market accounts |
667 | |||||
Savings accounts |
7 | |||||
Time deposits |
1,028 | |||||
|
|
|||||
$ | 1,745 | |||||
|
|
6. | FEDERAL HOME LOAN BANK OF ATLANTA ADVANCES |
Advances from the FHLB at September 30, 2011, are as follows (dollars in thousands):
Convertible advances with a weighted-average fixed interest rate of 3.22% |
$ | 25,000 | ||||
|
|
Interest expense on FHLB advances for the period ended September 30, 2011, was $533. On October 13, 2011, the Bank repaid $25,000 in convertible advances and incurred a prepayment penalty of $1,852.
At September 30, 2011, FTC had pledged residential mortgage loans of $34,000 as collateral for advances from the FHLB under a blanket floating lien.
The advance outstanding at September 30, 2011 at a rate of 3.22% is callable during 2011 and matures during 2014.
7. | SUBORDINATED DEBENTURES |
On September 17, 2003, Federal Trust Statutory Trust I sold adjustable-rate Trust Preferred Securities due September 17, 2033 in the aggregate principal amount of $5,000 in a pooled trust preferred securities offering. The interest rate on the Trust Preferred Securities adjusts quarterly, to a rate equal to the current three-month London Interbank Offered Rate, plus 295 basis points (3.30% at September 30, 2011). In addition, Federal Trust Corporation contributed capital of $155 to Federal Trust Statutory Trust I for the purchase of the common securities of Federal Trust Statutory Trust I. The proceeds from these sales were paid to Federal Trust Corporation in exchange for $5,155 of its adjustable-rate Junior Subordinated Debentures due September 17, 2033. The debentures have the same terms as the Trust Preferred Securities. The sole asset of Federal Trust Statutory Trust I, the obligor on the Trust Preferred Securities, is the debentures.
- 18 -
FEDERAL TRUST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2011, AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2011
(DOLLARS IN THOUSANDS)
Federal Trust Corporation guaranteed Federal Trust Statutory Trust Is payment of distributions on, payments on any redemptions of, and any liquidation distribution with respect to the Trust Preferred Securities. Cash distributions on both the Trust Preferred Securities and the debentures are payable quarterly in arrears on March 17, June 17, September 17 and December 17 of each year.
The Trust Preferred Securities are currently subject to mandatory redemption, in whole, but not in part, upon repayment of the debentures at stated maturity or, at the option of Federal Trust Corporation.
FTC is not considered the primary beneficiary of this Trust (variable interest entity), therefore the trust is not consolidated in FTCs financial statements, but rather the subordinated debentures are shown as a liability.
The trust preferred securities were assumed by CenterState on November 1, 2011, the merger date.
8. | FAIR VALUE MEASUREMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS |
General ASC 820-10, Fair Value Measurements and Disclosures, defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value hierarchy prioritizes the assumptions that market participants would use in pricing the assets or liabilities (the inputs) into three broad levels.
The fair value hierarchy gives the highest priority (Level 1) to quoted prices in active markets for identical assets and liabilities and the lowest priority (Level 3) to unobservable inputs in which little, if any, market activity exists, requiring entities to develop their own assumptions and data.
Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. These inputs include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in market areas that are not active, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, volatilities, prepayment speeds, credit risks and default rates) or inputs that are derived principally from or corroborated by observable market data by correlation or other means.
Foreclosed Assets Nonrecurring adjustments to certain commercial and residential real estate properties classified as foreclosed assets are measured at fair value, less costs to sell. As a result of the merger Agreement all foreclosed assets held as of September 30, 2011 have been subsequently disposed of by FTC and the recorded fair values are based on the subsequent sales price of the assets. The subsequent sales prices are considered to be a Level 2 inputs under the fair value hierarchy.
Foreclosed assets, net: |
||||||
Residential real estate |
$ | 684 | ||||
Commercial real estate |
1,573 | |||||
|
|
|||||
$ | 2,257 |
- 19 -
FEDERAL TRUST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2011, AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2011
(DOLLARS IN THOUSANDS)
Foreclosed assets measured at fair value less costs to sell, had a net carrying amount of $2,257, which is made up of the outstanding balance of $11,008, net of a valuation allowance of $8,751 at September 30, 2011, resulting in a write-down of $8,751 for the nine month period then ended.
Loans Held For Sale The fair value of loans held for sale was determined by using subsequent sales prices to third parties. An impairment charge of $13,847 was recognized during the nine month period ended September 30, 2011. The subsequent sales prices are considered to be a Level 2 inputs under the fair value hierarchy.
Fair Value of Financial Instruments The fair value of a financial instrument is the current amount that would be exchanged between willing parties, other than in a forced liquidation. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for FTCs various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument or may not necessarily represent the underlying fair value. The following methods and assumptions were used by FTC in estimating fair values of financial instruments.
Cash and Cash Equivalents The carrying amount of cash and cash equivalents represents fair value.
Loans For variable rate loans that reprice frequently and have no significant change in credit risk, fair values are based on carrying values. Fair values for residential, commercial real estate, commercial and
consumer loans other than variable rate loans were obtained from the Office of Thrift Supervisions asset liability model which utilizes current rates for similar loans.
Federal Home Loan Bank of Atlanta Stock It was not practicable to determine the fair value due to restrictions placed on its transferability.
Accrued Interest Receivable The carrying amount of accrued interest receivable represents the fair value.
Deposits The fair values for noninterest-bearing demand, interest-bearing demand, money-market and savings deposits are, by definition, equal to the amount payable on demand (that is their carrying amounts). Fair values for time deposits were obtained from the Office of Thrift Supervisions asset liability model which utilizes current rates for similar deposits.
Federal Home Loan Bank of Atlanta Advances Fair values for FHLB advances were obtained from FHLB proprietary model mathematical approximation of the market value fair value. The model estimates fair value by discounting future cash flows using the current rates on such borrowings with similar maturities.
Accrued Interest Payable The carrying amount of accrued interest payable represents the fair value.
Off-Balance Sheet Instruments Fair values for off-balance sheet lending commitments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties credit standing.
- 20 -
FEDERAL TRUST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2011, AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2011
(DOLLARS IN THOUSANDS)
The carrying amounts and estimated fair values of FTCs financial instruments as of September 30, 2011, are as follows:
Carrying | Fair | |||||||
Amount | Value | |||||||
Financial assets: |
||||||||
Cash and cash equivalents |
$ | 54,794 | $ | 54,794 | ||||
Loans held for sale |
25,948 | 25,948 | ||||||
Loans net |
130,210 | 115,671 | ||||||
Federal Home Loan Bank stock |
4,178 | NA | ||||||
Accrued interest receivable |
827 | 827 | ||||||
Financial liabilities: |
||||||||
Deposits |
202,279 | 202,982 | ||||||
Federal Home Loan Bank advances |
25,000 | 26,921 | ||||||
Subordinated debentures |
5,155 | 4,595 | ||||||
Accrued interest payable |
63 | 63 |
9. | OFF-BALANCE SHEET FINANCIAL INSTRUMENTS |
FTC has outstanding at any time a number of commitments to extend credit. These arrangements are subject to strict credit control assessments and each customers credit worthiness is evaluated on a case-by-case basis. The amount of collateral obtained, if deemed necessary by FTC upon extension of credit, is based on managements credit evaluation of the counterparty. A summary of the contractual amounts of off-balance sheet commitments which approximate fair value at September 30, 2011 is as follows:
Unused lines of credit |
$ | 3,668 | ||||
Standby letters of credit |
3 |
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. FTC evaluates each customers credit worthiness on a case by case basis.
Standby letters of credit are conditional commitments issued by FTC to guarantee the performance of a customer to a third party. Those letters-of-credit are primarily issued to support public and private borrowing arrangements. Essentially, all letters of credit issued have expiration dates within one year. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers.
FTCs policy is to require customers to provide collateral prior to the disbursement of approved loans. The amount of collateral obtained, if it is deemed necessary by FTC upon extension of credit, is based on managements credit evaluation of the counterparty. The collateral held by FTC is primarily real estate and income producing commercial properties, but may include accounts receivable and inventory.
