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, 1996 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.)
1211 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) 645-1201
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 1, 1997 was 2,239,928. The number of shares of the
voting common stock held by non-affiliates of the registrant was 1,568,536.
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
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 lesser extent commercial real estate primarily in Florida, in various types
of construction and other loans and in investment securities. The Holding
Company had been operating 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 leased the Holding Company's office located in Winter Park, Florida. On
July 1, 1996, the Company sold FTPC to an unaffiliated third party and is
renting the office space previously occupied by the Company to FTPC. On
September 26, 1996, the company dissolved 1270 Leasing Co.
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 1211 Orange Avenue, Winter
Park, Florida 32789 and its telephone number is (407) 645-1201. As used herein,
references to "Federal Trust and the Bank" may include Federal Trust and its
consolidated subsidiaries (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 the state of
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
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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 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 1.417 million in 1996, 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 over 20 million
visitors a year, the area has become a center for industries such as aerospace
and defense, 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. Many companies, including some in the Fortune 500, have
chosen the Orlando area as a base for corporate, regional, and divisional
headquarters. The area is also home to the University of Central Florida with an
enrollment of 26,000, 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 90,000. 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, 1996, the four largest banking institutions
in the state controlled approximately 57% 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.
Risk Factors
Readers shoud note, in particular, that this document contains forward-looking
statements within the meaning of Section 21E of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), that involve substantial risks and
uncertainties. When used in this document, or in the documents incorporated by
reference herein, the words "anticipate", "believe", "estimate", "may", "intend"
and "expect" and similar expressions identify certain of such forward-looking
statements. Actual results, performance or achievements could differ materially
from those contemplated, expressed or implied by the forward- looking statements
contained herein. The considerations listed herein represent certain important
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factors the Company believes could cause such results to differ. These
considerations are not intended to represent a complete list of the general or
specific risks that may affect the Company. It should be recognized that other
risks, including general economic factors and expansion strategies, may be
significant, presently or in the future, and the risks set forth herein may
affect the Company to a greater extent than indicated.
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
plus premiums paid for loans purchased less loans in process, unearned discounts
and loan origination fees and allowance for loan losses, totaled $112.5 million
at December 31, 1996, representing 80.6% of total assets at such date. At
December 31, 1995, the Bank's total loan portfolio (excluding mortgage-backed
securities) amounted to $112.9 million ("total loan portfolio").
Single-family residential loans comprise the largest group of loans in the
Bank's loan portfolio, amounting to $101.5 million or 88.3% of the total loan
portfolio at December 31, 1996, of which approximately 98.3% are first mortgage
loans and includes $3.8 million in loans for the construction of single-family
homes and $.92 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 land loans, amounted to
$11.3 million or 9.8% of the total loan portfolio at December 31, 1996.
Commercial real estate loans consist of $10.8 million of loans secured by other
non-residential property and $.5 million of loans secured by undeveloped land as
of December 31, 1996. 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 9.8% of the total loan portfolio in 1996. At December 31,
1996, consumer and other loans, consisting of installment loans and savings
account loans, amounted to $0.84 million or 0.73% of the total loan portfolio.
[THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK.]
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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1996 1995 1994 1993 1992
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Percent of Percent of Percent of Percent of Percent of
Amount Total Amount Total Amount Total Amount Total Amount Total
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Mortgage loans:
Permanent 109,012 94.8% 110,725 96.0% 103,659 92.2% 88,886 91.9% 114,639 92.4%
Construction 3,795 3.3% 1,667 1.4% 1,342 1.2% 1,661 1.7% 3,610 2.9%
------- ----- ------- ----- ------- ----- ------ ----- ------- -----
Total mortgage loans 112,807 98.1% 112,392 97.4% 105,001 93.4% 90,547 93.6% 118,249 95.3%
Loan on deposit accounts 154 0.1% 180 0.2% 503 0.5% 589 0.6% 1,222 1.0%
Commercial loans 1,350 1.2% 1,443 1.3% 891 0.8% 724 0.8% 1,251 1.0%
Lines of credit 686 0.6% 1,259 1.1% 2,385 2.1% 4,744 4.9% 3,082 2.5%
In substance foreclosure -- - % -- --% 3,592 3.2% 108 0.1% 298 0.2%
------- ----- ------- ----- ------- ----- ------ ----- ------- -----
Total loans 114,997 100.0% 115,274 100.0% 112,372 100.0% 96,712 100.0% 124,102 100.0%
Premium on loans purchased 1,155 987 1,460 1,128 1,923
Less:
Loans in process 1,902 1,190 525 478 981
Unearned discounts 170 104 149 138 172
& loan origination fees
Loans held for sale -- -- -- -- 1,105
Allowance for loan losses 1,533 2,061 1,975 1,850 1,291
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Net loans 112,547 112,906 111,183 95,374 122,476
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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, 1996, the Bank had $3.8 million in construction loans, all of
which mature in one year or less. Thirteen percent (13%) of such loans have
fixed rates and 87% 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 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,
-----------------------
1996 1995 1994 1993 1992
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(In Thousands of Dollars)
Originations:
Real Estate Loans:
Loans on existing property 4,955 3,354 3,739 5,600 4,586
Construction loans 621 186 1,466 1,500 2,891
Commercial loans 663 100 148 1,196 369
Lines of credit -- 74 154 933 2,143
Consumer & other loans 515 47 54 275 123
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Total loans originated 6,754 3,761 5,561 9,504 10,112
Purchases: 25,082 29,005 36,913 22,880 77,988
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Total loans originated & purchased 31,836 32,766 42,474 32,384 88,100
Sales and principal reductions
Loans sold (7,761) (2,561) (4,620) (30,422) (12,480)
Principal on loan reductions (24,351) (27,296) (22,194) (30,127) (27,396)
------- ------- ------- ------- -------
Total loans sold & principal reductions (32,112) (29,857) (26,814) (60,549) (39,876)
------- ------- ------- ------- -------
Increase (decrease) in loans receivable (before net items) (276) 2,909 15,660 (28,165) 48,224
======= ======= ======= ======= =======
Loan Underwriting 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. 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. Bank lending policy for real estate loans
generally requires that collateral be appraised by an independent, outside
appraiser approved by the bank's board of directors.
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Loans are approved at various management levels up to and including the board of
directors of the bank, depending on the amount of the loan. Loan approvals are
made in accordance with a Chart of Delegated Authority approved by the board of
directors. Generally, loans less than $250,000 are approved by authorized
officers or underwriters. Loans in excess of $250,000 to $350,000 require the
concurrence of two or more authorized officers. Loans over $350,000 usually
require approval by 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 valid mortgage lien on real estate securing a loan and to obtain a title
insurance policy which insures 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 prone area, flood insurance is required. Most real estate
loans also require the borrower 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 and
property insurance.
The bank is permitted to lend up to 100% of the appraised value of real property
securing a mortgage loan. However, if the amount of a conventional, residential
loan (including a construction loan or a combination construction and 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 single family residential
mortgage loans 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 programs or one of the Federal Housing
Administration, Veterans Administration or Farmers Home Guarantee or insurance
programs. The loan-to-value ratio on a home loan secured by a junior lien
generally does not exceed 90%, including the amount of the first mortgage on the
collateral. With respect to home loans granted for construction or combination
construction/permanent financing, 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 residential and commercial real estate loans
to 80% of value. Consumer loans are considered to be loans to natural persons
for personal, family or household purposes, and these loans may be unsecured,
secured by personal property or secured by liens on real estate which, when
aggregated with prior liens, equals or exceeds the appraised value of the
collateral property.
The maximum amount which the Bank could have loaned to one borrower and the
borrower's related entities at December 31, 1996 was approximately $.99 million.
The Bank currently has three 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 regulatory capital in loans secured by non-residential or commercial
real estate. At December 31, 1996, this limit allowed the Bank to invest in
non-residential or commercial real estate loans in an aggregate amount up to
$26.5 million. Loans in the Bank's loan portfolio secured by non-residential or
commercial real estate totaled $11.5 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.
Home Lending. The bank historically has been and continues to be primarily an
originator and/or buyer of 1-4 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, 1996, $97.7
Million or 85.0% of the bank's total loan portfolio consisted of 1-4 family
residential real estate loans. As of such date, approximately $79.4 Million or
81.3% of such loans were ARMS and $18.3 Million or 18.7 % of such loans were
fixed rate.
The home loans with adjustable rate terms currently offered by the bank have
interest rates that are fixed for a period of 1, 3 or 5 years and then after the
initial period, the interest rate is adjusted annually based upon an index such
as the yield on Treasury Securities adjusted to a one year maturity, plus a
margin. Most of the bank's ARM lending programs limit the amount of any increase
or decrease in the interest rate at each adjustment and over the life of the
loan. Typical limitations are 2% at each adjustment 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
usually offers an initial rate on ARM loans below a fully indexed rate, the bank
always underwrites a borrower's ability to pay at the interest rate which would
be in effect after adjustment of the loan. Some ARM loans include features that
allow the borrower, under special conditions, to convert the loan to a fixed
rate at the then prevailing market rates.
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 borrower's required payments increase, thus increasing the potential for
default. Marketability of real estate is also affected by the level of interest
rates.
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Most fixed rate home loans are originated for 30 year amortization terms.
Borrowers requesting a term of 15 years or less are usually granted an interest
rate slightly lower than is offered for a 30 year amortizing loan. These loans
are originated to ensure compliance with documentation and underwriting
standards which permit their sale in the secondary market to institutional
investors such as the Federal National Mortgage Association (Fannie Mae). Fixed
rate home loans include a "Due on Sale" clause which provides the bank with the
contractual right to declare the loan immediately due and payable in the event
the borrower transfers ownership of the property without the bank's consent. It
is the bank's policy to enforce "Due on Sale" provisions.
Construction Lending. The bank offers adjustable and fixed rate residential
construction loans to owners wishing to construct their primary residence and to
selected builders/developers acceptable to the bank to build 1-4 family
dwellings in the bank's primary market area. Loans to builders/developers are
for homes that are pre-sold or are constructed on a speculative basis. Loans to
builders for the construction of a home for which there is no end buyer at the
time of construction are considered speculative loans. Construction loans to
individuals usually are originated in connection with a permanent loan on the
property (a construction/permanent loan). Construction/permanent loans typically
provide for a construction term of six months to one year followed by the
permanent loan term of up to 30 years. Speculative builder loans are typically
for one year and provide for interest only payments during the loan term. The
bank reviews the financial capacity of the builder, the experience and credit
history of the builder, and present market conditions before approving
speculative loans. Speculative loans to one builder are generally limited to a
specific dollar amount in the aggregate. Loan advances to borrowers during
construction are made on a percentage of completion basis, and funds are
typically disbursed in four to six draws after an inspection is made by bank
personnel and/or authorized independent inspectors and a written report of
construction progress is received by the bank. At December 31, 1996 construction
loans amounted to $3.8 million or 3.3% of the total loan portfolio.
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 construction cost and of the initial estimate of the
property's value upon completion. During construction, 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 complete construction. If the estimate of value is high,
the bank may be confronted with a project having a value which is insufficient
to assure full repayment. Repayment of construction loans to builders of single
family homes usually depends upon the builder successfully negotiating a sale
for the property. Sales of homes are affected by market conditions and the
supply and demand for such products.
Consumer and Other Loans. Federal regulations permit the bank to make secured
and unsecured consumer loans up to 35% of the bank's assets. Management
considers consumer lending to be an important component of its future strategic
plan. Federal Trust originates consumer loans in order to provide a wide range
of financial services to its customers and to create stronger ties to its
customers and because the shorter term and normally higher interest rates on
such loans help the bank increase the sensitivity of its interest earning assets
to changes in interest rates and maintain a profitable spread between its
average loan yield and its cost of funds. The terms of consumer loans generally
range from one to ten years. Federal Trust's underwriting standards for consumer
loans include an assessment of the applicant's payment history on other debts
and ability to meet existing obligations and payments on the proposed loans.
Although the applicant's creditworthiness is a primary consideration, the
underwriting process also includes a comparison of the value of the security, if
any, to the proposed loan amount. Consumer loans generally involve more credit
risks than mortgage loans because of the type and nature of the collateral or
absence of collateral. Consumer lending collections are dependent on the
borrower's continuing financial stability, and are likely to be adversely
affected by job loss, divorce and illness. Furthermore, the application of
various federal and state laws, including federal and state bankruptcy and
insolvency laws, may limit the amount which can be recovered on such loans. In
most cases, any repossessed collateral for a defaulted consumer loan will not
provide an adequate source of repayment of the outstanding loan balance. The
bank believes that the yields earned on consumer loans are commensurate with the
credit risk associated with such loans. At December 31, 1996 consumer loans
amounted to $.84 million or .73% of the total loan portfolio.
Multi-family and Commercial Real Estate Loans. Multi-family real estate loans
are collateralized primarily by garden style apartments located in Florida.
Commercial real estate loans are secured primarily by office, warehouse and
retail business properties located in Florida. These types of loans amounted to
$12.6 million or 11.00% of the total loan portfolio at December 31, 1996. These
loans may be for an amortization term of up to 30 years but frequently include a
maturity in 7 to 15 years. Commercial and multi-family loans are usually
originated with an interest rate that adjusts based upon an index such as the
prime rate or the yield on Treasury Securities adjusted to a maturity of 1, 3 or
5 years. The bank generally does not offer fixed rate commercial real estate or
multi-family loans.
Loans secured by multi-family and commercial real estate are originated with
loan-to-value not exceeding 80% of the appraised value of the properties. Loans
on this type of collateral continue to be a part of the bank's future lending
programs.
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Loans secured by multi-family and commercial real estate are generally larger
and involve a greater degree of risk than residential mortgage loans. Because
payments on loans secured by multi-family and commercial property depend to a
large degree on results of operations and management of the properties,
repayment of such loans may be subject to a greater extent to adverse conditions
in the real estate market or the economy. As of December 31, 1996 the bank had
$0.5 million in loans secured by land which is undeveloped or in the process of
development. The bank will originate multi-family residential real estate,
commercial real estate and business loans, and management estimates such lending
will be between 5% and 10% of the bank's total loan portfolio in the future.
Business Loans with Government Guarantee. Through 1996, the bank has originated
three loans where the principal balance is partially guaranteed by the U.S.
Small Business Administration (SBA). The bank expects to continue to originate
loans to small businesses with guarantee by the SBA or the Farmers Home
Administration (FmHA). These loans are underwritten consistent with the bank's
policies but may include a higher loan relative to the value of collateral than
commercial loans originated without a government guarantee. These lending
programs help small businesses to develop and/or expand and are an important
tool in helping meet the credit needs of the bank's lending area.
