As filed with the Securities and Exchange Commission on July 8, 1997
Registration File No. 33-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
FEDERAL TRUST CORPORATION
(Exact name of Registrant as specified in its charter)
Florida 671 59-2935028
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(State or jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification No.)
incorporation or organization) Classification Code Number)
1211 Orange Avenue, Winter Park, Florida 32789 (407) 645-1201
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(Address, including zip code, and telephone number, including area code, of
Registrant principal executive offices)
James V. Suskiewich
President/Chief Executive Officer
1211 Orange Avenue
Winter Park, Florida 32789
(407) 645-1201
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Copies Requested to:
A. George Igler, Esquire Aaron Kaslow, Esquire
Igler & Dougherty, P.A. Breyer & Aguggia
1501 Park Avenue East 1300 I Street Northwest, Suite 470 East
Tallahassee, Florida 32301 Washington, D.C. 20005
(904) 878-2411 (202) 737-7900
(904) 878-1230 (facsimile) (202) 737-7979 (facsimile)
Approximate date of proposed sale to the public: As soon as practicable after
this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to rule 415 under the Securities Act of
1933 check the following box. [ ]
If this Form is filed to register additional securities for an Offering pursuant
to rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering.
[ ] _________
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] _________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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Title of Proposed Proposed
each class Amount maximum maximum
of securities to be Offering aggregate Amount of
to be registered registered(1) price per share (2) Offering price (2) registration fee
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Common Stock $.01 par value 2,701,619 $2.00 $5,403,238 $1,637.34
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(1) Common Stock ("Shares) are to be issued in a Rights Offering. Shares
not subscribed for in the Rights Offering shall be offered to members
of the general public in the Community Offering and the Syndicated
Community Offering which shall commence immediately following the
Rights Offering, at the same Subscription Price.
(2) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(o) under the Securities Act of 1933.
The Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to Section 8(a), may
determine.
FEDERAL TRUST CORPORATION
Up To 2,701,619 Shares
Common Stock
Federal Trust Corporation ("Federal Trust", or the "Company" when
discussed collectively with Federal Trust Bank), a Florida corporation, is
offering up to 2,701,619 shares of its common stock, par value $1.00 per share
("Common Stock"), on a priority basis, first to holders of record of its Common
Stock ("Shareholders") at the close of business on March 26, 1997 (the "Record
Date"). Each Shareholder will receive a nontransferable right to subscribe for
and purchase one (1) additional share of Common Stock for each whole share of
Common Stock owned on the Record Date (the "Subscription Right") at the price of
$2.00 per share ("Subscription Price"). Shareholders are entitled to subscribe
for all, or any portion of, the shares of Common Stock underlying their
Subscription Right. The offering of Common Stock pursuant to Subscription Rights
to Shareholders is referred to herein as the "Rights Offering". All Subscription
Rights to purchase Common Stock in the Rights Offering are non-transferrable and
will expire at 5:00 p.m. Eastern Time on August 29, 1997 (the "Rights Offering
Expiration Date").
Immediately following the Rights Offering, Federal Trust will offer
shares not subscribed for in the Rights Offering to members of the general
public to whom a copy of this Prospectus is delivered (the "Community Offering")
and through participating registered broker-dealers in a syndicated community
offering (the "Syndicated Community Offering"). The offering of shares of Common
Stock in the Community Offering and the Syndicated Community Offering is subject
to the prior Subscription Rights of the Shareholders in the Rights Offering,
Federal Trust's right to reject orders received in the Community Offering and
the Syndicated Community Offering in whole or in part, and the other limitations
described herein. The Rights Offering, the Community Offering and the Syndicated
Community Offering are collectively referred to as the "Offering." In the
Community Offering or the Syndicated Offering the minimum number of shares of
Common Stock any person may purchase is 500 shares and the maximum amount any
person may purchase, together with associates or persons acting in concert with
such person, is 5% of the total number of shares sold in the Offering. In
addition, no person shall be allowed to purchase (individually, or together with
associates or persons acting in concert with such persons) shares of Common
Stock in the Rights Offering, the Community Offering or the Syndicated Offering
which when aggregated with current holdings would exceed 9.99% of the total
number of shares outstanding at the conclusion of the Offering. The $2.00 price
per share to be paid for the Common Stock will be the same in the Rights
Offering, the Community Offering and the Syndicated Community Offering.
See "Risk Factors" beginning on page 15 for a discussion of certain
risks that should be carefully considered by prospective purchasers of
the Common Stock offered hereby.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
=======================================================================================================================
Estimated Fees
Subscription and Underwriting Proceeds to the
Price Expenses(1) Company(1)
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Per Share Minimum . . . . . . . . . $ 2.00 $ 0.25 $ 1.75
Per Share Maximum . . . . . . . . . $ 2.00 $ 0.19 $ 1.81
Total Minimum (2) . . . . . . . . . . $ 2,000,000 $ 250,000 $ 1,750,000
Total Maximum(3) . . . . . . . . . . $ 5,403,238 $ 500,000 $ 4,903,238
=================================== ============================= ======================== =========================
Keefe, Bruyette & Woods, Inc.
The date of this Prospectus is August ___, 1997. (Footnotes on following page)
1
(Continuation of cover)
Federal Trust has engaged Keefe, Bruyette & Woods, Inc. ("KBW"), a
registered broker-dealer, to consult with and advise Federal Trust with respect
to the Offering. KBW has agreed to use its best efforts to solicit subscriptions
and purchase orders for shares of Common Stock in the Offering. Neither KBW nor
any other registered broker-dealer shall have any obligation to take or purchase
any shares of Common Stock in the Offering.
Federal Trust is offering a maximum of 2,701,619 shares of Common Stock
hereby (the "Total Maximum"), and must sell a minimum of 1,000,000 shares of
Common Stock in the Offering (the "Total Minimum") or the Offering will not be
consummated and all funds submitted to the Subscription Agent (as defined
hereafter) will be promptly returned with interest. See "SUMMARY - Escrow
Account". The Offering will terminate at 5:00 p.m. Eastern Time on September 30,
1997, subject to an extension of 45 days up to November 15, 1997, at the
discretion of the Company. All subscriptions are irrevocable once submitted.
Federal Trust reserves the right to reject orders received in the Community
Offering or the Syndicated Community Offering, in whole or in part.
The Common Stock of Federal Trust is not listed on any exchange and
there currently is no active market for the shares. There can be no assurance
that an active and liquid trading market for the Common Stock will develop or,
if developed, will be maintained. Federal Trust has applied to have the Common
Stock listed on the National Association of Securities Dealers Automated
Quotation ("Nasdaq") SmallCap Market under the symbol"_________" upon completion
of the Offering. See "RISK FACTORS-- Limited Trading Market". No assurance,
however, can be given that the requirements for such listing can be satisfied.
Investors should consider the potential illiquid nature of an investment in the
Common Stock. KBW has advised Federal Trust that upon completion of the Offering
it intends to act as a market maker in the Common Stock, depending upon the
volume of trading and subject to compliance with applicable laws and regulatory
requirements. KBW will also assist Federal Trust in obtaining additional market
makers.
(Footnotes for Table)
(1) Consists of estimated expenses to be incurred by the Company in
connection with the Offering, including estimated marketing fees and
expenses, and fees to be paid to KBW and other registered
broker-dealers in connection with the sale of shares in the Syndicated
Community Offering, which fees and expenses are estimated to be
$250,000 and $500,000, respectively, assuming the sale of 1,000,000 and
2,701,619 shares, respectively. See "Use of Proceeds" for the
assumptions used to arrive at these estimates.
(2) Assumes the sale of 1,000,000 shares of Common Stock.
(3) Assumes the sale of 2,701,619 shares of Common Stock.
2
FEDERAL TRUST CORPORATION
[MAP OF FLORIDA]
THE SECURITIES OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS, DEPOSITS OR
OTHER OBLIGATIONS OF FEDERAL TRUST OR FEDERAL TRUST BANK AND ARE NOT INSURED OR
GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION ("FDIC"), THE BANK
INSURANCE FUND ("BIF"), THE SAVINGS ASSOCIATION INSURANCE FUND ("SAIF") OR ANY
OTHER GOVERNMENT AGENCY.
3
PROSPECTUS SUMMARY
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The following summary does not purport to be complete and is qualified
in its entirety by the more detailed information, including the Consolidated
Financial Statements and related Notes, appearing elsewhere in this Prospectus.
The Company
General. Federal Trust is a Florida corporation which was organized in
February 1989 as a unitary savings and loan holding company. Federal Trust
currently operates solely through its wholly-owned subsidiary Federal Trust
Bank, a federally-chartered stock savings bank ("the Bank"). The address for
Federal Trust is 1211 Orange Avenue, Winter Park, Florida 32789 and the
telephone number is (407) 645-1201. At March 31, 1997, the Company had total
consolidated assets of $140.0 million and stockholders' equity of $ 7.3 million.
History. Throughout the first five years of its existence the Company
focused on a wholesale thrift strategy by purchasing loans and engaging in real
estate development and related activities, such as mortgage brokerage,
commercial construction and office building management operations. During 1990
and 1991, the Company emphasized the origination of larger commercial real
estate loans, land acquisition and development loans and commercial construction
loans some of which were outside its market area. The Company relied heavily on
wholesale deposits and Federal Home Loan Bank ("FHLB") advances to fund loans.
The Company grew rapidly between 1989 and 1992. This rapid growth resulted
primarily from the acquisition of the assets and liabilities of the First
Federal of Seminole Savings and Loan Association from the Resolution Trust
Corporation, in April 1992, which added $78.0 million in loans and $120.2
million in deposits. From December 31, 1989 to December 31, 1993, the Company's
total assets grew from $24.3 million to $146.9 million. During this same period,
the Company posted increases in net income, which rose from a loss of $310,000
in 1989 (its first full year of operations) to $766,000 in 1993.
The Company's initial strategy to attract deposits was to utilize
wholesale funds, i.e., certificates of deposit obtained through the "CD
Network", a computer network which permits the Company to display its rates on
certificates to individual investors nationwide. The CD Network, which allows
Company personnel deal directly with investors, was implemented to avoid
overhead expenses associated with branch facilities, which are traditionally
used to generate deposits. Wholesale deposits, however, are generally considered
to be a more volatile source of funds. At the time the CD Network program was
started, interest rates paid on wholesale funds were lower than interest rates
being paid on local deposits. At December 31, 1993, deposits totaled $78.8
million, of which $26.1 million or 33.1% were obtained through the CD Network.
Beginning in 1993, however, interest rates on wholesale funds began to increase,
resulting in a higher cost of funds to the Company. At the same time the Company
had made the decision to become a more retail oriented financial institution
focussing its attention on generating local deposits. As of March 31, 1997,
deposits totaled $103.7 million, of which $3.0 million or 2.9% were obtained
through the CD Network.
Beginning in 1994, Federal Trust began to experience a sharp increase
in the level of non-performing loans and real estate owned ("REO"). Between 1991
and 1994, asset quality significantly declined, with non-performing assets
increasing from approximately $649,000 at December 31, 1991, to $9.3 million at
December 31, 1994. This deterioration in asset quality and the Company's high
overhead, had a negative impact on earnings during 1994, 1995 and 1996.
4
Earnings suffered as a result of higher reserves, lower interest margins and
higher expenses, as well as the wholesale funding strategy and its cost
structure. Federal Trust posted net losses of $976,503, $2,299,701 and $179,173
for the years ended 1996, 1995 and 1994, respectively. Concurrently, the
Company's total assets declined from $154.0 million at December 31, 1994, to
$140.0 million at December 31, 1996.
As a result of certain deficiencies identified during the examinations
conducted by the Office of Thrift Supervision ("OTS"), the Bank's primary
regulator, during 1992 and 1993, the Bank entered into a Supervisory Agreement
with the OTS in May 1993. Following the 1994 examinations of Federal Trust and
the Bank, due to further deterioration in asset quality and criticism of prior
management practices, Federal Trust and the Bank voluntarily agreed to the
issuance of individual Cease and Desist Orders which were entered in October
1994 (collectively, the "Orders"). The Bank's Order superseded the 1993
Supervisory Agreement with the OTS. Management of Federal Trust and the Bank
consented to the issuance of the respective Orders, without admitting or denying
that grounds for such Orders existed. In the 1996 examinations of Federal Trust
and the Bank, the OTS concluded that the overall condition of both companies had
improved and that Federal Trust and the Bank were in compliance with their
respective Orders. See "RISK FACTORS - Regulating Enforcement Actions" and
"BUSINESS - Supervision."
Recent Improvements. Since 1993, the Company has undertaken several
proactive measures to improve its financial stability, operational capability,
asset and liability structure and corporate image. Among other strategic
initiatives, the Company has:
Strengthened Management/Governorship: Since 1993, the Company has hired
executives with extensive banking and regulatory experience for the
Company's three principal positions, specifically, Chief Executive
Officer ("CEO"), Chief Financial Officer ("CFO") and Chief Lending
Officer ("CLO"). Moreover, the Company has implemented changes to other
senior and mid-level positions, as well as Federal Trust's Board of
Directors so as to increase the Company's effectiveness. This senior
management team consisting of James V. Suskiewich (CEO), Aubrey H.
Wright (CFO) and Louis E. Laubsher (CLO), whose professional
backgrounds are detailed under MANAGEMENT - Directors and Executive
Officer, have been directing the Bank's efforts since mid-1993 and
directing the Company's operations since mid-1996.
Improved Asset Quality: In connection with the corporate restructuring
effort, the Company hired a CLO with extensive problem asset resolution
expertise to concentrate in identifying and analyzing nonperforming and
potential problem assets and developing and executing an appropriate
course of action to rehabilitate or dispose of such assets. As part of
the asset quality improvement program, the management team has
established a Special Assets Department, which is responsible for the
disposition/liquidation of the non-performing assets, as well as
implementing an aggressive collection policy and real estate program.
As a result, the level of non-performing assets decreased to $5.2
million as of March 31, 1997, from $9.3 million as of December 31,
1994.
Augmented Credit Administration/Loan Loss Reserves: In addition to
focusing on pre-existing credit problems, the Company has invested
significant resources to ensure future asset quality and core income by
significantly enhancing the Company's credit policies, procedures and
allowance for loan losses. With regard to credit administration, the
5
Company has developed systematic changes that have improved the loan
origination and management process. The Company has also established an
officer's loan committee to enhance credit structuring and quality. As
such the Company's ratio of allowance for loan losses to nonperforming
loans increased to 73.5% as of March 31, 1997, from 31.0% as of
December 31, 1994.
Implemented Expense Reduction Measures: During the past three years,
the management team initiated a series of measures to resolve corporate
inefficiencies associated with above market occupancy expenses, high
levels of nonperforming assets and personnel overcapacity. This process
included an analysis of nearly every major aspect of the Company and
its organization which resulted in (1) major staff consolidations; (2)
organizational overhaul including the divestiture and/or dissolving of
five subsidiaries; (3) renegotiation of major vender contracts; and (4)
renegotiation of the Company's main office lease and the sale of a
branch office facility located near the main office. For the year ended
December 31, 1995, to December 31, 1996, operating and other expenses
declined by $2,270,597 or 39.21% (excluding the extraordinary one-time
SAIF assessment).
New Business Strategy
General. Federal Trust's management team and new Board of Directors
recognized several major factors impacting the Company's historical performance
and future prospects, specifically: (1) in recent years, the Company had drifted
in terms of market position, liquidity coverage and corporate reputation; (2)
Federal Trust's wholesale strategy and real estate development and management
activities did little to advance the Company's franchise value; (3) the Company
had incurred substantive " opportunity costs" with regard to garnering new
relationships and expanding existing relationships in recent years, as a result
of its wholesale strategy and adverse publicity relating to the Company's losses
and regulatory orders; and (4) the solid economic and demographic
characteristics of the Company's primary market, the greater Orlando market
area, combined with the substantial consolidation of the financial services
arena within the primary market, has created significant opportunities for a
community bank within the market. As such, a top to bottom strategic plan is
being developed with a new mission, strategic direction and long-term goals.
Three components of the plan are outlined below. See "RISK FACTORS".
Community Bank Orientation: The Company has refocused its business
strategy to operate as a community-oriented bank. A core retail and
commercial customer base is being developed by providing quality
service and bank products that meet the needs of customers in the
Company's market area. As a part of this strategy, the management team
endeavors to enhance the Company's product development, strengthen
asset/liability management, maintain high asset quality, and as a
result, significantly improve core earnings. The specific changes
within the asset and liability mix are as follows:
Lending Activities - Beginning in July 1993, the Company significantly
curtailed its commercial real estate loans and discontinued loans on
larger land acquisition and development projects and other commercial
construction loans. During this period, the Company began offering more
community bank loan products by emphasizing investments in residential
mortgages, mortgage-backed securities and other securities issued by
the United States Government, or agencies thereof, as well as the
origination of real estate based Small Business Administration ("SBA")
loans in the Company's primary market area.
6
Funding Activities - The management team has also made a concerted
effort to change the Company's liability mix since 1993. The management
team believes that the material shift to a more retail-based deposit
and borrowing structuring from the wholesale funding strategy will not
only mitigate the Company's interst rate risk, it will also help
position the Company as the local community bank alternative. As of
June 30, 1994, wholesale deposits (i.e. certificates of deposit
obtained through the CD network) represented 57.3% of total deposits.
By March 31, 1997, wholesale deposits represented only 2.9% of total
deposits.
Market Penetration Plans: In addition to diversifying the Company's
products and services to better serve the community, the management
team plans to utilize part of the net proceeds from the Offering to
expand the Company's local presence. The management team is currently
exploring cost effective market penetration opportunities such as the
acquisition of or starting of a new branch facility in one of the
outlying communities in the greater Orlando market area. The ability to
branch will be subject to approval by the OTS, which considers factors
such as earnings, capital, management and Community Reinvestmnt
Activities prior to approving branch applications.
Capital Infusion Through Common Stock Offer: The most recent OTS
examination of the Company included a review and evaluation of capital,
asset quality, management, earnings and asset/liability management.
Based on this examination, the OTS concluded that the overall condition
of the Company and the Bank improved and that the Bank meets the
regulatory definition of "well-capitalized". Notwithstanding, Federal
Trust and the Bank are required to establish a plan for raising
additional capital. Federal Trust is developing a plan which is being
implemented through this Offering. Federal Trust believes that the
capital infusion represents one of the principal components of the new
business plan, as the new capital should: (1) remove the regulatory
enforced growth restraints and provide for future growth potential
which should provide substantive economies of scale and creation of
synergies; (2) enable the Company to pursue new community bank business
opportunities; (3) strengthen the Company's margins with the new
activities; (4) return the Company to profitability; and (5) empower
the Company to reach its full valuation by pursuing a business plan
that is focused on maximization of shareholder and franchise value.
Risk Factors
The Company has experienced financial and operating problems in recent
periods and for these and other reasons a purchase of the Common Stock involves
certain investment risks. Holders of Subscription Rights and other prospective
investors should carefully consider the matters set forth under "RISK FACTORS"
beginning on page 15 herein.
7
The Offering
Shares Offered Hereby Federal Trust is offering up 2,701,619
shares of Common Stock (the "Total
Maximum") subject to increase in certain
circumstances. See "THE OFFERING".
Subscription Price The $2.00 per share of Subscription
Price was established by the Board of
Directors of Federal Trust after
considering a number of factors and
consultation with its financial
advisors. See "THE OFFERING--
Determination of Subscription Price and
Fairness Opinion."
The Rights Offering Holders of shares of Common Stock at the
close of business on the Record Date
("Shareholders"), are being provided, on
a priority basis, non-transferable
subscription rights to purchase at the
Subscription Price one (1) share of
Common Stock for each whole share of
Common Stock owned on the Record Date
(the "Subscription Right"). Shareholders
are entitled to subscribe for all, or
any portion of, the shares of Common
Stock underlying their Subscription
Rights, provided the aggregate number of
shares owned by any Shareholder
(individually, or together with
associates or persons acting in concert
with such person) at the conclusion of
the Offering, does not exceed 9.99%. See
"THE OFFERING--The Rights
Offering--Subscription Rights."
Community Offering and
Syndicated Community
Offering Immediately following the Rights
Offering, Federal Trust will offer
shares of Common Stock to members of the
general public to whom a copy of this
Prospectus is delivered. In addition,
the Company is offering shares of Common
Stock in a concurrent Syndicated
Community Offering to be managed by KBW.
The shares of Common Stock offered for
sale in the Community Offering and
Syndicated Community Offering are
subject to the prior Subscription Rights
of Shareholders in the Rights Offering,
the right of the Company to reject
orders received in the Community
Offering and Syndicated Community
Offering, in whole or in part, and the
other limitations described herein. If
the number of shares of Common Stock
remaining after the exercise of
Subscription Rights is not sufficient to
satisfy all orders received from
participants in the Community Offering
and the Syndicated Community Offering,
the remaining shares will be allocated
pro rata among such persons based on the
8
aggregate number of shares ordered for
in the Community Offering and the
Syndicated Community Offering, subject
to the rights of the Company referenced
above. There can be no assurance that
any shares of Common Stock will be
available to satisfy, in whole or in
part, an order from a Community Offering
and Syndicated Community Offering
participant. See "THE OFFERING--The
Community Offering and Syndicated
Community Offering."
Financial Advisors, Sales Agent
and Fees to Participating
Broker-Dealers Federal Trust and Carruthers & Company
("Carruthers & Co.") and RP Financial,
L.C. ("RP Financial") have entered into
agreements whereby Carruthers & Co. and
RP Financial have agreed to serve as
financial advisors to the Company in
connection with the Offering. In
addition, RP Financial has prepared an
opinion that the Subscription Price and
the terms of the Offering are fair from
a financial point of view to the Company
and its current shareholders. See "THE
OFFERING--Financial Advisor,"
Federal Trust has also entered into a
Sales Agency Agreement with KBW and has
agreed to pay certain fees and expenses
of KBW for its services in the Offering.
In addition, Federal Trust has agreed to
pay certain fees to selected
broker-dealers who participate in the
Syndicated Community Offering. See "THE
OFFERING - Community Offering and
Syndicated Offering."
Expiration Date The Rights Offering will expire at 5:00
p.m., Eastern Time, on August 29, 1997
("Rights Offering Expiration Date"). The
Community Offering and Syndicated
Community Offering will expire on
September 30, 1997, unless extended at
the discretion of the Board of Directors
of the Company to a date not later than
November 15, 1997. See "THE
OFFERING--"Rights Offering Expiration
Date" and "Offering Expiration Date ".
Minimum Offering The Offering will not be consummated and
all funds received with orders by the
Company's Escrow Agent, as defined
below, will be promptly returned with
interest if a minimum of 1,000,000
shares of Common Stock (the "Total
Minimum"), is not sold. See "THE
OFFERING -- Minimum Offering."
9
Shares of Common Stock
Outstanding After the
Offering As of the Record Date, there were
2,256,505 shares of Common Stock
outstanding. Upon successful completion
of the Offering at the Total Minimum and
Total Maximum there would be 3,256,505
and 4,958,124 shares of Common Stock
outstanding, respectively.
Procedure for Subscribing for
Common Stock in the Rights
Offering and the Community
Offering Shareholders who desire to exercise
their Subscription Rights, as well as
other persons who desire to participate
in the Community Offering, must properly
complete the Order Form which
accompanies this Prospectus. The Order
Form must be forwarded, with full
payment of the aggregate Subscription
Price, to the Escrow Agent on or prior
to the Rights Offering Expiration Date
in the case of Shareholders exercising
Subscription Rights, or the Offering
Expiration Date for persons purchasing
shares in the Community Offering. If the
mail is used to forward Order Forms, it
is recommended that insured, registered
mail, return receipt requested, be used.
See "THE OFFERING--Issuance of Common
Stock."
Subscriptions for the Common Stock which
are accepted by the Escrow Agent from
Shareholders exercising Subscription
Rights or from persons participating in
the Community Offering may not be
revoked. See "THE OFFERING -- Procedure
for Subscribing for Common Stock in the
Offering."
Procedure for Exercising
Rights by Foreign
Stockholders and
Blue Sky Considerations Order Forms will not be mailed to
Shareholders whose addresses are outside
the United States or who have an APO or
FPO address, but will be held by the
Escrow Agent for their account. To
exercise the Subscription Rights
represented thereby, such Shareholder
must notify the Escrow Agent and take
all other steps necessary to exercise
the Subscription Rights on or prior to
the Rights Offering Expiration Date. See
"THE OFFERING-- Foreign and Certain
Other Shareholders."
10
Blue Sky Considerations The securities in this Offering will be
registered in the following states:
California, Colorado, Delaware, Florida,
Illinois, Indiana, Michigan, New Jersey,
New York, North Dakota, Ohio,
Pennsylvania and Texas. The total
maximum number of shares being offered
in the states of Illinois, Texas and
Ohio is 500,000 in each state. The total
maximum number of shares being offered
in Indiana is 250,000. The total maximum
number of shares being offered in the
state of Michigan is 50,000.
The securities in this Offering will not
be registered in the following states:
Alabama, Connecticut, the District of
Columbia, Georgia, Hawaii, Idaho, Iowa,
Louisiana, Maine, Maryland,
Massachusetts, Minnesota, Missouri, New
Hampshire, New Mexico, Okalhoma, South
Carolina, Tennessee, Virginia and
Washington. In these states, the
Offering will be limited solely to
existing Shareholders of Federal Trust
under their Subscription Right, or will
be offered pursuant to other available
exemptions from registration provided
under the Blue Sky Laws of those states.
Persons Holding Shares of
Common Stock, or Wishing
to Exercise Subscription
Rights Through Nominees Subscription Rights are
non-transferable. Shareholders holding
shares of Common Stock through a broker,
dealer, commercial bank, trust company
or other nominee, as well as persons
holding certificates of Common Stock
personally who would prefer to have such
entities effect transactions relating to
the Subscription Rights on their behalf,
should contact the appropriate
institution or nominee and request it to
effect the transactions for them. See
"THE OFFERING--Procedure for Subscribing
for Shares of Common Stock in the
Offering."
Issuance of Common Stock Provided that all conditions necessary
to consummate the Offering are
satisfied, including the sale in the
Offering of the Total Minimum number of
shares of Common Stock, certificates
representing shares of Common Stock
purchased pursuant to the Offering will
be delivered to purchasers as soon as
practical after the Offering Expiration
Date and after all prorations and
adjustments contemplated by the Rights
Offering and Community Offering have
been effected. In the event that a
Syndicated Community Offering is to be
conducted following the Rights Offering
and the Community Offering, certificates
11
for shares of Common Stock purchased in
the Offering will be distributed as soon
as practical following the closing of
the Syndicated Community Offering. No
fractional shares will be issued in the
Offering. See "THE OFFERING --Issuance
of Common Stock."
Use of Proceeds Federal Trust intends to contribute at
least 90% of the net proceeds of the
Total Minimum Offering (estimated to be
approximately $1,575,000) to the Bank,
retaining 10% of the net proceeds of the
Offering for general corporate purposes
and miscellaneous operating expenses
associated with the Exchange Act.
Thereafter, Federal Trust intends to
contribute 75% of the net proceeds
raised in the Offering to the Bank,
retaining 25% of the net proceeds for
general corporate purposes. The Bank
will use such proceeds to increase its
regulatory capital and support future
growth of the Bank. See "USE OF
PROCEEDS."
Purchase Limitation Federal Trust will not be required to
issue shares of Common Stock pursuant to
the Offering to any person who, in the
opinion of Federal Trust, would be
required to obtain prior clearance or
approval from any federal regulatory
authority to own or control such shares.
The minimum number of shares of Common
Stock any person may purchase in the
Community Offering or the Syndicated
Community Offering is 500 shares and the
maximum amount any person may purchase
in the Community Offering or the
Syndicated Community Offering is 5% of
the total number of shares sold in the
Offering. In addition, no person shall
be allowed to purchase (individually, or
together with associates or persons
acting in concert with such person)
shares of Common Stock in the Rights
Offering or the Community Offering of
the Syndicated Offering which when
aggregated with current holdings would
exceed 9.99% of the total number of
shares outstanding at the conclusion of
the Offering.
Right to Amend or Terminate
the Offering Federal Trust expressly reserves the
right to amend the terms and conditions
of the Offering, whether the terms and
conditions are more or less favorable to
Shareholders and other participants. In
the event of any material change to the
terms of the Offering, such as a change
in the Total Minimum, the Subscription
Price or an extension beyond November
15, 1997, which changes would affect the
investment decision of subscribers,
Federal Trust will file a post-effective
amendment to its Registration Statement,
12
of which this Prospectus is a part, and
resolicit subscribers through a
Supplemental Prospectus to the extent
required by the Securities and Exchange
Commission ("SEC").
Escrow Agent Independent Bankers Bank of Florida,
Orlando, Florida (the "Escrow Agent").
Intentions of Executive
Officers and Directors The executive officers and directors of
the Company intend to purchase shares of
Common Stock in the Offering. See
"MANAGEMENT - Beneficial Ownership "
Federal Income Tax
Consequences Receipt of the Subscription Rights by
Shareholders of Federal Trust pursuant
to the Rights Offering should be treated
as a nontaxable distribution with
respect to the Common Stock. See "THE
OFFERING -- Certain Federal Income Tax
Consider- ations."
Nasdaq SmallCap Market
Symbol for the Common
Stock "___________"
Information on the Offering If you have questions concerning the
Offering, contact the Stock Sales Center
at (614) 766-8400 (Dublin, Ohio) or
(212) --- ---- (New York, New York).
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The following table presents selected consolidated financial and other
data for the Company as of or for the three-month periods ended March 31, 1997
and 1996, and as of or for each of the five years ended December 31, 1992,
through December 31, 1996. The data for each of the years in the five-year
period ended December 31, 1996, is derived from the consolidated financial
statements of the Company. The data for the three month periods ended March 31,
1996 and 1997, are unaudited but, in the opinion of management, reflect all
adjustments, consisting of normal recurring accruals, considered necessary for a
fair presentation. Operating results for the three months ended March 31, 1997,
are not necessarily indicative of the results that may be expected for the full
fiscal year ending December 31, 1997. This data should be read in conjunction
with the Consolidated Financial Statements and notes thereto, and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included herein.
13
As of or for the Three As of or for the
Months Ended March 31, Year Ended December 31,
---------------------- ----------------------------------------------
1997 1996 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ---- ----
(Dollars in thousands, except per share data)
Selected Financial Data:
Total assets........................ $139,995 $140,314 $139,582 $140,389 $153,957 $146,888 $139,137
Loans receivable, net............... 113,214 111,789 112,547 112,906 111,183 95,374 122,476
Investment securities............... 15,081 21,145 15,054 15,937 24,301 36,536 -
Real estate owned, net.............. 3,612 2,019 1,508 3,293 2,892 565 892
Deposits ........................... 103,726 107,703 106,119 109,203 101,528 78,742 97,434
Advances from the FHLB.............. 27,250 22,300 24,800 21,000 39,500 55,300 28,000
Stockholders' equity................ 7,327 7,982 7,165 8,060 11,018 10,526 8,796
Selected Operations Data:
Interest income..................... 2,550 2,558 9,937 10,609 9,847 9,506 11,765
Interest expense.................... 1,724 1,817 7,038 8,026 5,781 4,824 6,802
Net interest income................. 827 741 2,899 2,583 4,066 4,682 4,963
Provision (recovery) for loan losses (3) (18) 280 779 531 590 140
Net interest income (loss) after
provision for loan losses...... 830 759 2,619 1,804 3,535 4,092 4,823
Other income........................ 105 189 427 505 483 972 1,462
Gain on sale of branch office....... - - - - - 327 -
Real estate owned expenses ......... 33 18 251 654 393 34 -
Other expenses...................... 725 925 3,985 5,137 3,845 4,182 4,901
Income (loss) before income taxes
and extraordinary item......... 177 5 (1,190) (3,482) (220) 1,175 1,384
Income tax (benefit) expense........ 76 2 (214) (1,232) (41) 409 485
--------- --------- --------- ------- --------- ------- --------
Net income (loss)................... $ 101 $ 3 $ (977) $ (2,250) $ (179) $ 766 $ 899
========= ========== ========= ========= ========= ======== ========
Per Share Data(1):
Net income(loss).................... $0.04 $0.00 $ (0.43) $ (1.00) $ (0.08) $0.40 $0.48
Cash dividends...................... - - - - 0.12 0.08 0.05
Book value . . . . . ............... 3.25 3.54 3.18 3.57 4.88 4.66 3.90
Selected Operating Ratios(2):
Return (loss) on average assets..... .30% .01% (0.70)% (1.50)% (0.12)% .56% 0.60%
Return (loss) on average equity..... 6.19 .18 (13.62) (26.96) (2.00) 8.02 10.64
Average yield earned on
interest-earning assets 7.74 7.99 7.41 7.29 6.99 7.32 8.31
Average rate paid on
interest-bearing liabilities 5.42 5.61 5.42 5.73 4.36 3.97 4.89
Average interest rate spread(3)..... 2.32 2.09 1.99 1.56 2.63 3.33 3.42
Net yield on average
interest-earing assets(3) 2.51 2.23 2.16 1.78 2.89 3.61 3.51
Ratio of average interest-earning assets to
average interest-bearing liabilities 1.03 1.02 1.03 1.04 1.06 1.07 1.02
Ratio of average equity to average assets 4.94 4.83 5.13 5.55 6.22 7.06 5.60
Full-service offices at end of period 1 1 1 2 2 2 3
Asset Quality Data(2):
Non-performing assets(4)............ 5,234 5,233 2,499 6,619 9,264 3,798 2,952
Non-performing assets as a percent
of total assets (4)................. 3.74% 3.73% 1.79% 4.71% 6.02% 2.20% 2.12%
Allowances for loan losses as a
percentage of loans, net....... 1.05% 1.73% 1.36% 1.83% 1.78% 1.94% 1.06%
Allowance as a percentage of non-
performing assets.............. 22.29% 36.88% 61.34% 31.13% 21.32% 50.14% 43.76%
Allowance for loan losses as a percen-
tage of non-performing loans.... 73.5% 60.2% 154.7% 61.9% 31.0% 57.2% 54.8%
Capital Ratios(2):
Tangible............................ 4.90% 5.39% 4.74% 5.33% 5.84% 5.71% 6.9%
Core................................ 4.90% 5.39% 4.74% 5.33% 5.84% 5.71% 6.9%
Risk-based.......................... 10.27% 11.05% 9.92% 10.55% 11.97% 11.34% 11.5%
(Footnotes on following page)
14
- ---------------------
(1) The weighted average number of shares outstanding for the three month
period presented and the years ended December 31, 1996 and 1995 was
2,256,505. The weighted average number of shares outstanding for the
year ended December 31, 1994 was 2,210,957. 1,902,042 for the year
ended December 31, 1993 and 1,884,587 for the year ended December 31,
1992. Per share data has been adjusted to reflect three stock dividends
in December 1994, 1993 and 1992.
