As filed with the Securities and Exchange Commission on September 30, 1997
Registration File No. 33-30883
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 2
TO
Form S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
FEDERAL TRUST CORPORATION
(Exact name of Registrant as specified in its charter)
Florida 6711 59-2935028
------------------------- ---------------------------- ------------------------------------
(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
--------------
Copies Requested to:
A. George Igler, Esquire Paul M. Aguggia, Esquire
Igler & Dougherty, P.A. Aaron Kaslow, Esquire
1501 Park Avenue East Breyer & Aguggia
Tallahassee, Florida 32301 1300 I Street Northwest, Suite 470 East
(904) 878-2411 Washington, D.C. 20005
(904) 878-1230 (facsimile) (202) 737-7900
(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(3)
- --------------------------------------------------------------------------------------------------------------------------
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.
(3) Previously paid.
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 $0.01 per share
("Common Stock"), on a priority basis 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 October 25, 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 of, 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 of, 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.
---------------------
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 October ___, 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 hereby a maximum of 2,701,619 shares of
Common Stock (2,685,042 shares of authorized and unissued shares, and 16,577
shares currently held as Treasury Stock) (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 "THE OFFERING - Conditions to Consummation of the Offering". The
Offering will terminate 5:00 p.m. Eastern Time on November 17, 1997, subject to
an extension of 30 days up to December 17, 1997, at the direction 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 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. Upon completion of the Offering, it is
anticipated that the Common Stock of Federal Trust will be traded on the "Over
the Counter Bulletin Board" and its price quotation will also be displayed on
the "Electronic Pink Sheet System". It is the intent of Federal Trust, however,
to apply to the Nasdaq to have its securities listed on the Nasdaq SmallCap
Market as soon as Federal Trust is able to meet the qualification requirements.
Federal Trust currently meets most of these requirements except for three
qualifications: (1) the Company's securities must be registered pursuant to
Section 12(g)(1) of the Securities Exchange Act of 1934, as amended ("Exchange
Act"); (2) the listed securities are required to have a minimum bid price of
$4.00 per share; and (3) the Company must have at least two market makers making
a market in its securities. The shares in this Offering are being offered at a
Subscription Price of $2.00 per share. Federal Trust will not be able to apply
to Nasdaq until the minimum bid price is $4.00 per share. There can be no
assurance, therefore, that the requirements for Nasdaq SmallCap Market listing
can be satisfied. Investors should consider the potential illiquid nature of an
investment in the Common Stock. See "RISK FACTORS - Limited Trading Market". KBW
has advised Federal Trust that upon completion of the Offering it intends to act
as a market maker in the Common Stock and that it will assist the Company 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) Amount is based on the sale of 1,000,000 shares of Common Stock.
(3) Amount is based on 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
------------------
The following summary contains all material aspects of the subject
matter addressed. The summary, however, 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 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 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 to 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. As of June 30, 1994, deposits totaled $92.8
million, of which $53.0 million or 57.1% were obtained through the CD Network.
Beginning in 1994, 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 June 30, 1997,
deposits totaled $106.9 million, of which $3.1 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. On August 5, 1997, management was advised that the OTS had
authorized a "Formal Examination Proceeding" ("Formal Proceeding") to be
conducted on the Bank and its affiliates. Although the OTS has not informed the
Bank of the specific subject of the Formal Proceeding, based upon management's
independent review of the circumstances surrounding the Formal Proceeding,
management has no reason to believe that the Bank or any current member of the
Bank's management is the subject of the Formal Proceeding or will be subject to
any additional enforcement actions stemming from the Formal Proceeding.
Management does not know when the Formal Proceeding will be concluded. See "RISK
FACTORS - Regulatory 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 June 30, 1997, from $9.3 million as of December 31,
1994.