Applications for SBA or FmHA guaranteed or insured loans are carefully
underwritten and include an analysis of the borrower's business plan, the value
of collateral, financial capacity, the experience of the borrower and market
conditions. After the bank's underwriting review, a complete application is
submitted to the appropriate agency which in turn performs its own underwriting
analysis and makes a credit decision authorizing guarantee or insurance of the
loan. SBA usually guarantees up to 75% of a loan, and some programs of FmHA
provide guarantees up to 90% of the loan. Loans with government guarantees may
be originated with fixed or adjustable rates; however, the bank usually
originates loans with adjustable rate terms. Amortization terms for such loans
are commensurate with the business purpose and expected life of the collateral.
Real estate secured loans are usually offered for terms up to 25 years. SBA/FmHA
guaranteed loans are originated on fully amortizing terms without a shorter
maturity date and balloon payment requirement. At December 31, 1996 SBA
guaranteed loans amounted to $.96 thousand or .08% of the total loan portfolio.
Income from Lending Activities. Federal Trust receives fees in connection with
loan commitments and originations, loan modifications, late payments, changes of
property ownership and for miscellaneous services related to its loans. Federal
Trust also receives fees for servicing loans sold to others. Income from these
activities varies from period to period with the volume and type of loans
originated, sold and purchased, which in turn is dependent upon prevailing
mortgage interest rates and their effect on the demand for loans in the market
served by Federal Trust.
Loan fees typically are charged at the time of loan origination and may be a
flat fee or a percentage of the amount of the loan. Such fees cannot typically
be recognized as income and 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 that 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 required 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
end of a grace period (usually 15 days from the payment due date), notices are
sent 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 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, 1996 the bank had no loans
to facilitate.
Loans are placed on non-accrual status when, in the judgment of management, the
7
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 therefrom is charged to the
allowance for losses on loans.
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8
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,
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(In Thousands of Dollars)
Non-accrual loans:
Residential:
Construction and land loans 548 2,035 1,025 1,081 342
Permanent loans (1-4 units) 323 807 1,029 704 748
All other mortgage loans -- 416 650 1,310 853
Commercial loans 47 -- -- -- 64
Consumer and other loans 73 69 77 30 53
In-substance foreclosures -- -- 3,592 108 298
------ ---- ---- ---- ----
Total non-accrual loans 991 3,327 6,373 3,233 2,358
====== ==== ==== ==== ====
Total non-accrual loans to total loans 0.9% 2.9% 5.7% 3.3% 1.9%
====== ==== ==== ==== ====
Total non-accrual loans to total assets 0.7% 2.4% 4.1% 2.2% 1.7%
====== ==== ==== ==== ====
Total allowance for loss to total non-accrual loans 154.7% 61.9% 31.0% 57.2% 54.8%
====== ==== ==== ==== ====
Real estate owned:
Real estate acquired by foreclosure 1,508 3,293 2,891 565 594
Total real estate owned 1,508 3,293 2,891 565 892
====== ==== ==== ==== ====
Total non-accrual loans and
real estate owned to total assets 1.8% 4.7% 6.0% 2.6% 2.1%
====== ==== ==== ==== ====
9
If the non-accrual loans at December 31, 1996 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, 1996 would have been increased approximately
$181,000.
The $.32 million of non-accruing single-family residential permanent loans at
December 31, 1996 consists of 10 loans. Such loans have an average loan balance
of approximately $32,000 and no loan exceeds $110,000.
The Bank had one non-accruing land acquisition and development loan at December
31, 1996 in the amount of $547,930.
At December 31, 1996, the Bank had real estate owned of $1,508,166 acquired by
foreclosure consisting of eight single family properties with an average balance
of $62,776, two vacant land properties zoned commercial with an average balance
of $393,229, one acquisition and development project with a balance of $184,500
and one developed building lot with a balance of $35,000.
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 to 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.
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10
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,
1996 1995 1994 1993 1992
(In Thousands of Dollars)
Average loans outstanding, net 112,288 115,608 108,771 109,063 124,107
Allowance at beginning of year 2,061 1,975 1,850 1,292 359
Charge offs:
Conventional loans 794 267 4 27 37
Construction loans -- -- -- -- --
Commercial real estate loans 390 440 400 -- --
Consumer loans 39 -- 5 5 --
------- ------- ------- ------- -------
Total loans charged off 1,223 707 409 32 37
------- ------- ------- ------- -------
Recoveries 267 14 3 -- --
------- ------- ------- ------- -------
Net charge-offs 956 693 406 37 37
Provision for loan losses
charged to operating expenses 280 779 531 590 140
Transfer from allowance for
real estate owned 148 -- -- -- --
General reserves acquired
as part of loan package -- -- -- -- 830
purchases Allowance at end of year 1,533 2,061 1,975 1,850 1,292
------- ------- ------- ------- -------
Ratio of net charge-offs
to average loans outstanding 1.09% 0.61% 0.38% 0.03% 0.03%
------- ------- ------- ------- -------
Ratio of allowance to
period-end total loans, net 1.36% 1.83% 1.78% 1.94% 1.06%
------- ------- ------- ------- -------
Period-end total loans, net 112,547 112,906 111,183 95,374 122,476
------- ------- ------- ------- -------
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,
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Percent of Percent of Percent of Percent of Percent of
Loans to Loans to Loans to Loans to Loans to
Amount Total Amount Total Amount Total Amount Total Amount Total
Loans Loans Loans Loans Loans
----- ----- ----- ----- -----
(In Thousands of Dollars)
Residential real estate loans 283 88.3% 585 86.1 607 83.6 1,359 72.6 1,000 76.7
Commercial real estate loans
(Including multi-family
& land loans) 946 9.8% 1,041 11.4 1,160 13.1 414 21.0 292 23.3
Non-mortgage loans 304 1.9% 435 2.5 208 3.3 77 6.4 -- --
Total allowance for loan losses 1,533 100.0% 2,061 100.0% 1,975 100.0% 1,850 100.0% 1,292 100.0%
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, December 31, 1995, and December 31, 1996 the Bank had no investment in
mortgage-backed securities or mortgage derivatives.
The following table sets forth mortgage-backed securities purchased, sold and
repaid during the periods indicated:
Year Ended December 31,
-----------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(In Thousands of Dollars)
Purchases - - 4,647 4,521 --
Sales - - 4,124 (2,416) --
Principal reductions, net - - 13 (2,105) --
---- ---- ----- ----- ----
Increase (decrease) in
mortgage-backed securities - - -- -- -
==== ==== ===== ===== ====
Investment Activities
The Bank's investment portfolio currently consists of $15,047,984 in bonds
issued by the Federal Home Loan Bank. 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, 1996, $8,763,641 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, 1996, the
bonds had a market value of $15,030,829 and gross unrealized losses of
$1,069,171. The bonds have a par value of $16,100,000 and pay interest based on
the difference between two indices. All of the bonds pay interest at the10 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 1994, 1995, and 1996 were, 6.79%, 5.43%, and
3.98% respectively. Market values for all securities were calculated using
published prices or the equivalent at December 31, 1996.
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, 1996, 1995, and 1994, the Bank had $7,000,000, $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
11
the Bank. 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)
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. On April 1, 1996, the Bank transferred $7,000,000 par value of the
Federal Home Loan Bank bonds maturing in 2003 from the available for sale to the
held to maturity category, and during November, 1996, the Bank sold $1,000,000
par value of the Federal Home Loan Bank bonds that mature in 1998 at a gross
loss of $12,344.
As a member of the FHLB System, the Bank must maintain 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 and with the qualifying
unpledged bonds in the investment portfolio that have maturities of 5 years of
less. 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,
------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(In Thousands of Dollars)
Short-term investments:
Interest-bearing deposits 4,837 51 6,861 6,221 3,892
Debt securities:
FHLB Notes 15,048 15,918 24,257 24,353 --
Orange County tax certificates 6 19 44 135 --
Mortgage-backed securities -- -- -- -- --
ARM mutual fund -- -- -- 12,048 --
Equity securities:
FHLB stock 1,253 1,853 1,975 2,815 1,878
------ ------ ------ ------ -----
Total investment portfolio 21,144 17,841 33,137 45,572 5,770
====== ====== ====== ====== =====
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, 1996, the Bank had
$19.8 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,
to a much lesser extent, 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(R) and other shared ATM networks. The Bank utilizes very few
brokered deposits and at times seeks some negotiated rate certificates of
deposit less than $100,000 through the CD Network(R) 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.
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12
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,
-----------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
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 59 .1 209 0.2 257 0.3 776 1.0 1,556 1.6
Regular savings accounts 1,364 1.3 2,158 2.0 4,234 4.2 8,932 11.4 22,125 22.7
MMDA's 7,429 7.0 6,601 6.1 9,247 9.1 822 1.0 1,204 1.2
NOW accounts 654 .6 675 0.6 857 0.8 1,213 1.5 4,235 4.4
------- ----- ------- ----- ------- ----- ------ ----- ------ -----
Subtotal 9,506 9.0 9,643 8.9 14,595 14.4 11,743 14.9 29,120 29.9
------- ----- ------- ----- ------- ----- ------ ----- ------ -----
Certificate of Deposit:
1.00% to 3.99% 499 .5 1,219 1.0 5,431 5.4 36,857 46.8 21,206 21.7
4.00% to 4.99% 3,077 2.9 2,171 2.0 29,421 29.0 23,558 29.9 34,247 35.2
5.00% to 5.99% 78,123 73.5 54,847 49.9 29,165 28.7 4,845 6.2 9,555 9.8
6.00% to 7.99% 14,910 14.0 41,311 37.6 22,859 22.5 1,675 2.1 3,030 3.1
8.00% to 9.99% -- -- -- -- 46 0.0 50 0.1 263 0.3
------- ----- ------- ----- ------- ----- ------ ----- ------ -----
Total Certificates of Deposit 96,609 91.0 99,548 90.5 86,922 85.6 66,985 85.1 68,301 70.1
------- ----- ------- ----- ------- ----- ------ ----- ------ -----
Total Deposits 106,115 100.0 109,191 100.0 101,517 100.0 78,728 100.0 97,421 100.0
======= ===== ======= ===== ======= ===== ====== ===== ====== =====
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,
-----------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
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 7,722 3.44% 7,587 3.56% 8,629 3.11% 4,998 1.03% 7,349 2.10%
Regular savings 1,641 2.62% 2,975 3.09% 6,227 3.40% 15,529 3.05% 25,782 3.21%
Certificates of Deposit 97,042 5.62% 99,716 5.88% 77,333 4.30% 58,402 4.26% 77,340 4.53%
------- ---- ------- ---- ------ ---- ------ ---- ------- ----
Total Deposits 106,405 5.41% 110,278 5.63% 92,190 4.12% 78,929 3.90% 110,471 4.59%
======= ==== ======= ==== ====== ==== ====== ==== ======= ====
13
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, 1996
the Bank's deposits decreased $2.9 million.
The following table sets forth the net deposit flows of the Bank during the
periods indicated.
Year Ended December 31,
-----------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Net increase (decrease) before interest credited (6,675) 10,530 23,902 (18,585) 40,471
Less:
Interest credited 3,599 2,945 1,113 892 2,720
------ ----- ------ ------- ------
Net deposit increase (decrease) (3,076) 7,585 22,789 (18,693) 37,697
====== ===== ====== ======= ======
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, 1996, the Bank had $24.8 million in
borrowings outstanding and at December 31, 1995, the bank had $21.0 million in
borrowings outstanding.
The following is an analysis of the advances from the Federal Home Loan Bank:
Amounts outstanding at December 31, 1996:
Maturity Date Rate Amount Type
12/31/97 6.95% $ 4,800,000 Variable Rate
06/28/97 6.01% 5,000,000 Fixed Rate
09/16/97 6.01% 5,000,000 Fixed Rate
10/16/97 5.86% 5,000,000 Fixed Rate
09/15/98 6.12% 5,000,000 Fixed Rate
---- ----------
Total 6.18% $24,800,000
==== ===========
Amounts outstanding at December 31, 1995:
Maturity Date Rate Amount Type
01/02/96 6.10% $ 700,000 Variable Rate
01/27/96 5.76% 7,000,000 Fixed Rate
01/31/96 6.10% 3,300,000 Variable Rate
09/15/96 5.83% 5,000,000 Fixed Rate
09/15/98 6.12% 5,000,000 Fixed Rate
---- ----------
Total 5.93% $21,000,000
==== ===========
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:
- --------------------------------------------------------------------------------
1996 1995
---- ----
Monthend Rate Amount Monthend Rate Amount
- -------- ---- ------ -------- ---- ------
01/31/96 6.12% 20,500,000 01/31/95 6.21% 33,400,000
02/29/96 5.81% 19,300,000 02/28/95 6.27% 34,400,000
03/31/96 5.77% 22,300,000 03/31/95 6.29% 33,400,000
04/30/96 5.77% 23,300,000 04/30/95 6.34% 30,100,000
05/31/96 5.74% 24,700,000 05/31/95 6.36% 28,100,000
06/30/96 5.80% 25,500,000 06/30/95 6.43% 28,600,000
07/31/96 5.93% 22,800,000 07/31/95 6.33% 30,600,000
08/31/96 5.78% 24,100,000 08/31/95 6.36% 27,700,000
09/30/96 6.05% 25,000,000 09/30/95 6.37% 31,100,000
10/31/96 5.98% 24,200,000 10/31/95 6.19% 29,700,000
11/30/96 6.01% 23,800,000 11/30/95 6.23% 28,600,000
12/31/96 6.18% 24,800,000 12/31/95 5.93% 21,000,000
During the twelve-month periods ended December 31, 1996 and December 31, 1995,
average advances outstanding totaled $23.4 million and $29.7 million at an
average rate of 5.91% and 6.28%, respectively.
Advances from the FHLB are collateralized by loans, securities, and FHLB stock
that totaled approximately $34.6 million, $6.3, and $1.3 million, respectively
at December 31, 1996.
Expansion Plans
Management plans to raise additional capital in the first half of 1997. If
successful in raising the additional capital, management plans to expand the
operations of the bank via a branch in the near future. It is anticipated that
the branch would be located in the greater Orlando market area. 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, 1996, the Holding Company had no full-time employees and the
Bank had 26 full-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. In
14
addition, on April 1, 1997, the bank will begin offering its employees a 401k
Plan. 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
At December 31, 1996, the Company had no subsidiaries other than Federal Trust
Bank.
Total Equity Investments at December 31, 1996
Federal Trust Bank $ 6,401,425
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. At December
31, 1996, the Bank had one subsidiary, FTB Financial Services, Inc.("FTBFS"),
that commenced operations in 1996. FTBFS is engaged in the business of selling
non-FDIC insured annuities, and its operations in 1996 were minimal.
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
15
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.
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.
Sale of Federal Trust Properties Corporation. Pursuant to a Purchase Agreement
dated June 30, 1996 the Company sold all of the stock of Federal Trust
Properties Corporation to an unaffiliated party for $425,354 consisting of
$60,000 in cash, a note for $60,000 which was due and paid on August 8, 1996, a
note for $230,354 due upon the earlier of certain events, but in any event due
no later than July 31, 1997, and three notes for $25,000 each, due December 31,
1998, 1999 and 2000, respectively. In addition, the Company is renting the
quarters it previously occupied to FTPC on a month to month basis, and plans to
sub-lease the space to a long term tenant. No gain or loss was recognized on the
sale.