- 21 -
FEDERAL TRUST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2011, AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2011
(DOLLARS IN THOUSANDS)
10. | INCOME TAXES |
Allocation of Federal and state income tax benefits between current and deferred portions for the period ended September 30, 2011, is as follows:
Current | Deferred | Total | ||||||||||
Federal |
$ | (9,424 | ) | $ | (5,426 | ) | $ | (14,850 | ) | |||
State |
- | - | - | |||||||||
|
|
|
|
|
|
|||||||
Total |
$ | (9,424 | ) | $ | (5,426 | ) | $ | (14,850 | ) | |||
|
|
|
|
|
|
The effective tax rate was different than the statutory Federal income tax rate. A summary and the reasons for the difference for the period ended September 30, 2011, are as follows:
Amount | % of Pretax Loss |
|||||||||||
Income taxes at statutory rate |
$ | (14,729 | ) | 35.0 | % | |||||||
Increase (decrease) in tax resulting from: |
||||||||||||
State income taxes net of Federal income tax benefit |
(1,514 | ) | 4.4 | |||||||||
Increase in valuation allowance |
1,514 | (4.4 | ) | |||||||||
Tax-exempt income |
(69 | ) | 0.2 | |||||||||
Officers life insurance, meals and entertainment and other permanent items |
(52 | ) | 0.2 | |||||||||
Income taxes |
$ | (14,850 | ) | 35.3 | % | |||||||
|
|
|
|
- 22 -
FEDERAL TRUST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2011, AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2011
(DOLLARS IN THOUSANDS)
The tax effects of temporary differences between the tax basis of assets and liabilities and their financial reporting amounts which give rise to significant portions of deferred tax assets and liabilities as of September 30, 2011, are as follows:
Deferred tax assets: |
||||
State net operating loss carryforwards |
$ | 2,506 | ||
Alternative minimum tax |
4,271 | |||
Goodwill |
55,784 | |||
Impairments |
13,154 | |||
Nonaccrual loans |
481 | |||
Other |
529 | |||
|
|
|||
Total gross deferred tax assets |
76,725 | |||
Valuation allowance |
(8,301 | ) | ||
|
|
|||
Total deferred tax assets |
68,424 | |||
|
|
|||
Deferred tax liabilities: |
||||
Accretion of the non-credit related loan writedowns |
(7,458 | ) | ||
|
|
|||
Total deferred tax liabilities |
(7,458 | ) | ||
|
|
|||
Net deferred tax assets |
$ | 60,966 | ||
|
|
Due to historical losses for state income tax purposes and its lack of projected state taxable income, management believes that its state deferred tax assets will likely not be utilized. Consequently, a valuation allowance of $8,301 has been recorded against its state deferred tax assets.
FTCs federal taxable losses have been used to offset the taxable income of other members of its parents consolidated federal tax return, in which FTC is included. As a result, FTC has no federal net operating loss carry forward at September 30, 2011. FTCs total state net operating loss carry forward is $73 million which begins to expire in 2029.
11. | REGULATORY CAPITAL |
The Bank is subject to certain restrictions on the amount of dividends that it may declare and distribute to FTC without prior regulatory notification or approval.
The Bank and FTC is also subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Banks financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Banks assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Banks capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
- 23 -
FEDERAL TRUST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2011, AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2011
(DOLLARS IN THOUSANDS)
Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required. At September 30, 2011, the most recent regulatory notifications categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the institutions category.
The following tables summarize the capital thresholds for the minimum and well capitalized designations as of September 30, 2011 for the Bank. An institutions capital category is based on whether it meets the threshold for all three capital ratios within the category. At September 30, 2011, the Bank exceeded each of its capital requirements.
To Be Well Capitalized | ||||||||||||||||||||||||||||
Under Prompt | ||||||||||||||||||||||||||||
For Minimum Capital | Corrective Action | |||||||||||||||||||||||||||
Actual | Adequacy Purposes | Provisions | ||||||||||||||||||||||||||
Amount | % | Amount | % | Amount | % | |||||||||||||||||||||||
At September 30, 2011: |
||||||||||||||||||||||||||||
Tangible capital to tangible assets |
$ | 18,937 | 7.43 | % | $ | 4,731 | 1.5 | % | N/A | N/A | ||||||||||||||||||
Core capital to adjusted tangible assets |
18,937 | 7.43 | 10,194 | 4.0 | % | $ | 12,743 | 5.0 | ||||||||||||||||||||
Total capital to risk-weighted assets |
20,542 | 17.90 | 9,182 | 8.0 | % | 11,477 | 10.0 | |||||||||||||||||||||
Tier I capital to risk-weighted assets |
18,937 | 16.50 | N/A | N/A | 6,886 | 6.0 |
12. | EMPLOYEE BENEFIT PLAN |
The Bank sponsors an employee savings plan (the 401(k) Plan), which qualifies as a 401(k) plan under the Internal Revenue Code. Under the 401(k) Plan, employees can contribute up to 15% of their pre-tax compensation to the plan. The Bank makes contributions based on a matching schedule approved by the Board of Directors. Participants vest immediately in their own contributions and after three years of service in matching contributions made by the Bank. The 401(k) Plan expenses for the period ended September 30, 2011, were approximately $99.
13. | OTHER COMPREHENSIVE INCOME (LOSS) |
Other comprehensive income (loss) components and related tax effects were as follows for the period ended September 30, 2011:
Unrealized holding gains on available for sale securities |
$ | 355 | ||||
Reclassification adjustment for gains realized in income |
(716 | ) | ||||
|
|
|||||
Net unrealized losses |
(361 | ) | ||||
Tax effect |
123 | |||||
|
|
|||||
$ | (238 | ) | ||||
|
|
- 24 -
FEDERAL TRUST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2011, AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2011
(DOLLARS IN THOUSANDS)
14. | RELATED-PARTY TRANSACTIONS |
There were no loans to directors, officers and major stockholders (5% or more) of FTC outstanding during the period ended September 30, 2011.
During the year ended September 30, 2011, an affiliated entity, FTC Resolution Company, LLC, of FTCs parent company, the Hartford, acquired certain loans from the Bank at a price equal to the approximate book value of $13,894. The same $13,894 of loans was concurrently sold by FTC Resolution Company, LLC to independent third parties at a price of $4,527, resulting in a loss on sale of approximately $9,367. Accordingly, the Bank recorded the effect of this loss on sale of $9,367 to the accompanying financial statements with an offsetting entry to additional paid in capital of approximately $9,367.
During October, and prior to the issuance of these financial statements, FTC Resolution Company, LLC, acquired certain other real estate owned and loans from the Bank at a price equal to the approximate book value of $38,460. The same $38,460 in other real estate owned and loans was concurrently sold by FTC Resolution Company, LLC to independent third parties at a price of $22,344, resulting in a loss on sale of approximately $16,116. Accordingly, the Bank recorded the effect of this loss on sale of $16,116 with an offsetting capital contributions receivable of approximately $16,116.
15. | CONTINGENCIES |
Various legal claims arise from time to time in the normal course of business. In the opinion of management of the Bank, none have occurred that will have a material effect on FTCs results of operations or financial position.
16. | SUBSEQUENT EVENTS |
The Bank has performed an evaluation of subsequent events through January 13, 2012, the date the financial statements were available to be issued. The following events or transactions met the disclosure requirements under ASC 855-10, Subsequent Events:
On November 1, 2011 CenterState completed its previously announced transaction as described in the Agreement and Plan of Merger (the Agreement) with the Hartford and FTC, whereby FTC merged with and into CenterState. Pursuant to and simultaneously with the merger of FTC with and into CenterState, FTCs wholly owned subsidiary bank, FTB merged with and into CenterStates wholly owned subsidiary bank, CenterState Bank of Florida, N.A. With the closing of this transaction, the Company assumed all of the deposits, and purchased selected performing loans and other assets of Federal Trust Bank. CenterState did not pay a premium to assume the deposits and received a 27% discount on the selected performing loans. CenterState also has the option to put back any purchased loan for up to one year after closing that becomes 30 days past due or becomes adversely classified by applicable regulatory standards.
- 25 -
Exhibit 99.2
Federal Trust
Corporation
Consolidated Financial Statements as and
for the Year Ended December 31, 2010
and Independent Auditors Report
FEDERAL TRUST CORPORATION
TABLE OF CONTENTS
Page | ||||
INDEPENDENT AUDITORS REPORT | 1 | |||
CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEAR ENDED DECEMBER 31, 2010: | ||||
Consolidated Balance Sheet |
2 | |||
Consolidated Statement of Operations |
3 | |||
Consolidated Statement of Stockholders Equity |
4 | |||
Consolidated Statement of Cash Flows |
5 | |||
Notes to Consolidated Financial Statements |
624 |
INDEPENDENT AUDITORS REPORT
To the Board of Directors of
Federal Trust Corporation
Sanford, Florida
We have audited the accompanying consolidated balance sheet of Federal Trust Corporation (the Corporation) as of December 31, 2010, and the related consolidated statements of operations, stockholders equity and cash flows for the year then ended. These financial statements are the responsibility of the Corporations management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Corporations internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Corporation as of December 31, 2010, and the results of its operations and its cash flows for the year then ended December 31, 2010 in accordance with accounting principles generally accepted in the United States of America.