5
Augmented Credit Administration/Loan Loss Reserves: In addition to focusing
on pre-existing credit problems, the Company has invested significant
resources to address 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 Company has developed
systematic changes that have improved the loan origination and management
processes. 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 non-performing loans increased to 68% as of
June 30, 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 non-performing assets and personnel overcapacity. This process included
an analyses 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 vendor 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
$2.3 million 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 financial institution. A core retail and
commercial customer base is being developed by providing quality service
and financial 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, achieve 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
oriented loan products by emphasizing investments in residential mortgages
and the origination of real estate based loans with Small Business
Administration ("SBA") guarantees 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 June 30, 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 Reinvestment 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
capital requirements. Notwithstanding, Federal Trust and the Bank are
required to establish a written plan for raising additional capital for the
Bank. RP Financial, LC. ("RP Financial") was hired by Federal Trust to
serve as the Company's financial advisor and to assist the Company in
preparing a written plan. RP Financial prepared a Descriptive Memorandum
which was distributed to six investment banking firms for consideration in
preparation of their respective capital raising proposals. The Board of
Directors of Federal Trust determined that KBW's proposal to assist the
Company in a Rights Offering and Community Offering was in the best
interest of the Company and its shareholders. This Prospectus constitutes
the Company's written plan to raise additional capital. Management believes
that the capital infusion from this Offering will be instrumental in: (1)
removing the regulatory enforced growth restraints and providing for future
growth potential which should provide substantive economies of scale and
creation of synergies; (2) enabling the Company to pursue new community
bank business opportunities; (3) strengthening the Company's margins with
the new activities; (4) returning the Company to profitability; and (5)
empowering 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 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, RP Financial and
Carruthers & Company ("Carruthers &
Co.") have entered into agreements
whereby RP Financial and Carruthers &
Co. 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 October 25, 1997
("Rights Offering Expiration Date"). The
Community Offering and Syndicated
Community Offering will expire on
November 17, 1997, ("Offering Expiration
Date") unless extended at the discretion
of the Board of Directors of the Company
to a date not later than December 17,
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 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
Considerations The securities in this Offering will be
registered in the following states:
California (limited to existing
shareholders), 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 and North
Dakota is 500,000. The total maximum
number of shares being offered in Ohio
and Indiana is 250,000. The total
maximum number of shares being offered
in the states of Michigan and Texas is
50,000. The Company, however, reserves
the right to increase the maximum number
of shares to be offered in any state, to
the extent that such increase in
offering is permitted by the securities
laws and regulations of any such states.
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, Oklahoma, South
Carolina, Tennessee, Virginia and
Washington. In these states, the
Offering will be limited solely to
existing Shareholders of Federal Trust
under their Subscription Rights, 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 of, or persons
acting in concert with, such person)
shares of Common Stock in the Rights
Offering or 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.
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 December
17, 1997, which changes would affect the
investment decision of subscribers,
Federal Trust will file a post-effective
amendment to its Registration Statement,
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").
12
Escrow Agent SunTrust Bank, Central Florida, N.A.,
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."
Information on the Offering If you have questions concerning the
Offering, contact the Stock Sales Center
at 1-800-____ (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 six-month periods ended June 30, 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, are derived from the consolidated financial statements of the