Dissolution of 1270 Leasing Company. The Company dissolved 1270 LC on September
26, 1996, as it was no longer necessary to maintain the entity for purposes of
the lease on the office space previously occupied by the Company.
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"..
Until 1996, savings institutions that met certain definitional tests and other
conditions prescribed by the Internal Revenue Code of 1986 (the "Code") relating
primarily to the composition of their assets and the nature of their business
activities, were, within certain limitations, permitted to establish and deduct
additions to reserves for bad debts in amounts in excess of those which would
otherwise be allowable on the basis of actual loss experience. A qualifying
savings institution could elect annually to compute the addition to its bad debt
reserve for qualifying real property loans (generally, loans secured by
interests in improved real property) 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 specified percentage of the
institution's taxable income (the "percentage of taxable income method"), and
not be bound by the election in any subsequent year. The addition to the reserve
for nonqualifying loans was required to be computed under the experience method
and reduced by the current year's addition to the reserve for losses on
nonqualifying loans, unless that addition also was determined under the
experience method. The aggregate of the additions to each reserve for each year
16
was Federal Trust Bank's annual bad debt deduction for years preceding 1996,
Federal Trust Bank utilized either the percentage of taxable income method and
the experience method in computing the tax-deductible addition to its bad debt
reserves.
If the percentage of Federal Trust Bank's specified qualifying assets
(generally, loans secured by residential real estate or deposits, banker's
acceptances, educational loans, cash, government obligations and certain
certificates of deposit) were to fall below 60% of total assets, Federal Trust
Bank would not be eligible to claim further bad debt reserve deductions and
would recapture into income all previously accumulated bad debt reserves. At
December 31, 1996, Federal Trust Bank's qualifying assets were in excess of 60%
of total assets.
The Small Business Job Protection Act of 1996 repealed the percentage of taxable
income method of accounting for bad debts for tax years beginning after 1995.
Federal Trust Bank switched solely to the experience method to compute its bad
debt deduction in 1996 and future years. Federal Trust Bank is required to
recapture into taxable income the portion of its bad debt reserves that exceed
its bad debt reserves calculated under the experience method from the bank's
inception. Accordingly, Federal Trust Bank will have to recapture approximately
$70,000 of bad debt reserves as a result of this change in law.
The recapture amount resulting from the change in method of account for bad debt
reserves generally will be taken into Federal Trust Bank's taxable income
ratably (on a straight-line basis) over a six-year period. If a thrift meets a
residential loan requirement for a tax year beginning in 1996 or 1997, the
recapture of the reserves will be suspended for that tax year. Thus, recapture
can potentially be deferred for up to two years.
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
17
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.
Recent Regulatory Action
On October 3, 1994, Federal Trust 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
operational deficiencies cited in the Bank's 1992 examination, which resulted in
a Supervisory Agreement between the Bank and the OTS, and the deficiencies cited
in the 1994 examinations, it was determined that it was in the best interest of
the Federal Trust 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 were in
compliance with or had been corrected. The holding company's Order, on the other
hand, was administrative in nature and likewise could be easily monitored.
In August, 1995 the OTS informed Federal Trust that it was conducting an
expanded examination of the holding company with regard to certain transactions
that were entered into 1990 and 1991 by prior Bank management. As of the date of
this filing, Federal Trust has had no further contact with the OTS concerning
this examination. See, "Item 7. Supervision".
In the 1996 examinations of Federal Trust and the Bank, the OTS found the
companies to be in compliance with their Orders and upgraded the supervisory
rating of Federal Trust to "Satisfactory". In light of the improvement of the
Bank's operations, the OTS reduced the number of provisions in the Bank's Order
from 27 to 23. Management has been advised that the OTS will consider lifting
the Bank's Order when the ratio of classified assets to capital is reduced below
100%. With regard to the Bank, further improvement was noted in a number of
areas, including underwriting procedures, documentation, disposition of problem
assets, significant reduction in the dependency on wholesale funds, and a
continued reduction in operating expenses.
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
18
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, Federal Trust might not be inclined to provide such support.
In addition, any capital loans by Federal Trust to the Bank must be subordinate
in right of payment to deposits and to certain other indebtedness of the Bank.
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. To date, the principal source of cash flow of Federal
Trust, including cash flow to pay cash dividends, 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 Federal
Trust 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 1996.
According to the holding company's Order, Federal Trust 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 Federal Trust 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.
19
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. The OTS' prompt and corrective action
regulation became effective December 19, 1992. Among other things, the
regulations define the relevant capital measures for the five capital
categories. (well capitalized, adequately capitalized, undercapitalized,
significantly under capitalized and critically under capitalized). 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
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 institutions. These requirements
provide for a minimum ratio of tangible capital of not less than 1.5% of the
savings institutions 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. A savings institution
cannot make a capital distribution such as cash dividends, redemptions and other
purchases of stock, or pay management fees to any person having control of that
institution, if after doing so, the savings institution would be
undercapitalized.
Capital Requirements. Both OTS and FDIC have promulgated regulations setting
forth capital requirements applicable to depository institutions. The OTS
capital regulations require savings institutions to meet three capital
standards: a 1.5% tangible capital ratio (defined as the ratio of tangible
capital to adjusted total assets), a 3% leverage (core capital) ratio (defined
as the ratio of core capital to adjusted total assets ) and an 8% risk-based
capital standard as defined below. Core capital is defined as common
stockholder's equity (including retained earning), certain noncumulative
perpetual preferred stock and related surplus, minority interests in equity
accounts of consolidated subsidiaries, certain goodwill and certain mortgage
servicing rights less certain intangible assets, mortgage servicing rights less
certain intangible assets, mortgage servicing rights and investments in
nonincludable subsidiaries. Tangible capital is defined in the same manner as
core capital, except that all intangible assets (excluding certain mortgage
servicing rights) must be deducted. Adjusted total assets is defined as GAAP
total assets, minus intangible assets (except those included in core capital).
The OTS regulations also require that in calculating the leverage ratio,
tangible and risk-based capital standards, savings institutions must deduct
investments in and loans to subsidiaries engaged in activities not permissible
for a national bank. The Bank currently has one subsidiaries.
The OTS risk-based capital standard for savings institutions requires that total
capital (comprised of core capital and supplementary capital) be at least 8% of
risk-weighted assets. In determining risk-weighted assets, all assets, including
certain off-balance sheet assets, are multiplied by a risk-weight of 0% to 100%,
as assigned by the OTS capital regulation based on the risks OTS believes are
inherent in the type of asset. Generally, zero weight is assigned to risk-free
assets, such as cash and unconditionally guaranteed United States government
securities. A weight of 20% is assigned to, among other things, certain
obligations of United States government- sponsored agencies (such as the FNMA
and the FHLMC) and certain high quality mortgage-related securities. A weight of
50% is assigned to qualifying mortgage loans and certain other mortgaged-related
Securities, repossessed assets and assets that are 90 days or more past due. The
components of core capital are equivalent to those discussed above. The
components of supplementary capital include permanent capital instruments (such
as cumulative perpetual preferred stock, mandatory convertible subordinated debt
and perpetual subordinated debt), maturing capital instruments (such as
mandatory convertible subordinated debt and intermediate-term preferred stock)
and the allowance for loan and lease losses. Allowance for loan and lease losses
20
includable in supplementary capital is limited to a maximum of 1.25% of
risk-weighted assets. Overall, the amount of capital counted toward
supplementary capital cannot exceed 100% of core capital.
On August 31, 1995, the OTS issued an interim rule providing that the amount of
risk-based capital that may be required to be maintained by an institution for
recourse assets cannot be greater than the total of the recourse liability. The
interim rule provides that whenever the calculation of risk-based assets
(including assets sold with recourse) would result in a capital charge greater
than the institution's maximum recourse liability on the assets sold, instead of
including the assets sold in the savings institution's risk-weighted assets, the
institution may increase its risk-based capital by its maximum recourse
liability. In addition, qualified savings institutions may include in their
risk-weighted assets for the purpose of capital standards and other capital
measure, only the amount of retained recourse of small business obligation
transfers multiplied by the appropriate risk weight percentage. The interim rule
sets reserve requirements and aggregate limits for recourse held under the
modified treatment. Only well-capitalized institutions and adequately
capitalized institutions with OTS permission may use this reduced capital
treatment.
On August 16, 1996, the OTS and the other federal banking agencies jointly
proposed to revise their respective risk-based capital rules relating to
treatment of certain collateralized transactions. These types of transactions
generally include claims held by banks (such as loans and repurchase agreements)
that are collateralized by cash or securities issued by the U.S. Treasury or
U.S. Government agencies. If adopted, the proposal would permit certain
partially collateralized claims to qualify for the 0% risk category. To qualify
for the 0% risk category, the portion of the claim that will be continuously
collateralized must be specified either in terms of dollar amount or percentage
of the claim. For off-balance-sheet derivative contracts, the collateralized
portion of the transaction could be specified by dollar amount or percentage of
the current or potential future exposure.
On January 1, 1994 the OTS incorporated 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. Effective September 1, 1995, the
interest rate-risk rule was amended to include, in evaluating capital adequacy,
an assessment of exposure to declines in the economic value of a savings
institution's capital due to changes in interest rates. Under the rule, there is
a three-quarter lag between the reporting date of an institution's financial
data and the effective date for the new capital requirement based on that data.
Each quarter, the OTS calculates a savings institution's interest-rate risk
exposure and advised the savings institution of any interest-rate risk capital
component resulting from greater than "normal" exposure. The rule also provides
that the Director of the OTS may waive or defer a savings institution's
interest-rate risk component on a case by case basis.
The Bank's interest-rate risk exposure, according to OTS calculations, has been
determined to be not greater than "normal" exposure as of December 31, 1996.
The OTS issued a Thrift Bulletin in August 1995 that described how and under
what circumstances a savings institution may appeal its interest-rate risk
component by requesting an adjustment to the interest-rate risk component
generated by the OTS model or seek approval to use its own internal
interest-rate risk model to calculate the interest rate risk component. The
Thrift Bulletin provides that to be eligible to seek an adjustment to the
interest rate risk component, an institution must show that its interest-rate
risk component, as calculated by the OTS, could cause the savings institution to
move to a lower prompt corrective action category and that the accuracy of the
OTS' estimate of interest-rate risk exposure can be materially improved through
the use of more refined data or more appropriate assumptions tailored to the
specific institution. The Thrift Bulletin also outlines the circumstances under
which well-capitalized institutions may request to use their own internal
interest-rate risk model in place of the OTS model in calculating interest-rate
risk capital requirements. The internal model must meet certain OTS standards,
including reasonable assumptions about future interest rates, prepayment rates
for assets and attrition rates for liabilities.
The FDICIA also required that the OTS (and other federal banking agencies)
revise the risk-based capital standards with appropriate transition rules to
take into account concentration of credit risks and risks of nontraditional
activities. Effective January 17, 1995, the OTS (along with the other federal
banking agencies) issued final regulations which explicitly identify
concentration of credit risk and other risks from nontraditional activities, as
well as an institution's ability to manage these risks, as important factors in
21
assessing an institution's overall capital adequacy. These final regulations do
not contain any specific mathematical formulas or capital requirements.
At December 31, 1996, the Bank met each of its capital requirements, in each
case on a fully phased-in basis. The following table sets forth the regulatory
capital calculations of the Bank at December 31, 1996:
Tangible Core Risk-Based
- --------------------------------------------------------------------------------
Percent of
Percent Percent Risk-
of of Weighted
Amount Assets Amount Assets Amount Assets
------ ------ ------ ------ ------ ------
Regulatory Capital $6,614,345 4.74% $6,614,345 4.74% $7,485,055 9.92%
Requirement $2,093,147 1.50% $4,186,294 3.00% $6,036,335 8.00%
Excess $4,521,198 3.24% $2,428,051 1.74% $1,448,720 1.92%
New Standards for Safety and Soundness. The FDICIA, as amended by the Reigle
Community Development and Regulatory Improvement Act of 1994, 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, loan documentation, credit underwriting, interest
rate risk exposure, asset growth, and compensation, fees and benefits and such
other operational and managerial standards as the agency deems appropriate. On
July 10, 1995 the OTS and the other federal banking agencies adopted a final
rule establishing deadlines for the agencies to submit and review safety and
soundness compliance plans and Interagency Guidelines Establishing Standards for
Safety and Soundness. The final rule and guidelines went in to effect on August
9, 1995. The guidelines require savings institutions to maintain internal
controls and information systems and internal audit systems that are appropriate
for the size, nature and scope of the institution's business. The guidelines
also establish certain basic standards for loan documentation, credit
underwriting, interest rate-risk exposure, and asset growth. The guidelines
further provide that savings institutions should maintain safeguards to prevent
the payment of compensation, fees and benefits that are excessive or that could
lead to material financial loss, and that they should take into account factors
such as compensation practices at comparable institutions. In October 1996, the
federal banking agencies jointly adopted asset quality and earning standards to
be added to the Interagency Guidelines.
If the OTS determines that a savings institution is not in compliance with the
safety and soundness guidelines, it may require the institution to submit an
acceptable plan to achieve compliance with the guidelines. A savings institution
is required to submit an acceptable compliance plan to the OTS within 30 days
after receipt of a request for such a plan. Failure to submit or implement a
compliance plan may subject the institution to regulatory sanctions. Management
believes that the Bank already meets substantially all the standards adopted in
the interagency guidelines and, therefore, does not believe that implementation
of these regulatory standards will materially affect the Bank's operations.
Insurance of Deposit Accounts. The FDIC is the administrator for the SAIF and
the Bank Insurance Fund ("BIF"), independently setting insurance premiums for
each Fund. The FDIC is authorized to adjust the assessment rates. The Bank's
deposit accounts are insured by the SAIF which is administered by the FDIC. The
Federal Deposit Insurance Act required the FDIC to increase the reserves of the
SAIF and the BIF to 1.25% of total insured deposits. The Deposit Insurance Funds
Act of 1996 ("Deposit Act") required a depository institutions to pay a one-time
special assessment of 65.7 basis points on SAIF-insured deposits held at March
31, 1995 in order to recapitalize the SAIF to the same level as the BIF. The
Bank's pre-tax special assessment was $716,498. 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. 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
22
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 and 1996
was 29 basis points on deposits.
