SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549-1004
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1995 Commission File Number 33-27139
FEDERAL TRUST CORPORATION
(Exact name of registrant is specified in its charter)
Florida 59-2935028
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1270 Orange Avenue
Winter Park, Florida 32789
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(Address of principal (Zip Code)
executive office)
Registrant's telephone number, including area code: (407) 645-5550
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
The Registrant's voting common stock is not regularly or actively traded on any
established market and there are no regularly quoted bid and asked price for the
registrant's voting common stock. The number of shares of Common Stock
outstanding as of March 15, 1996 was 2,239,928. The number of shares of the
voting common stock held by non-affiliates of the registrant was 1,460,915.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days. YES X NO
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DOCUMENTS INCORPORATED BY REFERENCE:
NONE
PART I
ITEM 1. BUSINESS
GENERAL
Federal Trust Corporation ("Federal Trust" or the "Company" or the "Holding
Company") was organized in February 1989 for the purpose of becoming the unitary
savings and loan holding company of Federal Trust Bank (the "Bank"), a federally
chartered stock savings bank then headquartered in Amelia Island, Florida.
Federal Trust's and the Bank's headquarters are currently located in Winter
Park, Florida. Federal Trust is currently conducting business as a unitary
savings and loan holding company, and its principal asset is all of the capital
stock of the Bank. As a unitary holding company, Federal Trust has greater
flexibility than the Bank to diversify and expand its business activities,
either through newly formed subsidiaries or through acquisitions.
Federal Trust's primary investment is the ownership of the Bank. The Bank is
chartered as a federal stock savings bank and is primarily engaged in the
business of obtaining funds in the form of deposits and Federal Home Loan Bank
("FHLB") advances and investing such funds in permanent loans on residential and
to a lessor extent commercial real estate primarily in Florida, in various types
of construction and other loans and in investment securities. The Holding
Company presently operates two non-bank subsidiaries, Federal Trust Properties
Corp. ("FTPC") , a real estate holding and development company, organized
December 12, 1994, which owned two office buildings in Amelia Island, Florida
until December, 1995 and a residential site in Augusta, Georgia; and 1270
Leasing Co. ("1270 LC"), a real estate leasing entity organized May 27, 1994,
which leases the Holding Company's office located in Winter Park, Florida.
Prior to June 30, 1993, Federal Trust operated three other subsidiaries, First
Coast Financial Corporation ("FCFC"), a residential mortgage broker, FC
Construction Services Corp. ("FCCSC"), a small commercial construction and
consulting company and FedTrust Building Corporation ("FTBC"), the owner of the
First Coast Plaza office complex. The stock of FCFC and the assets of FCCSC and
FTBC were sold in June and July, 1993 and the corporate entities of FCCSC and
FTBC were dissolved in December, 1993.
The Federal Deposit Insurance Corporation ("FDIC"), an agency of the United
States Government, insures through the Savings Association Insurance Fund
("SAIF") all depositors of the Bank up to $100,000 in accordance with the rules
and regulations of the FDIC. The Bank is subject to comprehensive regulation,
examination and supervision by the Office of Thrift Supervision ("OTS") and the
FDIC, which is intended primarily for the benefit of depositors. See
"Regulation" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
Federal Trust is a legal entity separate from the Bank. The principal sources
of Federal Trust's revenues on an unconsolidated basis are earnings on its
investments and dividends from the Bank. Various regulatory restrictions and
tax considerations limit directly or indirectly the amount of dividends the Bank
can pay to Federal Trust. Currently no dividends can be paid to Federal Trust
by the Bank without the specific approval of the OTS. In addition, federal law
restricts the Bank in the making of investments in or loans to Federal Trust or
its affiliates. See "Regulation."
Federal Trust's executive offices are located at 1270 Orange Avenue, Winter
Park, Florida 32789 and its telephone number is (407) 645-5550. As used herein,
references to "Federal Trust and the Bank" may include Federal Trust and its
consolidated subsidiaries (primarily the Bank) unless the context otherwise
indicates.
The Bank is primarily engaged in the bulk purchase of loans and other assets,
the origination of one-to-four family residential mortgage loans, residential
construction loans, multi-family loans, commercial real estate loans, land
acquisition and development loans, as well as consumer loans. The Bank
originates loans within its market area, defined generally as north and central
Florida and well known out of state regions. The Bank also invests in U.S.
Government securities, federal funds and other debt securities as well as
mortgage-backed securities as appropriate. Funding for these activities is
primarily from customer deposits, FHLB advances and other borrowings as well as
normal amortization and prepayments from its loan portfolio.
Traditional thrift institutions are changing rapidly. Consumer-oriented
services historically provided by banks are now offered by thrift institutions.
The Bank's current operating strategy focuses on banking strategies which
include loan origination, bulk loan/asset purchases and core deposit generation
in its local community. Variable rate, short-term loans and adjustable rate
loans are offered to help the Bank manage its interest rate spreads. Also, the
Bank enhances its profitability by attracting deposits without a network of
branch offices thus gaining increased operating efficiency. The mortgage
lending emphasis is on bulk loan purchases, as well as, the origination of
residential loans in its market area. Management intends, to the extent
possible, to control interest rates paid on deposits; however, outside factors
such as economic, environmental, competitive and liquidity needs will have an
2
effect on the cost of deposits. The Bank's principal sources of earnings are
currently interest on real estate mortgage loans, investments, and overnight
deposits, fees on checking accounts and sales of loans. Its principal expenses
are interest paid on deposits, FHLB advances and operating expenses.
MARKET AREA AND COMPETITION
The bank is located in Winter Park, a city of 24,000 residents, located
approximately 7 miles northeast of downtown Orlando. Winter Park is in the
heart of the greater metropolitan Orlando area which encompasses Orange,
Seminole, Lake, and Osceola counties in central Florida. The total population
of the four county area is estimated at 1.359 million in 1994, with the majority
in Orange and Seminole counties. The bank's primary market area is northeast
Orange county and southwest Seminole county, although its customers come from
the entire four county area. Although best known as a tourist destination, with
approximately 20 million visitors a year, the area has become a center for
industries such as electro-optics and lasers, computer simulated training,
computer networking and data management. In addition, motion picture
production, professional and amateur sports and distribution make the local
economy more diverse each year. The area is also home to the University of
Central Florida with an enrollment of 25,000, one of the fastest growing schools
in the state university system, as well as Valencia Community College and
Seminole Community College whose combined enrollment exceeds 80,000. Winter
Park is home to Rollins College, the oldest college in Florida founded in 1885.
The greater metropolitan Orlando area is projected to be one of the fastest
growing areas in the United States through the year 2000, at which time the area
is projected to be the 27th largest market in the country.
The Bank experiences substantial competition in attracting and retaining
deposits and in lending funds. The primary factor in competing for deposits is
interest rates. Direct competition for deposits comes from other thrift
institutions and commercial banks. Additional significant competition for
deposits comes from corporate and government securities and money market funds.
The primary factors in competing for loans are interest rates and loan
origination points. The Bank is currently competing aggressively, due to the
current level of interest rates, for the origination of construction and
permanent residential mortgage loans. Competition for origination of real
estate loans normally comes from other thrift institutions, commercial banks,
mortgage bankers, insurance companies and real estate investment trusts.
In addition to competition from other thrifts, the Bank faces significant
competition from other financial services organizations. Commercial banks
continue to compete for loans and deposits, while finance companies and credit
unions compete in the important areas of consumer lending and deposit gathering.
Additionally, nontraditional financial service providers such as brokerages,
mutual funds and insurance companies have intensified competition for savings
and investment dollars in recent years.
Consolidation within the banking industry, and in particular within Florida, has
been dramatic. As of September 30, 1995, the four largest banking institutions
in the state controlled approximately 54% of the bank deposits. In 1980, the
four largest controlled less than 33% of the deposits. This consolidation
should result in more rational pricing, with rates and fees more closely
matching the actual costs of providing products and services.
Geographic deregulation also has had a material impact on the banking industry.
While the most common forms of interstate statutes have either regional
limitations or reciprocity requirements, a growing number of states allow
unrestricted entry. Florida is a member of a regional compact which permits
entry by financial institutions headquartered in certain other southeastern
states and the District of Columbia.
LENDING ACTIVITIES
GENERAL. The primary lending activity of the Bank is the acquisition and
origination of conventional loans for the purchase or construction of
residential real property, which loans are secured by first liens on such
property. Conventional loans are loans which are not insured by the Federal
Housing Administration ("FHA") or partially guaranteed by the Veterans
Administration ("VA"). Within this category, the largest portion of the Bank's
loans are made to homeowners on the security of single-family dwellings. The
Bank has also, to a lesser extent, made commercial real estate and consumer
loans.
LOAN PORTFOLIO COMPOSITION. The Bank's net loan portfolio, which is total loans
(excluding mortgage-backed securities) plus premiums paid for loans purchased
less loans in process, unearned discounts and loan origination fees and
allowance for loan losses, totaled $112.91 million at December 31, 1995,
representing 81.2% of total assets at such date. At December 31, 1995, the
Bank's total loan portfolio (excluding mortgage-backed securities) amounted to
$115.3 million ("total loan portfolio").
Single-family residential loans comprise the largest group of loans in the
Bank's loan portfolio, amounting to $97.5 million or 84.6% of the total loan
portfolio at December 31, 1995, of which approximately 96.9% are first mortgage
loans and includes $4.03
3
million in loans for the construction of single-family homes and $1.08 million
which are either insured by the Federal Housing Administration ("FHA") or
partially guaranteed by the Department of Veterans Administration ("VA"). The
percentage of the Bank's loan portfolio consisting of single-family residential
real estate loans has remained stable during the past few years.
In addition, commercial real estate loans, including multi-family residential
and land loans, amounted to $14.6 million or 12.66% of the total loan portfolio
at December 31, 1995. Commercial real estate loans consist of $1.50 million of
loans secured by multi-family residential property, $11.04 million of loans
secured by other non-residential property and $2.06 million of loans secured by
undeveloped land as of December 31, 1995. The percentage of the Bank's loan
portfolio consisting of such loans has, in the past five years, ranged from
19.54% of the total loan portfolio, in 1990, to 12.66% of the total loan
portfolio in 1995. At December 31, 1995, consumer and other loans, consisting
of installment loans and savings account loans, amounted to $0.5 million or
0.43% of the total loan portfolio.
[THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK.]
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The following table sets forth information concerning the Bank's loan
portfolio by type at the dates indicated.
AT DECEMBER 31,
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1995 1994 1993 1992 1991
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Percent of Percent of Percent Percent Percent of
Amount Total Amount Total Amount of Total Amount of Total Amount Total
------- ----- ------- ----- ------ ----- ------ -------- ------ -----
Mortgage loans:
Permanent 108,929 94.4% 103,659 92.2% 88,886 91.9% 114,639 92.37% 73,413 92.25%
Construction 4,026 3.5% 1,342 1.2% 1,661 1.7% 3,610 2.91% 2,332 2.93%
------- ----- ------- ----- ------ ----- ------- ------ ------ ------
Total mortgage loans 112,955 97.9% 105,001 93.4% 90,547 93.6% 118,249 95.28% 75,745 95.18%
Loan on deposit accounts 180 0.2% 191 0.2% 191 0.2% 374 0.30% 166 0.21%
Commercial loans 537 0.5% 891 0.8% 724 0.7% 1,251 1.01% 1,081 1.36%
Lines of credit 1,259 1.1% 2,385 2.1% 4,744 4.9% 3,082 2.48% 1,194 1.50%
Consumer & other loans 343 0.3% 312 0.3% 398 0.4% 848 0.68% 1,394 1.75%
In substance foreclosure 0 0.0% 3,592 3.2% 108 0.1% 298 0.24% - -
------- ----- ------- ----- ------ ----- ------- ------ ------ ------
Total loans 115,274 100.0% 112,372 100.0% 96,712 100.0% 124,102 100.0% 79,580 100.0%
Premium on loans purchased 987 1,460 1,128 1,923 1,194
Less:
Loans in process 1,190 525 478 981 2,158
Unearned discounts &
loan origination fees 104 149 138 172 164
Loans held for sale - - - 1,105 -
Allowance for loan losses 2,061 1,925 1,850 1,291 359
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Net loans 112,906 111,183 95,374 122,476 78,093
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5
CONTRACTUAL REPAYMENTS. Scheduled contractual principal repayments of loans do
not reflect the actual life of such assets. The average life of loans is
substantially less than their average contractual terms because of prepayments.
In addition, due-on-sale clauses on loans generally give the Bank the right to
declare a conventional loan immediately due and payable in the event, among
other things, that the borrower sells the real property subject to the mortgage
and the loan is not repaid. The average life of mortgage loans tends to
increase, however, when current mortgage loan rates are substantially higher
than rates on existing mortgage loans and, conversely, decrease when rates on
existing mortgages are substantially higher than current mortgage loan rates.
As of December 31, 1995, the Bank had $4.03 million in construction loans, all
of which mature in one year or less. Thirty-four percent (34%) of such loans
have fixed rates and 66% have adjustable rates. Also, as of December 31, 1995,
the Bank had no commercial loans with maturities of one year or less, $0.52
million in commercial loans with maturities due after one year through five
years and $0.02 million with maturities due after five years. Seventy-six
percent (76%) of such loans have fixed rates and 24% have adjustable rates.
ORIGINATION, PURCHASE AND SALE OF LOANS. The Bank generally originates loans on
real estate located in its primary lending area of central Florida. The Bank
has authority within regulatory limitations to originate loans secured by real
estate throughout the United States and has exercised this authority on a
limited basis.
Historically, Florida has experienced a rate of population growth in excess of
national averages. However, the real estate development and construction
industries in Florida have been sensitive to cyclical changes in economic
conditions and the demand for and supply of residential units. The Bank's real
estate mortgage loan origination activities will be affected by changes in the
real estate development and construction industries.
The Bank's residential real estate loan volume has been primarily purchased
since 1992. Residential mortgage loan originations by the Bank are attributable
to depositors, other existing customers, advertising and referrals from real
estate brokers, mortgage brokers and developers. Consumer loan originations by
the Bank are attributable largely to depositors and walk-in customers and
referrals. Commercial real estate loan originations are also attributable
largely to brokers, walk-in customers, and referrals. All of the Bank's loan
applications are evaluated by the Bank's staff at the main office to ensure
compliance with the Bank's underwriting standards. See "Lending Activities -
Loan Portfolio Composition - Loan Underwriting Policies."
The Bank's residential mortgage loans generally are originated to ensure
compliance with documentation and underwriting standards which permit their sale
to Fannie Mae and other investors in the secondary market. The Bank does not
originate all loans for its portfolio and has engaged in the sale of whole loans
and participations.
The following table sets forth for the Bank total loans originated, purchased,
sold and repaid during the periods indicated.
YEAR ENDED DECEMBER 31,
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1995 1994 1993 1992 1991
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(In Thousands of Dollars)
Originations:
Real Estate Loans:
Loans on existing property 3,354 3,739 5,600 4,586 3,380
Construction loans 186 1,466 1,500 2,891 12,539
Commercial loans 100 148 1,196 369 12,921
Lines of credit 74 154 933 2,143 -
Consumer & other loans 47 54 275 123 2,103
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Total loans originated 3,761 5,561 9,504 10,112 30,943
Purchases: 29,005 32,913 22,880 77,988 32,193
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Total loans originated & purchased 32,766 42,474 32,384 88,100 63,136
Sales and principal reduction
Loans sold (2,561) (4,620) (30,422) (12,480) (1,076)
Principal on loan reductions (27,296) (22,194) (30,127) (27,396) (19,130)
------ ------ ------ ------ ------
Total loans sold & principal reductions (29,857) (26,814) (60,549) (39,876) (20,206)
------ ------ ------ ------
Increase (decrease) in loans receivable
(before net items) 2,909 15,660 (28,165) 48,224 42,930
------ ------ ------ ------ ------
------ ------ ------ ------ ------
LOAN UNDERWRITING POLICIES. The Bank's lending activities are subject to the
Bank's underwriting standards and loan origination procedures prescribed by the
Bank's Board of Directors and its management. Detailed loan applications are
obtained to determine the borrower's ability to repay, and the more significant
items on these applications are verified through the use of credit reports,
financial statements and confirmations. Property valuations are performed by
independent outside appraisers approved by the Bank's Board of Directors.
6
AMOUNT AND TYPE OF LOAN. Loans are approved at various management levels,
including the Board of Directors of the Bank, depending on the amount of the
loan. Conforming single family real estate loans in an amount up to and
including $203,150 require the approval of the Chief Lending Officer or
President of the Bank. All real estate loans in excess of $203,150 require the
approval of the Bank's Loan Committee or Board of Directors. All commercial
real estate loans require approval of the Bank's Loan Committee or Board of
Directors.
GENERAL LENDING POLICIES. For real estate loans, it is the Bank's policy to
have a mortgage creating a valid lien on real estate and to obtain a title
insurance policy which ensures the validity and priority of the lien. Borrowers
must also obtain hazard insurance policies prior to closing, and when the
property is in a flood plain as designated by the Department of Housing and
Urban Development, flood insurance policies. Most borrowers are also required
to advance funds on a monthly basis together with each payment of principal and
interest to a mortgage escrow account from which the Bank makes disbursements
for items such as real estate taxes.
The Bank is permitted to lend up to 100% of the appraised value of the real
property securing a mortgage loan. However, if the amount of a conventional
residential loan (including a construction loan originated in connection with
the making of a permanent loan) originated or refinanced exceeds 90% of the
appraised value, the Bank is required by federal regulations to obtain private
mortgage insurance on that portion of the principal amount of the loan that
exceeds 80% of the appraised value of the property. The Bank will originate a
single-family residential mortgage loan with up to a 95% loan-to-value ratio if
the required private mortgage insurance is obtained. Loans over 95% loan to
value ratio, if originated, would be under special community support program or
one of the Federal Housing Administration, Veterans Administration, or Farmers
Home guarantee or insurance programs. The loan-to-value ratio on second
mortgage loans does not exceed 80%, including the amount of the first mortgage
on the loan, unless the second mortgage loan is covered by mortgage insurance.
With respect to residential construction loans, the Bank will lend up to 95% of
the appraised value of the property on an as completed basis. The Bank
generally limits the loan-to-value ratio on multi-family and commercial real
estate mortgage loans to 75%.
The maximum amount which the Bank could have loaned to one borrower and the
borrower's related entities at December 31, 1995 was approximately $1.11
million. The Bank currently has two loan relationships in excess of this
amount. See "Regulation."
Federal regulations also permit the Bank to invest, in the aggregate, up to four
times its capital in loans secured by non-residential or commercial real estate.
At December 31, 1995, this limit allowed the Bank to invest in non-residential
or commercial real estate loans in an aggregate amount up to $29.66 million.
Loans in the Bank's loan portfolio secured by non-residential or commercial real
estate totaled $13.10 million at such date.
Interest rates charged by the Bank on loans are affected principally by
competitive factors, the demand for such loans and the supply of funds available
for lending purposes. These factors are, in turn, affected by general economic
conditions, monetary policies of the federal government, including the Federal
Reserve Board, legislative tax policies and government budgetary matters.
RESIDENTIAL REAL ESTATE LENDING. The Bank historically has been and continues
to be primarily an originator and/or buyer of single-family residential real
estate loans secured by properties located in the southeastern United States.
The Bank currently originates fixed-rate residential mortgage loans and
adjustable rate residential mortgage loans (ARMs) for terms of up to 30 years.
At December 31, 1995, $97.5 million or 84.6% of the Bank's total loan portfolio
consisted of single-family residential real estate loans. As of such date,
approximately $73.4 million or 75.3% of such loans were ARMs and $24.1 million
or 24.7% of such loans were fixed-rate in nature.
The residential ARMs currently offered by the Bank have interest rates which
adjust every year based upon the rate on a one-year Treasury Securities Index
plus a margin. The amount of any increase or decrease in the interest rate is
typically limited to 2% per year, with a limit of 6% over the life of the loan.
The Bank may offer ARMs with different annual and life of loan interest change
limits, shorter or longer adjustment periods and different base indices as may
be appropriate to meet market demand, the needs of the Bank's portfolio, and the
Bank's interest rate risk management goals. Although the Bank occasionally
offers discounts of one to two percentage points on the interest rate on its
ARMs during the first year of the mortgage loan for competitive reasons,
generally it determines a borrower's ability to pay at the interest rate which
would be in effect at the second year's rate. These loans are not currently
convertible to fixed rate terms although convertible ARMs may be originated in
the future.
Adjustable-rate mortgage loans reduce the risks to the Bank concerning changes
in interest rates, but involve other risks because as interest rates increase,
the underlying payments by the borrower increase, thus increasing the potential
for default. At the same time, the marketability of the underlying collateral
may be adversely affected by higher interest rates.
The Bank continues to originate fixed-rate residential mortgage loans. Most of
these loans have 30-year amortization terms, but some are originated with
15-year terms at a commensurately lower interest rate. These loans are
originated to ensure compliance
7
with documentation and underwriting standards which permit their sale to FNMA
and other institutional investors in the secondary market, although
historically, the Bank has not sold such loans. Such loans also include "due on
sale" clauses which provide the Bank with the contractual right, when
appropriate, to deem the loan immediately due and payable in the event that the
borrower transfers ownership of the property without the Bank's consent. It is
the Bank's policy to enforce due-on-sale provisions or to require that the
interest rate be adjusted to the current market rate when ownership is
transferred.
COMMERCIAL AND MULTI-FAMILY RESIDENTIAL REAL ESTATE LENDING AND LAND LOANS. The
commercial and multi-family residential real estate loans originated by the Bank
are primarily secured by small office buildings, apartment buildings, small
strip shopping centers and restaurants, and amounted to $12.54 million or 10.88%
of the total loan portfolio at December 31, 1995. These loans are generally for
a term of up to 25 years and are generally originated with an interest rate that
adjusts every year based on a one-year Treasury Securities Index or Wall Street
prime plus a margin. The Bank does not generally offer fixed-rate commercial
real estate or multi-family loans.
Commercial real estate lending entails significant additional risk as compared
with residential property lending. The payment experience on such loans is
typically dependent on the successful operation of the real estate project.
These risks can be significantly impacted by supply and demand conditions in the
market for office and retail space, and as such, may be subject to a greater
extent to adverse conditions in the economy generally. The Bank generally
limits itself to borrowers with demonstrated financial capacity and verified
debt repayment experience on agreed upon loan terms. Further, the Bank seeks to
ensure that the property securing an income property loan will generate
sufficient cash flow to adequately cover operating expenses and debt service
payments. To this end, permanent commercial and multi-family residential real
estate loans are generally made at a loan-to-value ratio of 75% or less. In
underwriting these loans, consideration is given to the property's operating
history, future operating projections, current and projected occupancy, position
in the local and regional market, location and physical condition. The
underwriting analysis also includes credit checks and a review of the financial
condition of the borrower. A narrative appraisal report prepared by an outside
appraiser qualified by The State of Florida and a reputable appraisal
organization such as The Appraisal Institute, is commissioned by the Bank to
substantiate property values for every commercial real estate loan transaction.
These appraisal reports are reviewed by the Bank's lending personnel prior to
the closing of the loan to assure compliance with OTS appraisal standards and
policies.
During 1994 the Bank originated land acquisition and development loans. As of
December 31, 1995, the Bank had $2.06 million in loans secured by land which is
undeveloped or in the process of development. The Bank also originates
multifamily residential real estate, commercial real estate and business loans.
Management estimates such lending will continue to constitute between 5% and 10%
of the Bank's total loan portfolio in the future.
CONSTRUCTION LENDING. The Bank offers adjustable and fixed-rate residential
construction loans, to owners wishing to construct their primary residence and
to selected local developers with whom the Bank is familiar, to build
single-family dwellings in the Bank's primary market area on both a pre-sold and
speculative basis. To a lesser extent, the Bank also offers loans for the
construction of owner-occupied, single-family dwellings outside the Bank's
primary market area. Loans to individuals are originated in connection with the
permanent loan on the property and usually have a construction term of six
months ("construction-permanent loan"). Speculative loans to builders are also
originated. A loan is considered speculative when at the time of construction
there is no end buyer for the single-family residential property being
constructed. The typical term for this type of loan is six months with interest
only payments due during such time. The Bank reviews the financial capacity of
the builder, the historical relationship with such builder and present market
conditions before approving speculative loans, and speculative loans to one
builder are generally limited to a specific dollar amount in the aggregate.
Advances to individuals and builders are made on a percentage of completion
basis, typically consisting of four to six draws. At December 31, 1995,
construction loans amounted to $4.03 million or 3.5% of the total loan
portfolio.
Prior to making a commitment to fund a construction loan, the Bank requires an
appraisal of the property by an appraiser approved by the Board of Directors.
Bank policy requires that a loan officer of the Bank or an outside inspector
specifically designated for such purpose inspect each project prior to each
disbursement of funds during the term of the construction loan.
Construction financing is generally considered to involve a higher degree of
risk of loss than long-term financing on improved, owner-occupied real estate.
Risk of loss on a construction loan is dependent largely upon the accuracy of
the initial estimate of the property's value at completion of construction or
development and the estimated cost (including interest) of construction. During
the construction phase, a number of factors could result in delays and cost
overruns. If the estimate of construction costs proves to be inaccurate, the
Bank may be required to advance funds beyond the amount originally committed to
permit completion of the development. If the estimate of value proves to be
inaccurate, the Bank may be confronted, at or prior to the maturity of the loan,
with a project having a value which is insufficient to assure full repayment.
In addition, repayment on construction loans to builders of single-family homes
depends on the supply of and demand for such products.
8
CONSUMER AND OTHER LENDING. The Bank offers consumer loans in order to provide
a broader range of financial services to its customers and because the shorter
terms and normally higher interest rates on such loans help the Bank maintain a
profitable spread between its average loan yield and its cost of funds. The
Bank offers home improvement and home equity loans and loans secured by deposit
accounts. On consumer loans originated, the Bank's underwriting standards
include a determination of the applicant's payment history on other debts and an
assessment of the borrower's ability to meet existing obligations and payments
on the proposed loan. The Bank's consumer loans are primarily offered to
existing customers.
The Bank began originating second mortgage loans, including home improvement and
home equity loans, in 1988. The amount of such loans totaled $2.98 million or
2.58% of the Bank's total loan portfolio at December 31, 1995. Second mortgage
loans are originated and/or purchased for up to 80% of the appraised value, less
the amount of any existing prior liens on the property. The loans have a
maximum term of fifteen years, and the interest rate is dependent upon the term
of the loan, the creditworthiness of the borrower and the collateral.
Loans secured by deposit accounts at the Bank are originated for up to 90% of
the account balance, with a hold placed on 10% more than the amount borrowed
restricting the withdrawal of the account balance at least up to the amount
borrowed. The interest rate on such loans is typically equal to 2% above the
deposit account rate. These loans have remained relatively stable as a
percentage of the Bank's total loan portfolio and amounted to $180,194 or 0.2%
of the total loan portfolio at December 31, 1995.
Under federal law, the Bank may make secured and unsecured consumer loans in an
aggregate amount up to 30% of the institution's total assets. The 30%
limitation does not include home equity loans (loans secured by the equity in
the borrower's residence but not necessarily for the purpose of improvement),
home improvement loans or loans secured by deposit accounts.
Consumer loans generally have shorter terms and higher interest rates than
mortgage loans but generally involve more credit risk than mortgage loans
because of the type and nature of the collateral and, in certain cases, the
absence of collateral. In addition, consumer lending collections are dependent
on the borrower's continuing financial stability, and thus are more likely to be
adversely affected by job loss, divorce, illness and personal bankruptcy. In
most cases, any repossessed collateral for a defaulted consumer loan will not
provide an adequate source of repayment of the outstanding loan balance because
of improper repair and maintenance of the underlying security. The remaining
deficiency often does not warrant further substantial collection efforts
against the borrower. The Bank believes that the generally higher yields earned
on consumer loans compensate for the increased credit risk associated with such
loans.
LOAN FEE INCOME. In addition to interest earned on loans, the Bank receives
income through fees in connection with loan originations, loan modifications,
late payments and for miscellaneous services related to its loans. Income from
these activities varies from period to period with the volume and type of loans
originated, which, in turn, is dependent on prevailing mortgage interest rates
and their effect on the demand for loans in the market served by the Bank.
Loan fees typically are charged at the time of loan origination and may be a
flat fee or a percentage of the amount loaned. The Bank typically receives fees
of up to 1.5 points (one point being equivalent to 1% of the principal amount of
the loan) in connection with the origination of mortgage loans (including
construction-permanent loans). All loan origination fees are deferred and taken
into income over the contractual life of the loan using a level yield method.
If a loan is prepaid or refinanced, all remaining deferred fees with respect to
such loan are taken into income at such time.
The accounting for non-refundable fees and costs associated with originating and
acquiring loans is governed by Statement of Financial Accounting Standards
("SFAS") 91, promulgated by the Financial Accounting Standards Board ("FASB").
SFAS 91 requires that loan origination fees be offset against certain related
direct loan origination costs and that the resulting net amount be deferred and
amortized over the life of the related loans as an adjustment to the yield of
such related loans. In addition, commitment fees are required to be offset
against related direct costs, and the resulting net amount is recognized either
over the life of the related loans as an adjustment to the yield, if the
commitment is exercised, or upon expiration of the commitment, if the commitment
expires unexercised.
NON-PERFORMING LOANS AND REAL ESTATE OWNED. When a borrower from the Bank fails
to make a required payment on a loan, the Bank attempts to collect the payment
by contacting the borrower. If a payment on a loan has not been received by the
fifteenth day from the payment due date, notices are made at that time, with
follow-up contacts made thereafter. In most cases, the delinquencies are cured
promptly. If the delinquency exceeds 90 days and is not cured through the
Bank's normal collection procedures, the Bank will institute more formal
measures to remedy the default, including the commencement of foreclosure
proceedings. The Bank will attempt to negotiate with the delinquent borrower to
establish a satisfactory payment schedule.
If foreclosure is effected, the property is sold at a public auction in which
the Bank may participate as a bidder. If the Bank is the successful bidder, the
acquired real estate property is then included in the Bank's "real estate owned"
account until it is sold. The
9
Bank is permitted under federal regulations to finance sales of real estate
owned by "loans to facilitate," which may involve more favorable interest rates
and terms than generally would be granted under the Bank's underwriting
guidelines. At December 31, 1995, the Bank had no loans to facilitate.
Loans are placed on non-accrual status when, in the judgment of management, the
probability of collection of interest is deemed to be insufficient to warrant
further accrual. When a loan is placed on non-accrual status, previously
accrued but unpaid interest is deducted from interest income. As a matter of
policy, the Bank does not accrue interest on loans past due 90 days or more.
Real estate acquired by the Bank as a result of foreclosure or by deed-in-lieu
of foreclosure is classified as real estate owned until it is sold. When
property is acquired, it is recorded at the lower of cost or fair value at the
date of acquisition and any write-down resulting there from is charged to the
allowance for losses on loans.
[THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
10
The following table sets forth for the Company certain information regarding
non-accrual loans and real estate owned, including in-substance foreclosures,
the ratio as such loans and real estate owned to total assets as of the date
indicated, and certain other related information. The Bank did not have any
troubled debt restructuring or accruing loans more than 90 days delinquent at
any of the dates presented.