(2) Asset Quality Data and Capital Ratios are end of period ratios. With
the exception of end of period ratios, Selected Operating Ratios are
based on average monthly balances during the indicated periods and are
annualized where appropriate.
(3) Interest rate spread represents the difference between the weighted
average yield on interest-earning assets and the weighted average cost
of interest-bearing liabilities, and net yield represents net interest
income as a percent of average interest-earning assets.
(4) Non-performing assets consist of non-performing loans, troubled debt
restructurings and REO. Non-performing loans consist of nonaccrual
loans and accruing loans 90 days or more overdue, while REO consists of
real estate acquired through foreclosure, real estate acquired by
acceptance of a deed-in-lieu of foreclosure and in-substance
foreclosures.
RISK FACTORS
The purchase of Common Stock in the Offering involves certain
significant risks. In determining whether or not to make an investment in the
Common Stock, Shareholders and prospective investors should carefully consider
the matters set forth below, as well as the other information contained in this
Prospectus.
Operating Losses in Recent Years
The Company has experienced significant financial and operational
problems in recent years. The Company reported net income of $100,900 for the
three months ended March 31, 1997, as compared to net losses of $977,000,
$2,250,000, and $179,000 during the years ended December 31, 1996, 1995, and
1994, respectively. The losses were primarily due to high levels of
non-performing assets, as reflected in the substantial provisions for loan and
REO losses, net charge-offs and collection and carrying expenses of
non-performing assets during the periods. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations." The Company's
stockholders' equity decreased to $7.2 million or 5.13% of total assets at
December 31, 1996, from $8.1 million or 5.74 % of total assets at December 31,
1995. Book value per share of Common Stock declined from $3.60 at December 31,
1995, to $3.20 at December 31, 1996. As of March 31, 1997, stockholders' equity
and book value per share amounted to $7.3 million and $3.25 per share,
respectively.
15
Non-Performing Assets
The Company's non-performing assets amounted to $5.2 million or 3.53%
of total assets at March 31, 1997, as compared to $2.5 million or 1.79% of total
assets at December 31, 1996, $6.62 million or 4.72% of total assets at December
31, 1995, and $9.26 million or 6.02% of total assets at December 31, 1994. The
high levels of non-performing assets have had and will continue to have adverse
effects on the Company's operations, including decreased accrual of interest
income, increased provisions for loan losses, and increased operating expenses
as a result of the allocation of resources to the collection and work-out of
non-performing assets. On March 31, 1997, the Company reached agreement with a
borrower to accept a deed-in-lieu of foreclosure, which resulted in the property
being transferred to real estate owned at its net book value of $2,350,000. The
property consists of 44 unsold condominium units, of which 41 were being rented
at March 31, 1997. The Company is in the process of evaluating the units, which
are part of a 60 unit condominium complex in northeast Florida, and will begin
marketing the units in the second quarter of 1997. Until such time as the units
are sold, the Company expects to continue to rent the majority of the units, in
order to generate income from the property, with two or three held vacant for
sale at a given time.
The senior management team has been successful in working out
non-performing assets. There can be no assurance, however, that such success
will continue. The absence of continued progress in the reduction of
non-performing assets or changes in economic condition, or an increase in the
level of non-performing assets in the future will adversely affect earnings, the
returns on average assets and equity of the Company.
Management remains committed to the identification, collection and
work-out of non-performing assets. The real estate markets in Florida, along
with the local and national economy, will have a significant impact on the
Company's overall success in continuing to reduce its non-performing assets.
Regulatory Enforcement Actions
The Company is subject to extensive regulation, supervision and
examination by the OTS, the primary federal regulator, and by the FDIC, with
regard to the insurance of the Bank's deposit accounts. Such regulation and
supervision establish 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 Savings Associations
Insurance Fund ("SAIF"), administered by the FDIC, and depositors.
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 safety and soundness examinations. Although management and
the Board of Directors of the Federal Trust and the Bank believed that
significant action had been taken to correct operational deficiencies cited in
the Bank's 1992 safety and soundness 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
16
of 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. See "BUSINESS-Supervision." Failure to comply with the terms of the
Orders could result in further sanctions against Federal Trust or the Bank,
including but not limited to the assessment of civil money penalties. In the
1996 safety and soundness examinations of the Federal Trust and the Bank, OTS
found Federal Trust and the Bank to be in compliance with their respective
Orders. 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.
As a result of certain regulatory restrictions, the Bank is subject to
a limited growth restriction whereby the Bank cannot increase its assets in an
amount that would exceed net interest credited on deposit liabilities (or
earnings credited on share accounts) during a calendar quarter. Until the growth
restrictions are lifted the Bank cannot implement its growth strategy.
Management has been advised, however, that the OTS will consider
lifting the Bank's Order and growth restrictions when the ratio of classified
assets to capital is reduced below 100%. At March 31, 1997 the Bank's ratio of
classified assets to capital was 123%. At March 31, 1997, based upon the capital
that the Bank would receive if the Total Minimum Offering is sold, the ratio of
classified assets to capital would be below 100%. No assurances, however, can be
given that the OTS will in fact take action on the Bank's Order or the growth
restrictions. See "BUSINESS Supervision".
Adequacy of Allowance for Loan Losses
In originating loans, there is a substantial likelihood that credit
losses will occur. This risk of loss varies with, among other things, general
economic conditions, the type of loan being made, the creditworthiness and debt
servicing capacity of the borrower over the term of the loan and, in the case of
a collateralized loan, the value and marketability of the collateral securing
the loan. Management maintains an allowance for loan losses based on, among
other things, historical loan loss experience, known inherent risks in the loan
portfolio, adverse situations that may affect the borrower's ability to repay,
the estimated value of any underlying collateral and an evaluation of current
economic conditions. Provisions for loan losses are charged to operations to
bring the total allowance to a level considered by management to be adequate to
provide for estimated losses. Additional provision for loan losses may be
required should economic or other conditions change substantially in the future.
As of March 31, 1997, the Company's allowance for loan losses was $1.19
million, which represented 1.05% of net loans as compared to $1.53 million or
1.36% of net loans as of December 31, 1996. Although management believes that
the Bank's allowance for loan losses was adequate at December 31, 1996, and at
March 31, 1997, and further believes that it uses the best information available
to recognize losses on loans and to determine the fair value of REO, no
assurance can be given that future significant additions to the allowance for
loan losses or further reductions in the net carrying values may not be
necessary, especially if economic conditions or other factors differ
substantially from the assumptions used in making the initial determinations.
The provision for loan losses in the future will depend on, among other things,
the level of non-performing loans and market and economic conditions. The OTS
and the FDIC, as an integral part of their examination process, periodically
review the Company's allowances for possible loan losses and the net carrying
17
values of REO. Such agencies may require the Company to recognize additions to
the allowances or reductions in net carrying values based on their judgments
about information available to them at the time of examination.
Federal Home Loan Bank Bonds
The Company's investment in obligations of U.S. government agencies
consists of dual indexed bonds issued by the Federal Home Loan Bank ("FHLB"). At
March 31, 1997, the FHLB bonds had a market value of $14,868,078 and gross
unrealized pre-tax losses of $1,231,922. The FHLB bonds have a par value of
$16,100,000 and pay interest based on the difference between two indices. All of
the FHLB bonds at March 31, 1997, pay interest at the 10 year constant maturity
treasury ("CMT") 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 FHLB
bonds to partially offset its risk related to its portfolio of ARM loans.
Consequently, the FHLB bonds subject the Company to a certain degree of market
risk as the indices change with prevailing market rates. See "Business -
Investment Activities".
Dependence on Local Economy
The success of the Company is dependent, to a certain extent, upon the
general economic conditions in the geographic markets served by the Company.
Although the Company expects that economic conditions will continue to be
favorable in these markets, no assurance can be given that these economic
conditions will continue. Adverse changes in economic conditions in the
geographic markets that the Company serves would likely impair the Company's
ability to collect on loans and could otherwise have a material adverse effect
on the results of operations and financial condition of the Company. Examples of
potentially unfavorable changes in economic conditions which could affect the
Company's market areas include military base shutdowns and adverse weather
conditions resulting from natural causes, such as a hurricane.
Competition
Competition in the banking and financial services industry is intense.
In its primary market area, the Company competes with commercial banks, other
savings banks and savings and loan associations, credit unions, finance
companies, mutual funds, insurance companies, and brokerage and investment
banking firms operating locally and elsewhere. Many of these competitors have
substantially greater resources and lending limits than the Company and may
offer certain services that the Company does not or cannot provide. The
profitability of the Company depends upon its continued ability to compete
successfully in its market areas. See "BUSINESS - Competition."
Vulnerability to Changes in Interest Rates
The Company's net interest income, which is the difference between the
interest income received on its interest-earning assets, including loans and
investment securities, and the interest expense incurred in connection with its
interest-bearing liabilities, including deposits and borrowings, can be
significantly affected by changes in market interest rates. The Company actively
monitors its assets and liabilities in an effort to minimize the effects of
18
changes in interest rates, primarily by altering the mix and maturity of the
Company's loans, investments and funding sources. Rates of interest paid on
deposits are priced to be sufficiently competitive in its primary market area in
order to meet its asset/liability management objectives and requirements for
funds, but are typically not the highest rates available.
The Company's net interest income is also affected by its interest rate
sensitivity "gap," which 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 the amount of interest rate sensitive liabilities. A
gap is considered negative when the amount of interest rate sensitive
liabilities exceeds interest rate sensitive assets. During a prolonged period of
falling interest rates, a positive gap would reduce net interest income, while a
negative gap would tend to result in an increase in net interest income. During
a period of rising interest rates, a positive gap would tend to result in an
increase in net interest income while a negative gap would tend to affect net
interest income adversely. The Company has historically been dependent on
short-term certificates of deposits (i.e, certificates of deposits with
maturities of one year of less) which are more interest rate sensitive. As of
March 31, 1997, the amount of the Company's cumulative gap with respect to
assets maturing or repricing within one year was a negative $19.1 million, or a
negative 13.7% of total assets. Based upon its current cumulative gap, the
Company's results of operation would be adversely affected by a prolonged
increase in interest rates. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--Asset and Liability Management."
Dividends
Federal Trust suspended dividend payments on the Common Stock after the
fourth quarter of 1994. Due to its financial condition and recent results of
operations and regulatory restrictions on the payment of dividends imposed on
the Bank, which is Federal Trust's primary source of funds, management of
Federal Trust does not anticipate dividend payments on the Common Stock in the
foreseeable future. No assurances can be given as to when or if the payment of
dividends will be resumed or the amount of such dividends. For a discussion of
the requirements and limitations relating to Federal Trust's ability to pay
dividends to stockholders and the ability of the Bank to pay dividends to the
Company, see "MARKET FOR COMMON STOCK AND DIVIDENDS" .
Dilution
Because the Subscription Price is less than the per share book value of
the Common Stock, Shareholders will incur dilution in the book value of their
Common Stock upon completion of the Offering, regardless of whether they
exercise their Subscription Rights. In addition, Shareholders who do not
exercise their Subscription Rights will suffer dilution in their percentage of
voting interest in Federal Trust as a result of the voting rights acquired by
other investors in the Offering; however, voting rights per share will not
change, as all holders of Common Stock will continue to have one vote per share.
As of the Record Date, there were 2,256,505 shares of Common Stock outstanding.
Even if some current Shareholders exercise their Subscription Rights in full,
they may not be able to maintain their percentage voting interest since Federeal
Trust intends to issue up to 2,701,619 shares of Common Stock in the Offering.
19
For a tabular presentation of the actual book value of a share of Common Stock
at March 31, 1997, and the estimated pro forma book value of a share of Common
Stock based on certain assumptions, see "CAPITALIZATION."
Impact on Earnings per Share
The issuance of the 2,701,619 shares offered hereby may adversely
affect the Company's earnings per share until such time as the net proceeds of
the Offering are fully utilized to generate additional assets and deposits
through both internal and external means. See "USE OF PROCEEDS".
Major Shareholder
James T. Bell, the former director, Chief Executive Officer and
President of Federal Trust, together with his wife and children, own
approximately 23.9% of the issued and outstanding Common Stock of Federal Trust.
Mr. Bell has not stated his intentions with regard to exercising his
Subscription Rights. If he or his family does not exercise their Subscription
Rights, their beneficial ownership would be reduced to 16.6% if the Total
Minimum shares are sold and 10.8% if the Total Maximum shares are sold. If he or
his family does exercise their Subscription Rights, their combined beneficial
ownership would be 33.1% if the Total Minimum shares are sold and 21.6% if the
Total Maximm shares are sold. Mr. Bell has, however, indicated that he intends
to sell a portion of or all of his shares of Common Stock over the next few
months. Federal Trust has no knowledge as to whether Mr. Bell or his family will
in fact sell their stock. The sale of these shares during the Offering could
have a negative effect on the ability of Federal Trust to sell the Total Minimum
shares.
Right to Terminate the Offering
Federal Trust expressly reserves the right, in its sole discretion, at
any time prior to delivery of the shares of Common Stock offered hereby, to
terminate the Offering by giving notice thereof to the Escrow Agent and KBW and
making a public announcement thereof. If the Offering is so terminated or if the
Total Minimum Offering is not reached, all funds received from Shareholders and
other participants will be promptly refunded, with interest.
Anti-takeover Provisions
Certain provisions of the Articles of Incorporation and Bylaws of
Federal Trust could have the effect of discouraging non-negotiated takeover
attempts which certain stockholders might deem to be in their best interest and
making it more difficult for stockholders to remove members of its Board of
Directors and management. These provisions include restrictions on the removal
of directors (with or without cause) by shareholders, no cumulative voting, and
restrictions on calling a special meeting of shareholders. In addition, various
federal laws and regulations could affect the ability of a person, firm or
entity to acquire the Company or shares of its Common Stock. See "DESCRIPTION OF
CERTAIN PROVISIONS IN THE ARTICLES AND BYLAWS OF FEDERAL TRUST".
20
Limited Trading Market
Federal Trust's Common Stock is currently not listed on any stock
exchange. Prior to the Offering, there has been no active trading market for the
Common Stock. Federal Trust has applied to have the Common Stock listed on the
Nasdaq SmallCap Market, under the symbol"__________". No assurance can be given
that the requirements for such quotation can be satisfied. In the event a Nasdaq
listing is not received, Federal Trust anticipates (based on discussions with
KBW) that it will be able to secure at least two broker-dealers to match buy and
sell orders for the Common Stock. However, a public market having depth and
liquidity depends on the presence in the marketplace of a sufficient number of
buyers and sellers at any given time. There can be no assurance that a liquid
market for the Common Stock will develop. If an active trading market does
develop, there can be no assurance that such a trading market will continue.
Additionally, since the prices of securities generally fluctuate, there can be
no assurance that purchasers in this Offering will be able to sell the Common
Stock at or above the Subscription Price. Investors should consider the
potential illiquid and long-term nature of an investment in the Common Stock.
See "MARKET FOR COMMON STOCK".
Shares Eligible for Future Sale
Sales of Common Stock in the public market following this Offering
could adversely affect the market price of the Common Stock. Following this
Offering, approximately 2,239,928 shares of Common Stock held by current
shareholders, as well as all of the shares sold in this Offering (except for
shares purchased by officers and directors of the Company) will be eligible for
immediate sale without restriction in the public market. Federal Trust, its
executive officers and directors, and certain officers of the Bank owning 45,287
shares of Common Stock in the aggregate have agreed that, for a period of 180
days following The Offering, they will not offer, sell, grant any option to
purchase or otherwise dispose of any shares of Common Stock held by them or
securities held by them that are exchangeable for such stock, now or in the
future, without the prior written consent of KBW. Such shares also are subject
to the volume and other limitations of Rule 144 adopted under the Securities Act
of 1933 ("Securities Act"). See "SHARES ELIGIBLE FOR FUTURE SALE."
Potential Operational Restrictions Associated with Regulatory Oversight
The Company is subject to extensive government regulation and
oversight. Such regulation and supervision govern the activities in which an
institution can engage and is designed primarily to protect the federal deposit
insurance fund and depositors. Regulatory authorities have extensive discretion
in connection with their supervisory and enforcement activities, including the
imposition of restrictions on the operation of an institution, the
classification of assets by the institution and the determination of the
adequacy of an institution's allowance for loan losses. Such regulation often
has a material impact on the Bank's financial condition and results of
operations. See "Regulatory Enforcement Action," and "BUSINESS - Supervision".
During 1996, pursuant to the Deposit Insurance Funds Act of 1996 ("DIF
Act"), the Bank paid a one-time assessment of $716,498 to the FDIC to
recapitalize the SAIF. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
21
CONDITION AND RESULTS OF OPERATIONS -- Comparison of Operating Results for the
Years Ended December 31, 1996 and 1995." The U.S. Congress is expected to
consider legislation that may eliminate the thrift industry as a separate
industry. The DIF Act provides that the SAIF will be merged with the BIF on
January 1, 1999 but only if there are no thrift institutions in existence. The
DIF Act requires the Treasury Department to study the development of a common
charter for banks and thrifts and to submit a report of its findings to
Congress. The Company cannot predict what the attributes of such common charter
would be or whether any legislation will result from this study. If developed,
the common charter may not offer all the advantages that a federal savings
association now enjoys (e.g. unrestricted nationwide branching). Furthermore,
holding companies for institutions with the common charter may not have the same
advantages as a unitary savings and loan holding company now possesses (e.g.,
the absence of non-banking activities restrictions). If Congress fails to create
a common charter, or does not act otherwise to end the thrift industry's
separate existence, the merger of the SAIF and BIF contemplated by the DIF Act
would not likely occur. Although the SAIF currently meets its statutory reserve
ratios, there can be no assurance that it will continue to do so. The financial
burden of any future recapitalization would likely fall on a smaller assessment
base, potentially increasing the burden on individual institutions, including
the Bank.
USE OF PROCEEDS
Federal Trust intends to contribute at least 90% of the net proceeds of
the Total Minimum Offering (estimated to be approximately $1,575,000) to the
Bank retaining 10% of the net proceeds of the Offering for general corporate
purposes and miscellaneous operating expenses associated with operating as a
public company. Thereafter Federal Trust intends to contribute 75% of the net
proceeds raised in the Offering to the Bank, retaining 25% of the net proceeds
for general corporate purposes. The Bank will use such proceeds to increase its
regulatory capital and support future growth of the Bank, including development
of additional branches in the outlying communities in the greater Orlando area.
The net proceeds to be raised in the Offering depends on the number of
shares of Common Stock sold in the Offering, the portion of shares of Common
Stock sold in the Rights Offering, the Community Offering and the Syndicated
Community Offering and the amount of the actual expenses incurred in the
Offering, which may differ from the estimates thereof.
The following table shows estimated net proceeds based upon the sale of
the Total Minimum of 1,000,000 shares of Common Stock and the sale of the Total
Maximum of 2,701,619 shares of Common Stock in the Offering. In determining net
proceeds, the estimated expenses of the Offering have been subtracted from gross
proceeds. In estimating the expenses of the Offering, the following assumptions
have been utilized: (i) 15% of the shares of Common Stock will be sold to
Shareholders in the Rights Offering, of which 5% of the shares will be sold to
directors, officers and employees of the Company for which KBW will receive a
commission of 2% of the aggregate Subscription Price of such shares, excluding
the shares sold to directors, officers and employees; (ii) the remaining 85% of
shares of Common Stock will be sold in the Community Offering or Syndicated
Community Offering for which KBW will receive a commission of 7% of the
aggregate Subscription Price of such shares, excluding the shares sold to
directors, officers and employees of Federal Trust; and (iii) the estimated
expenses of the Offering, including the fees paid to KBW described above.
22
Issuance of the Issuance of the
Total Minimum Total Maximum
of 1,000,000 shares of 2,701,619 shares
------------------- -------------------
Gross Proceeds $2,000,000 $5,403,238
Less, Offering expenses (estimated) 250,000 500,000
------------ ------------
Total net proceeds $1,750,000 $4,903,238
========== ==========
Amount to be contributed to Bank $1,575,000 $3,752,428
========== ==========
Amount to be retained by Federal Trust $ 175,000 $1,150,810
========== ==========
CAPITALIZATION
The following table sets forth the consolidated capitalization of the Company as
of March 31, 1997, and as adjusted to give effect to the sale by Federal Trust
of 1,000,000 shares of Common Stock (Total Minimum) and 2,701,619 shares of
Common Stock (Total Maximum), offered at a price of $2.00 per share, net of fees
and commissions payable to KBW and other broker-dealers, and other estimated
Offering expenses, based on the assumptions set forth in "USE OF PROCEEDS".
As Adjusted As Adjusted
For Tota For Total
Actual Minimum Maximum
------ ------- -------
(Dollars in thousands)
Deposits $ 103,726 $ 103,726 $ 103,726
Advances from Federal Home Loan Bank 27,250 27,250 27,250
--------- --------- ---------
Total deposits and borrowed funds $ 130,976 $ 130,976 $ 130,976
========= ========= =========
Stockholders' equity:
Common Stock $0.01 par value, 5,000,000 shares
authorized 2,256,505 issued and outstanding
(3,256,505 shares based on Total Minimum Offering and
4,958,124 shares based on Total Maximum Offering)(1) $ 23 $ 33 $ 50
Additional paid-in capital 11,144 12,884 16,104
Retained earnings (3,125) (3,125) (3,125)
Treasury stock (16,577 shares of Common Stock at
cost at March 31, 1997) (77) (77) --
Unrealized loss on investment securities, net (204) (204) (204)
Unrealized loss on investment securities transferred
from available for sale to hold to maturity, net . (434) (434) (434)
Total stockholders' equity $ 7,327 $ 9,077 $ 12,391
========= ========= =========
Book value, per share . . . . . . . . . . . . . . . $ 3.25 $ 2.79 $ 2.90
========= ========= ---------
Subscription price as a percent
of book value, per share 61.54% 71.68% 80.00%
Actual Minimum Maximum
------ ------- -------
Bank Capital Ratios (2)
Tangible 4.90% 6.07% 8.22%
Core 4.90 6.07 8.22
Risk-based (March 31, 1997) 10.27 12.55 16.81
- ------------------------------
(Footnotes on following page)
23
(1) 4,958,124 shares outstanding includes 16,577 shares held as Treasury
Stock.
(2) Calculated in accordance with OTS regulations. Assumes that
approximately 90% of the net proceeds from the Total Minimum Offering
and 75% of the net proceeds from the Total Maximum Offering is
contributed to the capital of the Bank and is used to replace other
sources of funds, principally FHLB advances. Under OTS regulations, the
Bank is required to maintain Tangible Capital equal to 1.50% of
adjusted total assets, Core Capital equal to 3.00% of adjusted assets
and Risk-based Capital equal to 8% of risk-weighted assets.
- -----------------------------
DETERMINATION OF SUBSCRIPTION PRICE
Subscription Price
The Subscription Price of $ 2.00 per share, which is the uniform price
for all purchasers, was determined by Federal Trust's Board of Directors with
the assistance of RP Financial. Federal Trust believes that the Subscription
Price reflects the Company's objectives of achieving the maximum net proceeds
obtainable from the Offering while providing the current shareholders with an
opportunity to make an additional investment in Federal Trust and thus avoid or
minimize dilution of their ownership interest. In that regard, RP Financial
reviewed with management and the Board of Directors alternatives available to
Federal Trust for raising capital, the current liquidity characteristics of the
Common Stock, the regulatory capital requirements of Federal Trust and the Bank,
the business prospects of Federal Trust on a pro forma basis after giving effect
to the Offering, and the general condition of the securities markets at the time
of the meeting with the Board of Directors at which the Offering was approved.
Federal Trust has received s written statement from RP Financial, dated
July 1, 1997, stating that as of such date, in the opinion of RP Financial and
based upon and subject to the factors set forth in the statement, the terms of
the Offering, including the Subscription Price and the numbers of shares offered
in the Offering are fair to Federal Trust's current shareholders from a
financial point of view. RP Financial's statement was addressed to the Board of
Directors of Federal Trust and Federal Trust only, and does not constitute a
recommendation or advice to current shareholders of Federal Trust. RP Financial
expressed no opinion, and has not made any recommendation, to current
shareholders as to whether current shareholders should exercise their
Subscription Rights (See "Opinion of RP Financial").
In approving the Subscription Price, the Board of Directors considered
the written statement and oral advice provided by RP Financial and such
additional factors as the alternatives available to Federal Trust for raising
capital, the current liquidity characteristics of the Common Stock, the
regulatory capital requirements of Federal Trust and the Bank, the terms and
conditions of the supervisory Orders, the business prospects of Federal Trust on
a pro forma basis after giving effect to the Offering, and the general condition
of the securities markets at the time of the meeting with the Board of Directors
at which the Offering was approved. There can be no assurance, however, that
following the issuance of the Subscription Rights and of the Common Stock upon
exercise of the Subscription Rights, a current shareholder exercising
Subscription Rights will be able to sell shares purchased in the Offering at a
price equal to or greater than the Subscription Price.
24
Opinion of RP Financial
The Board of Directors of Federal Trust retained RP Financial in
December 1996 to provide certain financial advisory and valuation services to
Federal Trust in conjunction with the Offering, including the rendering of an
opinion with respect to the fairness of the terms of the Offering, including the
Subscription Price and the number of shares offered in the Offering, from a
financial point of view to the current shareholders. In requesting RP
Financial's advice and opinion, the Board of Directors of Federal Trust did not
give any special instructions to, or impose any limitations upon the scope of
the investigation which RP Financial might wish to conduct to enable it to give
its opinion. RP Financial was selected by Federal Trust to act as its financial
advisor because of RP Financial's expertise in the valuation of businesses and
their securities for a variety of purposes including its expertise in connection
with initial public offerings and secondary offerings including rights offerings
of savings and loans, savings banks, and savings and loan holding companies. RP
Financial stated that, to the best of its knowledge, RP Financial is independent
of Federal Trust, KBW and the other parties to the Offering.
On July 1, 1997, RP Financial rendered its opinion to the Board of
Directors of Federal Trust that, as of such date, the terms of the Offering,
including the Subscription Price and the number of shares offered pursuant to
the Offering, were fair to the current shareholder from a financial point of
view. The opinion was updated as of the date of this Prospectus. In connection
with its opinion dated the date of this Prospectus, RP Financial also confirmed
the appropriateness of its reliance on the analysis used to render its July 1,
1997 opinion, by performing procedures to confirm the appropriateness of such
analysis and by reviewing the assumptions on which such analysis were based and
the factors considered in connection therewith.
The full text of the opinion of RP Financial, which sets forth the
assumptions made, matters considered and limitations on the review undertaken,
is attached as Appendix A to this Prospectus and is incorporated herein by
reference. Current shareholders of Federal Trust are urged to read the opinion
in its entirety.
THE OPINION OF RP FINANCIAL IS DIRECTED TO THE BOARD OF DIRECTORS OF
FEDERAL TRUST AND DOES NOT CONSTITUTE A RECOMMENDATION TO ANY CURRENT
SHAREHOLDER OF FEDERAL TRUST AS TO WHETHER SUCH SHAREHOLDER SHOULD EXERCISE
HIS/HER SUBSCRIPTION RIGHTS OR ANY OTHER ACTION THAT SUCH SHAREHOLDER SHOULD
TAKE IN CONNECTION WITH THE OFFERING, OR OTHERWISE. IT IS FURTHER UNDERSTOOD
THAT THE OPINION OF RP FINANCIAL IS BASED ON MARKET CONDITIONS AND OTHER
CIRCUMSTANCES EXISTING ON THE DATE HEREOF.
The opinion states that RP Financial reviewed and analyzed the
following material in conjunction with its analysis: (1) the preliminary
Prospectus; (2) certain publicly available information concerning Federal Trust,
including annual reports (incorporating audited financial statements), Form
10-Ks and Proxy Statements for the years ended December 31, 1994, 1995, and
1996, and unaudited 10-Q reports for March 31, 1997; (3) certain other internal
and public financial information including, but not limited to, certain recent
unaudited internally and externally generated financial reports, analysis and
25
files through March 31, 1997, pertaining to the Company's (i) balance sheet
composition, trends, volume and market value, (ii) capitalization, (iii)
off-balance sheet assets, liabilities and contingencies, (iv) statements of
operations, (v) cash flows, (vi) delinquent, non-accrual and non-earning assets
and general valuation allowances, (vii) interest rate, credit and liquidity
risks, and (viii) taxable position; (4) the current budget and business plan of
the Company; (5) comparative analysis of Federal Trust relative to recent
publicly-available financial statements, operating results, and market
characteristics of the common stock of publicly-traded savings institutions,
including such institutions with financial, operating and market characteristics
which are relatively comparable to Federal Trust; (6) the terms and conditions
of the supervisory Orders for Federal Trust and the Bank; (7) the financial
terms of other rights offerings by savings institutions and savings institution
holding companies.
The opinion further states that in the course of its evaluation and
analysis, RP Financial conducted discussions with management of Federal Trust
regarding past and current business operations, financial condition, and future
prospects. RP Financial reviewed the Company's financial, operational and market
area characteristics compared to similar information for comparable savings
institutions, evaluated the potential for growth and profitability for the
Company in its market, specifically regarding competition by other banks,
thrifts, mortgage banking companies and other financial services companies,
economic projections in the local market area, the impact of the regulatory,
legislative and economic environments on operations and the public perception of
the thrift and banking industries, and the pro forma impact on the Company's
financial condition and operations of the Offering.
As set forth in the opinion, RP Financial relied, without independent
verification, on the accuracy and completeness of the information furnished to
RP Financial by Federal Trust, as well as publicly-available information
regarding other financial institutions and economic data. RP Financial relied
upon the management of the Company as to the reasonableness of the financial
forecasts (and the assumptions and bases therefor) provided to RP Financial and
assumed that such forecasts reflected the best currently available estimates and
judgments of such management and that such financial forecasts would be realized
in the amounts and in the time periods estimated by such management. Federal
Trust does not publicly disclose internal management forecasts of the type
provided to RP Financial in connection with its review, and such financial
forecasts were not prepared with a view towards public disclosure. The financial
forecasts were based upon numerous variables and assumptions which are
inherently uncertain, including without limitation factors related to general
economic and competitive conditions, as well as trends in asset quality.
Accordingly, actual results could vary significantly from those set forth in
such financial forecasts. RP Financial did not perform or obtain any independent
appraisals or evaluations of the assets and liabilities and potential and/or
contingent liabilities of the Company. Moreover, RP Financial expressed no
opinion on matters of a legal, accounting or tax nature or the ability of the
offering to be consummated as set forth in the Prospectus.