/s/ Deloitte & Touche LLP |
Deloitte & Touche LLP |
Tampa, Florida
January 9, 2012
FEDERAL TRUST CORPORATION
CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 2010
(Dollars in thousands, except par value)
ASSETS |
||||
INTEREST-EARNING ASSETS: |
||||
Cash and due from Banks |
$ | 3,055 | ||
Interestearning deposits |
10,867 | |||
|
|
|||
Total cash and cash equivalents |
13,922 | |||
Securities available for sale |
26,611 | |||
Loans held for investment, net of allowance for loan losses of $3,019 |
205,211 | |||
OTHER ASSETS: |
||||
Accrued interest receivable |
1,206 | |||
Income tax receivable |
1,418 | |||
Premises and equipment - net |
14,408 | |||
Foreclosed assets - net |
16,082 | |||
Federal Home Loan Bank of Atlanta stock |
6,931 | |||
Deferred tax assets - net |
55,414 | |||
Other assets |
14,234 | |||
|
|
|||
TOTAL |
$ | 355,437 | ||
|
|
|||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||
LIABILITIES: |
||||
Noninterest-bearing demand deposits |
$ | 10,268 | ||
Interest-bearing demand deposits |
17,310 | |||
Money-market deposits |
115,483 | |||
Savings deposits |
2,901 | |||
Time deposits |
86,808 | |||
|
|
|||
Total deposits |
232,770 | |||
Federal Home Loan Bank of Atlanta advance |
25,000 | |||
Trust preferred securities |
5,155 | |||
Accrued expenses and other liabilities |
4,810 | |||
|
|
|||
Total liabilities |
267,735 | |||
|
|
|||
COMMITMENTS AND CONTINGENCIES (Notes 5, 8, 10 and 15) |
||||
STOCKHOLDERS EQUITY: |
||||
Common stock $.01 par value, (100 shares authorized, issued, and outstanding) |
- | |||
Additional paid-in capital |
210,627 | |||
Accumulated deficit |
(123,163 | ) | ||
Accumulated other comprehensive income |
238 | |||
|
|
|||
Total stockholders equity |
87,702 | |||
|
|
|||
TOTAL |
$ | 355,437 | ||
|
|
See notes to consolidated financial statements.
- 2 -
FEDERAL TRUST CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2010
(Dollars in thousands)
INTEREST INCOME: |
||||
Loans |
$ | 25,472 | ||
Securities |
783 | |||
Other |
120 | |||
|
|
|||
Total interest income |
26,375 | |||
|
|
|||
INTEREST EXPENSE: |
||||
Deposits |
3,410 | |||
Borrowings |
2,251 | |||
|
|
|||
Total interest expense |
5,661 | |||
|
|
|||
Net interest income |
20,714 | |||
|
|
|||
Provision for loan losses |
3,019 | |||
|
|
|||
Net interest income after provision for loan losses |
17,695 | |||
|
|
|||
OTHER INCOME: |
||||
Service charges and fees |
331 | |||
Servicing income |
97 | |||
Rental income |
199 | |||
Other |
307 | |||
|
|
|||
Total other income |
934 | |||
|
|
|||
OTHER EXPENSE: |
||||
Salary and employee benefits |
6,916 | |||
Occupancy and equipment |
2,477 | |||
Foreclosure expenses |
4,106 | |||
Impairment charge on foreclosed assets |
2,906 | |||
Impairment charge on premises and equipment |
1,683 | |||
Impairment of goodwill |
174,562 | |||
FHLB advances prepayment penalty |
3,173 | |||
Loss on sale of loans |
713 | |||
Net gain on sale of securities available for sale |
(42 | ) | ||
General and administrative |
4,956 | |||
|
|
|||
Total other expense |
201,450 | |||
|
|
|||
LOSS BEFORE INCOME TAXES |
(182,821 | ) | ||
INCOME TAX BENEFIT |
(62,201 | ) | ||
|
|
|||
NET LOSS |
$ | (120,620 | ) | |
|
|
See notes to consolidated financial statements.
- 3 -
FEDERAL TRUST CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
FOR THE YEAR ENDED DECEMBER 31, 2010
(Dollars in thousands)
Common Stock |
Additional Paid-In Capital |
Accumulated Deficit |
Accumulated Other Comprehensive Income |
Total Stockholders Equity |
||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
BALANCE December 31, 2009 |
$ | - | $ | 205,421 | $ | (2,543 | ) | $ | 596 | $ | 203,474 | |||||||||
Capital contributions |
- | 5,206 | - | - | 5,206 | |||||||||||||||
Comprehensive loss: |
||||||||||||||||||||
Net loss |
- | - | (120,620 | ) | - | (120,620 | ) | |||||||||||||
Change in net unrealized gain on securities available for sale net of tax |
- | - | - | (358 | ) | (358 | ) | |||||||||||||
|
|
|||||||||||||||||||
Comprehensive loss |
- | - | - | - | (120,978 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
BALANCE December 31, 2010 |
$ |
- |
|
$ | 210,627 | $ | (123,163 | ) | $ | 238 | $ | 87,702 | ||||||||
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
- 4 -
FEDERAL TRUST CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2010
(Dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES: |
||||
Net loss |
$ | (120,620 | ) | |
Adjustments to reconcile net loss to net cash provided by operating activities: |
||||
Impairment of goodwill |
174,562 | |||
Impairment charge on premises and equipment |
1,683 | |||
Depreciation and amortization |
1,444 | |||
Provision for loan losses |
3,019 | |||
Fair value accretion on deposits and advances |
(1,008 | ) | ||
Impairment charge on foreclosed assets |
2,906 | |||
Increase in cash surrender value of bank-owned life insurance |
(273 | ) | ||
Net gain on sale of securities available for sale |
(42 | ) | ||
Deferred income taxes |
(54,483 | ) | ||
Proceeds from sales of loans |
253 | |||
Loans originated for resale |
(596 | ) | ||
Loss on sale of loans |
713 | |||
Cash provided by (used in) resulting from changes in: |
||||
Accrued interest receivable |
634 | |||
Income tax receivable |
1,367 | |||
Other assets |
2,029 | |||
Accrued expenses and other liabilities |
(1,108 | ) | ||
|
|
|||
Net cash provided by operating activities |
10,480 | |||
|
|
|||
CASH FLOWS FROM INVESTING ACTIVITIES: |
||||
Principal repayments net of loans originated |
33,010 | |||
Proceeds from sales of loans |
9,616 | |||
Proceeds from principal repayments and sales of securities available for sale |
7,199 | |||
Proceeds from the sale of foreclosed assets |
9,697 | |||
Purchase of securities available for sale |
(14,449 | ) | ||
Redemption of Federal Home Loan Bank Stock |
827 | |||
Purchase of premises and equipment |
(2,313 | ) | ||
|
|
|||
Net cash provided by investing activities |
43,587 | |||
|
|
|||
CASH FLOWS FROM FINANCING ACTIVITIES: |
||||
Net decrease in deposits |
(40,925 | ) | ||
Repayments of Federal Home Loan Bank of Atlanta advances |
(52,847 | ) | ||
Capital contributions |
5,206 | |||
|
|
|||
Net cash used in financing activities |
(88,566 | ) | ||
|
|
|||
NET DECREASE IN CASH AND CASH EQUIVALENTS |
(34,499 | ) | ||
CASH AND CASH EQUIVALENTS Beginning of year |
48,421 | |||
|
|
|||
CASH AND CASH EQUIVALENTS End of year |
$ | 13,922 | ||
|
|
|||
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION |
||||
Cash paid for interest |
$ | 6,491 | ||
|
|
|||
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITY |
||||
Foreclosed assets acquired in settlement of loans |
$ | 13,736 | ||
|
|
See notes to consolidated financial statements.
- 5 -
FEDERAL TRUST CORPORATION
NOTES TO FINANCIAL STATEMENTS
AS OF AND FOR THE YEAR ENDED DECEMBER 31, 2010
(DOLLARS IN THOUSANDS)
1. | ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
Organization Federal Trust Corporation (the Corporation) is the sole shareholder of Federal Trust Bank (the Bank) and Federal Trust Mortgage Company (Mortgage Company). The Corporation operates as a unitary savings and loan holding company. The Corporations business activities are primarily the operation of the Bank and the Mortgage Company. On June 24, 2009, the Corporation and subsidiaries, including the Bank, were acquired by the Hartford Financial Services Group, Inc. (Hartford). The Bank is federally-chartered as a stock savings bank. The Banks deposits are insured up to applicable limits by the Federal Deposit Insurance Corporation. The Bank provides a wide range of banking services to individual and corporate customers through its 11 offices located in Seminole, Orange, Volusia, Lake and Flagler Counties, Florida. In 2008, the Bank assumed the staff and operations of the Mortgage Company.
Basis of Financial Statement Presentation The accounting and reporting policies of the Corporation conform to U.S. generally accepted accounting principles and prevailing practices within the banking industry. The following summarizes the more significant of these policies and practices.