December 31,
------------------------------------------------------------------
1995 1994 1993 1992 1991
------ ------ ------ ------ ------
(In Thousands of Dollars)
Non-accrual loans:
Residential:
Construction and land loans 2,035 1,025 1,081 342 56
Permanent loans (1-4 units) 807 1,029 704 748 159
All other mortgage loans 416 650 1,310 853 96
Commercial loans - - - 64 -
Consumer and other loans 69 77 30 53 -
In-substance foreclosures 0 3,592 108 298 -
------ ------ ------ ------ ------
Total non-accrual loans 3,327 6,373 3,233 2,358 311
------ ------ ------ ------ ------
------ ------ ------ ------ ------
Total non-accrual loans to total loans 2.9% 5.7% 3.3% 1.9% 0.4%
------ ------ ------ ------ ------
------ ------ ------ ------ ------
Total non-accrual loans to total assets 2.4% 4.1% 2.2% 1.7% 0.3%
------ ------ ------ ------ ------
------ ------ ------ ------ ------
Total allowance for loss to total
non-accrual loans 61.9% 31.0% 57.2% 60.3% 115.4%
------ ------ ------ ------ ------
------ ------ ------ ------ ------
Real estate owned:
Real estate acquired by foreclosure 3,276 2,891 565 892 338
Total real estate owned 3,276 2,891 565 892 338
------ ------ ------ ------ ------
------ ------ ------ ------ ------
Total non-accrual loans and real
estate owned to total assets 4.7% 6.0% 2.6% 2.3% 0.7%
------ ------ ------ ------ ------
------ ------ ------ ------ ------
11
If the non-accrual loans at December 31, 1995 had been current in accordance
with their original terms for the entire year (or from the date of origination
if originated during such period), the total interest income on such loans for
the period ended December 31, 1995 would have been increased approximately
$381,000. The Bank had $1.2 million in non-accruing construction and land loans
at December 31, 1995 consisting of one land acquisition and development project.
The $1.08 million of non-accruing single-family residential permanent loans at
December 31, 1995 consists of 17 loans. Such loans have an average loan balance
of approximately $63,293 and no loan exceeds $201,011.
The Bank had one non-accruing other mortgage loan at December 31, 1995 in the
amount of $415,544.
At December 31, 1995, the Bank had real estate owned of $3,275,758 acquired by
foreclosure and $887,754 of in-substance foreclosures. The $4,163,512 of total
real estate owned and in-substance foreclosures consist of fourteen single
family properties with an average balance of $70,241, four developed building
lots with an average balance of $43,127, one commercial real estate building
with a balance of $1,126,250, two vacant land properties zoned commercial with
an average balance of $518,794, two acquisition and development projects with an
average balance of $417,395 and one mobile home with a balance of $9,000. At
December 31, 1995, FTPC had real estate owned consisting of a parcel of vacant
residential land with a balance of $17,351.
ALLOWANCE FOR LOSSES ON LOANS
The allowance for loan losses is established through a provision for loan losses
charged to expenses. Loans are charged against the allowance when management
believes that the collectibility of the principal is unlikely. The allowance is
an estimated amount that management believes will be adequate to absorb losses
inherent in the loan portfolio and commitments to extend credit, based on
evaluations of its collectibility. The evaluations take into consideration such
factors as changes in the nature and volume of the portfolio, overall portfolio
quality, specific problem loans and commitments, and current and anticipated
economic conditions that may affect the borrower's ability pay. While
management uses the best information available to recognize losses on loans,
future additions to the allowance may be necessary based on changes in economic
conditions.
In accordance with SFAS No. 114, as amended by SFAS No. 118, the Bank records
impairment in the value of its loan as an addition to the allowance for loan
losses. Any changes in the value of impaired loans due to the passage of time
or revisions in estimates are reported as adjustments to provision expense in
the same manner in which impairment initially was recognized. Adoption of SFAS
No. 114, as amended by SFAS No. 118, had no impact on the level of the overall
allowance for loan losses or on operating results, and does not affect the
Bank's policies regarding write-offs, recoveries or income recognition.
Regulatory examiners may require the Bank to recognize additions to the
allowance based upon their judgment about the information available to them at
the time of their examination.
[THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK.]
12
The following table sets forth information with respect to activity in the
Bank's allowance for loan losses during the periods indicated.
Year Ended December 31,
1995 1994 1993 1992 1991
(In Thousands of Dollars)
Average loans outstanding, net 116,612 108,771 109,063 124,107 55,995
------- ------- ------- ------- -------
Allowance at beginning of year 1,975 1,850 1,292 359 84
Charge offs:
Conventional loans 267 4 27 37 -
Construction loans - - - - -
Commercial real estate loans 440 440 - - -
Consumer loans - 5 5 - 61
------- ------- ------- ------- -------
Total loans charged off 707 409 32 37 61
------- ------- ------- ------- -------
Recoveries 14 3 - - -
Net charge-offs 693 406 37 37 61
------- ------- ------- ------- -------
Provision for loan losses charged
to operating expenses 779 531 590 140 117
General reserves acquired as part
of loan package purchases - - - 830 219
Allowance at end of year 2,061 1,975 1,850 1,292 359
------- ------- ------- ------- -------
Ratio of net charge-offs to
average loans outstanding 0.6% 0.4% 0.03% 0.03% 0.11%
------- ------- ------- ------- -------
Ratio of allowance to period-end
total loans, net 1.83% 1.78% 1.94% 1.06% 0.46%
------- ------- ------- ------- -------
Period-end total loans, net 112,906 111,183 95,374 122,177 78,094
------- ------- ------- ------- -------
The following table represents information regarding the Bank's total allowance
for losses as well as the allocation of such amounts to the various categories
of loans.
Year Ended December 31,
1995 1994 1993 1992 1991
Percent of
Percent of Percent of Percent of Percent of Loans to
Loans to Loans to Loans to Loans to Total
Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans Amount Loans
------ ----------- ------ ----------- ------ ----------- ------ ----------- ------ ----------
(In Thousands of Dollars)
Residential real estate
loans 585 0.51 607 0.54 1,359 1.40 1,000 0.80 100 0.12
Commercial real estate
loans (Including multi-
family & land loans) 1,041 0.90 1,160 1.03 414 0.43 292 0.24 209 0.27
Non-mortgage loans 435 0.38 208 0.19 77 0.08 - - 50 0
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Total allowance for
loan losses 2,061 1.79 1,975 1.76 1,850 1.91 1,292 1.04 359 0.46
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
13
MORTGAGE-BACKED SECURITIES AND MORTGAGE DERIVATIVES
During 1994, the Bank invested in a GNMA "Dollar Roll" consisting of a portfolio
of mortgage-backed securities which were guaranteed as to principal and interest
by the full faith and credit of the United States or insured or guaranteed by
agencies of or corporations or entities chartered by the Federal government or
have investment grade ratings issued by either of the top two rating agencies.
The mortgage-backed securities owned by the Bank were insured or guaranteed by
the Government National Mortgage Association ("GNMA"). The securities were
purchased for a period of 20 days and were sold on July 9, 1994, and at December
31, 1994 and December 31, 1995, the Bank had no investment in mortgage-backed
securities.
The following table sets forth mortgage-backed securities purchased, sold and
repaid during the periods indicated:
Year Ended December 31,
------------------------------------------------------------------
1995 1994 1993 1992 1991
------ ------ ------ ------ ------
(In Thousands of Dollars)
Purchases - 4,647 4,521 - -
Sales - 4,124 (2,416) - (335)
Principal reductions, net - 13 (2,105) - -
------ ------ ------ ------ ------
Increase (decrease) in
mortgage-backed securities - - - - (81)
------ ------ ------ ------ ------
------ ------ ------ ------ ------
INVESTMENT ACTIVITIES
The Bank's investment portfolio currently consists of $15,918,376 in bonds
issued by the Federal Home Loan Bank and $19,093 in Tax Certificates issued by
Orange County, Florida. The Bank purchases securities to meet regulatory
liquidity requirements, to invest excess funds resulting from excess liquidity
and to leverage capital through the use of borrowed funds. Of the securities
held at December 31, 1995, $9,589,344 have maturities of five (5) years or less
which meet the liquidity requirements of the Office of Thrift Supervision.
The Bank's investment in obligations of U.S. government agencies consist of dual
indexed bonds issued by the Federal Home Loan Bank. At December 31, 1995, the
bonds had a market value of $15,918,376 and gross unrealized losses of
$1,181,624. The bonds have a par value of $17,100,000 and pay interest based on
the difference between two indices. The majority of the bonds, approximately
$14,939,000 at December 31, 1995, pay interest at the 10 year constant maturity
treasury rate less the 3 month or 6 month LIBOR rate plus a contractual amount
ranging from 2.3% to 4.0%. The Bank purchased the bonds to offset some of its
risk related to its portfolio of adjustable rate mortgages and, as such,
subjects the Bank to a certain degree of market risk as the indices change with
prevailing market interest rates. Generally, when short term interest rates are
low and the yield curve is in a normal slope, i.e., long term interest rates
higher than short term interest rates, the bonds will have a yield that is above
the yields on other agency securities of three or six month maturities, however,
the bank's portfolio of adjustable rate mortgage ("ARM") loans will have yields
that are declining due to the adjustment on these loans being based on a short
term index, primarily the one year CMT. When short term rates are high and the
yield curve is flat or inverted, the bonds will have yields that are generally
lower than the yields on other agency securities of three or six month
maturities, however, the bank's ARM loans will have yields that are increasing
since their adjustment is based on a short term index, primarily the one year
CMT. As a result, the yields on the dual indexed bonds generally move in an
inverse relationship to the movement in yields on the bank's ARM loans and as a
result, offset some of the risk related to the movement of interest rates in the
loan portfolio. The risk associated with changes in the indices is that when
the yield curve is flat, the bonds will generally have yields that are below the
yields on bonds that mature or reprice in three or six months unless the general
level of rates is very low in which case the margin on the bonds would reduce or
mitigate the effects of a flat yield curve. If the yield curve is inverted, the
bonds will generally have below market yields. The Bank does not currently have
any investments in hedges to offset the market risk for these securities. The
effective rates earned for the portfolio of dual indexed bonds for 1993, 1994,
and 1995 were 6.34%, 6.79%, and 5.43%, respectively. Market values for all
securities were calculated using published prices or the equivalent at December
31, 1995.
Based on Office of Thrift Supervision (OTS) Thrift Bulletin 65 - Structured
Notes, and other releases from the OTS, it is the opinion of management that
the OTS would prefer that the institutions that they regulate not hold
structured notes because many institutions do not clearly understand them, and
the OTS has directed that the Bank refrain from purchasing any dual indexed
bonds (see "Supervision"), although they continue to be a permissible investment
for Thrifts.
At December 31, 1995 and 1994, the Bank had $7,000,000 and $22,850,000 (par
value), respectively, in investments securities pledged to the Federal Home Loan
Bank as collateral under its short-term credit agreement with the Bank. On
November 30, 1995
14
the bank reclassified its entire portfolio of Federal Home Loan Bank bonds from
the held to maturity category to the available for sale category, in accordance
with the guidance issued by the Financial Accounting Standards Board (FASB),
which permittied the one-time opportunity to reassess the designations of all
securities between November 15, 1995 and December 31, 1995. The transfer
resulted in an increase in the unrealized loss on investment securities
available for sale, net (of the effect of income taxes) account, a component of
stockholders' equity, to $1,291,699 at November 30,1995. During December 1995,
the bank sold $7,250,000, par value, of the Federal Home Loan Bank bonds
maturing in 2003, at a gross loss of $942,500, which decreased the unrealized
loss on investment securities available for sale, net (of the effect of income
taxes) account in stockholder's equity to $779,872 at December 31, 1995.
As a member of the FHLB System, the Bank must maintain a minimum liquidity
levels specified by the OTS which vary from time to time. The Bank complies
with such requirement primarily by maintaining a significant amount of funds in
interest-bearing deposits at the FHLB of Atlanta. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources." Liquidity may increase or decrease depending upon the
yields available on investment opportunities and upon management's judgment as
to the attractiveness of such yields and its expectation of the level of yields
that will be available in the future. The Bank also has an investment in the
common stock of the FHLB of Atlanta in order to satisfy the requirement for
membership in such FHLB.
The following table sets forth the carrying value of the Bank's total
investments and liquidity as of the dates indicated.
December 31,
------------------------------------------------------------------
1995 1994 1993 1992 1991
---------------------- -------- ------- ------
(In Thousands of Dollars)
Short-term investments:
Interest-bearing deposits 754 7,251 6,221 3,892 4,476
Debt securities:
FHLB Notes 15,918 24,257 24,353 - -
Orange County tax certificates 19 44 135 - -
Mortgage-backed securities - - - - -
ARM mutual fund - - 12,048 - 335
Equity securities:
FHLB stock 1,853 1,975 2,815 1,878 150
------ ------ ------ ------ ------
Total investment portfolio 18,544 33,527 45,572 5,770 10,393
------ ------ ------ ------ ------
------ ------ ------ ------ ------
SOURCES OF FUNDS
GENERAL. Deposits are the primary source of the Bank's funds for use in lending
and for other general business purposes. In addition to deposits, the Bank
obtains funds from normal loan amortization and prepayments and from operations.
Contractual loan payments are a relatively stable source of funds, while deposit
inflows and outflows and loan prepayments are significantly influenced by
general market interest rates and economic conditions. Borrowings are also used
on a short-term basis to compensate for seasonal or other reductions in normal
sources of funds. Borrowings may also be used on a longer term basis to support
expanded lending or investment activities. At December 31, 1995, the Bank had
$16 million in FHLB Advances outstanding which are due in one year or less.
DEPOSITS. Due to changes in regulatory and economic conditions in recent years,
the Bank has increasingly emphasized deregulated fixed-rate certificate accounts
and other types of deposits. The Bank has a number of different programs
designed to attract both short-term and long-term deposits of the general public
by providing an assortment of accounts and rates. These programs include
statement savings accounts, NOW accounts, MMDAs and certificates of deposit
currently ranging in terms from 91 days to 120 months.
The Bank's deposits are obtained from residents in its primary market area and
nationwide via a computer network and the principal methods used by the Bank to
attract "in market" deposit accounts include offering a wide variety of services
and accounts, competitive interest rates and a convenient office location,
including access to automated teller machines ("ATMs"). The Bank currently
operates no ATM's but issues cards which have access to the Honor-Registered
Trademark- and other shared ATM networks. The Bank utilizes very few brokered
deposits and seeks negotiated rate certificates of deposit less than $100,000
through the CD Network-Registered Trademark- which electronically allows the
Bank to display its rates on certificates to individual investors nationwide.
Bank personnel then deal directly with investors who telephone or write for
information concerning certificates of deposit.
15
The following table shows the distribution of, and certain other information
relating to, the Bank's deposits by type as of the dates indicated.
December 31,
--------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991
------------------- ------------------ ------------------ ------------------ ------------------
Percent of Percent of Percent of Percent of Percent of
Amount Deposits Amount Deposits Amount Deposits Amount Deposits Amount Deposits
------ -------- ------ -------- ------ -------- ------ -------- ------ --------
Non-interest bearing
commercial checking accounts 209 0.2 257 0.3 776 1.2 1,556 1.6 1,114 1.9
Regular savings accounts 2,158 0.2 4,234 4.1 8,932 11.3 22,125 22.7 21,947 36.8
MMDA's 6,602 6.0 9,247 9.8 822 1.1 1,204 1.2 1,250 21.1
NOW accounts 675 0.6 852 0.8 1,213 1.5 4,235 4.4 1,907 3.2
------- ------ ------ ------ ------ ------ ------ ------ ------ ------
Subtotal 9,644 8.8 14,595 15.0 11,743 15.1 29,120 29.9 26,218 44.0
------- ------ ------ ------ ------ ------ ------ ------ ------- ------
Certificate of Deposit:
2.00% to 3.99% 1,219 1.1 5,431 5.3 39,857 46.7 21,206 21.7 - -
4.00% to 4.99% 2,171 2.0 29,421 28.9 23,558 29.9 34,247 35.2 - -
5.00% to 5.99% 54,847 50.2 29,165 28.5 4,845 6.1 9,555 9.8 12,236 20.5
6.00% to 7.99% 41,311 37.9 22,859 22.3 1,675 2.1 3,030 3.1 19,901 33.4
8.00% to 9.99% - - 46 0.0 50 0.1 263 0.3 1,221 2.1
------- ------ ------ ------ ------ ------ ------ ------ ------ ------
Total Certificates
of Deposit 99,548 91.2 86,922 85.0 66,985 84.9 68,301 70.1 33,410 56.0
------- ------ ------ ------ ------ ------ ------ ------ ------ ------
Total Deposits 109,192 100.0 101,517 100.0 78,728 100.0 97,421 100.0 59,628 100.0
------- ------ ------ ------ ------ ------ ------ ------ ------ ------
------- ------ ------ ------ ------ ------ ------ ------ ------ ------
The following table shows the average amount of and the average rate paid on
each of the following categories during the periods indicated.
December 31,
-------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991
----------------- ---------------- ----------------- ----------------- ----------------
Average Average Average Average Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate Balance Rate Balance Rate
------- ---- ------- ---- ------- ---- ------- ---- ------- ----
MMDA's, NOW and non-interest
bearing commercial
checking accounts 7,587 3.55% 8,385 3.19% 4,998 1.03% 7,349 2.10% 5,710 2.96%
Regular savings 2,975 2.62% 6,375 3.32% 15,529 3.05% 25,782 3.98% 17,684 5.96%
Certificates of Deposit 99,716 5.90% 77,430 4.29% 58,402 4.26% 77,340 5.02% 30,485 6.90%
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total Deposits 110,278 5.65% 92,190 4.12% 78,929 3.90% 110,471 4.59% 53,879 6.50%
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
16
The variety of deposit accounts offered by the Bank has increased the Bank's
ability to retain deposits and has allowed it to be competitive in obtaining new
funds, although the threat of disintermediation (the flow of funds away from
savings institutions into direct investment vehicles such as government and
corporate securities) still exists. Newer types of accounts, however, have been
more costly than traditional accounts during periods of high interest rates. The
Bank's ability to attract and retain deposits and the Bank's cost of funds have
been, and will continue to be, significantly affected by market conditions.
Management of the Bank periodically reviews rates offered by other savings
institutions in its market area and will adjust the rates it offers to be
competitive with such institutions. Due to the increase in customers and the
Bank's adequate capital levels, the Bank has generally not had to price its
deposit products higher than its competitors to attract deposits. The increases
in deposits after interest credited of $37.7 million, $25.9 million and $17.8
million for the years ended 1992, 1991 and 1990, respectively, were due to an
increase in the number of customers during each of the years and, during 1992,
to the acquisition of a local savings institution, a portion of the deposits of
which remained in the Bank. The $18.7 million decrease in 1993 resulted from
the sale of the Bank's Amelia Island branch. During the year ended December 31,
1995, the Bank's deposits increased $7.6 million.
The following table sets forth the net deposit flows of the Bank during the
periods indicated.
Year Ended December 31,
-------------------------------------------------------------------
1995 1994 1993 1992 1991
------- ------- ------- ------- -------
(In Thousands of Dollars)
Net increase (decrease)
before interest credited 10,530 23,902 (18,585) 40,471 26,753
Less:
Interest credited 2,945 1,113 892 2,720 863
------- ------- ------- ------- -------
Net deposit increase (decrease) 2,585 22,789 (18,693) 37,697 17,858
------- ------- ------- ------- -------
------- ------- ------- ------- -------
BORROWINGS. The Bank is permitted to obtain advances from the FHLB of Atlanta,
upon the security of the capital stock of the FHLB of Atlanta it owns and
certain of its home mortgage loans and other assets (principally, securities
which are obligations of, or guaranteed by, the U.S. government or agencies
thereof), provided certain standards related to creditworthiness have been met.
Such advances may be made pursuant to several different credit programs. Each
credit program has its own interest rate and range of maturities, and the FHLB
of Atlanta prescribes the acceptable uses to which the advances pursuant to each
program may be made as well as limitations on the size of such advances.
Depending on the program, such limitations are based either on a fixed
percentage of the Bank's regulatory capital or its liability for shares and
deposits or on the FHLB's assessment of Federal Trust Bank's creditworthiness.
The FHLB is required to review its credit limitations and standards at least
once every six months. Prepayment of FHLB of Atlanta advances would incur
prepayment penalties. At December 31, 1995, the Bank had $21.0 million in
borrowings outstanding and at December 31, 1994, the bank had $39.5 million in
borrowings outstanding.
The following is an analysis of the advances from the Federal Home Loan Bank:
Amounts Outstanding at December 31, 1995:
Maturity Date Rate Amount Type
- ------------- ---- ------ ----
1/2/96 6.10% $ 700,000 Variable Rate
1/31/96 6.10% 3,300,000 Variable Rate
1/27/96 5.76% 7,000,000 Fixed Rate
9/15/96 5.83% 5,000,000 Fixed Rate
9/15/98 6.12% 5,000,000 Fixed Rate
----- ---------
Total 5.93% $21,000,000
----- -----------
----- -----------
Amounts Outstanding at December 31, 1994:
Maturity Date Rate Amount Type
- ------------- ---- ------ ----
1/3/95 6.88% $ 1,500,000 Variable Rate
1/24/95 5.94% 3,000,000 Fixed Rate
2/14/95 6.31% 5,000,000 Fixed Rate
3/30/95 6.88% 4,600,000 Variable Rate
4/14/95 5.62% 5,000,000 Fixed Rate
6/29/95 6.85% 3,400,000 Fixed Rate
17
6/30/95 5.08% 2,000,000 Fixed Rate
8/15/95 5.98% 5,000,000 Fixed Rate
10/17/95 6.23% 5,000,000 Fixed Rate
12/15/95 6.36% 5,000,000 Fixed Rate
Total 6.22% $ 39,500,000
----- ------------
----- ------------
Variable rate advances reprice daily and may be repaid at any time without
penalty. Fixed rate advances incur a prepayment penalty if repaid prior to
maturity, and the interest rate is fixed for the term of the advance.
Amounts Outstanding at:
1995 1994
- --------------------------------------------- -------------------------------------------
Monthend Rate Amount Monthend Rate Amount
- -------- ---- ------ -------- ---- ------
1/31/95 6.21% 33,400,000 1/31/94 4.08% 37,500,000
2/28/95 6.27% 34,400,000 2/28/94 4.09% 37,500,000
3/31/95 6.29% 33,400,000 3/31/94 4.43% 37,000,000
4/30/95 6.34% 30,100,000 4/30/94 4.45% 47,700,000
5/31/95 6.36% 28,100,000 5/31/94 4.76% 44,000,000
6/30/95 6.43% 28,600,000 6/30/94 5.44% 53,000,000
7/31/95 6.33% 30,600,000 7/31/94 4.82% 41,000,000
8/31/95 6.36% 27,700,000 8/31/94 5.14% 38,000,000
9/30/95 6.37% 31,100,000 9/30/94 5.66% 45,500,000
10/31/95 6.19% 29,700,000 10/31/94 5.68% 38,000,000
11/30/95 6.23% 28,600,000 11/30/94 6.07% 38,000,000
12/31/95 5.93% 21,000,000 12/31/94 6.22% 39,500,000
During the twelve-month periods ended December 31, 1995 and December 31, 1994,
average advances outstanding totaled $28.4 million and $41.6 million at an
average rate of 6.30% and 4.93%, respectively.
Advances from the FHLB are collateralized by loans, securities, and FHLB stock
that totaled approximately $35.3 million, $7.0, and $1.8 million, respectively
at December 31, 1995.
EXPANSION PLANS
Management has no specific branch expansion plans for the Bank at this time;
however, management is exploring the feasibility of opening a branch office in
the future. The ability to branch is subject to approval by the OTS. The OTS
considers factors such as earnings, capital, management and Community
Reinvestment Activities prior to approving branch applications.
EMPLOYEES
At December 31, 1995, the Holding Company had 3 full-time employees and the Bank
had 24 full-time and 1 part-time employees. Management considers its relations
with its employees to be excellent.
Federal Trust currently maintains a comprehensive employee benefit program
providing, among other benefits, hospitalization and major medical insurance,
long-term disability insurance, life insurance, and education assistance. Such
employee benefits are considered by management to be generally competitive with
employee benefits provided by other major employers in Federal Trust's market
areas. Federal Trust's employees are not represented by any collective
bargaining group.
OTHER SUBSIDIARIES
FEDERAL TRUST PROPERTIES CORP. ("FTPC"). FTPC, a wholly-owned real estate
holding and development subsidiary of the Company, was formed in December, 1994.
FTPC owned two office buildings in Amelia Island, Florida, which it sold in
December, 1995, and a residential site in Augusta, Georgia.
1270 LEASING CO. ("1270 LC"). 1270 LC, a wholly-owned real estate leasing
subsidiary of the Company, was organized on May 27, 1994. 1270 LC leases the
Holding Company's office located in Winter Park, Florida.
18
Set forth below is information on the Company's investment in subsidiaries:
Total Equity Investments at December 31, 1995
- ---------------------------------------------
Federal Trust Bank $ 6,674,271
Federal Trust Properties Corp 1,089,911
1270 Leasing Co 754
------------
Total $ 7,764,936
------------
------------
THRIFT SUBSIDIARIES
Current OTS regulations permit a thrift to invest up to 3% of its assets in
service corporations, provided any investment in excess of 2% must serve
primarily community, inner city or community development purposes. In addition,
a thrift can invest up to 20% of its net worth in conforming loans to service
corporations if net worth is equal to the minimum net worth requirement of the
thrift and scheduled items do not exceed 2.5% of specified assets. The Bank has
no subsidiaries.
LEGAL PROCEEDINGS
There are no material pending legal proceedings to which Federal Trust or the
Bank or any other subsidiary of Federal Trust is a party or to which any of
their property is subject.
ASSET SALES
SALE OF FIRST COAST FINANCIAL CORPORATION. Pursuant to a Purchase Agreement
dated June 30, 1993, the Company sold all of the stock of First Coast Financial
Corporation for $200,000 comprised of $1,000 in cash and a $199,000 note secured
by FCFC stock payable over ten (10) years. No loss was reported on the sale.
Subsequent to the sale, the operations of the company and its profitability
declined and the purchaser was unable to make the required payments on the note
held by Federal Trust Corporation (FTC). In December 1994, the purchaser
defaulted on the note and FTC's subsidiary FTPC acquired the personal property
consisting of furniture and equipment valued at $12,410. FTPC chose not to
acquire the stock of FCFC, as it had determined that the operations of the
company had essentially ceased and could not be restarted without an investment
of significant resources, if at all. The Company recognized a loss on the note
in the amount of $187,028.
SALE OF SUBSIDIARY ASSETS. A Purchase Agreement with Amelia Building Corporation
("ABC"), a South Carolina Corporation, was entered into by FCCSC in July, 1993
for the sale of (i) a multi-family building site located in Augusta, Georgia
with a book value of $17,350 for a purchase price of $25,000, resulting in a
gain on the sale of $7,650, and (ii) an Installment Note receivable and accrued
interest, from a large multi-family apartment developer, in the amount of
$68,250 for a purchase price of $43,250, resulting in a loss on the sale of
$25,000. Both sales closed on July 31, 1993 and FCCSC agreed to finance $67,250
of the purchase price through a Secured Promissory Note payable in 5 years at an
interest rate of 4.5% per annum with payments of interest payable annually. The
Note was secured by the property located in Georgia and the Installment Note
receivable. The $7,650 gain was deferred until such time as the Note would be
substantially paid. FCCSC assigned the Secured Promissory Note to FTC, ceased
operations, and the company was dissolved. During 1994, ABC defaulted on its
note and, in December, 1994, FTPC, to whom FTC had subsequently assigned the
Secured Promissory Note, acquired the Georgia property through a deed in lieu of
foreclosure and the Note through a voluntary assignment.
A Purchase Agreement with ABC was also entered into by FTBC in July, 1993 for
the sale of Buildings 100 and 300 and all of the common area located in First
Coast Plaza, Amelia Island, Florida with a book value of $811,682 for a purchase
price of $1,069,323, resulting in a gain on the sale of $257,641. The Bank then
held a first mortgage on the property in the amount of $370,404. The sale closed
on July 31, 1993 and ABC assumed the mortgage with the Bank and FTBC agreed to
finance $697,919 of the remaining purchase price through a Secured Promissory
Note payable in 5 years at an interest rate of 4.5% per annum with payments of
interest payable annually. The Note was secured by the property located in First
Coast Plaza. The $257,641 gain was deferred until such time as the Note would be
substantially paid. FTBC assigned the Secured Promissory Note to FTC, ceased
operations, and the company was dissolved. During 1994, ABC defaulted on its
notes and, in December, 1994, FTPC, to whom FTC had subsequently assigned the
Secured Promissory Note, acquired the property through a deed in lieu of
foreclosure and the deferred gain was offset against the Secured Promissory
Note. In 1994, Federal Trust recognized a loss on the disposition of
subsidiaries in the amount of $15,361 in connection with the ABC transactions.
19
In December, 1995, FTPC sold Buildings 100 and 300 and all of the common area
located in First Coast Plaza, Amelia Island, Florida with a book value of
$677,605 for a purchase price of $583,334, resulting in a loss on the sale of
$94,271. The properties were sold to an unaffiliated party for cash.
REGULATORY AND SUPERVISORY ACTIONS. On October 3, 1994, the OTS issued a
Supervisory Order to Cease and Desist (the "Order") for the Bank. Management
and the Board of Directors have committed to adhering to the terms of the Order.
The Order provides for the Board of Directors to: develop, adopt and adhere to
policies and procedures to strengthen the Bank's underwriting, administration,
collection and foreclosure efforts; review and revise underwriting policies and
procedures to comply with regulatory requirements; record minutes to the loan
committee and grant loans only on terms approved by the committee and document
the recipient of proceeds of the loan; develop and implement a written plan to
collect, strengthen and reduce the risk of loss for all real estate owned and
for certain loans at risk and secured by real estate; comply with policies and
procedures requiring written inspection of development and construction loans;
pay no more than market rate, determined by a rent study approved by the OTS for
lease of the Bank's offices; make no payment of taxes owed by a person
affiliated with the Bank; seek services agreement for work performed for the
Holding Company by the Bank; develop and submit for approval a three year
business plan; comply with loans to one borrower policy; pay no dividend without
consent of the OTS; appoint a compliance committee; refrain from purchasing dual
indexed bonds. In addition, the OTS issued a separate Order for the Company
requiring: the Holding Company shall not request dividends from the Bank without
written permission from the OTS; the Holding Company reimburse the Bank for the
Holding Company's expenses, develop a management services agreement with the
Bank which provides for the reimbursement for employees who work for both the
Bank and the Holding Company; appoint a compliance committee to report to the
Board of Directors as to the Holding Company's compliance with the Order. See
"Regulation".
TAXATION
FEDERAL
Federal Trust files a consolidated calendar tax year federal income tax return
on behalf of itself and its subsidiaries. In previous years, the Bank reported
its income and expenses using the cash method of accounting and the other
companies used the accrual method. During 1993, the Bank was required to switch
to the accrual method of accounting inasmuch as its average annual gross
receipts for the prior three tax years exceeded $5 million.
Thrift institutions are generally taxed in the same manner as other
corporations. Unlike other corporations, however, qualifying savings
institutions such as the Bank that meet certain definitional tests relating to
the nature of their supervision, income, assets and business operations are
allowed to establish a reserve for bad debts and are permitted to deduct
additions to that reserve on "qualifying real property loans" using one of two
alternatives.
"Qualifying real property loans" are, in general, loans secured by interests in
improved real property. For each tax year, a qualifying institution may compute
the addition to its bad debt reserve for qualifying real property loans using
the more favorable of the following methods: (i) a method based on the
institution's actual loss experience (the "experience method") or (ii) a method
based on a specified percentage of an institution's taxable income (the
"percentage of taxable income method"). The addition to the reserve for non-
qualifying real property loans must be computed under the experience method.