The FDIC in early December, 1996 adopted a rule that would reduce regular
semi-annual SAIF assessments from the current range of 0.23% - 0.31% of deposits
to a range of 0% - 0.27% of deposits. The new rates will be effective for
SAIF-assessable institutions on January 1, 1997. From October 1, 1996 through
December 31, 1996, SAIF-assessable institutions will be assessed at rates
ranging from 0.18% to 0.27% of deposits, which represents the amount the FDIC
calculates as necessary to cover the interest due for that period on outstanding
Financing Corporation ("FICO") Bonds discussed below. Because SAIF-assessable
institutions have already been assessed at current rates (i.e., 0.23% - 0.31% of
deposits) for the semi-annual period ending December 31, 1996, the FDIC will
refund or credit with interest the amount collected for the period from October
1, 1996 through December 31, 1996 which exceeds the amount due for that period
under the reduced assessment schedule. Assuming the Bank retains its current
risk classification under the FDIC's risk-based assessment system, the deposit
insurance assessments payable by the Bank will be reduced significantly.
Effective October 1, 1996, the Bank's SAIF insurance premiums were reduced from
$0.29 per $100 to $0.17 per $100 of insured deposits in January, 1997.
The federal banking agencies are required by the Deposit Act to take appropriate
measures to prevent insured depository institutions and insured depository
holding companies from facilitating or encouraging shifting from SAIF-assessable
deposits to BIF-assessable deposits to avoid assessments imposed on SAIF
members. These measures include enforcement actions, denial of applications, and
treating the transaction as a conversion by imposing exit fees and entrance
fees.
The Deposit Act also reduced the burden on SAIF-insured institutions in paying
bonds (the "FICO Bonds") issued by the FICO, the entity created in 1987 to
finance the recapitalization of the Federal Savings and Loan Insurance
Corporation, the SAIF's predecessor insurance fund. Prior to the Deposit Act, a
substantial amount of the SAIF assessment revenue was used to pay the interest
due on the FICO Bonds. Beginning with the semi-annual period after December 31,
1996, interest due on FICO Bonds will be covered by assessments against both
SAIF and BIF insured institutions. Between January 1, 1997 and December 31,
1999, BIF-assessable deposits will be assessed at a rate of 20% of the
assessment rate applicable to SAIF-assessable deposits. After December 31, 1999,
FICO assessments are to be shared on a pro rata basis.
The Deposit Act also provides for the merger of the SAIF and the BIF into one
"Deposit Insurance Fund" on January 1, 1999, provided there are no state or
federally chartered FDIC-insured savings associations existing on that date. To
facilitate the merger of the BIF and SAIF, the Treasury Department is required
to conduct a study on the development of a common charter and to submit a
report, along with appropriate legislative recommendations, to Congress by March
31, 1997. Immediately prior to the merger of the SAIF and the BIF, a Special
Reserve of the Deposit Insurance Fund (the "DIF Special Reserve") will be
created that will consist of the excess amount in the SAIF reserve ratio over
the designated reserve ratio as of that date, if any. The DIF Special Reserve
would be available for emergency purposes if the reserve ratio of the Deposit
Insurance Fund is less than 50% of the designated reserve ratio and the FDIC
expects the reserve ratio to remain at less than 50% of the designated reserve
ratio for each of the next four calendar quarters.
If the SAIF and the BIF are not merged, the Deposit Act provides for creation of
a SAIF Special Reserve if the reserve ratio of the SAIF exceeds the designated
reserve ratio. The amount by which the SAIF reserve ratio exceeds the designated
reserve ratio will be deposited into the SAIF Special Reserve. Like the DIF
Special Reserve, the SAIF Special Reserve would be available for emergency
purposes if the reserve ratio of the SAIF is less than 50% of the designated
reserve ratio and the FDIC expects the reserve ratio to remain at less than 50%
of the designated reserve ratio for each of the next four calendar quarters.
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 does not know of any
practice, condition or violation that might lead to termination of deposit
insurance. At December 31, 1996, the Bank exceeded all of the fully phased-in
capital requirements.
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, 1996, the Bank had one brokered deposit, a
$99,000 five-year certificate of deposit which was acquired in March 1992.
23
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, 1996, the Bank had four loans which exceeded the
loans to one borrower limit, totaling $7,044,577.
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 12 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, 1996, the Bank met the QTL test, maintaining 84.1% of its
portfolio assets in qualified thrift investments.
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. Prior approval of the OTS is required for a
savings institution to branch interstate or intrastate. 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 does not conduct interstate
branching operations and does not plan to do so in the foreseeable future.
Interstate Banking. The Riegle-Neal Interstate Banking and Branching Efficiency
Act of 1994 ("Interstate Act") which became effective September 29, 1995,
eliminates many existing restrictions on interstate banking by authorizing
interstate acquisitions of banks by bank holding companies without geographic
limitations and without regard to whether such acquisitions are permissible
under the state law.
Florida enacted the Florida Interstate Banking Act ("Florida Act") which became
effective May 16, 1996. The Florida Act permits acquisitions of Florida banks in
existence three years or more (or all Florida bank subsidiaries in the case of
Florida bank holding companies) by bank holding companies based in other states.
Florida law has permitted interstate reciprocal acquisitions of and by Florida
savings institutions since 1986. The effect of the Interstate Act and the
Florida Act, which will expand the number of out-of-state bank holding companies
permitted to acquire Florida banks, on the Bank cannot be predicted at this
time. It is anticipated that these acts may facilitate further consolidation in
the banking industry and, by permitting out-of-state banks nationwide to acquire
Florida banks, may increase competition in the Bank's market.
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 withdrawable
deposit accounts plus short-term borrowings. This liquidity requirement may be
24
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, 1996, was 9.55%, and it's short-term liquidity ratio for the same period was
2.33%. The Bank has never been subject to monetary penalties for failure to meet
its liquidity requirements.
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
$66,255 in OTS assessments for the year-ended December 31, 1996.
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.
On May 4, 1995, the OTS and the other federal banking agencies adopted new,
uniform CRA regulations that provide guidance to financial institutions on their
CRA obligations and the methods by which those obligations would be assessed and
enforced. The regulations establish three tests applicable to the Bank: (i) a
lending test to evaluate direct lending in low-income areas and indirect lending
to groups that specialize in community lending; (ii) a service test to evaluate
an institution's delivery of services to such areas; and (iii) an investment
test to evaluate an institution's investment in programs beneficial to such
areas. The new CRA regulations became effective on July 1, 1995, but reporting
requirements are not effective until January 1, 1997. Evaluation under the
regulations is not mandatory until July 1, 1997. The Bank believes its current
operations and policies substantially comply with the new regulations and,
therefore, no material changes to operations or policies are expected.
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 Company are
audited by independent auditors.
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.
25
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, 1996, dividends paid by the
FHLB-Atlanta to the Bank amounted $127,746, 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 reversible 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.
[THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
26
ITEM 2. PROPERTIES
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
a director 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
1996 was $268,987 or $20.22 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 offices leased by, and formerly occupied by, Federal Trust Corporation are
rented on a month to month basis by Federal Trust Properties Corporation, a
former subsidiary of the Corporation, for the same amount as the Corporation
pays.
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, 1996.
Net carrying value of real property
Lease
Owned Leased expiration
----- ------ ----------
Federal Trust Building -0- $777,714 12/31/00
1211 Orange Avenue
Winter Park, Florida 32789
Federal Trust Corporation - former offices -0- $ -0- 10/1/01
1270 Orange Avenue, Suite C
Winter Park, Florida 32789
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, 1996, no matters
were submitted to a vote of the security holders through a solicitation or
otherwise.
27
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, 1997, there are 437 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 or
1996.
28
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,
-----------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(In Thousands of Dollars except per share amounts)
Interest income 9,937 10,609 9,847 9,506 11,765
Interest expense 7,038 8,026 5,781 4,824 6,802
Net interest income 2,899 2,583 4,066 4,682 4,963
Provision for loan losses 280 779 531 590 140
Net interest income
after provision
for loan losses 2,619 1,804 3,535 4,092 4,823
Non-interest income 427 505 483 1,299 1,463
Non-interest expenses 4,236 5,791 4,238 4,216 4,902
Earnings (loss) before income taxes (1,190) (3,482) (220) 1,175 1,384
Income tax (benefit) expense (214) (1,232) (41) 409 485
Net earnings (loss) (977) (2,250) (179) 766 899
Net earnings (loss) per share (.43) (1.00) (.08) 0.40 0.48
Average equity to average assets 5.13% 5.55% 6.22% 7.06% 5.60%
Return on average assets (.70%) (1.50%) (.12%) .56% .60%
Return on average equity (13.62%) (26.96%) (2.0%) 8.02% 10.64%
Summary of Financial Condition
At December 31,
---------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(In Thousands of Dollars except per share amounts)
Cash, non-interest-bearing 629 1,619 744 1,090 2,078
Investments (2) 21,145 17,842 33,137 45,573 5,770
Mortgage-backed securities -- -- -- -- --
Loans, net 112,547 112,906 111,183 95,374 122,476
All other assets 5,261 8,022 8,893 4,851 8,813
------- ------- ------- ------- -------
Total assets 139,582 140,389 153,957 146,888 139,137
======= ======= ======= ======= =======
Deposits 106,119 109,203 101,528 78,742 97,434
Borrowings 24,800 21,000 39,500 55,300 28,000
All other liabilities 1,498 2,126 1,911 2,320 4,907
Stockholders' equity 7,165 8,060 11,018 10,526 8,796
------- ------- ------- ------- -------
Total liabilities and
stockholders' equity 139,582 140,389 153,957 146,888 139,137
======= ======= ======= ======= =======
29
Other Data
For the Year Ended December 31,
-------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Return on average assets (.70%) (1.50%) (.12%) .56% .60%
Return on average equity (13.62%) (26.96%) (2.00%) 8.02% 10.64%
Dividend payout -- -- $.12 $.092 $.064
Average equity to average assets ratio 5.13% 5.55% 6.22% 7.06% 5.60%
Average interest rate spread (1) 1.99% 1.58% 2.63% 3.33% 3.42%
Net yield on average interest-earning assets(2) 7.41% 7.41% 6.99% 7.32% 8.31%
Non-interest expenses to average assets 3.03% 3.79% 2.96% 3.11% 3.23%
Ratio of average interest-earning assets to average
interest-bearing liabilities 1.03 1.04 1.06 1.07 1.02
Residential mortgage loans (1-4), mortgage-backed
securities, US Government and agency obligations, and
interest-earning deposits with the FHLB as a percentage
of total assets 87.0% 76.5% 78.5% 81.47% 71.02%
Non-performing loans and real estate owned as a
percentage of total assets 1.79% 4.70% 6.02% 2.66% 2.33%
Allowance for loan losses as a percentage of total loans,
net 1.36% 1.83% 1.78% 1.94% 1.06%
Total number of full service facilities 1 1 2 2 2
Total shares outstanding(3)(in thousands) 2,240 2,240 2,240 2,082 1,904
Earnings (loss) per share(3) ($.43) ($1.00) ($.08) $.40 $.48
Book value per share(3) 3.20 $3.60 $4.92 $5.06 $4.62
(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.
[THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK.]
30
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. The level of non-performing loans
decreased in 1996 and, although management believes that the level of
non-performing assets will continue to decrease 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 1996, primarily as a result of the continued
legal expenses and other costs associated with repossessed assets, the
continuing impact of higher interest rates on the Bank's net interest margin,
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, and the one time special assessment that was charged
to all SAIF insured institutions to fully capitalize the SAIF at 1.25 percent of
insured deposits, which amounted to $716,498 for the Bank. In addition, the
Holding Company incurred one time charges of $64,921 to sell the remote drive-in
facility previously used by the Bank, and a one time charge to write-off the
leasehold improvements at the offices it previously occupied.
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 only
operating subsidiary of Federal Trust and began operations on May 3, 1988.
The Holding Company had been operating 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, which was sold in February, 1996; and 1270 Leasing Co. ("1270 LC"), a
real estate entity organized May 27, 1994, which leased the Holding Company's
office located in Winter Park, Florida. FTPC was sold on July 1, 1996, and 1270
LC was dissolved on September 26, 1996. 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
31
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.
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. In
February, 1996, FTPC sold the residential site in Augusta, Georgia for cash for
a loss of $1,647.
During 1995 and the first half of 1996 FTPC had been in the initial stages of a
HUD insured apartment development project, which during the quarter ended June
30, 1996, had advanced to the stage of applying for a mortgage insurance
commitment. Based on the anticipated cash needs and continuing overhead for such
a project, the Company concluded that it would be in the best interest of the
Company, and its banking subsidiary, to sell FTPC, in order to focus the
Company's efforts and resources on the Bank. On July 1, 1996, the Company sold
the stock of FTPC for $425,354 consisting of $60,000 in cash, a note for $60,000
which was due and paid on August 8, 1996, a note for $230,354 due upon the
earlier of certain events, but in any event due no later than July 31, 1997, and
three notes for $25,000 each, due December 31, 1998, 1999 and 2000,
respectively. In addition, the Company is renting the quarters it previously
occupied to FTPC on a month to month basis, and plans to sub-lease the space to
a long term tenant. The Company dissolved 1270 LC on September 26, 1996, as it
was no longer necessary to maintain the entity for purposes of the lease on the
office space previously occupied by the Company.
As a result of the sale of FTPC and the dissolution of 1270 LC, the only
remaining subsidiary of the Company is the Bank, and the Company's expenses have
been reduced to minimal levels, as there are no longer any salaried employees in
the Company and its offices have been sub-let. As a part of this reorganization,
Mr. James T. Bell resigned as Chairman, President and Chief Executive Officer of
the Company, although he remains on the Board of Directors. The Board has named
James V. Suskiewich, the Chairman, President and Chief Executive Officer of the
Bank, to the positions previously held by Mr. Bell. Employees of the Bank
perform all necessary functions needed by the Company, and the Company
reimburses the Bank for the time they spend on Company business.
On June 1, 1995, the Company assumed the lease from the Bank on the remote
drive-in facility that had been previously used by the Bank. The current annual
lease payment on this facility was $40,063. During the second quarter of 1996,
the Company entered into a contract to sell this facility under the purchase
option in the lease. This was done in order to terminate the remaining lease
obligation which had 16 years remaining. The sale closed in September and the
Company incurred a loss of $34,262, which was the lease termination fee and
closing costs on the sale. In addition, the Company wrote off the remaining
balance of the leasehold improvements at the facility, totaling $34,921, during
the second quarter of 1996.
32
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 and
purchase 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, 1996, $79.0 million or 81.2% of
the Bank's portfolio of single-family residential mortgage loans consisted of
ARMs and 77.8% 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 $9.5 million or 9.0% of total deposits at December 31,
1996. These accounts bore a weighted average nominal rate of 3.59% at December
31, 1996. Since 1988, these accounts have consistently accounted for more 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, 1996, 3.92 % 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 9.55%.