In connection with rendering its opinion dated July 1, 1997, and
updated as of the date of this Prospectus, RP Financial performed a variety of
analysis, which are summarized below. The preparation of a fairness opinion is a
complex process involving subjective judgments and is not necessarily
suspectable to partial analysis or summary description. RP Financial stated that
its analysis must be considered as a whole and that selecting portions of such
analysis and of the factors considered by RP Financial without considering all
26
such analysis and factors could create an incomplete view of the process
underlying RP Financial's opinion. In its analysis, RP Financial made numerous
assumptions with respect to industry performance, business and economic
conditions, applicable laws and regulations, and other matters, many of which
are beyond the control of Federal Trust. Any estimates contained in RP
Financial's analyses are not necessarily indicative of future results or values,
which may be significantly more or less favorable than such estimates. No
company or transaction utilized in RP Financial's analyses was identical to
Federal Trust of the Offering. None of the analyses performed by RP Financial
was assigned a greater significance by RP Financial than any other.
The following is a summary of the financial analyses performed by RP
Financial in connection with providing its opinion of July 1, 1997, and does not
purport to be a complete description of all factors that were considered .
(a) Transaction Summary. RP Financial summarized the terms of the
Offering. including the Subscription Price, the range of number of shares to be
offered in the Offering, and the Subscription Rights issued to current
shareholders, including certain limitations imposed on the exercise of such
Subscription Rights. RP Financial also summarized the estimated earnings
improvements anticipated as a result of reinvestment of the net proceeds of the
Offering, the pro forma capitalization levels resulting from the Offering, and
the pricing ratios indicated by the Subscription Price relative to the pro forma
book value, earnings, and assets of Federal Trust.
(b) Comparable Transactions Approach. In this analysis, RP Financial
conducted an evaluation of the financial terms of recent rights offerings
completed by publicly-traded savings institutions, including the financial
condition, operating results and other characteristics of the savings
institution and the terms of the offerings. Specifically, RP Financial stated
that it evaluated six rights offering transactions completed by publicly-traded
savings institutions since December 1992 and December 1995 (the most recent
comparable rights offering transactions) with relatively comparable pre-offering
capital levels and non-performing assets levels (the "Comparable Transactions").
In conjunction with its analysis, RP Financial considered the pricing multiples
relative to pro forma tangible book value per share, and the dilution of
ownership and tangible book value per share implied by the terms of the
Comparable Transactions. RP Financial did not consider the pricing multiples
relative to pro forma earnings per share because most such multiples indicated
by the Comparable Transactions were considered not meaningful by virtue of
minimal or negative pro forma earnings. The average and median pro forma
price-to-tangible book value multiples indicated by the Comparable Transactions
were 78% and 80%, respectively, versus a pro forma price-to-tangible book value
multiple of 81% indicated by the Subscription Price at the maximum of the
Offering. The average and median dilution in tangible book value per share
indicated by the Comparable Transactions was 33% and 28%, respectively, versus a
pro forma dilution in tangible book value per share of 24% indicated by the
Subscription Price at the maximum of the Offering. The average and median
dilution in ownership (assuming that current shareholders did not exercise their
Subscription Rights in the respective Offerings) indicated by the Comparable
Transactions was 68% and 75%, respectively, versus a pro forma dilution in
ownership (assuming that current shareholders did not exercise their
Subscription Rights in the Offering) of 54% indicated by the number of shares
offered at the maximum of the Offering. RP Financial stated that the terms of
the Comparable Transactions, specifically the higher pro forma price-to-tangible
book value multiple indicated by the Subscription Price relative to the average
27
and median of the Comparable Transactions and the lower level of dilution
indicated by the Offering relative to tangible book value per share and
ownership, supported its fairness conclusions.
(c) Market Value Approach. In this analysis, RP Financial analyzed the
current stock prices of publicly-traded savings institutions and savings
institution holding companies that RP Financial considered comparable to Federal
Trust. RP Financial considered only publicly-traded institutions with total
assets less than $750 million, return on average assets (core earnings) of 0.5%
or less, equity-to-assets of 8.5% or lower, and non-performing assets to assets
ratios of 1.5% or greater. A total of seven public companies met these criteria
(the "Public Company Peers"). The Public Company Peers reported average and
median total assets of $280 million and $263 million, respectively, various
assets of $139 for Federal Trust; reported average and median equity-to assets
ratios of 6.6% and 6.5%, respectively, versus 5.3% for Federal Trust; reported
average and median and non-performing assets to assets ratios of 2.2% and 1.7%,
respectively, versus 3.5% for Federal Trust; and reported average and median
market capitalization of $11.5 million and $18.4 million, respectively, versus
$9.9 million on a pro forma basis for Federal Trust, assuming a market value
based on the Subscription Price and pro forma shares outstanding at the maximum
of the Offering. As of June 20, 1997, the average and median price to tangible
book value ratios indicated by the trading prices of the Public Company Peers
common stock were 92% and 91%, respectively, versus a pro forma price to
tangible book value ratio of 81% indicated by the Subscription Price at the
maximum of the Offering. Based on its comparative analysis, RP Financial
concluded that Federal Trust's pro forma stock price warranted a discount
relative to the Public Company Peers by virtue of Federal Trust's higher level
of non-performing assets, lower pro forma market capitalization (which suggests
lower liquidity in the Common Stock on a pro forms basis relative to the Public
Company Peers which are all publicly-traded institutions), and smaller asset
size which implies lower resources than the Public Company Peers. RP Financial
considered an analysis of the price-to- earnings multiples of the Public Company
Peers versus the pro forma price-to-earnings multiple of Federal Trust indicated
by the Subscription Price. However, RP Financial discarded an earnings based
analysis because Federal Trust's pro forma earnings multiple was not meaningful
and was not subject to comparison. Based on the Subscription Price at that
maximum of the Offering, Federal Trust's pro forma price-to-tangible book value
Multiple of 81% is at a valuation discount of 12% and 11%, relative to the
average and median of the Public Company Peers, respectively. RP Financial
considered these discounts to be reasonable relative to the comparative
financial analysis discussed above and in light of some level of new issue
discount warranted for a securities offering. RP Financial concluded that the
conclusions reached in the market value approach supported its fairness
conclusion.
(d) Discounted Cash Flow Approach. In this approach, RP Financial
sought to prepare two discounted cash flow ("DCF") analyses. The first DCF
analysis would quantify the present value benefit of Federal Trust's current
business plan (incorporating potential dividends and a terminal value) to
current shareholders, without the impact of the Offering (the "Stand-Alone
DCF"). The second DCF analysis would quantify the present value benefit of
Federal Trust's pro forma business plan to current shareholders, incorporating
the impact of the Offering and post- recapitalization growth strategies (the
"Post-Recapitalization DCF"). After considering the potential regulatory
enforcement actions facing Federal Trust in the absence of the Offering, and the
potential resulting market value loss to current shareholders (of such
enforcement action), and the historical losses Federal Trust has experienced due
28
to non-performing assets, RP Financial stated that future cash flows could not
reasonably be estimated under a Stand-Alone DCF scenario. Accordingly, the DCF
approach was not used in the final fairness analysis.
In addition to these financial analyses, RP Financial considered
several other considerations in its fairness conclusions. Such other financial
considerations included the greater market capitalization of Federal Trust on a
pro forma basis, suggesting the potential for greater liquidity for the current
shareholders; the stronger pro forma equity-to-assets ratio resulting from the
Offering, which should provide enhanced future potential to leverage the balance
to increase earnings per share for the current shareholders; and the potential
negative implications to the interests of the current shareholders in the event
the Offering is not completed and the OTS initiates regulatory enforcement
options.
On the basis of its analyses and other considerations, RP Financial
concluded that the terms of the Offerings, included the Subscription Price and
number of shares to be offered in the Offering, are fair to the current
shareholders of Federal Trust from a financial point of view. As described
above, RP Financial's written statement and presentation to the Board of
Directors of Federal Trust was one of many factors taken into consideration by
the Board of Directors of Federal Trust in making its determination to approve
the Offering. Although the foregoing summary describes the material components
of the analyses presented by RP Financial to the Board of Directors of Federal
Trust, it does not purport to be a complete description of all the analyses
performed by RP Financial and is qualified by reference to the written opinion
of RP Financial set forth as Appendix A hereto, which investors are urged to
read in its entirety.
Pursuant to a letter dated January 27, 1997 (the "RP Financial
Engagement Letter"), RP Financial estimates that it will receive from Federal
Trust total fees of $75,000 for its financial advisory services, of which
$35,000 has been paid to date, plus reimbursement of certain out-of-pocket
expenses. In addition, Federal Trust has agreed to indemnify RP Financial
against certain liabilities, including liabilities under the federal securities
laws.
MARKET FOR COMMON STOCK AND DIVIDENDS
Market for Common Stock
There has been a limited market for Federal Trust's Common Stock, which
is not listed on any exchange or Nasdaq. Federal Trust has applied for listing
of its Common Stock on the Nasdaq Small Cap Market upon completion of the
Offering. No assurance can be given, however, that the application for such
listing will be approved, or that an active trading market for the Common Stock
will develop or be sustained subsequent to the Offering. Furthermore, because
the Nasdaq Stock Market has filed proposed rule changes with the Security and
Exchange Commission that strengthens the listing requirements for the Nasdaq
Small Cap Market, there can be no assurance that if Federal Trust meets the
Nasdaq Small Cap Market listing requirements that it will be able to maintain
its listing. KBW has advised Federal Trust that it intends to use its best
efforts to make a market in the Common Stock, but has no obligation to do so.
Making a market involves maintaining bid and ask quotations and being able, as
principal, to effect transactions in reasonable quantities at those quoted
prices, subject to various securities laws and other regulatory requirements.
29
The development of a liquid public market depends on the existence of willing
buyers and sellers and is not within the control of Federal Trust or any market
maker. There can be no assurance that an active and liquid trading market for
the Common Stock will develop or that, if developed, it will continue.
Furthermore, there is no assurance that persons purchasing shares in the
Offering will be able to sell them at or above the Subscription Price.
As of March 31, 1997 there were 2,239,928 shares of Common Stock
outstanding, which were held by 434 holders of record. The number of holders of
record does not reflect the number of persons who hold their stock in nominee or
"street" name through various brokerage firms or other entities.
Dividends
Each share of Common Stock shares equally in dividends, which are
payable when and as declared by Federal Trust's Board of Directors out of funds
legally available therefor. Under Florida law, Federal Trust is not limited to
the amount or number of dividends that can be paid or declared.
Federal Trust suspended dividend payments on the Common Stock in the
fourth quarter of 1994. Due to its financial condition, its recent results of
operations and regulatory restrictions on the payment of dividends imposed on
the Bank, Federal Trust does not anticipate the resumption of dividend payments
on the Common Stock in the foreseeable future.
Federal Trust's ability to pay dividends on the Common Stock will
depend on the receipt of dividends from the Bank. For a description of
limitations on the ability of the Bank to pay dividends to Federal Trust, see
"REGULATION AND SUPERVISION - Payment of Dividends."
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
The Company's primary business consists of attracting deposits from the
general public and using these funds, together with FHLB advances, to fund bulk
purchases of one-to-four family residential mortgage loans, the origination of
one-to-four family residential mortgage loans, residential consumer loans,
multi-family loans and, to a lesser extent, commercial real estate related SBA
loans, and consumer loans. Profitability of the Company depends largely on net
interest income, which is the difference between interest income generated from
interest-earning assets (i.e., deposits and borrowings) and interest paid on
interest-bearing liabilities. Net interest income is affected by the relative
amounts of interest-earning assets and interest-bearing liabilities, and the
interest rates earned and paid on these balances. Net interest income is
dependent upon the Company's interest rate spread, which is the difference
between the average yield earned on its interest-earning assets and the average
rate paid on its interest-bearing liabilities. When interest-earning assets
approximate or exceed interest-bearing liabilities, any positive interest rate
spread will generate interest income. The interest rate spread is impacted by
interest rates, deposit flows and loan demand. To a lesser extent, profitability
30
is affected by such factors as the level of other income and expenses, the
provision for loan losses and the effective tax rate. Other income consists
primarily of customer service fees, loan servicing fees, and gains on the sale
of mortgage loans. Other expenses consist of compensation and benefits,
occupancy-related expenses, deposit insurance premiums paid to the FDIC and
other operating expenses.
The net earnings of the Company were adversely affected by the rise in
interest rates in 1994, 1995, and 1996, due to its negative GAP position, as its
liabilities have repriced sooner than (and in greater amounts than) its assets.
As a result, the 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 Company continues to concentrate on increasing its portfolio of
ARMs, as well as 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 Company is
able to further reduce its negative GAP, the Company's earnings would be
adversely affected.
In addition, loss reserves have been increased 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 Company's control could result in material
additions to the loss reserves in future periods if the level of non-performing
assets increases. Management does anticipate additions to the loss reserves in
future periods as part of the normal course of business, as the Company's
assets, which consist primarily of loans, are continually evaluated and the loss
allowances are adjusted to reflect the potential losses in the portfolio on an
ongoing basis.
Financial Condition
The Company's total assets increased slightly to $140.0 million as of
March 31, 1997, from $139.6 million as of December 31, 1996. Loans receivable
increased $667,000 from $112.5 million to $113.2 million as a result of the
purchase and origination of loans.
Total deposits decreased by $2.4 million to $103.7 million as of March
31, 1997, from $106.1 million as of December 31, 1996. The decrease in deposits
was replaced by advances from the FHLB which increased $2.4 million.
Total shareholders' equity increased slightly to $7.3 million as of
March 31, 1997, from $7.2 million as of December 31, 1996. This increase
primarily reflects the Company's earnings for the three months ended March 31,
1997.
Results of Operation for the Three Months Ended March 31, 1997 and 1996
The Company reported net income for the three months ended March 31,
1997, of $100,889 or $.04 per share, as compared to net income of $3,473 or $.00
per share for the same period in 1996. The increase in earnings is due to
improved net interest income, and the reduction of other expenses, offset
partially by decreased other income.
Interest Income and Expense. Net interest income increased by $85,585
for the three months ended March 31, 1997. Interest income decreased by $7,763
31
to $2,550,059 for the three months ended March 31, 1997, from $2,557,822 for the
same period in 1996. Interest income on loans decreased to $2,335,042 in 1997
from $2,353,343 in 1996, primarily as a result of a decrease in the average
amount of loans outstanding and a decrease in the average yield on loans. During
the quarter ended March 31, 1997, the Company sold a participation interest in a
loan originated in March 1996 in conjunction with the sale of a previously
foreclosed property, which resulted in the realization of $122,007 in interest
income that had been deferred since the origination of the loan in accordance
with the accounting standards which require the income on the loan and profit on
the sale be deferred until such time as the loan balance is reduced to a certaun
level, in this case 85%, when the buyer does not make a cash downpayment.
Interest income on the securities portfolio increased by $15,026 for the three
months ended March 31, 1997, over the same period in 1996, as a result of an
increase in the average yield on securities held. Other interest and dividends
decreased $4,488 during the same three month period in 1997 from 1996 as a
result of a decrease in the average volume of other interest-bearing assets.
Management expects the rates earned on the portfolio to fluctuate with general
market conditions.
Interest expense decreased by $93,348 to $1,723,526 during the three
month period ended March 31, 1997, from $1,816,874 for the same period in 1996
primarily due to a decrease in the amount of, and the average rate paid on
deposits. Interest on deposits decreased by $135,185 to $1,384,785 in 1997 from
$1,519,970 in 1996 as a result of decreased deposits and a decrease in the
average rate paid, and interest on FHLB advances increased to $338,741 in 1997
from $296,904 in 1996 as a result of the increase in the average amount of FHLB
advances outstanding and an increase in the rates paid on such advances.
Management expects to continue to use FHLB advances as a liability management
tool.
Provisions for Loan Losses. A provision for loan losses is generally
charged to operations to bring the total allowance for loan losses to a level
deemed appropriate by management. 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. During the
first quarter of 1997, management did not make a provision for loan losses based
on its evaluation of the loan portfolio, however a provision for $30,000 was
made for losses on REO, and $3,000 was transferred from the provision for loan
losses to the provision for losses on real estate owned. The Company did not
make a provision for loan losses during the same period in 1996; however,
$18,356 was transferred to the provision for losses on REO. There were net
charge-offs of $337,269 during the three month-period ended March 31, 1997, as
compared to net charge offs of $112,398 during the three month-period ended
March 31, 1996. Total non-performing loans at March 31, 1997, were $1,622,027
compared to $3,215,300 at March 31, 1996. The allowance for loan losses at March
31, 1997, was $1,192,734 or 73.5% of non-performing loans and 1.05% of net loans
outstanding.
Total Other Income. Other income decreased from $189,087 for the
three-month period ended March 31, 1996, to $104,868 for the same period in
1997. The decrease in other income was primarily due to a decrease of $86,577 in
32
gains on the sale of assets, offset partially by an increase in rental income of
$8,129 on a repossessed rental property. During the quarter ended March 31,
1997, the Company sold a participation interest in a loan originated in March
1996 in connection with the sale of a previously foreclosed property, which
resulted in the realization of $30,993 in profit that had been deferred since
the origination of the loan in accordance with the accounting standards which
require the income on the loan and profit on the sale be deferred until such
time as the loan balance is reduced to a certain level. Rental income increased
as a result of receipt of rental income on a repossessed property. Gains on the
sale of assets decreased as a result of fewer loan sales and sales of REO.
Total Other Expense. Other expense decreased to $757,212 for the
three-month period ended March 31, 1997, from $942,965 for the same period in
1996. The decrease in 1997 was primarily the result of the elimination of the
staff and separate offices of Federal Trust at the end of the second quarter of
1996 and decreases in the amount of non-performing loans. Compensation decreased
by $18,358 as a result of reductions in staff. Professional fees decreased by
$57,161, primarily as a result of decreased legal costs associated with
non-performing loans. Other miscellaneous expense decreased by $51,675 due to
reduced costs associated with repossessed assets. Occupancy and equipment
expense decreased by $37,658 to $131,813 in 1997 due to the subletting of
Federal Trust's offices and the termination of the lease on the remote drive-in
facility that had been previously used by the Bank. Data processing expense
decreased by $2,463 due to the decreased number of accounts, and FDIC Insurance
expense decreased by $18,438 as a result of the reduction in the premium rate
charged by the FDIC. Management expects professional fees and other
miscellaneous expenses to decrease further as non-performing loans are resolved
and repossessed assets are disposed.
Results of Operations for the Years Ended December 31, 1996 and 1995
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. The loss
in 1996 was attributable in part to the one-time SAIF special assessment of
$716,498. The special assessment, (which was based upon the Company's deposits
as of March 31, 1995) was charged against third quarter earnings and paid in
November 1996. A special assessment was charged by the FDIC to all SAIF insured
institutions in order to fully capitalize the SAIF to its required reserve level
of 1.25 percent of insured deposits. In addition, the Company incurred a
one-time charge of $64,921 to sell the remote drive-in branch facility and a
one-time charge to write off $114,646 in leasehold improvements at the offices
which Federal Trust previously occupied. The decrease in 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. Net interest income increased by $316,025
for the year ended December 31, 1996. Interest income was $9,936,960 in 1996
compared to $10,609,387 in 1995. Interest income on loans increased to
$9,039,426 in 1996 from $9,001,646 in 1995. 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. Interest
income on investment securities decreased to $675,279 in 1996 from $1,289,025 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.
33
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.
Interest expense decreased during 1996 to $7,037,882 compared to
$8,026,334 in 1995 primarily due to a decrease in interest rates and the average
amount of FHLB advances and deposit accounts outstanding. Interest on FHLB
advances and other borrowings decreased to $1,277,492 in 1996 from $1,812,655 in
1995 due to a decrease in the average amount of FHLB advances outstanding during
the year and a decrease in interest rates.
Provisions for Loan Losses. 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
provision for loan losses for 1996 was $279,596, compared to $779,415 in 1995.
Net charge-offs totaled $1,223,240 for 1996, compared to $707,222 for 1995.
Total non-performing loans at December 31, 1996, were $991,000, compared to
$3,326,000 at December 31, 1995. The allowance for loan losses at December 31,
1996, was $1,533,003 or 154.70% of non-performing loans and 1.36% of net loans
receivable compared to $2,060,568 or 61.93% of non-performing loans and 1.83% of
net loans receivable at December, 31, 1995.
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 services 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 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. 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
expenses 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 $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 Federal Trust
which eliminated all of its full-time 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 Federal Trust's corporate offices to
Properties Corporation, both of which were no longer necessary as a result of
the corporate restructuring at Federal Trust. Legal and professional expense
decreased due to the reduction in the amount and number of non-performing loans.
REO expenses and losses on the sale of REO were reduced as the result of a
reduction in the amount of repossessed properties during 1996. General and
administrative expenses were reduced primarily as a result of the elimination of
Federal Trust's staff and corporate offices. The increase in deposit insurance
premiums was due to the one-time SAIF special assessment. The loss on the sale
of fixed assets was the result of the leasehold improvements written-off by the
34
Company in conjunction with the sale of the drive-in branch facility, and the
write-off of the leasehold improvements at the former corporate office of
Federal Trust, which it no longer uses. The decrease in loss on the sale of
investments securities was a result of the large loss incurred in 1995 on the
sale of a $7,250,000 block of bonds.
Comparison of the Years Ended December 31, 1995 and 1994
General. The Company had a net loss for 1995 of $2,249,701 or $1.00 per
share, compared to a net loss of $179,173 or $.08 per share in 1994. The
decrease in net earnings for 1995 was due to a decrease in net interest income,
an increased provision for loan losses, and an increase in other expenses,
including a loss on the sale of investment securities.
Interest Income and Expense. Net interest income decreased by
$1,483,051 for the year ended December 31, 1995. Interest income was $10,609,387
in 1995 compared to $9,846,673 in 1994. Interest income on loans increased to
$9,001,646 in 1995 from $7,731,077 in 1994. The increase in interest income on
loans in 1995 as compared to 1994 was primarily attributable to increased
interest rates on the loans. Interest income on investment securities decreased
to $1,289,085 in 1995 from $1,753,625 in 1994 as a result of a decrease in the
interest rates earned on the securities and a decrease in the average balance of
investment securities held by the Company, which was attributable to the sale of
$7,250,000, par value, of investment securities in early December, 1995. Other
interest and dividends decreased $43,315 during 1995 as a result of a decrease
in the average balance of other interest-bearing assets.
Interest expense increased during 1995 to $8,026,334 compared to
$5,780,569 in 1994, primarily due to an increase in interest rates and the
average amount of deposit accounts outstanding, which was only partially offset
by a decrease in the FHLB advances outstanding. Interest on FHLB advances and
other borrowings decreased to $1,812,655 in 1995 from $1,978,219 in 1994 due to
a decrease in the amount of FHLB advances outstanding during the year, however
this was partially offset by an increase in interest rates.
Provisions for Loan Losses. The provision for loan losses for 1995 was
$779,415 compared to $531,483 in 1994. Net charge-offs totaled $707,222 for 1995
compared to $409,329 for 1994. Total non-performing loans at December 31, 1995
were $3,326,000 compared to $6,373,000 at December 31, 1994. The allowance for
loan losses at December 31, 1995, was $2,060,568 or 61.93% of non-performing
loans and 1.83% of net loans receivable compared to $1,974,950 or 31.0% of
non-performing loans and 1.78% of net loans receivable at December, 31, 1994.
Total Other Income. Other income increased to $505,424 for the year
ended December 31, 1995 from $483,277 for the same period in 1994. The increase
in other income during 1995 resulted from a $85,820 increase in rent income
attributable to a repossessed office building, a gain on the sale of repossessed
real estate of $43,056, and an increase of $12,398 in other miscellaneous income
consisting mainly of increased other loan income, which was offset partially by
a decrease in fees and service charges of $6,084, and a decrease in gains on
loan sales of $113,043.
Total Other Expense. Other expense increased to $5,790,591 in 1995,
compared to $4,238,071 in 1994. The increase of $1,552,520 in 1995 was primarily
the result of a loss on the sale of investment securities of $942,500, increased
35
legal and professional expenses of $264,636, increased REO expense of $260,892,
increased occupancy and equipment expense of $127,999, a $99,548 increase in
deposit insurance premiums, an increase of $75,935 in losses on the sale of real
estate owned, and an increase of $33,523 in other expense. The Company incurred
a loss of $942,500 on the sale of $7,250,000 in FHLB bonds in December, 1995.
The increases in legal and professional expenses were the result of the legal
costs incurred on non-performing loans and foreclosures on loans secured by real
estate. The increases in REO expense and losses on the sale of REO, were the
result of the increased levels of repossessed properties at the Bank during 1995
and the expenses incurred in owning the properties and the losses taken on sales
of some of the properties. Occupancy and equipment increased primarily due to
the additional space rented by the Company during 1995 as compared to 1994.
Deposit insurance premiums increased as a result of the increase in the amount
of deposits during 1995 and the increased assessment rate on the deposits. Other
expense increased primarily as a result of the write-down of an asset and
miscellaneous expenses incurred in the operation of rental properties.
Data processing expense decreased by $9,730 in 1995 as a result of the
renegotiation of the contract with the service bureau in 1994, and the closure
of the Bank's drive-in branch on June 1, 1995, which was located down the street
from the Company's headquarters. General and administrative expenses decreased
by $56,804, stationary, printing and supplies expense decreased by $12,757, and
telephone expense decreased by $4,390, postage expense decreased by $1,234,
compared to 1994. These expenses decreased as a result of the closure of the
drive-in branch facility and efforts by the Company to reduce expenses.
Advertising expense increased by $15,304 in 1995, as the Company expanded its
marketing efforts in order to increase the amount of deposits from its local
market.
Asset/Liability Management
The Company's operating results depend primarily on net interest
income, which is the difference between interest income on interest-earning
assets, primarily single-family residential loans, and interest expense on
interest-bearing liabilities, consisting of deposits, FHLB advances, and other
borrowings. Net interest income is determined by (i) the difference between
yields earned on interest-earning assets and rates paid on interest-bearing
liabilities ("interest rate spread") and (ii) the relative amounts of
interest-earning assets and interest-bearing liabilities. The interest rate
spread is affected by regulatory, economic and competitive factors that
influence interest rates, loan demand and deposit flows.
The Company's one year GAP position at March 31, 1997, the most recent
report available, was -14%, as compared to -22.8% at December 31, 1995. The
primary reason for the decrease in the one-year GAP has been the ability to
extend the maturities of its liabilities and the sale of a portion of the
dual-indexed bonds from the Company's investment portfolio during the fourth
quarters of 1995 and 1996. In addition, the Company sold fixed rate loans in the
first quarter of 1997 which it replaced with ARMs as part of its efforts to
continue improving its GAP position. As interest rates declined slightly in
1996, the net interest spread improved, but as interest rates have risen in
1997, the net interest spread has decreased. Should interest rates continue to
rise, the Company's net interest income could be adversely affected as a result
of its negative GAP; however, should interest rates begin to decline, the
Company's net interest income should improve as the rates paid on its
liabilities will fall faster than the rates earned on its assets.
36
In order to minimize the potential for adverse effects of material and
prolonged increases in interest rates on the Company's results of operations,
the Company has an Interest Rate Risk Management Policy, which is reviewed and
approved by the Board of Directors on an annual basis. The policy provides: (i)
for management to manage the assets and liabilities to protect earnings over the
interest rate cycle; (ii) the maximum allowable percentage changes in net
interest income and net portfolio value over different interest rate scenarios;
(iii) for the Asset/Liability Management Committee ("ALCO"); and (iv) for
quarterly reporting to the Board of Directors. The ALCO monitors the Company's
interest-rate risk position and manages the asset and liability mix in order to
better match the maturities and repricing terms of the Company's
interest-earning assets and interest-bearing liabilities. Since the latter half
of 1993 the ALCO has focused primarily on (i) emphasizing the origination and
purchase of single-family residential ARMs; (ii) extending the term of deposits
and borrowings; and (iii) maintaining an adequate amount of liquid assets (cash
and interest-earning assets). As a result, the Company has continued to
originate and purchase ARMs throughout this period and has extended deposits and
borrowings to longer terms whenever possible through its pricing practices.
While the Company has had success in these efforts, it has not been able to
achieve a level of success great enough to completely insulate its net interest
rate spread during periods of rising interest rates. Until such time as the
Company is able to further reduce its negative GAP position, it will be subject
to a declining net interest spread when interest rates are rising. When interest
rates began to decline in the first half of 1996, the Company increased its
efforts to lengthen liabilities and shall continue to do so whenever prudent.
The following table sets forth the interest rate sensitivity of the
Company's interest-earning assets and interest-bearing liabilities as of March
31, 1997, using the interest rate sensitivity gap ratio, based on the
information and assumptions set forth in the notes below.
[Table Follows On Next Page]
37
From From From From From Greater
1 to 3 3 to 6 6 to 12 1 to 3 3 to 5 than 5
Months Months Months Years Years Year
------ ------ ------ ----- ----- ----
(Dollars in thousands)
Total Loans(1) $ 8,198 $ 10,851 $ 66,263 $ 15,006 $ 2,847 $ 8,493
Other interest-bearing assets(2) 2,493 - - 7 16,100 --
------- ----------- ---------- ---------- ------- ---------
Total interest-earning assets 10,691 10,851 66,263 15,013 18,947 8,493
Non-interest bearing demand deposits(3) 84 75 126 260 70 154
Interest bearing demand deposits(3) 59 53 89 184 49 109
Money Market Demand Deposits(3) 2,339 1,582 1,797 797 379 345
Savings deposits(3) 82 79 147 467 305 729
Time deposits 26,981 - 46,032 18,561 2,193 0
FHLB advances and other 9,850 21 17,540 143 116 513
------ --------- ---------- -------- ------ ------
Total interest-bearing liabilities 39,395 1,810 65,731 20,412 3,112 1,850
------ ------ ------ ------ ------ -----
Interest rate sensitivity gap $(28,704) $9,041 $532 $(5,399) $15,835 $6,643
========= ====== ==== ======== ======== ======
Cumulative interest rate sensitivity gap $(28,704) $(19,663) $(19,131) $(24,530) $(8,695) $(2,052)
========= ========= ========= ========= ======== ======
Cumulative interest rate sensitivity gap
as a percentage of total assets (20.61)% (4.22)% (13.74)% (17.61)% (6.24)% (1.47)%
========= ======= ======== ======== ======= =====
(1) Mortgage loans and mortgage-backed securities are net of the
undisbursed portion of loans due borrowers. Adjustable and
floating-rate loans are included in the period in which interest rates
are next scheduled to adjust, and fixed-rate loans are included in the
periods in which they are scheduled to be repaid.
(2) Consists of interest-bearing deposits, FHLB stock and investment
securities.
(3) Decay rates for deposits, based on a study by the OTS:
Decay Rates From From From From From Greater
1 to 3 3 to 6 6 to 12 1 to 3 3 to 5 than 5
Months Months Months Years Years 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
38
Average Balances and Net Interest Income Analysis
Yield Earned and Rates Paid. The following tables set forth certain information
relating to the categories of the Company's interest-earning assets and
interest-bearing liabilities for the periods indicated. All yield and rate
information is calculated on an annualized basis. Average balances are derived
from monthly balances. Net interest margin is net interest income divided by
average interest-earning assets. Non-accrual loans are included in asset
balances for the appropriate periods, whereas recognition of interest on such
loans is discontinued and any remaining accrued interest margins appearing in
the following tables have been calculated on a pre-tax basis.
Three Months Ended March 31,
1997 1996
------------------------------------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
(Dollars in thousands)
Interest-earning assets:
Loans(1) $113,289 $ 2,335 8.24% $112,492 $ 2,353 8.37%
Investment securities 15,070 167 4.43 15,904 153 3.85
Other interest-earning assets 3,347 48 5.74 4,770 52 4.36
--------- ------- ---- --------- ------- ----
Total interest-earning assets 131,706 2,550 7.74 133,166 2,558 7.68
Non-interest earning assets 3,905 5,569
---------- ---------
Total assets $135,611 $138,735
======= ========
Interest -bearing liabilities:
Non-interest bearing demand deposits $208 - - $ 255 - -
Interest bearing demand deposits 8,276 79 3.82 7,173 63 3.51
Savings deposits 1,377 9 2.61 1,832 12 2.61
Time Deposits 94,614 1,298 5.49 100,102 1,445 5.77
------ ----- ---- ------- ----- ----
Total deposit accounts 104,475 1,385 5.31 109,362 1,520 5.56
FHLB advances & other borrowings 22,810 339 5.93 20,700 297 5.74
------ --- ---- ------ --- ----
Total interest-bearing liabilities 127,285 1,724 5.42 130,067 1,817 5.59
Non-interest bearing liabilities 1,798 1,969
Retained earnings and stockholder's equity 6,528 6,704
----------- ------------
Total liabilities & retained earnings $135,611 $ 138,735
========== =========
Net interest income $ 826 $ 741
======= =======
Interest rate spread(3) 2.32% 2.09%
===== =====
Net interest margin(4) 2.51% 2.23%
===== =====
Ratio of average interest-earning assets to average
interest -bearing liabilities 1.03% 1.02%
===== =====
(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 divided by average
interest-earning assets.