The Bank computes its additions to its reserve for losses on qualifying real
property loans using the method that provides it with the maximum tax benefits
available. Under percentage of taxable income method, a qualifying institution
may deduct up to a maximum of 8% of its taxable income computed without regard
to bad debt deductions (reduced by the amount of its addition to reserves for
losses on non-qualifying loans for the taxable year). The net effect of the
percentage of taxable income method deduction is that the maximum effective
federal income tax rate on income computed without regard to actual bad debts
for qualifying institutions is 32.20%.
The Bank currently computes its addition to its reserve for qualifying real
property loans using the percentage of taxable income method. The amount of the
bad debt deduction that a thrift institution may claim with respect to additions
to its reserve for bad debts is subject to certain limitations. First, the
deduction may be reduced or eliminated entirely (regardless of the method of
computation) if at least 60% of the savings institution's assets do not fall
within certain designated categories. Second, the bad debt deduction
attributable to "qualifying real property loans" cannot exceed the greater of
(i) the amount deductible under the experience method or (ii) the amount which,
when added to the bad debt deduction for non-qualifying loans, equals the amount
by which 12% of the sum of the total deposits and the advance payments by
borrowers for taxes and insurance at the end of the taxable year exceeds the sum
of the surplus, undivided profits, and reserves at the beginning of the taxable
year. Third, the amount of the bad debt deduction attributable to qualifying
real property loans computed using the percentage of taxable income method is
permitted only to the extent that the institution's reserve for losses on
qualifying real property loans at the close of the taxable year does not exceed
6% of such loans outstanding at such time. Fourth, the amount of the bad debt
deduction is reduced, but not below zero, by the amount of the addition to
reserves for losses on non-qualifying loans for the taxable year. Finally, a
thrift
20
institution that computes its bad deduction using the percentage of taxable
income method and files its federal income tax return as part of a consolidated
group is required to reduce proportionately its bad debt deduction for losses
attributable to activities of non-savings institution members of the
consolidated group that are "functionally related" to the savings institution
member. (The thrift institution member is permitted, however, to
proportionately increase its bad debt deduction in subsequent years to recover
any such reduction to the extent the non-thrift institution members realize
income in subsequent years from their "functionally related" activities.) To
date, these limitations have not restricted the amount of the Bank's otherwise
allowable deductions for additions to its bad debt reserve.
To the extent that (i) the Bank's reserve for losses on qualifying real property
loans exceeds the amount that would have been allowed under the experience
method and (ii) the Bank makes distributions to its stockholders that are
considered to result in withdrawals from that excess bad debt reserve, then the
amounts withdrawn will be included in the Bank's taxable income. The amount
considered to be withdrawn by a distribution will be the amount of the
distribution plus the amount necessary to pay the tax with respect to the
withdrawal. Dividends paid out of the Bank's current or accumulated earnings
and profits as calculated for federal income tax purposes, however, will not be
considered to result in withdrawals from the Bank's bad debt reserves.
Distributions in excess of the Bank's current and accumulated earnings and
profits, distributions in redemption of stock, and distributions in partial or
complete liquidation of the Bank will be considered to result in withdrawals
from the Bank's bad debt reserves. Because the Bank made no distributions to
Federal Trust during the year, it has no excess loss reserves that could be
subject to these provisions.
Depending on the composition of its items of income and expense, a thrift
institution may be subject to the alternative minimum tax. A thrift institution
must pay an alternative minimum tax equal to the amount (if any) by which 20% of
alternative minimum taxable income ("AMTI"), as reduced by an exemption varying
with AMTI, exceeds the regular tax due. AMTI equals regular taxable income
increased by certain tax preferences, including depreciation deductions in
excess of that allowable for alternative minimum tax purposes, tax-exempt
interest on most private activity bonds issued after August 7, 1986 (reduced by
any related interest expense disallowed for regular tax purposes), the amount of
the bad debt reserve deduction claimed in excess of the deduction based on the
experience method and, 75% of the excess of adjusted current earnings over AMTI.
The alternative minimum tax applicable to tax years after 1986 is significantly
broader in scope than the old minimum tax and substantially increases the
likelihood that savings institutions will have to pay alternative minimum tax.
The Bank's federal income tax returns have never been examined by the Internal
Revenue Service.
STATE
The State of Florida imposes a corporate income/franchise tax on banks and
thrift institutions which subjects the Florida taxable income of such
institutions to a 5.5% tax (or, if greater, an alternative minimum tax equal to
3.3% of alternative minimum taxable income). Florida taxable income is
substantially similar to federal taxable income less $5,000, except that it
includes interest income on obligations of any state or political subdivision
thereof which is not otherwise exempt under Florida laws, and net operating
losses cannot be carried back to prior taxable years. The Florida
income/franchise tax may be reduced by a credit equal to the lesser of (i)
intangible tax paid or (ii) 65% of the sum of the franchise tax due before the
credit and the emergency excise tax due. The Florida franchise tax is
deductible in determining federal tax income.
REGULATION AND SUPERVISION
GENERAL
The banking industry is highly regulated with numerous federal and state laws
and regulations governing its activities. As a saving and loan Holding Company,
Federal Trust is subject to examination and the regulations of the OTS as
provided under the Home Owners Loan Act, as amended ("HOLA"). Federal Trust is
a reporting Holding Company with the Securities and Exchange Commission for
purposes of the Securities Exchange Act of 1934. Being a Florida Corporation,
Federal Trust is also subject to the Florida Business Corporations Act ("Act")
and the regulation of the Florida Department of State under its authority to
administer and implement the Act.
The Bank is a federally-chartered savings bank and its deposits accounts are
insured by the Savings Association Insurance Fund ("SAIF") which is administered
by the FDIC. The Bank is subject to examination and regulation by the OTS and
the FDIC, and to a lesser extent the Federal Reserve Board ("Federal Reserve").
Federal Trust and the Bank are required to file reports with the OTS and the
FDIC concerning their activities and financial conditions, in addition to
obtaining regulatory approvals prior to entering into certain transactions such
as mergers with or acquisitions of other financial institutions.
21
RECENT REGULATORY ACTION
In the December 1992 examination the OTS raised significant concerns regarding
the operations and general underwriting policies of the Bank. To address these
concerns, the Bank hired a new Chief Executive Officer/President who was
responsible for evaluating existing personnel, developing a new credit culture
for the Bank, which included new underwriting policies and procedures, as well
as the development of a new business strategy for the Bank. In May 1993, the
Bank entered into a supervisory agreement which formalized specific operational
and lending procedures that needed to be followed by the Bank. The supervisory
agreement resulted from certain deficiencies that were cited in the 1992
examination of the Bank. The Bank took immediate action to comply with the
directives of the supervisory agreement which included contracting with its
independent auditors to confirm the Bank's compliance therewith. See, "Item 7.
Supervision".
In the regular 1994 examinations of Federal Trust and the Bank, the OTS cited
certain new deficiencies not covered in the supervisory agreement. On October
3, 1994, the Holding Company and the Bank each entered into a voluntary Cease
and Desist Order (collectively the "Orders") with the OTS. The decision by
management and the Board of Directors of both companies to enter into the Orders
was reached after several months of discussions with the OTS following the 1994
examinations. Although management and the Board of Directors of the Holding
Company and the Bank believed that significant action had been taken to correct
the deficiencies cited in the 1992 examination (as spelled out in the
supervisory agreement), including the deficiencies cited in the 1994
examinations, it was determined that it was in the best interest of the Holding
Company and the Bank to agree to the Orders, due to the increase in the Bank's
classified assets and the resulting increase to the Bank's loan loss reserves.
Another factor that was considered in this decision was the fact that most of
the items included in the Bank's Order were repetitive of the directives
contained in the supervisory agreement which the Bank was either already in
compliance with or had been corrected and, therefore, could be effectively
monitored. The Holding Company's Order, on the other hand, was administrative
in nature and likewise could be easily monitored.
In the 1995 examinations of the Holding Company and Bank, which were
concluded in June 1995, the OTS found the companies to be in compliance with
their Orders. With regard to the Bank, improvement was noted in a number of
areas, including underwriting procedures, documentation, disposition of
problem assets, reduction in the dependency on wholesale funds, and a
reduction in operating expenses. In August, 1995 the OTS informed the Holding
Company that it was conducting an expanded examination of the Holding Company
with regard to certain transactions that were entered into by prior
Bank management in 1990 and 1991. As of the date of this filing, the
examination had not been concluded. See, "Item 7. Supervision".
REGULATION OF THE HOLDING COMPANY
RESTRICTIONS ON THE ACQUISITION OF FEDERAL TRUST. Section 1467a of the HOLA
provides that no Holding Company, "directly or indirectly" or acting in concert
with one or more persons, or through one or more subsidiaries, or through one or
more transactions, may acquire "control" of an insured savings institution at
any time without the prior approval of the OTS. In addition, any Holding Company
that acquires such control becomes a "savings and loan Holding Company" subject
to registration, examination and regulation under HOLA and the regulations
promulgated thereunder. "Control" in this context means ownership, control of,
or holding proxies representing more than 25% of the voting shares of, an
insured institution, the power to control in any manner the election of a
majority of the directors of such institution or the power to exercise a
controlling influence over the management or policies of the institution.
TRANSACTIONS WITH AFFILIATES. The authority of Federal Trust to engage in
transactions with related parties or "affiliates" or to make loans to certain
insiders, is limited by Sections 23A and 23B of the Federal Reserve Act ("FRA").
Section 23A limits the aggregate amount of transactions with any individual
affiliate to 10% of the capital and surplus of the savings institution and also
limits the aggregate amount of transactions with all affiliates to 20% of the
savings institution's capital and surplus. Certain transactions with affiliates
are required to be secured by collateral in an amount and of a type described in
the FRA and the purchase of low quality assets from affiliates is generally
prohibited. Section 23B provides that certain transactions with affiliates,
including loans and asset purchases, must be on terms and circumstances,
including credit standards, that are substantially the same or at least as
favorable to the savings institution as those prevailing at the time for
comparable transactions with a non-related party or nonaffiliated Holding
Company. In the absence of comparable transactions, such transactions may only
occur under terms and circumstances, including credit standards, that in good
faith would be offered to or would apply to non-related parties or nonaffiliated
companies. Notwithstanding Sections 23A and 23B, savings institutions are
prohibited from lending to any affiliate that is engaged in activities that are
not permissible for bank holding companies under Section 4(c) of the Bank
Holding Company Act of 1956. Further, no savings institution may purchase the
securities of any affiliate other than a subsidiary.
In addition, Sections 22(g) and 22(h) of the FRA and Regulation O (which set
limits on extensions of credit to executive officers, directors and 10%
shareholders, as well as companies which such persons control) apply to savings
institutions. Among other things, such loans must be made on terms, including
interest rates, substantially the same as loans to unaffiliated individuals and
which involve no more than the normal risk of collectability. In addition, these
regulations place limits on the amount of loans the Bank may make to such
persons. These restrictions apply in addition to certain restrictions on
transactions with affiliates contained in the OTS regulations.
SUPPORT OF SUBSIDIARY DEPOSITORY INSTITUTIONS. Under OTS policy, Federal Trust
is expected to act as a source of financial strength to and to commit resources
to support the Bank. This support may be required at times when, in the absence
of such OTS policy, the Holding Company might not be inclined to provide such
support. In addition, any capital loans by a Holding Company to any
22
of its subsidiary depository institutions must be subordinate in right of
payment to deposits and to certain other indebtedness of such subsidiary
depository institutions. In the event of bankruptcy, any commitment by a Holding
Company to a federal bank regulatory agency to maintain the capital of a
subsidiary depository institution will be assumed by the bankruptcy trustee and
will be entitled to a priority of payment.
Under the FDIA, a depository institution of a Holding Company, can be held
liable for any loss incurred by, or reasonably expected to be incurred by, the
FDIC after August 9, 1989, in connection with (i) the default of a commonly
controlled FDIC-insured depository institution or (ii) any assistance provided
by the FDIC to any commonly controlled FDIC-insured depository institution "in
danger of default". "Default" is defined generally as the appointment of a
conservator or a receiver and "in danger of default" is defined generally as the
existence of certain conditions indicating that a default is likely to occur in
the absence of regulatory assistance.
PAYMENT OF DIVIDENDS. Federal Trust is a legal business entity separate and
distinct from the Bank and its subsidiaries. To date, the principal source of
cash flow of the Holding Company, including cash flow to pay dividends on the
Holding Company's common stock, has been dividends from the Bank. There are
statutory and regulatory limitations on the payment of dividends by the Bank.
In general, the ability of the Bank to pay a dividend to the Holding Company is
governed by the OTS's capital distribution regulation. The OTS regulation
establishes three tiers of savings institutions based primarily on an
institution's capital level. A savings institution that exceeds all fully
phased-in capital requirements before and after the proposed capital
distribution ("Tier 1 association") and has not been advised by the OTS that it
is in need of more than normal supervision could, after prior notice but without
the approval of the OTS, make capital distribution during a calendar year equal
to the greater of: (i) 100% of its net income to date during the calendar year,
plus the amount that would reduce by one-half its "surplus capital ratio" (the
excess capital over its fully phased-in capital requirements) at the beginning
of the calendar year, or (ii) 75% of the savings institution's net income for
the previous four quarters. Any additional capital distributions require prior
regulatory approval. Because the Bank is currently operating under an OTS
Order, the Bank is considered a Tier 2 association and is required to obtain OTS
approval before it can make a capital distribution to the Holding Company. A
Tier 2 association may make capital distributions of between 25% and 75% of its
net income over the most recent four-quarter period, depending on its risk-based
capital level. The OTS can prohibit a proposed capital distribution by a
savings institution, which would otherwise be permitted by the regulation if the
OTS determines that such distribution would constitute an unsafe or unsound
practice. The Bank did not make a capital distribution to Federal Trust in
1995.
According to the Holding Company's Order, the Holding Company cannot request
dividends from the Bank without written permission from the OTS. It is unlikely
that the Bank will be permitted to pay a dividend to the Holding Company while
the Orders are in effect.
REGULATION OF THE BANK
Bills are introduced from time to time in the United States Congress with
respect to the regulation of financial institutions. Recent banking
legislation, particularly the Financial Institution Reform, Recovery and
Enforcement Act of 1989 ("FIRREA") and the Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA"), has broadened the regulatory powers of the
federal bank regulatory agencies and restructured the nation's banking system.
FIRREA. The activities of savings institutions are governed by the HOLA and, in
certain respects, the Federal Deposit Insurance Act ("FDIA"). The HOLA and the
FDIA were amended by the FIRREA and the FDICIA. The FIRREA was enacted for the
purpose of resolving problem savings institutions, establishing a new thrift
insurance fund, reorganizing the regulatory structure applicable to savings
institutions, and imposing bank-like standards on savings institutions.
FDICIA. The FDICIA revised sections of the Federal Deposit Insurance Act
affecting bank regulation, deposit insurance and provisions for funding of the
Bank Insurance Fund ("BIF"). The FDICIA also revised bank regulatory structures
embodied in several other federal banking statutes, strengthened the bank
regulators' authority to intervene in cases of deterioration of a bank's capital
level, placed limits on real estate lending and imposes detailed audit
requirements.
PROMPT AND CORRECTIVE ACTION. The FDICIA required the federal banking
regulatory agencies to set certain capital and other criteria which would define
the category under which a particular financial institution would be classified.
The FDICIA imposes progressively more restrictive constraints on operations,
management, and capital distributions depending on the category in which a
financial institution is classified. On September 16, 1992, the OTS adopted
final regulations to implement the prompt corrective action provisions of the
FDICIA. These regulations became effective December 19, 1992. Among other
things, the regulations define the relevant capital measures for the five
capital categories. For example, a savings institution is deemed to be "well
capitalized" if it has a total risk-based capital ratio (total capital to risk-
weighted assets) of 10% or greater, a Tier 1 risk-based capital ratio (Tier 1
capital to risk-weighted assets) of 6% or greater, and a Tier 1 leverage capital
ratio (Tier 1 capital to
23
adjusted total assets) of 5% or greater, and is not subject to a regulatory
order, agreement or directive to meet and maintain a specific capital level for
any capital measure. The OTS has also established minimum tangible and minimum
leverage capital requirements for savings banks. These requirements provide for
a minimum ratio of tangible capital of not less than 1.5% of the savings bank's
adjusted total assets. Tangible capital is defined as core capital minus any
"intangible assets (as defined by the regulation). The minimum leverage capital
(as defined by the regulation) ratio established by the regulation is 3% of
adjusted total assets.
A savings institution is deemed to be "adequately capitalized" if it has a total
risk-based capital ratio of 8% or greater, and (generally) a Tier 1 leverage
capital ratio of 4% or greater, and the institution does not meet the definition
of a "well capitalized" institution. A savings institution is deemed to be
"critically undercapitalized" if it has a ratio of tangible equity (as defined
in the regulations) to total assets that is equal to or less than 2%. In
addition, the OTS is authorized to downgrade a savings institution to a lower
capital category than the savings institution's capital ratios would otherwise
indicate, based upon safety and soundness considerations (such as when the
institution has received a less than satisfactory examination rating for any of
the equivalent CAMEL rating categories). Both the risk-based capital guidelines
and the leverage ratio are minimum requirements, applicable only to top-rated
savings institutions. Institutions operating at or near these levels are
expected to have well-diversified risk, excellent asset quality, high liquidity,
good earnings and in general, have to be considered strong banking organizations
and rated composite 1 under the CAMEL rating system adopted by the OTS.
Institutions with lower ratings and institutions with high levels of risk or
experiencing or anticipating significant growth would be expected to maintain
ratios 100 to 200 basis points above the state minimums.
The OTS' new capital rule, which became effective January 1, 1994, incorporates
an interest-rate component as part of the calculation of a savings institution's
regulatory capital. Savings institutions with "above normal" interest-rate risk
exposure are subject to a deduction from total capital for purposes of
calculating their risk-based capital requirements. A savings institution's
interest-rate risk is measured by the decline in the net portfolio value of its
assets (i.e. the difference between incoming and outgoing discounted cash flows
from assets, liabilities and off-balance sheet contracts) that would result from
a hypothetical 200 basis point increase or decrease in market interest rates
(except when the three-month Treasury bond equivalent yield falls below 4%, then
the decrease will be equal to one-half of that Treasury rate) divided by the
estimated economic value of the savings institution's assets, as calculated in
accordance with guidelines set forth by the OTS. A savings institution whose
measured interest-rate risk exposure exceeds 2% must deduct an interest-rate
component in calculating its total capital under the risk-based capital rule.
The interest-rate risk component is an amount equal to one-half of the
difference between the savings institution's measured interest-rate risk and 2%,
multiplied by the estimated economic value of the savings institution's assets.
That dollar amount is deducted from the savings institution's total capital in
calculating compliance with its risk-based capital requirement.
The FDICIA also requires each federal banking agency to prescribe rules which
will incorporate two areas of risk into assessments of a financial institution's
capital adequacy. These two areas of risk are the concentration of credit risk
and the risks of nontraditional activities. The OTS, along with the other
federal banking agencies, jointly issued a rule, effective January 17, 1995,
which implements the requirements of the FDICIA by identifying concentration of
credit risk and certain risks arising from nontraditional activities, as well as
a financial institution' s ability to manage these risks as important factors in
assessing an institutions overall capital adequacy. The rule provides that a
case by case approach will be used in assessing a financial institutions risks
and overall capital adequacy. The rule has had only a minimum effect, if any,
on the Bank's capital adequacy.
CAPITAL REQUIREMENTS. The Bank exceeds all of its regulatory capital
requirements. The following table summarizes the Bank's capital requirements at
December 31, 1995:
TANGIBLE CORE RISK-BASED
-------------------------- -------------------------- --------------------------
Percent of
Percent Percent Risk-
of of Weighted
Amount Assets Amount Assets Amount Assets
------ ------ ------ ------ ------ ------
Regulatory Capital $7,454,143 5.33% $7,454,143 5.33% $8,273,806 10.56%
Requirement $2,098,736 1.50% $4,197,472 3.00% $6,270,885 8.00%
Excess $5,355,407 3.83% $3,256,671 2.33% $2,002,921 2.56%
NEW STANDARDS FOR SAFETY AND SOUNDNESS. The FDICIA requires each federal
banking agency to prescribe for all insured depository institutions and their
holding companies standards relating to internal controls, information systems
and audit systems,
24
loan documentation, credit under-writing, interest rate risk exposure, asset
growth, and compensation, fees and benefits and such other operational and
managerial standards as the agency deems appropriate. In addition, the federal
banking regulatory agencies are required to prescribe by regulation standards
specifying: (i) maximum classified assets to capital ratios; (ii) minimum
earnings sufficient to absorb losses without impairing capital; (iii) to the
extent feasible, a minimum ratio of market value to book value for publicly
traded shares of depository institutions or the depository institution holding
companies; and (iv) such other standards relating to asset quality, earnings and
valuation as the agency deems appropriate. Finally, each federal banking agency
is required to prescribe standards for employment contracts and other
compensation arrangements of executive officers, employees, directors and
principal stockholders of insured depository institutions that would prohibit
compensation and benefits and other arrangements that are excessive or that
could lead to a material financial loss for the institution. If an insured
depository institution or its Holding Company fails to meet any of its standards
described above, it will be required to submit to the appropriate federal
banking agency a plan specifying the steps that will be taken to cure the
deficiency. If an institution fails to submit an acceptable plan or fails to
implement the plan, the appropriate federal banking agency will require the
institution or Holding Company, to correct the deficiency and until corrected,
may impose restrictions on the institution or the Holding Company including any
of the restrictions applicable under the prompt corrective action provisions of
the FDICIA. The Federal banking agencies have adopted a final rule regarding
implementation of these standards which became effective on August 9, 1995.
INSURANCE OF DEPOSIT ACCOUNTS. The Bank's deposit accounts are insured by the
SAIF which is administered by the FDIC. The FDICIA required the FDIC to
establish a risk-based assessment system for insured depository institutions
that takes into account the risks attributable to different categories and
concentrations of assets and liabilities. In response to the requirements of
the FDICIA, the FDIC established a risk-based assessment system for insured
depository institutions that takes into account the risks attributable to
different categories and concentrations of assets and liabilities. The first
semi-annual assessment was made on January 1, 1994. In accordance with its
rule, the FDIC assigns a financial institution to one of three capital
categories based on the institution's financial information, as of the reporting
period ending seven months before the assessment period. These categories
consist of well capitalized, adequately capitalized or undercapitalized, and one
of three supervisory subcategories within each capital group. The supervisory
subgroup to which an institution is assigned is based on a supervisory
evaluation provided to the FDIC by the financial institution's primary
regulator, in the Bank's case the OTS, and information which the FDIC determines
to be relevant to the institution's primary federal regulator and information
which the FDIC determines to be relevant to the institution's financial
condition and the risk posed to the deposit insurance funds. A financial
institution's assessment rate depends on the capital category and supervisory
category to which it is assigned. There are nine assessment risk
classifications (I.E., combinations of capital groups and supervisory subgroups)
to which different assessment rates are applied. Assessment rates range from 23
basis points on deposits for a financial institution in the highest category
(I.E.. well-capitalized and financially sound with only a few minor weaknesses)
to 31 basis points on deposits for an institution in the lowest category (I.E.,
undercapitalized and posing a substantial probability of loss to the SAIF or the
BIF, unless effective corrective action is taken). The Bank's assessment for
1995 was 29 basis points on deposits or $307,487. The Bank has been advised
that its insurance premium for the first six months of 1996 will again be 29
basis points on deposits or $159,950, based upon total deposits as of December
31, 1995.
In September 1995, the FDIC drastically reduced the basis for deposit insurance
premium paid by most BIF-insured banks from 23 basis points to 4 basis points.
No similar proposal was made for the SAIF-insured institutions since the SAIF
has not reached a reserve ratio equal to 1.25% of deposits. During 1995,
Congress considered various proposals for a one-time special assessment to be
charged on all SAIF deposits to fully capitalize he SAIF at 1.25 percent of
insured deposits. The proposed amount of the special assessment has been as
high as $0.85 per $100 of SAIF deposits. Assuming that a special assessment was
applied at the $0.85 rate based upon SAIF insured deposits at December 31, 1995,
the Bank would incur additional deposit insurance premium expense of
approximately $0.93 million which would be charged against current period
income. The timing and amount of such an assessment cannot be accurately
predicted at this time.
Under the FDIA, insurance of deposits may be terminated by the FDIC upon a
finding that the savings institution has engaged in unsafe or unsound practices,
is in such an unsafe or unsound condition so as to warrant discontinuation of
operations or has violated any applicable law regulation, rule, order or
condition imposed by the FDIC or the OTS. Management of Federal Trust does not
know of any practice, condition or violation that might lead to termination of
deposit insurance.
BROKERED DEPOSITS. The FDIC has adopted regulations under FDICIA governing the
acceptance or retention of brokered deposits. Under these regulations, a
depository institution cannot accept, rollover or renew brokered deposits unless
(i) it is well capitalized or (ii) it is adequately capitalized and receives a
waiver from the FDIC. A depository institution that cannot receive brokered
deposits also cannot offer "pass-through" insurance on certain employee benefit
accounts. Whether or not it has obtained such a waiver, an adequately
capitalized depository institution may not pay an interest rate on any deposits
in excess of 75 basis points over certain prevailing market rates specified by
regulation. There are no such restrictions on a depository institution that is
well capitalized. As of December 31, 1995, the Bank had one brokered deposit, a
$99,000 five-year certificate of deposit which was acquired in March 1992.
25
LOANS TO ONE BORROWER. Under the HOLA, savings institutions are subject to the
same limits on loans to one borrower as national banks. Generally, savings
institutions may lend to a single or related group of borrowers on an unsecured
basis an amount equal to 15% of its unimpaired capital and surplus. An
additional amount may be lent, equal to 10% of unimpaired capital and surplus,
if such loan is secured by readily-marketable collateral, which is defined to
include certain securities and bullion, but generally does not include real
estate.
On February 21, 1995, the Office of the Comptroller of the Currency revised the
rules governing national bank lending limits which was effective March 17, 1995.
The revisions automatically apply to savings institutions regulated by the OTS.
Under the revision, the calculation of capital has been changed to include the
bank's total Tier 1 and Tier 2 capital, plus the balance of the bank's allowance
for loan and lease losses not included in the total Tier 1 and Tier 2 capital.
The revisions have simplified the calculation of loan limits as savings banks
may now rely mainly on information from quarterly reports of condition of income
or call reports, instead of requiring calculation of the lending limits on a
daily basis. At December 31, 1995, the Bank had two loans which exceeded the
loans to one borrower limit, totaling $5,057,983.
QUALIFIED THRIFT LENDER TEST ("QTL"). The HOLA requires savings institutions to
meet a QTL test. The QTL test, as amended by the FDICIA, requires savings
institutions to maintain at least 65% of its "portfolio assets" (total assets
less [i] specified liquid assets up to 20% of total assets; [ii] intangibles,
including goodwill; and [iii] the value of property used to conduct business) in
qualified thrift investments, primarily residential mortgages and related
investments (including certain mortgage-backed and mortgage-related securities)
on a monthly basis in nine out of every twelve months.
A savings institution that fails to become or remain a qualified thrift lender
must convert to a bank charter or be subject to certain operating restrictions.
A savings institution that fails to meet the QTL test and does not convert to a
bank charter will be prohibited from: (i) making any new investment or engaging
in activities that would not be permissible for national banks; (ii)
establishing any new branch offices where a national bank located in the savings
institution's home state would not be able to establish a branch office; (iii)
obtaining new advances from any FHLB; and (iv) the payment of dividends except
as limited to the statutory and regulatory dividend restrictions applicable to
national banks. Also, beginning three years after the savings institution ceases
to be a qualified thrift lender, the savings institution would be prohibited
from retaining any investment or engaging in any activity not permissible for a
national bank and would be required to repay any outstanding advances to any
FHLB. A savings institution may requalify as a qualified thrift lender if it
thereafter complies with the QTL test.
As of December 31, 1995, the Bank met the QTL test, maintaining 81.7% of its
portfolio assets in qualified thrift investments.
INTERSTATE BRANCHING. In April 1992, the OTS amended its rules on branching by
federally chartered savings institutions to allow nationwide branching to the
extent allowed by federal statute. This action permits savings institutions with
interstate networks to diversify their loan portfolios and lines of business.
The OTS authority preempts any state law purporting to regulate branching by
federal savings institutions.
The limitations that remain are statutory. A savings institution may not
establish or operate a branch outside the state in which the institution has its
home office if such branch would violate Section 5(r) of the HOLA. This Section
permits a federal savings institution to branch outside its home state if (i)
the association meets the domestic building and loan test of Internal Revenue
Code Section 7701(a)(19) or the asset composition test of subparagraph (c) of
that Section, and (ii) each branch outside of its home state also satisfies the
domestic building and loan test. The Bank satisfies these statutory
limitations.
The second limitation prohibits branching that would result in formation of a
multiple savings and loan Holding Company controlling savings institutions in
more than one state in violation of HOLA Section 10(e)(3), unless the Holding
Company falls within one of the following three safe harbors for permissible
multiple Holding Company operations: (1) A Holding Company may acquire an
association or operate branches in additional states pursuant to a supervisory
acquisition under Section 13(k) of the FDIA; (2) Holding companies that, as of
March 5, 1987, controlled an association subsidiary that operated an office in
an additional state are permitted to acquire another association or branch in
that state; or (3) Interstate Holding Company operations are permitted if the
law of the additional state specifically authorizes acquisition of its
state-chartered associations by state-chartered associations or their holding
companies in the state where the acquiring association or Holding Company is
located.
To obtain supervisory clearance for branching, an applicant's regulatory capital
must meet or exceed the minimum requirements established by law and by the OTS
regulations. In addition, the savings institution must have a satisfactory
record under the Community Reinvestment Act ("CRA"). The Bank currently does not
conduct interstate branching operations.
LIQUIDITY. The Bank is required to maintain an average daily balance of liquid
assets (cash, certain time deposits, bankers' acceptances, specified United
States Government, state or federal agency obligations, shares of certain mutual
funds and certain corporate debt securities and commercial paper) equal to a
monthly average of not less than a specified percentage of its net
26
withdrawable deposit accounts plus short-term borrowings. This liquidity
requirement may be changed from time to time by the OTS to any amount within the
range of 4% to 10% of the institution's average daily liquidity base balance
during the preceding calendar month, depending upon economic conditions and the
savings flows of member institutions. The current liquidity requirement is 5%.
The OTS regulations also require each member savings institution to maintain an
average daily balance of short-term liquid assets at a specified percentage
(currently 1%) of the total of its net withdrawable deposit accounts and
borrowings payable in one year or less. Monetary penalties may be imposed for
failure to meet these liquidity requirements. The Bank's average daily liquidity
ratios at December 31, 1995, was 8.95%, and it's short-term liquidity ratio for
the same period was 1.81%. The Bank has never been subject to monetary penalties
for failure to meet its liquidity requirements.
ENFORCEMENT. The OTS has primary enforcement responsibility over savings
institutions and has the authority to bring enforcement actions against all
"institution-related parties," including stockholders, attorneys, appraisers and
accountants who knowingly or recklessly participate in wrongful actions likely
to have an adverse effect on an insured institution. Civil penalties have been
broadened to cover a wider range of violations and actions and range up to
$25,000 per day unless a finding of reckless disregard is made, in which case
penalties may be as high as $1 million per day. Criminal imprisonment penalties
for most financial institution crimes have been increased to 15 years. In
addition, regulators are provided with far greater flexibility to impose
enforcement action on an institution that fails to comply with its regulatory
requirement, particularly with respect to the capital requirements. Possible
enforcement action ranges from the imposition of a capital plan and capital
directive to receivership, conservatorship or the termination of deposit
insurance. The FDIA empowers the FDIC to recommend to the Director of OTS
enforcement action be taken with respect to a particular savings institution. If
action is not taken by the Director, the FDIC has authority to take such action
under certain circumstances.