Based upon the assumptions set forth below, the Bank's one-year negative
interest rate sensitivity gap amounted to $18.2 million or 13.1% of total assets
as of December 31, 1996. At December 31, 1995, the one-year negative interest
rate sensitivity gap was $ 30.4 million or 21.8% of total assets based on the
assumptions in effect on such date. During 1996, the Bank's one-year negative
interest rate sensitivity gap improved and contributed to the increase in the
Bank's interest rate spread from 1.58% in 1995 to 1.99% in 1996. During this
period, general interest rates decreased slightly and the average volume of
interest-earning assets decreased $11.4 million and the average yield on these
assets increased by .13%, due to the lagging nature of the adjustable rate
mortgage loan portfolio. For the same period, interest-bearing liabilities
decreased $10.1 million and the average rate on these liabilities decreased .31%
due to the lower level of interest rates on 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 1996. 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, 1996, 1995 and
1994 were based on the assumptions for 1996, 1995 and 1994 and were based on
economic and interest rate conditions during such years including the then
prevailing prepayment experience and decay rate levels.
33
December 31,
------------
1996 1995 1994
---- ---- ----
(In Thousands of Dollars)
Interest-earning assets maturing or
repricing within one year 86,677 72,382 94,392
Interest-bearing liabilities
maturing or repricing within one year 104,845 102,781 127,762
------- ------- -------
Excess (deficiency) of interest-earning
assets over interest-bearing liabilities (18,168) (30,399) (33,370)
======= ======= =======
Excess (deficiency) of interest-earning
assets over interest-bearing liabilities
maturing or repricing within
one year as a percentage of total assets (13.08%) (21.85%) (21,88%)
======= ======= =======
Percentage of assets to liabilities
maturing or repricing within one year (82.67%) 70.42% 73.88%
======= ======= =======
The following table sets forth certain information relating to Federal Trust's
interest-earning assets and interest-bearing liabilities at December 31, 1996
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) 8,323 12,076 61,247 16,612 2,543 11,289
Other interest-bearing assets(2) 5,031 0 0 8 16,100 0
----- -- ------ --- --- ---
Total interest-earning assets 13,354 12,076 61,247 16,620 18,643 11,289
Non-interest bearing demand deposits(3) 89 80 134 278 74 165
Interest bearing demand deposits(3) 71 64 107 222 59 131
Money Market Demand Deposits(3) 2,400 1,625 1,844 817 389 354
Savings deposits(3) 85 81 151 481 314 752
Time deposits 20,788 1,419 51,278 20,177 2,266 0
FHLB advances and other 4,565 22 20,042 148 119 496
----- -- ------ --- --- ---
Total interest-bearing liabilities 27,998 3,291 73,556 22,123 3,221 1,898
Interest rate sensitivity gap (14,644) 8,785 (12,309) (5,503) 15,422 9,391
Cumulative interest rate sensitivity gap (14,644) (5,859) (18,168) (23,671) (8,249) 1,142
Cumulative interest rate sensitivity gap
as a percentage of total assets -10.54% -4.22% -13.08% -17.04% -5.94% 0.82%
(Mortgage loans and mortgage-backed securities are net of the undisbursed
portion of loans due borrowers. (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
[THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK.]
34
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,
-----------------------
1996 1995 1994
---- ---- ----
Average Average Average
Avareage Yield/ Avareage Yield/ Avareage Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- --------------------- -------- ----
Interest-earning assets:
Loans(1) 112,288 9,040 8.05% 115,608 9,001 7.78% 108,771 7,731 7.11%
Investment securities 15,728 675 4.29% 23,408 1,289 5.51% 24,544 1,754 7.15%
Other interest-earning assets 6,046 222 3.66% 6,424 319 4.97% 7,592 362 4.77%
----- --- ---- ----- --- ---- ----- --- ----
Total interest-earning assets 134,062 9,937 7.41% 145,440 10,609 7.29% 140,907 9,847 6.99%
Non-interest-earning assets 5,719 5,033 2,795
----- ----- -----
Total assets 139,781 150,473 143,702
======= ======= =======
Interest-bearing liabilities:
Non-interest bearing demand deposits 239 -- 0.00% 286 -- 0.00% 836 -- 0.00%
Interest bearing demand deposits 7,483 266 3.55% 7,301 269 3.56% 7,793 268 3.44%
Savings deposits 1,641 43 2.62% 2,975 78 3.09% 6,227 212 3.40%
Time deposits 97,042 5,451 5.62% 99,716 5,883 5.88% 77,333 3,322 4.30%
------ ----- ---- ------ ----- ---- ------ ----- ----
Total Deposit accounts 106,405 5,760 5.41% 110,278 6,230 5.63% 92,189 3,802 4.12%
FHLB advances & other borrowings 23,529 1,277 5.43% 29,725 1,766 6.10% 40,526 1,978 4.88%
------ ----- ---- ------ ----- ---- ------ ----- ----
Total interest-bearing liabilities 129,934 7,037 5.42% 140,003 7,996 5.73% 132,715 5,780 4.36%
Non-interest-bearing liabilities 2,677 2,125 2,043
Retained earnings and
stockholder's equity 7,170 8,345 8,944
----- ----- -----
Total liabilities & retained earnings 139,781 150,473 143,702
======= ======= =======
Net interest/dividend income 2,899 2,583 4,067
===== ===== =====
Interest rate spread(3) 1.99% 1.56% 2.63%
== ==== ==== ====
Net interest margin(4) 2.16% 1.78% 2.89%
== ==== ==== ====
Ratio of average interest-earning
assets to average interest-bearing
liabilities 1.03% 1.04% 1.06%
==== ==== ====
(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.
35
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, 1996 Year Ended December 31, 1995 Year Ended December 31, 1994
vs. 195 vs. 1994 vs. 1993
- ------------------------------------------------------------------------------------------------------------------------------------
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 315 (258) (19) 38 761 484 48 1,293 (911) 486 (33) (458)
Investment securities (284) (423) 93 (614) (403) (81) 19 (465) 441 341 46 828
Other interest-earning assets (92) (19) 15 (96) 24 (56) (4) (35) 145 (128) (46) (29)
Total (61) (700) 89 (672) 382 403 66 828 (325) 699 (33) 341
Interest-bearing liabilities:
Deposit accounts (260) (218) 25 (453) 1,401 745 275 2,421 176 546 -- 722
FHLB Advances & other
borrowings (151) (368) (16) 470 (516) (125) (171) 287 (73) 20 234
Total (411) (586) 9 (988) 1,871 229 150 2,250 463 473 20 956
Net change in net interest income
before provision for loan losses 350 (114) 80 316 (1,489) 118 (87)(1,457) (788) 226 (53) (615)
[THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK.]
36
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, 1994 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 and 1996. At
December 31, 1994, the portfolio had unrealized losses totaling $5,342,700, at
December 31, 1995, the unrealized losses had decreased to $1,181,624, and at
December 31, 1996 the unrealized losses had decreased to $1,069,171.
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. During November 1996, the Bank sold $1,000,000 par value, of the
Federal Home Loan Bank bonds maturing in 1997 and 1998 at a gross loss of
$12,344. The unrealized loss on investment securities available for sale, net of
the effect of income taxes as a component of stockholder's equity at December
31, 1996 was $210,224. (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 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 $1,618,308 of the
premium as of December 31, 1996 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 $26,947,063 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.
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 1996, the Bank's average liquidity was 9.55%.
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 $279,596 to its provision for loan losses during 1996.
The Bank's net loans were essentially unchanged during 1996. Although management
believes that its present allowance for loan losses is adequate as of December
31, 1996, 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, 1996 was $1,533,003 or 154.7% of
non-performing loans and 1.36% of net loans receivable compared to $2,060,568 or
61.9% of non-performing loans and 1.83% of net loans at December 31, 1995.
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 June 30, 1996 and concluded September 6, 1996.
See "Supervision".
During 1996, the Bank's total non-accrual loans decreased by approximately
$2,336,000.
38
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 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.
39
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 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".
In the 1996 examinations of Federal Trust and the Bank, the OTS found the
companies to be in compliance with their Orders and upgraded the supervisory
rating of Federal Trust to "Satisfactory". In light of the improvement of the
Bank's operations, the OTS reduced the number of provisions in the Bank's Order
from 27 to 23. Management has been advised that the OTS will consider lifting
the Bank's Order when the ratio of classified assets to capital is reduced below
100%. With regard to the Bank, further improvement was noted in a number of
areas, including underwriting procedures, documentation, disposition of problem
assets, significant reduction in the dependency on wholesale funds, and a
continued reduction in operating expenses.
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.
40
Impact of Accounting Requirements
In June 1996, the FASB issued Statement of Financial Accounting Standards No.
125, "Accounting for transfers and Servicing of Financial Assets and
Extinguishments of Liabilities". SFAS 125 provides accounting and reporting
standards for transfers and servicing of financial assets and extinguishments of
liabilities. Those standards are based on consistent application of a financial-
components approach that focuses on control. Under that approach, after a
transfer of financial assets, an entity recognizes the financial and servicing
assets it controls and the liabilities it has incurred, derecognizes financial
assets when control has been surrendered, and derecognizes liabilities when
extinguished. SFAS 125 is effective for transfers and servicing of financial
assets and extinguishments of liabilities occurring after December 31, 1996, and
is to be applied prospectively. The Company does not anticipate a material
impact on its operations or financial position from the implementation of SFAS
125.
In February 1997, the FASB issued Statement of Accounting Standards No. 128,
"Earnings Per Share". SFAS 128 establishes new standards for computing and
presenting earnings per share (EPS) and applies to entities with publicly held
common stock. In effect, this statement simplifies the standards for computing
EPS previously addressed in APB Opinion No. 15, "Earnings Per Share", by making
them comparable to international EPS standards. SFAS 128 replaces the
presentation of primary EPS with a presentation of basic EPS and it also
requires dual presentation of basic and diluted EPS on the face of the income
statement for all public entities with complex capital structures. In addition,
the statement requires a reconciliation of the numerator and denominator used to
compute basic EPS. SFAS 128 supersedes APB Opinion No. 15 and the AICPA
Interpretations thereon and is effective for financial statements issued for
periods ending after December 15, 1997. The standard also requires the
restatement of all prior-period EPS data presented in the financial statements.
The Company has not adopted the disclosure requirements of this standard in its
December 31, 1996 financial statements and does not anticipate a material impact
on its operations or financial position from its implementation during the
fiscal year ending December 31, 1997.
[THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK.]
41
Results of Operations
Comparison of the Years Ended December 31, 1996 and 1995 and 1994
General. The Company had a net loss for 1996 of $976,503 or $.43 per share,
compared to a net loss of $2,249,701 or $1.00 per share in 1995 and a net loss
of $179,173 or $.08 per share for 1994, respectively. The decrease in the net
loss for 1996 was due to an increase in net interest income, a decreased
provision for loan losses, and a decrease in other expenses, offset partially by
a decrease in other income.
Interest Income and Expense. Interest income was $9,936,960 in 1996 compared to
$10,609,387 in 1995 and $9,846,673 in 1994. Interest income on loans increased
to $9,039,426 in 1996 from $9,001,646 in 1994 compared to $7,731,077 in 1994.
The increase in interest income on loans in 1996 as compared to 1995 was
primarily attributable to increased interest rates on the loans and a lower
amount of non-accruing loans. The increase in interest income on loans between
1995 and 1994 was the result of an increase in interest rates in 1995. Interest
income on investment securities decreased to $675,279 in 1996 from $1,289,085 in
1995 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.
Other interest and dividends decreased $96,401 during 1996 and $43,315 during
1995 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 decreased during 1996 to $7,037,882 compared to $8,026,334 in
1995 and $5,789,569 in 1994 primarily due to a decrease in interest rates and
the average amount of deposit accounts and FHLB advances outstanding. Management
believes that deposit accounts and FHLB advances will remain relatively stable
in the future and 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 $1,277,492 in 1996 from $1,812,655 in 1995 and $1,978,219 in 1994
due to a decrease in the average amount of FHLB advances outstanding during the
year and a decrease 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 1996 was $279,596 compared to $779,415 in 1995 and $531,483
in 1994. Net charge-offs totaled $1,223,240 in1996 compared to $707,222 for 1995
and $409,329 for 1994. Total non-performing loans at December 31, 1996 were
$991,000 compared to $3,327,000 at December 31, 1995 and $6,373,000 at December
31, 1994. The allowance for loan losses at December 31, 1996 was $1,533,003 or
150.00% of non-performing loans and 1.36% of net loans receivable compared to
$2,060,568 or 61.95% of non-performing loans and 1.83% of net loans receivable
at December 31, 1995 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 $505,424 in 1995 to $426,707 for
the year ended December 31, 1996. The decrease in other income during 1996
resulted from a $88,171 decrease in rent income attributable to a repossessed
office building that was sold in December, 1995, a decrease in fees and service
charges of $24,772, a decrease of $2,673 in other income consisting mainly of
decreased other loan income, offset partially by an increase in the gain on the
sale of loans of $31,381 and an increase in the gain on the sale of other real
estate of $5,518.
Total Other Expense. Other expense decreased to $4,236,492 in 1996 from
$5,790,591 in 1995 and to $4,238,071 in 1994. The decrease of $1,554,099 in 1996
was primarily the result of a decrease of $263,891 in salary and employee
benefits, a decrease of $118,383 in occupancy and equipment expense, decreased
legal and professional expense of $490,556, a decrease of $402,620 in real
estate owned expenses, decreased general and administrative expenses of
$124,442, a decrease of $930,156 in losses on sale of investment securities, a
decrease of $122,222 in losses on the sale of real estate, partially offset by
an increase in deposit insurance premiums of $710,415, a loss on the sale of
fixed assets of $152,621, and increased other expense of $35,135. The decrease
in salary and employee benefits were the result of reduced staff levels,
particularly at the Holding Company which eliminated all of its staff, which
consisted of three positions. Occupancy and equipment expense were reduced as a
result of the sale of the drive-in facility and the sub-letting of the Holding
Company's offices, both of which were no longer necessary. Legal and
professional expense decreased as a result of the reduction in the amount and
number of non-performing loans. Real estate owned expenses and losses on the
sale of real estate owned were reduced as the result of a reduction in the
amount of repossessed properties at the bank during 1996.
42
General and administrative expenses were reduced primarily as a result of the
elimination of the staff and offices of the Holding Company. The increase in
deposit insurance premiums was the result of the one-time special assessment
that was charged by the FDIC on all SAIF insured deposits as a result of
legislation approved by Congress which the President signed on September 30,
1996. The special assessment was paid in November 1996 at the rate of $0.657 per
$100 and the Bank charged $716,498 against third quarter earnings, which
resulted in a $448,198 or $.20 per share after tax reduction in earnings for the
Company in 1996. The loss on the sale of fixed assets was the result of the
leasehold improvements written-off by the Holding Company in conjunction with
the sale of the drive-in facility, and the write-off of the leasehold
improvements at the Holding Company's office which it no longer uses. The
decrease in loss on the sale of investment securities was a result of the large
loss incurred in 1995 on the sale of a $7,250,000 block of bonds.