Company. The data for the six month periods ended June 30, 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 six months ended June 30, 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 Six As of or for the
Months Ended June 30, Year Ended December 31,
---------------------- ----------------------------------------------
1997 1996 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ---- ----
(Dollars in thousands, except per share data)
Selected Financial Data:
Total assets........................ $140,021 $140,478 $139,582 $140,389 $153,957 $146,888 $139,137
Loans receivable, net............... 112,073 113,116 112,547 112,906 111,183 95,374 122,476
Investment securities............... 15,186 15,789 15,054 15,937 24,301 36,536 -
Real estate owned, net.............. 3,429 1,757 1,508 3,293 2,892 565 892
Deposits ........................... 106,894 104,703 106,119 109,203 101,528 78,742 97,434
Advances from the FHLB.............. 23,500 25,500 24,800 21,000 39,500 55,300 28,000
Stockholders' equity................ 7,418 7,813 7,165 8,060 11,018 10,526 8,796
Selected Operations Data:
Interest income..................... 5,044 4,989 9,937 10,609 9,847 9,506 11,765
Interest expense.................... 3,523 3,517 7,038 8,026 5,781 4,824 6,802
Net interest income................. 1,521 1,472 2,899 2,583 4,066 4,682 4,963
Provision (recovery) for loan losses 38 113 280 779 531 590 140
Net interest income (loss) after
provision for loan losses...... 1,483 1,359 2,619 1,804 3,535 4,092 4,823
Other income........................ 249 252 427 505 483 939 1,462
Gain on sale of branch office....... - - - - - 360 -
Real estate owned expenses ......... 42 79 251 654 393 34 -
Other expenses...................... 1,447 1,932 3,985 5,137 3,845 4,182 4,901
Income (loss) before income taxes
and extraordinary item......... 243 (400) (1,190) (3,482) (220) 1,175 1,384
Income tax (benefit) expense........ 117 (240) (214) (1,232) (41) 409 485
--------- --------- --------- ------- --------- -------- --------
Net income (loss)................... $ 126 $ (160) $ (977) $ (2,250) $ (179) $ 766 $ 899
========= ========== ========= ========= ========= ======== ========
Per Share Data(1):
Net income(loss).................... $0.06 $(0.07) $ (0.43) $ (1.00) $ (0.08) $0.40 $0.48
Cash dividends...................... - - - - 0.12 0.08 0.05
Book value . . . . . ............... 3.29 3.46 3.18 3.57 4.88 4.66 3.90
Selected Operating Ratios(2):
Return (loss) on average assets..... .18% (0.23)% (0.70)% (1.50)% (0.12)% .56% 0.60%
Return (loss) on average equity..... 3.36 (4.00) (13.62) (26.96) (2.00) 8.02 10.64
Average yield earned on
interest-earning assets 7.64 7.47 7.41 7.29 6.99 7.32 8.31
Average rate paid on
interest-bearing liabilities 5.49 5.47 5.42 5.73 4.36 3.97 4.89
Average interest rate spread(3)..... 2.15 2.06 1.99 1.56 2.63 3.33 3.42
Net yield on average
interest-earing assets(3) 2.30 2.20 2.16 1.78 2.89 3.61 3.51
Ratio of average interest-earning assets to
average interest-bearing liabilities 1.03 1.03 1.03 1.04 1.06 1.07 1.02
Ratio of average equity to average assets 4.84 4.78 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)............ 5,181 5,228 2,499 6,620 9,264 3,798 2,952
Non-performing assets as a percent
of total assets (4)................. 3.70% 3.72% 1.79% 4.72% 6.02% 2.20% 2.12%
Allowances for loan losses as a
percentage of loans, net....... 1.06% 0.96% 1.36% 1.83% 1.78% 1.94% 1.06%
Allowance as a percentage of non-
performing assets.............. 22.99 20.89 61.34% 31.13% 21.32% 50.14% 43.76%
Allowance for loan losses as a percen-
tage of non-performing loans.... 68.00 31.46 154.7% 61.9% 31.0% 57.2% 54.8%
Capital Ratios(2):
Tangible............................ 4.91% 5.45% 4.74% 5.33% 5.84% 5.71% 6.90%
Core................................ 4.91% 5.45 4.74% 5.33% 5.84% 5.71% 6.90%
Risk-based.......................... 10.15% 11.14 9.92% 10.55% 11.97% 11.34% 11.50%
(Footnotes on following page)
14
- ---------------------
(1) In 1996, all financial institutions whose deposits were insured by the SAIF
as of March 30, 1995, were required to pay a one-time special assessment to
recapitalize the SAIF to its required reserve level of 1.25% of insured
deposits. The Company's SAIF assessment was $716,498 which was paid in the
last quarter of 1996.
(2) The weighted average number of shares outstanding for the six-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.
(3) 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.
(4) 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.
(5) 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 $126,039 for the
six months ended June 30, 1997, as compared to net losses of $977,000, $2.2
million, 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
June 30, 1997, stockholders' equity and book value per share amounted to $7.4
million and $3.29 per share, respectively.