OTS ASSESSMENTS. Savings institutions are required by OTS regulation to pay
assessments to the OTS to fund the operations of the OTS. The general
assessment, to be paid on a semiannually basis, is computed upon the savings
institution's total assets, including consolidated subsidiaries, as reported in
the institution's latest quarterly thrift financial report. The Bank paid
$69,799 in OTS assessments for the year-ended December 31, 1995.
COMMUNITY REINVESTMENT. The Community Reinvestment Act of 1977 ("CRA") and the
implementing regulations of the Federal Reserve and the FDIC are intended to
encourage regulated financial institutions to help meet the credit needs of
their local community or communities, including low and moderate income
neighborhoods, consistent with the safe and sound operation of such financial
institutions. The CRA and such regulations provide that the appropriate
regulatory authority will access the records of regulated financial institutions
in satisfying their continuing and affirmative obligations to help meet the
credit needs of their local communities as part of their regulatory examination
of the financial institution. The results of such examinations are made public
and are taken into account upon the filing of any application to establish a
domestic branch or to merge or to acquire the assets or assume the liabilities
of a financial institution. In the case of a bank or savings and loan holding
company, the CRA performance recorded of the financial institutions involved in
the transaction are reviewed in connection with the filing of an application to
acquire ownership or control of shares or assets of a financial institution or
to merge with any other bank or savings and loan holding company. An
unsatisfactory record can substantially delay or block the transaction.
The Bank received a "Satisfactory" CRA Rating in its last CRA Examination.
ANNUAL INDEPENDENT AUDITS AND REPORTING REQUIREMENTS. On May 11, 1993, the FDIC
adopted a rule implementing a provision in FDICIA that imposes more stringent
reporting requirements and requires the establishment and maintenance of
internal control structures and procedures effective July 2, 1993. The FDIC rule
is applicable to any insured depository institution having assets of $500
million or more as of the beginning of each fiscal year after December 31, 1992,
and requires management to prepare annual and agency reports on the financial
condition of the institution that are to be filed with the FDIC and the OTS in
the case a federally-chartered savings association. The annual report would
contain financial statements prepared in accordance with generally accepted
accounting principles that are audited by the institution's independent public
accountant. The annual report must also contain management's assertions
concerning the effectiveness of the institution's internal control structure and
procedures and its compliance with designated laws and regulations. The rule
requires that the independent public accountant examine the institution's
internal control structure and apply procedures agreed upon by the FDIC to
determine the extent of the institution's compliance with certain laws and
regulations designated by the FDIC concerning the safety and soundness, such as
regulations governing affiliate transactions, legal lending limitations, loans
to insiders, dividend restrictions and financial reporting in thrift financial
reports. The Bank is not subject to this requirement; nevertheless, the Bank
has opted to comply with this rule. The financial statements of the Holding
Company and the Bank have been audited by independent auditors since their
respective inceptions.
27
FEDERAL HOME LOAN BANK SYSTEM
The Bank is a member of the Federal Home Loan Bank ("FHLB") System which
consists of 12 regional FHLBs. The FHLB provides a central credit facility
primarily for member institutions. As a member of the FHLB-Atlanta, the Bank is
required to acquire and hold shares of capital stock in that FHLB in an amount
at least equal to 1% of the aggregate principal amount of its unpaid residential
mortgage loans and similar obligations at the beginning of each year, or 1/20th
of its advances (borrowings) from the FHLB-Atlanta, whichever is greater. The
Bank is in compliance with this requirement. FHLB advances must be secured by
specified types of collateral and may be obtained only for the purpose of
providing funds for residential housing finance.
The FHLBs are required to provide funds for the resolution of insolvent savings
institutions and to contribute funds for affordable housing programs. These
requirements could reduce the amount of dividends that the FHLBs pay to their
members and could also result in the FHLBs imposing a higher rate of interest on
advances to members. For the year ended December 31, 1995, dividends paid by the
FHLB-Atlanta to the Bank amounted $136,486, of the Bank's pre-tax income.
Should dividends be reduced, or interest on FHLB advances increased, the
consolidated net interest income might also be reduced for the Bank.
Furthermore, there can be no assurance at the value of the FHLB-Atlanta stock
held by the Bank will not decrease as a result of any new legislation.
FEDERAL RESERVE SYSTEM
The Federal Reserve regulations require savings institutions to maintain non-
interest-earning reserves against their transaction accounts (primarily NOW and
regular checking accounts). The Federal Reserve regulations generally require
that reserves of 3% must be maintained against aggregate transaction accounts of
$52.0 million less (subject to adjustment by the Federal Reserve), and an
initial reserve of $1,560,000 plus 10% (subject to adjustment by the Federal
Reserve between 11 3/4% and 16 1/4%) against that portion of total transaction
accounts in excess of $52 million. The first $4.3 million of otherwise
reserveable balances (subject to adjustments by the Federal Reserve) are
exempted from the reserve requirements. The Bank is in compliance with the
foregoing requirements. The balances maintained to meet the reserve requirements
imposed by the Federal Reserve may be used to satisfy liquidity requirements
imposed by the OTS. Because required reserves must be maintained in the form of
either vault cash, a non-interest-bearing account at a Federal Reserve or a
pass-through account as defined by the Federal Reserve, the effect of this
reserve requirement is to reduce the Bank's interest-earning assets. FHLB System
members are also authorized to borrow from the Federal Reserve "discount
window", however, Federal Reserve regulations require institutions to exhaust
all FHLB sources before borrowing from a Federal Reserve.
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28
ITEM 2. PROPERTIES
In July, 1993, Federal Trust sold three office buildings located on Amelia
Island at First Coast Plaza, a 2.4 acre office complex consisting of 22,606
leasable square feet. In December, 1994, Federal Trust acquired, through deeds
in lieu of foreclosure, two office buildings located at First Coast Plaza that
it had sold in 1993, which were held as real estate owned. Each office building
contains 6,816 square feet and is substantially rented. In December, 1995,
Federal Trust sold both office buildings located on Amelia Island at First Coast
Plaza.
During 1990, Federal Trust entered into a long-term lease obligation with John
Martin Bell, a stockholder and former director of Federal Trust, and the wife of
the president of Federal Trust, James T. Bell, for the use of the Federal Trust
Building located at 1211 Orange Avenue, Winter Park, Florida. The Federal Trust
Building serves as the headquarters for the Bank. The base annual rental paid
in 1995 was $247,923 or $19.18 per square foot and increases annually according
to the CPI. The lease was restated in 1991 and amended in 1992, 1993 and 1995
and expires in 2000, unless allowed to automatically renew for two successive
ten year periods. The lease is considered an "affiliated party" transaction
under Federal Reserve Board regulations.
The following table sets forth certain information on the Federal Trust's
principal offices, net carrying value and the expiration of leases when
applicable at December 31, 1995.
Net carrying value of real property
Lease
Owned Leased expiration
----- ------ ----------
Federal Trust Drive-In -0- $36,055 11/31/12
Facility
1121 Orange Avenue
Winter Park, Florida 32789
Federal Trust Building
1211 Orange Avenue
Winter Park, Florida 32789 -0- $833,134 12/31/00
Federal Trust Corporation - offices
1270 Orange Avenue, Suite C
Winter Park, Florida 32789 -0- $126,173 10/1/01
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Company is a party
or to which any of its property is subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS
During the fourth quarter of the fiscal year ended December 31, 1995, no matters
were submitted to a vote of the security holders through a solicitation or
otherwise.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND
RELATED SECURITY HOLDER MATTERS
There has been no active or established public market in the common stock of the
Company. As of March 1, 1996, there are 426 holders of common stock of the
Company. The Company paid quarterly cash dividends to stockholders during 1994,
1993 and 1992 in the annual amount of $0.12, $.092 and $.064 per share of common
stock, respectively, as adjusted to reflect the five-for-four stock split
effective November 30, 1992. The Company did not pay dividends during 1995.
29
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial data for Federal Trust as of
the dates and for the periods indicated. Such information is qualified in its
entirety by the more detailed information set forth in the Financial Statements
and the notes thereto included elsewhere herein.
SUMMARY OF OPERATIONS
Year Ended December 31,
------------------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
(In Thousands of Dollars except per share amounts)
Interest income 10,609 9,847 9,506 11,765 6,424
Interest expense 8,026 5,781 4,824 6,802 4,351
Net interest income 2,583 4,066 4,682 4,963 2,073
Provision for loan losses 779 531 590 140 117
Net interest income after provision for loan losses 1,804 3,535 4,092 4,823 1,956
Non-interest income 505 483 1,299 1,463 1,270
Non-interest expenses 5,738 (4,238) 4,216 4,902 2,773
Earnings (loss) before income taxes (3,482) (200) 1,175 1,384 453
Income tax (benefit) expense (1,232) (41) 409 485 --
Net earnings (loss) (2,250) (179) 766 899 453
Net earnings (loss) per share (1.00) (.08) 0.04 0.48 0.26
Average equity to average assets 6.65% 7.52% 7.06% 5.60% 9.60%
Return on average assets (1.48%) (.12%) .56% .60% .63%
Return on average equity (22.31%) (1.63%) 8.02% 10.64% 6.55%
SUMMARY OF FINANCIAL CONDITION
At December 31,
------------------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
(In Thousands of Dollars)
Cash, non-interest-bearing 1,619 744 1,090 2,078 949
Investments (2) 17,842 33,137 36,536 3,892 4,476
Mortgage-backed securities -- -- -- -- --
Loans, net 112,906 111,183 95,374 122,178 78,094
All other assets 8,037 8,893 13,888 10,989 8,163
------- ------- ------- ------- ------
Total assets 140,389 153,957 146,888 139,137 91,682
------- ------- ------- ------- ------
------- ------- ------- ------- ------
Deposits 109,203 101,528 78,742 97,434 59,642
Borrowings 21,000 39,500 55,300 30,170 21,750
All other liabilities 2,126 1,911 2,300 2,737 2,404
Stockholders' equity 8,060 11,018 10,526 8,796 7,886
------- ------- ------- ------- ------
Total liabilities and stockholders' equity 140,389 153,957 146,888 139,137 91,682
------- ------- ------- ------- ------
------- ------- ------- ------- ------
30
For the Year Ended December 31,
------------------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
OTHER DATA
Return on average assets (1.48%) (.12%) .56% .60% .63%
Return on average equity (22.31%) (1.63%) 8.02% 10.64% 6.55%
Dividend payout -- $.12 $.092 $.064 $.032
Average equity to average assets ratio 6.65% 7.52% 7.06% 5.60% 9.60%
Average interest rate spread (1) 1.81% 2.65% 3.33% 3.42% 3.05%
Net yield on average interest-earning assets (2) 7.41% 6.97% 7.32% 8.31% 9.75%
Non-interest expenses to average assets 3.79% 2.96% 3.11% 3.23% 3.93%
Ratio of average interest-earning assets to average
interest-bearing liabilities 1.02 1.06 1.07 1.02 1.06
Residential mortgage loans (1-4), mortgage-backed
securities, US Government and agency obligations,
and interest-earning deposits with the FHLB as a
percentage of total assets 76.5% 78.5% 81.47% 71.02% 79.47%
Non-performing loans and real estate owned as a
percentage of total assets 4.70% 6.02% 2.66% 2.33% 1.33%
Allowance for loan losses as a percentage of
total loans, net 1.83% 1.78% 1.94% 1.06% .46%
Total number of full service facilities 1 2 2 2 2
Total shares outstanding (3) (in thousands) 2,240 2,240 2,082 1,904 1,683
Earnings (loss) per share (3) ($1.00) ($.08) $.40 $.48 $.16
Book value per share (3) $3.60 $4.92 $5.06 $4.62 $4.80
- ------------------------
(1) Difference between weighted average yield on all interest-earning assets and
weighted average rate on all interest-bearing liabilities.
(2) Includes interest-earning balances in other banks, federal funds sold, U.S.
government and agency obligations, FHLB Stock and marketable equity
securities.
(3) Adjusted for five for four stock splits effective November 30, 1992; and in
1991, 1990, and 1989.
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31
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF
FEDERAL TRUST CORPORATION
RESULTS OF OPERATIONS
OVERVIEW
The Bank's net earnings have been adversely affected by the rise in interest
rates that has occurred during 1994 and 1995, due to its negative GAP position,
as its liabilities have repriced sooner than, and in greater amounts than, its
assets. As a result, the Bank's cost of funds has increased faster than the
yields earned on its assets, resulting in a decrease in its interest rate spread
and lower earnings. The Bank has continued to concentrate on increasing its
portfolio of adjustable rate loans and, as interest rates have begun to decline
in 1995, is increasing its efforts to lengthen the maturities of its liabilities
in order to reduce its negative GAP position and the impact of higher interest
rates in the future. Should interest rates begin to rise before the Bank is
able to further reduce its negative GAP, the Bank's earnings would be adversely
affected.
In addition, the Bank has had to increase its loss reserves as a result of a
higher level of non-performing loans. Although management believes that the
level of non-performing assets should begin decreasing in future periods,
unforeseen economic conditions and other circumstances beyond the Bank's control
could result in material additions to the loss reserves in future periods if the
level of non-performing assets increases. The Bank does anticipate additions to
the loss reserves in future periods as part of the normal course of business, as
the Bank's assets, consisting primarily of loans, are continually evaluated and
the loss allowances are adjusted to reflect the potential losses in the
portfolio on an ongoing basis.
The Company incurred a loss for 1995, primarily as a result of the increase in
the Bank's loss reserves, increased legal expenses and other costs associated
with repossessed assets, the continuing impact of higher interest rates on the
Bank's net interest margin, and the reduced yields on the Bank's portfolio of
structured notes resulting from the current yield curve in which the spread
between short term and longer term interest rates is narrow.
GENERAL
Federal Trust Corporation ("Federal Trust" or the "Company" or the "Holding
Company"), formerly FedTrust Corporation, was incorporated as a unitary savings
and loan holding company in August, 1988. Federal Trust was capitalized on
February 28, 1989 and acquired all outstanding common stock of Federal Trust
Bank, a federally chartered savings bank (the "Bank"), formerly First Coast
Savings Bank, F.S.B., in exchange for all the outstanding shares of Federal
Trust. Five shares of Federal Trust's common stock were exchanged for each four
shares of the Bank's common stock on that date. The acquisition of the Bank was
accounted for as a pooling of interests. The Bank is currently the primary
operating subsidiary of Federal Trust and began operations on May 3, 1988.
The Holding Company presently operates two non-bank subsidiaries, Federal Trust
Properties Corp. ("FTPC"), a real estate holding and development company,
organized December 12, 1994, which owned two office buildings in Amelia Island,
Florida, which were sold in December, 1995, and a residential site in Augusta,
Georgia; and 1270 Leasing Co. ("1270 LC"), a real estate entity organized may
27, 1994, which leases the Holding Company's office located in Winter Park,
Florida. Three former subsidiaries, First Coast Financial Corporation ("FCFC"),
a mortgage broker, FC Construction Services Corp. ("FCCSC"), a commercial
construction company and FedTrust Building Corporation ("FTBC"), which operated
office buildings in Amelia Island, Florida were all disposed of during fiscal
year 1993. See "Business - Asset Sales - Sale of Subsidiary Assets". The
assets of FCCSC and FTBC were sold on July 31, 1993 and the companies were
dissolved in December, 1993. The stock of FCFC was sold on June 30, 1993.
Operations of these subsidiaries were not significant to the consolidated
entity.
Federal Trust acquired FCFC on February 17, 1989. The acquisition of FCFC
was accounted for as a purchase and goodwill of $193,585 resulted. Federal
Trust sold the stock of FCFC on June 30, 1993 for $200,000 comprised of
$1,000 in cash and a $199,000 note secured by FCFC stock payable over ten
(10) years. No loss was reported on the sale. During 1994, the purchaser of
FCFC defaulted on the $199,000 note and, in December, 1994, FTPC acquired
FCFC's personal property valued at $12,410. FTPC chose not to acquire the
stock of FCFC, as it had determined that the operations of the company had
essentially ceased and could not be restarted without an investment of
significant resources, if at all. The Company recognized a loss on the note
in the amount of $187,028.
32
Federal Trust also formed FCCSC, a commercial construction company, during
1989. FCCSC actively marketed its services during 1989 by building and
selling an office building, and during 1990 by buying and selling an office
building site, developing and licensing plans for residential townhouse
units, and providing technical and consulting services to a real estate
contractor/developer, and in 1991 by continuing to provide significant
technical and consulting services to real estate contractors and developers.
During 1992, FCCSC continued to license plans for residential townhouse
units, but no significant marketing of services of FCCSC occurred in 1992 or
during 1993. In July, 1993, Federal Trust sold substantially all of the
assets held by FCCSC to two unrelated third parties and ceased operations of
FCCSC. During 1994, the purchaser of a portion of FCCSC's assets defaulted
on its note and, in December, 1994, FTPC acquired Georgia property through a
deed in lieu of foreclosure and a Note through a voluntary assignment. See
"Business - Asset Sales - Sale of Subsidiary Assets".
On March 27, 1990, Federal Trust acquired FTBC, formerly The John Martin Bell
Corporation, from the sole shareholder who is a former director and major
shareholder of Federal Trust, in exchange for 174,212 shares of Federal Trust's
common stock. The transaction was approved by Federal Trust's stockholders and
was accounted for as a purchase. The effect of the transaction was to increase
net assets of Federal Trust by approximately $1.7 million. The primary business
of FTBC was the ownership of commercial rental property comprising the office
complex where the Amelia Island offices of Federal Trust were located. In 1992,
FTBC conveyed the portion of the office complex which housed FCFC and the Bank
to FCFC, subject to the outstanding mortgage. In December, 1992, FTBC and FCFC
conveyed their interests in the property to the Bank, and the outstanding
mortgage was paid in full. In July, 1993, the Bank sold its interest in the
property to another bank as part of the sale of its Amelia Island deposits and
branch office and the remaining property was sold by FTBC to an unrelated third
party and Federal Trust ceased operations of FTBC. During 1994, the purchaser
of the remaining property defaulted on its notes and, in December, 1994, FTPC
acquired the property through a deed in lieu of foreclosure. See "Business -
Asset Sales - Sale of Subsidiary Assets".
In December, 1995, FTPC sold Buildings 100 and 300 and all of the common area
located in First Coast Plaza, Amelia Island, Florida with a book value of
$677,605 for a purchase price of $583,334, resulting in a loss on the sale of
$94,271. The properties were sold to an unaffiliated party for cash.
ASSET/LIABILITY MANAGEMENT
In order to minimize the potential for adverse effects of material and prolonged
increases in interest rates on Federal Trust's results of operations, Federal
Trust's management has implemented and continues to monitor asset and liability
management policies to better match the maturities and repricing terms of
Federal Trust's interest-earning assets and interest-bearing liabilities. Such
policies have consisted primarily of: (i) emphasizing the origination of
single-family residential adjustable-rate mortgage loans ("ARMs"); (ii)
maintaining a stable core deposit base with a relatively high percentage of
low-cost deposits; and (iii) maintaining an adequate portion of liquid assets
(cash and interest-bearing deposits).
The matching of assets and liabilities may be analyzed by examining the extent
to which such assets and liabilities are "interest rate sensitive" and by
monitoring an institution's interest rate sensitivity "gap." An asset or
liability is said to be interest rate sensitive within a specific time period if
it will mature or reprice within that time period. The interest rate
sensitivity gap is defined as the difference between interest-earning assets and
interest-bearing liabilities maturing or repricing within a given time period.
A gap is considered positive when the amount of interest rate sensitive assets
exceeds interest rate sensitive liabilities. A gap is considered negative when
the amount of interest rate sensitive liabilities exceeds interest rate
sensitive assets. During a period of rising interest rates, a negative gap
would adversely affect net interest income, while a positive gap would result in
an increase in net interest income. During a period of falling interest rates,
a negative gap would result in an increase in net interest income, while a
positive gap would adversely affect net interest income.
Between 1988 and 1989, Federal Trust successfully emphasized the origination of
single-family residential ARMs. However, due to the generally lower interest
rates which have prevailed during the past few years, Federal Trust's
originations of ARMs have decreased, especially during 1992, 1993, 1994 and
1995, due to the preference of Federal Trust's customers for fixed-rate
residential mortgage loans. As of December 31, 1995, $73.4 million or 75.3% of
the Bank's portfolio of single-family residential mortgage loans consisted of
ARMs and 73.1% of the Bank's total mortgage loan portfolio had adjustable
interest rates.
The Bank also seeks to maintain a large stable core deposit base by providing
quality service to its customers without significantly increasing its cost of
funds or operating expenses. The success of Federal Trust's core deposit
strategy is demonstrated by the stability of its money market demand ("MMDA"),
passbook, regular savings, checking and negotiable order of withdrawal ("NOW")
accounts, which totaled $10.35 million or 9.42% of total deposits at December
31, 1995. These accounts bore a weighted average nominal rate of 3.42% at
December 31, 1995. Since 1988, these accounts have consistently accounted for
more
33
than 9% of total deposits and Federal Trust anticipates that these accounts
will continue to comprise a significant portion of its deposit base.
The Bank has also maintained a portfolio of short-term liquid assets (cash and
assets maturing in one year or less) in order to reduce its vulnerability to
shifts in market rates of interest. At December 31, 1995, 1.20 % of Federal
Trust's total assets consisted of cash and interest-earning deposits.
Furthermore, as of such date, Federal Trust's overall average liquidity ratio
was 8.95%.
Based upon the assumptions set forth below, the Bank's one-year negative
interest rate sensitivity gap amounted to $ 30.4 million or 21.9% of total
assets as of December 31, 1995. At December 31, 1994, the one-year negative
interest rate sensitivity gap was $ 33.4 million or 21.9% of total assets based
on the assumptions in effect on such date. During 1995, the Bank's one-year
negative interest rate sensitivity gap contributed to the decrease in the Bank's
interest rate spread from 2.65% in 1994 to 1.58% in 1995. During this period,
general interest rates increased and the average volume of interest-earning
assets increased $4.5 million and the average yield on these assets increased by
only .32%, due to the lagging nature of the adjustable rate mortgage loan
portfolio. For the same period, interest-bearing liabilities increased $7.3
million and the average rate on these liabilities increased 1.39% due to the
short-term maturities of certificates of deposit and FHLB advances. Although
management believes that the Bank's current asset and liability management
strategies reduce the potential adverse effects of changes in interest rates on
the Bank's results of operations, any substantial and prolonged increases in
market rates of interest would have an adverse impact on the Bank's results of
operations. Management of Federal Trust Bank monitors the Bank's interest rate
sensitivity and believes that its present gap position is appropriate for the
current interest rate environment.
In preparing the tables below, the following assumptions have been made, which
are based upon assumptions used by the FHLB of Atlanta during 1994. The FHLB's
prepayment estimates are based upon a major Wall Street firm's prepayment model
and the specific prepayment speeds applied to the bank's mortgages are a
function of their underlying coupons, maturities and lifetime rate caps.
Adjustable-rate mortgages are separated into 160 individual buckets by current
versus lagging market index, coupon reset frequency, teaser versus non-teaser,
distance to lifetime cap and periodic rate caps. The one-year decay rates for
NOW, money market, passbook and non-interest demand deposits are 37%, 79%, 17%
and 37%, respectively, based on a study done by the Office of Thrift
Supervision. The above assumptions should not be regarded as indicative of the
actual prepayments or withdrawals which may be experienced by Federal Trust in
the future. The interest rate sensitivity gaps as of December 31, 1995, 1994
and 1993 were based on the assumptions for 1994, 1993 and 1992 and were based on
economic and interest rate conditions during such years including the then
prevailing prepayment experience and decay rate levels.
December 31,
-------------------------------------
1995 1994 1993
-------------------------------------
(In Thousands of Dollars)
Interest-earning assets maturing or repricing within one year 72,382 94,392 88,564
Interest-bearing liabilities maturing or repricing within one year 102,781 127,762 113,179
------- ------- -------
Excess (deficiency) of interest-earning assets over interest-bearing
liabilities (30,399) (33,370) (24,615)
------- ------- -------
------- ------- -------
Excess (deficiency) of interest-earning assets over interest-bearing
liabilities maturing or repricing within one year as a percentage of total assets (21.85%) (21.88%) (16.93%)
Percentage of assets to liabilities maturing or repricing within one year 70.42% 73.88% 78.25%
------- ------- -------
------- ------- -------
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34
The following table sets forth certain information relating to Federal Trust's
interest-earning assets and interest-bearing liabilities at December 31, 1995
that are estimated to mature or are scheduled to reprice within the periods
shown.
From From From From From Greater
One to 3 to 6 to 1 to 3 to than
3 Months 6 Months 12 Months 3 Years 5 Years 5 Years
-------- -------- --------- ------- ------- -------
(In Thousands of Dollars)
Total Loans(1) 10,546 53,757 6,559 26,163 3,491 10,194
Other interest-bearing assets (2) 1,521 0 0 0 17,111 0
------- ------ ------- ------- ------- ------
Total interest-earning assets 12,067 53,757 6,559 26,163 20,602 10,194
Non-interest bearing demand deposits (3) 98 87 147 305 82 181
Interest bearing demand deposits (3) 74 66 111 229 61 135
Money Market Demand Deposits (3) 2,361 1,598 1,814 804 383 348
Savings deposits (3) 152 145 270 862 562 1,346
Time deposits 27,642 103 57,048 11,469 1,633 0
FHLB advances and other 10,998 73 44 10,155 125 517
------- ------ ------- ------- ------- ------
Total interest-bearing liabilities 41,325 2,022 59,434 23,824 2,846 2,527
Interest rate sensitivity gap (29,258) 51,735 (52,875) 2,339 17,756 7,667
Cumulative interest rate sensitivity gap (29,258) 22,477 (30,398) (28,059) (10,303) (2,636)
Cumulative interest rate sensitivity gap
as a percentage of total assets -21.03% 16.15% -21.85% -20.17% -7.40% -1.89%
(1) Mortgage loans and mortgage-backed securities are net of the undisbursed
portion of loans due borrowers.
(2) Consists of interest-bearing deposits, FHLB stock and investment securities.
(3) Decay rates for deposits, based on a study by the Office of Thrift
Supervision:
Decay Rates From From From From From Greater
One to 3 to 6 to 1 to 3 to than
3 Months 6 Months 12 Months 3 Years 5 Years 5 Years
-------- -------- --------- ------- ------- -------
Non-interest bearing demand 37.00 37.00 37.00 33.87 9.06 20.07
Interest bearing demand 37.00 37.00 37.00 33.87 9.06 20.07
Money Market demand 79.00 79.00 79.00 11.00 5.24 4.76
Savings Deposits 17.00 17.00 17.00 25.82 16.83 40.35
35
The following table sets forth, for the periods indicated, information regarding
(i) the total dollar amount of interest and dividend income of Federal Trust
from interest-earning assets and the resultant average yields; (ii) the total
dollar amount of interest expense on interest-bearing liabilities and the
resultant average cost; (iii) net interest income; (iv) interest rate spread;
(v) net interest margin; and (vi) weighted average yields and rates. Average
balances are based on average daily balances.
Year Ended December 31,
---------------------------------------------------------------------------------------
1995 1994 1993
--------------------------- --------------------------- ---------------------------
Average Average Average
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ---- ------- -------- ----
Interest-earning assets:
Loans(1) 115,608 8,993 7.78% 108,771 7,705 7.08% 101,901 8,189 8.04%
Investment securities 23,408 1,289 5.51% 24,544 1,754 7.15% 14,978 926 6.18%
Other interest-earning assets 6,424 322 5.09% 7,592 362 4.77% 12,943 391 3.02%
------- ------ ----- ------- ----- ----- ------- ----- -----
Total interest-earning assets 145,440 10,609 7.29% 140,907 9,821 6.97% 129,822 9,506 7.32%
Non-interest-earning assets 5,033 2,795 5,523
------- ------- -------
Total assets 150,473 143,702 135,345
------- ------- -------
------- ------- -------
Interest-bearing liabilities:
Non-interest bearing demand deposits 286 -- 0.00% 836 -- 0.00% 1,500 -- 0.0%
Interest bearing demand deposits 7,301 269 3.68% 7,793 268 3.44% 3,354 45 1.33%
Savings deposits 2,975 78 2.62% 6,227 214 3.44% 11,901 318 2.67%
Time deposits 99,716 5,883 5.90% 77,333 3,320 4.29% 62,174 2,717 4.37%
------- ------ ----- ------- ----- ----- ------- ----- -----
Total Deposit accounts 110,278 6,230 5.64% 92,189 3,802 4.12% 78,929 3,080 3.90%
FHLB advances & other borrowings 29,725 1,766 5.94% 40,526 1,936 4.78% 42,060 1,744 4.15%
------- ------ ----- ------- ----- ----- ------- ----- -----
Total interest-bearing liabilities 140,003 7,996 5.71% 132,715 5,738 4.32% 120,990 4,824 3.99%
Non-interest-bearing liabilities 2,125 2,043 4,806
Retained earnings and stockholder's
equity 8,345 8,944 9,549
------- ------- -------
Total liabilities & retained earnings 150,473 143,702 135,345
------- ------- -------
------- ------- -------
Net interest/dividend income 2,613 4,083 4,682
------ ----- -----
------ ----- -----
Interest rate spread (3) 1.58% 2.65% 3.33%
----- ----- -----
----- ----- -----
Net interest margin (4) 1.80% 2.90% 3.61%
----- ----- -----
----- ----- -----
Ratio of average interest-earning assets
to average interest-bearing liabilities 1.04% 1.06% 1.07%
----- ----- -----
----- ----- -----
(1) Includes non-accrual loans.
(2) Includes interest-earning deposits and FHLB of Atlanta stock.
(3) Interest rate spread represents the difference between the average yield
on interest-earning assets and the average cost of interest-bearing
liabilities.
(4) Net interest margin is net interest income dividend divided by average
interest-earning assets.
36
Rate/Volume Analysis: The following table sets forth certain information
regarding changes in interest income and interest income expense of Federal
Trust for the periods indicated. For each category of interest-earning
assets and interest-bearing liabilities, information is provided on changes
attributable to (1) changes in rate (change in rate multiplied by prior
volume, (2) changes in volume multiplied by prior rate and (3) changes in
rate-volume (change in rate multiplied by change in volume).