39
Years Ended December 31
-----------------------
1996 1995 1994
---- ---- ----
Average Average Average
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ---- ------- -------------
(Dollars in thousands)
Interest-earning assets:
Loans (1) $112,288 $ 9,040 8.05% $115,608 $ 9,001 7.79% $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 3.67 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 dem
and deposits $ 239 -- -- $ 286 -- -- $ 836 -- --
Interest-bearing demand deposits 7,483 266 3.55 7,301 259 3.55 7,793 268 3.44
Savings deposits 1,641 43 2.62 2,975 92 3.09 6,227 212 3.40
Time deposits 97,042 5,451 5.62 99,716 5,862 5.88 77,333 3,322 4.30
------ ----- ---- ------ ----- ---- ------ ----- ----
Total deposit accounts 106,405 5,760 5.41 110,278 6,213 5.63 92,189 3,802 4.12
FHLB advances &
other borrowings 23,529 1,277 5.43 29,725 1,813 6.10 40,526 1,978 4.88
------ ----- ---- ------ ----- ---- ------ ----- ----
Total interest-bearing liabilities 129,934 7,037 5.42 140,003 8,026 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 income $ 2,900 $ 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%
==== ==== ====
- ----------------------------------------
(footnotes on following page)
40
(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 by average
interest-earning assets.
- ----------------------------
Rate/Volume Analysis: The following table sets forth certain information
regarding changes in interest income and interest 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
(i) change in rate (change in rate multiplied by prior volume, (ii) changes in
volume multiplied by prior rate and (iii) changes in rate-volume (change in rate
multiplied by change in volume).
Three Months Ended Year Ended December 31, 1996
March 31, 1997 vs. 1995
vs. 1996 Increase (Decrease) Due to
---------------------------------- -----------------------------------
Rate/ Rate/
Rate Volume Volume Total Rate Volume Volume Total
---- ------ ------ ----- ---- ------ ------ -----
(In thousands)
Interest-earning assets:
Loans(1) $ (146) $ 17 $ 111 $ (18) $ 315 $ (285) $ (19) $ 38
Investment securities 23 (8) (1) (14) (284) (423) 93 (614)
Other interest-earning assets 17 (15) (6) (4) (92) (19) 15 (96)
------- ------- ------- ------- ------- ------- ------- -------
Total interest-earning assets (106) (6) 104 (8) (61) (700) 89 (672)
Interest -bearing liabilities:
Non-interest bearing
demand deposit $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ --
Interest bearing demand deposits 1 10 -- 11 5 7 (3) 9
Savings deposits -- 3 -- 3 -- (35) -- (35)
Time Deposits (65) (79) 2 (142) (265) (190) 28 (427)
Total deposit accounts (64) (72) 2 (134) (260) (218) 25 (453)
FHLB advances &
other borrowings 9 30 2 41 (151) (368) (16) (535)
------- ------- ------- ------- ------- ------- ------- -------
Total interest-bearing
liabilities (55) (42) 4 (93) (411) (586) 9 (988)
------- ------- ------- ------- ------- ------- ------- -------
Net change in net interest income
before provision for loan losses $ (51) $ 36 $ 100 $ 85 $ 350 $ (114) $ 80 $ 316
======= ======= ======= ======= ======= ======= ======= =======
(1) Includes non-accrual loans.
Year Ended December 31, 1995
vs. 1994
Increase (Decrease) Due to
----------------------------------
Rate/
Rate Volume Volume Total
---- ------ ------ -----
(In thousands)
Interest-earning assets:
Loans(1) $ 761 $ 484 $ 48 $ 1,293
Investment securities (403) (81) 19 (465)
Other interest-earning assets 24 (56) (4) (35)
------- ------- ------- -------
Total interest-earning assets 383 347 63 793
Interest -bearing liabilities:
Non-interest bearing
demand deposit $ -- $ -- $ -- $ --
Interest bearing demand deposits 19 (17) (1) 1
Savings deposits (51) (112) 27 (136)
Time Deposits 1,433 874 249 2,556
Total deposit accounts 1,401 745 275 2,421
FHLB advances &
other borrowings 470 (516) (125) (171)
------- ------- ------- -------
Total interest-bearing
liabilities 1,871 229 150 2,250
------- ------- ------- -------
Net change in net interest income
before provision for loan losses $(1,488) $ 118 $ 87 $(1,457)
======= ======= ======= =======
- -------
(1) Includes non-accrual loans.
41
Liquidity and Capital Resources
General. Financial institutions must ensure that sufficient funds are
available to meet deposit withdrawals, loan commitments, investment needs and
expenses. Control of the Company's cash flow requires the anticipation of
deposit flows and loan payments. The primary sources of funds are deposit
accounts, FHLB advances and principal and interest payments on loans.
The Company requires funds in the short term to finance ongoing
operating expenses, pay liquidating deposits, purchase temporary investments in
securities and invest in loans. Short-term liquidity requirements are funded
through FHLB advances, the sale of temporary investments, deposit growth and
loan principal payments. The Company 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. Management has no plans to
significantly change long-term funding requirements. Long-term liquidity
requirements are funded with proceeds from maturing loans, the sale of loans,
the sale of investments in securities and deposits and the sale of real estate.
OTS regulations require the Bank 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
currently 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, management seeks to maintain its liquid assets
at comfortable levels above the minimum requirements imposed by its regulators.
At March 31, 1997, the Company's average liquidity was 9.50%.
During the three-month period ended March 31, 1997, the Company used
funds primarily from principal collected on loans, $4,408,212; proceeds from
FHLB advances, $2,450,000; proceeds from the sale of real estate owned,
$219,772; proceeds from loan sales, $699,248; advance payments by borrowers,
$332,847; and cash from operating activities, $294,957; to fund the origination
and purchase of loans, $8,163,721; decreases in net deposits, $2,392,859; and
the purchase of FHLB Stock $174,300. As of March 31, 1997, there was $27,250,000
outstanding FHLB advances. The Company's total borrowing capacity with the FHLB
of Atlanta is currently $35,000,000.
At March 31, 1997, loans-in-process, or closed loans scheduled to be
funded over a future period of time, totaled $1,407,473. Loans committed, but
not closed, totaled $4,253,667 and available lines of credit totaled $172,453.
During the three-month period ended March 31, 1997, the Company acquired $6.6
million net in primarily residential mortgage loans.
The Company expects its current central Florida office facility to
generate sufficient deposits to provide liquidity for expected loan originations
and other investments. The Asset/Liability Management Committee meets regularly
and, in part, reviews liquidity levels to ensure that funds are available as
needed.
At March 31, 1997, certificates of deposit scheduled to mature by March
31, 1998, or sooner totaled $73.2 million. Management believes that the Company
can adjust the rates offered for certificates of deposit to retain deposits in a
changing interest rate environment.
42
At March 31. 1997, the Bank's capital totaled $7.3 million, or 5.2% of
total assets.
Impact of Inflation and Changing Prices
The consolidated 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 the
Company are monetary in nature. As a result, interest rates have a more
significant impact on the Company's performance than the effects of general
levels of inflation. Interest rates do not necessarily move in the same
direction or in the same magnitude as the prices of goods and services, since
such prices are affected by inflation to a larger extent than interest rates.
Impact of Accounting Requirements
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, de-recognizes
financial assets when control has been surrendered, and de-recognizes
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. In December 1996, the FASB amended
SFAS 125 to delay the effective date of certain provisions of the standard to
transfers occuring after December 31, 1997. The Company adopted SFAS 125 as
amended on January 1, 1997, and does not anticipate a material impact on its
operations or financial position from the implementation of SFAS 125, as
amended.
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, 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 adopted SFAS 128 as of January 1, 1997
and, therefore, did not incorporate the disclosure requirements of this standard
in its December 31, 1996, consolidated financial statements. The Company does
not anticipate a material impact on its operations or financial position from
its implementation during the fiscal year ending December 31, 1997.
43
BUSINESS
The Company
General. Federal Trust is a Florida corporation which was organized in
February 1989 as a unitary savings and loan holding company. Federal Trust
currently operates solely through its wholly-owned subsidiary Federal Trust
Bank, a federally-chartered stock savings bank. The address for Federal Trust is
1211 Orange Avenue, Winter Park, Florida 32789 and the telephone number is (407)
645-1201. At March 31, 1997, the Company had total consolidated assets of $140.0
million and stockholders' equity of $ 7.3 million.
Throughout the first five years of its existence the Company focused on
a wholesale thrift strategy by purchasing loans and engaging in real estate
development and related activities, such as mortgage brokerage, commercial
construction and office building management operations. During 1990 and 1991,
the Company emphasized the origination of larger commercial real estate loans,
land acquisition and development loans and commercial construction loans some of
which were outside its market area. The Company relied heavily on wholesale
deposits and Federal Home Loan Bank ("FHLB") advances to fund loans. The Company
grew rapidly between 1989 and 1992. This rapid growth resulted primarily from
the acquisition of the assets and liabilities of the First Federal of Seminole
Savings and Loan Association from the Resolution Trust Corporation, in April
1992, which added $78.0 million in loans and $120.2 million in deposits. From
December 31, 1989 to December 31, 1993, the Company's total assets grew from
$24.3 million to $146.9 million. During this same period, the Company posted
increases in net income, which rose from a loss of $310,000 in 1989 (its first
full year of operations) to $776,000 in 1993.
The Company's initial strategy to attract deposits was to utilize
wholesale funds, i.e., certificates of deposit obtained through the CD Network.
This business plan was implemented to avoid overhead expenses associated with
branch facilities, which are traditionally used to generate deposits. Wholesale
deposits, however, are generally considered to be a more volatile source of
funds. At the time the CD Network program was started, interest rates paid on
wholesale funds were lower than interest rates being paid on local deposits. At
December 31, 1993, deposits totaled $78.8 million, of which $26.1 million or
33.1% were obtained through the CD Network. Beginning in 1993, however, interest
rates on wholesale funds began to increase, resulting in a higher cost of funds
to the Company. At the same time the Company had made the decision to become a
more retail oriented financial institution focussing its attention on generating
local deposits. As of March 31, 1997, deposits totaled $103.7 million, of which
$3.0 million or 2.9% were obtained through the CD Network.
Since 1993, the Company has undertaken measures to significantly
restructure the Company. These measures include strengthening management by
hiring executives with extensive banking experience for the positions of CEO,
CFO and CLO. Several other senior and mid-level positions have been restructured
to better utilize staff experience. The Company established a Special Asset
Department to handle the disposition and resolution of non-performing assets.
The Company developed stricter lending policies and procedures, and improved the
internal loan review and classification process. In addition, the Company has
implemented a series of cost cutting moves that include staff reductions and
44
operational streamlining with specific emphasis in the areas of occupancy, data
processing, and servicing costs while maintaining focus on providing high
quality customer service. The final restructuring of the Company was completed
in May 1997, when the Board of Directors of the Bank was elected by the
Shareholders as the Board of Directors of Federal Trust, further emphasizing
Federal Trust's commitment to focus all of its attention and resources on making
the Bank a community oriented financial institution in order that the Company
can reach its full valuation and maximize shareholder value.
The Company's current operating strategy focuses on banking strategies
which include bulk loan/asset purchases, loan origination, and core deposit
generation in its local community. While the Company originates residential real
estate loans, the practice of the Company is to purchase $2.0 million to $10
million dollars in loan packages which are primarily seasoned one-year ARMs.
Each loan package is reviewed to determine if the loans comply with the
Company's Loan Underwriting Policy. Variable rate, short-term loans and
adjustable rate loans are offered to help manage interest rate risk. The Company
has been successsful in its business strategy in making the shift from reliance
on wholesale funds to attracting funds from its local market. The Company offers
a number of deposit products such as regular checking, statement savings
account, money market account and its new "Advantage" checking account which
provides for free checks, unlimited checkwriting, no per check charge, ATM card
availability, free cashiers checks, among other features. The Company is
currently working on a new business account and an Advantage Plus account.
In order to further expand its deposit base and control the Company's
interest-rate spread, the senior management team is exploring cost effective
market penetration opportunities such as the acquisition of or starting of a new
branch facility in one of the outlying communities in the greater Orlando market
area. The ability to accomplish this strategy will be subject to the lifting of
the current growth restrictions by the OTS. The OTS will also consider factors
such as earnings, capital, management and Company Reinvestment Activities as
part of the approval process.
Supervision
The Company is subject to extensive regulation, supervision and
examination by the OTS, its primary federal regulator, and by the FDIC with
regard to the insurance of deposit accounts. 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 deposit insurance funds and
depositors.
The first significant supervisory concerns regarding the Bank's
operation and underwriting policy were cited by the OTS in the December 1992
examination. 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.
45
In the April, 1994 examination, the OTS cited Federal Trust and the
Bank with certain deficiencies, many of which stemmed from transactions and
loans which occurred or were made prior to 1993. Management of Federal Trust and
the Bank consented to the issuance of individual Cease and Desist Orders,
without admitting or denying that grounds for such Orders existed. The Bank's
Order superseded the 1993 Supervisory Agreement with the OTS.
Under Federal Trust's Order, Federal Trust: (i) cannot request
dividends from the Bank without written permission from the OTS; (ii) must
reimburse the Bank for its expenses; and (iii) must develop a Management
Services Agreement with the Bank which provides for the reimbursement for
employees who work for both the Bank and Federal Trust. The Board must report to
the OTS, on a quarterly basis, Federal Trust's compliance with the Order.
The Bank's Order provides for the Board of Directors to, among other
items: (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 pursuant to procedures that 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 owed by a
person affiliated with the Bank; (ix) seek a Management Services Agreement for
work performed for Federal Trust 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 Federal Trust without the consent
of the OTS; and (xiii) refrain from purchasing additional dual indexed bonds.
The Orders require Federal Trust 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 internal control systems and operating procedures
of financial institutions, including compliance with internal policies and
procedures to ensure that the Bank was in compliance with its Order.
The most recent OTS examinations of Federal Trust and the Bank were
completed in September, 1996. The examination of the Bank included a review and
evaluation of capital, asset quality, management, earnings, and
liquidity-asset/liability management. While the examination concluded that there
had been modest improvement in the overall condition of the Bank, and that the
Bank met the FDICIA definition of a well-capitalized institution, Federal Trust
and the Bank needed to establish a plan for raising additional capital due to
the level of classified assets. The OTS noted that while classified assets had
declined 37.0% from the prior examination, classified assets still represented
6.3% of total assets and continued to have an adverse effect on earnings and
capital.
46
The examination did not disclose any violations of the Bank's Order, law or
regulation. The Board of Directors of Federal Trust and the Bank authorized
management to file written appeals regarding the respective supervisory ratings
and to request that the Bank's Order be lifted in whole or in part.
On December 20, 1996, the OTS Regional Director advised Federal Trust
that the OTS had decided to upgrade its supervisory rating. As for the Bank, the
OTS Regional Director noted that there was an overall improvement in the Bank's
operations including underwriting procedures, documentation, disposition of
problem assets, significant reduction in the dependency on wholesale funds and a
continued reduction in operating expenses. As a result, the OTS reduced the
number of provisions in the Bank's Order from 27 to 23.
Since the issuance of the 1993 Supervisory Agreement, the overall
management of the Bank has been strengthened with the hiring of James V.
Suskiewich as the CEO/President in January 1993, the addition of a new CFO,
Aubrey H. Wright, Jr., in June 1993, the reorganization of the Loan Department
and the establishment of improved underwriting systems, coupled with the
addition of Louis E. Laubscher as the new CLO/Senior Problem Asset Officer in
March, 1995. This transition carried over to Federal Trust in June 1996, when
James Suskiewich was named President and CEO of Federal Trust.
The Board of Directors and management of the Company believe that the
necessary corrective measures are being taken to ensure that the Company is
being operated prudently and that the level of classified assets are being
carefully monitored and managed in order to provide for the steady reduction of
classified and non-performing assets. The Board of Directors of the Company is
committed to taking the appropriate steps to have the respective Orders lifted
as soon as possible and to assist the management in its efforts to making the
Company a more traditional financial institution with consistent core earnings.
Under the growth limitations that accompany the Orders, the Company
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
expects that the interest income of the Company will continue to be limited, so
long as the current growth limitations remain in place. Management, however,
does not believe that Orders, or the current growth limitations, will have a
material impact on the financial condition of the Company.
Primary Market Area
The Company is located in Winter Park, a city of 24,000 residents,
located approximately seven 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 1.4 million, with the majority of the
population in Orange and Seminole counties. The Company's primary market area is
Northeast Orange County and Southwest Seminole County, although its customer
base comes from the four county area. Although best known as a tourist
47
destination, with approximately 20 million visitors a year, the area has become
a center for industries such as electro-optics and lasers, computer simulated
training, computer networking and data management. In addition, motion picture
production, and distribution make the local economy more diverse each year.
Orlando is home to the Orlando Magic, one of the newer NBA franchises and is
also home to the University of Central Florida with an enrollment of 25,000, one
of the fastest growing schools in the state university system, as well as
Valencia Community College and Seminole Community College whose combined
enrollment exceeds 80,000. Winter Park is also home to Rollins College, the
oldest college in Florida founded in 1885. According to The Orlando Sentinel
newspaper, the greater metropolitan Orlando area is projected to be one of the
fastest growing areas in the United States through the year 2000.
Competition
The Company 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
savings institutions and commercial bank holding companies. 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 Company 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
savings institutions, commercial banks, bank holding companies, mortgage
bankers, insurance companies and real estate investment trusts.
In addition to competition from other savings institutions, the Company
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 70% of the bank deposits. In
1980, the four largest controlled less than 33% of the deposits.
Geographic deregulation has also had a material impact on the banking
industry. Recent legislation in Florida and on the national level will remove
most of the final barriers to interstate banking. Under Florida Law, bank
holding companies are permitted to acquire existing banks across state lines. As
of June 1, 1997, a bank holding company may now consolidate its interstate
subsidiary banks into branches and merge with a bank in another state, depending
upon state laws.
See "REGULATION AND SUPERVISION - Interstate Branching".
48
Lending Activities
General. The Company's primary lending activity is the acquisition and,
to a more limited extent, the origination of conventional loans for the purchase
or construction of residential real estate, 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
Company's loans are made to homeowners on the security of single-family
dwellings. The Company has also, to a lesser extent, made commercial real estate
and consumer loans. The Company also makes SBA loans secured by real estate.
Loan Portfolio Composition. Single-family residential loans comprise
the largest group of loans in the Company's loan portfolio, amounting to $100.6
million or 87.8% of the total loan portfolio as of March 31, 1997, of which
approximately 98.4% are first mortgage loans and includes $2.5 million in loans
for the construction of single-family homes and $900,000 which are either
insured by the Federal Housing Administration ("FHA") or partially guaranteed by
the Department of Veterans Administration ("VA"). The percentage of the
Company'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 and land loans, amounted to
$11.9 million or 10.4% of the total loan portfolio as of March 31, 1997.
Commercial real estate loans consist of $11.0 million of loans secured by other
non-residential property and $900,000 of loans secured by undeveloped land as of
March 31, 1997. The percentage of the Company's loan portfolio consisting of
such loans has, in the past five years, ranged from 19.5% of the total loan
portfolio, in 1990, to 9.8% of the total loan portfolio in 1996. As of March 31,
1997, consumer and other loans, consisting of installment loans and savings
account loans, amounted to $153,000 or 0.1% of the total loan portfolio.
[Intentionally Left Blank]
49
The following table sets forth information concerning the Bank's loan
portfolio by type at the dates indicated.
At March 31, At December 31,
---------------- --------------------------------------------------------
1997 1996 1995 1994
---------------- ----------------- -------------- ---------------
% of % of % of % of
Amount Total Amount Total Amount Total Amount Total
------ ----- ------ ----- ------ ----- ------ -----
(Dollars in thousands)
Mortgage loans:
Commercial $ 11,931 10.54% $ 11,295 10.04% 13,112 11.61% 14,675 13.20%
Residential 98,074 86.63% 97,718 86.82% 97,613 86.46% 88,984 80.03%
Residential construction
conventional 2,547 2.25 % 3,795 3.37 % 1,667 1.48 % 1,342 1.2%
----- ---- ----- ---- ----- ---- ----- -----
Total mortgage loans 112,552 99.42 % 112,808 100.23 % 112,392 99.55 % 105,001 94.44%
Commercial loans 1,239 1.09 % 1,349 1.20 % 1,443 1.28 % 891 0.80 %
Consumer loans 153 0.13 % 154 0.14 % 180 0.16 % 503 0.45 %
Lines of credit 711 0.63 % 686 0.60 % 1,258 1.11 % 2,385 2.15 %
In substance foreclosure -- 0.00 % -- 0.00 % -- -- 3,592 3.23 %
------- ------ ------- ------ ------- ------ ------- ------
Total loans receivable 114,655 101.27 % 114,997 102.17 % 115,273 102.10 % 112,372 101.07 %
Net premium on mortgage
loans purchased 1,202 1.06 % 1,155 1.03 % 987 0.87 % 1,460 1.31 %
Deduct:
Unearned discounts &
loan origination fees 42 0.04 % 170 0.15 % 104 0.09 % 149 0.13 %
Undisbursed portion of loans 1,408 1.24 % 1,902 1.69 % 1,190 1.05 % 525 0.47 %
Allowance for loan losses 1,193 1.05 % 1,533 1.36 % 2,060 1.83 % 1,975 1.78 %
----- ---- ----- ---- ----- ---- ----- ----
Loans receivable, net $113,214 100.00 % $112,547 100.00 % $112,906 100.00 % $111,183 100.00 %
======== ====== ======== ====== ======== ====== ======== ======
50
The following table sets forth as of March 31, 1997, loans by scheduled
due date for the periods indicated. Loans maturing after one year are further
distinguished between fixed and adjustable interest rates.
Within 1-5 After
1 year years 5 years Total
------ ----- ------- -----
(In thousands)
Mortgage loans:
Permanent $ 6,665 $ 6,145 $ 96,202 $ 109,012
Construction 3,795 - - 3,795
------- --------- ---------- ----------
Total mortgage loans 10,460 6,145 96,202 112,807
Consumer loans 148 6 - 154
Commercial loans 632 602 116 1,350
Lines of credit 540 146 - 686
------------ ------------- -------------- ------------
Total loans receivable $ 11,780 $ 6,889 $ 96,318 $ 114,997
============== ============ ========= =========
Loans maturing after one year:
Fixed interest rates $ 3,860 $ 18,103
Adjustable interest rates 3,039 78,215
--------- ----------
Total $ 6,899 $ 98,318
========= ==========
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 due to prepayments. In addition, due-on-sale
clauses on loans generally give the Company 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 March 31, 1997, the
Company had $ 3.5 million in construction loans, all of which mature in one year
or less. Thirteen percent (13%) of the construction loans have fixed rates and
87% have adjustable rates.
51
Purchase, Origination, and Sale of Loans. 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 Company's real estate mortgage
loan origination activities will be affected by changes in the real estate
development and construction industries.
The Company's residential real estate loan volume has been
primarily purchased since 1991. The Company generally purchases loan packages of
$2.0 million to $10.0 million of single family residential mortgages which are
primarily seasoned one-year ARM loans. Approximately 75% of the single family
residential mortgages in the Company's loan portfolio are secured by properties
located in Florida. While the Company prefers to purchase loan packages
comprised of Florida real estate, because of pricing and the limited number of
Florida loan packages that are available, the Company also purchases seasoned
loan packages outside of Florida, generally consisting of loans in Georgia,
Ohio, South Carolina and Virginia. The loan packages undergo the same
underwriting standards as are applied to loans which the Company originates.
The Company generally originates loans on real estate located
in its primary lending area of Central Florida. Residential mortgage loan
originations by the Company are attributable to depositors, other existing
customers, advertising and referrals from real estate brokers and developers.
The Company has authority within regulatory limitations to originate loans
secured by real estate throughout the United States and has exercised this
authority in the past on a limited basis. The Company'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 Company has engaged in the sale of whole loans and
participations.
The Company utilizes the sale of fixed rate loans and
purchases of ARM loans to improve its interest rate sensitivity and to ensure
its future interest margin against adverse economic conditions created by rising
interest rates. Sale of fixed rate loans can also provide liquidity and profits
under certain market conditions.
Commercial real estate loan originations have been made
recently on a limited basis through walk-in customers, and referrals. All loan
applications are evaluated by staff to ensure compliance with underwriting
standards. See "Lending Activities - Loan Portfolio Composition - Loan
Underwriting Policies."
[Table Follows On Next Page]
52
The following table sets forth for the Company total loans originated,
purchased, sold and repaid during the periods indicated.
Three Months
Ended March 31, Year Ended December 31,
-------------------- ---------------------------------------------------
1997 1996 1995 1994 1993 1992
-----------------------------------------------------------------------------
(In thousands)
Originations:
Real Estate Loans:
Loans on existing property $ 1,474 3,655 $ 3,354 $ 3,739 $ 5,600 4,586
Construction loans 100 621 186 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
-------- -------- -------- -------- -------- --------
Total loans originated 1,574 5,454 3,761 5,561 9,504 10,112
Purchases: 6,590 25,082 29,005 36,913 22,880 77,988
Total loans originated
& purchased 8,164 30,536 32,766 42,474 32,384 88,100
Sales and principal reductions
Loans sold (689) (7,761) (2,704) (4,356) (30,084) (11,992)
Principal on loan reductions (5,368) (24,490) (23,380) (19,829) (29,392) (31,884)
-------- -------- -------- -------- -------- --------
Total loans sold
& principal reductions (6,057) (31,251) (26,084) (24,185) (59,476) (43,876)
-------- -------- -------- -------- --------
Real estate acquired in settlement
of loans (2,350) (861) (3,780) (2,629) -- --
Loans acquired in settlement of
real estate sold -- 1,300 -- -- -- --
Increase (decrease) in loans
receivable (before net items) $ (243) $ (276) $ 2,909 $ 15,660 $ (27,092) $ 44,224
======== ======== ======== ======== ======== ========
53
Loan Underwriting. Lending activities are subject to underwriting
standards and loan origination procedures prescribed by the Board of Directors
and 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. The Company's lending policy for real estate loans generally
requires that collateral be appraised by an independent, outside appraiser
approved by the Board of Directors.
Loans are approved at various management levels up to and including the
Bank's Board of Directors, 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 loan 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 Loan Committee or Board of Directors.
While the Company has always had underwriting standards and loan policies
for its lending programs, the management team has established an internal and an
external loan review process to ensure that the underwriting standards and loan
policies are being followed.
General Lending Policies. The policy of the Company for real estate loans
is 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 disbursements are made for items such as real estate taxes
and property insurance.
The Company is permitted to lend up to 100% of the appraised value of the
real property securing a mortgage loan. However, if the amount of a
conventional, residential loan (including a construction loan 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 Company will originate
single-family residential mortgage loans with up to a 95% loan-to-value ratio if
the required private mortgage insurance is obtained. Loans over 95% loan to
value ratio are limited to 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 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 Company
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.
54
The maximum amount which the Company could have loaned to one borrower and
the borrower's related entities as of March 31, 1997, was approximately $1.0
million. The Company currently has two loan relationships in excess of this
amount. See "REGULATION AND SUPERVISION - Regulation of the Bank."
Federal regulations also permit the Company to invest, in the aggregate,
up to four times its regulatory capital in loans secured by non-residential or
commercial real estate. As of March 31, 1997, the Company was allowed to invest
an aggregate amount up to $28.9 million in non-residential or commercial real
estate loans. As of March 31, 1997, loans secured by non-residential or
commercial real estate totaled $11.9 million.
Interest rates charged on loans are affected principally by competitive
factors, the demand for such loans and the supply of funds available for lending
purposes. These factors are, in turn, affected by general economic conditions,
monetary policies of the federal government, including the Federal Reserve
Board, legislative tax policies and government budgetary matters.
Residential Loans. The Company historically has been and continues to be
primarily a purchaser and, to a lesser extent, an originator of one-to-four
family residential real estate loans secured by properties located in the
southeastern United States. The Company generally purchases loan packages of
$2.0 million to 10.0 million of single-family residential mortgages comprised of
seasoned one-year ARM loans. The loan packages undergo the same underwriting
standards as are applied to loans which the Company originates. The Company
currently originates fixed-rate residential mortgage loans and ARMS loans for
terms of up to 30 years. As of March 31, 1997, $100.6 million or 87.8% of the
Company's total loan portfolio consisted of one-to-four family residential real
estate loans. As of such date, approximately $83.9 million or 82.7% of these
loans were ARM loans and $17.5 million or 17.3% of the residential loans were
fixed-rate.
The residential ARM loans currently being offered, have interest rates
that are fixed for a period of one, three or five 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 Company'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 Company may offer ARM loans 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,
portfolio needs, and the Company's interest rate risk management goals. While
the Company usually offers an initial rate on ARM loans below a fully indexed
rate, the loan is always underwritten based on the 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.
ARMs 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.
55
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 Company's
consent. It is the Company's policy to enforce "Due on Sale" provisions.
Construction Loans. The Company has and continues to offer adjustable and
fixed-rate residential construction loans to owners wishing to construct their
primary residence and to selected builders/developers to build one-to-four
family dwellings in the Company's primary market area and neighboring
communities. As of March 31, 1997, construction lending amounted to $ 3.5
million or 3.1% often total loan portfolio. Loans to builders/developers are for
homes that are pre-sold or are constructed on a speculative basis ("Spec
Loans"). Loans to builder 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 the
permanent loan on the property ("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 financial capacity of the builder, the
builder experience and credit history of the builder, as well as, present market
conditions are reviewed when considering speculative loans. As of March 31,
1997, the Company had four Spec Loans for an aggregate of $462,000. The largest
loan to one builder was $180,000. All of the Spec Loans are performing in
accordance with their original terms.
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 Company personnel and/or authorized independent
inspectors and after a written report of construction progress is received.
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, funds may be required to be advanced beyond the amount
originally committed to complete construction. If the estimate of value proves
is high, the Company may be confronted with a project having a value which is
insufficient to assure full payment. 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 Loans. Federal regulations permit the Company to make secured and
unsecured consumer loans up to 35% of the Bank's assets. Although the Company
has few consumer loans, management considers consumer lending to be an important
component of its future strategic plan. The Company makes various types of
56
consumer loans, primarily home equity loans and second mortgages. Consumer loans
are originated in order to provide a wide range of financial services to
customers and to create stronger ties to its customers and because the shorter
term and normally higher interest rates on such loans help increase the
sensitivity of interest earning assets to changes in interest rates and maintain
a profitable spread between the Company's average loan yield and its cost of
funds. The terms of consumer loans generally range from one to ten years.
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. Management believes that the yields
earned on consumer loans are commensurate with the credit risk associated with
such loans. The Company intends to continue to increase its investment in these
types of loans. As of March 31, 1997, consumer loans amount to $ 152,795 or 0.1%
of the total loan portfolio.
Commercial Real Estate Loans. Commercial real estate loans are secured
primarily by office, warehouse and retail business properties located in
Florida. These types of loans amounted to $ 11.9 million or 10.4% of the total
loan portfolio as of March 31, 1997. Commercial loans may be for an amortization
term of up to 30 years, but frequently include a maturity in seven to 15 years.
The Company also offers multi-family real estate loans which are collateralized
primarily by garden style apartments located in Florida. 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 one, three or five years. The Company generally does
not offer fixed-rate commercial real estate or multi-family loans.
Commercial and multi-family real estate are originated with a
loan-to-value ratio not exceeding 80%. Loans on this type of collateral will
continue to be a part of the Company's future lending programs. Commercial and
multi-family real estate loans are generally larger and involve a greater degree
of risk than residential mortgage loans. Because payments on loans secured by
commercial properties 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.
At March 31, 1997 the largest commercial real estate loan was $1,957,806,
secured by a motel complex located in Orlando, Florida. The loan is current. The
largest multi-family real estate loan is $360,722, secured by a multi-story
retirement facility located in Orlando, Florida. The loan is current.
Commercial Loans. The Company's commercial loans are business loans that
are not secured by real estate. At March 31, 1997, the largest commercial loan
was $380,889 to a smoker/grill manufacturer in Macon, Georgia, secured by
inventory. The owner of the smoker/grill company is related by marriage to the
57
former Chairman and President of Federal Trust. The Loan is current, but has
been classified as Doubtfull. The Company does not anticipate making these types
of commercial loans in the future; rather the Company is focusing more on real
estate based commercial loans in its primary market area, which are guaranteed
in part by the SBA or the Farmers Home Administration ("FmHA"). Through 1996,
the Company originated three SBA loans. These loans are underwritten consistent
with the Company's policies, but may include a higher loan balance 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 Company's
lending area.