Use of Estimates The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. The most significant estimates made by management that are particularly susceptible to significant change in the near term relate to the estimates of future cash flows on the acquired credit impaired loan portfolio, valuation of assets acquired through foreclosure, determination of the adequacy of the allowance for loan losses, valuations and the timing of write-down for other-than-temporary impairment losses on securities. Actual results could differ from these estimates.
Cash and Cash Equivalents Cash and cash equivalents includes cash and due from banks and interest-earning deposits with maturities at the time of purchase of three months or less. Interest-earning deposits as of December 31, 2010 include $10.9 million, held with the Federal Reserve Bank. The Corporation is required by law or regulation to maintain cash reserves in the form of vault cash or in a noninterest-earning account with the Federal Reserve Bank or other qualified banks, based on its transaction deposit accounts. The required reserve balance at December 31, 2010 was approximately $558,000.
Investment Securities The Corporation may classify its investments as either trading, held to maturity or available for sale. Trading securities are held principally for resale and recorded at their fair values. Unrealized gains and losses on trading securities are included immediately in operations. The Corporation did not hold any investment securities for trading during the year ended December 31, 2010.
Held-to-maturity investment securities are those which the Corporation has the positive intent and ability to hold to maturity and are reported at amortized cost.
- 6 -
Available-for-sale securities consist of securities not classified as trading or as held-to-maturity. Unrealized holding gains and losses, net of tax, on available-for-sale securities are excluded from the statement of operations and reported in accumulated other comprehensive income (AOCI). Premiums and discounts on securities available for sale are recognized in interest income using the effective interest method over the period to maturity. Gains and losses on the sale of available-for-sale securities are recorded on the trade date and determined using the specific-identification method.
Management evaluates all investments for other than temporary impairment (OTTI) on a quarterly
basis, and more frequently when economic or market conditions warrant such evaluation. An investment is considered impaired if its fair value is less than its accumulated cost. If the impairment is considered to be other-than-temporary, an impairment loss is recognized in operations equal to the difference between the securitys cost and its fair value.
In estimating other-than-temporary impairment losses, management considers: (a) the length of time and extent that fair value has been less than cost, (b) the financial condition and near term prospects of the issuer, (c) the Corporations ability and intent to hold the investment for a period sufficient to allow for any anticipated recovery in fair value and (d) evaluation of cash flows to determine if they have been adversely affected. If the Company intends to sell the debt security, or it is more likely than not that it will be required to sell the security before recovery of its remaining amortized cost basis, total OTTI will be recognized in earnings. However, if neither of those conditions exists, the amount of OTTI related to the credit loss is the excess of the amortized cost over its present value and is recognized in earnings while the amount of impairment related to all other factors is recognized in AOCI.
For equity securities, declines in the fair value below their cost are deemed to be other than temporary unless the Company has the intent and ability to retain the investment in the issuer for a period of time sufficient to allow recovery in the fair value. For the year ended December 31, 2010, the Corporation did not incur any other-than-temporary losses.
Loans Loans that management has the intent and the Corporation has the ability to hold until maturity or payoff, are reported at their outstanding unpaid principal balance, adjusted for premiums or discounts on loans purchased, charge-offs and recoveries, the allowance for loan losses and deferred fees and costs on originated loans. Loans are placed on nonaccrual status when the loan becomes 90 days past due as to interest or principal. When a loan is placed on nonaccrual status, the accrued and unpaid interest receivable is written off and the loan is accounted for on the cash or cost recovery method thereafter, until qualifying for return to accrual status.
The Corporation considers a loan to be impaired when it is probable that the Corporation will be unable to collect all amounts due, both principal and interest, according to the contractual terms of the loan agreement. When a loan is impaired, the Corporation may measure impairment based on (a) the present value of the expected future cash flows of the impaired loan discounted at the loans original effective interest rate, (b) the observable market price of the impaired loan, or (c) the fair value of the collateral of a collateral-dependent loan. The Corporation selects the measurement method on a loan-by-loan basis, except for collateral-dependent loans for which foreclosure is probable, are measured at the fair value of the collateral less costs to sell. In a troubled debt restructuring involving a restructured loan, the Corporation measures impairment by discounting the total expected future cash flows at the loans original effective rate of interest.
Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Corporation does not separately identify individual consumer and residential loans for impairment disclosures.
- 7 -
Loans that were acquired in the acquisition described above are accounted for under ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality. The Corporation considered expected prepayments and estimated the amount and timing of undiscounted expected principal, interest and other cash flows for each pool of loans and determined the excess of the pools scheduled contractual principal and contractual interest payments over all cash flows expected at acquisition as an amount that should not be accreted (non-accretable difference). The remaining amount, representing the excess of the pools cash flows expected to be collected over the fair value of the acquired loans is accreted into interest income over the remaining life of the loan pools (accretable yield).
Periodically, the Corporation evaluates the expected cash flows for each pool. An additional allowance for loan losses is recognized if the present value of future cash flows discounted at the effective interest rate of the pool has decreased. The present value of any subsequent increase in the pools actual cash flows or cash flows expected to be collected is used first to reverse any existing valuation allowance for that pool. Any remaining increase in cash flows expected to be collected is adjusted to the accretable yield and recognized over the estimated remaining life of the pool.
Allowance for Loan Losses A number of factors are considered when establishing our allowance for loan losses. For loan loss purposes, the loan portfolio is segregated by collateral type. A general allowance for losses is then provided for each collateral type, which consists of two components. General loss percentages are calculated based upon historical analyses. A supplemental portion of the allowance is calculated for inherent losses which probably exist as of the evaluation date even though they might not have been identified by the more objective processes used for the portion of the allowance described above. This portion of the allowance is particularly subjective and requires judgments based on qualitative factors which do not lend themselves to exact mathematical calculations such as: trends in delinquencies and nonaccruals; trends in volume, terms, and portfolio mix; new credit products, changes in the geographic distribution of those products; changes in lending policies and procedures; collection practices; examination results from bank regulatory agencies; external loan reviews, and our internal credit review function; changes in the outlook for local, regional and national economic conditions; concentrations of credit; and peer group comparisons.
Large commercial loans that exhibit probable or observed credit weaknesses are subject to individual review. Where appropriate, loss allowances are allocated to individual loans based on our estimate of the borrowers ability to repay the loan given the availability of collateral, other sources of cash flows, and available legal options. Any specific valuation allowance for impaired loans are measured based on the fair market value of the underlying collateral. We evaluate the collectability of both principal and interest when assessing the need for a specific valuation allowance. Specific valuation allowances on individual loans and historical loss rates are reviewed throughout the year and adjusted as necessary based on changing borrower and collateral conditions and actual collection and charge-off experience. Historical loss rates are applied to other commercial loans not subject to specific valuation allowance allocations.
Homogenous loans, such as installment and residential mortgage loans are not individually reviewed by management except in the case of delinquencies. Loss allowances are established for each pool of loans based on the expected net charge-offs. Loss rates are based on the average net charge-off history and an analysis of the risks and trend information by loan category.
- 8 -
Historical loss rates for loans may be adjusted for significant factors that, in managements judgment, reflect the impact of any current conditions or loss recognition. Based on these procedures, management believes that the allowance for loan losses is adequate to absorb estimated probable loan losses associated with the loan portfolio as of December 31, 2010. Actual results could differ from these estimates. However, since the allowance is affected by managements judgments and uncertainties, there is the possibility that materially different amounts would be reported under different conditions or assumptions. To the extent that real estate values and the general economy, collateral values, loss factors, or the nature and volume of problem loans change, we may need to adjust the provision for loan losses. In addition, federal regulatory agencies, as an integral part of the examination process, periodically review our allowance for loan losses. Such agencies may require us to recognize additions to the allowance level based upon their judgment of the information available to them at the time of their examination. Material additions to our provision for loan losses would result in an increase in net losses and a decrease in capital.
Loans Held for Sale Loans originated that are intended to be sold in the secondary market are carried at the lower of cost or estimated fair value in the aggregate. Net unrealized losses are recognized through a valuation allowance by charges to operations. Gains and losses on sales of mortgage loans are based on the difference between the selling price and the carrying value of the loans sold. Loan origination fees are deferred and direct loan origination costs are capitalized until the related loan is sold, at which time the net fees are included in the gain on sale of loans held for sale in the statements of operations.
Derivative Financial Instruments ASC 815-10, Derivatives and Hedging requires an entity to recognize all derivative instruments as either assets or liabilities in the balance sheet and measure those instruments at fair value. The Corporation does not hold any derivatives as of December 31, 2010.