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, 1996, the Company used funds primarily from
sale of loans of $7,942,943, funds from Federal Home Loan Bank advances of
$3,800,000, proceeds from the sales of real estate owned of $1,014,345, proceeds
from the sale of investment securities of $987,656, and funds from the sale of
Federal Home Loan Bank stock of $600,000 to fund $7,394,909 in loan originations
and purchases, net, decreases in total deposits of $3,076,286, repayment of
debentures of $420,000 and an increase in cash and cash equivalents of
$3,796,001. Management believes that in the future, funds will be obtained from
the above sources. The weighted average cost of interest-bearing liabilities at
December 31, 1996 was 5.63% compared to 5.94% at December 31, 1995.
At December 31, 1996, loans-in-process, or closed loans scheduled to be funded
over a future period of time, totaled $1,902,256. Loans committed, but not
closed, totaled $2,959,941, available lines of credit totaled $179,000, 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, 1996,
the Bank had outstanding FHLB advances of $24,800,000 compared to $21,000,000 in
1995.
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 $1,281,611 and $1,011,953, respectively, for the
Company after payment of offering expenses. No securities were sold during 1995
or 1996.
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, 1996, liquidity averaged 9.55%.
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 1996, and does not anticipate
the payment of dividends in 1997. In addition, although the Company does not
require OTS approval for the granting 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 1997. The payment of dividends in
subsequent years will depend on general economic conditions, the overall
43
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 6,401 6,401 6,401
Other:
Unrealized loss on investments 699 699 699
General valuation allowances -- -- 945
Less: Excess mortgage servicing rights and
Excess net deferred tax assets (486) (486) (486)
Less: Assets required to be deducted -- -- (74)
----- ----- -----
Regulatory capital 6,614 6,614 7,485
===== ===== =====
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44
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
45
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Consolidated Financial Statements
December 31, 1996, 1995 and 1994
With Independent Auditors' Report Thereon
46
Independent Auditors' Report
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, 1996 and 1995, 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, 1996. 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 at December 31, 1996 and 1995 and the results of
their operations and their cash flows for each of the years in the three year
period ended December 31, 1996, in conformity with generally accepted accounting
principles.
/s/ KPMG Peat Marwich LLP
February 7, 1997, except as to note 18,
which is as of March 7, 1997
47
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1996 and 1995
Assets 1996 1995
------ ---- ----
Cash 628,648 1,618,607
Interest-bearing deposits 4,837,114 51,154
Investment securities available for sale 8,763,641 15,918,376
Investment securities held to maturity 6,290,610 19,093
Loans, less allowance for loan losses of $1,533,003 and
$2,060,568 in 1996 and 1995, respectively) 112,547,266 112,905,740
Accrued interest receivable on loans 833,458 824,330
Accrued interest receivable on investment securities 196,171 179,874
Accounts receivable 143,048 --
Note receivable 305,354 --
Loan sale proceeds receivable -- 37,765
Office facilities and equipment, net 917,572 1,291,974
Real estate owned 1,508,166 3,293,108
Federal Home Loan Bank stock, at cost 1,253,200 1,853,200
Prepaid expenses and other assets 228,113 358,465
Deferred income taxes 1,129,696 964,499
Income tax refund receivable -- 1,073,253
-------------
$ 139,582,057 140,389,438
============= =============
Liabilities and Stockholders' Equity
Liabilities:
Deposits 106,119,006 109,203,123
Official checks 646,235 695,332
Federal Home Loan Bank advances 24,800,000 21,000,000
Debentures -- 420,000
Advance payments by borrowers for taxes and insurance 347,774 330,504
Accrued expenses and other liabilities 504,414 680,353
------------- -------------
Total liabilities 132,417,429 132,329,312
------------- -------------
Stockholders' equity:
Common stock, $.01 par value, 5,000,000 shares authorized;2,256,505
shares issued and outstanding at December 31, 1996 and 1995 22,565 22,565
Additional paid-in capital 11,143,65 11,143,659
Accumulated deficit (3,226,204) (2,249,701)
Treasury stock (16,577 shares of common stock, at cost,
at December 31, 1996 and 1995) (76,525) (76,525)
Unrealized loss on investment securities, net (210,224) (779,872)
Unrealized loss on investment securities transferred from
available for sale to held to maturity, net (488,643) --
------------- -------------
Total stockholders' equity 7,164,628 8,060,126
Commitments and contingencies
------------- -------------
Total liabilities and stockholders' equity $ 139,582,057 140,389,438
============= =============
See accompanying notes to consolidated financial statements
48
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
For each of the years in the three-year period ended December 31, 1996
1996 1995 1994
---- ---- ----
Interest income:
Loans $ 9,039,426 9,001,646 7,731,077
Investment securities 675,279 1,289,085 1,753,625
Interest-bearing deposits and other 222,255 318,656 361,971
--------- ---------- ---------
Total interest income 9,936,960 10,609,387 9,846,673
--------- ---------- ---------
Interest expense:
Deposit accounts 5,760,390 6,213,679 3,802,350
FHLB advances, notes payable and other borrowings 1,277,492 1,812,655 1,978,219
--------- ---------- ---------
Total interest expense 7,037,882 8,026,334 5,780,569
--------- ---------- ---------
Net interest income 2,899,078 2,583,053 4,066,104
Provision for loan losses 279,596 779,415 531,483
--------- ---------- ---------
Net interest income after provision for loan losses 2,619,482 1,803,638 3,534,621
--------- ---------- ---------
Other income:
Fees and service charges 163,010 187,782 193,866
Rent income -- 88,171 2,351
Gain of sale of loans 182,045 150,664 263,707
Gain on sale of other real estate, net 48,574 43,056 --
Other 33,078 35,751 23,353
--------- ---------- ---------
Total other income 426,707 505,424 483,277
--------- ---------- ---------
Other expenses:
Salary and employee benefits 1,173,742 1,437,633 1,436,387
Deposit insurance premiums 1,017,902 307,487 207,939
Occupancy and equipment 594,703 713,086 585,087
Legal and professional 392,775 883,331 618,695
Real estate owned expenses 251,156 653,776 392,884
General and administrative expenses 172,430 296,872 353,676
Loss on disposal of fixed assets, net 152,621 -- --
Loss on sale of investment securities available for sale 12,344 942,500 9,927
Loss on sale of real estate -- 122,222 46,287
Loss on foreclosure of notes receivable -- -- 187,028
Other 468,819 433,684 400,161
--------- ---------- ---------
Total other expenses 4,236,492 5,790,591 4,238,071
--------- ---------- ---------
Net loss before income taxes (1,190,303) (3,481,529) (220,173)
Income tax benefit 213,800 1,231,828 41,000
--------- ---------- ---------
Net loss $ (976,503) (2,249,701) (179,173)
=========== =========== ===========
Loss per share $ (.43) (1.00) (.08)
=========== =========== ===========
Weighted average number of shares outstanding 2,256,505 2,256,505 2,210,957
=========== =========== ===========
See accompanying notes to consolidated financial statements.
49
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
For each of the years in the three year period ended December 31, 1996
Retained Unrealized
Additional earnings Treasury loss on Total
Common paid-in (accumulated stock, investment stockholders'
stock capital deficit) at cost securities, net equity
----- ------- -------- ------- --------------- ------
Balances at December 31, 1993 $20,986 10,303,589 277,602 (76,525) -- 10,525,652
Net 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 -- (76,525) (71,879) 11,017,820
Net 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) (76,525) (779,872) 8,060,126
Net Loss -- -- (976,503) -- -- (976,503)
Unrealized loss associated with
investment securities transferred
from available for sale to held
to maturity -- -- -- -- (553,923) (553,923)
Amortization of unrealized loss
on investment securities
held to maturity -- -- -- -- 65,280 65,280
Change in unrealized loss on
investment securities
available for sale, net -- -- -- -- 569,648 569,648
-------- ---------- ---------- ------- -------- ---------
Balances at December 31, 1996 $ 22,565 11,143,659 (3,226,204) (76,525) (698,867) 7,164,628
======== ========== ========== ======= ======== =========
See accompanying notes to consolidated financial statements
50
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For each of the years in the three year period ended December 31, 1996
1996 1995 1994
---- ---- ----
Cash flows provided by (used in) operating activities:
Net loss $ (976,503) (2,249,701) (179,173)
Adjustments to reconcile net loss to net cash
flows from operations:
Loss on sale of investment securities available for sale 12,344 942,500 9,927
Provision for losses on loans and real estate owned 428,897 1,098,119 838,267
Amortization of premium on purchased loans 241,747 428,853 427,201
Deferred income taxes (213,800) (171,747) (371,000)
Depreciation of office facilities and equipment 159,564 179,416 210,872
Gain on sale of loans (182,045) (150,664) (263,707)
Net amortization of fees and discounts on loans (89,405) (84,930) 7,137
Net (gain) loss on the sale of real estate owned (48,574) 75,374 37,507
Write-down on other real estate owned 257,921 -- --
Net amortization of premiums and accretion
of discounts on investment securities -- 14,574 --
Net loss on disposal of office facilities and equipment 155,347 371 --
Loss on foreclosure of notes receivable -- -- 187,028
Cash provided by (used in) changes in
Accrued interest receivable on loans (9,128) (159,546) (46,625)
Accrued interest receivable on investment securities (16,297) 383,380 13,263
Accounts receivable (143,048) 19,787 48,312
Loan sale proceeds receivable 37,765 2,453,594 (2,491,359)
Prepaid expenses and other assets 130,352 (80,877) 179,753
Income tax refund receivable 1,073,253 (976,558) --
Official checks (49,097) 221,388 (125,436)
Accrued expenses and other liabilities (175,939) 100,481 (203,293)
Accrued interest on deposit accounts (7,831) 931 (2,283)
Income tax payable -- -- (221,049)
------- --------- ----------
Net cash provided by (used in) operating activities 585,523 2,044,745 (1,943,658)
======= ========= ==========
(Continued)
51
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
1996 1995 1994
---- ---- ----
Cash flows provided by (used in)
investing activities:
Long-term loans originated or
purchased, net of principal
repayments (7,394,909) (9,330,970) (23,430,621)
Proceeds from sale of investment
securities, available for sale 987,656 6,307,501 12,117,605
Proceeds from the sale of other
real estate owned 1,014,345 3,139,470 461,554
Proceeds from loans sold 7,942,943 2,855,234 4,620,485
Capitalized costs on other
real estate owned (27,504) (154,961) --
Notes receivable originated,
net of repayments (305,354) -- --
Proceeds from the sale of
Federal Home Loan Bank stock 600,000 121,800 840,300
Purchase of premises and equipment (21,353) (36,951) (314,621)
Proceeds from sale of property and
equipment 80,844 26,967 --
Maturities of investment securities
held to maturity 12,826 24,968 --
---------- ---------- -----------
Net cash provided by
(used in) investing activities 2,889,494 2,953,058 (5,705,298)
---------- ---------- -----------
Cash flows provided by (used in)
financing activities:
Deposit accounts
(Decrease) increase in
certificate accounts (3,613,173) 12,625,716 19,936,747
Net increase (decrease)
in deposits 536,887 (4,951,858) 2,852,143
Proceeds from (repayment)
of FHLB advances 3,800,000 (18,500,000) (15,800,000)
Net increase (decrease) in
advance payments by
borrowers for taxes and insurance 17,270 (106,305) 210,203
Repayment of debentures (420,000) -- --
Issuance of capital stock,
net of stock issuance costs -- -- 1,013,532
Dividends paid on common stock -- -- (270,312)
---------- ---------- -----------
Net cash provided by (used in)
financing activities 320,984 (10,932,431) 7,942,313
Net increase (decrease)
in cash and cash equivalents 3,796,001 (5,934,628) 293,357
Cash and cash equivalents at
beginning of period 1,669,761 7,604,389 7,311,032
---------- ---------- -----------
Cash and cash equivalents at
end of period $ 5,465,762 1,669,761 7,604,389
=========== ========= =========
(Continued)
52
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
1996 1995 1994
---- ---- ----
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 7,003,551 8,291,649 5,881,345
=========== ========= =========
Income taxes -- -- 685,417
=========== ========= =========
Supplemental disclosures of non-cash transactions:
Real estate acquired in settlement of loans 860,613 3,780,216 2,629,056
=========== ========= =========
Market value adjustment - investment securities (336,359) (1,181,624) (107,647)
available for sale:
Market value adjustment - investments
Deferred income tax asset (126,135) (401,752) (35,768)
----------- --------- ---------
Unrealized loss on investment securities
available for sale, net $ (210,224) (779,872) (71,879)
=========== ========= =========
Unrealized loss on investment securities
transferred from available
for sale to held to maturity (715,657) -- --
Deferred income tax asset (227,014) -- --
----------- --------- ---------
Unrealized loss on investment securities
transferred from available for sale to
held to maturity (488,643) -- --
=========== ========= =========
Loans acquired in settlement of other real estate sold (1,300,066) -- --
=========== ========= =========
See accompanying notes to consolidated financial statements.
53
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1996 and 1995
(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.
During the current year the Holding Company sold a subsidiary,
Federal Trust Properties Corp. ("FTPC"), a real estate holding and
development company for book value. In addition, the Holding Company
dissolved its other subsidiary, 1270 Leasing Company ("1270 LC"), a
real estate leasing entity. The assets of 1270 LC were transferred to
the Bank or written-off. Operations of these subsidiaries were not
significant to the consolidated entity.
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.
(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 dilutive.
(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
Certain securities are reported 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.
(Continued)
54
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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.
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.
(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.
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.
(Continued)
55
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(i) Mortgage Servicing Rights
The Bank originates mortgage servicing rights by selling loans
and retaining servicing rights. In May 1995, the Financial
Accounting Standards Board ("FASB") issued Statement of financial
Accounting Standards ("Statement") No. 122, Accounting for
Mortgage Servicing Rights. This Statement provides guidance for
the recognition of mortgage servicing rights as an asset when a
mortgage loan is sold and servicing rights are retained. The Bank
adopted this standards effective January 1, 1996. The results of
this adoption was to capitalize approximately $70,303 in mortgage
servicing rights related to loans originated by the Bank in 1996.
The carrying value of mortgage servicing rights is amortized over
the life of the related loan portfolio.
(j) 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 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.
(k) 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.
(l) 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 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.
(m) 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
(Continued)
56
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
reported amount of revenues and expenses during the reporting
period. The most significant estimates made by management are the
determination of the adequacy of the allowance for loan losses,
that real estate owned is stated at the lower of cost or fair
value, and the recoverability of the deferred tax asset. Actual
results could differ from these estimates.
(n) Effect of New Accounting Pronouncements
In October 1995, the FASB issued Statement No. 123, Accounting for
Stock-Based Compensation. The Statement provides that companies
must either charge the value of stock options granted to their
income statement or provide pro forma equivalent information in a
footnote disclosure and continue to account for the value of the
stock options in accordance with APB Opinion No. 25. The Company
adopted this standard effective January 1, 1996 by accounting for
employee stock-based compensation under APB Opinion No. 25.