The Company is currently not a delegated SBA underwriter, but anticipates
that in the future it will apply for and receive such SBA designation.
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. The Company requires personal guarantees from the borrower as part
of the terms of the loan. After the 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. The 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
Company usually originates these 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. As of
March 31, 1997, SBA guaranteed loans amount to $ 910,782 or 0.81% of the
Company's total loan portfolio.
Income from Lending Activities. Fees are earned in connection with loan
commitments and originations, loan modifications, late payments, changes of
property ownership and for miscellaneous services related to its loans. The
Company also receives fees for servicing loans sold to others. At March 31,
1997, the Company was servicing $8.4 million of loans of 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
Company's market area.
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. Under current accounting
standards 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.
Non-performing Loans and Real Estate Owned. When a borrower fails to make
a required payment on a loan, the Company 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 dated), 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 normal collection procedures, the Company will institute more
58
formal measures to remedy the default, including the commencement of foreclosure
proceedings. The Company will attempt to negotiate with the delinquent borrower
to establish a satisfactory payment schedule.
If foreclosure is completed, the property is sold at a public auction in
which the Company may participate as a bidder. If the Company is the successful
bidder, the acquired real estate property is then included in the Company's
"real estate owned" account until it is sold. The Company 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 normal underwriting guidelines. As of March 31,
1997, the Company had no loans to facilitate.
Loans are placed on non-accrual status when, in the judgment of
management, the probability of collection of interest is deemed to be
insufficient to warrant further accrual. When a loan is placed on non-accrual
status, previously accrued but unpaid interest is deducted from interest income.
As a matter of policy, interest is not accrued on loans past due 90 days or
more.
Real estate acquired 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 market value at the
date of acquisition, less estimated selling costs and any write-down resulting
therefrom is charged to the allowance for losses on loans.
On March 31, 1997, the Company reached agreement with a borrower to accept
a deed-in-lieu of foreclosure, which resulted in a substandard loan being
transferred to real estate owned at its net book value of $2.3 million. The
property consists of 44 unsold condominium units, which have been, and currently
are being rented. The Company is in the process of evaluating the units, which
are part of a 60 unit condominium complex in northeast Florida, and will begin
marketing the units in the second quarter of 1997. Until such time as the units
are sold, the majority of the units will be rented, with one or two held vacant
for sale, in order to generate income from the property. The Company has engaged
a local management company and are preparing the individual units for sale. The
Company plans to sell the units individually, but will consider bulk sale. As of
the date of this Prospectus the Company had ____ sales and _____ units under
contract. Based on current market conditions, the Company expects to recover its
investment. The rental income on the property is currently generating net income
to the Company of $ $20,000 per month, which will change as the units are sold.
59
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. There was no
troubled debt restructuring or accruing loans more than 90 days delinquent at
any of the dates presented.
As of March 31, As of December 31,
--------------- -----------------------------------------------
1997 1996 1995 1994 1993 1992
--------------- -----------------------------------------------
(Dollars in thousands)
Non-accrual loans:
Commercial $ 548 $ 548 $2,457 $1,435 $2,058 $1,195
Residential 997 323 800 1,029 704 748
Residential Construction -- -- -- -- 333 --
Total mortgage loans 1,545 871 3,257 2,464 3,095 1,943
Commercial loans 47 47 -- 240 -- 64
Consumer loans 30 73 69 77 30 53
In-substance foreclosures -- -- -- 3,592 108 298
------ ------ ------ ------ ------ ------
Total non-accrual loans $1,622 $ 991 $3,326 $6,373 $3,233 $2,358
====== ====== ====== ====== ====== ======
Total non-accrual loans to total loans 1.43% 0.88% 2.95% 5.73% 3.39% 1.93%
====== ====== ====== ====== ====== ======
Total non-accrual loans to total assets 1.16% 0.71% 2.37% 4.14% 2.20% 1.69%
====== ====== ====== ====== ====== ======
Total allowance for loss to total
non-accrual loans 73.53% 154.69% 61.95% 30.99% 57.22% 54.77%
====== ====== ====== ====== ====== ======
Real estate owned:
Total real estate owned $3,612 $1,508 $3,293 $2,891 $ 565 $ 594
====== ====== ====== ====== ====== ======
Total non-accrual loans and real estate
owned to total assets 3.74% 1.79% 4.71% 6.02% 2.59% 2.34%
====== ====== ====== ====== ====== ======
60
If the non-accrual loans at March 31, 1997, 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 March 31, 1997, would have been increased
approximately $49,000.
The $997,000 of non-accruing single-family residential permanent loans
at March 31, 1997, consists of 19 loans, which have an average loan balance of
approximately $52,000. No loan exceeds $134,000. The Company had one
non-accruing land acquisition and development loan at March 31, 1997, in the
amount of $547,930.
At March 31, 1997, the Company had $3.6 million in REO acquired by
foreclosure (or deed in lieu) consisting of six single family properties with an
average of balance of $42,739, two vacant land properties zoned commercial with
an average balance of $393,229, one acquisition and development project with an
average balance of $184,500, one 44-unit condominium project with a balance of
$2,350,000 and one developed building lot with a balance of $35,000.
Asset Classification
The OTS has adopted various regulations regarding problem assets of
savings institutions. The regulations require that each insured institution
review and classify its assets on a regular basis. In addition, in connection
with examinations of insured institutions, OTS examiners have authority to
identify problem assets and, if appropriate, require them to be classified.
There are three classifications for problem assets: substandard, doubtful and
loss. Substandard assets have one or more defined weaknesses and are
characterized by the distinct possibility that the insured institution will
sustain some loss if the deficiencies are not corrected. Doubtful assets have
the weaknesses of substandard assets with the additional characteristic that the
weaknesses make collection or liquidation in full on the basis of currently
existing facts, conditions and values questionable, and there is a high
possibility of loss. An asset classified as loss is considered uncollectible and
of such little value that continuance as an asset of the institution is not
warranted. If an asset or portion thereof is classified as loss, the insured
institution establishes specific allowances for loan losses for the full amount
of the portion of the asset classified as loss. All or a portion of general loan
loss allowances established to cover possible losses related to assets
classified substandard or doubtful may be included in determining an
institution's regulatory capital, while specific valuation allowances for loan
losses generally do not qualify as regulatory capital. Assets that do not
currently expose the insured institution to sufficient risk to warrant
classification in one of the aforementioned categories but possess weaknesses
are classified as special mention and monitored by the Company.
At March 31, 1997, the Company had $7.5 million in loans classified as
Substandard, $513,885 classified as Doubtful, and $47,000 as Loss.
Allowance for Losses on Loans
The allowance for loan losses is established through a provision for
loan losses charged against income. Loans are charged against the allowance when
management believes that the collectibility of the principal is unlikely. The
61
allowance is an estimated amount that management believes will be adequate to
absorb losses inherent in the loan portfolio and commitments to extend credit,
based on evaluations of its collectibility. The evaluations take into
consideration such factors as changes in the nature and volume of the portfolio,
overall portfolio quality, specific problem loans and commitments, and current
and anticipated economic conditions that may affect the borrower's ability pay.
While management uses the best information available to recognize losses on
loans, future additions to the allowance may be necessary based on changes in
economic conditions.
In accordance with SFAS No. 114, as amended by SFAS No. 118, the
Company 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 did not affect the Company's policies regarding write-offs, recoveries or
income recognition.
Although management believes that it uses the best information
available to determine the allowance, unforeseen market conditions could result
in adjustments and net earnings could be significantly affected if circumstances
differ substantially from the assumptions used in making the final
determination. Future additions to the Company's allowance for loan losses will
be the result of periodic loan, property and collateral reviews and thus cannot
be predicted in advance. In addition, federal regulatory agencies, as an
integral part of the examination process, periodically review the Company's
allowance for loan losses. Such agencies may require the Company to recognize
additions to the allowance level based upon their judgment of the information
available to them at the time of their examination. At March 31, 1997, the
Company had a total allowance for loan losses of $1.2 million representing 1.05%
of total loans. See Note 1 of the Notes to Consolidated Financial Statements.
[Table Follows On Next Page]
62
The following table sets forth information regarding the Company's
allowance for loan losses during the periods indicated.
Three Months
Ended March 31, Year Ended December 31,
----------------------------- ------------------------------------------
1997 1996 1996 1995 1994 1993 1992
-------- --------- -------- -------- -------- -------- ------
(Dollars In thousands)
Allowance at beginning of year $ 1,533 $ 2,061 $ 2,061 $ 1,975 $ 1,850 $ 1,292 $ 359
Charge offs:
Commercial -- 71 390 440 400 -- --
Residential loans 340 6 794 267 4 27 37
Residential construction -- -- -- -- -- -- --
Consumer loans -- 39 39 -- 5 5 --
--------- --------- --------- --------- --------- --------- ---------
Total loans charged off 340 116 1,223 707 409 32 37
Recoveries 3 3 267 13 3 -- --
--------- --------- --------- --------- --------- --------- ---------
Net charge-offs 337 113 956 694 406 32 37
Provision for loan losses charged to
operating expenses (3) (18) 280 779 531 590 140
Transfer from allowance for real
estate owned -- -- 149 -- -- -- --
General reserves acquired as part of
loan package purchases -- -- -- -- -- -- 830
--------- --------- --------- --------- --------- --------- ---------
Allowance at end of year $ 1,193 $ 1,930 $ 1,533 $ 2,061 $ 1,975 $ 1,850 $ 1,292
========= ========= ========= ========= ========= ========= =========
Ratio of net charge-offs to average
loans outstanding 0.30% 0.10% 0.85% 0.61% 0.37% 0.03% 0.03%
Ratio of allowance to period-end
total loans, net 1.05% 1.73% 1.36% 1.83% 1.78% 1.94% 1.06%
Period-end total loans, net $ 113,315 $ 111,800 $ 112,547 $ 112,906 $ 111,183 $ 95,374 $ 122,476
========= ========= ========= ========= ========= ========= =========
Average loans outstanding, net $ 113,289 $ 112,492 $ 112,288 $ 115,608 $ 108,771 $ 109,063 $ 124,107
========= ========= ========= ========= ========= ========= =========
63
The following table represents information regarding the
Company's total allowance for losses, as well as the allocation of such amounts
to the various categories of loans.
At March 31, At December 31,
--------------- -------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ----
% of % of % of % of % of % of
Loans to Loans to Loans to Loans to Loans to Loans to
Total Total Total Total Total Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------ ----- ------ ----- ------ ------------ ----- ------ ----- ------ -----
(Dollars in thousands)
Residential loans $ 421 86.8% $ 283 88.3% $ 415 86.1% $ 421 83.6% $ 983 72.6% $1,076 76.7%
Commercial
real estate loans
(Including multi-family loans) 452 11.4% 946 9.8 1,073 11.4 1,318 13.1 772 21.0 178 23.3
Non-mortgage loans 320 1.8% 304 1.9 573 2.5 236 3.3 95 6.4 38 --
------ ----- ------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Total allowance for loan losses $1,193 100.0% $1,533 100.0% $2,061 100.0% $1,975 100.0% $1,850 100.0% $1,292 100.0%
====== ===== ====== ===== ====== ===== ====== ===== ====== ===== ====== =====
64
Investment Activities
The Company's investment in obligations of United States government
agencies consist of dual indexed bonds issued by the FHLB. At March 31, 1997,
the bonds had a market value of $14.9 million and gross unrealized losses of
$1.2 million. The FHLB bonds have a par value of $16.1 million and pay interest
based on the difference between two indices. The bonds pay interest at the 10
year constant maturity treasury rate less the three month or six month LIBOR
rate plus a contractual amount ranging from 2.3% to 4.0%. The Company purchased
the FHLB bonds to offset some of its risk related to its portfolio of adjustable
rate mortgages. Accordingly, the bonds subject the Company to a certain degree
of market risk as the indices change with prevailing market interest rates. The
yields on the dual indexed bonds generally move in an inverse relationship to
the movement in yields on the ARMs and as a result, offset some of the risk
related to the movement of interest rates in the loan portfolio. However, 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 Company 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 7.01%, 5.51%, and 3.98%, respectively. Market
values for all securities were calculated using published prices or the
equivalent at March 31, 1997.
Based on 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
savings institutions they regulate not hold structured notes. The OTS has
directed the Company not to purchase any additional dual indexed bonds (see
"BUSINESS - Supervision"), although they continue to be a permissible investment
for savings institutions.
At December 31, 1996, 1995, and 1994, the Company had $7.0 million,
$7.0 million and $22.8 million (par value), respectively, in investments
securities pledged to the FHLB as collateral under its short-term credit
agreement with the Company. On November 30, 1995, the Company reclassified its
entire portfolio of FHLB 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. In December 1995, the Company sold $7,250,000, par value, of
the FHLB 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 $780,937 at December
31, 1995. On April 1, 1996, the Company transferred $7,000,000 par value of the
FHLB bonds maturing in 2003 from the available for sale to the held to maturity
category. During November, 1996, the Company sold $1,000,000 par value of the
available for sale FHLB bonds that mature in 1998 at a gross loss of $12,344.
65
The Company must maintain minimum liquidity levels specified by the OTS
which vary from time to time. The Company 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 five years or 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 and its expectation of the level of yields
that will be available in the future. The Company also has an investment in the
common stock of the FHLB of Atlanta in order to satisfy its membership
requirement.
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66
The following table sets forth the composition of the Company's
investments portfolio (including investments held for sale) as of the dates
indicated.
At March 31, At December 31,
1997 1996 1995 1994
----------------- ------------------------------------------------------------------
Carrying % of Carrying % of Carrying % of Carrying % of
Value Total Value Total Value Total Value Total
----- ----- ----- ----- ----- ----- ----- -----
(Dollars in thousands)
Short-term investments:
Interest-bearing deposits $ 2,762 14.3% $ 4,837 22.9% $ 51 0.3% $ 6,861 20.7%
Debt Securities -- -- -- -- -- -- --
FHLB notes 15,080 78.3 15.048 71.2 15,918 89.2 24,257 73.2
------- ----- ------- ----- ------- ---- ------- ----
Orange County tax
certificates 1 6 19 .1 44 0.1
Mortgage backed
securities
ARM mutual fund Equity securities:
FHLB stock 1,428 7.4 1,253 5.9 1,853 1,975 6.0
------- ----- ------- --- ------- --- ------- ---
Total . . . . . . . $19,096 100.0% $21,144 100% $ 1,784 100% $33,137 100%
======= ===== ======= ==== ======= ==== ======= ====
67
Investment Maturities. The table below sets forth the amortized cost,
fair value, yield and maturity distribution of the Company's investments in debt
securities by type as of March 31, 1995.
Held to Maturity Available for Sale
- -----------------------------------------------------------------------------------------------------------------------
Amortized Fair Period-End Amortized Fair Period -End
Cost Value Yield Cost Value Yield
---- ----- ----- ---- ----- -----
(Dollars in thousands)
U.S.Government Agencies
Within 1 year $ -- $ -- $-- $ -- $ -- --
1 to 5 years -- -- -- 9,100 8,774 3.64%
5 to 10 years 6,306 6,094 4.87 -- -- --
------ ------ ----
More than 10 years -- -- -- -- -- --
------ ------ ----- ------ ------ ----
Total $6,306 $6,094 4.87 $9,100 $8,774 3.64%
====== ===== ====== ====== ====
Sources of Funds
General. Deposits are the Company's primary source of funds for use in
lending and for other general business purposes. In addition to deposits, the
Company 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 March 31,
1997, the Company had $22.3 million in FHLB advances outstanding which are due
in one year or less.
Deposits. The Company 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.
Deposits are obtained from residents in the Company's primary market
area and to a much lesser extent, nationwide via a computer network. The
principal methods used 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 Company currently does not operate ATM's, but issues cards which
have access to the Honor(R) and other shared ATM networks. The Company generally
does not utilize brokered deposits. The Company previously relied on the CD
Network to generate certificates of deposit of less than $100,000. The CD
Network allows the Company to electronically display the rates it is paying on
certificates of deposit to investors. Company personnel deal directly with
investors who telephone or write for information concerning certificates of
deposit. As the Company continues to evolve into a traditional financial
institution, it has focused its attention to generating deposits within the
local market area and has significantly reduced its dependency on the CD
Network. As of March 31, 1997, deposits totaled $103.7 million of which $2.8
million or 2.9% were obtained through the CD Network.
68
The following table shows the distribution of, and certain other
information relating to, the Bank's deposits by type as of the dates indicated.
At March 31, At December 31,
------------ ----------------------------------------------------------
1997 1996 1995 1994
---- ---- ---- ----
% of % of % of % of
Amounts Deposits Amounts Deposits Amounts Deposits Amounts Deposits
------- -------- ------- -------- ------- ---------------- --------
(Dollars in thousands)
Commercial checking accounts
Savings accounts $ 170,762 .2% $ 59 .1% $ 209 0.2% $ 257 0.3%
MMDA's 612,477 .6 1,364 1.3 2,158 2.0 4,234 4.2
Now accounts 7,172,954 6.9 7,429 7.0 6,601 6.1 9,247 9.1
Subtotal 1,355,076 1.3 654 .6 675 0.6 857 0.8
9,311,269 9.0 9,506 9.0 9,643 8.9 14,595 14.4
Certificates of deposit:
1.00% to 3.99% 463,973 .4 499 .5 1,219 1.1 5,431 5.5
4.00% to 4.99% 2,549,837 2.5 3,077 2.9 2,171 2.0 29,421 29.0
5.00% to 5.99% 76,284,827 73.6 78,123 73.5 54,847 50.2 29,165 28.7
6.00% to 7.99% 15,116,241 14.6 14,910 14.0 41,311 37.8 22,859 22.5
8.00% to 9.99% - - - - - - 46 -
-------------- ------ -------- ----- --------- ----- --------- -----
Total Certificates of Deposit 94,414,878 91.0 96,609 91.0 99,548 91.1 86,922 85.6
-------------- ------ -------- ----- --------- ----- --------- -----
Total Deposits $ 103,726,147 100.00% $106,115 100.0% $ 109,191 100.0% $ 101,517 100.0%
============== ====== ======== ===== ========= ===== ========= =====
The following table shows the average amount of and the average rate
paid on each of the following categories during the periods indicated.
At March 31, At December 31,
----------------- ---------------------------------------------------------
1997 1996 1995 1994
---- ---- ---- ----
Average Average Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate Balance Rate
------- ---- ------- ---- ------- ---- ------- ----
(Dollars in thousands)
Commercial checking accounts
- non-interest
bearing MMDA's and NOW $ 8,484 3.72% $ 7,722 3.44% $ 7,587 3.55% $ 8,629 3.11%
Statement savings accounts 1,377 2.61 1,641 2.62 2,975 3.09 6,227 3.40
Certificates of deposit 94,614 5.49 97,042 5.62 99,716 5.88 77,333 4.30
-------- ---- -------- ---- --------- ---- ------- ----
Total Deposits $104,475 5.31% $106,405 5.41% $ 110,278 5.63% $92,189 4.12%
======== ==== ======== ==== ========= ==== ======= ====
69
The Company's large denomination ($100,000 and over) deposits included
in certificate accounts mature as follows:
At March 31, 1997
-----------------
Amount % of Total
------ ----------
(Dollars in thousands)
Three months or less $ 5,562 30.4%
Over three months to six months 3,365 18.4
Over six months to twelve months 5,117 28.0
Over twelve months 4,242 23.2
------- -----
$18,286 100.0%
======= =====
The variety of deposit accounts now offered by the Company has
increased the its 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 ability to attract and retain deposits and
related cost of funds have been, and will continue to be, significantly affected
by market conditions.
Management regularly reviews rates offered by other savings
institutions in its market area and will adjust the rates it offers to be
competitive with such institutions. The Company has generally had to price its
deposit products competively to attract deposits. The $18.7 million decrease in
1993 resulted from the sale of the Company's Amelia Island branch. During the
year ended December 31, 1996, the Company's deposits decreased $3.1 million.
The following table sets forth the net deposit flows during the periods
indicate.
Three Months
Ended March 31, Years Ended December 31,
--------------- --------------------------
1997 1996 1996 1995 1994
--------------- --------------------------
(Dollars in thousands)
Net increase (decrease) before interest
credited $(1,509) $ (604) $ 523 $10,619 $23,902
Less:
Interested credited 884 896 3,599 2,945 1,113
------- ------- ------- ------- -------
Net deposit increase (decrease) $(2,393) $(1,500) $(3,076) $ 7,674 $22,789
======= ======= ======= ======= =======
70
Borrowings. The Company 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 Company's regulatory capital, or its liability for shares and
deposits or on the FHLB's assessment of the Company'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 March 31, 1997, the Company had $27.3 million in borrowings
outstanding.
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71
The following is an analysis of the advances from the FHLB during the
periods indicated:
Amounts outstanding at March 31, 1997:
- --------------------------------------------------------------------------------
Maturity Date Rate Amount Type
- ------------- ----- ----------- ---------
12/31/97 6.85% $ 4,750,000 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
03/04/98 6.02 2,500,000 Fixed Rate
09/15/98 6.12 5,000,000 Fixed Rate
---- ---------
Total 6.15% $27,250,000
==== ==========
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
- ------------------------------------------------------ -------------------------------------------------------
Month-end Rate Amount Month-end Rate Amount
- --------- ---- ------ --------- ---- ------
01/31/96 6.12% $20,500,000 01/31/95 6.21% $33,400,000
02/28/96 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 million, and $1.3
million, respectively, at December 31, 1996.
72
Federal Trust Subsidiaries
At March 31, 1997, Federal Trust had no subsidiaries other than the
Bank. The total equity investment in the Bank at March 31, 1997 was $6,591,045.
During the first half of 1996, Federal Trust operated two non-bank subsidiaries,
Federal Trust Properties Corp. ("Properties Corp.") and 1270 Leasing Company
("1270 LC"). Properties Corp. is a Florida corporation which was organized in
December 1994. Properties Corp. initially owned two-office buildings in Amelia
Island, Florida, which were sold in December 1995, and a residential site owned
in Augusta, Georgia, which was sold in February 1996. Properties Corp. was sold
in July 1996 for $425,354, consisting of $60,000 in cash, a note for $60,000,
which was paid on August 8, 1996, and four notes totalling $305,354. Federal
Trust had $421,698 invested in Federal Trust Properties Corporation ("Properties
Corp.") at the time of the sale. The employment agreement of the former
President and Chief Executive Officer of Federal Trust and certain other related
expenses were assumed by Properties Corp. as part of the sale.
1270 LC was a Florida corporation organized in May 1994. 1270 LC leased
3,096 feet of office space in Winter Park for Federal Trust. 1270 LC was
dissolved when Federal Trust relocated its corporate headquarters to the Bank's
premises.
Bank 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.
which commenced operations in 1996. FTB Financial Services, Inc. is engaged in
the business of selling non-FDIC insured annuities. The operations of FTB
Financial Services, Inc. to date have been minimal.
Employees
As of March 31, 1997, Federal Trust had no salaried employees. The Bank
had 26 full-time employees. Management considers its relations with its
employees to be excellent. The employees are not represented by any collective
bargaining group.
The Company 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 addition, on April 1, 1997, the Company began 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 the Company's market area.
73
Legal Proceedings
There are no material pending legal proceedings to which Federal Trust
or the Bank or any other subsidiary of the Bank is a party or to which any of
their property is subject.
REGULATION AND SUPERVISION
General
The banking industry is highly regulated with numerous federal and
state laws and regulations governing its activities. As a saving and loan
holding company, Federal Trust is subject to examination and the regulations of
the OTS as provided under the Home Owners Loan Act, as amended ("HOLA"). While
Federal Trust is a reporting company and files its Form 10-Qs and Form 10-Ks
with the Securities and Exchange Commission ("SEC"), it is currently not a
registered company for purposes of the Securities Exchange Act of 1934 ("34
Act"). As 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 deposit 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.
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.
Regulation of the 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.
The OTS also has established certain rebuttable control determinations.
An acquiror must file for approval of control with the OTS or file to rebut the
74
presumptions before surpassing a rebuttable control level of ownership. To rebut
the presumption, the acquiror must file a submission with the OTS setting forth
the reasons for rebuttal. The submission must be filed when the acquiror
acquires 10% or more of any class of voting stock of the savings bank and again
when the acquiror acquires more than 25% of any class of voting stock of the
savings bank and they have any of the control factors enumerated in 12 C.F.R.,
Section 574.4(c) which include but are not limited to: (i) the acquiror would be
one of the two largest shareholders of any class of voting stock; (ii) the
acquiror and/or the acquiror's representative or nominees would constitute more
than one member of the savings bank's board of directors; and (iii) the acquiror
or nominee or management official of the acquiror would serve as the chairman of
the board of directors, chairman of the executive committee, chief executive
officer, chief operating officer, chief financial officer, or in any similar
policy making authority in the savings bank.
A rebuttable presumption of concerted action will occur but is not
limited to these situations: (1) a person will be presumed to be acting in
concert with members of the person's immediate family (which includes a person's
spouse, father, mother, children, brothers, sisters and grandchildren; the
father, mother, brother and sisters of the person's spouse; and the spouse of
the person's child, brother or sister); (2) persons will be presumed to be
acting in concert with each other where: (i) both own stock in a savings bank
and both are also management officials, controlling shareholders, partners, or
trustees of another company; or (ii) one person provides credit to another or is
instrumental in obtaining financing for another person to purchase stock of the
savings bank; and (3) a person will be presumed to be acting in concert with any
trust for which such person or company serves as a trustee.
Under the FDI Act, 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 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
75
of the calendar year, or (ii) 75% of the savings institution's net income for
the previous four quarters. Any additional capital distributions require prior
regulatory approval. Because the Bank is currently operating under an OTS Order,
the Bank is considered a Tier 2 association and is required to obtain OTS
approval before it can make a capital distribution to the holding company. A
Tier 2 association may make capital distributions of between 25% and 75% of its
net income over the most recent four-quarter period, depending on its risk-based
capital level. The OTS can prohibit a proposed capital distribution by a savings
institution, which would otherwise be permitted by the regulation if the OTS
determines that such distribution would constitute an unsafe or unsound
practice. The Bank did not make a capital distribution to Federal Trust in 1995,
1996, or in the first quarter of 1997.
According to Federal Trust'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. Legislation,
particularly the Financial Institution Reform, Recovery and Enforcement Act of
1989 ("FIRREA") and the Federal Deposit Insurance Corporation Improvement Act of
1991 ("FDICIA"), broadened the regulatory powers of the federal bank regulatory
agencies and restructured the nation's banking system.
Prompt 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. 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). 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
76
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 CAMELS 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 stated 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 earnings), 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 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
77
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 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.
The OTS has 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
78
an amount equal to one-half of the difference between the savings institution's
measured interest-rate risk and 2%, multiplied by the estimated economic value
of the savings institution's assets. That dollar amount is deducted from the
savings institution's total capital in calculating compliance with its
risk-based capital requirement. The interest rate-risk rule includes, 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 OTS, however, has
post-pponed the effective date of the interest-rate component as part of the
calculation of a savings institutions risk-based capital requirement.
As of March 31, 1997, the Bank's interest-rate risk exposure, according
to OTS calculations, would have been above the threshold requiring an additional
capital component.
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. The regulations 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 assessing
an institution's overall capital adequacy. These regulations do not, however,
contain any specific mathematical formulas or capital requirements.
At March 31, 1997, the Bank met each of its capital requirements. The
following table sets forth the regulatory capital calculations at March 31,
1997:
Tangible Core Risk-Based
-------- ---- ----------
(Dollars in thousands)
Percent Percent
of of Weighted
Amount Assets Amount Assets Amount Assets
------ ------ ------ ------ ------ ------
Regulatory Capital $ 6,820 4.90% $ 6,820 4.90% $ 7,683 10.27%
Requirement 2,092 1.50 4,184 3.00 5,986 8.00
----- ---- ----- ---- ----- ----
Excess $ 4,728 3.40% $ 2,636 1.90% $ 1,697 2.27%
===== ==== ===== ==== ===== ====
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. The
OTS and the other federal banking agencies adopted a rule establishing deadlines
for the agencies to submit and review safety and soundness compliance plans and
79
Interagency Guidelines Establishing Standards for Safety and Soundness. 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.
Insurance of Deposit Accounts. The FDIC is the administrator for the
SAIF and the BIF, independently setting insurance premiums for each Fund. The
Bank's deposit accounts are insured by the SAIF. The FDI 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
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 FDIC applies a risk-based assessment system for insured depository
institutions that takes into account the risks attributable to different
categories and concentrations of assets and liabilities. In 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. 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. Until September 30, 1996, assessment
rates ranged from 23 basis points on deposits for a financial institution in the
highest category (i.e.. well-capitalized and financially sound with only a few
minor weaknesses) to 31 basis points on deposits for an institution in the
lowest category (i.e., undercapitalized and posing a substantial probability of
loss to the SAIF or the BIF, unless effective corrective action is taken). The
Bank's assessment for 1995 and 1996 was 29 basis points on deposits.
The FDIC in early December, 1996 adopted a rule that reduced 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 for SAIF-assessable
institutions became effective on January 1, 1997. From October 1, 1996 through
December 31, 1996, SAIF-assessable institutions were assessed at rates ranging
from 0.18% to 0.27% of deposits, which represents the amount the FDIC calculated
as necessary to cover the interest due for that period on outstanding Financing
Corporation ("FICO") Bonds discussed below. Effective October 1, 1996, the
80
Bank's SAIF insurance premiums were reduced from $0.29 per $100 to $ .17 per
$100 of insured deposits in January, 1997. The FDIC has notified the Bank that
its assessment will remain at $.17 oer $100 of insured deposits for the second
half of 1997.
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. 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 March 31, 1997, 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 March 31, 1997, the Bank had no
brokered deposits.
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
81
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. The calculation of capital includes 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. At March 31, 1997, the Bank had
two loans which exceeded the loans to one borrower limit, totaling $3,152,199.
Qualified Thrift Lender Test ("QTL"). The HOLA requires savings
institutions to meet a QTL test. The QTL test, 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 March 31, 1997, the Bank exceed the 65.0% QTL requirements,
maintaining 84.2% of its portfolio assets in qualified thrift investments.
Interstate Branching. Federally chartered savings institutions are
allowed to branch nationwide to the extent allowed by federal statute. This
ability 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. The Bank does not
conduct interstate branching operations and does not plan to do so in the
foreseeable future.
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
("Interstate Act") eliminated many existing restrictions on interstate banking
by authorizing interstate acquisitions of banks by bank holding companies
82
without geographic limitations. Under the Interstate Act, existing restrictions
on interstate acquisitions of banks by bank holding companies were repealed on
September 29, 1995, so that bank holding companies located in Florida are able
to acquire any Florida-based bank, subject to certain deposit percentage and
other restrictions. The legislation also provides that, unless an individual
state elects before hand either (i) to accelerate the effective date or (ii) to
prohibit out-of-state banks from operating interstate branches within its
territory, on or after June 1, 1997, adequately capitalized and managed bank
holding companies will be able to consolidate. De novo branching by an
out-of-state bank would be permitted only if it is expressly permitted by the
laws of the host state. The authority of a bank to establish and operate
branches within a state will continue to be subject to applicable state
branching laws. In 1996, the Florida Legislature adopted legislation which
permits interstate branching effective June 1, 1997.
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. Management
83
believes that the current operations and policies of the Bank substantially
comply with the new regulations and, therefore, no material changes to
operations or policies are expected.
Federal Home Loan Bank System
The Bank is a member of the Federal Home Loan Bank ("FHLB") System
which consists of 12 regional FHLBs. The FHLB provides a central credit facility
primarily for member institutions. As a member of the FHLB-Atlanta, the Bank is
required to acquire and hold shares of capital stock in that FHLB in an amount
at least equal to 1% of the aggregate principal amount of its unpaid residential
mortgage loans and similar obligations at the beginning of each year, or 1/20th
of its advances (borrowings) from the FHLB-Atlanta, whichever is greater. The
Bank is in compliance with this requirement. FHLB advances must be secured by
specified types of collateral and may be obtained only for the purpose of
providing funds for residential housing finance.
The FHLBs are required to provide funds for the resolution of insolvent
savings institutions and to contribute funds for affordable housing programs.
These requirements could reduce the amount of dividends that the FHLBs pay to
their members and could also result in the FHLBs imposing a higher rate of
interest on advances to members. For the year ended December 31, 1996, dividends
paid by the FHLB-Atlanta to the Company amounted to $129,246. Should dividends
be reduced, or interest on FHLB advances increased, the consolidated net
interest income might also be reduced for the Company. 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 Company'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.
84
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 $5.0 million.