Premises and Equipment Land is stated at cost. Premises and equipment and leasehold improvements are stated at cost less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets. Amortization of leasehold improvements is computed using the straight-line method over the lesser of the estimated useful lives or the respective lease terms, including renewal options expected to be exercised. The Corporation reviews premises and equipment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. An impairment loss is recognized when the sum of the undiscounted future net cash flows expected to result from the use of the asset and its eventual disposal is less than its carrying amount.
Foreclosed Assets Assets acquired in the settlement of loans are initially recorded at the lower of cost (principal balance of the former loan plus costs of obtaining title and possession) or estimated fair value (less costs to sell) at the date of acquisition. Subsequently, such assets acquired are carried at the lower of cost or fair value less estimated costs to sell. Costs relating to development and improvement of foreclosed assets are capitalized, whereas costs relating to holding the foreclosed assets are charged to operations.
Goodwill Goodwill is not amortized and is evaluated for impairment annually. If implied goodwill from impairment testing is less than recorded goodwill, impairment exists and the amount of shortfall between implied goodwill and recorded goodwill is the impairment amount which is to be written off in the period the determination is made. During 2010, the Corporation determined that the carrying value of the Corporation exceeded the fair value and a goodwill impairment charge of $175 million was recorded.
The following is a summary of the carrying amount of goodwill for the year ended December 31:
Balance at December 31, 2009 |
$ | 174,562 | ||||
Impairment loss |
(174,562 | ) | ||||
|
|
|||||
Balance at December 31, 2010 |
$ | - | ||||
|
|
- 9 -
Core Deposit Premiums Core deposit premiums of approximately $2.8 million at December 31, 2010 are amortized over the estimated life of the acquired deposits, currently approximately seven years, using the straight-line method. Amortization expense was approximately $785,000 for the year ended December 31, 2010. Core deposit premiums are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of the asset may not be recoverable. No events or changes indicating possible impairment of the Corporations core deposit premiums occurred during 2010.
Federal Home Loan Bank of Atlanta Stock Federal Home Loan Bank of Atlanta (FHLB) stock is carried at cost, which represents redemption value. The Bank is a member of the FHLB. The required investment in the common stock is based upon a certain percentage of the Banks assets and advances.
Bank Owned Life Insurance Bank owned life insurance is recorded at the amount that can be realized under the insurance contract at December 31, 2010, which is the cash surrender value adjusted for other charges or other amounts due that are probable at settlement.
Comprehensive Income (Loss) Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net loss. However, certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities, are reported as a separate component of stockholders equity. Such items, along with net loss, are components of comprehensive loss.
Income Taxes The Corporation is included in the Hartfords consolidated Federal income tax return. The Corporation and the Hartford have entered into a tax sharing agreement under which each member in the consolidated U.S. Federal income tax return will make payments between them such that, with respect to any period, the amount of taxes to be paid or benefit received by the member, subject to certain tax adjustments, is consistent with the parent down approach. Under this approach, the Corporations deferred tax assets and tax attributes are considered realized by it so long as the group is able to recognize (or currently use) the related deferred tax asset or attribute. Thus the need for a valuation allowance against deferred tax assets is determined at the consolidated return level rather than at the level of the individual entities comprising the consolidated group.
Impairment of Long-Lived Assets All long-lived assets are reviewed for impairment upon the occurrence of events or changes in circumstances that would indicate that the carrying value of the assets may not be recoverable. An impairment loss may be recognized when estimated undiscounted future cash flows expected to result from the use of the asset, including disposition, are less than the carrying value of the asset. The Corporation recorded an impairment loss on its headquarters building in 2010, see Note 5.
The measurement of the impairment loss to be recognized is based upon the difference between the fair value and the carrying amounts of the assets. Fair value is generally determined based upon a discounted cash flow analysis. In order to determine if an asset has been impaired, assets are grouped and tested at the lowest level for which identifiable, independent cash flows are available (reporting units).
Off-Balance Sheet Financial Instruments In the ordinary course of business, the Corporation has entered into off-balance-sheet financial instruments consisting of commitments to extend credit, unused lines of credit, standby letters of credit and undisbursed construction loans in process. Such financial instruments are recorded in the financial statements when they are funded.
Trust Preferred Securities The Corporation issued trust preferred securities through an unconsolidated trust as a form of additional funding. These securities are recorded at the principal amount, with interest expense accrued at the coupon rate.
Loss Contingencies Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated.
- 10 -
Fair Value of Financial Instruments Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in Note 9. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect the estimates.
Recent Accounting Pronouncements In June 2009, the FASB issued guidance which is now part of ASC 860, Transfers and Servicing, and amends the criteria to meet sale accounting for transfers of financial assets. This guidance eliminates the concept of a qualifying special purpose entity, provides clarification of whether a transferor has surrendered control over transferred financial assets, limits the circumstances in which a transferor should derecognize financial assets when the entire financial asset has not been transferred, and requires that the transferor recognize all assets obtained and liabilities incurred at fair value. The guidance was effective beginning January 1, 2010 and it did not have a significant impact on the results of operations or financial position of the Corporation as of or for the year December 31, 2010.
In January 2010, the FASB issued Accounting Standards Update (ASU) 2010-06, Improving Disclosures about Fair Value Measurements. ASU 2010-06 requires additional disclosures about fair value measurements including transfers in and out of Levels 1 and 2 and a higher level of disaggregation for the different types of financial instruments. For Level 3 fair value measurements, information about purchases, sales, issuances and settlements are presented separately. This standard was effective for reporting periods beginning after December 15, 2009, with the exception of revised Level 3 disclosure requirements which are effective for reporting periods beginning after December 15, 2010. Comparative disclosures are not required in the year of adoption. The Corporation adopted the provisions of the standard on January 1, 2010, except for those effective in 2011. The adoption did not have a material impact on the financial statement disclosures of the Corporation.
In April 2010, the FASB issued guidance which is now part of ASC 310, Receivables, which amends the accounting guidance related to loans that are accounted for within a pool under ASC 310-30. The new guidance clarifies that modifications of such loans do not result in the removal of those loans from the pool even if the modification of those loans would otherwise be considered a troubled debt restructuring (TDR). The amended guidance continues to require that an entity consider whether the pool of assets in which the loan is included is impaired if expected cash flows for the pool change. No additional disclosures are required as a result of the new guidance. The guidance is effective for modifications of loans accounted for under ASC 310-30 occurring in the first interim or annual period ending on or after July 15, 2010. The Corporations accounting for acquired credit impaired loans within pools is consistent with the new guidance.
In July 2010, the FASB issued ASU 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. ASU 2010-20 requires additional information about credit risk exposure for financing receivables and the related allowance for loan losses including an allowance rollforward on a portfolio segment basis, the recorded investment in financing receivables on a portfolio segment basis, the nonaccrual status of financing receivables by class, impaired financing receivables by class, aging of past due receivables by class, credit quality indicators by class, troubled debt restructurings information by class, and significant purchases and sales of financing receivables. ASU 2010-20 defines portfolio segment as the level at which an entity develops and documents a systematic method for determining its allowance for loan losses. Classes of financing receivables generally are a disaggregation of portfolio segments. For nonpublic entities, the disclosures are effective for annual reporting periods ending on or after December 15, 2010. In January 2011, the FASB issued ASU 2011-01 Deferral of the Effective Date of Disclosures about Troubled Debt Restructuring in Update 2010-20. ASU 2011-01 delays the disclosures related to troubled debt restructurings until interim and annual periods ending after June 30, 2011. The adoption did not have a material impact on the financial statement disclosures of the Corporation.
- 11 -
2. | SECURITIES AVAILABLE FOR SALE |
All securities have been classified as available for sale by management. The amortized cost and estimated fair values of securities available for sale are as follows (dollars in thousands) at December 31, 2010:
Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value | |||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Agency-backed securities |
$ | 4,708 | $ | 192 | $ | - | $ | 4,900 | ||||||||
Municipal bonds |
3,496 | 416 | - | 3,912 | ||||||||||||
U.S. government sponsored enterprise securities |
18,040 | - | (241 | ) | 17,799 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
$ | 26,244 | $ | 608 | $ | (241 | ) | $ | 26,611 | ||||||||
|
|
|
|
|
|
|
|
The amortized cost and estimated fair values of securities available for sale at December 31, 2010 are detailed below by contractual maturity. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties (dollars in thousands) at December 31, 2010:
Amortized Cost |
Fair Value | |||||||
|
|
|
|
|||||
Due after one year through five years |
$ | 769 | $ | 795 | ||||
Due after five years through ten years |
924 | 956 | ||||||
Due after ten years |
24,551 | 24,860 | ||||||
|
|
|
|
|||||
$ | 26,244 | $ | 26,611 | |||||
|
|
|
|
For the year ended December 31, 2010 the following summarizes sales of securities (dollars in thousands):
Proceeds from sales |
$ | 2,810 | ||
|
|
|||
Gross gains from sales |
$ | 42 | ||
Gross losses from sales |
- | |||
|
|
|||
Net gain (loss) |
$ | 42 | ||
|
|
At December 31, 2010 the Corporation did not have any investments pledged to the FHLB as collateral for advances. In addition, at December 31, 2010 the Corporation had pledged securities with a carrying value of $3.9 million to the Federal Reserve Bank as a result of certain restrictions placed on the activities and transactions of the Bank.