(2) Investment Securities Held to Maturity and Investments Securities
Available for Sale
The amortized cost and estimated market values of investment securities
held to maturity and available for sale at December 31, 1996 and 1995
are as follows:
Investment securities held to maturity:
Gross
Amortized unrealized Estimated
cost loss market value
---- ---- ------------
1996:
Obligation of U.S.
government agencies $ 6,284,343 (17,155) 6,267,188
Other 6,267 - 6,267
----- ------------ -----
$ 6,290,610 (17,155) 6,273,455
========= ======== =========
1995:
Other $ 19,093 - 19,093
====== ============= ======
Investment securities available for sale:
Gross
Amortized unrealized Estimated
Cost loss market value
1996: $ 9,100,000 (336,359) 8,763,641
============ ======== =========
Obligations of U.S.
government agencies
1995: $ 17,100,000 (1,181,624) 15,918,376
============ ========== ==========
Obligations of U.S.
government agencies
(Continued)
57
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The amortized cost and estimated market value of investment securities held to
maturity and investment securities available for sale at December 31, 1996, 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.
Amortized Estimated
cost market value
---- ------------
Investment securities held to maturity:
Due in one year or less $ 6,267 $ 6,267
Due after five years through ten years 6,284,343 6,267,188
--------- ---------
$6,290,610 $6,273,455
========== ==========
Investment securities available for sale:
Due after one year through five years $9,100,000 $8,796,641
========== ==========
Market values for all securities were calculated using published prices or the
equivalent at December 31, 1996.
The Company'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 $16,100,000 and pay interest based on the difference between two
indices. The bonds at December 31, 1996, 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 Company purchased the bonds to partially
offset its risk related to its portfolio of adjustable rate mortgages and as
such subjects the Company to a certain degree of market risk as the indices
change with prevailing market interest rates.
Proceeds from sales of investment securities available for sale were $987,656,
$6,307,501 and $12,117,605 in 1996, 1995 and 1994, respectively. Gross realized
losses on sales of investment securities available for sale during 1996, 1995
and 1994 were $12,344, $942,500 and $9,927, respectively.
In November 1995, the Company 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.
In March 1996, the Company transferred securities in the amount of $7,000,000
from the available for sale category to the held to maturity category resulting
in an unrealized loss of $780,937 which remains in equity, net of amortization
and income tax.
Amortization is an adjustment to yield over the remaining term of the
investments.
(Continued)
58
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Notes to onsolidated Financial Statements
(3) Loans Receivable, Net
A summary of loans receivable at December 31, 1996 and 1995 follows:
1996 1995
---- ----
Mortgage loans:
Permanent conventional:
Commercial $ 11,294,679 13,112,448
Residential 97,717,708 97,612,560
Residential construction conventional 3,795,050 1,666,960
------------ ------------
Total mortgage loans 112,807,437 112,391,968
Commercial loans 1,349,483 1,442,811
Consumer loans 154,445 180,194
Lines of credit 686,072 1,258,501
------------ ------------
Total loans receivable 114,997,437 115,273,474
Net premium on mortgage loans purchased 1,154,942 986,918
Deduct:
Unearned loan origination fees, net of direct loan
origination costs 169,854 104,132
Undisbursed portion of loans in process 1,902,256 1,189,952
Allowance for loan losses 1,533,003 2,060,568
------------ ------------
Loans receivable, net $112,547,266 112,905,740
============ ============
At December 31, 1996 and 1995, nonaccrual loans were approximately $991,000 and
$3,326,600, 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 $181,000, $381,000 and $616,000 in 1996, 1995
and 1994, respectively.
The recorded investment in loans for which an impairment has been recognized and
the related allowance for loan losses at December 31, 1996 were $4,078,174 and
$626,435, respectively. The average recorded investment in impaired loans during
1996 and 1995 was $5,071,872 and $6,032,515, respectively. Interest income
recognized on impaired loans during 1996 and 1995 was $259,263 and $338,997,
respectively.
The activity in the allowance for loan losses for the years ended December 31,
1996, 1995 and 1994 is as follows:
(Continued)
59
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1996 1995 1994
---- ---- ----
Balance at beginning of period $ 2,060,568 1,974,950 1,850,000
Charge-offs (1,223,240) (707,222) (409,329)
Provision for loan losses 279,596 779,415 531,483
Recoveries 266,778 13,425 13,425
Transfer from allowance for real estate owned 149,301 -- --
Balance at end of period $ 1,533,003 2,060,568 1,974,950
=========== ========= =========
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.
There were no outstanding loans to executive officers, directors and affiliates
at December 31, 1995 or 1996.
(4) Loan Servicing
Mortgage loans serviced for others are not included in the accompanying
consolidated balance sheets. The unpaid principal balances of these loans were
$7,915,631 and $1,301,078 at December 31, 1996 and 1995, respectively. Servicing
fees earned were $22,086, $22,026 and $52,144 for the years ended December 31,
1996, 1995 and 1994, respectively.
(5) Mortgage Servicing Rights
An analysis of the activity for originated mortgage servicing rights for the
year ended December 31, 1996 is as follows:
Balance, January 1, 1996 $ -
Originations 70,303
Amortization (2,672)
-------
Balance, December 31, 1996 $ 67,631
======
(6) Office Facilities and Equipment
Office facilities and equipment and their related accumulated
depreciation and amortization at December 31, 1996 and 1995 are summarized as
follows:
(Continued)
60
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Estimated
1996 1995 useful lives
---- ---- ------------
Leasehold improvements $1,035,861 1,251,412 3-25 years
Furniture and fixtures 542,727 651,910 3-7 years
Automobiles - 33,841 5 years
--------- ---------
1,578,588 1,937,163
Less accumulated depreciation and amortization 661,016 645,189
------- -------
Office facilities and equipment, net $ 917,572 1,291,974
======= =========
(7) Deposits
A summary of deposits at December 31, 1996 and 1995 follows:
Weighted Weighted
average average
interest interest
1996 rate 1995 rate
---- ---- ---- ----
Commercial checking accounts -
noninterest-bearing $ 58,994 - % $ 209,637 -- %
NOW accounts 654,473 1.79% 674,556 .68%
Money market deposit accounts 7,428,630 4.02% 6,601,689 4.02%
Statement savings accounts 1,363,750 2.58% 2,157,600 2.60%
--------- ------------ --------- ----
9,505,847 3.59% 9,643,482 3.42%
--------- ------------ --------- ----
Certificate accounts by interest rates:
1.00% - 3.99% $ 499,355 1,219,498
4.00% - 4.99% 3,076,939 2,170,725
5.00% - 5.99% 78,123,278 54,846,938
6.00% - 7.99% 14,909,692 41,310,738
---------- ----------
Total certificate accounts 96,609,264 5.56% 99,547,899 5.89%
---------- ------------ ---------- ----
Accrued interest 3,895 11,742
----- ------
Total deposits $106,119,006 5.38% $ 109,203,123 5.66%
============ ------------ ============== ====
(Continued)
61
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The following table presents, by various interest rate categories, the amount of
certificate accounts maturing during the periods reflected below:
Interest Rate 1997 1998 1999 2000 2001 Total
1.00% - 3.99% $ 436,854 29,171 24,944 4,046 4,340 499,355
4.00% - 4.99% 2,731,349 343,714 1,876 -- -- 3,076,939
5.00% - 5.99% 60,521,909 9,529,759 6,639,456 693,372 738,782 78,123,278
6.00% - 6.99% 9,306,213 2,671,973 1,073,589 633,292 201,000 13,886,067
7.00% - 7.99% 925,625 98,000 -- -- -- 1,023,625
----------- ---------- --------- --------- ------- ----------
$73,921,950 12,672,617 7,739,865 1,330,710 944,122 96,609,264
=========== ========== ========= ========= ======= ==========
The Company's large denomination ($100,000 and over) deposits included in
certificate accounts mature as follows:
At December 31, 1996 At December 31, 1995
Amount % total Amount % total
------ ------- ------ -------
Three months or less $ 3,952,908 21.5% $ 4,143,788 27.1%
Over three months to six months 5,844,172 31.9% 4,038,318 26.4
Over six months to twelve months 4,707,383 25.7% 4,648,096 30.4
Over twelve months 3,829,936 20.9% 2,446,328 16.1
--------- ----- --------- ----
$ 18,334,399 100.0% $ 15,276,530 100.0%
========== ====== ========== ======
Interest expense on deposits for the years ended December 31, 1996, 1995
and 1994 is as follows:
1996 1995 1994
---- ---- ----
Interest on NOW and Super NOW accounts $ 9,510 5,624 6,876
Interest on money market accounts 256,130 254,271 260,832
Interest on savings accounts 43,335 91,557 211,787
Interest on certificate accounts, net of penalties 5,451,414 5,862,227 3,322,855
--------- --------- ---------
$ 5,760,390 6,213,679 3,802,350
========= ========= =========
(8) Federal Home Loan Bank Advances
A summary of advances from the Federal Home Loan Bank of Atlanta at December 31,
1996 and 1995 follows:
Maturing in year Interest rate
ending December 31, (variable rates) December 31, 1996
------------------- ---------------- -----------------
1997 6.01 $ 10,000,000
1997 5.86 5,000,000
1997 (6.95) 4,800,000
1998 6.12 5,000,000
---------
$ 24,800,000
=================
(Continued)
62
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Maturing in year Interest rate
ending December 31, (variable rates) December 31, 1995
------------------- ---------------- -----------------
1996 5.83 $ 5,000,000
1996 5.76 7,000,000
1996 (6.10) 4,000,000
1998 6.12 5,000,000
---------
$ 21,000,000
=================
Pursuant to collateral agreements with the Federal Home Loan Bank ("FHLB"),
advances are secured by all stock in the FHLB in the amount of $1,253,200 and
qualifying mortgage loans in the amount of $34,588,904. In addition, investment
securities with book values of $6,284,343 and $7,000,000 at December 31, 1996
and 1995, respectively, and with market values of approximately $6,267,188 and
$6,348,125 at December 31, 1996 and 1995, respectively, were pledged as
collateral to the Federal Home Loan Bank for FHLB advances.
(9) Fair Value of 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 and FHLB
bonds. The carrying value of tax certificates approximates the fair value.
The fair value of FHLB bonds was based on quoted market prices.
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, 1996 (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.
(Continued)
63
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Federal Home Loan Bank Advances - Fair value of Federal Home Loan Bank
advances are estimated using discounted cash flow analysis based on the
Company's current incremental borrowing rates for similar types of borrowing
arrangements.
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, 1996 are as follows:
Carrying amount Fair value
--------------- ----------
Financial assets:
Cash and cash equivalents $ 5,465,762 5,465,762
Investment securities available for sale 8,763,641 8,763,641
Investment securities held to maturity 6,290,610 6,273,455
Loans (carrying amount less allowance
for loan loss of $1,533,003) 112,547,266 112,879,373
Federal Home Loan Bank stock 1,253,200 1,253,200
Financial liabilities:
Deposits:
Without stated maturities $ 9,505,847 9,505,847
With stated maturities 96,609,264 96,869,394
Federal Home Loan Bank advances 24,800,000 24,784,484
Commitments:
Letters of credit $ -- 500,000
Loan commitments -- 2,959,941
The carrying amounts shown in the table are included in the consolidated balance
sheet under the indicated captions.
(10) 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 were unsecured.
Interest on the debentures is payable annually. The debentures were redeemed
during 1996.
One stock purchase warrant was issued in connection with each $10 of debentures
purchased. Each warrant entitled 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 expired on November 15, 1996.
(Continued)
64
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(11) Income Taxes
Income tax for the years ended December 31, 1996, 1995 and 1995 consists
of:
Current Deferred Total
------- -------- -----
1996:
Federal $ - (213,800) (213,800)
State - - -
Total $ - (213,800) (213,800)
=============== ========= =========
1995:
Federal (1,060,081) (152,747) (1,212,828)
State - (19,000) (19,000)
Total $ (1,060,081) (171,747) (1,231,828)
=========== ========= ===========
1994:
Federal 294,000 (328,000) (34,000)
State 36,000 (43,000) (7,000)
------ -------- -------
Total $ 330,000 (371,000) (41,000)
======= ========= ========
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:
1996 1995
---- ----
Deferred tax assets:
Allowance for loan losses $ 411,600 642,000
Unrealized loss on investment securities available
for sale 353,149 401,752
Deferred loan fees 14,008 41,000
AMT credit carryforward 44,294 44,294
Other 1,133 --
Net operating loss carryforward 782,467 251,684
----------- -----------
Gross deferred tax asset 1,606,651 1,380,730
Less valuation allowance (432,526) (179,231)
----------- -----------
1,174,125 1,201,499
Deferred tax liabilities:
FHLB stock dividend (18,846) (71,000)
Amortization of discount on loans -- (70,000)
Accrual to cash -- (68,000)
Depreciation (25,583) (28,000)
----------- -----------
(44,429) (237,000)
Total $ 1,129,696 964,499
=========== ===========
(Continued)
65
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
At December 31, 1996, the Company has net operating loss carryovers (NOL's) of
approximately $2,055,954 for federal and $5,121,042 state tax purposes, which
expire between 2009 and 2011. In addition, the Company has approximately $44,000
in alternative minimum tax (AMT) credit carryforwards. A valuation allowance has
been established for those NOL and AMT carryovers that management believes are
more likely than not to be utilized prior to their expiration through future
profitable operations.
The Company's effective tax rate on pretax (loss) income for 1996, 1995 and 1994
differs from the statutory Federal income tax rate as follows:
1996 % 1995 % 1994 %
-------- ----- ---------- ----- ------- -----
Tax (benefit) provision at
statutory rate $ (404,703)(34.0)% $(1,183,720) (34.0)% $ (74,860) (34.0)%
Increase (decrease) in
tax resulting from:
Officers life insurance -- -- -- -- 7,000 3.2
Loss on sale of subsidiary -- -- -- -- 65,000 29.5
Operating loss carryforward 211,70 17.8 -- -- -- --
State income taxes net of
federal income tax benefit -- -- (107,473) (3.0) (4,400) (2.0)
Graduated tax rates -- -- -- -- (9,000) (4.1)
Other (20,799) (1.7) 59,365 1.7 (24,740) (11.2)
-------- ----- ---------- ----- ------- -----
(213,800)(17.9)% (1,231,828) (35.3)% (41,000) (18.6)%
======== ===== ========== ===== ======= =====
(12) Commitments
Future minimum lease payments under noncancelable leases, at December 31, 1996
are as follows:
Year ending December 31, Operating leases
1997 $ 288,217
1998 288,217
1999 288,217
2000 288,217
2001 26,288
------
Total minimum lease payments $ 1,179,156
=========
Rent expense amounted to $351,150, $334,834 and
$282,868 for the years ended 1996, 1995 and 1994, respectively.