Savings 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 mote favorable of the
following methods: (i) a method based on the institution's actual loss
experience (the "experience method") or (ii) a method based on a specified
percentage of an institution's taxable income (the "percentage of taxable income
method") and not be bound by the election in any subsequent year. The addition
to the reserve for non-qualifying loans was required to be computed under the
experience method and reduced by the current year's addition to the reserve for
losses on non-qualifying loans, unless that addition also was determined under
the experience method. The aggregate of the additions to each reserve for each
year was the Bank's annual bad debt deduction for years preceding 1996. The 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 the 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, the 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, the 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
85
after 1995. The Bank switched solely to the experience method to compute its bad
debt deduction in 1996 and future years. The 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, the Bank will have to recapture approximately $70,000 of bad debt
reserves as a result of this change in the law.
The recapture amount resulting from the change in method of account for
bad debt reserves generally will be taken into the Bank's taxable income ratably
(on a straight line basis) over a six-year period. If a savings institution
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 capital
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
savings institution may be subject to the alternative minimum tax. A savings
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.
86
State
The State of Florida imposes a corporate income/franchise tax on banks
and savings 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.
MANAGEMENT
Directors and Executive Officers
The Boards of Directors of Federal Trust and the Bank currently consist
of five directors, James V. Suskiewich, Aubrey H. Wright, Jr., Dr. Samuel C.
Certo, George W. Foster and Kenneth W. Hill. The Board of Directors of Federal
Trust are elected for a one-year term or until there successors are duly
elected, while the Bank's Board of Directors is divided into three classes, with
the members of each class serving three-year terms.
The following table sets forth information regarding the directors and
executive officers of Federal Trust and the Bank.
Year Term As
Name Age Director will Expire Position(s)
---- --- -------------------- -----------
James V. Suskiewich 49 1998(1)/2000(2) Chairman of the Board, President and Chief
Executive Officer of Federal Trust; Chairman of
Board, President and Chief Executive Officer of
the Bank
Aubrey H. Wright, Jr. 50 1998(1)/1998(2) Senior Vice President, Chief Financial Officer and
Director of Federal Trust and the Bank;
George W. Foster 67 1998(1)/2000(2) Director of Federal Trust and the Bank
Dr. Samuel C. Certo 49 1998(1)/1999(2) Director of Federal Trust and the Bank
Kenneth W. Hill 63 1998(1)/1999(2) Director of Federal Trust and the Bank
Louis E. Laubscher 54 (3) Vice President and Chief Lending Officer of the
Bank
(Footnotes on following page)
87
- -------------------
(1) Year term of director will expire at Federal Trust.
(2) Year term of director will expire at the Bank.
(3) Not a director.
- -------------------
James V. Suskiewich has been Chairman of the Board, President and Chief
Executive Officer of Federal Trust since July 23, 1996, and the President and
Chief Executive Officer of the Bank since January 1993. Mr Suskiewich was named
Chairman of the Board of the Bank in May 1996. Prior to joining the Bank, Mr.
Suskiewich, from 1988 to 1993, was the President and Chief Executive Officer of
First Federal Savings Bank of the Glades. Mr. Suskiewich who currently resides
in Apopka, Florida, has over 25 years of banking experience.
Aubrey H. Wright, Jr. is Senior Vice President and Chief Financial Officer
for Federal Trust and the Bank. Mr. Wright joined the Bank in June 1993 as the
Chief Financial Officer and was appointed the Chief Financial Officer of Federal
Trust in April 1994. From 1991 to 1993, Mr. Wright was the President, Chief
Executive Officer and a Director of Essex Savings Bank, F.S.B., West Palm Beach,
Florida. Mr. Wright, who resides in Winter Park, Florida, has over 30 years of
banking experience.
George W. Foster is a Director of Federal Trust and the Bank. Mr. Foster
retired from the Bank as a Vice President in 1994. Mr. Foster served as the
Chairman of the Board of the Bank from January 1993 to May 1996. From December
1990 to January 1993, Mr. Foster was the President and Chief Executive Officer
of the Bank. Mr. Foster has served as the President of Barnett Bank of Seminole
County, President of the Seminole County Chamber of Commerce and past President
of the American Safe Deposit Association. Mr. Foster has been a resident of
Longwood, Florida since 1963.
Dr. Samuel C. Certo is a Director of Federal Trust and the Bank. Dr. Certo
was first elected as a Director of the Bank on January 26, 1996. Dr. Certo had
served as an advisory director of the Bank since 1993. He is the former Dean and
is currently a Professor of Management at the Crummer Graduate School of
Business at Rollins College in Winter Park, Florida. Dr. Certo also serves as a
business consultant and is an author of several management and strategic
management books. Dr. Certo resides in Longwood, Florida.
Kenneth W. Hill is a Director of Federal Trust and the Bank. Mr. Hill
became a director of the Bank on January 26, 1996. He was formerly a Vice
President and Trust Officer for SunBank, N.A. from 1983 through 1995. Mr. Hill,
who is now retired, has been a resident of central Florida since 1957.
88
Louis E. Laubscher is a Vice President and Chief Lending Officer of the
Bank and oversees the Bank's Lending Department. Mr. Laubscher joined the Bank
in February 1995 as a Vice President and was promoted to Chief Lending Officer
in January 1996. From 1992 as a Vice President in charge of Problem Assets, Mr.
Laubscher was a director, Executive Vice President and Chief Lending Officer for
First Family Bank, fsb, Eustis, Florida. From 1975 to 1992, Mr. Laubscher was a
Senior Vice President and Manager of the Loans and Investments Division for The
First, F.A., Orlando, Florida. The First F.A. was acquired by Great Western Bank
of Florida in a Resolution Trust Corporation assisted transaction in October
1991. Mr. Laubscher has over 20 years of experience in Senior Management of
financial institutions and holds an MBA from the University of California at
Berkeley. Mr. Laubscher has been a resident of Winter Park, Florida since 1971.
EXECUTIVE COMPENSATION
Executive Compensation
The following table sets forth, for the fiscal years ended December 31,
1996, 1995, and 1994, the total compensation paid to or accrued by the Chief
Executive Officer and each of the four most highly compensated executive
officers of Federal Trust and its subsidiaries, whose aggregate salaries and
bonuses exceeded $100,000 per year.
Annual Compensation(1)
- ------------------------------------------------------------------------------------------------------------
Name and Principal Bonus Other Annual
Position Year Salary(3)(4) Options Compensation (5)
--------------------------- ---- ------------ ------- ----------------
James T. Bell, 1996 $ 33,033 $ - $ 25,290
CEO and President(2) 1995 151,508 - 27,279
1994 182,327 5,563 21,879
James V. Suskiewich, 1996 137,409 11,000 14,161
CEO and President 1995 118,223 16,000 13,169
of the Bank(4) 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) Mr. Bell resigned his position as Chairman of the Board, President and
Chief Executive Officer on June 12, 1996. Mr. Bell did not receive a
bonus in 1996 and his Annual Compensation for fiscal years ended December
31, 1996, 1995 and 1994, were paid by Federal Trust. Mr. Bell was granted
stock options to acquire 107,674 shares of common stock at $6.40 per
share pursuant to the 1993 Stock Option Plan for Directors ("Stock
Plan"). The Stock Options were canceled when the Board rescinded the
Stock Plan on March 7, 1997.
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(3) Includes CEO. There were no other executives whose salary and bonus
exceeded $ 100,000 per year.
(4) Mr. Suskiewich was appointed Chairman of the Board, President and Chief
Executive Officer of Federal Trust on July 26, 1996. His compensation is
paid by the Bank.
(5) Amount includes disability insurance, health and life insurance premiums,
use of automobile and Country Club dues.
Options and Long-Term Compensation
Employee Stock Ownership Plan. In 1990, the Company adopted an Employee
Stock Ownership Plan ("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 of the Internal Revenue Code.
All full-time salaried employees of Federal Trust 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 current employees had vested interest in the ESOP as of December 31,
1996. Mr. Suskiewich is not vested in the ESOP.
The ESOP contributions 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, the Company contributed $38,000 to the ESOP.
Stock Option Plan for Directors. On May 5, 1993, the Board of Directors
of the Company approved a Stock Option Plan for Directors ("Stock Plan"). The
Stock Plan provided that a maximum of 176,968 shares of common stock (the "Stock
Options") would be made available to directors and former directors of the
Company. Stock options were issued on May 6, 1993, to 13 individuals who were at
that time directors or were former directors of the Company. The Stock Options
were for a term of ten years from the date of grant. The Stock Options were
issued at an exercise price of $6.40 per share determined at the time of
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issuance to be the fair market value of the underlying common stock on the date
the Stock Option was granted. The options held by an active director are
canceled immediately if such director is removed for "cause," as defined in the
Stock Plan.
On March 7, 1997, the Board of Directors of Federal Trust rescinded the
Stock Plan and the underlying Stock Options were canceled. At the time the Stock
Plan was rescinded, none of the Stock Options had been exercised. The Company
issued no Stock Options or stock appreciation rights as compensation during the
period January 1, 1996, through March 31, 1997.
Salary Continuation Plan. In January, 1997, the Board of Directors of the
Bank adopted a Salary Continuation Plan ("Plan") for the Bank's senior executive
officers, James V. Suskiewich and Aubrey H. Wright, Jr., subject to the approval
of the OTS. The Plan is designed to provide the senior executive with a salary
continuation retirement benefit based on 60% of his final salary. The OTS
approved the Plan on April 4, 1997. The Plan is a non-qualified executive
benefit plan wherein the Bank has agreed to pay the senior executives additional
benefits at retirement (age 65), in return for their continued satisfactory
performance. In order to implement the Plan, the Bank entered into separate
written salary Continuation Agreements ("Agreements") with James V. Suskiewich
and Aubrey H. Wright, Jr. The Agreements are identical except for the
contractual annual benefit and the total benefit. Under the Plan and Agreements,
Mr. Suskiewich will receive an annual benefit of $65,000 per year with a total
death benefit of $400,000, and Mr. Wright will receive an annual benefit of
$25,000 per year with a total death benefit of $200,000. The duration of the
retirement benefits for both individuals are 17 years. Early retirement benefits
under the Agreements vest on a gradual basis, 30% at the end of the third year,
and 10% each year thereafter. Should the senior executive become disabled, he
will vest 100% in the accrued balance. In the event of a change of control, the
senior executive will become fully vested under the Plan.
The Plan is backed by separate life insurance policies which the Bank
purchased to offset the Bank's contractual obligation to pay pre-retirement
death benefits and to recover the Bank's cost of providing such benefits upon
the death of the senior executives. The senior executives are the insured
persons under the respective policies, while the Bank is the owner and
beneficiary. The senior executive has no claim on the insurance policy, its cash
value, or the proceeds thereof.
Stock Options for Stock Sales
In connection with the 1993 Private Placement Offering and the 199_ Public
Offering, Federal Trust issued stock options to certain sales representatives
for their commitment to sell common stock in the respective offerings. The
options have a strike price of $10.00 per share and will expire on October 26,
1999. Based upon the terms of the stock options, the strike price would be
adjusted to $5.54 per share if the Offering reaches the Total Maximum. At March
31, 1997 none of the stock options for 58,453 shares had been exercised.
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Director Compensation
Effective July 1, 1996, Federal Trust temporarily suspended the payment
on all Board and Committee fees. Prior to that time, each director of Federal
Trust received a fee of $500 for each meeting of the Board which he or she
attended, 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 or which
he or she attended. Directors are reimbursed for expenses incurred in connection
with attendance at meetings of the Board of Directors and all standing
committees. Federal Trust does not intend to resume paying Board and Committee
for the remainder of 1997. The Bank's Board of Directors, however, receive
director's compensation. Each Bank director receives a quarterly director's fee
of $750, $500 per Board meeting, and $250 for each Committee meeting he attends.
Employment Contracts
Federal Trust and the Bank have jointly entered into employment
agreements with two of their executive officers, James V. Suskiewich, President
and Chief Executive Officer, and Aubrey H. Wright, Chief Financial Officer. The
employment agreements became effective September 1, 1995. The employment
agreements with Messrs. Suskiewich and Wright are substantially the same except
as noted herein.
Each of the individuals is entitled to receive a base salary, plus
reimbursement of reasonable business expenses. 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. Mr. Wright is also considered for any annual
performance bonus program developed by the Bank or the Corporation. For the year
ended December 31, 1996, Mr. Wright received a performance bonus of $7,500. The
base salary and any bonus is paid by the Bank. Messrs. Suskiewich and Wright may
participate in all employee benefits, stock option plans, pension plans,
insurance plans and other fringe benefits commensurate with his position. On or
before September 15 each, the Board of Directors shall review the employment
agreements and the employees' performance and vote whether to extend the term of
the employment agreements for an additional year. The decision to extend these
agreements is within the sole discretion of the Board of Directors.
The employment agreements provide for termination by the Bank for
"cause", as defined in the employment agreement. In the event the Bank chooses
to terminate Messrs. Suskiewich and Wright's employment for reasons other than
for cause, they (or in the event of death, their respective beneficiaries) would
be entitled to a severance payment equal to the total annual compensation for
the remainder of the term of the employment agreement. In the event of a change
of control of Federal Trust 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 Federal Trust or the Bank is acquired. If he
accepts employment with the acquirer, he will be entitled to 50 percent of the
special incentive bonus. The special incentive bonus is payable by either
Federal Trust or the Bank. In the event of a change of control of Federal Trust
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or the Bank, Mr. Wright will be entitled to a special incentive bonus equal to
his annual salary then in effect, times the price/book value ratio at which
Federal Trust or the Bank is acquired. If he accepts employment with the
acquiror or the Bank, he shall receive a special incentive bonus equal to 50
percent of his annual salary then in effect, times the price/book value ratio at
which Federal Trust or the Bank is acquired.
The Agreement permits Messrs. Suskiewich and Wright to terminate their
employment voluntarily. In the event of voluntary termination, except as
previously described herein, all rights and benefits under the contracts shall
immediately terminate upon the effective dates of termination.
CERTAIN TRANSACTIONS
Indebtedness of Management
In 1994 the Board of Directors of Federal Trust and the Bank amended
their respective loan policies with regard to loans to directors, and officers,
but permits loans to 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 Federal Trust 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 James T. Bell, the former
Chairman, President and Chief Executive Officer of Federal Trust. Mr. Morrone is
considered to be an "affiliate," as that term is defined by SEC regulations. The
largest outstanding balance during 1996 was $737,128. As of March 31, 1997, the
balance on the loan was $478,128.
Transactions With Certain Related Persons
Effective January 1, 1990, John Martin Bell, a major shareholder and
former director of Federal Trust, and the wife of James T. Bell, the former
Chairman of the Board of Federal Trust, as lessor, and Federal Trust, as lessee,
entered into a triple net lease ("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 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 Federal
Trust increased to 11,393 square feet. On November 11, 1991, Federal Trust and
Mrs. Bell terminated the Lease and executed a new triple net lease (the "New
Lease"), pursuant to which Federal Trust has leased 13,305 square feet in the
Premises. The term of the New Lease runs until December 31, 2000. The New Lease
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will automatically be extended for two consecutive periods of ten years each
unless Federal Trust elects to terminate the New Lease pursuant to the notice
provisions in the New Lease prior to expiration of ten-year lease period.
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 New Lease term will
be the preceding year's rent increased by the Consumer Price Index Escalation;
provided, however, that in no event shall rent increase be less than 3 percent
or more than 6 percent. Federal Trust believes the terms of this transaction are
no less favorable to Federal Trust than transactions obtainable from
unaffiliated parties.
BENEFICIAL OWNERSHIP OF COMMON STOCK
The following table indicates certain information regarding the current
beneficial ownership of Common Stock by each of the Company's directors and
executive officers, and all of the directors and executive officers as a group,
along with their anticipated purchases in the Offering.
Amount Owned % of Amount Owned % of Ownership % of Ownership
Name At March 31, 1997 Ownership After the Offering Based on Total Min. Based on Total Max.
---- ----------------- ---------- ------------------ ------------------ -------------------
James V. Suskiewich 33,844(1) 1.51% 58,844(1) 1.80 % 1.24 %
Aubrey H. Wright 100 (2) 25,100 (2) (2)
George W. Foster 1,343 (2) 1,343 (2) (2)
Dr. Samuel C. Certo (3) (2) 25,000 (2) (2)
Kenneth W. Hill (3) (2) 25,000 (2) (2)
Louis E. Laubscher 10,000 (2) 10,000 (2) (2)
All Directors, Former
Directors and Executive
Officers as a Group
(6 persons) 45,287 2.02% 145,287 4.48 % 3.07 %
- --- ====== ====== ======= ======= =====
- --------------------------
(1) Includes 25,391 shares held as trustee under the Company's ESOP with
respect to which Mr. Suskiewich exercises sole voting and investment
power.
(2) Amount is less than 1 %.
(3) Currently owns no stock.
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DESCRIPTION OF CAPITAL STOCK
Federal Trust has authorized 5,000,000 shares of Common Stock, par
value $0.01 per share. As of March 31, 1997, 2,239,928 shares of Common Stock
were issued and outstanding and 16,577 shares were held as Treasury Stock. The
Articles of Incorporation of Federal Trust ("Federal Trust Articles") do not
authorize the issuance of preferred stock.
Each share of Federal Trust Common Stock has the same relative rights
and is identical in all respects with every other share of Federal Trust Common
stock. The holders of Common Stock possess exclusive voting rights in Federal
Trust, and are entitled to one vote for each share held of record on all matters
submitted to a vote of holders of Federal Trust Common Stock.
The holders of the Common Stock are entitled to dividends when, as and
if declared by the Board of Directors in their discretion out of funds legally
available therefore. As a holding Company, the principal source of funds for
Federal Trust is capital distributions from the Bank, the payment of which is
subject to certain legal restrictions. See "BUSINESS - Supervision and
Regulation."
All outstanding shares of Common Stock, and the shares offered hereby
(upon payment therefore) are fully paid and nonassessable. Holders of Common
Stock have no conversion, preemptive or other rights to subscribe for any other
shares or securities, or any conversion rights, and there are no redemption or
sinking fund provisions with respect to such shares. Holders of Common Stock,
however, are being given Subscription Rights in the Offering. In the event of
liquidation, the holders of Common Stock are entitled to receive pro rata any
assets distributable to shareholders in respect of shares held by them.
DESCRIPTION OF CERTAIN PROVISIONS IN THE ARTICLES
AND BYLAWS OF FEDERAL TRUST
The following summaries of certain provisions of Federal Trust Articles
and Bylaws ("Federal Trust Bylaws") do not purport to be complete and are
qualified in their entirety by reference to such instruments, each of which is
incorporated by reference as an exhibit to the Registration Statement of which
this Prospectus is a part. See "AVAILABLE INFORMATION".
Certain provisions of Federal Trust Articles and Federal Trust Bylaws
may have the effect of preventing, discouraging or delaying any change in
control of Federal Trust. The Board of Directors has the power to issue
additional shares of Common Stock which may help delay or deter a change in
control by increasing the number of shares needed to gain control. The following
provisions in Federal Trust Articles and Federal Trust Bylaws also may deter any
change in control of Federal Trust.
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Removal of Directors
Any director, or the entire Board of Directors, may be removed from
office at any time, with or without cause, by the affirmative vote of the
holders of at least a majority of the voting power of all of the
then-outstanding shares of capital stock of Federal Trust entitled to vote
generally in the election of directors voting together as a single class.
Special meetings of the Stockholders may be called only by (i) the
Board of Directors pursuant to a resolution duly adopted by a majority of the
total number of directors then authorized whether or not any vacancies then
exist in previously authorized directorships (the Board of Directors as
comprised of all directorships authorized at a given time being the "Full
Board"), or (ii) by Shareholders who hold not less than ten percent (10%) of all
of the votes entitled to be cast on any issue proposed to be considered at the
proposed special meeting by their signing, dating and delivering to Federal
Trust's Secretary one or more written demands for the meeting describing the
purpose or purposes for which it is to be held. The Federal Trust Articles also
provide that any action required or permitted to be taken by the shareholders of
Federal Trust may be taken only at an annual or special meeting and prohibits
shareholder action by written consent in lieu of a meeting.
Amendment of Articles and Bylaws
Amendments to Federal Trust Articles or Bylaws must be approved by the
affirmative vote of the holders of a majority of the voting power of all of the
then outstanding shares of the Common Stock entitled to vote generally in the
election of directors, voting together as a single class.
Noncumulative Voting for Directors
Federal Trust Articles do not provide Shareholders the right to
cumulate their votes for the election of directors. Accordingly, holders of more
than 50% of the shares voting to elect directors may elect all of the directors
and, in such event, the holders of the remaining shares (less than 50%) voting
would not be able to elect any board members.
Indemnification
The Florida Act authorizes Florida corporations to indemnify any person
who was or is a party to any proceeding (other than an action by, or in the
right of, the corporation) by reason of the fact that he or she is or was a
director, officer, employee, or agent of the corporation or is or was serving at
the request of the corporation as a director, officer, employee, or agent of
another corporation or other entity, against liability incurred in connection
with such proceeding, including any appeal thereof, if he or she acted in good
faith and in a manner he or she reasonably believed to be in, or not opposed to,
the best interests of the corporation and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his or her conduct was
unlawful. In the case of an action by or on behalf of a corporation,
indemnification may not be made if the person seeking indemnification is
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adjudged liable, unless the court in which such action was brought determines
such person is fairly and reasonably entitled to indemnification. The
indemnification provisions of the Florida Act require indemnification if a
director or officer has been successful on the merits or otherwise in defense of
any action, suit or proceeding to which he or she was a party by reason of the
fact that he or she is or was a director or officer of the corporation. The
indemnification authorized under Florida law is not exclusive and is in addition
to any other rights granted to officers and directors under the articles of
incorporation or bylaws of the corporation or any agreement between officers and
directors and the corporation. A corporation may purchase and maintain insurance
or furnish similar protection on behalf of any officer or director against any
liability asserted against the director or officer and incurred by the director
or officer in such capacity, or arising out of the status, as an officer or
director, whether or not the corporation would have the power to indemnify him
or her against such liability under the Florida Act.
Federal Trust's Articles provide for the indemnification of directors
and executive officers to the maximum extent permitted by Florida law as
authorized by the Board of Directors and for the advancement of expenses
incurred in connection with the defense of any action, suit or proceeding that
the director or executive officer was a party to by reason of the fact that he
or she is or was a director of Federal Trust upon the receipt of an undertaking
to repay such amount, unless it is ultimately determined that such director is
not entitled to indemnification.
THE OFFERING
The Rights Offering
Federal Trust is offering up to 2,701,619 shares of its Common Stock
(the "Total Maximum"), on a priority basis to Shareholders as of the March 26,
1997, Record Date, pursuant to non-transferable Subscription Rights. The
Subscription Right entitles each Shareholder to purchase one additional share of
Common Stock for each whole share of Common Stock held on the Record Date.
Shareholders are entitled to subscribe for all, or any portion of, the shares of
Common Stock underlying their Subscription Rights. See "Subscription
Limitation".
The Community Offering and Syndicated Community Offering
Immediately following the Rights Offering, Federal Trust is offering
shares of Common Stock in a Community Offering to members of the general public
whom a copy of the Prospectus is delivered. In addition, following completion of
the Rights Offering such shares will be offered by Federal Trust to the general
public in a Syndicated Community Offering to be managed by KBW. The shares of
Common Stock offered for sale in the Community Offering and the Syndicated
Community are subject to the right of Federal Trust to accept or reject orders
received in the Community Offering and the Syndicated Community Offering, in
whole or in part, and the other limitations described herein. If the number of
shares of Common Stock not subscribed for through the Rights Offering are not
sufficient to satisfy all orders received from participants in the Community
Offering, such excess shares will be allocated pro rata among such persons based
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on the aggregate number of shares ordered in the Community Offering and the
Syndicated Community Offering. If a proration of such excess shares results in a
person receiving fewer shares than the person subscribed for in the Community
Offering, then any excess funds paid by such person as the Subscription Price
for shares not issued will be returned without interest or deduction as soon as
practical following the Offering Expiration Date. There can be no assurance that
any shares of Common Stock will be available to persons desiring to subscribe
for Common Stock in the Community Offering. To subscribe for Common Stock in the
Community Offering properly, the appropriate section of the Order Form must be
completed, and payment in full of the aggregate Subscription Price for all
shares of Common Stock subscribed for must accompany the Order Form.
Financial Advisor
Federal Trust has entered into agreements with Carrthers & Co. and RP
Financial, whereby Carruthers & Co. and RP Financial are to serve as the
Company's financial advisors in connection with the Offering. In connection with
their respective engagements, Carruthers & Co. and RP Financial have assisted
management and Board in its evaluation of various capital transactions,
including equity and debt securities, which would raise sufficient capital to
support the Company's growth objective. RP Financial is providing advice to
management and the Board of Directors regarding the terms of the Offering. RP
Financial has prepared a written opinion that the Subscription Price and the
terms of the Offering are fair from a financial point of view to Federal Trust
and its current shareholders. Neither Carruthers & Co. nor RP Financial have
been retained to solicit the sale or purchase of the Common Stock being offered
in this Offering. Furthermore, neither Carruthers & Co. nor RP Financial have
had any prior financial transactions with the Company or are affiliated with the
Company in any manner. See "DETERMINATION OF SUBSCRIPTION PRICE".
Marketing Arrangements
Federal Trust has engaged KBW as its "Sales Agent" in connection with
the Offering pursuant to a Sales Agency Agreement executed between Federal Trust
and KBW (the "Agency Agreement"). KBW was chosen because of its general
experience in the financial services industry and because of its experience in
transactions involving shareholder rights offerings and community offerings.
KBW has provided advice to Federal Trust regarding the structure of the
Offering, as well as with respect to marketing the shares of Common Stock to be
issued in the Offering. KBW will use its best efforts to solicit subscriptions
and purchase orders for shares of Common Stock in the Offering.
KBW has not prepared any report or opinion constituting a
recommendation or advice to Federal Trust or its shareholders, nor have they
prepared an opinion as to the fairness of the Subscription Price or the terms of
the Offering to Federal Trust or its Shareholders. KBW expresses no opinion and
makes no recommendation to holders of Subscription Rights as to whether such
Holders should exercise their Subscription Rights. KBW also expresses no opinion
98
as to the prices at which shares to be distributed in connection with the
Offering may trade if and when they are issued or any future time. See
"DETERMINATION OF SUBSCRIPTION PRICE."
As compensation for its services, Federal Trust has agreed to pay KBW:
(i) an advisory fee of $25,000 (which has previously been paid and will be
credited against the marketing fees paid to KBW); (ii) a marketing fee equal to
2.0% of the aggregate Subscription Price of the Common Stock sold in the Rights
Offering, excluding shares subscribed for or purchased by the Bank's officers,
directors, or employees, and (iii) a marketing fee of 7.0% of the aggregate
Subscription Price of the Common Stock sold in the Community Offering and the
Syndicated Community Offering, excluding shares subscribed for or purchased by
the Bank's officers, directors or employees. KBW will pass on to such selected
broker-dealers who participate in the Syndicated Community Offering an amount of
stock sold at a comparable price per share in a similar market environment. Fees
with respect to purchases affected with the assistance of broker-dealers other
than KBW will be transmitted by KBW to such broker-dealer. In connection with
its engagement of KBW, Federal Trust has agreed to indemnify KBW against certain
liabilities arising out of its engagement or, in the event indemnification is
unavailable, to contribute payments that KBW may be required to make in respect
thereof.
Expiration Date of the Offering
The Rights Offering will expire at 5:00 p.m., Eastern Time, on August
29, 1997 (the "Rights Offering Expiration Date"). After the Rights Offering
Expiration Date, unexercised Subscription Rights will be null and void. Federal
Trust will not be obligated to honor any Order Form received by the Escrow Agent
after the Rights Offering Expiration Date, regardless of when the documents were
sent.
The Community Offering and Syndicated Offering will expire on September
30, 1997, unless extended at the sole discretion the Board of Directors of
Federal Trust to a date not later than November 15, 1997 (the "Offering
Expiration Date").
Conditions to Consummation of the Offering
The Offering will not be consummated and all funds received with
subscriptions by the Company's Escrow Agent will be promptly returned with
interest if the Total Minimum (1,000,000 shares of Common Stock) is not sold
through the Offering.
Procedure for Subscribing for Common Stock
Current Stockholders who desire to exercise their Subscription Rights,
as well as persons who desire to participate in the Community Offering must
deliver to the Escrow Agent , on or prior to the Rights Offering Expiration Date
or the Offering Expiration Date, whichever the case may be, a properly completed
and executed Order Form with any required signatures guaranteed, together with
payment in full of the aggregate Subscription Price for the shares of Common
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Stock subscribed for in the Offering. Such payment in full must be by (a) check
or bank draft drawn upon a U.S. bank or postal, telegraphic or express money
order payable to the Independent Bankers Bank of Florida ("IBBF") as Escrow
Agent for Federal Trust, or (b) wire transfer of funds to the account maintained
by the Escrow Agent for such purpose at IBBF. The aggregate Subscription Price
will be deemed to have been received by the Escrow Agent only upon (i) clearance
of any non-certified check, (ii) receipt by the Escrow Agent of any certified
check or bank draft drawn upon a U.S. bank or of any postal, telegraphic or
express money order, or (iii) receipt of good funds in the Escrow Agent's
account designated above. If paying by a non-certified personal check, please
note that the funds paid thereby may take at least five business days to clear.
Accordingly, persons who wish to pay the aggregate Subscription Price by means
of a non-certified personal check are urged to make payment sufficiently in
advance to the Rights Offering Expiration Date to ensure that such payment is
received and clears by such date and are urged to consider payment by means of
certified or cashier's check, money order or wire transfer of funds. All funds
received shall be held by the Escrow Agent and invested at the direction of
Federal Trust in short-term certificates of deposit, short-term obligations of
the United States, any state or agency thereof, or money market mutual funds
investing in the foregoing instruments. The account in which such funds will be
held may not be insured by the FDIC. Earnings on such funds (which are not
expected to be material) will be retained by Federal Trust. The Total Minumum
(shares) must be sold in order to break escrow. If the Total Minimum Shares are
not sold, the funds held in the Escrow Account will be returned with interest.
If the Total Minimum shares are sold and the Offering is closed, any earning on
such funds pending disposition of the Subscription Funds, the Escrow Agent will
invest collected Subscription Funds, in $1,000 increments above a maintained
balance of $50,000, in overnight repurchase agreements collateralized at 102%
with obligations of the United States Treasury or United States Government
Agencies. These repurchase agreement transactions will earn interest at a rate
of 35 basis points below the daily Overnight Fed Funds Sold rate.
The address to which the Order Form and payment of the Subscription
Price should be delivered is:
Independent Bankers' Bank of Florida
Attention: James H. McKillop, III, Senior Vice President
109 East Church Street
Orlando, Florida 32801
Payment may be made by wire transfer as described above. Persons who
make payments by such method must be sure to deliver to the Escrow Agent, prior
to the Expiration Date, a properly executed and completed Order Form. Order
Forms may be delivered to the Escrow Agent as described above or by telecopy.
The Escrow Agent's telephone number is (407) 423-2002. The Escrow Agent's
telecopy number is (407) 481-8637. The contact person is Senior Vice President
James McKillop, III.
If the aggregate Subscription Price paid by a Shareholder is
insufficient to purchase the number of shares of Common Stock that the
100
Shareholder indicates are being subscribed for, or if a Shareholder does not
specify the number of shares of Common Stock to be purchased, or if the
Aggregate Subscription Price paid by a Shareholder exceeds the amount necessary
to purchase the number of shares of Common Stock for which the Shareholder has
indicated an intention to subscribe, then the Shareholder will be deemed to have
exercised first, the Subscription Right (if not already exercised) and second,
to have purchased shares of Common Stock to the full extent of the payment
tendered (subject only to reduction to the extent necessary to comply with any
regulatory limitation or conditions imposes by Federal Trust in connection with
the Community Offerings). See "Subscription Limitation."
If the Aggregate Subscription Price paid by a person purchasing shares
in the Community Offering is insufficient to purchase the number of shares of
Common Stock that the person indicates are being subscribed for, or if such
Community Offering participant does not specify the number of share of Common
Stock subscribed for, or if the aggregate Subscription Price paid by a Community
Offering participant exceeds the amount necessary to purchase the number of
shares of Common Stock for which the Community Offering participant has
subscribed, then the Community Offering participant will be deemed to have
subscribed for the number of shares of Common Stock which may be purchased by
the full extent of the payment tendered (subject only to reduction to comply
with regulatory limitations or conditions of the Offering). See "Subscription
Limitation".
With respect to Order Forms submitted by Shareholders, unless such
Order Form (i) provides that the shares of Common Stock to be issued pursuant to
the exercise of Subscription Rights are to delivered to the holder of such
Subscription Rights or (ii) is submitted for the account of an Eligible
Institution, as defined, signatures on such Order Forms must be guaranteed by an
Eligible Institution. An "Eligible Institution" for this purpose is a member
firm of a registered national securities exchange or a member of the National
Association of Securities Dealers, Inc. ("NASD"), or a commercial bank or trust
company having an office or correspondent in the United States.