YEAR ENDED DECEMBER 31, 1995 YEAR ENDED DECEMBER 31, 1994 YEAR ENDED DECEMBER 31, 1993
VS. 1994 VS. 1993 VS. 1992
------------------------------- ---------------------------- -------------------------------
INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO
------------------------------- ---------------------------- -------------------------------
RATE/ RATE/ RATE/
RATE VOLUME VOLUME TOTAL RATE VOLUME VOLUME TOTAL RATE VOLUME VOLUME TOTAL
------ ------ ------ ------- ---- ------ ------ ----- ------ ------ ------ ------
Interest-earning assets:
Loans 761 484 48 1,293 (911) 486 (33) (458) (1,537) (1,090) 43 (2,584)
Investment securities (403) (81) 19 (465) 441 341 46 828 -- 463 463 926
Other interest-earning assets 24 (56) (4) (35) 145 (128) (46) 29 (599) 5 (9) (603)
------ --- --- ------ --- --- --- --- ------ --- --- ------
Total 359 403 66 828 (325) 699 (33) 341 (2,136) (622) 497 (2,261)
------ --- --- ------ --- --- --- --- ------ --- --- ------
Interest-bearing liabilities:
Deposit accounts 1,401 745 275 2,421 176 546 -- 722 (1,994) -- -- (1,994)
FHLB Advances & other borrowings 470 (516) (125) (171) 287 (73) 20 234 (65) -- 80 15
------ --- --- ------ --- --- --- --- ------ --- --- ------
Total 1,871 229 150 2,250 463 473 20 956 (2,059) -- 80 (1,979)
Net change in net interest income
before provision for loan losses (1,512) 174 (83) (1,422) (788) 226 (53) (615) (77) (622) 417 (282)
------ --- --- ------ --- --- --- --- ------ --- --- ------
------ --- --- ------ --- --- --- --- ------ --- --- ------
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37
IMPACT OF INCREASED INTEREST RATES ON INVESTMENT PORTFOLIO
During 1994 the Federal Reserve began raising interest rates to combat the
growing threat of inflation that was becoming evident from the Leading
Indicators of the U.S. economy. Starting in February, interest rates
increased 250 basis points (2.50%) by the end of 1994, however during the
fourth quarter of 1995 the Federal Reserve began decreasing interest rates as
the economy slowed. As a result of the increased interest rates in 1994, the
Bank's portfolio of investments consisting primarily of Federal Home Loan
Bank Bonds ("Bonds"), was adversely affected as to their market value, but
the market value has improved as a result of decreasing interest rates in
1995.At December 31, 1994, the portfolio had unrealized losses totaling
$5,342,700 and at December 31, 1995, the unrealized losses had decreased to
$1,181,624.
Pursuant to Financial Accounting Standards Board (FASB), Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments
in Debt and equity Securities", which requires that investments be classified
into three categories, the Bank had classified the Bonds as Held-to-maturity
securities, and, as a result, the Bonds were reported at amortized cost.
However, on November 30, 1995 the bank reclassified its entire portfolio of
Federal Home Loan Bank bonds from the held to maturity category to the
available for sale category, in accordance with the guidance issued by the
Financial Accounting Standards Board (FASB), which permitted the one-time
opportunity to reassess the designations of all securities between November
15, 1995 and December 31, 1995. The transfer resulted in an increase in the
unrealized loss on investment securities available for sale, net of the
effect of income taxes as a component of stockholders' equity, to $1,291,699
at November 30,1995. During December 1995, the bank sold $7,250,000, par
value, of the Federal Home Loan Bank bonds maturing in 2003, at a gross loss
of $942,500, which decreased the unrealized loss on investment securities
available for sale, net of the effect of income taxes as a separate component
of stockholder's equity to $779,872 at December 31, 1995. (See "Impact of
Accounting Requirements").
The Bonds are issued by, and are joint and several obligations of, the
Federal Home Loan Banks, which are instrumentalities of the U.S. Government
and are rated AAA by Moody's. As a result, management is of the opinion that
the Bonds carry little, if any, risk of default. The market value of the
Bonds has been and will continue to be affected by the overall level of
interest rates until they mature. As, and when, interest rates decline the
unrealized losses on the Bonds should decrease and the market value of the
Bonds should be affected to a lesser extent as they near maturity. The bonds
begin maturing in 1997 with maturities continuing in 1998, and the longest
issue matures in 2003.
ACQUISITIONS
On April 3, 1992, the Bank acquired certain assets and liabilities of First
Federal Savings and Loan Association of Seminole County, F.A. from the RTC.
The Bank acquired approximately $77,988,000 of loans and assumed $120,227,000
in deposits and other liabilities. In addition, the Bank paid a net premium
of approximately $2,056,269 to the RTC and First Guaranty Mortgage
Corporation in connection with the acquisition. The Bank has amortized
$1,563,639 of the premium as of December 31, 1995 as an adjustment to
interest income. The acquisition was accounted for as a purchase.
BRANCH OFFICE AND ASSET SALE
Pursuant to an Agreement to Purchase Assets and Assume Liabilities dated as
of February 26, 1993, between the Bank and SouthTrust Bank of Jacksonville,
N.A. ("SouthTrust"), a national banking association having its principal
office in Jacksonville, Florida, the Bank conveyed to SouthTrust $26,605,016
in assets and $19,153,517 in deposit liabilities of the Bank's branch office
located at 1890 S. 14th Street, Amelia Island, Florida on July 22, 1993 for a
net purchase price of $7,451,499.
The transaction included, the Bank's (i) conveyance to SouthTrust of deposit
liabilities, with a book value of $19,153,517, at a premium to the Bank of
$360,410, resulting in a cash payment by the Bank of $18,793,107, (ii) sale
to SouthTrust of real estate, consisting of the branch office building with a
book value of $1,282,908, for $1,300,000 in cash, resulting in a gain on the
sale of real estate of $17,092, (iii) sale to SouthTrust of other fixed
assets, consisting of furniture, fixtures, equipment and leasehold
improvements to the branch office building, with an aggregate book value of
$434,299, for $221,902 in cash, resulting in a loss on the sale of other
fixed assets of $212,397, and (iv) sale to SouthTrust of certain loans, with
a book value of $25,229,856, for $25,391,383, resulting in a gain on the sale
of loans of $161,527. The resulting net gain to the Bank on the transaction
was $326,632.
The sale of a portion of the loans was conditioned on the prepayment
experience of such loans over the subsequent twenty-four (24) month period,
and $20,333 of the resulting gain on the sale of said loans was deferred from
income and held in escrow by SouthTrust. As a result of the subsequent
prepayments experienced on the loans, the bank earned all of the deferred
gain of $20,333 in 1995.
38
LIQUIDITY
As a member of the Federal Home Loan Bank system, the Bank is required to
maintain a daily average balance of liquid assets equal to a specified
percentage (currently 5%) of net withdrawable deposit accounts and borrowings
payable in one year or less. Federal regulations also require that each
member institution maintain short-term liquid assets of at least 1% of its
net withdrawable deposit accounts and borrowings payable in one year or less.
Generally, the Bank's management seeks to maintain its liquid assets at
comfortable levels above the minimum requirements imposed by its regulators.
In December 1995, the Bank's average liquidity was 8.95%.
Federal Trust expects the Bank to generate sufficient deposits to provide
liquidity for expected loan growth and other investments. The
Asset/Liability Management Committee of the Bank meets regularly and, in
part, reviews liquidity levels to ensure that funds are available as needed.
PROVISIONS FOR LOAN LOSSES
A provision for loan losses is generally charged to operations based upon
management's evaluation of the potential losses in its loan portfolio and as
a result, the Bank charged $779,415 to its provision for loan losses during
1995.
The Bank increased its net loans during 1995 as a result of loan purchases.
Although management believes that its present allowance for loan losses is
adequate as of December 31, 1995, the Bank's provisions are based on the
current and currently anticipated future operating conditions, thereby
causing these estimates to be susceptible to changes that could result in a
material adjustment to results of operations in the near term. The amount
needed in the allowance for loan losses is based on the particular
circumstances of the individual non-performing loans, including the type,
amount, and value of the collateral, if any, and the overall composition and
amount of the performing loans in the portfolio at the time of evaluation,
and, as a result, will vary over time. Recovery of the carrying value of
such loans is dependent to a great extent on economic, operating and other
conditions that may be beyond the Bank's control. Therefore, actual losses
in future periods could differ materially from amounts provided in the
current period and could result in a material adjustment to operations.
It is the Bank's practice to maintain the allowance for loan losses at a
level considered by management to be adequate to provide for reasonably
foreseeable loan losses. There is no precise method of predicting specific
losses or amounts that ultimately may be charged off on particular segments
of the loan portfolio. The conclusion that a loan may become uncollectible,
in whole or in part, is a matter of judgement. Similarly, the adequacy of
the allowance for loan losses can be determined only on a judgmental basis,
after full review, including consideration of:
The borrower's financial data, together with evaluations of industry data,
competition, the borrower's management capabilities and the underlying
collateral for secured loans, including, when appropriate, independent
appraisals of real estate properties, and other factors;
Consumer loan growth trends and delinquency and default rates, together
with an analysis of past and present repayment performance;
A continuing evaluation of the loan portfolio by lending officers and
senior management; and
Monthly review and evaluation of loans identified as having loss
potential. If, as a result of such monthly reviews, a loan is judged to
be uncollectible, the carrying value of the loan is reduced to that
portion that is considered to be collectible.
The allowance for loan losses at December 31, 1995 was $2,060,568 or 61.9% of
non-performing loans and 1.83% of net loans receivable compared to $1,974,950 or
31.0% of non-performing loans and 1.78% of net loans at December 31, 1994
In addition to the continuing internal assessment of the loan portfolio, the
Bank's loan portfolio is also subject to examination by the OTS. The most
recent OTS regular examination was as of December 31, 1994 and concluded June 8,
1995. See "Supervision".
During 1995, the Bank's total non-accrual loans decreased by approximately
$2,725,000.
39
CREDIT RISK
The Bank's primary business is the origination and acquisition of loans to
families and businesses. That activity entails potential credit losses, the
magnitude of which depends on a variety of economic factors affecting
borrowers which are beyond the control of the Bank. While the Bank has
instituted guidelines and credit review procedures to protect it from
avoidable credit losses, some losses may inevitably occur.
Short-term balloon mortgage loans are sometimes used to allow borrowers the
option of waiting until interest rates are more favorable for a long term
fixed rate loan. If interest rates rise, these loans may require renewals if
borrowers fail to qualify for a long term fixed rate loan at maturity and
there is no assurance that a borrower's income will be sufficient to service
the renewal. Management recognizes the risks associated with this type of
lending and believes that the policies and procedures it applies to such
loans lowers the general risk.
SUPERVISION
The Holding Company and the Bank are subject to extensive regulation,
supervision and examination by the OTS, the primary federal regulator, by the
FDIC with regard to the insurance of deposit accounts and, to a lesser
extent, the Federal Reserve. Such regulation and supervision establishes a
comprehensive framework of activities in which a savings and loan holding
company and its financial institution subsidiaries may engage and is intended
primarily for the protection of the SAIF administered by the FDIC and
depositors.
The first significant supervisory concerns regarding the Bank's operation and
underwriting policy were cited by the OTS in the Bank's December 1992
examination. In response to the supervisory concerns, in January 1993, the
Bank hired a new Chief Executive Officer/President who was given the
responsibility of evaluating existing personnel, policies and procedures, and
the development of new operating strategies for the Bank.
In May 1993, the OTS and the Bank entered into a Supervisory Agreement which
was mainly directed at correcting loan underwriting deficiencies; limiting
certain affiliated party transactions, including taking measures to avoid the
appearance of conflicts of interest in transactions with affiliated persons;
amending the Bank's main office lease with an affiliate to more accurately
reflect market rates; developing plans for the disposition of classified
assets; and better monitoring and documenting of loans to borrowers to ensure
compliance with the Bank's loan to one borrower limits. To ensure compliance
with the terms of the Supervisory Agreement, the Bank hired its outside
independent auditors, KPMG Peat Marwick LLP, to report to management on a
quarterly basis their assessment of the Bank's performance. The independent
auditors reviewed the operations of the Bank in connection with the
Supervisory Agreement and certified to management that the Bank was in
compliance with the Supervisory Agreement.
In the following examinations of the Holding Company and the Bank, which were
completed in April, 1994, the OTS cited the Holding Company and the Bank with
certain deficiencies, many of which were the subject of the individual cease
and desist orders that were entered into on October 3, 1994 (collectively,
the "Orders"). The Bank's Order superseded the 1993 Supervisory Agreement
with the OTS. Management of the Holding Company and the Bank consented to
the issuance of the respective Orders, without admitting or denying that
grounds for such Orders existed.
The OTS examination directives which were not included in the Holding
Company's Order, require management of the Holding Company to amend the
Holding Company's office lease with an affiliated party to better reflect
market terms and conditions; discount certain notes receivable to better
reflect market rates; require officers to submit detailed expense reports to
the Board of Directors; discontinue use of the Bank's credit cards for
Holding Company expenditures; and obtain written approval from the Board of
Directors for all Holding Company expenses. The Board and management of the
Holding Company believe that the Holding Company has complied and is in
compliance with each of these directives.
The OTS examination directives that were not included in the Bank's Order,
required management of the Bank to ensure adequate documentation of
accounting information, modify loan relationships to comply with loans to one
borrower; obtain appraisals for certain collateral property; obtain Board of
Directors approval for changes to policies and procedures of the Bank;
increase the amount of the general valuation allowance to $1.85 million and
effectuate changes in the management of the lending department, establishing
guidelines and individual responsibility for monitoring loan maturities,
collection and foreclosures. The Board and management believe the Bank has
complied and is in compliance with each of these directives.
Under the Holding Company's Order, the Company: (i) cannot request dividends
from the Bank without written permission from the OTS; (ii) must reimburse
the Bank for the Holding Company's expenses; (iii) develop a Management
Services Agreement with the Bank which provides for the reimbursement for
employees who work for both the Bank and the Holding Company; (iv) must
40
appoint a Compliance Committee to report to the Board of Directors as to the
Company's compliance with the Order; and (v) the Board must report to the OTS
on a quarterly basis the Company's compliance with the Order.
The Bank's Order provides for the Board of Directors to: (i) develop, adopt
and adhere to policies and procedures to strengthen the Bank's underwriting,
administration, collection and foreclosure efforts; (ii) review and revise
underwriting policies and procedures to comply with regulatory requirements;
(iii) record minutes of the loan committee and grant loans only on procedures
to comply with regulatory requirements; (iv) record minutes of the loan
committee and grant loans only on terms approved by the loan committee; (v)
develop and implement a written plan to collect, strengthen and reduce the
risk of loss for all real estate owned and for certain loans at risk and
secured by real estate; (vi) comply with policies and procedures requiring
written inspection of development and construction loans; (vii) pay no more
than market rate, determined by a rent study approved by the OTS for lease of
the Bank's offices; (viii) make no payment of taxes owned by a person
affiliated with the Bank; (ix) seek a Management Services Agreement for work
performed for the Holding Company by Bank employees; (x) develop and submit
for approval a three year business plan; (xi) comply with loans to one
borrower policy; (xii) make no capital distribution to the Holding Company
without the consent of the OTS; (xiii) appoint a compliance committee; and
(xiv) refrain from purchasing additional dual indexed bonds.
The Orders require the Holding Company and the Bank to establish separate
Compliance Committees. The Compliance Committees meet monthly to review, in
detail, the terms of the Orders to ensure that the respective companies are
in compliance with their Orders. The Bank also contracted with a company
specializing in the review of the system of internal controls and operating
procedures of financial institutions, including compliance with internal
policies and procedures.
In the most recent examinations of the Holding Company and the Bank, which
were concluded in June, 1995, the OTS found the companies to be in compliance
with their Orders. With regard to the Bank, improvement was noted in a
number of areas, including underwriting procedures, documentation,
disposition of problem assets, reduction in the dependency on wholesale funds
and a reduction in operating expenses. In August, 1995 the OTS informed the
Holding Company that it was conducting an expanded examination of the Holding
Company with regard to certain transactions that were entered into by prior
Bank management in 1990 and 1991. As of the date of this filing, the examination
had not been concluded. See, "Item 7. Supervision".
Since the issuance of the 1993 Supervisory Agreement, the Board of Directors
of the Bank has strengthened the overall management of the Bank with the
hiring of a Chief Executive Officer/President in January 1993, the addition
of a new Chief Financial Officer in June 1993, the reorganization of the Loan
Department and the establishment of a new credit culture, coupled with the
addition of a new Chief Lending Officer/Senior Problem Asset Officer in
March, 1995. The Board and management of the Holding Company and the Bank
believe that the Bank's management is taking the necessary corrective
measures to ensure that the Bank is being operated properly and that the
level of classified assets are being carefully monitored and managed in order
to provide for the steady reduction of classified assets. The respective
management's are committed to taking the appropriate steps to have the Orders
lifted as soon as possible.
Management expects that the interest income of the Bank will continue to be
limited, so long as the Bank's Order and current growth limitations remain in
place. Under the growth limitations, the Bank cannot increase its total
assets during any quarter in excess of an amount equal to net interest
credited on deposit liabilities during the quarter. Management of the
Holding Company and the Bank, however, do not believe that the respective
Orders, or the current growth limitations on the Bank, will have a material
impact on the financial condition of the Holding Company or the Bank.
Changes in banking regulation by the U.S. Congress, or changes in the banking
regulations by the OTS or the FDIC could, however, have a significant impact
on the Holding Company and the Bank and their operations.
IMPACT OF INFLATION AND CHANGING PRICES
The financial statements and related data presented herein have been prepared
in accordance with Generally Accepted Accounting Principles ("GAAP"), which
require the measurement of financial position and operating results in terms
of historical dollars, without considering changes in the relative purchasing
power of money over time due to inflation. Unlike most industrial companies,
substantially all of the assets and liabilities of Federal Trust are monetary
in nature. As a result, interest rates have a more significant impact on
Federal Trust's performance than the effects of general levels of inflation.
Interest rates do not necessarily move in the same direction or in the same
magnitude as the prices of goods and services, since such prices are affected
by inflation to a larger extent than interest rates.
IMPACT OF ACCOUNTING REQUIREMENTS
On May 31, 1993, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 114, "Accounting by Creditors
for Impairment of a Loan". This Statement applies to all creditors (not just
financial institutions) and amends FASB Statements Nos. 5, "Accounting for
Contingencies," and 15, "Accounting by Debtors and Creditors for Troubled
Debt Restructurings". It prescribes the recognition criterion for loan
impairment and the measurement methods for certain impaired loans and loans
whose terms are modified in troubled-debt restructurings (a "restructured
loan"). Statement 114 is effective for
41
financial statements issued for fiscal years beginning after December 15,
1994; therefore, it is required to be implemented in the first quarter of
1995 for calendar year companies, and is applicable to the Company in 1995.
In October, 1994, the Financial Accounting Standards Board issued SFAS No.
118, "ACCOUNTING FOR IMPAIRMENT OF A LOAN-INCOME RECOGNITION OF DISCLOSURES."
Statement 118 amends FASB Statement No. 114, to allow a creditor to use
existing methods for recognizing interest income on impaired loans. This
statement amends the disclosure requirements in Statement 114 to require
information about the recorded investment in certain impaired loans and about
how a creditor recognizes interest income related to those impaired loans.
This statement is effective for financial statements for fiscal years
beginning after December 15, 1994 and is applicable to the Company in 1995.
In October, 1994, the Financial Accounting Standards Board issued SFAS No.
119, "DISCLOSURE ABOUT DERIVATIVE FINANCIAL INSTRUMENTS AND FAIR VALUE
FINANCIAL INSTRUMENTS." Statement 119 requires disclosures abut derivative
financial instruments, futures, forward, swap and options contracts, and
other financial instruments with similar characteristics. It amends existing
requirements of FASB Statement No. 119 and FASB Statement No. 107. This
statement is effective for financial statements issues for fiscal year ending
after December 15, 1994, except for entities with less than $150 million in
total assets. For those entities, this statement is effective for financial
statements issued for fiscal year ending December 15, 1995. In 1994, the
Bank made proper disclosure in the Company's accompanying financial
statements in accordance with SFAS No. 119.
In March 1995, the Financial Accounting Standards Board issued SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed of." This Statement requires that long-lived assets and
certain identifiable intangibles to be held and used by an entity be reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. The Statement also
requires that long-lived assets and certain identifiable intangibles to be
disposed of be reported at the lower of the carrying amount of fair value
less costs sell, except for assets that are covered by APB Opinion No. 30
which will continue to be reported at the lower of the carrying amount or net
realizable value. This Statement is effective for financial statements with
fiscal years beginning after December 15, 1995. The Company has determined
that FAS 121 is not applicable in 1995.
In May 1995, the Financial Accounting Standards Board issued SFAS No. 122,
"Accounting for Mortgage Servicing Rights." This Statement amends FASB
Statement No. 65. "Accounting for Certain Mortgage Banking Activities", to
require that a mortgage banking enterprise recognize as separate assets,
rights to service mortgage loans for others, however those servicing rights
are acquired. This Statement requires that a mortgage banking enterprise
assess its capitalized mortgage servicing rights for impairment based on the
fair value of those rights. Impairment should be recognized through a
valuation allowance for each impaired stratum. This Statement is applies
prospectively in fiscal years beginning after December 15, 1995. The Company
has determined that FAS 122 is not applicable in 1995 as the bank does not
engage in this activity.
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock Based Compensation. This Statement establishes
financial accounting and reporting standards for stock-based employee
compensation plans. Those plans include all arrangements by which employees
receive shares of stock or other equity instruments of the employer or the
employer incurs liabilities to employees in amounts based on the price of the
employer's stock. Examples are stock purchase plans, stock options,
restricted stock and stock appreciation rights. This Statement also applies
to transactions in which an entity issues its equity instruments to acquire
goods or services from nonemployees. Those transactions must be accounted
for based on the fair value of the consideration received or the fair value
of the equity instruments issued, whichever is more reliably measurable.
This Statement is effective for transactions entered into in fiscal years
that begin after December 15, 1995. The company has determined that FAS 123
is not applicable in 1995 as no such arrangements were consummated during
1995.
[THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK.]
42
RESULTS OF OPERATIONS
COMPARISON OF THE YEARS ENDED DECEMBER 31, 1995 AND 1994 AND 1993
GENERAL. The Company had a net loss for 1995 of $2,249,701 or $1.00 per
share, compared to a net loss of $179,173 or $.08 per share in 1994 and a net
profit of $766,436 or $.40 per share for 1993, respectively. The decrease in
net earnings for 1995 was due to a decrease in net interest income, an
increased provision for loan losses, and an increase in other expenses,
including a loss on the sale of investment securities.
INTEREST INCOME AND EXPENSE. Interest income was $10,609,387 in 1995
compared to $9,846,673 in 1994 and $9,505,713 in 1993. Interest income on
loans increased to $9,001,646 in 1995 from $7,731,077 in 1994 compared to
$8,188,669 in 1993. The increase in interest income on loans in 1995 as
compared to 1994 was primarily attributable to increased interest rates on
the loans. The decrease in interest income on loans between 1994 and 1993
was the result of a decrease in interest rates in 1994. Interest income on
investment securities decreased to $1,289,085 in 1995 from $1,753,625 in 1994
as a result of a decrease in the interest rates earned on the securities and
a decrease in the average balance of investment securities held by the Bank,
which was attributable to the sale of $7,000,000, par value, of investment
securities in early December, 1995. Other interest and dividends decreased
$43,315 during 1995 and $29,377 during 1994 as a result of a decrease in the
average balance of other interest-bearing assets. Management does not
believe that interest income will increase, except for increases in interest
rates, until the cease and desist order and growth restrictions are removed
and the Bank is able to increase its loan and investment portfolios.
Management expects the rates earned on the portfolios to fluctuate with
general market conditions.
Interest expense increased during 1995 to $8,026,334 compared to $5,780,569
in 1994 and $4,824,342 in 1993 primarily due to an increase in interest rates
and the average amount of deposit accounts outstanding, only partially offset
by a decrease in the FHLB advances outstanding. Management believes that
deposit accounts will increase in the future and FHLB advances and other
borrowings will decrease, although the overall total of deposit accounts and
FHLB advances will not increase until the cease and desist order and growth
restrictions are removed and the Bank is able increase its asset size.
Interest expense on these accounts will increase or decrease according to the
general level of interest rates. Interest on FHLB advances and other
borrowings decreased to $1,812,655 in 1995 from $1,978,219 in 1994 and
$1,744,431 in 1993 due to a decrease in the amount of FHLB advances
outstanding during the year, however this was partially offset by an increase
in interest rates. Management expects to continue to use such advances when
the proceeds can be invested wisely.
PROVISIONS FOR LOAN LOSSES. A provision for loan losses is generally charged
to operations based upon management's evaluation of the potential losses in
its loan portfolio. However, in May 1995, the OTS directed the Bank to
increase its reserves for loan and REO losses by $730,000. The increase was
primarily the result of the classification of the first mortgages on two
loans on which the Bank has a second mortgage position. Also, additional
reserves were required on two commercial loans whose classification was
downgraded. The Bank's provision for loan losses for 1995 was $779,415
compared to $531,483 in 1994 and $589,861 in 1993. Net charge-offs totaled
$707,222 for 1995 compared to $409,329 for 1994 and $31,361 for 1993. Total
non-performing loans at December 31, 1995 were $3,326,000 compared to
$6,373,000 at December 31, 1994 and $3,233,000 at December 31, 1993. The
allowance for loan losses at December 31, 1995 was $2,060,568 or 61.95% of
non-performing loans and 1.83% of net loans receivable compared to $1,974,950
or 31.0% of non-performing loans and 1.78% of net loans receivable at
December, 31, 1994. The amount needed in the allowance for loan losses is
based on the particular circumstances of the individual non-performing loans,
including the type, amount, and value of the collateral, if any, and the
overall composition and amount of the performing loans in the portfolio at
the time of evaluation, and, as a result, will vary over time.
TOTAL OTHER INCOME. Other income decreased from $1,299,318 in 1993 to
$483,277 in 1994 and increased to $505,424 for the year ended December 31,
1995. The increase in other income during 1995 resulted from a $85,820
increase in rent income attributable to a repossessed office building, a gain
on the sale of repossessed real estate of $43,056, and an increase of $12,398
in other miscellaneous income consisting mainly of increased other loan
income, offset partially by a decrease in fees and service charges of $6,084,
and a decrease in gains on loan sales of $113,043.
TOTAL OTHER EXPENSE. Other expense increased to $5,790,591 in 1995 compared
to $4,238,071 in 1994 and $4,215,892 in 1993. The increase of $1,552,520 in
1995 was primarily the result of a loss on the sale of investment securities
of $942,500, increased legal and professional expenses of $264,636, increased
real estate owned expense of $260,892, increased occupancy and equipment
expense of $127,999, a $99,548 increase in deposit insurance premiums, an
increase of $75,935 in losses on the sale of real estate owned, and an
increase of $34,610 in other expense. The company incurred a loss of
$942,500 on the sale of $7,250,000 in FHLB bonds in December, 1995. The
increases in legal and professional expenses, were the result of the legal
costs incurred on non-performing loans and foreclosures on loans secured by
real estate. The increases in real estate owned expense and losses on the
sale of real estate owned, were the result of the increased levels of
repossessed properties at the bank during 1995 and the expenses incurred in
owning the properties and the losses taken on sales of some of the
properties. Management expects legal and other costs associated with
non-performing loans and real estate owned to decrease as the loans are
resolved and the repossessed assets
43
are disposed of. Occupancy and equipment increased primarily due to the
additional space rented by the Company during 1995 as compared to 1994.
Deposit insurance premiums increased as a result of the increase in the
amount of deposits in the Bank during 1995 and the increased assessment rate
on the deposits. Salaries and employee benefits increased $1,246 in 1995, as
the company reduced staff during the second half of the year, and general
insurance increased $1,793 compared to 1994. Other expense increased
primarily as a result of the write-down of an asset and miscellaneous
expenses incurred in the operation of rental properties.
Data processing expense decreased by $9,730 in 1995 as a result of the
renegotiation of the contract with the service bureau in 1994, and the
closure of the bank's drive-in branch on June 1, 1995, which was one block
from the main office of the bank. General and administrative expenses
decreased by $56,804, stationary, printing and supplies expense decreased by
$12,757, and telephone expense decreased by $4,390, postage expense decreased
by $1,234, compared to 1994. These expenses decreased as a result of the
closure of the drive-in branch and efforts by the company to reduce expenses.
Advertising expense increased by $15,304 in 1995, as the bank expanded its
marketing efforts in order to increase the amount of deposits from its local
market.
LIQUIDITY AND CAPITAL RESOURCES AT DECEMBER 31, 1995
GENERAL. Like other financial institutions, the Bank must ensure that
sufficient funds are available to meet deposit withdrawals, loan commitments,
investment needs and expenses. Control of the Bank's cash flow requires the
anticipation of deposit flows and loan payments. The Bank's primary sources
of funds are deposit accounts, FHLB advances and principal and interest
payments on loans.
The Bank requires funds in the short term to finance ongoing operating
expenses, pay liquidating deposits, purchase temporary investments in
securities and invest in loans. The Bank funds short-term requirements
through advances from the FHLB, the sale of temporary investments, deposit
growth and loan principal payments. In addition, management has no plans to
significantly change long-term funding requirements. The Bank requires funds
in the long-term to invest in loans for its portfolio, purchase fixed assets
and provide for the liquidation of deposits maturing in the future. The Bank
funds its long-term requirements with proceeds from maturing loans, the sale
of loans, the sale of investments in securities and deposits and the sale of
real estate.
During the year ended December 31, 1995, the Company used funds primarily
from sales of investment securities of $6,307,501, net increases in deposits
of $7,673,874, proceeds from loan sales of $5,308,828, and sales of real
estate owned of $3,139,470 to fund $9,330,970 in net purchases and
originations of loans, $18,500,000 in net decreases in FHLB advances and a
$5,934,628 decrease in cash and cash equivalents. Management believes that
in the future, funds will be obtained from the above sources as well as FHLB
advances. The weighted average cost of interest-bearing liabilities for the
month ending December 31, 1995 was 5.94% compared to 5.17% at December 31,
1994.
At December 31, 1995, loans-in-process, or closed loans scheduled to be
funded over a future period of time, totaled $1,189,952. Loans committed,
but not closed, totaled $2,162,583, available lines of credit totaled $9,500,
and standby letters of credit totaled $500,000. Funding for these amounts is
expected to be provided by the sources described above. As of December 31,
1995, the Bank had outstanding FHLB advances of $21,000,000 compared to
$39,500,000 in 1994.
During 1993 and 1994, the Company sold common stock through a private
placement memorandum. The offering provided for the sale of a maximum of
500,000 shares (minimum of 125,000 shares). The offering terminated on March
31, 1994. The number of shares sold during 1993 and 1994 were 177,704 and
157,935, respectively and generated $1,281,6111 and $833,410, respectively,
for the Company after payment of offering expenses. No securities were sold
during 1995.
As a member of the Federal Home Loan Bank system, the Bank is required to
maintain a daily average balance of liquid assets equal to a specified
percentage (currently 5%) of net withdrawable deposit accounts and borrowings
payable in one year or less. Federal regulations also require that each
member institution maintain short-term liquid assets of at least 1% of its
net withdrawable deposit accounts and borrowings payable in one year or less.
Generally, the Bank's management seeks to maintain its liquid assets at
comfortable levels above the minimum requirements imposed by its regulators.
For the month ending December 31, 1995, liquidity averaged 8.95%.
The Company expects the Bank's central Florida office to generate sufficient
deposits to provide liquidity for expected loan originations and other
investments. The Asset/Liability Management Committee of the Bank meets
regularly and, in part, reviews liquidity levels to ensure that funds are
available as needed.
The Company last declared a dividend to its stockholders on September 30,
1994, which was paid on November 14, 1994. As a result of the net losses
that have been incurred by the Company since the fourth quarter of 1994, no
additional dividends have been declared and the Board of Directors decided to
suspend the payment of dividends for calendar year 1995, and does not
anticipate the payment of dividends in 1996. In addition, although the
Company does not require OTS approval for the granting
44
of dividends, the Bank is prohibited from granting dividends without OTS
approval and Bank does not anticipate the payment of dividends to the Company
for calendar year 1996. The payment of dividends in subsequent years will
depend on general economic conditions, the overall performance of the
Company, and the capital needs of the Company
CREDIT RISK. The Bank's primary business is the origination or acquisition
of loans to families and businesses. That activity entails potential credit
losses, the magnitude of which depends on a variety of economic factors
affecting borrowers which are beyond the control of the Bank. While the Bank
has instituted guidelines and credit review procedures to protect it from
avoidable credit losses, some losses may occur.