- 12 -
3. | LOANS |
Purchased Credit-Impaired Loans In connection with the acquisition of the Corporation, all loans at acquisition were determined to be credit impaired. These loans are being accounted for on a pooled basis. Purchased credit-impaired (PCI) loans were determined to be credit impaired based on specific risk characteristics of the loan, including product type, domicile of the borrower, past due status, owner occupancy status, geographic location of the collateral, and loan to value ratios. Purchasers are permitted to aggregate credit impaired loans acquired in the same fiscal quarter into one or more pools, provided that the loans have common risk characteristics. A pool is then accounted for as a single asset with a single composite interest rate and an aggregate expectation of cash flows. The Corporation aggregated the commercial, consumer, and residential loans into nineteen pools of loans with common risk characteristics.
The accretable yield represents the excess of cash flows expected to be collected over the carrying value of the purchased credit impaired loans. This amount is not reported on the Corporations balance sheet but is accreted into interest income at a level rate of return over the expected lives of the underlying pools of loans. For variable rate loans, expected future cash flows were initially based on the rate in effect at acquisition; expected future cash flows are recalculated as rates change over the lives of the loans.
The table below sets forth the accretable yield activity for these loans for the year ended December 31, 2010 (dollars in thousands).
Accretable Yield Activity |
||||
Balance, Beginning of year |
$ | 136,550 | ||
Acquisition of credit impaired loans |
- | |||
Accretion into interest income |
(25,472 | ) | ||
Other changes in expected cash flows (a) |
504 | |||
|
|
|||
Balance, End of year |
$ | 111,582 | ||
|
|
(a) Other changes in expected cash flows may vary from period to period as the Corporation continues to refine its cash flow model and periodically updates model assumptions.
On a quarterly basis, the Corporation updates the amount of loan principal and interest cash flows expected to be collected, incorporating assumptions regarding default rates, loss severities, the amounts and timing of prepayments and other factors that are reflective of current market conditions. Probable decreases in expected loan principal cash flows trigger the recognition of impairment, which is then measured as the present value of the expected principal loss plus any related foregone interest cash flows discounted at the pools effective interest rate. Impairments that occur after the acquisition date are recognized through the provision for loan losses. Probable and significant increases in expected principal cash flows would first reverse any previously recorded allowance for loan losses; any remaining increases are recognized prospectively as interest income. The impacts of (i) prepayments, (ii) changes in variable interest rates, and (iii) any other changes in the timing of expected cash flows are recognized prospectively as adjustments to interest income. Disposals of loans, which may include sales of loans, receipt of payments in full by the borrower, or foreclosure, result in removal of the loan from the purchased credit impaired portfolio.
- 13 -
Purchased credit impaired loans are also being modified in the Corporations loss mitigation programs. For these loans, the impact of the modification is incorporated into the Corporations quarterly assessment of whether a probable and/or significant change in estimated future cash flows has occurred, and the loans continue to be accounted for as and reported as purchased credit impaired loans.
Purchased credit impaired loans are reported in loans in the accompanying balance sheet. The Corporation originated an insignificant amount of new loans for the year ended December 31, 2010 in the normal course of business subsequent to the acquisition date.
The table below provides additional information about the Corporations loans as of December 31, 2010 (dollars in thousands).
Commercial | Residential with Dwelling |
Residential Lot | Home Equity | Total | ||||||||||||||||
Carrying value (a) |
$ | 41,664 | $ | 142,932 | $ | 13,087 | $ | 7,528 | $ | 205,211 | ||||||||||
Related allowance for loan losses (b) |
421 | 1,959 | 61 | 578 | 3,019 | |||||||||||||||
Unpaid principal balance |
63,758 | 191,466 | 21,304 | 10,441 | 286,969 |
(a) Carrying value includes the effect of fair value adjustments that were applied to the PCI portfolio at the date of acquisition and is net of the allowance for loan loss.
(b) Management concluded as part of the Corporations regular assessment of the PCI loan pools that it was probable that higher expected principal credit losses would result in a decrease in expected cash flows. As a result, an allowance for loan losses for impairment of these pools has been recognized.
On December 3, 2010, the Corporation sold $26.4 million in nonperforming residential with dwelling loans with a carrying value of $10.3 million for proceeds of $9.6 million which resulted in a loss of approximately $713,000.
Originated Loans Originated loans that management has the intent and ability to hold for the foreseeable future are reported at their outstanding principal balances net of any unearned income, charge-offs, unamortized fees and costs. The net amount of nonrefundable loan origination fees and certain direct costs associated with the lending process are deferred and amortized to interest income over the contractual lives of the loans using methods which approximate the interest method.
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4. | ALLOWANCE FOR LOAN LOSSES |
Changes in the allowance for loan losses for the year ended December 31, 2010 are as follows:
Commercial | Residential with Dwelling |
Residential Lot |
Home Equity | Total | ||||||||||||||||
Balance, beginning of year |
$ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||
Provision for loan losses |
421 | 1,959 | 61 | 578 | 3,019 | |||||||||||||||
Charge-offs |
- | - | - | - | - | |||||||||||||||
Recoveries |
- | - | - | - | - | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Balance, end of year |
$ | 421 | $ | 1,959 | $ | 61 | $ | 578 | $ | 3,019 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Allowance for loan losses |
||||||||||||||||||||
PCI loans |
$ | 421 | $ | 1,959 | $ | 61 | $ | 578 | $ | 3,019 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Loans carrying value |
||||||||||||||||||||
PCI loans |
$ | 41,664 | $ | 142,932 | $ | 13,087 | $ | 7,528 | $ | 205,211 | ||||||||||
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|
|
|
|
|
|
|
|
5. | PREMISES AND EQUIPMENT - NET |
Premises and equipment consists of the following (dollars in thousands) at December 31, 2010:
Land |
$ | 3,163 | ||
Buildings and improvements |
11,194 | |||
Furniture, fixtures, and equipment |
1,027 | |||
|
|
|||
Total |
15,384 | |||
Accumulated depreciation |
(976 | ) | ||
|
|
|||
Premises and equipment - net |
$ | 14,408 | ||
|
|
The Corporation recognized an impairment loss of $1.7 million during the year ended December 31, 2010 on its headquarters building located in Sanford, Florida as the carrying value exceeded its fair value. The loss was based on the fact that there had been a significant decrease in the market value of the building and managements expectation that, more likely than not, the building will be sold before the end of its previously estimated useful life.
The Corporation leases the office space for one branch office, and has ground leases for the Lake Mary and Palm Coast branches. Each of these leases is accounted for as operating leases. The terms of these branch and land leases are for up to 20 years and the leases contain escalation clauses and renewal options. Rent expense under operating leases was approximately $802,000 for the year ended December 31, 2010.
- 15 -
At December 31, 2010, future minimum payments under operating leases are as follows (dollars in thousands):
Years Ending December 31 |
Amount | |||
2011 |
$ | 482 | ||
2012 |
487 | |||
2013 |
492 | |||
2014 |
497 | |||
2015 |
502 | |||
Thereafter |
8,520 | |||
|
|
|||
$ | 10,980 | |||
|
|
The Corporation also leases space to third parties in its administration building and pays a fee to a third party to manage the property. The Corporation recognized approximately $199,000 in rental income for the year ended December 31, 2010.
6. | DEPOSITS |
Time deposits of $100,000 or more were approximately $31.3 million as of December 31, 2010. The scheduled maturities of such time deposits as of December 31, 2010 are as follows (dollars in thousands):
2011 |
$ | 22,239 | ||
2012 |
6,294 | |||
2013 |
2,341 | |||
2014 |
100 | |||
2015 |
300 | |||
|
|
|||
$ | 31,274 | |||
|
|
At December 31, 2010, time deposits did not include any brokered deposits.
Interest expense on deposits for the year ended December 31, 2010 is as follows (dollars in thousands):
Interest-bearing demand deposits |
$ | 82 | ||
Money-market accounts |
1,081 | |||
Savings accounts |
10 | |||
Time deposits |
2,237 | |||
|
|
|||
$ | 3,410 | |||
|
|
7. | FEDERAL HOME LOAN BANK OF ATLANTA ADVANCE |
The advance from the FHLB at December 31, 2010 is as follows (dollars in thousands):
Convertible advance with a weighted-average fixed interest rate of 3.22% |
$ | 25,000 |
- 16 -
Interest expense on FHLB advance for the year ended December 31, 2010 was $2,079.