Holders who hold shares of Common Stock for the account of others, such
as brokers, trustees or depositories for securities, should notify the
respective beneficial owners of such shares as soon as possible to ascertain
such beneficial owners' intentions and to obtain instructions with respect to
Subscription Rights. If such a beneficial owner so instructs, the record holder
of such Subscription Right should submit payment to the Escrow Agent with the
proper documentation. In addition. beneficial owners of Common Stock held
through such a nominee holder should contact the holder and request the holder
to effect transactions in accordance with the beneficial owner's instructions.
The instructions accompanying the Order Form should be read carefully
and followed in detail. Order Forms should be sent with payment to the Escrow
Agent. Do not send Order Forms to Federal Trust.
The method of delivery of Order Forms and payment of the aggregate
Subscription Price to the Escrow Agent will be at the election and risk of
Shareholders and Community Offering participants, but if sent by mail, it is
recommended that such Order Form and payments be sent by registered mail,
properly insured, with return receipt requested and that a sufficient number of
101
days be allowed to ensure delivery to the Escrow Agent and clearance of payment
prior to the Rights Offering Expiration Date or the Offering Expiration Date,
whichever the case may be. Because uncertified personal checks may take five
business days to clear, you are strongly urged to pay, or arrange for payment,
by means of certified or cashier's check, money order or wire transfer of funds.
All questions concerning the timeliness, validity, form and eligibility
of Order Forms received or any exercise of Subscription Rights will be
determined by Federal Trust, whose determinations will be final and binding.
Federal Trust in its sole discretion may waive any defect or irregularity, or
permit a defect or irregularity to be corrected within such time as it may
determine, or reject the purported subscriptions for shares of Common Stock.
Order Forms will not be deemed to have been received or accepted until all
irregularities have been waived or cured within such time as Federal Trust
determine in its sole discretion. Neither Federal Trust nor the Escrow Agent
will be under any duty to give notification of any defect or irregularity in
connection with the submission of Order Forms or incur any liability for failure
to give such notification.
Subscriptions for the Common Stock which are received by the Escrow
Agent from Shareholders exercising Subscription Rights or from person in the
Community Offering may not be revoked.
Investors who desire to purchase shares of Common Stock in the
Syndicated Community Offering are advised that any broker-dealer who
participates in such Syndicated Community Offering will be required either (i)
upon receipt of an executed Order Form or direction to execute an Order Form on
behalf of an investor, to forward the aggregate Subscription Price to the Escrow
Agent on or before twelve noon, prevailing time, of the business day next
following such receipt or execution, or (ii) upon receipt of confirmation by
such broker-dealer of an investor's interest in purchasing shares, and following
an acknowledgment by such broker-dealer to such investor on the next business
day next following receipt of confirmation, to debit the account of such
investor on the fifth business day next following receipt of confirmation and to
forward the aggregate Subscription Price to the Escrow Agent on or before twelve
noon, prevailing time, of the business day next following such debiting.
Certain directors and executive officers of Federal Trust and the Bank
will assist the Company in the Offering by, among other things, participating in
shareholder and community informational meetings regarding the Offering,
generally being available to answer questions of potential subscribers and
soliciting orders in the Rights Offering and Community Offering. The directors
and executive officers are not registered as securities brokers or dealers under
the federal or applicable state securities laws, nor are these individuals
affiliated with any broker or dealer. Because none of the directors or executive
officers are in the business of either effecting securities transactions for
others or buying and selling securities for their own account, they are not
required to register as brokers or dealers under the federal securities laws. In
addition, the proposed activities of such directors and executive officers are
exempted from registration pursuant to a specific safe-harbor provision under
Rule 3a4-1 under the Exchange Act. Substantially similar exemptions from
registration are available under applicable state securities laws.
102
The Rights Offering
Shareholders, defined herein as the holders of shares of Common Stock
at the close of business as of the March 26, 1997 Record Date ("Shareholders"),
are being provided, on a priority basis, non transferable subscription rights to
purchase at the Subscription Price one share of Common Stock for each whole
share of Common Stock owned on the Record Date (the "Subscription Right").
Shareholders are entitled to subscribe for all, or any portion of (subject to
the minimum subscription requirement), the shares of Common Stock underlying
their Subscription Rights, provided the aggregate number of shares owned by any
Shareholder, individually or together with associates or persons acting in
concert with such Shareholder, at the conclusion of the Offering does not exceed
9.99%.
Subscription Limitation
Federal Trust will not be required to issue shares of Common Stock
pursuant to the Offering to any person who, in the opinion of Federal Trust,
would be required to obtain prior clearance or approval from any federal
regulatory authority to own or control such shares. The minimum number of shares
of Common Stock any person may purchase in the Community Offering or the
Syndicated Community Offering is 500 shares and the maximum amount any person
may purchase (individually, or together with associates or persons acting in
concert with such person) in the Community Offering or the Syndicated Community
Offering is 5% of the total number of shares sold in the Offering. In addition,
no person shall be allowed to purchase (individually or together with associates
or persons acting in concert with such person) shares of Common Stock in the
Rights Offering or the Community Offering of the Syndicated Offering which when
aggregated would exceed 9.99% of the total number of shares outstanding at the
conclusion of the Offering.
Under OTS regulations a rebuttable presumption of concerted action will
occur but is not limited to these situations: (1) a person will be presumed to
be acting in concert with the members of the person's immediate family (which
includes a person's spouse, father, mother, children, brothers, sisters and
grandchildren; the father, mother, brother and sisters of the person's spouse;
and the spouse of the person's child, brother or sister); (2) persons will be
presumed to be acting in concert with each other where: (i) both own stock in a
savings bank and both are also management officials, controlling shareholders,
partners, or trustees of another company; or (ii) one person provides credit to
another or is instrumental in obtaining financing for another person to purchase
stock of the savings bank; and (3) a person will be presumed to be acting in
concert with any trust for which such person or company serves as a trustee.
Blue Sky Consideration
The securities in this Offering will be registered in the following
states: California, Colorado, Delaware, Florida, Illinois, Indiana, Michigan,
New Jersey, New York, North Dakota, Ohio, Pennsylvania and Texas. The total
maximum number of shares being offered in the states of Illinois, Texas and Ohio
103
is 500,000 in each state. The total maximum number of shares being offered in
Indiana is 250,000. The total maximum number of shares being offered in the
state of Michigan is 50,000.
The securities in this Offering will not be registered in the following
states: Alabama, Connecticut, the District of Columbia, Georgia, Hawaii, Idaho,
Iowa, Louisiana, Maine, Maryland, Massachusetts, Minnesota, Missouri, New
Hampshire, New Mexico, Okalhoma, South Carolina, Tennessee, Virginia and
Washington. In these states, the Offering will be limited solely to existing
Shareholders of Federal Trust under their Subscription Right, or will be offered
pursuant to other available exemptions from registration provided under the Blue
Sky Laws of those states.
Issuance of Common Stock
Provided that all conditions necessary to consummate the Offering are
satisfied, including the sale in the Offering of the Total Minimum number of
shares of Common Stock, certificates representing shares of Common Stock
purchased pursuant to the Offering will be delivered to purchasers as soon as
practical after the Offering Expiration Date and after all prorations and
adjustments contemplated by the Rights Offering and Community Offering have been
effected. No fractional shares will be issued in the Offering
Subscription Price
The Subscription Price is $2.00 in cash, per share of the Common Stock
subscribed for in the Offering. See"DETERMINATION OF SUBSCRIPTION PRICE".
Foreign and Certain Other Stockholders
Order Forms will not be mailed to Shareholders whose addresses are
outside the United States or who have an APO or FPO address, but will be held by
the Escrow Agent for their account. To exercise their Subscription Rights, such
Shareholder must notify the Escrow Agent prior to the Rights Offering Expiration
Date.
Certain Federal Income Tax Considerations
For federal income tax purposes, receipt of the Subscription Rights
should be treated as a non-taxable distribution with respect to the Common
Stock. A Current Stockholder will have a zero basis in the Subscription Rights,
unless: (i) either the Shareholder elects under Section 307 of the Internal
Revenue Code of 1986, as amended ("Code"), to allocate a portion of his or her
basis in his or her existing Common Stock to the Subscription Rights (based on
their relative fair market value) or the fair market value of the Subscription
Rights at the time of distribution equals or exceeds 15% of the fair market
value of the Common Stock at that time, in which case the allocation of basis
(based upon relative fair market values) is required; and (ii) the Shareholder
exercises such Subscription Rights.
104
Upon exercise of Subscription Rights, Shareholder will not recognize
gain or loss. The basis of each share of Common Stock acquired upon exercise of
a Subscription Right will equal the sum of the Subscription Price and the basis,
if any, in the Subscription Right exercised. The holding period for such Common
Stock will begin on the date the Subscription Rights are exercised. No loss will
be recognized by a Shareholder who receives Subscription Rights and allows those
Subscription Rights to lapse.
Because of the individual nature of tax consequences, Shareholders are
advised to consult their tax advisors with respect to these and other federal,
state and local tax consequences of the distribution and exercise of
Subscription Rights.
Intention of Directors and Executive Officers
Directors and executive officers of the Company as a group (6 person)
have indicated to the Company that they intend to subscribe for , in the
aggregate, 100,000 shares of Common Stock, either through exercise of
Subscription Rights or in the Community Offering. These intentions are not
commitments and could change based upon individual circumstances. Assuming the
full exercise indicated by the directors and executive officers of the Company,
such persons would be deemed to beneficially own 4.48% and 3.07% of the Common
Stock assumed to be outstanding on a pro forma basis following the Offering at
the Total Minimum and the Total Maximum, respectively.
Right to Amend or Terminate the Offering
Federal Trust expressly reserves the right to amend the terms and
conditions of the Offering whether the terms and conditions are more or less
favorable to Shareholders and Community Offering participants. In the event of a
material change to the terms of the Offering, the Company will file a
post-effective amendment to its Registration Statement, of which this Prospectus
is a part, and resolicit subscribers to the extent required by the Securities
and Exchange Commission ("Commission"). Federal Trust expressly reserves the
right, at any time prior to delivery of shares of Common Stock offered hereby,
to terminate the Offering if the Offering is prohibited by law or regulation or
the Board of Directors concludes, in its judgment, that it is not in the best
interests of Federal Trust to complete the Offering under the circumstances. The
Offering would be terminated by Federal Trust by giving oral or written notice
thereof to the Escrow Agent and KBW and making a public announcement thereof. If
the Offering is so terminated, all funds received from shareholders or Community
Offering participants will be promptly refunded, with interest.
Transfer Agent and Registrar
The Bank currently serves as transfer agent for the Common Stock.
Following the Offering, Federal Trust intends to contract with an independent
transfer agent and registrar company to handle the stock transfers, stock record
keeping, and mailing of proxy materials for Federal Trust.
105
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, Federal Trust will have 3,239,928
shares of Common Stock outstanding assuming the sale of the Total Minimum and
4,941,547, assuming the sale of the Total Maximum shares (including the sale of
the Allotment shares). Of these shares, ______ shares of Common Stock, including
the ______ shares sold in this offering (along with 16,577 shares of the
Allotment if exercised in full), will be freely tradeable without restriction or
further registration under the Securities Act. In addition, _____ shares held by
"affiliates" of the Company "defined in Rule 144 under the Securities Act as a
person who directly or indirectly through the use of one or
more intermediaries controls, is controlled by, or is under common control with
the Company) will be eligible for sale either without restriction or pursuant to
Rule 144.
The Company and its executive officers and directors, and certain
officers of Federal Trust (holding, in the aggregate, ______ shares of Common
Stock assuming all of the Reserved Shares are purchased by such persons) have
agreed that, for a period of 180 days after the consummation of the Offering,
they will not offer, sell, grant any option to purchase or otherwise dispose of
any shares of Common Stock held by them or securities held by them that are
convertible into or exchangeable for such stock, now or in the future, without
the prior written consent of KBW. Thereafter, such shares will be eligible for
sale in the public market, subject to the volume and other limitations on sale
imposed by Rule 144, or unless otherwise registered under the Securities Act.
In general, under Rule 144, a person (or person whose shares are
aggregated) who has beneficially owned shares for at least one year, including
"affiliates" of the Company, would be entitled to sell within any three month
period that number of shares that does not exceed the greater of (i) 1% of the
number of shares of Common Stock then outstanding, or (ii) the average weekly
trading volume of the Common Stock during the four calendar weeks preceding such
sale. Sales pursuant to Rule 144 are subject to certain manner of sale
provisions, notice requirements and the availability of current public
information about the Company. A person (or persons whose shares are aggregated)
who is not deemed to have been an affiliate of the Company at any time during
the 90 days preceding a sale, and who has beneficially owned the shares proposed
to be sold for at least two years, would be entitled to sell such shares under
Rule 144(k) without regard to the requirements described above.
LEGAL MATTERS
Certain legal matters, including, among other things, the validity of
the shares of Common Stock offered hereby, have been passed upon by Igler &
Dougherty, P.A., counsel to the Company. Certain legal matters will be passed
upon for KBW by Breyer & Aguggia, Washington, D.C.
106
EXPERTS
The consolidated financial statements of the Company set forth herein
as of December 31, 1996 and 1995, and for each of the years in the three year
period ended December 31, 1996, have been included herein and in the
Registration Statement in reliance upon the report of KPMG Peat Marwick LLP
appearing elsewhere herein, and upon the authority of said firm as experts in
accounting and auditing.
AVAILABLE INFORMATION
Federal Trust is subject to the informational requirements of the
Exchange Act, and in accordance therewith files reports, proxy statements and
other information with the Commission. Such reports, proxy statements and other
information can be inspected and copied at the public reference facilities
maintained by the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Room
1024, Washington, D.C. 20549 and at the following regional offices of the
Commission: 7 World Trade Center, Suite 1300, New York, New York 10048 and 500
West Madison Street, Suite 1400, Chicago, Illinois 60621. Copies of such
material also can be obtained from the Commission's Public Reference Section at
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed
rates and from the Commission's home page on the World Wide Web at
http://www.sec.gov.
This Prospectus constitutes part of a Registration Statement on Form
S-1 (File No. 33- _______) filed by Federal Trust with the Commission under the
Securities Act. This Prospectus omits certain of the information contained in
the Registration Statement in accordance with the rules and regulations of the
Commission. Reference is hereby made to the Registration Statement and related
exhibits for further information with respect to Federal Trust and the Common
Stock. Statements contained herein concerning the provisions of any document are
not necessarily complete and, in each instance, where a copy of such document
has been filed as an exhibit to the Registration Statement or otherwise has been
filed with the Commission, reference is made to the copy so filed. Each such
statement is qualified in its entirety by such reference.
107
F-35
INDEX TO FINANCIAL STATEMENTS
Report of Independent Public Accountants........................................................................ F-2
Consolidated Balance Sheets - March 31, 1997 (unaudited) and
December 31, 1996 and 1995................................................................................. F-3
Consolidated Statements of Operations for the three months ended March 31, 1997
and 1996 (unaudited) and for the years ended
December 31, 1996, 1995 and 1994........................................................................... F-4
Consolidated Statements of Shareholders' Equity for the three months ended March
31, 1997 and 1996 (unaudited) and for the years
ended December 31, 1996, 1995 and 1994..................................................................... F-5
Consolidated Statements of Cash Flows for the three months ended March 31, 1997
and 1996 (unaudited) and for the years ended
December 31, 1996, 1995 and 1994........................................................................... F-6
Notes to Consolidated Financial Statements...................................................................... F-8
F-1
Report of Independent Public Accountants
F-2
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
March 31, December 31,
Assets 1997 1996 1995
----- ---- ---- ----
(Unaudited)
Cash $ 373,297 628,648 1,618,607
Interest-bearing deposits 2,762,055 4,837,114 51,154
Investment securities available for sale 8,773,703 8,763,641 15,918,376
Investment securities held to maturity 6,307,745 6,290,610 19,093
Loans, less allowance for loan losses 113,214,544 112,547,266 112,905,740
Accrued interest receivable on loans 829,431 833,458 824,330
Accrued interest receivable on investment securities 105,460 196,171 179,874
Accounts receivable - 143,048 -
Note receivable 305,354 305,354 -
Loan sale proceeds receivable - - 37,765
Office facilities and equipment, net 887,140 917,572 1,291,974
Real estate owned 3,612,392 1,508,166
3,293,108
Federal Home Loan Bank stock, at cost 1,427,500 1,253,200 1,853,200
Prepaid expenses and other assets 313,905 228,113 358,465
Deferred income taxes 1,082,724 1,129,696 964,499
Income tax refund receivable - - 1,073,253
---------- ---------- ----------
$ 139,995,250 139,582,057 140,389,438
=============== =========== ===========
Liabilities and Stockholders' Equity
-------------------------------
Liabilities:
Deposits $ 103,745,499 106,119,006 109,203,123
Official checks 508,329 646,235 695,332
Federal Home Loan Bank advances 27,250,000 24,800,000 21,000,000
Debentures - - 420,000
Advance payments by borrowers for taxes and insurance 680,621 347,774 330,504
Accrued expenses and other liabilities 483,879 504,414 680,353
---------- ---------- ----------
Total liabilities 132,668,328 132,417,429 132,329,312
---------- ---------- ----------
Stockholders' equity:
Common stock, $.01 par value, 5,000,000 shares authorized; 2,256,505 shares
issued and outstanding at March 31,
1997 and December 31, 1996 and 1995 22,565 22,565 22,565
Additional paid-in capital 11,143,659 11,143,659 11,143,659
Accumulated deficit (3,125,315) (3,226,204) (2,249,701)
Treasury stock (16,577 shares of common stock, at cost,
at March 31, 1997 and December 31, 1996 and 1995) (76,525) (76,525) (76,525)
Unrealized loss on investment securities, net (203,936) (210,224) (779,872)
Unrealized loss on investment securities transferred from
available for sale to held to maturity, net (433,526) (488,643) -
---------- ---------- ----------
Total stockholders' equity 7,326,922 7,164,628 8,060,126
Commitments and contingencies
---------- ---------- ----------
Total liabilities and stockholders' equity $ 139,995,250 139,582,057 140,389,438
=============== =========== ===========
See accompanying notes to consolidated financial statements.
F-3
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
Three months ended Years ended
March 31, December 31,
----------------- ----------------------
1997 1996 1996 1995 1994
---- ---- ---- ---- ----
(Unaudited)
Interest income:
Loans $ 2,335,042 2,353,343 9,039,426 9,001,646 7,731,077
Investment securities 167,450 152,424 675,279 1,289,085 1,753,625
Interest-bearing deposits and other 47,567 52,055 222,255 318,656 361,971
-------- -------- -------- --------- --------
Total interest income 2,550,059 2,557,822 9,936,960 10,609,387 9,846,673
-------- -------- -------- --------- --------
Interest expense:
Deposit accounts 1,384,785 1,519,970 5,760,390 6,213,679 3,802,350
FHLB advances, notes payable
and other borrowings 338,741 296,904 1,277,492 1,812,655 1,978,219
-------- -------- -------- --------- --------
Total interest expense 1,723,526 1,816,874 7,037,882 8,026,334 5,780,569
-------- -------- -------- --------- --------
Net interest income 826,533 740,948 2,899,078 2,583,053 4,066,104
Provision for loan losses (3,000) (18,356) 279,596 779,415 531,483
-------- -------- -------- --------- --------
Net interest income after provision
for loan losses 829,533 759,304 2,619,482 1,803,638 3,534,621
-------- -------- -------- --------- --------
Other income:
Fees and service charges 25,835 26,301 163,010 187,782 193,866
Rent income 13,673 5,544 - 88,171 2,351
Gain of sale of loans 9,821 101,105 182,045 150,664 263,707
Gain on sale of other real estate, net 39,998 35,291 48,574 43,056 -
Other 15,541 20,846 33,078 35,751 23,353
-------- -------- -------- --------- --------
Total other income 104,868 189,087 426,707 505,424 483,277
-------- -------- -------- --------- --------
Other expenses:
Salary and employee benefits 325,867 344,225 1,173,742 1,437,633 1,436,387
Deposit insurance premiums 61,952 80,390 1,017,902 307,487 207,939
Occupancy and equipment 131,813 169,471 594,703 713,086 585,087
Legal and professional 79,664 136,825 392,775 883,331 618,695
Real estate owned expenses 58,807 66,316 251,156 653,776 392,884
General and administrative expenses 60,490 49,493 172,430 296,872 353,676
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 38,619 96,245 468,819 433,684 400,161
-------- -------- -------- --------- --------
Total other expenses 757,212 942,965 4,236,492 5,790,591 4,238,071
-------- -------- -------- --------- --------
Net income (loss) before income taxes 177,189 5,426 (1,190,303) (3,481,529) (220,173)
Income tax expense (benefit) 76,300 1,953 (213,800) (1,231,828) (41,000)
-------- -------- -------- --------- --------
Net income (loss) $ 100,889 3,473 (976,503) (2,249,701) (179,173)
=========== ===== ======== ========== ========
Earnings (loss) per share $ 0.04 0.00 (.43) (1.00) (.08)
=========== ==== ==== ===== ====
Weighted average number of shares outstanding 2,256,505 2,256,505 2,256,505 2,256,505 2,210,957
========= ========= ========= ========= =========
See accompanying notes to consolidated financial statements.
F-4
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
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
Net income (unaudited) -- -- 100,889 -- -- 100,889
Amortization of unrealized loss on investment
securities held to maturity (unaudited) -- -- -- -- 55,117 55,117
Change in unrealized loss on investment
securities available for sale, net (unaudited) -- -- -- -- 6,288 6,288
----------- ----------- ----------- ----------- ----------- -----------
Balances at March 31, 1997 (unaudited) $ 22,565 11,143,659 (3,125,315) (76,525) (637,462) 7,326,922
----------- ----------- ----------- ----------- ----------- -----------
See accompanying notes to consolidated financial statements
F-5
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Three months ended Years ended
March 31, December 31,
----------------- -------------------------------
1997 1996 1996 1995 1994
---- ---- ---- ---- ----
(Unaudited)
Cash flows provided by (used in) operating activities:
Net income (loss) $ 100,889 3,473 (976,503) (2,249,701) (179,173)
Adjustments to reconcile net income (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 30,000 -- 428,897 1,098,119 838,267
Amortization of premium on purchased loans 90,890 60,013 241,747 428,853 427,201
Deferred income taxes 76,300 1,953 (213,800) (171,747) (371,000)
Depreciation of office facilities and equipment 39,878 50,271 159,564 179,416 210,872
Gain on sale of loans (9,821) (101,105) (182,045) (150,664) (263,707)
Net amortization of fees and
discounts on loans (17,072) (56,484) (89,405) (84,930) 7,137
Net (gain) loss on the sale of real estate owned (39,998) (35,291) (48,574) 75,374 37,507
Write-down on other real estate owned 33,000 18,356 257,921 -- --
Net amortization of premiums and
accretion of discounts on
investment securities (22,015) -- -- 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 4,027 (47,332) (9,128) (159,546) (45,625)
Accrued interest receivable on
investment securities 90,711 86,520 (16,297) 383,380 13,263
Accounts receivable -- 37,765 (143,048) 19,787 48,312
Loan sale proceeds receivable -- -- 37,765 2,453,594 (2,491,359)
Prepaid expenses and other assets 57,257 (18,195) 130,352 (80,877) 179,753
Income tax refund receivable -- -- 1,073,253 (976,558) --
Official checks (137,906) 52,489 (49,097) 221,388 (125,436)
Accrued expenses and other liabilities (16,641) 81,494 (175,939) 100,481 (203,293)
Accrued interest on deposit accounts 15,458 3,785 (7,831) 947 (2,283)
Income tax payable -- -- -- -- (221,049)
----------- ----------- ----------- ----------- -----------
Net cash provided by (used in)
operating activities 294,957 137,712 585,523 2,044,761 (1,943,658)
----------- ----------- ----------- ----------- -----------
Cash flows provided by (used in) investing activities:
Long-term loans originated or purchased, net of
principal repayments (3,755,509) (2,802,737) (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 219,772 1,272,767 1,014,345 3,139,470 461,554
Proceeds from loans sold 699,248 4,084,252 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 (174,300) -- 600,000 121,800 840,300
Purchase of premises and equipment (9,446) (4,147) (21,353) (36,951) (314,621)
Proceeds from sale of property and equipment -- -- 80,844 26,967 --
Maturities of investment securities held to maturity 4,880 8,324 12,826 24,968 --
----------- ----------- ----------- ----------- -----------
Net cash provided by (used in)
investing activities (3,015,355) 2,558,459 2,889,494 2,953,058 (5,705,298)
----------- ----------- ----------- ----------- -----------
(Continued)
F-6
2
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
Three months ended Years ended
March 31, December 31,
--------------------- ------------------------------
1997 1996 1996 1995 1994
---- ---- ---- ---- ----
(Unaudited)
Cash flows provided by (used in) financing activities:
Deposit accounts:
(Decrease) increase in certificate accounts $(2,194,386) (847,379) (3,613,173) 12,625,716 19,936,747
Net increase (decrease) in deposits (198,473) (652,754) 536,887 (4,951,858) 2,852,143
Proceeds from (repayment) of FHLB advances 2,450,000 1,300,000 3,800,000 (18,500,000) (15,800,000)
Net increase (decrease) in advance payments by
borrowers for taxes and insurance 332,847 234,451 17,270 (106,305) 210,203
Repayment of debentures -- (170,000) (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 389,988 (135,682) 320,984 (10,932,447) 7,942,313
----------- ----------- ----------- ----------- -----------
Net increase (decrease) in cash
and cash equivalents (2,330,410) 2,560,489 3,796,001 (5,934,628) 293,357
Cash and cash equivalents at beginning of period 5,465,762 1,669,761 1,669,761 7,604,389 7,311,032
----------- ----------- ----------- ----------- -----------
Cash and cash equivalents at end of period $ 3,135,352 4,230,250 5,465,762 1,669,761 7,604,389
----------- ----------- ----------- ----------- -----------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 803,481 921,320 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 $ 2,350,000 306,143 860,613 3,780,216 2,629,056
----------- ----------- ----------- ----------- -----------
Market value adjustment - investment securities
available for sale:
Market value adjustment - investments $ (326,297) (1,311,609) (336,359) (1,181,624) (107,647)
Deferred income tax asset (122,361) (450,496) (126,135) (401,752) (35,768)
----------- ----------- ----------- ----------- -----------
Unrealized loss on
investment securities
available for sale, net $ (203,936) (861,113) (210,224) (779,872) (71,879)
----------- ----------- ----------- ----------- -----------
Unrealized loss on investment securities
transferred from available
for sale to held to maturity $ (693,642) -- (715,657) -- --
Deferred income tax asset (260,116) -- (227,014) -- --
----------- ----------- ----------- ----------- -----------
Unrealized loss on investment securities
transferred from available
for sale to held to maturity $ (433,526) -- (488,643) -- --
----------- ----------- ----------- ----------- -----------
Loans acquired in settlement of
other real estate sold $ -- -- (1,300,066) -- --
----------- ----------- ----------- ----------- -----------
See accompanying notes to consolidated financial statements.
F-7
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(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.
(Continued)
F-8
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(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.
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.
(Continued)
F-9
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(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 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.
Regulatory examiners may require the Bank to recognize additions
to the allowance based upon their judgment about the information
available to them at the time of their examination.
(i) 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.
(Continued)
F-10
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(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
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.
(Continued)
F-11
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(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 March 31, 1997 and December 31, 1996
and 1995 are as follows:
Investment securities held to maturity:
Gross
Amortized unrealized Estimated
cost loss market value
---- ---- -----------
March 31, 1997 (unaudited):
Obligation of U.S. government agencies $ 6,306,358 (211,983) 6,094,375
Other 1,387 - 1,387
--------- -------- --------
$ 6,307,745 (211,983) 6,095,762
--------- -------- ---------
December 31, 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
--------- -------- ---------
December 31, 1995:
Other $ 19,093 - 19,093
--------- -------- ---------
Investment securities available for sale:
Gross
Amortized unrealized Estimated
cost loss market value
---- ---- -----------
March 31, 1997 (unaudited):
Obligation of U.S. government agencies $ 9,100,000 (326,297) 8,773,703
--------- -------- ---------
December 31, 1996:
Obligations of U.S. government agencies $ 9,100,000 (336,359) 8,763,641
--------- -------- ---------
December 31, 1995:
Obligations of U.S. government agencies $ 17,100,000 (1,181,624) 15,918,376
=============== ========== ==========
(Continued)
F-12
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 and March 31, 1997, 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.
March 31, 1997 December 31, 1996
---------------------- -----------------
Estimated Estimated
Amortized market Amortized market
cost value cost value
---- ---- ---- ----
(Unaudited)
Investment securities held to maturity:
Due in one year or less $ 1,387 1,387 6,267 6,267
Due after five years through ten years 6,306,358 6,094,375 6,284,343 6,267,188
-------- -------- -------- --------
$ 6,307,745 6,095,762 6,290,610 6,273,455
============ ========= ========= =========
Investment securities available for sale:
Due after one year through five years $ 9,100,000 8,773,703 9,100,000 8,763,641
============ ========= ========= =========
Market values for all securities were calculated using published prices
or the equivalent at the dates indicated.
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 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. There were no sales in the unaudited three months
ended March 31, 1997 or 1996.