Short-term balloon mortgage loans are sometimes used to allow borrowers the
option of waiting until interest rates are more favorable for a long term
fixed rate loan. If interest rates rise, these loans may require renewals if
borrowers fail to qualify for a long term fixed rate loan at maturity and
there is no assurance that a borrower's income will be sufficient to service
the renewal. Management recognizes the risks associated with this type of
lending and believes that the policies and procedures it applies to such
loans lowers the general risk.
The following table is a reconciliation of the Bank's stockholder's equity
calculated in accordance with generally accepted accounting principles to
regulatory capital:
AT DECEMBER 31, 1995
----------------------------
TANGIBLE CORE RISK-BASED
-------- ---- ----------
(In Thousands of Dollars)
Stockholders' equity as shown in the accompanying
financial statements 6,674 6,674 6,674
Other:
Unrealized loss on investments 780 780 780
General valuation allowances 1,811
Less: Portion in excess of maximum allowable (821)
Intangibles and equity risk investments (170)
----- ----- -----
Regulatory capital 7,454 7,454 8,274
----- ----- -----
----- ----- -----
45
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
46
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 AND 1993
(WITH INDEPENDENT AUDITORS' REPORT THEREON)
47
INDEPENDENT AUDITORS' REPORT
----------------------------
KPMG PEAT MARWICK LLP
111 NORTH ORANGE AVENUE, SUITE 1600
P.O. BOX 3031
ORLANDO, FL 32802
Board of Directors
Federal Trust Corporation and Subsidiaries:
We have audited the consolidated balance sheets of Federal Trust Corporation
and subsidiaries as of December 31, 1995 and 1994, and the related
consolidated statements of operations, stockholders' equity and cash flows
for each of the years in the three-year period ended December 31, 1995.
These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 audits provide 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 and subsidiaries as of December 31, 1995 and 1994 and the
results of their operations and their cash flows for each of the years in the
three year period ended December 31, 1995, in conformity with generally
accepted accounting principles.
As discussed in note 19 to the consolidated financial statements, on October
3, 1994, the Company was ordered by the Office of Thrift Supervision to cease
and desist from certain activities. Failure to meet the cease and desist
order requirements exposes the Company to regulatory sanctions, including
regulatory take-over. At this time, the financial impact, if any, of
regulatory sanctions that may result from the failure of the Company to meet
the cease and desist requirements is not known. The accompanying
consolidated financial statements do not include any adjustments relating to
the recovery of reported asset amounts that could be necessary because of
sanctions that would be implemented by the Office of Thrift Supervision or
other regulators.
As discussed in note 1 to the consolidated financial statements, the Company
adopted the provisions of the Financial Accounting Standards Board's
Statement of Financial Accounting Standard No. 115, "ACCOUNTING FOR CERTAIN
INVESTMENTS IN DEBT AND EQUITY SECURITIES", as of January 1, 1994.
/s/ KPMG PEAT MARWICK LLP
- -----------------------------------
KPMG PEAT MARWICK LLP
March 12, 1996
48
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1995 and 1994
ASSETS 1995 1994
------ ---- ----
Cash $ 1,618,607 743,785
Interest-bearing deposits 51,154 6,860,604
Investments securities available for
sale 15,918,376 -
Investment securities held to
maturity 19,093 24,300,989
Loans, less allowance for loan losses
of $20,060,568 and $1,974,950 in 1995 and
1994, respectively) 112,905,740 111,182,894
Accrued interest receivable on loans 824,330 664,784
Accrued interest receivable on
investment securities 179,874 563,254
Accounts receivable - 19,787
Loan sale proceeds receivable 37,765 2,491,359
Office facilities and equipment, net 1,291,974 1,461,777
Other real estate owned 3,293,108 2,891,479
Federal Home Loan Bank stock, at cost 1,853,200 1,975,000
Prepaid expenses and other assets 358,465 277,588
Deferred income taxes 847,752 426,768
Income tax refund receivable 1,190,000 96,695
------------ -----------
Total Assets $140,389,438 153,956,763
------------ -----------
------------ -----------
See accompanying notes to consolidated financial statements
49
LIABILITIES AND STOCKHOLDERS' EQUITY 1995 1994
------------------------------------ ---- ----
Liabilities:
Deposits $109,203,123 101,528,318
Official checks 695,332 473,944
Federal Home Loan Bank advances (note 8) 21,000,000 39,500,000
Debentures 420,000 420,000
Advance payments by borrowers for taxes and insurance 330,504 436,809
Accrued expenses and other liabilities 680,353 579,872
------------ -----------
Total liabilities 132,329,312 142,938,943
------------ -----------
------------ -----------
Stockholders' equity:
Common stock, $.01 par value, 5,000,000 shares authorized;
2,256,505 shares issued and outstanding at December 31,
1995 and 1994 22,565 22,565
Additional paid-in capital 11,143,659 11,143,659
Retained earnings (accumulated deficit) (2,249,701) -
Treasury stock (16,577 shares of common stock, at cost, at
December 31, 1995 and 1994 (76,525) (76,525)
Unrealized loss on investment securities available for sale,
net (779,87) (71,879)
------------ -----------
Total stockholders' equity 8,060,126 11,017,820
Commitments and contingencies
------------ -----------
Total liabilities and shareholders; equity $140,389,438 153,956,763
------------ -----------
------------ -----------
50
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For each of the years in the three year period ended December 31, 1995
1995 1994 1993
---- ---- ----
Interest income:
Loans $ 9,001,646 7,731,077 8,188,669
Investment securities 1,289,085 1,753,625 925,696
Interest-bearing deposits and other 318,656 361,971 391,348
----------- --------- ---------
Total interest income 10,609,387 9,846,673 9,505,713
----------- --------- ---------
Interest expense:
Deposit accounts 6,213,679 3,802,350 3,079,911
FHLB advances, notes payable and other
borrowings 1,812,655 1,978,219 1,744,431
----------- --------- ---------
Total interest expense 8,026,334 5,780,569 4,824,342
----------- --------- ---------
Net interest income 2,583,053 4,066,104 4,681,371
Provision for loan losses 779,415 531,483 589,861
----------- --------- ---------
Net interest income after provisions
for loan losses 1,803,638 3,534,621 4,091,510
----------- --------- ---------
Other income:
Loan brokerage fees - - 99,478
Fees and service charges 187,782 193,866 279,601
Rent income 88,171 2,351 48,027
Licensing fees - - 90,000
Net gain on sale of property and equipment - - 20,277
Gain of sale of loans 150,664 263,707 338,464
Gain on sale of deposits - - 360,410
Gain on sale of other real estate 43,056 - 22,066
Other 35,751 23,353 40,995
----------- --------- ---------
Total other income 505,424 483,277 1,299,318
----------- --------- ---------
(continued)
51
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS, CONTINUED
1995 1994 1993
---- ---- ----
Other expense:
Salary and employee benefits $ 1,437,633 1,436,387 1,624,363
Loss on sale of investment securities
available for sale 942,500 9,927 (2,985)
Legal and professional 883,331 618,695 491,620
Occupancy and equipment 713,086 585,087 686,160
Real estate owned expenses 653,776 392,884 33,663
Deposit insurance premiums 307,487 207,939 219,844
General and administrative expenses 296,872 353,676 609,514
Loss on sale of real estate 122,222 46,287 -
General insurance 100,627 98,834 105,839
Data processing 77,397 87,127 235,359
Stationery, printing and supplies 49,433 62,190 76,080
Telephone 45,163 49,553 59,436
Other 95,635 51,098 30,127
Advertising 42,029 26,725 15,713
Postage 23,400 24,634 31,159
Loss on foreclosure of notes receivable - 187,028 -
----------- --------- ---------
Total other expense 5,709,591 4,238,071 4,215,892
----------- --------- ---------
Net (loss) income before income taxes (3,481,529) (220,173) 1,174,936
Income tax (benefit) expense (1,231,828) (41,000) 408,500
----------- --------- ---------
Net (loss) income $(2,249,701) (179,173) 766,436
----------- --------- ---------
----------- --------- ---------
(Loss) earnings per share $ (1.00) (.08) .40
----------- --------- ---------
----------- --------- ---------
Weighted average number of shares
outstanding 2,256,505 2,210,957 1,902,042
----------- --------- ---------
----------- --------- ---------
See accompanying notes to consolidated financial statements
52
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For each of the years in the three year period ended December 31, 1995
Unrealized
loss on
Retained investment
Additional earnings securities Treasury Total
paid-in (Accumulated available for stock, stockholders'
Common stock capital Deficit) sale, net at cost equity
------------ ---------- ------------ ------------- -------- -------------
Balances at December 31, 1992 $19,209 9,141,261 (309,801) - (54,950) 8,795,719
Net income (loss) - - 766,436 - - 766,436
Dividends paid - - (179,033) - - (179,033)
Purchase of treasury stock - - - - (62,247) (62,247)
Sales of treasury stock - 39,295 - - 40,672 79,967
Proceeds from sale of 177,704 shares
of common stock 1,777 1,123,033 - - - 1,124,810
------- ---------- ---------- --------- ------- ----------
Balances at December 31, 1993 20,986 10,303,589 277,602 - (76,525) 10,525,652
Net income (loss) - - (179,173) - - (179,173)
Dividends paid - (171,883) (98,429) - - (270,312)
Unrealized loss on investment
securities available for sale, net - - - (71,879) - (71,879)
Proceeds from sale of 157,935 shares
of common stock 1,579 1,011,953 - - - 1,013,532
------- ---------- ---------- --------- ------- ----------
Balances at December 31, 1994 22,565 11,143,659 - (71,879) (76,525) 11,017,820
Net income (loss) - - (2,249,701) - - (2,249,701)
Amortization of unrealized loss
associated with investment
securities held to maturity - - - 15,305 - 15,305
Unrealized loss on investment
securities available for sale, net - - - (723,298) - (723,298)
------- ---------- ---------- --------- ------- ----------
Balances at December 31, 1995 $22,565 11,143,659 (2,249,701) (779,872) (76,525) 8,060,126
------- ---------- ---------- --------- ------- ----------
------- ---------- ---------- --------- ------- ----------
See accompanying notes to consolidated financial statements
53
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For each of the years in the three year period ended December 31, 1995
1995 1994 1993
---- ---- ----
Cash flows provided by (used in) operating activities:
Net (loss) income $(2,249,701) (179,173) 766,436
Adjustments to reconcile net (loss) income to net
cash flows from operations:
Net loss (gain) on sale of investment securities 942,500 9,927 (2,985)
Provision for loan losses 779,415 531,483 589,861
Amortization of premium on purchased loans 428,853 427,201 510,902
Provision for loan loss on real estate owned 318,704 306,784 -
Deferred income taxes (55,000) (371,000) (255,000)
Depreciation of office facilities and equipment 179,416 210,872 242,704
Gain on sale of loans (150,664) (263,707) (338,464)
Net amortization of fees and discounts on loans (84,930) 7,137 (24,462)
Net loss (gain) on the sale of real estate owned 75,374 37,507 (20,277)
Amortization of goodwill - - 163,257
Net amortization of premiums and accretion of
discounts on investment securities 14,574 - 10,424
Net loss (gain) on sale of office facilities and
equipment 371 - (22,066)
Gain on sale of deposits - - (360,410)
Loss on foreclosure of notes receivable - 187,028 -
Amortization of organizational costs and other
assets - - 10,284
Cash provided by (used in) changes in:
Loan sale proceeds receivable 2,453,594 (2,491,359) 1,228,240
Income tax refund receivable (1,093,305) - 61,000
Accrued interest receivable on investment
securities 383,380 13,263 (576,517)
Official checks 221,388 (125,436) (502,658)
Prepaid expenses and other assets (80,877) 179,753 4,293
Accrued interest receivable on loans (159,546) (45,625) 313,029
Accrued expenses and other liabilities 100,481 (203,293) (144,906)
Accounts receivable 19,787 48,312 (29,210)
Accrued interest on deposit accounts 931 (2,283) 226
Notes receivable - - (1,122,025)
Income tax payable - (221,049) 124,354
Technical service fee receivable - - 56,079
----------- ---------- ----------
Net cash provided by (used in) operating activities 2,044,745 (1,943,658) 682,109
----------- ---------- ----------
(Continued)
54
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
1995 1994 1993
---- ---- ----
Cash flows provided by (used in) investing activities:
Long-term loans originated or purchased, net of
principal repayments $ (9,330,970) (23,430,621) (3,549,739)
Proceeds from sale of investment securities, available
for sale 6,307,501 12,117,605 11,678,561
Proceeds for the sale of real estate owned 3,139,470 461,554 647,121
Proceeds from loans sold 2,855,234 4,620,485 30,421,759
Capitalization costs on other real estate owned (154,961) - -
Proceeds from the sale of Federal Home Loan Bank
stock 121,800 840,300 -
Purchases of investment securities - - (48,222,168)
Purchase of premises and equipment (36,951) (314,621) (122,925)
Proceeds from sale of property and equipment 26,967 - 2,641,255
Maturities of investment securities held to maturity 24,968 - -
Purchase of Federal Home Loan Bank stock - - (937,700)
------------ ----------- -----------
Net cash provided by (used in) investing activities 2,953,058 (5,705,298) (7,443,836)
------------ ----------- -----------
Cash flows provided by (used in) financing activities:
Deposit accounts:
Increase (decrease) in certificate accounts, net 12,625,716 19,936,747 (4,482,632)
Net (decrease) increase in money market deposit
accounts, commercial checking, NOW accounts
and statement savings (4,951,858) 2,852,143 (33,363,648)
Net repayment of FHLB advances (18,500,000) (15,800,000) -
Net (decrease) increase in advance payments by
borrowers for taxes and insurance (106,305) 210,203 (78,248)
Net proceeds from FHLB advances - - 27,300,000
Proceeds from sale of deposits - - 19,513,927
Repayment of other borrowings - - (1,750,000)
Issuance of capital stock, net of stock issuance costs - 1,013,532 1,124,810
Dividends paid on common stock - (270,312) (179,033)
Sale of treasury stock - - 79,967
Purchase of treasury stock - - (62,247)
------------ ----------- -----------
Net cash (used in) provided by financing
activities (10,932,431) 7,942,313 8,102,896
------------ ----------- -----------
Net (decrease) increase in cash and cash
equivalents (5,934,628) 293,357 1,341,169
Cash and cash equivalents at beginning of period 7,604,389 7,311,032 5,969,863
------------ ----------- -----------
Cash and cash equivalents at end of period $ 1,669,761 7,604,389 7,311,032
------------ ----------- -----------
------------ ----------- -----------
(Continued)
55
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
1995 1994 1993
---- ---- ----
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 8,291,649 5,881,345 4,705,102
----------- --------- ---------
----------- --------- ---------
Income taxes $ - 685,417 490,262
----------- --------- ---------
----------- --------- ---------
Supplemental disclosures of non-cash transactions:
Real estate acquired in settlement of loans $ 3,780,216 2,629,056 562,432
----------- --------- ---------
----------- --------- ---------
Market value adjustment - investment securities
available for sale
Market value adjustment - investments (1,181,624) (107,647) -
Deferred income tax asset (401,752) (35,768) -
----------- --------- ---------
Unrealized loss on investment securities
available for sale, net $ (779,872) (71,879) -
----------- --------- ---------
----------- --------- ---------
See accompanying notes to consolidated financial statements.
56
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995 and 1994
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) ORGANIZATION
Federal Trust Corporation (the "Holding Company"), is the sole
shareholder of Federal Trust Bank (the "Bank"). The Holding Company
operates as a unitary savings and loan holding company. The Holding
Company's business activities primarily include the operation of the
Bank. Three other subsidiaries, First Coast Financial Corporation
("FCFC"), a mortgage broker, FC Construction Services Corp.
("FCCSC"), a commercial construction company and FedTrust Building
Corporation ("FTBC"), which operated office buildings in Amelia
Island, Florida were disposed of during fiscal year 1993. The assets
of FCCSC and FTBC were sold on July 31, 1993 and the companies were
dissolved. The stock of FCFC was sold on June 30, 1993. Operations
of these subsidiaries were not significant to the consolidated entity.
The Holding Company presently operates two non-bank subsidiaries,
Federal Trust Properties Corp. ("FTPC"), a real estate holding and
development company organized on December 12, 1994 and 1270 Leasing
Company ("1270 LC"), a real estate leasing entity organized May 27,
1994, for the purposes of leasing the Holding Company's office
located in Winter Park, Florida.
During 1995, FTPC began developing a HUD-qualified, multi-unit
apartment complex located in east Orlando. As of December 31, 1995,
FTPC's investment in this multi-unit apartment complex totaled
$112,031.
The Bank was chartered as a federal stock savings bank. The Bank
provides a full range of banking services to individual and corporate
customers.
(B) BASIS OF FINANCIAL STATEMENT PRESENTATION
The consolidated financial statements include the accounts of the
Holding Company and its subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation.
The accounting and reporting policies of Federal Trust Corporation and
subsidiaries (collectively called the "Company") conform to generally
accepted accounting principles and to general practices within the
thrift industry. The following summarizes the more significant of
these policies and practices.
57
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1), CONTINUED
(C) EARNINGS PER SHARE
Earnings per share is computed using the weighted average number of
common shares outstanding during the period. Stock warrants issued
are not included in the calculation of earnings per share as their
effect is not dilative.
(D) CASH AND CASH EQUIVALENTS
For the purposes of reporting cash flows, cash and cash
equivalents includes cash and interest-bearing deposits with
maturities of three months or less.
(E) FEDERAL HOME LOAN BANK ("FHLB") STOCK
This asset is owned due to regulatory requirements and is carried at
cost. This stock is pledged as collateral to secure FHLB advances.
(F) INVESTMENT SECURITIES HELD TO MATURITY AND INVESTMENT SECURITIES
AVAILABLE FOR SALE
At January 1, 1994, the Company adopted Statement of Financial
Accounting Standards ("FAS") No. 115, "ACCOUNTING FOR CERTAIN
INVESTMENTS IN DEBT AND EQUITY SECURITIES." FAS 115 requires the
reporting of certain securities at fair value except for those
securities which the Company has the positive intent and ability to
hold to maturity. Investments to be held for indefinite periods of
time and not intended to be held to maturity are classified as
available for sale and are carried at fair value. Unrealized holding
gains and losses are included in stockholders' equity net of the
effect of income taxes.
Securities that management has the intent and the Company has the
ability at the time of purchase or origination to hold until maturity
are classified as investment securities held to maturity. Securities
in this category are carried at amortized cost adjusted for accretion
of discounts and amortization of premiums using the level yield method
over the estimated life of the securities. If a security has a
decline in fair value below its amortized cost that is other than
temporary, then the security will be written down to its new cost
basis by recording a loss in the consolidated statements of
operations. Realized gains and losses on investment securities are
computed using the specific identification method.
(G) LOANS
Loans receivable that the Bank has the intent and ability to hold
until maturity or payoff are reported at their outstanding unpaid
principal balance reduced by any charge-offs or specific valuation
accounts, net of any deferred fees on originated loans.
58 (Continued)
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1), CONTINUED
(G) CONTINUED
Loan origination fees and certain direct loan origination costs are
capitalized and recognized in income over the contractual life of the
loans, adjusted for estimated prepayments based on the Bank's
historical prepayment experience. If the loan is prepaid, the
remaining unamortized fees and costs are charged to operations.
Amortization is ceased on nonaccrual loans.
Commitment fees and costs relating to the commitments are recognized
over the commitment period on a straight-line basis. If the
commitment is exercised during the commitment period, the remaining
unamortized commitment fee at the time of exercise is recognized over
the life of the loan as an adjustment of yield.
Loans are placed on nonaccrual status when the loan becomes 90 days
past due as to interest or principal, unless the loan is both well
secured and in the process of collection, or when the full timely
collection of interest or principal becomes uncertain. 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 Bank adopted the provisions of Statement of Financial Accounting
Standards No. 114, "ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN",
as amended by SFAS No. 118, "ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF
A LOAN-INCOME RECOGNITION AND DISCLOSURE", on January 1, 1995. The
Bank, considering current information and events regarding the
borrower's ability to repay their obligations, considers a loan to be
impaired when it is probable that the Bank will be unable to collect
all amounts due according to the contractual terms of the loan
agreement. When a loan is considered to be impaired, the amount of
the impairment is measured based on the present value of expected
future cash flows discounted at the loan's effective interest rate,
the secondary market value of the loan, or the fair value of the
collateral for collateral dependent loans. Impaired loans are written
down to the extent that principal is judged to be uncollectible and,
in the case of impaired collateral dependent loans where repayment is
expected to be provided solely by the underlying collateral and there
is no other available and reliable sources of repayment, are written
down to the lower of cost or collateral value. Impairment losses are
included in the allowance for loan losses through a charge to the
provisions for loan losses. Cash receipts on impaired loans are
applied to reduce the principal amount of such loans until the
principal has been recovered and are recognized as interest income
thereafter. Prior periods have not been restated.
59 (Continued)
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) CONTINUED
(H) ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is established through a provision for
loan losses charged to expenses. Loans are charged against the
allowance when management believes that the collectibility of the
principal is unlikely. The allowance is an estimated amount that
management believes will be adequate to absorb losses inherent in the
loan portfolio and commitments to extend credit, based on evaluations
of its collectibility. The evaluations take into consideration such
factors as changes in the nature and volume of the portfolio, overall
portfolio quality, specific problem loans and commitments, and current
and anticipated economic conditions that may affect the borrower's
ability pay. While management uses the best information available to
recognize losses on loans, future additions to the allowance may be
necessary based on changes in economic conditions.
In accordance with SFAS No. 114, as amended by SFAS No. 118, the
Bank records impairment in the value of its loan as an addition to the
allowance for loan losses. Any changes in the value of impaired loans
due to the passage of time or revisions in estimates are reported as
adjustments to provision expense in the same manner in which
impairment initially was recognized. Adoption of SFAS No. 114, as
amended by SFAS No. 118, had no impact on the level of the overall
allowance for loan losses or on operating results, and does not affect
the Bank's policies regarding write-offs, recoveries or income
recognition.
Regulatory examiners may require the Bank to recognize additions
to the allowance based upon their judgment about the information
available to them at the time of their examination.
(I) OTHER REAL ESTATE OWNED
Real estate acquired in the settlement of loans is initially recorded
at the lower of cost (principal balance of the former loan plus costs
of obtaining title and possession) or estimated fair value at the date
of acquisition. Subsequently, such real estate acquired is carried at
the lower of cost or fair market value less estimated costs to sell.
Costs relating to development and improvement of the property are
capitalized, whereas those relating to holding the property are
charged to operations.
(J) OFFICE FACILITIES AND EQUIPMENT
Office facilities and equipment 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. Leasehold improvements are stated at cost less accumulated
amortization. Amortization of leasehold improvements is computed
using the straight-line method over the lesser of the estimated useful
life or the respective lease terms.
60 (Continued)
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1), CONTINUED
(K) INCOME TAXES
The Holding Company and its subsidiaries file a consolidated income
tax return. Income taxes are allocated proportionately to the Holding
Company and its subsidiaries as though separate income tax returns
were filed.
The Holding Company accounts for income taxes under the asset and
liability method. Deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in
income in the period that included the enactment date.
(L) USE OF ESTIMATES
The preparation of financial statements in conformity with
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. Actual results
could differ from these estimates.
(M) RECLASSIFICATIONS
Certain amounts previously reported have been reclassified to
conform to the current presentation.
(2) BRANCH SALE
In July 1993, the Company signed an agreement to sell certain assets
and be relieved of deposit liabilities associated with the Bank's Amelia
Island branch office. The transaction included the sale of the branch
premises, furniture, fixtures and equipment. The net assets sold for
proceeds of $7,451,499 and consisted principally of loans of $25,229,856,
branch premises, furniture, fixtures and equipment of $1,717,207 and
deposits assumed of $19,153,517.
61 (Continued)
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(3) INVESTMENT SECURITIES HELD TO MATURITY AND INVESTMENT SECURITIES
AVAILABLE FOR SALE
The amortized cost and estimated market values of investment securities held
to maturity and available for sale at December 31, 1995 and 1994 are as
follows:
INVESTMENT SECURITIES HELD TO MATURITY:
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES MARKET VALUE
---- ----- ------ ------------
1995:
Other $ 19,093 -- -- 19,093
----------- --------- ---------- ----------
1994:
Obligations of U.S.
government agencies 24,256,928 -- (5,342,700) 18,914,228
Other 44,061 -- 44,061
----------- --------- ---------- ----------
$24,300,989 -- (5,342,700) 18,958,289
----------- --------- ---------- ----------
----------- --------- ---------- ----------
INVESTMENT SECURITIES AVAILABLE FOR SALE:
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES MARKET VALUE
---- ----- ------ ------------
1995:
Obligations of U.S.
government agencies $17,100,000 -- (1,181,624) 15,918,376
----------- --------- ---------- ----------
----------- --------- ---------- ----------
Market values for all securities were calculated using published prices or
the equivalent at December 31, 1995.
The Bank's investment in obligations of U.S. government agencies consist of
dual indexed bonds issued by the Federal Home Loan Bank. The bonds have a
par value of $17,100,000 and pay interest based on the difference between
two indices. The majority of the bonds, approximately $16,100,000 at
December 31, 1995, pay interest at the 10 year constant maturity treasury
rate less the 3 month or 6 month LIBOR rate plus a contractual amount
ranging from 2.3% to 4.0%. The Bank purchased the bonds to partially
offset its risk related to its portfolio of adjustable rate mortgages and
as such subjects the Bank to a certain degree of market risk as the indices
change with prevailing market interest rates.
62 (Continued)
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(3), CONTINUED
The amortized cost and estimated market value of investment securities held
to maturity and investment securities available for sale at December 31,
1995, by contractual maturity, are below. 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.
ESTIMATED
AMORTIZED COST MARKET VALUE
-------------- ------------
INVESTMENT SECURITIES HELD TO MATURITY:
Due in one year or less $ 19,093 19,093
----------- ----------
----------- ----------
INVESTMENT SECURITIES AVAILABLE FOR SALE:
Due after one year through five years 10,100,000 9,570,251
Due after five years through ten years 7,000,000 6,348,125
----------- ----------
$17,100,000 15,918,376
----------- ----------
----------- ----------
Proceeds from sales of investment securities available for sale were
$6,307,501 and $12,117,605 in 1995 and 1994, respectively. Gross realized
losses on sales of investment securities available for sale during 1995
were $942,500.
In March 1994, the Bank transferred securities in the amount of $24,350,000
from the available for sale category to the held to maturity category
resulting in an unrealized loss of $112,500 which remained in equity and
was being amortized as an adjustment to yield over the remaining term of
the investments. In November 1995, the Bank transferred investment
securities classified as held to maturity to investment securities
available for sale in accordance with guidelines issued by the Financial
Accounting Standards Board which permitted such a one-time election. The
amortized cost of the investment securities transferred was $24,350,000 and
the estimated market value was $22,283,281 and the unrealized loss was
$2,066,719.
63 (Continued)
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(4) LOANS
A summary of loans at December 31, 1995 and 1994 follows:
1995 1994
----------- -----------
Real estate loans:
Permanent conventional:
Commercial $ 13,112,448 14,674,730
Residential 97,612,560 92,576,368
Residential construction conventional 1,666,960 1,342,000
------------ -----------
Total real estate loans 112,391,968 108,593,098
Commercial loans 1,442,811 891,356
Consumer loans 180,194 502,582
Lines of credit 1,258,501 2,384,887
------------ -----------
Total loans receivable 115,273,474 112,371,923
Net premium on real estate loans purchased 986,918 1,460,167
Less:
Unearned loan origination fees, net of direct loan
origination costs 104,132 148,973
Undisbursed portion of loans in process 1,189,952 525,273
Allowance for loan losses 2,060,568 1,974,950
------------ -----------
Loans receivable, net $112,905,740 111,182,894
------------ -----------
------------ -----------
At December 31, 1995 and 1994, nonaccrual loans were approximately
$3,326,000 and $6,373,000, respectively. Nonaccrual loans consist
primarily of residential and nonresidential mortgage loans. If interest
due on all nonaccrual loans had been accrued at the original contract
rates, estimated interest income would have been increased by
approximately $381,000, $616,000 and $483,000 in 1995, 1994 and 1993,
respectively.
The recorded investment in loans for which an impairment has been
recognized and the related allowance for loan losses at December 31, 1995
were $6,122,356 and $1,319,343, respectively. All loans identified for
impairment had an associated allowance for credit losses determined in
accordance with SFAS No. 114. The average recorded investment in impaired
loans during 1995 was $6,032,515. Interest income recognized on impaired
loans during 1995 was $338,997.
64 (Continued)
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(4), CONTINUED
The activity in the allowance for loan losses for the years ended
December 31, 1995, 1994 and 1993 is as follows:
1995 1994 1993
---------- --------- ---------
Balance at beginning of period $1,974,950 1,850,000 1,291,500
Charge-offs (707,222) (409,329) (31,361)
Provision for loan losses 779,415 531,483 589,861
Recoveries 13,425 2,796 --
---------- --------- ---------
Balance at end of period $2,060,568 1,974,950 1,850,000
---------- --------- ---------
---------- --------- ---------
Loan customers of the Bank include certain executive officers and directors
and their related interests and associates. All loans to this group were
made in the ordinary course of business at prevailing terms and conditions.
Loan transactions for the year ended December 31, 1994 with executive
officers, directors and affiliates are as follows:
Loans outstanding, beginning of period $ 1,237,339
Loan repayments (1,237,339)
-----------
Loans outstanding, end of period $ --
-----------
-----------
There were no outstanding loans to executive officers, directors and
affiliates at December 31, 1995.
(5) LOAN SERVICING
Mortgage loans serviced for others are not included in the
accompanying consolidated balance sheets. The unpaid principal balances
of these loans were $1,301,078, $1,440,629, and $17,926,011 at
December 31, 1995, 1994 and 1993, respectively. Servicing fees earned
were $22,026, $52,144 and $45,080 for the years ended December 31, 1995,
1994 and 1993, respectively.