(Continued)
66
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(13) Parent Company Financial Information
The parent company financial information is as follows at December 31,
1996 and 1995:
Condensed Balance Sheets
1996 1995
---- ----
Assets:
Cash, deposited with subsidiary $ 115,099 242
Prepaid expenses and other assets 79,303 315,186
Property, plant and equipment, net 377,678 655,237
Note receivable 305,354 --
Investment in subsidiaries 6,401,425 7,764,936
---------- ----------
$7,278,859 8,735,601
========== ==========
Liabilities and stockholders' equity:
Due to subsidiaries $ -- 103,000
Accounts payable and accrued expenses 114,231 152,475
Capital debentures -- 420,000
Stockholders' equity 7,164,628 8,060,126
---------- ----------
$7,278,859 8,735,601
========== ==========
Condensed Statements of Operations
1996 1995 1994
---- ---- ----
Revenues:
Interest and dividend income $ 17,579 8,280 25,997
Other income 308,770 250,485 205,764
---------- ---------- ----------
Total income 326,349 258,765 231,761
---------- ---------- ----------
Expenses:
Compensation 114,985 230,279 279,680
Occupancy 442,483 420,285 329,159
Other expense 382,926 473,678 795,703
---------- ---------- ----------
Total expenses 940,394 1,124,242 1,404,542
---------- ---------- ----------
Loss before income from subsidiaries (614,045) (865,477) (1,172,781)
(Loss) income from subsidiaries (362,458) (1,597,758) 586,029
---------- ---------- ----------
Net loss before income taxes (976,503) (2,463,235) (586,752)
Income tax (benefit) expense -- (213,534) 407,579
---------- ---------- ----------
Net loss (976,503) (2,249,701) (179,173)
========== ========== ==========
(Continued)
67
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Condensed Statements of Cash Flows
1996 1995 1994
---- ---- ----
Cash flows provided by (used in) operating activities:
Net loss $ (976,503) (2,249,701) (179,173)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Loss on foreclosure of notes receivable -- -- 187,028
Loss on disposal of premises and equipment 154,327 371 --
Depreciation 59,800 74,672 56,706
Equity in undistributed loss (earnings) of subsidiaries 362,458 1,597,758 (586,029)
Cash provided by (used in) changes in:
Prepaid expenses and other assets 235,883 (95,498) (25,919)
Investment in subsidiaries 1,082,058 -- --
Due to subsidiaries (103,000) (284,800) 17,800
Due from subsidiary -- -- 675,884
Accounts payable and accrued expenses (38,244) 152,475 (3,721)
---------- ---------- ----------
Net cash provided by (used in) by operating
activities 776,779 (804,723) 142,576
---------- ---------- ----------
Cash flows provided by (used in) investing activities:
Notes receivable originated, net of repayments (305,354) -- --
Purchase of property and equipment (4,759) -- (227,306)
Proceeds from sale of property and equipment 68,191 13,353 --
Net cash provided by (used in)
investing activities (241,922) 13,353 (227,306)
---------- ---------- ----------
(Continued)
68
- -16-
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Condensed Statements of Cash Flows, Continued
1996 1995 1994
---- ---- ----
Cash flows (used in) provided by financing activities:
Proceeds from sale of stock, net of issuance costs -- -- 1,013,532
Dividends paid -- -- (270,312)
Repayment of debentures (420,000) -- --
Net cash (used in) provided by financing
activities (420,000) -- 743,220
---------- ----------
Net increase (decrease) in cash and cash
equivalents 114,857 (791,370) 658,490
Cash and cash equivalents at beginning of year 242 791,612 133,122
---------- ---------- ----------
Cash and cash equivalents at end of year $ 115,099 242 791,612
========== ========== ==========
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 (336,359) (1,181,624) (107,647)
Deferred income tax asset (126,135) (401,752) (35,768)
---------- ---------- ----------
Unrealized loss on investment securities
available for sale, net $ (210,224) (779,872) (71,879)
========== ========== ==========
Unrealized loss on investment securities
transferred from available for sale to
held to maturity $ (715,657) -- --
========== ========== ==========
The major sources of funds available to the Company for payment of
dividends are dividends from the Bank. The ability of the Bank to pay
dividends to the Holding Company is subject to the approval of the Office
of Thrift Supervision.
(Continued)
69
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(14) Selected Quarterly Financial Data (Unaudited)
Summarized quarterly financial data follows (in thousands, except for
per share amounts):
Fourth quarter
--------------
1996 1995 1994
---- ---- ----
Interest income $ 2,460 2,548 2,632
Net interest income 685 516 859
Provision for loan losses (311) 5 278
Income (loss) before income taxes 361 (1,806) (834)
Net income (loss) 16 (1,177) (582)
== ====== ====
Earnings (loss) per share $ .01 (.52) (.26)
======= ==== ====
Third quarter
-------------
1996 1995 1994
---- ---- ----
Interest income $ 2,487 2,648 2,504
Net interest income 752 548 995
Provision for loan losses 441 42 --
Income (loss) before income taxes (1,151) (626) 61
Net income (loss) (737) (400) 40
==== ==== ==
Earnings (loss) per share $ (.33) (.18) .02
======= ==== ===
Second quarter
--------------
1996 1995 1994
---- ---- ----
Interest income $ 2,432 2,765 2,447
Net interest income 731 735 1,078
Provision for loan losses 132 730 38
Income (loss) before income taxes (405) (1,006) 254
Net income (loss) (259) (644) 173
==== ==== ===
Earnings (loss) per share $ (.11) (.29) .08
======= ==== ===
(Continued)
70
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
First quarter
-------------
1996 1995 1994
---- ---- ----
Interest income 2,558 2,648 2,264
Net interest income 741 784 1,134
Provision for loan losses 18 2 --
Income (loss) before income 5 (46) 299
Net income (loss) 3 (26) 190
----- ----- -----
Earnings (loss) per share $ - (.01) .08
===== ===== =====
(15) Related Party Transactions
During 1990, the Company entered into a long-term lease obligation with John
Martin Bell, wife of the former 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 $291,767, $247,923 and $223,552
were made during the years ended December 31, 1996, 1995 and 1994, respectively.
During the years ended December 31, 1996, 1995 and 1994, 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 $-0-,
$1,417 and $23,937, respectively.
(16) 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, 1996, 1995 and 1994, the Company contributed cash to the Plan of
$38,000, $10,000 and $25,000, respectively.
(17) 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. During the current year, the FDIC imposed a one-time
assessment on all SAIF-insured deposits in the amount of 65.7 cents per $100 of
insured deposits, held as of March 31, 1995. The effect of this assessment
resulted in a pre-tax charge to income of $716,498. 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.
(Continued)
71
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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; (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.
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.
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
(Continued)
72
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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.
In the 1996 examinations of the Holding Company and Bank, which were concluded
in September 1996, 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 disposition of problem assets, reduction of interest rate risk, and a
reduction in operating expenses. Subsequent to year end, the OTS upgraded the
Holding Company's rating to satisfactory.
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.
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.
(18) 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, 1996. On March 7, 1997, the board of directors of the Company rescinded all
options previously granted and terminated the plan.
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, 1996 and 1995, options for 58,453 shares were
outstanding to various sales representatives.
(19) 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, 1996 and 1995 are as follows:
(Continued)
73
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1996 1995
---- ----
Available lines of credit $ 179,283 9,500
======= =====
Standby letters of credit $ 500,000 500,000
======= =======
Outstanding mortgage loan commitments, exclusive of loans in
process:
Net fixed rates $ 584,097 1,810,038
Net variable rates 2,375,844 352,500
--------- -------
$ 2,959,941 2,162,583
========= =========
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 balance sheet 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 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.
(20) 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.
74
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
OF THE REGISTRANT
MANAGEMENT
Management of Federal Trust
The Board of Directors of Federal Trust Corporation consists of 6 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, 1996 Holding Company Elected Director Office Expires
- --------------- --------------- --------------- ---------------- --------------
James T. Bell 53 Director 1988 1997
Anne T. Coonrod 52 Director 1988 1998
Edwin J. Feiler, Jr 61 Director 1989 1997
Francis T. West 76 Director 1989 1998
James V. Suskiewich 49 President/Director 1994 1997
Aubrey H. Wright, Jr 50 Sr. V.P./CFO/Director 1995 1997
Directors are elected for a term of one year effective with the 1996 Annual
meeting, however two directors had terms remaining of greater than one year when
the Corporation's By-laws were amended in1996.
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 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 from 1988 to June 1996. Mr. Bell was President of the Bank during 1990.
Mr. Bell is the President of Federal Trust Properties Corporation.
Anne T. Coonrod served as Vice President of the Corporation from December 1989
to July 1996. 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 has served as President of the Bank since January 1993 and as
Chairman of the Board of Directors of the Bank since May 1996. He has been
President and Chairman of the Board of Directors of Federal Trust Corporation
since June 1996. 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., 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.
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.
75
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
- --------------------------------------------------------------------------------
James V. Suskiewich 49 President/
Chairman
Director 1993 1997
George W. Foster 67 Director 1991 1997
Aubrey H. Wright, Jr. 50 SVP and CFO/
Director 1994 1998
Samuel C. Certo 49 Director 1996 1999
Kenneth W. Hill 63 Director 1996 1999
Louis Laubscher 53 VP and CLO N/A N/A
Mr. Suskiewich joined the Bank as President in January 1993. He has served as
Chairman of the Board of Directors since May 1996. 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. Foster 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. 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, 1991.
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 the 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 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.
76
Principal Holders of Voting Securities
The following table sets forth information as of March 1, 1997 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.
Percentage of options to
Shares of Common Stock Purchase Percentage of
Common issued & Common Common Stock on a
Name Stock(1) Outstanding Stock(2) fully diluted basis(3)
---- -------- ----------- -------- ----------------------
James T. Bell and/or John M. Bell(4)(5)(6) 522,369 23.32 107,674 28.13
Anne T. Coonrod (7) 22,045 .98 9,307 1.40
Edwin J. Feiler, Jr. (8) 36,710 1.64 26,771 2.83
George W. Foster 1,343 .06 2,234 .16
James V. Suskiewich(9) 33,844 1.51 - 0 - 1.51
Francis T. West 44,981 2.01 11,747 2.53
Aubrey H. Wright, Jr 100 .004 - 0 - .004
------- ----- ------- -----
Officers & Directors as a Group 671,392 29.97 157,733 36.57
======= ===== ======= =====
(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) The Stock Option Plan was rescinded by the Board of Directors of the Company
on March 7, 1997. 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 with respect to which Mr. Bell exercises sole
voting and investment power.
(5) Includes 115,558 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 181,906 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, 5,000 held by Edwin J. Feiler, Jr.,
Guardian for Stanley W. Feiler, 4,395 shares held by Feiler Enterprises,
5,000 held by the Feiler Company, and 11,329 held by Metro Developers.
(9) Includes 25,391 shares held as trustee under Federal Trust's ESOP with
respect to which Mr. Suskiewich exercises sole voting and investment power.
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.
[THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK.]
77
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
- --------------- ---- ------ ----- --------------- ------ -------
James V. Suskiewich, 1996 $137,409 $ 11,000 $ 14,161 - --
CEO of the Bank 1995 $118,223 $ 16,000 $ 13,169 - --
CEO of the Co. 1994 $105,729 $ 5,000 $ 13,822 - --
(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 V. Suskiewich 1996 1995 1994
- ------------------- ---- ---- ----
Health & Life insurance premiums 4,454 $3,933 $3,926
Use of Company automobile 6,928 6,564 7,263
Social/Country Club Dues 2,779 2,671 2,633
----- ----- -----
Total: $14,161 $13,169 $13,822
(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.
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. Two employees had vested interest in the ESOP as of December 31, 1996. 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 1996, 1995 and 1994, the Company contributed cash of $38,000,
$10,000 and $25,000, 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
78
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. On March 7, 1997, the Board of
Directors of the Company rescinded the Stock Option Plan for Directors. The
Company issued no stock options or stock appreciation rights as compensation
during the period January 1, 1996 through March 7, 1997.
Director Compensation
Each 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. The Company temporarily suspended the payment on all
Board and Committee fees in July 1996.
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:
o Attract and retain qualified management of the Company;
o Enhance hort-term financial goals of the Company; and
o 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 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 CEO of the Company does not
receive compensation from the Company, but is compensated in his position as CEO
of the Bank. The Company reimburses the Bank for the time that the CEO spends on
Company matters.
The employment contract of the former CEO of the Company was assigned to Federal
Trust Properties Corporation ("FTPC") in June 1996, and FTPC was sold to an
unaffiliated third party on July 1, 1996.
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
79
James V. Suskiewich, President and Chief Executive Officer of the Company and
President and Chief Executive Officer of Federal Trust Bank, (the "Bank") is a
member of the Company's Board of Directors and participated in deliberations of
the Board of Directors regarding executive compensation. Mr. Suskiewich,
however, did not participate in any deliberation regarding his own compensation
or transactions.
Employment Contracts
The Company and Bank entered into an employment agreement with James V.
Suskiewich (Agreement). Mr. Suskiewich is the President and Chief Executive
Officer, and 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, 1996, Mr. Suskiewich received a performance bonus of $20,000. 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
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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80
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 Ownership
---------
Beneficial Owner Percent of Class
- ---------------- ----------------
James T. and John M. Bell
675 Osceola Avenue
Winter Park, Florida 32789 522,369(1) 23.3
Directors and Executive Officers as a Group
(7 persons) 671,392(1) 29.9
- ---------------------
(1) Includes 115,558 shares held by Mr. Bell in his name, 12,500 shares
held as trustee, 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, 181,906 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 forth 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.
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81
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, 1996, 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 former Chairman and Chief
Executive Officer, who remains as a director of the Company. Mr. Morrone is
considered to be an "affiliate", as that term is defined by SEC regulations.
This largest outstanding balance during 1996 was $737,128. As of February 28,
1996 the balance was $478,128.
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.
82
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, 1996.
o Independent Auditors' Report
o Consolidated Balance Sheets at December 31, 1996 and 1995
o Consolidated Statements of Operations for each of the years
in the three year period ended December 31, 1996
o Consolidated Statements of Cash Flows for each of the three
years in the three year period ended December 31, 1996
o Consolidated Statement of Stockholders' Equity for each of
the three years in the three year period ended December 31,
1996
o 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. ****
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 1, 1995. *****
21 Subsidiaries. 86
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.
***** Incorporated by reference to the document files as Exhibits 10(j) to
the Company's Annual Report on Form 10-K from the fiscal year ended
December 31, 1995.
83
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 V. Suskiewich Chairman of the Board and March 25, 1996
- -------------------------
James V. Suskiewich President
/s/ James T. Bell Director 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/ Aubrey H. Wright, Jr. Director March 25, 1996
- -------------------------
Aubrey H. Wright, Jr.
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.
84
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 1, 1995. *****
21 Subsidiaries. 86
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.
***** Incorporated by reference to the document files as Exhibits 10(j) to
the Company's Annual Report on Form 10-K from the fiscal year ended
December 31, 1995.
85