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)
F-13
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(3) Loans Receivable, Net
A summary of loans receivable are as follows:
March 31, December 31,
1997 1996 1995
---- ---- ----
(Unaudited)
Mortgage loans:
Permanent conventional:
Commercial $ 11,931,285 11,294,679 13,112,448
Residential 98,073,906 97,717,708 97,612,560
Residential construction conventional 2,546,600 3,795,050 1,666,960
---------- ---------- ----------
Total mortgage loans 112,551,791 112,807,437 112,391,968
Commercial loans 1,239,108 1,349,483 1,442,811
Consumer loans 152,795 154,445 180,194
Lines of credit 710,902 686,072 1,258,501
---------- ---------- ----------
Total loans receivable 114,654,596 114,997,437 115,273,474
Net premium on mortgage loans purchased 1,202,264 1,154,942 986,918
Deduct:
Unearned loan origination fees,
net of direct loan origination costs 42,109 169,854 104,132
Undisbursed portion of loans in process 1,407,473 1,902,256 1,189,952
Allowance for loan losses 1,192,734 1,533,003 2,060,568
---------- ---------- ----------
Loans receivable, net $ 113,214,544 112,547,266 112,905,740
================== =========== ===========
(Continued)
F-14
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The following is a summary of information regarding nonaccrual and
impaired loans:
March 31, December 31,
1997 1996 1995
---- ---- ----
(Unaudited)
Nonaccrual loans $ 1,622,027 991,000 3,326,600
============== ======= =========
Recorded investment in impaired loans $ 1,369,892 4,078,174 6,122,356
============== ========= =========
Allowance for loan losses related to
impaired loans $ 476,504 626,435 1,319,343
============== ======= =========
Interest Average Interest
income recorded income
not recognized investment recognized on
on nonaccrual in impaired impaired
loans loans loans
----- ----- -----
For the unaudited three months ended March 31:
1997 $ 49,486 3,384,957 46,153
============== ========= ======
1996 $ 89,708 5,899,251 69,938
============== ========= ======
For the years ended December 31:
1996$ 181,000 5,071,872 259,263
============== ========= =======
1995$ 381,000 6,032,515 338,997
============== ========= =======
1994$ 616,000
==============
(Continued)
F-15
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The activity in the allowance for loan losses is as follows:
Three months ended Years ended
March 31, December 31,
--------------- ----------------------
1997 1996 1996 1995 1994
---- ---- ---- ---- ----
(Unaudited)
Balance at beginning of period $ 1,533,003 2,060,568 2,060,568 1,974,950 1,850,000
Charge-offs (340,335) (115,681) (1,223,240) (707,222) (409,329)
Provision for loan losses (3,000) (18,356) 279,596 779,415 531,483
Recoveries 3,066 3,283 266,778 13,425 2,796
Transfer from allowance for real estate owned - - 149,301 - -
-------- -------- -------- -------- --------
Balance at end of period $ 1,192,734 1,929,814 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 March 31, 1997 (unaudited) or December 31, 1995 and 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 $8,387,656, $7,915,631 and $1,301,078 at March 31, 1997 (unaudited)
and December 31, 1996 and 1995, respectively. Servicing fees earned were
$6,520, $3,308, $22,086, $22,026 and $52,144 for the unaudited three
months ended March 31, 1997 and 1996 and 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 is
as follows:
Balance, January 1, 1996 $ --
Originations 70,303
Amortization (2,672)
--------
Balance, December 31, 1996 67,631
Originations (unaudited) 3,856
Amortization (unaudited) (2,211)
--------
Balance, March 31, 1997 (unaudited) $ 69,276
--------
(Continued)
F-16
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(6) Office Facilities and Equipment
Office facilities and equipment and their related accumulated
depreciation and amortization are summarized as follows:
March 31, December 31, Estimated
1997 1996 1995 useful lives
---- ---- ---- ----------
(Unaudited)
Leasehold improvements $ 1,037,991 1,035,861 1,251,412 3-25 years
Furniture and fixtures 543,539 542,727 651,910 3-7 years
Automobiles - - 33,841 5 years
-------- -------- --------
1,581,530 1,578,588 1,937,163
Less accumulated depreciation
and amortization 694,390 661,016 645,189
-------- -------- --------
Office facilities and
equipment, net $ 887,140 917,572 1,291,974
=============== ======= =========
(7) Deposits
A summary of deposits follows:
Weighted Weighted Weighted
average average average
March 31, interest December 31, interest December 31, interest
1997 rate 1996 rate 1995 rate
---- ---- ---- --- ---- ----
(Unaudited)
Commercial checking accounts -
noninterest-bearing $ 170,762 - % $ 58,994 - % $ 209,637 -%
NOW accounts 612,477 1.77% 654,473 1.79% 674,556 .68%
Money market deposit accounts 7,172,954 4.02% 7,428,630 4.02% 6,601,689 4.02%
Statement savings accounts 1,355,076 2.59% 1,363,750 2.58% 2,157,600 2.60%
---------- ----- ---------- ----- ---------- -----
9,311,269 3.59% 9,505,847 3.59% 9,643,482 3.42%
---------- ----- ---------- ----- ---------- -----
Certificate accounts by interest rates:
1.00% - 3.99% $ 463,973 $ 499,355 $ 1,219,498
4.00% - 4.99% 2,549,837 3,076,939 2,170,725
5.00% - 5.99% 76,284,827 78,123,278 54,846,938
6.00% - 7.99% 15,116,241 14,909,692 41,310,738
---------- ---------- ----------
Total certificate accounts 94,414,878 5.59% 96,609,264 5.56% 99,547,899 5.89%
---------- ----- ---------- ----- ---------- -----
Accrued interest 19,352 3,895 11,742
---------- ---------- ----------
Total deposits $ 103,745,499 5.41% $106,119,006 5.38% $ 109,203,123 5.66%
============= ==== ============ ==== ============= ====
(Continued)
F-17
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The following table presents, by various interest rate categories, the
amount of certificate accounts at December 31, 1996 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:
March 31, 1997 December 31, 1996 December 31, 1995
------------- ----------------- -----------------
Amount % total Amount % total Amount % total
------- ------- ------- ------- ------- -------
(Unaudited)
Three months or less $ 5,562,080 30.4% $ 3,952,908 21.5% $ 4,143,788 27.1%
Over three months to six months 3,365,049 18.4% 5,844,172 31.9% 4,038,318 26.4%
Over six months to twelve months 5,116,733 28.0% 4,707,383 25.7% 4,648,096 30.4%
Over twelve months 4,241,949 23.2% 3,829,936 20.9% 2,446,328 16.1%
--------- ------ --------- ------ --------- ------
$ 18,285,811 100.0% $ 18,334,399 100.0% $ 15,276,530 100.0%
--------- ------ --------- ------ --------- ------
Interest expense on deposits is as follows:
Three months ended Years ended
March 31, December 31,
--------------- -------------------
1997 1996 1996 1995 1994
---- ---- ---- ---- ----
(Unaudited)
Interest on NOW and Super NOW accounts $ 2,727 1,654 9,510 5,624 6,876
Interest on money market accounts 75,007 61,447 256,130 254,271 260,832
Interest on savings accounts 8,783 12,195 43,335 91,557 211,787
Interest on certificate accounts, net of penalties 1,298,268 1,444,674 5,451,415 5,862,227 3,322,855
-------- -------- -------- -------- --------
$ 1,384,785 1,519,970 5,760,390 6,213,679 3,802,350
-------- -------- -------- -------- --------
(Continued)
F-18
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(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) March 31, 1997
- ------------------- -------------- -----------
(Unaudited)
1997 6.01 $10,000,000
1997 5.86 5,000,000
1997 (6.85) 4,750,000
1998 6.02 2,500,000
1998 6.12 5,000,000
-----------
$27,250,000
===========
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
===========
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
===========
(Continued)
F-19
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Pursuant to collateral agreements with the Federal Home Loan Bank
("FHLB"), advances are secured by the following:
March 31, December 31,
1997 1996 1995
---- ---- ----
(Unaudited)
FHLB stock $ 1,427,500 1,253,200 1,853,200
Qualifying mortgage loans 40,065,005 34,588,904 35,277,703
Investment securities:
Amortized cost 6,306,358 6,284,373 7,000,000
Market value 6,094,375 6,267,188 6,348,125
--------- --------- ---------
(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.
(Continued)
F-20
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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.
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.
(Continued)
F-21
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(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.
(11) Income Taxes
Income tax expense (benefit) consists of:
Three months ended Years ended
March 31, December 31,
--------------- --------------------
1997 1996 1996 1995 1994
---- ---- ---- ---- ----
(Unaudited)
Current:
Federal $ - - - (1,060,081) 294,000
State - - - - 36,000
------ ----- ------- -------- -------
$ - - - (1,060,081) 330,000
------ ----- ------- -------- -------
Deferred:
Federal $ 65,000 1,953 (213,800) (152,747) (328,000)
State 11,300 - - (19,000) (43,000)
------ ----- ------- -------- -------
$ 76,300 1,953 (213,800) (171,747) (371,000)
------ ----- ------- -------- -------
Total:
Federal $ 65,000 1,953 (213,800) (1,212,828) (34,000)
State 11,300 - - (19,000) (7,000)
------ ----- ------- -------- -------
$ 76,300 1,953 (213,800) (1,231,828) (41,000)
------ ----- ------- -------- -------
(Continued)
F-22
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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:
March 31, December 31,
1997 1996 1995
---- ---- ----
(Unaudited)
Deferred tax assets:
Allowance for loan losses $ 407,837 411,600 642,000
Unrealized loss on investment securities
available for sale 382,477 353,149 401,752
Deferred loan fees 9,287 14,008 41,000
AMT credit carryforward 44,294 44,294 44,294
Other 2,954 1,133 -
Net operating loss carryforward 750,208 782,467 251,684
-------- -------- --------
Gross deferred tax asset 1,597,057 1,606,651 1,380,730
Less valuation allowance (442,093) (432,526) (179,231)
-------- -------- --------
1,154,964 1,174,125 1,201,499
-------- -------- --------
Deferred tax liabilities:
FHLB stock dividend (18,846) (18,846) (71,000)
Amortization of discount on loans - - (70,000)
Accrual to cash - - (68,000)
Depreciation (27,325) (25,583) (28,000)
Mortgage servicing (26,069) - -
-------- -------- --------
(72,240) (44,429) (237,000)
-------- -------- --------
Total $ 1,082,724 1,129,696 964,499
============== ========= =======
At December 31, 1996, the Company has net operating loss carryovers
(NOLs) 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.
(Continued)
F-23
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The Company's effective tax rate on pretax (loss) income differs from the
statutory Federal income tax rate as follows:
Three months ended March 31,
----------------------------
1997 % 1996 %
---- -- ---- --
(Unaudited) (Unaudited)
Tax (benefit) provision at
statutory rate $60,244 34.0% $ 1,844 34.0%
Increase (decrease) in tax
resulting from:
Operating loss carryforward 6,000 3.4 -- --
State income taxes net of
federal income tax benefit 7,500 4.2 -- --
Other 2,556 1.5 109 2.0
----- --- --- ---
$76,300 43.1% $ 1,953 36.0%
======= ==== ======= ====
Years ended December 31,
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 211,702 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)%
=========== ===== =========== ===== =========== =====
(Continued)
F-24
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(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 $71,410, $91,502, $351,150, $334,834 and
$282,868, for the unaudited three months ended March 31, 1997 and 1996
and the years ended December 31, 1996, 1995 and 1994, respectively.
(13) Parent Company Financial Information
The parent company financial information is as follows:
Condensed Balance Sheets
-----------------------
March 31, December 31,
1997 1996 1995
---- ---- ----
(Unaudited)
Assets:
Cash, deposited with subsidiary $ 68,263 115,099 242
Prepaid expenses and other assets 73,227 79,303 315,186
Property, plant and equipment, net 366,331 377,678 655,237
Note receivable 305,354 305,354 -
Investment in subsidiaries 6,591,045 6,401,425 7,764,936
--------- --------- ---------
$ 7,404,220 7,278,859 8,735,601
============ ========= =========
Liabilities and stockholders' equity:
Due to subsidiaries $ - - 103,000
Accounts payable and accrued expenses 77,298 114,231 152,475
Capital debentures - - 420,000
Stockholders' equity 7,326,922 7,164,628 8,060,126
--------- --------- ---------
$ 7,404,220 7,278,859 8,735,601
============ ========= =========
(Continued)
F-25
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Condensed Statements of Operations
-------------------------------
Three months ended Years ended
March 31, December 31,
--------------- -----------------------------
1997 1996 1996 1995 1994
---- ---- ---- ---- ----
(Unaudited)
Revenues:
Interest and dividend income $ 3,758 2,800 17,579 8,280 25,997
Other income 70,234 71,840 308,770 250,485 205,764
------- ------- ------- -------- --------
Total income 73,992 74,640 326,349 258,765 231,761
------- ------- ------- -------- --------
Expenses:
Compensation 2,701 44,463 114,985 230,279 279,680
Occupancy 81,663 115,187 442,483 420,285 329,159
Other expense 16,954 55,583 382,926 473,678 795,703
------- ------- ------- -------- --------
Total expenses 101,318 215,233 940,394 1,124,242 1,404,542
------- ------- ------- -------- --------
Loss before income
from subsidiaries (27,326) (140,593) (614,045) (865,477) (1,172,781)
(Loss) income from subsidiaries 204,515 146,020 (362,458) (1,597,758) 586,029
------- ------- ------- -------- --------
Net loss before income taxes 177,189 5,427 (976,503) (2,463,235) (586,752)
Income tax (benefit) expense 76,300 1,954 - (213,534) (407,579)
------- ------- ------- -------- --------
Net income (loss) $ 100,889 3,473 (976,503) (2,249,701) (179,173)
========== ===== ======== ========== ========
(Continued)
F-26
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Condensed Statements of Cash Flows
--------------------------------
Three months ended Years ended
March 31, December 31,
---------------- -------------------
1997 1996 1996 1995 1994
---- ---- ---- ---- ----
(Unaudited)
Cash flows provided by (used in) operating activities:
Net loss $ 100,889 3,473 (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 11,347 18,316 59,800 74,672 56,706
Equity in undistributed loss (earnings)
of subsidiaries (128,215) (91,480) 362,458 1,597,758 (586,029)
Cash provided by (used in) changes in:
Prepaid expenses and other assets 6,076 (25,877) 235,883 (95,498) (25,919)
Investment in subsidiaries -- -- 1,082,058 -- --
Due to subsidiaries -- 288,759 (103,000) (284,800) 17,800
Due from subsidiary -- -- -- -- 675,884
Accounts payable and accrued expenses (36,933) (6,457) (38,244) 152,475 (3,721)
---------- ---------- ---------- ---------- ----------
Net cash provided by (used in) by
operating activities (46,836) 186,734 776,779 (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)
---------- ---------- ---------- ---------- ----------
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 -- (170,000) (420,000) -- --
---------- ---------- ---------- ---------- ----------
Net cash (used in) provided by
financing activities -- (170,000) (420,000) -- 743,220
---------- ---------- ---------- ---------- ----------
Net increase (decrease) in cash and
cash equivalents (46,836) 16,734 114,857 (791,370) 658,490
Cash and cash equivalents at beginning of year 115,099 242 242 791,612 133,122
---------- ---------- ---------- ---------- ----------
Cash and cash equivalents at end of year $ 68,263 16,976 115,099 242 791,612
========== ====== ======= === =======
(Continued)
F-27
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Condensed Statements of Cash Flows (Continued)
-------------------------------------------
Three months ended Years ended
March 31, December 31,
----------------- -------------------
1997 1996 1996 1995 1994
---- ---- ---- ---- ----
(Unaudited)
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 $ (326,297) (1,311,609) (336,359) (1,181,624) (107,647)
Deferred income tax asset (122,361) (450,496) (126,135) (401,752) (35,768)
---------- ---------- ---------- ---------- ----------
Unrealized loss on investment securities
available for sale, net $ (203,936) (861,113) (210,224) (779,872) (71,879)
---------- ---------- ---------- ---------- ----------
Unrealized loss on investment securities
transferred from available for sale to
held to maturity $ (693,642) -- (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.
(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)
------- ------- -------
(Continued)
F-28
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Third quarter
----------------------------------
1996 1995 1994
---- ---- ----
Interest income $ 2,487 2,648 2,504
Net interest income 742 548 995
Provision for loan losses 441 42 -
(Loss) income before income taxes (1,151) (624) 61
Net (loss) income (737) (400) 40
==== ==== ==
(Loss) earnings 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
(Loss) income before income taxes (405) (1,006) 254
Net (loss) income (259) (644) 173
==== ==== ===
(Loss) earnings per share $ (.11) (.29) .08
========== ==== ===
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 taxes 5 (46) 299
Net income (loss) 3 (29) 190
==== === ===
Earnings (loss) per share $ - (.01) .08
==== === ===
(Continued)
F-29
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(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 $70,234,
$68,691, $291,767, $247,923 and $223,552 were made during the unaudited
three months ended March 31, 1997 and 1996 and the years ended December
31, 1996, 1995 and 1994, respectively.
During the unaudited three months ended March 31, 1997 and 1996 and 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-, $-0-, $-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)
F-30
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.
(Continued)
F-31
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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 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.
(Continued)
F-32
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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 March 31, 1997 (unaudited) and December
31, 1996 and 1995, options for 58,453 shares were outstanding to various
sales representatives.
(Continued)
F-33
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(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 are as follows:
March 31, December 31,
1997 1996 1995
---- ---- ----
(Unaudited)
Available lines of credit $ 172,453 179,283 9,500
-------- -------- --------
Standby letters of credit $ 500,000 500,000 500,000
-------- -------- --------
Outstanding mortgage loan
commitments, exclusive of loans in
process:
Net fixed rates $ 449,436 584,097 1,810,038
Net variable rates 3,804,231 2,375,844 352,500
-------- -------- --------
$ 4,253,667 2,959,941 2,162,538
-------- -------- --------
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.
(Continued)
F-33
RP FINANCIAL, LC.
Financial Services Industry Consultants
July 1, 1997
Board of Directors
Federal trust Corporation
1211 Orange Avenue
Winter Park, FL 32789
Gentleman:
You have requested RP Financial, LC. ("RP Financial") to provide you with
our opinion regarding the fairness, from a financial point of view, to the
current common stockholders of Federal Trust Corporation, Winter Park, Florida
("Federal Trust" or the "Company"), of the terms of the offering of Common Stock
as described more fully below. The offering of Common Stock will be conducted on
a priority basis, first to current shareholders ("Rights Offering") and
subsequently to certain members of the community to whom the prospectus is
delivered ("Community Offering") and through participating registered
broker-dealers in a syndicated community offering ("Syndicated Community
Offering"). The Rights Offering, Community Offering, and Syndicated Community
Offering are collectively referred to as the "Offering".
Summary Description of the Offering
Pursuant to the preliminary prospectus (incorporated herein by reference),
Federal Trust will offer a minimum of 1,000,000 shares of Common Stock to a
maximum of 2,701,619 shares of Common Stock at an offering price of $2.00 per
share (the "Offering Price"). Each holder of shares of Common Stock (the
"Current Stockholders") at the close of business on March 26, 1997 (the "Record
Date") are being provided, on a priority basis, a non-transferable right to
subscribe for and purchase one additional share of Common Stock for each whole
share of Common Stock owned on the Record Date (the "Subscription Right") at the
price of $2.00 per share ("Subscription Price"). Current Stockholders are
entitled to subscribe for all, or any portion of, the shares of Common Stock
underlying their Subscription Right, provided the aggregate number of shares
owned by any shareholder (individually, or together with associates or persons
acting in concert with such person) at the conclusion of the Offering does not
exceed 9.99 percent.
Immediately following the Rights Offering, Federal Trust will offers shares
not subscribed for in the Rights Offering to members of the general public to
whom a copy of the prospectus is
delivered (the "Community Offering"), and through participation by registered
broker-dealers in a syndicated community offering ("Syndicated Community
Offering") to be managed by Keefe, Bruyette & Woods, Inc. ("KBW"). The offering
of share of Common Stock in the Community Offering and Syndicated Community
Offering is subject to the prior Subscription Rights of Current Stockholders in
the Rights Offering, Federal Trust's right to reject orders received in the
Community Offering and the Syndicated Community Offering in whole or in part and
other limitations. If the number of shares of Common Stock not subscribed for
through the exercise of Subscription Rights is not sufficient to satisfy all
orders received from participants in the Community Offering and Syndicated
Community Offering the remaining shares will be allocated pro rata among such
persons based on the aggregate number of shares ordered for in the Community
Offering and Syndicated Community Offering, subject to the rights of Federal
Trust referenced above.
RP Financial Background and Experience
RP Financial, as part of its financial institution valuation and consulting
practice, is regularly engaged in the valuation of financial institution
securities in connection with mergers and acquisitions of financial
institutions, rights offerings, negotiated underwritings, competitive biddings,
mutual-to-stock conversion of savings institutions, initial and secondary
offerings, stock benefit plans and other corporate purposes for financial
institutions. As specialists in the valuation of securities of financial
institutions RP Financial has experience in, and knowledge of, the national,
Southeast, and Florida markets for the common stock of savings institutions and
commercial bank operating in these respective markets.
Materials Reviewed
In carrying out its current engagement, RP Financial reviewed and analyzed
the following materials pertaining to Federal Trust: (1) the preliminary
prospectus for the Offering; (2) certain publicly available information
concerning Federal Trust, including annual reports (incorporating audited
financial statements), Form 10-Ks and Proxy Statements for the years ended
December 31, 1994, 1995 and 1996, and unaudited 10-Q reports for March 31, 1997;
(3) certain other internal and public financial information, including but not
limited to certain recent unaudited internally and externally generated
financial reports, analyses and files through March 31, 1997 pertaining to
Federal Trust's (a) balance sheet composition, trends, volume and market value,
(b) capitalization, (c)off- balance sheet assets, liabilities and contingencies,
(d) statement of operations, (e) cash flows, (f) delinquent, non-accrual and
non-earning assets and general valuation allowances, (g) interest rate, credit
and liquidity risks and (h) taxable position; (4) discussions with Federal
Trust's management regarding past, current and prospective business operations,
financial condition, stock value and trading activity, shareholder returns and
external factors impacting Federal Trust (including economic, regulatory,
legislative and competitive factors, among others); (5) current budgets and
business plans; (6) comparative analyses of Federal Trust relative to recent
publicly-available financial statements, operating results and market
characteristics of the common stock of publicly- traded savings institutions,
including such institution with financial, operating and market characteristics
which are relatively comparable to
Federal Trust; (7) the terms and conditions of the voluntary Cease and Desist
Orders (the "Orders") that Federal Trust and the Bank entered into with the OTS
in October 1994, in particular the prospective regulatory enforcement options in
the event Federal Trust or the Bank fails to comply with the terms of the Order;
and (8) the financial terms of other recent stock offerings of savings
institutions and savings institution holding companies with comparable
financial, operating and market characteristics to the Bank and Federal Trust,
including publicly-traded and non publicly-traded institutions.
In rendering its opinion, RP Financial relied, without independent
verification, on the accuracy and completeness of the information concerning
Federal Trust which was furnished to RP Financial by Federal Trust for purposes
of this opinion. With respect to financial forecasts reviewed, we have assumed
that they have been reasonably prepared on bases reflecting the best currently
available estimates and judgments of Federal Trust's management. Further, RP
Financial relied upon the accuracy and completeness of the published information
concerning other financial institutions and national and regional economic data.
Federal Trust did not restrict RP Financial as to the material it was permitted
to review. RP Financial has not obtained nor conducted any independent
appraisals or evaluations of any Federal Trust's specific assets, liabilities,
off-balance sheet assets and/or contingent liabilities. RP Financial expresses
no opinion on matters of a legal accounting or tax nature regarding Federal
Trust, the Offering, or the ability of the Offering to be consummated as set
forth in the Prospectus under Federal or state laws or otherwise. In the course
of its evaluation, RP Financial conducted a number of analyses, including (a) a
transaction summary evaluating the impact of the Offering on Federal Trust and
the Current Stockholders, including a summary of the Offering, including the
anticipated pro forma impact of the Offering incorporating the Subscription
Price and the number of share offered in the Offering; (b) a comparable
transactions analysis that evaluated the financial terms and pricing ratios
indicated by recent rights offerings versus similar information for Federal
Trust, including the Subscription Price and other terms of the Offering; (c)a
market value analysis that evaluated current stock pricing characteristics of
comparable publicly-traded savings institutions relative to the pricing ratios
indicated by the Subscription Price and other terms of the Offering; (d) a
discounted cash flow approach that evaluated the reasonability of applying
discounted cash flow analysis to Federal Trust, with a conclusion that such an
analysis did not yield a reliable conclusion; and (e) other financial
consideration such as the ratios and leverage possibilities of the Offering, and
the potential risks of the regulatory enforcement of the Orders and the
resulting anticipated impact on market value to the Current Stockholders in the
absence of the Offering.
Opinion
The opinion of RP Financial is directed to the Board of Directors of
Federal Trust and Federal Trust in its consideration of the Subscription Price
and number of shares offered in the Offering as described in the prospectus, and
does not constitute a recommendation to any Current Stockholder of Federal Trust
as to whether a Current Stockholder should exercise their Subscription Rights or
any other action that such Current Stockholder should take in connection with
the Offering, or otherwise. It is further understood that the opinion of RP
Financial is based on market conditions and other circumstances existing on the
date hereof.
RP Financial's opinion does not represent our opinion as to what the value
of Federal Trust's shares of common stock necessarily will be when the shares of
Common Stock are issued or thereafter.
It is understood that this opinion may be included in its entirety in any
communication by Federal Trust or its Board of Directors to the stockholders of
Federal Trust, This opinion may not, however, be summarized, excerpted from or
otherwise publicly referred to without our prior written consent.
Based upon and subject to the foregoing, it is RP Financial's opinion that,
as of the date hereof, the terms of the Offering, including the Subscription
Price and number of shares to be offered in the Offering, are fair to the
Current Stockholders of Federal Trust from a financial point of view.
Respectfully submitted,
RP FINANCIAL, LC.
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(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.
No dealer, salesperson or other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus in connection with the Offer made by this Prospectus, and if given or
made, such information or representations must not be relied upon as having been
authorized by Federal Trust Corporation or any sales agent or broker-dealer.
Neither the delivery of this Prospectus nor any sale made hereunder shall, under
any circumstances, create any implication that the information herein is correct
as of any time subsequent to the date hereof. This Prospectus does not
constitute an offer to sell or a solicitation of an offer to buy any securities
offered hereby by anyone in any jurisdiction in which such offer or solicitation
is not authorized or in which the person making such offer or solicitation is
not qualified to do so or to anyone to whom it is unlawful to make such offer or
solicitation.
TABLE OF CONTENTS
Prospectus Summary ....................................................... 4
Selected Consolidated Financial Data ..................................... 13
Risk Factors ............................................................. 15
Use of Proceeds .......................................................... 22
Capitalization ........................................................... 23
Determination of Subscription Price ...................................... 24
Market for Common Stock and Dividends .................................... 30
Management's Discussion and Analysis of
Financial Condition and
Results of Operations .................................................... 31
Business ................................................................. 44
Regulation and Supervision ............................................... 74
Management ............................................................... 87
Executive Compensation ................................................... 89
Certain Transactions ..................................................... 93
Beneficial Ownership of Common Stock ..................................... 94
Description of Capital Stock ............................................. 95
Description of Certain Provisions in the
Articles of Incorporation and Bylaws of
Federal Trust Corporation ................................................ 95
The Offering ............................................................. 97
Shares Eligible for Future Sale .......................................... 106
Legal Matters ............................................................ 107
Experts .................................................................. 107
Available Information .................................................... 107
Index to Consolidated Financial Statements ............................... F-1
Fairness Opinion ......................................................... Appendix A
FEDERAL TRUST
CORPORATION
2,701,619 Shares
Common Stock
PROSPECTUS
Keefe, Bruyette & Woods, Inc.
August _____, 1997
PART - II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
Item 14: Other Expenses of Issuance and Distribution
The expenses in connection with the sale of the Common Stock, other
than the sales agents commission are estimated as follows:
Securities and Exchange Commission registration fee $ 1,637
National Association of Securities Dealers, Inc. filing fee 1,040
Printing and engraving 18,000
Legal fees and expenses 105,000
Accounting fees and expenses 35,000
Blue Sky qualifications, related legal fees and expenses 30,000
Miscellaneous 5,000
--------
Total $195,677
Item 15: Indemnification of Directors and Officers
The Florida Business Corporation Act (Chapter 607, Florida Statutes)
["Florida Act"] authorizes Florida corporations in indemnify any person who was
or is a party to any proceeding (other than an action by, or in the right of,
the corporation) by reason of the fact that he or she is or was a director,
officer, employee, or agent of the corporation or is or was serving at the
request of the corporation as a director, officer, employee, or agent of another
corporation or other entity, against liability incurred in connection with such
proceeding, including any appeal thereof, if he or she acted in good faith and
in a manner he or she reasonably believed to be in, or not opposed to, the best
interests of the corporation and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his or her conduct was unlawful.
In the case of an action by or on behalf of a corporation, indemnification may
not be made if the person seeking indemnification is adjudged liable, unless the
court in which such action was brought determines such person is fairly and
reasonably entitled to indemnification. The indemnification provisions of the
Florida Act require indemnification if a director or officer has been successful
on the merits or otherwise in defense of any action, suit or proceeding to which
he or she was a party by reason of the fact that he or she is or was a director
or officer of the corporation. The indemnification authorized under Florida law
is not exclusive and is in addition to any other rights granted to officers and
directors under the articles of incorporation or Bylaws of the corporation or
any agreement between officers and directors and the corporation. A corporation
may purchase and maintain insurance or furnish similar protection on behalf of
any officer or director against any liability asserted against the director or
officer and incurred by the director or officer in such capacity, or arising out
of the status, as an officer or director, whether or not the corporation would
have the power to indemnify him or her against such liability under the Florida
Act.
The 1995 Amended and Restated Articles of Incorporation of Federal
Trust Corporation ("Federal Trust") provide for the indemnification of directors
and executive officers to the maximum extent permitted by Florida law as
authorized by the Board of Directors, and for the advancement of expenses
incurred in connection with the defense of any action, suit or proceeding that
the director or executive officer was a party to by reason of the fact that he
or she is or was a director of Federal Trust upon the receipt of an undertaking
to repay such amount, unless it is ultimately determined that such director is
not entitled to indemnification.
Item 16: Exhibits
(a) Listing of Exhibits
Exhibit
- -------
1.0 Form of Sales Agency Agreement with Keefe, Bruyette & Woods, Inc.
3.1 1996 Amended Articles of Incorporation and the 1995 Amended and
Restated Articles of Incorporation of Federal Trust Corporation.
3.2 1995 Amended and Restated Bylaws of Federal Trust Corporation.
4.0 Specimen Common Stock certificate.
5.0 Opinion of Igler & Dougherty, P.A. regarding legality of shares of
Federal Trust.
8.0 Opinion of Igler & Doughtery, P.A. regarding tax matters.*
10.1 Stock Options for prior Stock Sales ("Option for the Purchase of
Common Stock").*
10.2 Employment Agreement between Federal Trust and James V. Suskiewich.
10.3 Employment Agreement between Federal Trust and Aubrey H. Wright, Jr.
10.4 Salary Continuation Agreement between Federal Trust Bank and James V.
Suskiewich.
10.5 Salary Continuation Agreement between Federal Trust Bank and Aubrey H.
Wright, Jr.
10.6 Agreement between RP Financial, LC and Federal Trust Corporation.
23.1 Consent of Igler & Dougherty, P.A.
23.2 Consent of KPMG Peat Marwick.
23.3 Consent of RP Financial, LC.
23.4 Consent of Carruthers & Company.
24.0 Power of Attorney.
* To be submitted by Supplement.
Item 17: Undertakings
(a) The undersigned Registrant hereby undertakes that:
(1). for purposes of determining any liability under the
Securities Act of 1933 ("Securities Act"), the information omitted from the form
of Prospectus filed as part of this Registration Statement in reliance upon Rule
430A and contained in a form of prospectus filed by the Registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be
part of this Registration Statement as of the time it was declared effective.
(2). For the purpose of determining any liability under the
Securities Act, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new Registration Statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(b) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against policy as expressed in the Securities Act and
will be governed by the final adjudication of such issue.
(c) The undersigned Registrant hereby undertakes to supplement the
Prospectus, after the expiration of the Subscription period, to set forth the
results of the Subscription Offer, the transactions by the underwriters during
the Subscription Period, the amount of unsubscribed securities to be purchased
by the underwriters, and the terms of any subsequent reoffering thereof. If any
public offering by the underwriters is to be made on terms differing from those
set forth on the cover page of the Prospectus, a post-effective amendment will
be filed to set forth the terms of such offering.
Signatures
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Winter
Park, State of Florida, on ___________, 1997.
FEDERAL TRUST CORPORATION
By:______________________________
James V. Suskiewich
President (Principal Executive Officer)
of the Company: Federal Trust Corporation
Pursuant to the requirements of the Securities Act of 1933, this
Regsitration Statement has been signed by the following persons in the
capacities and as of the dates indicated:
Signature Title Date
--------- ----- ----
________________________ Chairman of the Board, _________________
James V. Suskiewich Chief Executive Officer and Date
President
________________________ Director, Senior Vice President _________________
Aubrey H. Wright, Jr. And Chief Financial Officer Date
(Principal Financial Officer)
________________________ Director _________________
Dr. Samuel C. Certo Date
________________________ Director _________________
George W. Foster Date
________________________ Director _________________
Kenneth W. Hill Date
Signatures
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Winter
Park, State of Florida, on July 1, 1997.
FEDERAL TRUST CORPORATION
By: /s/ James V. Suskiewich
James V. Suskiewich
President (Principal Executive Officer)
of the Company: Federal Trust Corporation
Pursuant to the requirements of the Securities Act of 1933, this
Regsitration Statement has been signed by the following persons in the
capacities and as of the dates indicated:
Signature Title Date
--------- ----- ----
/s/ James V. Suskiewich Chairman of the Board, July 1, 1997
- -----------------------
James V. Suskiewich Chief Executive Officer and
President
/s/ Aubrey H. Wright, Jr. Director, Senior Vice President July 1, 1997
- -------------------------
Aubrey H. Wright, Jr. And Chief Financial Officer
(Principal Financial Officer)
/s/ Dr. Samuel C. Certo Director July 1, 1997
- -------------------------
Dr. Samuel C. Certo
/s/ George W. Foster Director July 1, 1997
- --------------------------
George W. Foster
/s/ Kenneth W. Hill Director July 1, 1997
- ---------------------------
Kenneth W. Hill
EXHIBIT INDEX
FORM S-1
Sequentially
Numbered Page
1.0 Form of Sales Agency Agreement with Keefe, Bruyette & Woods,
Inc.
3.1 1996 Amended Articles of Incorporation and the 1995 Amended and
Restated Articles of Incorporation of Federal Trust Corporation.
3.2 1995 Amended and Restated Bylaws of Federal Trust Corporation.
4.0 Specimen Common Stock Certificate.
5.0 Opinion of Igler & Dougherty, P.A. regarding legality of shares of
Federal Trust Corporation.
8.0 Opinion of Igler & Dougherty, P.A. regarding tax matters.*
10.1 Stock Options for Prior Stock Sales ("Opinion for Purchase of
Common Stock").
10.2 Employment Agreement between Federal Trust Corporation and
James V. Suskiewich.
10.3 Employment Agreement between Federal Trust Corporation and
Aubrey H. Wright, Jr..
10.4 Salary Continuation Agreement between Federal Trust Bank and
James V. Suskiewich.
10.5 Salary Continuation Agreement between Federal Trust Bank and
Aubrey H. Wright, Jr.
10.6 Agreement between RP Financial, LC and Federal Trust
Corporation.
23.1 Consent of Igler & Dougherty, P.A.
23.2 Consent of KPMG Peat Marwick.
23.3 Consent of RP Financial, LC
23.4 Consent of Carruthers & Company
24.0 Power of Attorney.
* To be submitted by supplement