65 (Continued)
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(6) OTHER REAL ESTATE OWNED
Activity in the allowance for losses for other real estate owned for
the years ended December 31, 1995 and 1994 is as follows:
1995 1994
--------- -------
Beginning balance $ 431,050 25454
Provision charged to income 318,704 166,784
Charge-offs, net of recoveries (749,754) (251,145)
Transfer from allowance for loan losses -- 489,957
--------- --------
Ending balance $ -- 431,050
--------- --------
--------- --------
(7) OFFICE FACILITIES AND EQUIPMENT
Office facilities and equipment and their related accumulated
depreciation and amortization at December 31, 1995 and 1994 are summarized
as follows:
ESTIMATED
1995 1994 USEFUL LIVES
---------- --------- ------------
Leasehold improvements $1,251,412 1,252,089 3-25 years
Furniture and fixtures 651,910 588,681 3-7 years
Automobiles 33,841 147,472 5 years
---------- ---------
1,937,163 1,988,242
Less accumulated depreciation and amortization 645,189 526,465
---------- ---------
Office facilities and equipment, net $1,291,974 1,461,777
---------- ---------
---------- ---------
66 (Continued)
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(8) DEPOSITS
A detail of deposits at December 31, 1995 and 1994 follows:
WEIGHTED WEIGHTED
AVERAGE AVERAGE
1995 INTEREST 1994 INTEREST
BALANCE RATE BALANCE RATE
------------ -------- ----------- ---------
Commercial checking accounts-non-interest-bearing $ 209,637 -- 257,254 --
NOW accounts 674,556 .68% 856,909 .70%
Money market deposit accounts 6,601,689 4.02% 9,247,272 4.02%
Statement savings accounts 2,157,600 2.60% 4,233,905 2.62%
------------ ------ ----------- -----
9,643,482 3.42% 14,595,340 3.35%
------------ ------ ----------- -----
Certificate accounts by interest rates:
1.00% - 3.99% 1,219,498 5,431,454
4.00% - 4.99% 2,170,725 29,420,575
5.00% - 5.99% 54,846,938 29,165,446
6.00% - 7.99% 41,310,738 22,858,572
8.00% - 8.99% -- 46,136
------------ ------ ----------- -----
Total certificate accounts 99,547,899 5.89% 86,922,183 5.20%
------------ ------ ----------- -----
Accrued interest 11,742 10,795
------------ -----------
Total deposit accounts $109,203,123 5.66% 101,528,318 4.93%
------------ ------ ----------- -----
------------ ------ ----------- -----
The following table presents, by various interest rate categories, the
amount of certificate accounts maturing during the periods reflected below:
INTEREST RATE 1996 1997 1998 1999 2000 TOTAL
------------- ----------- --------- ---------- -------- --------- ----------
1.00%-3.99% $ 902,106 239,835 45,876 6,376 25,305 1,219,498
4.00%-4.99% 1,725,732 100,238 342,707 2,048 -- 2,170,725
5.00%-5.99% 46,952,591 2,608,436 4,473,375 150,586 661,950 54,846,938
6.00%-6.99% 32,201,506 2,358,455 477,462 193,649 624,907 35,855,979
7.00%-7.99% 4,346,940 1,009,819 98,000 -- -- 5,454,759
---------- --------- --------- ------- --------- ----------
$86,128,875 6,316,783 5,437,420 352,659 1,312,162 99,547,899
----------- --------- --------- ------- --------- ----------
----------- --------- --------- ------- --------- ----------
67 (Continued)
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(8), CONTINUED
The Bank's large denomination ($100,000 and over) deposits included in
certificate accounts mature as follows:
AT DECEMBER 31, 1995 AT DECEMBER 31, 1994
--------------------- --------------------
AMOUNT % TOTAL AMOUNT % TOTAL
------------ ------- ---------- -------
Three months or less $ 4,143,788 27.1% 1,500,000 13.1%
Over three months to six months 4,038,318 26.4% 4,600,403 40.1%
Over six months to twelve months 4,648,096 30.4% 4,666,976 40.6%
Over twelve months 2,446,328 16.1% 718,240 6.2%
----------- ----- ---------- ------
$15,276,530 100.0% 11,485,619 100.0%
----------- ----- ---------- ------
----------- ----- ---------- ------
Interest expense on deposit accounts for the years ended December 31,
1995, 1994 and 1993 is as follows:
1995 1994 1993
---------- --------- ---------
Interest on NOW and Super NOW accounts $ 5,624 6,876 26,757
Interest on money market accounts 254,271 260,832 29,946
Interest on savings accounts 91,557 211,787 512,308
Interest on certificate accounts 5,862,227 3,322,855 2,510,900
---------- --------- ---------
$6,213,679 3,802,350 3,079,911
---------- --------- ---------
---------- --------- ---------
(9) FEDERAL HOME LOAN BANK ADVANCES
A summary of advances from the Federal Home Loan Bank of Atlanta at
December 31, 1995 and 1994 follows:
MATURING IN YEAR INTEREST RATE
ENDING DECEMBER 31, (VARIABLE RATES) DECEMBER 31, 1995
------------------- ---------------- -----------------
1996 5.83 $ 5,000,000
5.76 7,000,000
(6.10) 4,000,000
1998 6.12 5,000,000
-----------
$21,000,000
-----------
-----------
68 (Continued)
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(9), CONTINUED
MATURING IN YEAR INTEREST RATE
ENDING DECEMBER 31, (VARIABLE RATES) DECEMBER 31, 1995
------------------- ---------------- -----------------
1995 (6.88) $ 6,100,000
5.94 3,000,000
6.31 5,000,000
5.62 5,000,000
6.85 3,400,000
5.08 2,000,000
5.93 5,000,000
6.23 5,000,000
6.36 5,000,000
-----------
$39,500,000
-----------
-----------
Pursuant to collateral agreements with the Federal Home Loan Bank ("FHLB"),
advances are secured by all stock in the FHLB in the amount of $1,853,200
and(qualifying mortgage loans in the amount of $35,277,703. In addition,
investment securities with book values)of $7,000,000 and $24,256,928 at
December 31, 1995 and 1994, respectively, and with market values of
approximately $6,348,125 and $18,914,228 at December 31, 1995 and 1994,
respectively, were pledged as collateral to the Federal Home Loan Bank for
FHLB advances.
(10) FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "DISCLOSURES ABOUT
FAIR VALUE OF FINANCIAL INSTRUMENTS," requires that the Company disclose
estimated fair values for financial instruments. The following methods and
assumptions were used by the Company in estimating fair values of financial
instruments as disclosed herein:
CASH AND CASH EQUIVALENTS - The carrying amount of cash and cash
equivalents (demand deposits maintained by the Company at various
financial institutions) and interest bearing deposits represents fair
value.
INVESTMENT SECURITIES AVAILABLE FOR SALE AND HELD TO MATURITY - The
Company's investment securities available for sale represent
investments in Federal Home Loan Bank ("FHLB") bonds. The fair value
of the FHLB bonds was based on quoted market prices. The Company's
investments held to maturity represent investments in Orange County,
Florida Tax Certificates. The carrying values of these certificates
approximate the fair value.
69 (Continued)
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(10), CONTINUED
FEDERAL HOME LOAN BANK STOCK - Fair value approximates carrying 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 commercial real estate, commercial and
consumer loans other than variable rate loans are estimated using
discount cash flow analysis, using interest rates currently being
offered for loans with similar terms to borrowers of similar credit
quality. Fair values of impaired loans are estimated using discounted
cash flow analysis or underlying collateral values, where applicable.
DEPOSITS - The fair values disclosed for demand deposits are, by
definition, equal to the amount payable on demand at December 31, 1995
(that is their carrying amounts). The carrying amounts of variable
rate, fixed term money market accounts and certificates of deposit
(CDs) approximate their fair value at the reporting date. Fair values
for fixed rate CDs are estimated using a discounted cash flow
calculation that applies interest rates currently being offered on
certificates to a schedule of aggregated expected monthly maturities on
time deposits.
FEDERAL HOME LOAN BANK ADVANCES AND DEBENTURES - Fair values of Federal
Home Loan Bank advances and other borrowings are estimated using
discounted cash flow analysis based on the Company's current
incremental borrowing rates for similar types of borrowing
arrangements. The carrying value of the debentures approximates fair
value.
COMMITMENTS - 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.
The estimated fair values of the Company's financial instruments at
December 31, 1995 are as follows:
CARRYING AMOUNT FAIR VALUE
---------------------- -------------
Financial assets;
Cash and cash equivalents $ 1,669,761 1,669,761
Investment securities available for sale 15,918,376 15,918,376
Investment securities held to maturity 19,093 19,093
Loans (carrying amount less allowance
for loan loss of $2,060,568) 112,905,740 113,500,00
Federal Home Loan Bank stock 1,853,200 1,853,200
70 (Continued)
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(10), CONTINUED
CARRYING AMOUNT FAIR VALUE
---------------------- -------------
Financial liabilities:
Deposits:
Without stated maturities $ 9,643,482 9,644,000
With stated maturities 99,547,899 99,800,000
Federal Home Loan Bank advances 21,000,000 21,075,670
Debentures 420,000 420,000
Commitments:
Letters of credit - 500,000
Loan commitments - 2,172,083
The carrying amounts shown in the table are included in the consolidated
balance sheet under the indicated captions.
(11) DEBENTURES AND COMMON STOCK PURCHASE WARRANTS
During 1991, the Company issued $420,000 of 10% callable debentures
maturing in 1996. The debentures were issued in $1,000 denominations and
are unsecured. Interest on the debentures is payable annually.
One stock purchase warrant was issued in connection with each $10 of
debentures purchased. Each warrant entitles the registered owner to
purchase one and a quarter shares of common stock at the greater of $10 or
the book value per share of common stock as determined in accordance with
generally accepted accounting principles at the end of the Company's most
recent fiscal year end or, at any time prior to November 15, 1996. All
warrants issued are outstanding as of December 31, 1995.
(12) INCOME TAXES
Income tax for the years ended December 31, 1995 and 1994 consists of:
CURRENT DEFERRED TOTAL
------- -------- -----
1995:
Federal $(1,176,828) (36,000) (1,212,828)
State - (19,000) (19,000)
------------ -------- -----------
Total $(1,176,828) (55,000) (1,231,828)
------------ -------- -----------
------------ -------- -----------
71 (Continued)
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(12), CONTINUED
CURRENT DEFERRED TOTAL
------- -------- -----
1993:
Federal $294,000 (328,000) (34,000)
State 36,000 (43,000) (7,000)
-------- -------- --------
Total $330,000 (371,000) (41,000)
-------- -------- --------
-------- -------- --------
CURRENT DEFERRED TOTAL
------- -------- -----
1993:
Federal $590,000 (229,000) (361,500)
State 73,000 (26,000) (47,000)
-------- --------- --------
Total $663,500 (255,000) (408,500)
-------- -------- --------
-------- -------- --------
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 are as follows:
1995 1994
----------- ---------
Deferred tax assets:
Allowance for loan losses $ 642,000 594,000
Unrealized loss on investment securities available for sale 401,752 35,768
Deferred loan fees 41,000 56,000
Provision for loss on real estate owned - 195,000
----------- ---------
1,084,752 880,768
----------- ---------
Deferred tax liabilities:
FHLB stock dividend (71,000) (109,000)
Amortization of discount on loans (70,000) (188,000)
Accrual to cash (68,000) (136,000)
Depreciation (28,000) (21,000)
----------- ---------
(237,000) (454,000)
----------- ---------
Total $ 847,752 426,768
----------- ---------
----------- ---------
72 (Continued)
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company has recorded a deferred tax asset of $847,752 and $426,768 as of
December 31, 1995 and 1994, respectively. Although realization of the
deferred tax asset is not assured, the Company believes that it has paid
sufficient taxes in prior carryback years which will enable it to realize
the net deferred tax asset. The amount of the deferred tax asset considered
realizable, however, could be reduced in the near term if estimates of
future taxable income during the carryforward periods are reduced. No
valuation allowance is required at December 31, 1995 and 1994.
73 (Continued)
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(12), CONTINUED
The Company's effective tax rate on pretax (loss) income for 1995, 1994 and 1993
differs from the statutory Federal income tax rate as follows:
1995 % 1994 % 1993 %
---- --- ---- --- ---- ---
Tax (benefit) provision at
statutory rate $(1,183,720) (34.0)% $(74,860) (34.0)% 399,480 (34.0)%
Increase (decrease) in tax - - 7,000 3.2% - -
resulting from: - - 65,000 29.5% - -
Officers life insurance
Loss on sale of subsidiary (107,473) (3.0)% (4,400) (2.0)% 31,020 2.6%
State income taxes net of - - (9,000) (4.1)% - -
federal income tax benefit 59,365 1.7% (24,740) (11.2)% (22,000) (1.9)%
----------- ----- ------- ----- ------- ----
Graduated tax rates $(1,231,828) (35.3)% (41,000) (18.6)% 408,500 34.7%
----------- ----- ------- ----- ------- ----
----------- ----- ------- ----- ------- ----
Other
(13) COMMITMENTS AND CONTINGENCIES
Future minimum lease payments under noncancelable leases, at December 31, 1995
are as follows:
YEAR ENDING DECEMBER 31, OPERATING LEASES
------------------------ ----------------
1996 $ 333,330
1997 333,330
1998 333,330
1999 333,330
2000 333,330
Thereafter 482,171
------------
Total minimum lease payments $ 2,148,821
------------
------------
Rent expense amounted to $334,834, $282,868 and $226,580 for the years ended
1995, 1994 and 1993, respectively.
74 (Continued)
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(14) PARENT COMPANY FINANCIAL INFORMATION
The parent company financial information is as follows at December 31:
CONDENSED BALANCE SHEETS
1995 1994
---- ----
Assets:
Cash, deposited with subsidiary $ 242 791,612
Prepaid expenses and other assets 315,186 219,688
Property, plant and equipment, net 655,237 743,633
Investment in subsidiaries 7,764,936 10,070,687
---------- ----------
8,735,601 11,825,620
---------- ----------
---------- ----------
Liabilities and stockholders' equity:
Due to subsidiaries 103,000 387,800
Accounts payable and accrued expenses 152,475 -
Capital debentures 420,000 420,000
Stockholders' equity 8,060,126 11,017,820
---------- ----------
8,735,601 11,825,620
---------- ----------
---------- ----------
75 (Continued)
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(14), CONTINUED
CONTINUED CONDENSED STATEMENTS OF OPERATIONS
1995 1994 1993
---- ---- ----
Revenues:
Interest and dividend income $ 8,280 25,997 24,610
Other income 250,485 205,764 669,947
----------- -------- ---------
Total income 258,765 231,761 694,557
----------- -------- ---------
Expenses:
Compensation 230,279 279,680 259,574
Occupancy 420,285 329,159 296,876
Other expense 473,678 795,703 710,030
----------- -------- ---------
Total expenses 1,124,242 1,404,542 1,266,480
----------- -------- ---------
(Loss) before income of subsidiaries (865,477) (1,172,781) (571,923)
(Loss) income of subsidiaries (1,597,758) 586,029 1,150,359
----------- -------- ---------
Net (loss) income before taxes (2,463,235) (586,752) 578,436
Income tax (benefit) expense (213,534) 407,579 188,000
----------- -------- ---------
Net (loss) income (2,249,701) (179,173) 766,436
----------- -------- ---------
----------- -------- ---------
76 (Continued)
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(14), CONTINUED
CONDENSED STATEMENT OF CASH FLOWS
1995 1994 1993
---- ---- ----
Cash flows provided by (used in) operating activities:
Net (loss) income $(2,249,701) (179,173) 766,436
Adjustments tp reconcile net (loss) income to net cash
provided by (used in) operating activities:
Loss on foreclosure of notes receivable - 187,028 -
Amortization of organizational costs - - 5,768
Loss on sale of premises and equipment 371 - -
Depreciation 74,672 56,706 39,710
Equity in undistributed earnings of subsidiaries 1,597,758 (586,029) (1,150,359)
Cash provided by (used in) changes in:
Investment in and due from subsidiaries - - 2,436,366
Due from subsidiaries - 675,884 (340,884)
Notes receivable - - (1,187,025)
Prepaid expenses and other assets (95,498) (25,919) (62,635)
Accrued and other liabilities 152,475 (3,721) (125,369)
Due to subsidiaries (284,800) 17,800 (1,813,386)
----------- -------- ----------
Net cash (used in) provided by operating activities (804,723) 142,576 (1,431,378)
----------- -------- ----------
Cash flows provided by (used in) investing activities:
Purchase of property and equipment - (277,306) (34,900)
Proceeds from sale of property and equipment 13,353 - -
Dividends received from subsidiary - - 2,376,036
----------- -------- ----------
Net cash provided by (used in) investing activities 13,353 (227,306) 2,341,136
----------- -------- ----------
(Continued)
77
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(14), CONTINUED
CONDENSED STATEMENTS OF CASH FLOWS, CONTINUED
1995 1994 1993
---- ---- ----
Cash flows provided by (used in) financing activities:
Proceeds from sale of stock, net of issuance costs $ - 1,013,532 1,124,811
Purchase of treasury stock - - (62,247)
Sale of treasury stock - - 79,966
Dividends paid - (270,312) (179,033)
Repayment of note payable - - (1,750,000)
---------- --------- ---------
Net cash provided by (used in) financing activities: - 743,220 (786,503)
---------- --------- ---------
Net (decrease) increase in cash and cash equivalents (791,370) 658,490 123,255
Cash and cash equivalents at beginning of year 791,612 133,122 9,867
---------- --------- ---------
Cash and cash equivalents at end of year 242 791,612 133,122
---------- --------- ---------
---------- --------- ---------
Supplemental disclosures of non-cash transactions:
Real estate acquired in settlement of notes receivable - 832,729 -
---------- --------- ---------
---------- --------- ---------
Assets transferred to subsidiaries - 75,175 -
---------- --------- ---------
---------- --------- ---------
Market value adjustment - investment securities
available for sale:
Market value adjustment - investments (1,181,624) (107,647) -
Deferred income tax asset (401,752) (35,768) -
---------- --------- ---------
---------- --------- ---------
Unrealized loss on investment securities available
for sale, net $ (779,872) (71,879) -
---------- --------- ---------
---------- --------- ---------
The major sources of funds available to the Company for payment of dividends are
the interest earned on investments and earnings of the Bank. The ability of the
Bank to pay dividends to the Holding Company is restricted.
78 (Continued)
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(15) SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data follows (in thousands, except for per share
amounts):
FOURTH QUARTER
-------------------------------
1995 1994 1993
--------- --------- ---------
Interest income $ 2,548 2,632 2,398
Net interest income 516 859 1,240
Provision for loan losses 5 278 575
(Loss) income before taxes (1,806) (834) 52
Net (loss) income (1,177) (582) (7)
--------- ------ ------
--------- ------ ------
Loss per share (.52) (.26) (.01)
--------- ------ ------
--------- ------ ------
THIRD QUARTER
--------------------------------
1995 1994 1993
---------- --------- ---------
Interest income $ 2,648 2,504 2,371
Net interest income 548 995 1,220
Provision for loan losses 42 - -
(Loss) income before taxes (624) 61 609
Net (loss) income (400) 40 384
--------- ------ ------
--------- ------ ------
Loss per share (.18) .02 .20
--------- ------ ------
--------- ------ ------
SECOND QUARTER
--------------------------------
1995 1994 1993
---------- --------- ---------
Interest income $ 2,765 2,447 2,257
Net interest income 735 1,078 1,061
Provision for loan losses 730 38 -
(Loss) income before taxes (1,006) 254 305
Net (loss) income (644) 173 192
--------- ------ ------
--------- ------ ------
Loss per share (.29) .08 .10
--------- ------ ------
--------- ------ ------
79 (Continued)
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(15), CONTINUED
FIRST QUARTER
--------------------------------
1995 1994 1993
---------- --------- ---------
Interest income $ 2,648 2,264 2,717
Net interest income 784 1,134 1,398
Provision for loan losses 2 - 15
(Loss) income before taxes (46) 299 313
Net (loss) income (29) 190 197
--------- ------ ------
--------- ------ ------
Loss per share (.01) .08 .11
--------- ------ ------
--------- ------ ------
(16) RELATED PARTY TRANSACTIONS
During 1990, the Company entered into a long-term lease obligation with
John Martin Bell, wife of the president of the Company, James T. Bell,
and a stockholder and director of the Company for the use of the building
in Winter Park, Florida. Rent payments in the amount of $247,923, $223,552
and $183,827 were made during the years ended December 31, 1995, 1994 and
1993, respectively.
During the years ended December 31, 1995, 1994 and 1993, the Company
reimbursed John M. and James T. Bell for their cost of furniture and
fixtures and leasehold improvements for the Winter Park, Florida
location in the amounts of $1,417, $23,937 and $9,950, respectively.
For the fiscal year ended December 31, 1994, the Company purchased fixed
assets in the amount of $162,303 from a company that is wholly owned by a
stockholder whose family owns 6,329 shares of the outstanding shares of the
Company.
80 (Continued)
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(17) EMPLOYEE STOCK OWNERSHIP PLAN
The Company maintains a qualified employee stock ownership plan (the
"Plan"). The Plan is qualified under Section 4975(e)(7) of the Internal
Revenue Code, under which all of its subsidiaries may act as participating
employees. In addition, the Plan meets all applicable requirements of the
Tax Reform Act of 1986 and is qualified under Section 401(c) of the
Internal Revenue Code.
At the discretion of the Board of Directors, the Company may make a
contribution to the Plan of up to 15% of total compensation paid to
employees during the year. Employees are 100% vested after five years of
service. For the years ended December 31, 1995 and 1994, the Company
contributed cash to the Plan of $10,000 and $25,000, respectively.
(18) TECHNICAL SERVICE CONSULTING AGREEMENTS
The Bank entered into a technical service consulting agreement during 1990
with First Guaranty Mortgage Corporation ("FGMC"). Under terms of the
agreement, the Bank performed consulting services for FGMC. First Guaranty
Mortgage Corporation was wholly owned by a stockholder whose family owns
6,329 shares of the outstanding shares of the Company. The agreement has
been terminated and no services were performed under the agreement during
the years ended December 31, 1995 and 1994.
The Holding Company entered into a technical service consulting agreement
during 1990 with FGMC. Under terms of the agreement, the Holding Company
performed consulting services for FGMC. The agreement has been terminated
and no services were performed under the agreement during the years ended
December 31, 1995 and 1994.
Under terms of the technical services agreement between the Bank and FGMC,
the Bank was obligated to pay FGMC a fee totaling one percent of the assets
acquired from the RTC in connection with the First Federal of Seminole
Savings and Loan Association acquisition. The fee paid to FGMC of $854,083
was capitalized as a portion of the premium on loans acquired.
81 (Continued)
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(19) REGULATION AND SUPERVISORY AGREEMENT
The Bank is subject to extensive regulation, supervision and examination
by the Office of Thrift Supervision ("OTS"), its primary federal regulator,
and by the FDIC, which insures deposits up to applicable limits. Such
regulation and supervision establishes a comprehensive framework of
activities in which a bank may engage and is intended primarily for the
protection of the SAIF administered by the FDIC and depositors. As a
thrift holding company, the Holding Company also is subject to extensive
regulation, supervision and examination by the OTS and, to a lesser extent,
the FDIC.
The OTS completed a regular examination of both the Holding Company and
the Bank in December 1992 and cited certain deficiencies which management
believes it has addressed in the form of various corrective actions. In
May 1993, the OTS and the Bank entered into a supervisory agreement which
provides that the Bank shall; (i) adopt policies and procedures regarding
affiliated party transactions; (ii) not permit overdrafts by affiliated
persons; (iii) take action necessary to prohibit and to avoid the
appearance of conflicts of interest in transactions with affiliated
persons; (iv) either amend its lease for the Winter Park office to lower
the rent or obtain a market rent study to support the rent; (v) comply with
loan to one borrower limits; (vi) maintain adequate documentation to
support compliance with loan to one borrower limits; (vii) develop plans
for the disposition of real estate owned and other classified assets;
(viii) review and revise loan underwriting policies and loan documentation
procedures; (ix) fully document all loans approved by the loan committee
and grant such loans only in accordance with approved terms; (x) establish
procedures requiring written inspection reports for each development and
construction loan; (xi) not use transactions with affiliates to increase
capital of the Bank; and (xii) report to OTS quarterly its compliance with
the agreement.
The OTS completed a regular examination of both the Holding Company and
the Bank in April 1994 and cited certain deficiencies which management
believes it has addressed in the form of corrective actions. Supervisory
directives were issued by the OTS and provide for the Bank to take specific
actions: (i) reimbursement of Holding company expenses paid by the Bank
and prohibit further payment of Holding Company expenses by the Bank; (ii)
the Bank is prohibited from granting dividends without OTS approval; (iii)
management is directed to complete a Management Services Agreement with the
Holding Company detailing employees' specific duties, and rate of
remuneration; (iv) rectify deficiencies in employment arrangements
consistent with OTS regulations; (v) ensure adequate documentation of
accounting information; (vi) prepare a plan and timetable to modify loan
relationships so as to comply with OTS regulations for loans to one
borrower; (vii) obtain appraisals for certain collateral property; (viii)
ensure that requested changes to policies and procedures are approved by
the Board within 45 days; (ix) increase the amount of the general valuation
allowance to $1,850,000; (x) properly classify assets consistent with OTS
recommendations; (xi) effectuate changes in the management of the lending
department, establishing guidelines and individual responsibility for
monitoring loan maturities, collections, and foreclosures, and (xii)
establish a three year business plan detailing effects to improve the local
core deposit base, establishing future lending patterns, plan for less
reliance on telemarketing and out-of-state brokers, borrowers and
collateral, and provide support for material changes in the financial
structure of the Bank.
82 (Continued)
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(19), CONTINUED
The OTS also issued supervisory directives requiring specific action by
Holding Company as follows: (i) amend the existing lease of the office
premises to reflect market terms and conditions; (ii) the Holding Company
is prohibited from recognizing profit on the sale of First Coast Plaza
buildings without prior approval of the OTS; (iii) discount certain notes
receivable to reflect market rates; (iv) require officers to submit detail
expense reports for review by the Board; (v) discontinue use of the Bank's
credit cards for Holding Company expenditures; (vi) completion of a
Management Services Agreement between the Holding Company and the Bank;
(vii) ensure that all consulting agreements are written and approved by the
Board and (viii) reimburse the Bank for all Holding Company expenses paid
by the Bank. Based on conclusions set forth in the examination report, the
Holding Company has been assigned a rating of "unsatisfactory" by the OTS.
In the 1995 examinations of the Holding Company and Bank, which were
concluded in June 1995, the OTS found the companies to be in compliance
with their Orders. With regard to the Bank, improvement was noted in a
number of areas, including underwriting procedures, documentation,
disposition of problem assets, reduction in the dependency on wholesale
funds and a reduction in operating expenses. In August 1995, the OTS
informed the Holding Company that it was conducting an expanded
examination of the Holding Company with regard to certain transactions
that were entered into by prior Bank management in 1990 and 1991. The
examination has not been concluded as of the date of this report.
On October 3, 1994, the OTS issued a Supervision Order to Cease and Desist
(the "Order") for the Bank. Management and the Board of Directors have
committed to adhering to the terms of the Order. The Order provides for
the Board of Directors to: develop, adopt and adhere to policies and
procedures to strengthen the Bank's underwriting, administration,
collection and foreclosure efforts; review and revise underwriting policies
and procedures to comply with regulatory requirements; record minutes to
the loan committee and grant loans only on terms approved by the committee
and document the recipient of proceeds of the loan; develop and implement a
written plan to collect, strengthen and reduce the risk of loss for all
real estate owned and for certain loans at risk and secured by real estate;
comply with policies and procedures requiring written inspection of
development and construction loans; pay no more than market rate,
determined by a rent study approved by the OTS for lease of the Bank's
offices; make no payment of taxes owed by a person affiliated with the
Bank; seek reimbursement of expenses of the Holding Company paid by the
Bank; provide a management services agreement for work performed for the
Holding Company by the Bank; develop and submit for approval a three year
business plan; comply with loans to one borrower policy; pay no dividend
without consent of the OTS; appoint a compliance committee; refrain from
purchasing dual indexed bonds. In addition, the OTS issued a separate
Order for the Company requiring: the Holding Company shall not request
dividends from the Bank without written permission from the OTS; the
Holding Company reimburse the Bank for the Holding Company's expenses,
develop a management services agreement with the Bank which provides for
the reimbursement for employees who work for both the Bank and the Holding
Company; appoint a compliance committee to report to the board of directors
as to the Holding Company's compliance with the Order.
Management does not believe that the supervisory agreement or the Order
and the required actions relating to cited deficiencies will have a
material impact on the financial condition of the Holding Company or the
Bank. In addition, management believes it is in substantial compliance
with the above provisions.
83 (Continued)
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(19), CONTINUED
The regulatory structure governing savings associations and savings and
loan holding companies gives the regulatory authorities extensive
discretion in connection with their supervisory and enforcement activities.
Any change in such regulation, whether by the OTS, the FDIC or the U.S.
Congress, could have a significant impact on the Bank and the Holding
Company and their operations.
(20) STOCK OPTIONS
On May 5, 1993, the Board of Directors of the Company approved a Stock
Option Plan for Directors. The Plan provides that a maximum of 176,968
shares of common stock (the "Option Shares") will be made available to
directors and former directors of the Company. Options for all the Option
Shares were issued on May 6, 1993 to 13 present and former directors. The
options are for a term of ten (10) years from the date of grant. The
Options were issued at an exercise price of $6.40 per share determined at
the time of issuance to be the fair market value of the underlying Common
Stock subject to the Option on the date the Option was granted. No options
have been exercised under the Plan at December 31, 1995.
In addition, the Company has issued stock options to certain sales
representatives for their commitment in selling Federal Trust Corporation
stock. These options have a strike price of $10.00 per share and will
expire on October 26, 1999. At December 31, 1995 and 1994, options for
58,453 shares were granted to various sales representatives.
(21) CREDIT COMMITMENTS
The Bank has outstanding at any time a significant number of commitments to
extend credit. These arrangements are subject to strict credit control
assessments and each customer's credit worthiness is evaluated on a case-
by-case basis. A summary of commitments to extend credit and standby
letters of credit written at December 31, 1995 and 1994 are as follows:
1995 1994
--------- ---------
Available lines of credit $ 9,500 683,113
--------- ---------
--------- ---------
Standby letters of credit 500,000 500,000
--------- ---------
--------- ---------
Outstanding mortgage loan commitments,
exclusive of loans in process:
Net fixed rates 1,810,038 623,582
Net variable rates 352,500 53,200
--------- ---------
2,162,583 676,782
--------- ---------
--------- ---------
84 (Continued)
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(21), CONTINUED
Because many commitments expire without being funded in whole or part,
the contract amounts are not estimates of future cash flows.
Loan commitments written have off-balance-sheet credit risk because only
original fees are recognized in the statement of financial position until
the commitments are fulfilled or expire. Credit risk represents the
accounting loss that would be recognized at the reporting date if
counterparties failed completely to perform as contracted. The credit
risk amounts are equal to the contractual amounts, assuming that the
amounts are fully advanced and that, in accordance with the requirements
of FASB Statement No. 105, "DISCLOSURE OF INFORMATION ABOUT FINANCIAL
INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND FINANCIAL INSTRUMENTS WITH
CONCENTRATIONS OF CREDIT RISK", collateral or other security is of no
value.
The Bank's 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 Bank upon extension of credit, is based
on management's credit evaluation of the counterparty. Collateral held
varies but may include accounts receivable, inventory, real estate and
income producing commercial properties.
Standby letters of credit are contractual commitments issued by the Bank
to guarantee the performance of a customer to a third party. The credit
risk involved in issuing letters of credit is essentially the same as
that involved in extending loan facilities to customers.
(22) CONCENTRATION OF CREDIT RISK
The Bank originates real estate, consumer and commercial loans primarily
in its Central Florida market area. Although the Bank has a diversified
loan portfolio, a substantial portion of its borrowers' ability to honor
their contracts is dependent upon the economy of Central Florida. The
Bank does not have a significant exposure to any individual customer or
counterparty.
85
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There have been no disagreements with the Company's accountants on any matter
of accounting principles or practices or financial statement disclosures
during the two most recent fiscal years.
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86
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
OF THE REGISTRANT
MANAGEMENT
MANAGEMENT OF FEDERAL TRUST
The Board of Directors of Federal Trust consists of 5 members of whom 2 also
presently serve as directors of the Bank. See "Management of the Bank." The
table below sets forth the name and positions of each director and executive
officer of Federal Trust.