At December 31, 2010 the Corporation had pledged residential mortgage loans of $157 million as collateral for the advance from the FHLB under a blanket floating lien.
The advance outstanding at December 31, 2010 at a rate of 3.22% is callable during 2011 and matures during 2014. The advance was not called by the FHLB during 2011.
8. | TRUST PREFERRED SECURITIES |
Federal Trust Statutory I (Statutory Trust I) was formed in 2003 for the sole purpose of issuing $5,000,000 of trust preferred securities. On September 17, 2003, Statutory Trust I sold adjustable-rate trust preferred securities due September 17, 2033 in the aggregate principal amount of $5,000 (the Trust Preferred Securities) in a pooled trust preferred securities offering. The interest rate on the Trust Preferred Securities adjusts quarterly, to a rate equal to the current three-month London Interbank Offered Rate, plus 295 basis points (3.25% at December 30, 2010). In addition, the Corporation contributed capital of $155 to Statutory Trust I for the purchase of the common securities of Statutory Trust I. The proceeds from these sales were paid to Federal Trust Corporation in exchange for $5,155 of its adjustable-rate junior subordinated debentures (the Debentures) due September 17, 2033. The Debentures have the same terms as the Trust Preferred Securities. The sole asset of Statutory Trust I, the obligor on the Trust Preferred Securities, is the Debentures.
The Corporation has guaranteed Statutory Trust Is payment of distributions on, payments on any redemptions of, and any liquidation distribution with respect to, the Trust Preferred Securities. Cash distributions on both the Trust Preferred Securities and the Debentures are payable quarterly in arrears on March 17, June 17, September 17 and December 17 of each year.
The Trust Preferred Securities are currently subject to mandatory redemption, in whole, but not in part, upon repayment of the Debentures at stated maturity or, at the option of the Corporation.
The terms of the outstanding trust preferred securities at December 31, 2010 are summarized as follows:
Maturity |
Dividend Rate |
|||||
September 2033 |
LIBOR on determination date, plus 2.95% | $ | 5,155 |
9. | FAIR VALUE MEASUREMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS |
General ASC 820-10, Fair Value Measurements and Disclosures, defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value hierarchy prioritizes the assumptions that market participants would use in pricing the assets or liabilities (the inputs) into three broad levels.
The fair value hierarchy gives the highest priority (Level 1) to quoted prices in active markets for identical assets and liabilities and the lowest priority (Level 3) to unobservable inputs in which little, if any, market activity exists, requiring entities to develop their own assumptions and data.
Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. These inputs include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in market areas that are not active, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, volatilities, prepayment speeds, credit risks and default rates) or inputs that are derived principally from or corroborated by observable market data by correlation or other means.
- 17 -
Valuation Techniques Available for sale securities are carried at fair value on a recurring basis utilizing Level 2 inputs see Note 2 for a summary of available for sale securities held at December 31, 2010. Level 2 securities include agency-backed securities, municipal bonds, and U.S. government sponsored enterprise securities. Fair values are derived from quoted market prices and values from independent third party pricing services for which management understands the methods used to determine fair value and is able to assess the values. The Corporation also performs an assessment on the pricing of investment securities received from pricing services to ensure that the prices represent a reasonable estimate of the fair value. The procedures include, but are not limited to, initial and on-going review of pricing methodologies and trends. The Corporation has the ability to challenge values and discuss its analysis with the pricing service provider in order to ensure that investments are recorded at the appropriate fair value. The fair value measurements consider observable data that may include dealer quotes, live trading levels, trade execution data, cash flows, market consensus prepayment speeds, market spreads, credit information and the U.S. Treasury yield curve. Assumptions used in the analysis include the default rate, deferral of interest and other factors. The discount rate was based upon spreads currently observed in the market for similar securities.
Impaired loans, other than PCI loans (see Note 3) are carried at fair value on a non-recurring basis utilizing Level 3 inputs, consisting of appraisals of underlying collateral. The Corporation did not have any impaired originated loans as of December 31, 2010.
Fair Value of Financial Instruments The fair value of a financial instrument is the current amount that would be exchanged between willing parties, other than in a forced liquidation. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Corporations various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument or may not necessarily represent the underlying fair value. The following methods and assumptions were used by the Corporation in estimating fair values of financial instruments, exclusive of securities which were discussed under the caption Valuation Techniques above.
Cash and Cash Equivalents The carrying amount of cash and cash equivalents represents fair value.
Loans For variable rate loans that reprice frequently and have no significant change in credit risk, fair values are based on carrying values. Fair values for residential, commercial real estate, commercial and consumer loans other than variable rate loans were obtained from the Office of Thrift Supervisions asset liability model which utilizes current rates for similar loans.
Federal Home Loan Bank of Atlanta Stock The stock is not publicly traded and the estimated fair value is based on its redemption value of $100 per share, which equals the carrying value.
Deposits The fair values for noninterest-bearing demand, interest-bearing demand, money-market and savings deposits are, by definition, equal to the amount payable on demand (that is their carrying amounts). Fair values for time deposits were obtained from the Office of Thrift Supervisions asset liability model which utilizes current rates for similar deposits.
Federal Home Loan Bank of Atlanta Advances Fair values for FHLB advances were obtained from FHLB proprietary model mathematical approximation of the market value fair value. The model estimates fair value by discounting future cash flows using the current rates on such borrowings with similar maturities.
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Off-Balance Sheet Instruments Fair values for off-balance sheet lending commitments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties credit standing.
Trust Preferred Securities Fair value is estimated using quantitative models, including discounted cash flow models that require the use of multiple market inputs including interest rates and spreads to generate pricing curves. The majority of market inputs are actively quoted and can be validated through external sources, including brokers, market transactions and third party pricing services.
At December 31, 2010 | ||||||||
Carrying Amount |
Fair Value |
|||||||
|
|
|||||||
Financial assets: |
||||||||
Cash and cash equivalents |
$ | 13,922 | $ | 13,922 | ||||
Securities available for sale |
26,611 | 26,611 | ||||||
Loans net |
205,211 | 207,710 | ||||||
Federal Home Loan Bank stock |
6,931 | 6,931 | ||||||
Financial liabilities: |
||||||||
Deposits |
232,770 | 235,481 | ||||||
Federal Home Loan Bank advances |
25,000 | 26,734 | ||||||
Trust preferred securities |
5,155 | 4,386 |
10. | OFF-BALANCE SHEET FINANCIAL INSTRUMENTS |
The Corporation has outstanding at any time a significant number of commitments to extend credit. These arrangements are subject to strict credit control assessments and each customers credit worthiness is evaluated on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Corporation upon extension of credit, is based on managements credit evaluation of the counterparty. A summary of the contractual amounts of off-balance sheet commitments which approximate fair value at December 31, 2010 is as follows (dollars in thousands):
Unused lines of credit |
$ | 4,315 | ||
Standby letters of credit |
28 |
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Corporation evaluates each customers credit worthiness on a case by case basis.
Standby letters of credit are conditional commitments issued by the Corporation to guarantee the performance of a customer to a third party. Those letters-of-credit are primarily issued to support public and private borrowing arrangements. Essentially, all letters of credit issued have expiration dates within one year. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers.
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The Corporations policy is to require customers to provide collateral prior to the disbursement of approved loans. The amount of collateral obtained, if it is deemed necessary by the Corporation upon extension of credit, is based on managements credit evaluation of the counterparty. The collateral held by the Corporation is primarily real estate and income producing commercial properties, but may include accounts receivable and inventory.