AGE AT POSITION WITH THE YEAR FIRST TERM OF
DIRECTOR'S NAME JANUARY 1, 1995 HOLDING COMPANY ELECTED DIRECTOR OFFICE EXPIRES
- --------------- --------------- ----------------- ---------------- --------------
James T. Bell 52 President/Director 1988 1997
Anne T. Coonrod 51 Vice-President/Director 1988 1998
Edwin J. Feiler, Jr. 60 Director 1989 1996
Francis T. West 75 Director 1989 1998
James V. Suskiewich 48 Director 1994 1997
Directors are elected for a term of three years, with approximately one-third
of the directors standing for election each year.
Set forth below is certain information with respect to the persons who are
directors or executive officers of Federal Trust, including an employment
history covering the past five years. Except as otherwise indicated, all
persons named have been engaged in their principal occupations for more than
the past five years.
JAMES T. BELL has served as a director and Chairman of the Board of the Bank
from 1986 to December 1992 and as Chairman of the Board and President of
Federal Trust since 1988. Mr. Bell was President of the Bank during 1990.
ANNE T. COONROD has served as Vice-President of Federal Trust since December,
1989. She is the former Vice President of FedTrust Building Corporation and
the Bank. She is also the owner of the Front and Center Gift shop located in
Fernandina Beach, Florida. She has been the owner of Atlantic Seafood, a
seafood retailer/wholesaler since 1973.
EDWIN J. FEILER, JR. is the Vice Chairman of the Board of Directors of
Federal Trust. He is also President of Metro Developers, Inc., a residential
construction and property management company located in Savannah, Georgia and
a general partner of American Housing Associates, a multi-family construction
supervision and management partnership located in Savannah, Georgia and
Arlington, Virginia.
FRANCIS T. WEST, now retired, was the President and Chairman of the Board of
West Window Corporation, Martinsville, Virginia, a company that has
manufactured windows since 1949. He is also the retired Mayor of
Martinsville and is a former director of the Crestar Bank of Martinsville.
Mr. West presently serves as President of Franklin Finance Company and
Chairman of Multitrade Group, Inc. He is a former Member of the White House
Commission on Presidential Scholars, the former Chairman of Radio Free Europe
and the former President of the Virginia Municipal League.
MR. SUSKIEWICH joined the Bank as President in January 1993. Prior to
joining the Bank, he was the President and a director of First Federal
Savings Bank of the Glades, Clewiston, Florida from March, 1988 to December
31, 1992.
AUBREY H. WRIGHT, JR., 49, has been the Chief Financial Officer of the
Company since April, 1994 and of the Bank since June, 1993. He was elected
to the Board of Directors of the Bank in August, 1994. Prior to joining the
Bank, Mr. Wright was President, Chief Operating Officer and a director of
Essex Savings Bank, F.S.B. in West Palm Beach, Florida from August, 1991 to
May, 1993. From 1989 to August, 1991, Mr. Wright served as President and
Chief Financial Officer of Coral Savings and Loan Association, Coral Springs,
Florida and Senior Vice President for Finance and Operations of Ambassador
Federal Savings, Tamarac, Florida. Mr. Wright does not own any common stock
of the Company.
87
The executive officers of Federal Trust are elected annually at the
discretion of the Board of Directors and hold office until their respective
successors have been elected and qualified or until death, resignation or
removal by the Board of Directors.
MANAGEMENT OF THE BANK
The direction and control of the Bank is vested in its Board of Directors,
who are elected by Federal Trust as the sole stockholder of the Bank.
Directors are elected for a term of three years, with one-third of the
directors standing for election each year.
AGE AT POSITION WITH EXPIRATION
NAME JANUARY 1, 1995 THE BANK DIRECTOR SINCE OF TERM
- ---- --------------- -------- -------------- -------
Anne T. Coonrod 51 Director 1988 1996
George W. Foster 66 Chairman/Director 1991 1997
James V. Suskiewich 48 President/Director 1993 1997
Aubrey H. Wright, Jr. 49 SVP and CFO/ 1994 1998
Director
Samuel C. Certo 48 Director Elect 1996 1996(1)
Kenneth W. Hill 62 Director Elect 1996 1996(1)
Louis Laubscher 52 VP and CLO N/A N/A
(1) Dr. Certo and Mr. Hill were elected to the Board of Directors in September,
1994, subject to regulatory approval by the Office of Thrift Supervision,
which was received in January, 1996.
MR. FOSTER was elected Chairman of the Bank in January, 1993. He served as
President of the Bank from December, 1990 to January, 1993, has served as
President of Barnett Bank of Seminole County, President of Seminole County
Chamber of Commerce, National President of the American Safe Deposit
Association, as well as Director and President of numerous other civic and
professional organizations. Prior to joining the Bank, Mr. Foster served as
Assistant Vice President, Security Branch manager of First Federal Savings
and Loan Association of Seminole County from 1980 to 1990.
MR. SUSKIEWICH joined the Bank as President in January 1993. Prior to
joining the Bank, he was the President and a director of First Federal
Savings Bank of the Glades, Clewiston, Florida from March, 1988 to December
31, 1992.
MR. WRIGHT joined the Bank as Chief Financial Officer in June, 1993. Prior
to joining the Bank, Mr. Wright was President, Chief Operating Officer and
director of Essex Saving Bank, F.S.B. in West Palm Beach, Florida from
August, 1991 to May, 1993. From 1989 to August, 1991, Mr. Wright served as
and President and Chief Financial Officer of Coral Savings and Loan
Association, Coral Springs, Florida and Senior Vice President for Finance and
Operations of Ambassador Federal Savings, Tamarac, Florida. Coral Savings
and Loan Association was placed under conservatorship by the Resolution Trust
Corporation in January, 1992.
DR. CERTO is the former dean and has been a professor of management in the
Crummer Graduate School of Business at Rollins College in Winter Park since
1986. In addition, Dr. Certo serves as a business consultant and has
published textbooks in hte areas of management and strategic management, and
has been involved in executive education for the past 20 years.
MR. HILL is retired from SunBank, N.A., where he served as Vice President and
Trust Officer from 1983 until 1995. Mr. Hill's banking career began in 1966
and he has been a resident of central Florida since 1957.
MR. LAUBSCHER joined the Bank in February, 1995 and has been Chief Lending
Officer since January, 1996. Prior to joining the Bank, Mr. Laubscher was
Executive Vice President, Director and Chief Loan Officer for First Family
Bank, FSB from
88
March, 1992 to January, 1995. Mr. Laubscher was employed by The First, F.A.
as Senior Vice President and Manager of the Loan and Investment divisions.
The First, F.A. was acquired by Great Western Bank in a Resolution Trust
Corporation assisted transaction in October, 1991. Mr. Laubscher has over 20
years of experience in senior management of financial institutions. He holds
an MBA from the University of California at Berkeley.
PRINCIPAL HOLDERS OF VOTING SECURITIES
The following table sets forth information as of March 1, 1995 with respect
to the ownership of shares of the Common Stock by (i) such persons are
believed by management to be the beneficial owners of more than 5% of the
Common Stock, (ii) directors and officers of Federal Trust, and (iii) all
directors and officers as a group.
SHARES OF PERCENTAGE OF OPTIONS TO PERCENTAGE OF COMMON
COMMON COMMON STOCK ISSUED PURCHASE STOCK ON A
NAME STOCK(1) & OUTSTANDING COMMON FULLY DILUTED BASIS(3)
- ---- -------- ------------- ---------- ----------------------
STOCK(2)
-------
James T. Bell and/or John
M. Bell(4)(5)(6) 642,860 28.70 107,674 33.48
Anne T. Coonrod (7) 22,045 .98 9,307 1.40
Edwin J. Feiler, Jr.(8) 15,381 .69 26,771 1.88
George W. Foster 1,343 .06 2,234 .16
James V. Suskiewich(9) 8,453 .38 7,500 .38
Francis T. West 44,981 2.01 11,747 2.53
------- ------ -------- -----
Officers & Directors as a Group 735,063 32.82 157,733 39.83
------- ------ -------- -----
------- ------ -------- -----
(1) Except as indicated below, includes all shares of Common Stock owned by
each director's spouse, or as custodian or trustee for minor children, over
which shares such individuals effectively exercise sole voting and
investment power.
(2) See "Item 11. Executive Compensation - Options."
(3) Assumes exercise of all Options to Purchase Common Stock shown by persons
held.
(4) Includes 12,500 shares held as trustee under Crummer Graduate School of
Business of Rollins College and 25,391 shares held as trustee under Federal
Trust's ESOP, with respect to which Mr. Bell exercises sole voting and
investment power.
(5) Includes 7,643 shares held by Mr. Bell in his name, with respect to which
Mr. Bell exercises sole voting and investment power, 212,405 shares held by
Mrs. Bell in her name, with respect to which Mrs. Bell exercises sole
voting and investment power, and 384,921 shares held by Mr. and Mrs. Bell
as joint tenants, with respect to which Mr. and Mrs. Bell share voting and
investment power.
(6) Based on their percentage of ownership, Mr. Bell and Mrs. Bell may be
considered "controlling persons" of Federal Trust.
(7) Includes 18,150 shares held by Ms. Coonrod individually and 3,895 shares
held of record by Century Federal Bank, Trustee for Anne T. Coonrod.
(8) Includes 8,545 shares held by Mr. Feiler individually, 2,441 shares held by
Aleen W. Feiler and Edwin J. Feiler, Jr., Trustees for Stanley W. Feiler
under the will of Edwin J. Feiler and 4,395 shares held by Feiler
Enterprises.
(9) Includes 8,453 shares of stock purchased in September, 1993.
Management is not aware of any contractual arrangements or any pledge of
voting stock which may result in a change of control of Federal Trust.
89
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
COMPENSATION. The following table sets forth, for the fiscal years ended
December 31, 1995, 1994 and 1993, the total compensation paid or accrued for
the Chief Executive Officer and each of the four most highly compensated
executive officers of the Company and its subsidiaries, whose aggregate
salary and bonus exceeded $100,000 per year.
ANNUAL COMPENSATION (1)
- ----------------------------------------------------------------------------------------------------
NAME AND PRINCIPAL OTHER ANNUAL RESTRICTED STOCK
POSITION (2) YEAR SALARY BONUS COMPENSATION(3) AWARDS(4) OPTIONS(5)
----------------- ---- ----- -------------- ---------------- ----------
James T. Bell, CEO 1995 $151,508 -- $27,279 -- --
1994 $182,327 $5,563 $21,870 -- --
1993 $173,645 $5,995 $24,632 -- 107,674
James V. Suskiewich, 1995 $118,223 $16,000 $13,169 -- --
CEO of the Bank 1994 $105,729 $5,000 $13,822 -- --
1993 $87,885 -- $11,495 -- --
(1) Includes all compensation in the year earned whether received or deferred
at the election of the executive.
(2) Includes CEO. There were no other executives whose salary and bonus exceed
$100,000 per year.
(3) Includes the estimated value of:
JAMES T. BELL 1995 1994 1993
------------- ---- ---- ----
Health insurance premiums $5,044 $5,152 $5,550
Life insurance premiums 5,556 36 5,340
Disability 7,714 7,227 6,763
Use of Company automobile 4,000 4,000 4,000
Social/Country Club Dues 4,965 5,455 2,979
------- ------- -------
Total: $27,279 $21,870 $24,632
JAMES V. SUSKIEWICH 1995 1994 1993
------------------- ---- ---- ----
Health & Life insurance premiums 3,933 $3,926 $4,077
Use of Company automobile 6,564 7,263 5,443
Social/Country Club Dues 2,671 2,633 1,975
------- ------- -------
Total: $13,169 $13,822 $11,495
(4) Includes value of fully vested participation in the Company's Employee
Stock Ownership Plan ("ESOP"). In 1990, the Company adopted an ESOP which
provides that the Company can make a contribution to a trust fund for the
purpose of purchasing shares of the Company's common stock on behalf of the
participants. The Company pays the entire cost of the ESOP and all
salaried employees of the Company who have completed six months of service
are eligible to participate. The ESOP is qualified under Section 497(e)(7)
of the Internal Revenue Code, under which subsidiaries may act as
participating employees. In addition, the ESOP meets all applicable
requirements of the Tax Replacement Act of 1986 and is qualified under
Section 401(c) of the Internal Revenue Code.
(5) Represents options held jointly with Mrs. Bell.
All full-time salaried employees of the Company, and its subsidiaries are
participants in the ESOP. Executive officers of the Company are eligible to
participate in the ESOP, but directors are not eligible unless they are also
full-time salaried employees. A participant's interest in the ESOP is vested
after five years of service and there is no vesting prior to that period of
time. Mr. Bell and 3 other employees had vested interest in the ESOP as of
December 31, 1995. Mr. Bell's
90
vested interest equals approximately 26% of the total ESOP contributions made
by the Company. Mr. Suskiewich is not vested in the ESOP.
The ESOP contributions by the Company are determined annually by the Board of
Directors of the Company, taking into consideration the prevailing financial
conditions, the Company's fiscal requirements and other factors deemed relevant
by the Board. The Company, generally, may make contributions to the ESOP of up
to 15% of total compensation paid to employees during the year. Each
participant's contribution equals the proportion that each such participant's
compensation for the year bears to the total compensation of all participants
for such year. In 1995, 1994 and 1993, the Company contributed cash of $10,000,
$25,000 and $16,500, respectively to the ESOP.
OPTIONS AND LONG-TERM COMPENSATION
STOCK OPTION PLAN FOR DIRECTORS: On May 5, 1993, the Board of Directors of the
Company approved a Stock Option Plan for Directors. The Plan provides that a
maximum of 176,968 shares of common stock (the "Option Shares") will be made
available to directors and former directors of the Company. Options for all the
Option Shares were issued on May 6, 1993 to 13 present and former directors.
The options are for a term of ten (10) years from the date of grant. The
Options were issued at an exercise price of $6.40 per share determined at the
time of issuance to be the fair market value of the underlying Common Stock
subject to the Option on the date the Option was granted. The options held by
an active director are canceled immediately if such director is removed for
"cause" as defined in the Plan.
The Company issued no stock options or stock appreciation rights as compensation
during the fiscal year ended December 31, 1995.
DIRECTOR COMPENSATION
Each non-management director of the Company receives a fee of $500 for each
meeting of the Board which he or she attends plus $750 per quarter, $250 for
each Compliance Committee meeting and no fee for any other standing committee
of which he or she is a member which he or she attends. Directors are
reimbursed for expenses incurred in connection with attendance at meetings of
the Board of Directors and all standing committees.
REPORT OF BOARD OF DIRECTORS
The compensation of the Company's executive officers is determined by the
Company's entire Board of Directors excluding any Director who is also an
executive officer. The Chief Executive Officer (the"CEO") determines the salary
range recommendations for all employees, including executives other than
himself. The CEO presents these to the Board and the Board, in turn, reviews
and analyzes all information submitted to it. Thereafter, the Board determines
compensation of all executive officers of the Company including the compensation
of the CEO.
EXECUTIVE COMPENSATION POLICIES AND PROGRAM. The Company's executive
compensation program is designed to:
- Attract and retain qualified management of the Company;
- Enhance short-term financial goals of the Company; and
- Enhance long-term shareholder value of the Company.
The Company strives to pay each executive officer the base salary that would be
paid on the open market for a fully qualified officer of that position. The
Board of Directors determines the level of base salary and any incentive bonus
plan for the CEO and certain senior executive officers of the Company and a
range for other executive officers based upon competitive norms, derived from
annual surveys published by several independent banking institutes or private
companies specializing in financial analysis of financial institutions. Such
surveys provide information regarding compensation of financial institution
officers and employees based on size and geographic location of the financial
institution and serve as a bench mark for determining executive salaries.
Actual salary changes are based upon an evaluation of each individual's
performance based upon Holding Company objectives and specific job description
objectives, as well as the overall performance of the Holding Company.
Executive officers's salaries were reduced in fiscal year 1995 as compared to
1994, consistent with the Holding Company's efforts to reduce budgeted expenses
and overhead. Bonus awards are made based upon the attainment of the Holding
Company's net income targets, the officer's responsibilities and individual
performance standards with each officer given the opportunity to earn an annual
performance bonus, generally in the
91
range of approximately 10-40% of his or her base salary. In fiscal year
1995, however, no bonuses were awarded primarily because the Holding Company
failed to attain its performance goals.
COMPENSATION OF THE CHIEF EXECUTIVE OFFICER. The Board of Directors entered
into an employment contract (the "Contract") with the CEO in January, 1990. The
Contract is for a period of one year, automatically renewable at the discretion
of both parties. The Contract was amended in June, 1990, April, 1991 and
January, 1994 to reflect an increase in the rate of annual compensation and the
inclusion of other benefits. The Committee, in recommending changes in the
Contract to the Board, reviews the salaries of top executives of comparable
financial institutions, using the process previously described. In determining
the level of incentive compensation, the Board has established a general policy
of linking incentives to the Company's financial performance. In 1990, the
Board determined that a prudent basis for establishing CEO compensation was a
base salary plus a bonus linked to 10% of pre-tax earnings in excess of $1.1
million. On September 1, 1995, the CEO voluntarily reduced his salary to
$60,000 per year, but the contract was not amended.
BOARD OF DIRECTORS
James T. Bell Anne T. Coonrod James V. Suskiewich
Edwin J. Feiler, Jr. Francis T. West
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION
DECISIONS
James T. Bell, President and Chief Executive Officer of the Company, James V.
Suskiewich, President and Chief Executive Officer of Federal Trust Bank, (the
"Bank") and Anne T. Coonrod, Vice President of the Company are members of the
Company's Board of Directors and participated in deliberations of the Board of
Directors regarding executive compensation. Mr. Bell, Mr. Suskiewich and Ms.
Coonrod, however, did not participate in any deliberation regarding their own
compensation or transactions.
EMPLOYMENT CONTRACTS
The Company has entered into an employment agreement ("Company CEO Agreement")
with James T. Bell which commenced January 1, 1990. Mr. Bell's salary for the
fiscal year ending December 31, 1995 was $151,508. The CEO Agreement provides
for an annual bonus equal to ten percent (10%) of the difference of the
Company's pre-tax profit calculated in accordance with generally accepted
accounting principles less $1,100,000. No bonus was paid for the year ended
December 31, 1995. The Company CEO Agreement provides that Mr. Bell may direct
the Company to pay a portion of the bonus to other employees. No bonuses were
paid to Company employees during 1995, since the Company did not meet the
Board's profit objectives. In addition to the annual compensation and bonus,
the Company will provide Mr. Bell with a Company automobile and memberships in a
business and a social/country club in the city where the Company is located.
The term of the Company CEO Agreement is one year. Either party may terminate
the CEO Agreement with at least one hundred eighty (180) days notice. The CEO
Agreement is automatically extended on a year-to-year basis if not otherwise
terminated or otherwise amended in writing. On September 1, 1995, the CEO
voluntarily reduced his salary to $60,000 per year, but the contract was not
amended.
The Company and Bank entered into an employment agreement with James V.
Suskiewich (Agreement). Mr. Suskiewich is a director of the Company and serves
as the Chief Executive Officer and President of the Bank. The Agreement which
became effective September 1, 1995 has a three-year term. The Agreement
provides for a minimum base salary of $120,000 per year. Mr. Suskiewich is
entitled to a discretionary performance bonus payable annually for the duration
of the Agreement. For the year ended December 31, 1995, Mr. Suskiewich received
a performance bonus of $10,000. The base salary and any bonus is paid by the
Bank. In addition to the base salary and bonus, the Agreement provides for
participation in all employee benefits, stock option plans, pension plans,
insurance plans and other fringe benefits including club memberships and
business related expenditures commensurate with his position. On each
successive anniversary of the employment contract, the Board of directors is
required to vote on whether the Agreement should be extended an additional year
so that the remaining term shall be three years. The decision to extend the
Agreement is within the sole discretion of the Board of Directors.
The Agreement provides for termination by the Bank for "cause", as defined in
the Agreement. In the event the Bank chooses to terminate Mr. Suskiewich's
employment for reasons other than for cause, Mr. Suskiewich (or in the event of
92
death, Mr. Suskiewich's beneficiary) would be entitled to a severance payment
equal to his total annual compensation for the remainder of the term of the
Agreement. In the event of a change of control of the Company or the Bank, Mr.
Suskiewich will be entitled to a special incentive bonus equal to two times his
annual salary, times the price/book value ratio at which the Company or Bank is
acquired. If Mr. Suskiewich accepts employment with the acquirer, he will be
entitled to fifty percent (50%) of the special incentive bonus. The special
incentive bonus is payable by either the Company or the Bank.
The Agreement permits Mr. Suskiewich to terminate his employment voluntarily.
In the event of voluntary termination, except as previously described herein,
all rights and benefits under the contract shall immediately terminate upon the
effective date of termination.
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93
ITEM 12. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The Company is not aware of any person who, on March 1, 1995, was the beneficial
owners of 5% or more of the Company's outstanding Common Stock, except for James
T. Bell and John M. Bell. Information concerning such ownership is set forth in
the following table together with information concerning beneficial ownership by
directors and officers as a group.
AMOUNT AND NATURE OF
BENEFICIAL OWNER BENEFICIAL OWNERSHIP PERCENT OF CLASS
---------------- -------------------- ----------------
James T. and John M. Bell 642,860(1) 28.7
675 Osceola Avenue
Winter Park, Florida 32789
Directors and Executive Officers 735,063(1) 32.8
as a Group (7 persons)
- -------------------
(1) Includes 7,643 shares held by Mr. Bell in his name, 12,500
shares held as trustee and 25,391 shares held as trustee under
the Company's ESOP, with respect to which Mr. Bell exercises
sole voting and investment power, 212,405 shares held by Mrs.
Bell in her name, with respect to which Mrs. Bell exercises sole
voting and investment power, 384,921 shares held by Mr. and Mrs.
Bell as joint tenants, with respect to which Mr. and Mrs. Bell
share voting and investment power.
SECURITY OWNERSHIP OF MANAGEMENT
The table set for in "Item 10. Directors and Executive Officers of the
Registrant" contains certain information concerning shares of the Company's
Common Stock beneficially owned by directors and all directors and officers as a
group. There are no shares of the Company's Preferred Stock issued and
outstanding.
CHANGES IN CONTROL
The Registrant does not know of any arrangement, including any pledge by any
person of the securities of the Registrant or any of its subsidiaries, the
operation of which may at a subsequent date result in a change in control of the
Registrant.
94
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
TRANSACTIONS WITH MANAGEMENT
INDEBTEDNESS OF MANAGEMENT
In 1994 the Board of Directors of the Company and the Bank amended their loan
policies with regard to loans to directors, officers and employees. The current
policy is generally not to make loans to directors, officers and employees. Any
loans that are made, however, will require approval of a majority of the
disinterested directors of the company making the loan. The Bank is also
subject to the provisions of Section 22(h) of the Federal Reserve Act. Any
credit extended by the Bank to directors, executive officers and, to the extent
otherwise permitted, principal shareholders, or any affiliates thereof must be:
(I) on substantially the same terms, including interest rates and collateral, as
those prevailing at the time for comparable transactions by the Bank with non-
affiliated parties and (ii) not involve more than the normal risk of repayment
or present other unfavorable features.
As of December 31, 1995, neither the Company nor the Bank had any loans
outstanding to directors or executive officers. The Bank, however, did have
$737,472 in commercial loans to Morrone, Smoker and Grill, Inc., whose President
Jack L. Morrone is the brother-in-law of the Company's Chairman and Chief
Executive Officer. Mr. Morrone is considered to be an "affiliate", as that term
is defined by SEC regulations. This largest outstanding balance during 1995 was
$741,786. As of March 15, 1996 the balance was $486,202.
TRANSACTIONS WITH CERTAIN RELATED PERSONS
Effective January 1, 1990, John Martin Bell, a director and major shareholder of
the Company and the wife of the Chairman of the Board of the Company, as lessor,
and the Company, as lessee, entered into a triple net lease (the "Lease"),
pursuant to which the Company leased from Mrs. Bell 3,953 square feet of office
space located at 1211 Orange Avenue, Winter Park, Florida (the "Premises"). The
term of the Lease was two (2) years. Effective January 1, 1991, the Lease was
amended to increase the term from December 31, 1991 to December 31, 2000. The
square footage leased by the Company increased to 11,393 square feet. On
November 11, 1991, the Company and Ms. Bell terminated the Lease and executed a
new triple net lease (the "New Lease"), pursuant to which the Company has leased
13,305 square feet in the Premises. The term of the New Lease runs until
December 31, 2000. The New Lease will automatically be extended for two (2)
consecutive periods of ten (10) years each unless the Company elects to
terminate the New Lease pursuant to the notice provisions in the New Lease prior
to the expiration of the ten year lease period. Effective July 15, 1992, the
New Lease was modified to reduce the amount of space leased to 12,392 square
feet and to decrease the annual rental by $49,510 to $240,686. Effective June
6, 1994, the New Lease was modified to decrease the annual rent for the years
1993 and 1994 to $216,984 and $223,552, respectively. Effective June 1, 1995,
the New Lease was modified to increase the amount of space leased to 13,305
square feet. The rent for 1996 through the end of the New Lease term will be
the preceding year's rent increased by the Consumer Price Index Escalation,
provided however, that in no event shall the rent increase be less than 3% or
more than 6%. The Company believes that the terms of this transaction are no
less favorable to the Company than transactions obtainable from unaffiliated
parties.
During the year 1995, the Company reimbursed John Martin Bell for her cost of
furniture, fixtures and leasehold improvements for the Company's office space
located at 1270 Orange Avenue, Winter Park, Florida in the amount of $1,417. No
fees or profit was paid to the Bells in connection with this reimbursement. The
Company believes that the terms of this reimbursement are no less favorable to
the Company than what could be obtained from unaffiliated parties.
All future transactions with officers, directors, principal shareholders or
affiliates of the Company and its subsidiaries will be on terms no less
favorable than could be obtained from unaffiliated parties, and shall be
approved by the Board of Directors, including a majority of the independent
disinterested directors of the Company.
[THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
95
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON
FORM 8-K
(a) List of Documents filed by Registrant as part of this report:
FINANCIAL STATEMENTS. Financial statements of Registrant included herein for
the year ended December 31, 1995.
-Independent Auditors' Report
-Consolidated Balance Sheets at December 31, 1995 and 1994
-Consolidated Statements of Operations for each of the years in the three
year period ended December 31, 1995
-Consolidated Statements of Cash Flows for each of the three years in the
three year period ended December 31, 1995
-Consolidated Statement of Stockholders' Equity for each of the three
years in the three year period ended December 31, 1995
-Notes to Consolidated Financial Statements
(b) The following exhibits are filed as part of this report:
EXHIBIT NUMBER DESCRIPTION PAGE
- --------------- ----------- ---------
3(a) Restated Articles of Incorporation dated July 22, 1994. ****
3(g) Bylaws dated August 3, 1988, as amended March 23, 1990 and July 20, 1990. ****
10(a) Stock Exchange Agreement by and between the Company and The John Martin Bell Corporation *
dated March 8, 1990.
10(b) Employment Agreement by and between the Company and James T. Bell dated January 26, 1990. *
10(c) Amendment to the Employment Agreement by and between the Company and James T. Bell dated **
June 29, 1990.
10(d) Second Amendment to the Employment Agreement by and between the Company and James T. Bell ***
dated April 5, 1991.
10(e) Employee Stock Ownership Plan dated January 1, 1990. **
10(f) Lease for Federal Trust Building dated November 11, 1991, as amended July 29, 1992 and ****
March 1, 1994.
10(g) Amended and Restated Lease for Federal Trust Drive-In Facility dated December 31, 1992. ****
96
10(h) Lease for Federal Trust Corporation offices dated April 7, 1992, as amended and assumed ****
on June 1, 1994.
10(i) Third Amendment to the Employment Agreement by and between the Company and James T. Bell ****
dated January 5, 1994
10(j) Employment Agreement by and between the Company and James V. Suskiewich dated September 99
1, 1995.
21 Subsidiaries. 109
99 Statement Regarding Issuance of Debentures. ***
(c) Financial Statement Schedules
All supplemental schedules are omitted as inapplicable or because the
required information is included in the financial statements or notes
thereto.
* Incorporated by reference to such documents filed as Exhibits 3, 10(a),
10(b), and 22 to the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1989
** Incorporated by reference to the document filed as Exhibits 10(c) and
10(e) to the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1990
*** Incorporated by reference to the document files as Exhibit 10(d) and
Exhibit 99 to the Company's Annual Report on Form 10-K from the fiscal
year ended December 31, 1991.
**** Incorporated by reference to the document files as Exhibits 3(a), 3(g),
10(f), 10(g), 10(h) and 10(i) to the Company's Annual Report on Form 10-K
from the fiscal year ended December 31, 1994.
97
SIGNATURES
Pursuant to the requirement of Section 13 of 15(d) of the Securities and
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
March 25, 1996 FEDERAL TRUST CORPORATION
By: /s/ Aubrey H. Wright
---------------------------------
Aubrey H. Wright
Chief Financial Officer
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ James T. Bell
- ------------------------------------------- Chairman of the Board and President March 25, 1996
James T. Bell
/s/ Anne T. Coonrod
- ------------------------------------------- Director March 25, 1996
Anne T. Coonrod
/s/ Francis T. West
- ------------------------------------------- Director March 25, 1996
Francis T. West
/s/ Edwin J.Feiler, Jr.
- ------------------------------------------- Director March 25, 1996
Edwin J. Feiler, Jr.
/s/ James V. Suskiewich
- ------------------------------------------- Director March 25, 1996
James V. Suskiewich
Supplemental information to be furnished with Reports Filed Pursuant to
Section 15(d) of the Act by Registrants Which Have Not Registered Securities
Pursuant to Section 12 of the Act.
No Annual Report or proxy material has been sent to security holders.
98
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION PAGE
- --------------- ----------- ---------
3(a) Restated Articles of Incorporation dated July 22, 1994. ****
3(g) Bylaws dated August 3, 1988, as amended March 23, 1990 and July 20, 1990. ****
10(a) Stock Exchange Agreement by and between the Company and The John Martin Bell Corporation *
dated March 8, 1990.
10(b) Employment Agreement by and between the Company and James T. Bell dated January 26, 1990. *
10(c) Amendment to the Employment Agreement by and between the Company and James T. Bell dated **
June 29, 1990.
10(d) Second Amendment to the Employment Agreement by and between the Company and James T. Bell ***
dated April 5, 1991.
10(e) Employee Stock Ownership Plan dated January 1, 1990. **
10(f) Lease for Federal Trust Building dated November 11, 1991, as amended July 29, 1992 and ****
March 1, 1994.
10(g) Amended and Restated Lease for Federal Trust Drive-In Facility dated December 31, 1992. ****
10(h) Lease for Federal Trust Corporation offices dated April 7, 1992, as amended and assumed ****
on June 1, 1994.
10(i) Third Amendment to the Employment Agreement by and between the Company and James T. Bell ****
dated January 5, 1994
10(j) Employment Agreement by and between the Company and James V. Suskiewich dated September 99
1, 1995.
21 Subsidiaries. 109
99 Statement Regarding Issuance of Debentures. ***
(c) Financial Statement Schedules
All supplemental schedules are omitted as inapplicable or because the
required information is included in the financial statements or notes
thereto.
* Incorporated by reference to such documents filed as Exhibits 3, 10(a),
10(b), and 22 to the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1989
** Incorporated by reference to the document filed as Exhibits 10(c) and
10(e) to the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1990
*** Incorporated by reference to the document files as Exhibit 10(d) and
Exhibit 99 to the Company's Annual Report on Form 10-K from the fiscal
year ended December 31, 1991.
**** Incorporated by reference to the document files as Exhibits 3(a), 3(g),
10(f), 10(g), 10(h) and 10(i) to the Company's Annual Report on Form 10-K
from the fiscal year ended December 31, 1994.
99