11. | INCOME TAXES |
Allocation of Federal and state income tax benefits between current and deferred portions for the year ended December 31, 2010 is as follows (dollars in thousands):
Current | Deferred | Total | ||||||||||
Federal |
$ | (7,433 | ) | $ | (54,768 | ) | $ | (62,201 | ) | |||
State |
- | - | - | |||||||||
|
|
|
|
|
|
|||||||
Total |
$ | (7,433 | ) | $ | (54,768 | ) | $ | (62,201 | ) | |||
|
|
|
|
|
|
The effective tax rate was different than the statutory Federal income tax rate. A summary and the reasons for the difference for the year ended December 31, 2010 is as follows (dollars in thousands):
Amount | % of Pretax Loss |
|||||||
Income taxes at statutory rate |
$ | (63,614 | ) | 35.0 | % | |||
Increase (decrease) in tax resulting from: |
||||||||
State income taxes net of Federal income tax benefit |
(6,376 | ) | 3.5 | |||||
Increase in valuation allowance |
6,325 | (3.5 | ) | |||||
Tax-exempt income |
(99 | ) | 0.1 | |||||
Officers life insurance, meals and entertainment and other permanent items 3/4 |
(86 | ) | 0.1 | |||||
Goodwill |
1,380 | (0.8 | ) | |||||
Other |
269 | (0.3 | ) | |||||
|
|
|
|
|||||
Income taxes |
$ | (62,201 | ) | 34.1 | % | |||
|
|
|
|
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The tax effects of temporary differences between the tax basis of assets and liabilities and their financial reporting amounts which give rise to significant portions of deferred tax assets and liabilities as of December 31, 2010 is as follows (dollars in thousands):
Deferred tax assets: |
||||
State net operating loss carryforwards |
$ | 1,398 | ||
Alternative minimum tax |
3,043 | |||
Goodwill |
59,066 | |||
Impairments |
2,934 | |||
Nonaccrual loans |
1,233 | |||
Other |
444 | |||
|
|
|||
Total gross deferred tax assets |
68,118 | |||
Valuation allowance |
(6,758 | ) | ||
|
|
|||
Total deferred tax assets |
61,360 | |||
|
|
|||
Deferred tax liabilities: |
||||
Unrealized gain on securities available for sale |
(128 | ) | ||
Accretion of the non-credit related loan writedowns |
(5,818 | ) | ||
|
|
|||
Total deferred tax liabilities |
(5,946 | ) | ||
|
|
|||
Net deferred tax assets |
$ | 55,414 | ||
|
|
The Corporation was acquired by Hartford on June 24, 2009 in a purchase accounted for in accordance with an election under Section 338 of the Internal Revenue Code. As a result of the acquisition and election, deferred taxes related to periods prior to the acquisition were eliminated. The deferred tax balance as of December 31, 2010 relates to the period beginning with the date of acquisition.
Due to historical losses for state income tax purposes and its lack of projected state taxable income, management believes that its state deferred tax assets will likely not be utilized. Consequently, a valuation allowance of $6.8 million has been recorded against its state deferred tax assets.
The Corporations post acquisition taxable losses have been used to offset the taxable income of other members of its parents consolidated federal tax return, in which the Corporation is included. As a result, the Corporation has no federal net operating loss carry forward at December 31, 2010.
12. | REGULATORY CAPITAL |
The Bank is subject to certain restrictions on the amount of dividends that it may declare and distribute to the Corporation without prior regulatory notification or approval.
The Bank and the Corporation are also subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Banks and the Corporations financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank and the Corporation must meet specific capital guidelines that involve quantitative measures of the Banks and Corporations assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices.
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The Banks and the Corporations capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
The following tables summarize the capital thresholds for the minimum and well capitalized designations as of December 31, 2010. An institutions capital category is based on whether it meets the threshold for all three capital ratios within the category. At December 31, 2010 the Bank and Corporation exceeded each of its capital requirements (dollars in thousands).
To Be Well Capitalized | ||||||||||||||||||||||||||||
Under Prompt | ||||||||||||||||||||||||||||
For Minimum Capital | Corrective Action | |||||||||||||||||||||||||||
Actual | Adequacy Purposes | Provisions | ||||||||||||||||||||||||||
Amount | % | Amount | % | Amount | % | |||||||||||||||||||||||
Bank |
||||||||||||||||||||||||||||
Tangible capital to tangible assets |
$ | 90,663 | 30.29 | % | $ | 4,490 | 1.5 | % | N/A | N/A | ||||||||||||||||||
Core capital to adjusted tangible assets |
35,274 | 11.82 | 11,972 | 4.0 | $ | 14,965 | 5.0 | % | ||||||||||||||||||||
Total capital to risk-weighted assets |
37,621 | 20.03 | 15,023 | 8.0 | 18,779 | 10.0 | ||||||||||||||||||||||
Tier I capital to risk-weighted assets |
35,274 | 18.78 | N/A | N/A | 11,267 | 6.0 |
To Be Well Capitalized | ||||||||||||||||||||||||||||
Under Prompt | ||||||||||||||||||||||||||||
For Minimum Capital | Corrective Action | |||||||||||||||||||||||||||
Actual | Adequacy Purposes | Provisions | ||||||||||||||||||||||||||
Amount | % | Amount | % | Amount | % | |||||||||||||||||||||||
Corporation |
||||||||||||||||||||||||||||
Tangible capital to tangible assets |
$ | 87,464 | 24.52 | % | $ | 5,350 | 1.5 | % | N/A | N/A | ||||||||||||||||||
Core capital to adjusted tangible assets |
32,050 | 8.99 | 14,266 | 4.00 | N/A | N/A | ||||||||||||||||||||||
Total capital to risk-weighted assets |
34,386 | 18.40 | 14,947 | 8.00 | N/A | N/A | ||||||||||||||||||||||
Tier I capital to risk-weighted assets |
32,050 | 17.15 | N/A | N/A | N/A | N/A |
13. | EMPLOYEE BENEFIT PLAN |
The Corporation sponsors an employee savings plan (the 401(k) Plan), which qualifies as a 401(k) plan under the Internal Revenue Code. Under the 401(k) Plan, employees can contribute up to 15% of their pre-tax compensation to the plan. The Corporation makes contributions based on a matching schedule approved by the Board of Directors. Participants vest immediately in their own contributions and after three years of service in matching contributions made by the Corporation. The 401(k) Plan expenses for the year ended December 31, 2010 were approximately $113,000.
14. | RELATED-PARTY TRANSACTIONS |
There were no loans to directors, officers and major stockholders (5% or more) of the Corporation outstanding during the year ended December 31, 2010.
15. | CONTINGENCIES |
Various legal claims arise from time to time in the normal course of business. In the opinion of management of the Corporation, none have occurred as of December 31, 2010 that will have a material effect on the Corporations consolidated financial position or future results of operation.
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16. | CONDENSED PARENT COMPANY FINANCIAL INFORMATION |
Condensed balance sheet of the Corporation as of December 31, 2010 is as follows:
Assets |
||||
Cash and cash equivalents |
$ | 38 | ||
Investment in subsidiaries |
93,825 | |||
Other assets |
656 | |||
|
|
|||
Total assets |
$ | 94,519 | ||
|
|
|||
Liabilities |
||||
Accounts payable and accrued liabilities |
$ | 1,662 | ||
Trust preferred securities |
5,155 | |||
|
|
|||
Total liabilities |
6,817 | |||
Stockholders Equity |
87,702 | |||
|
|
|||
Total Liabilities and Stockholders Equity |
$ | 94,519 | ||
|
|
Condensed statement of operations of the Corporation for the year ended December 31, 2010 is as follows:
Income |
||||
Other income |
$ | 5 | ||
Expense |
||||
Interest expense |
172 | |||
Other expense |
737 | |||
|
|
|||
Total expense |
909 | |||
Loss before income tax benefit income tax benefit |
(904 | ) | ||
Income tax benefit |
156 | |||
|
|
|||
Loss before equity in losses of subsidiaries |
(748 | ) | ||
Equity in losses of subsidiaries |
(119,872 | ) | ||
|
|
|||
Net loss |
$ | (120,620 | ) | |
|
|
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Condensed statements of cash flows for the Corporation for the year ended December 31, 2010:
CASH FLOWS FROM OPERATING ACTIVITIES: |
||||
Net loss |
$ | (120,620 | ) | |
Adjustments to reconcile net loss to net cash used in operating activities: |
||||
Impairment of goodwill |
486 | |||
Equity in losses of subsidiaries |
119,872 | |||
Cash provided by (used in) resulting from changes in: |
||||
Other assets |
(79 | ) | ||
Accrued expenses and other liabilities |
150 | |||
|
|
|||
Net cash used in operating activities |
(191 | ) | ||
|
|
|||
CASH FLOWS FROM FINANCING ACTIVITIESCapital contributions |
206 | |||
|
|
|||
NET INCREASE IN CASH AND CASH EQUIVALENTS |
15 | |||
CASH AND CASH EQUIVALENTS Beginning of year |
23 | |||
|
|
|||
CASH AND CASH EQUIVALENTS End of year |
$ | 38 | ||
|
|
17. | SUBSEQUENT EVENTS |
The Corporation has performed an evaluation of subsequent events through January 9, 2012, the date the financial statements were available to be issued. The following events or transactions met the disclosure requirements under ASC 855-10, Subsequent Events:
On May 23, 2011, the Hartford announced a definitive agreement to sell the Corporation and subsidiaries, including Federal Trust Bank, to CenterState Banks, Inc. (CSB). Certain assets and liabilities were excluded from the sale to CSB and were moved to a separate operational entity owned by the Hartford. The acquisition of FTC by CSB closed on November 1, 2011.
On June 29, 2011, the Bank sold its headquarters building, located in Sanford, Florida, to a third party for cash consideration of $800,000 and six months of free possession of the property, commencing at the sale closing date. As of the date of the sale, the building had a net book value of approximately $900,000 No material gain or loss was recorded on the sale.
* * * * * *
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