Non-Performing Assets
The Company's non-performing assets amounted to $5.2 million or 3.7% of
total assets at June 30, 1997, as compared to $2.5 million or 1.79% of total
15
assets at December 31, 1996, $6.6 million or 4.72% of total assets at December
31, 1995, and $9.3 million or 6.0% 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 was subsequently written down in the quarter ended June 30, 1997, to
its fair value of $2,340,000. The property consisted of 44 unsold condominium
units, of which 39 were being rented at June 30, 1997. The Company is in the
process of evaluating the units, which are part of a 60 unit condominium complex
in northeast Florida, and began 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. As of the date of this
Prospectus, the Company had sold eight of the units at the asking price and had
17 units under contract.
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.
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, its 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 SAIF, administered by the
FDIC, and depositors.
On October 3, 1994, Federal Trust and the Bank each entered into 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 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." In the 1996 safety and
16
soundness examinations of Federal Trust and the Bank, the 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. 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.
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.
At the request of management, in July 1997, the OTS conducted an
examination of the Bank's loan portfolio, loan classifications and the allowance
for loan loss reserves. As a result of the examination the Bank was advised that
the OTS will give serious consideration in eliminating all of the conditions of
the Bank's Order dealing with operational issues, reconsider the Bank's current
CAMELS rating, as well as lift the Bank's current growth restrictions; provided
the Bank receives a capital infusion of $3.7 million and the scheduled October
1997 full examination does not reveal any material problems. If the Total
Maximum is not sold in this Offering, Federal Trust will not be able to infuse
$3.7 million to the Bank which in turn could limit the regulatory relief that
the OTS may be willing to provide the Bank. While management believes that these
conditions can be satisfied, no assurance can be given that the Total Maximum
will be sold or that the OTS will take the foregoing actions.
On August 5, 1997, the OTS advised management that it was conducting a
formal examination proceeding ("Formal Proceeding") with respect to the Bank and
its affiliates. Although the OTS has not informed the Bank of the specific
subject of the Formal Proceeding, based upon management's review of the
circumstances surrounding the Formal Proceeding, management has no reason to
believe that the Bank or any member of current management is the subject of the
Formal Proceeding or will be subject to any additional enforcement action
stemming from the Formal Proceeding. Management does not know when the Formal
Proceeding will be concluded.
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 June 30, 1997, the Company's allowance for loan losses was $1.2
million, which represented 1.06% of net loans as compared to $1.5 million, or
17
1.36% of net loans as of December 31, 1996. In the OTS examination conducted in
July 1997, the OTS did not disagree with the Company's loan classifications or
allowance for loan losses. Although management believes that the Bank's
allowance for loan losses was adequate at December 31, 1996, and at June 30,
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 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.
Determination of Offering Price
The Subscription Price of $2.00 per share is the same in the Rights
Offering, the Community Offering and Syndicated Community Offering, and was
determined by the Board of Directors with the assistance of RP Financial. See
"DETERMINATION OF SUBSCRIPTION PRICE" for a description of the factors
considered by the Board in determining the Subscription Price and for a
description of the opinion rendered by RP Financial in connection therewith. The
price at which the shares are being offered may not be indicative of the price
at which the shares may be traded following the Offering. The price of the
shares following the Offering will depend upon certain factors, many of which
are outside of the control of Federal Trust, including the number of willing
buyers and sellers, the local, regional and national economy and the market for
stocks of financial institutions. No assurance can be given that the shares
purchased in the Offering can be sold after the Offering at or above the
Subscription Price.
Federal Home Loan Bank Bonds
The Company's investment in obligations of U.S. government agencies
consists of dual indexed bonds issued by the FHLB. At June 30, 1997, the FHLB
bonds had a market value of $15.1 million and gross unrealized pre-tax losses of
$1.0 million. Of the $15.2 million in FHLB bonds, $8.9 million are classified as
available for sale and as such the net unrealized loss is deducted from
stockholders' equity. At June 30, 1997, such deduction totaled $148,000. A
further decline in the market value of these securities would result in a
further decline in stockholders' equity. The FHLB bonds have a par value of
$16.1 million and pay interest based on the difference between two indices. All
of the FHLB bonds at June 30, 1997, pay interest at the 10 year constant
maturity treasury ("CMT") 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 partially offset its risk related to its portfolio of adjustable
rate mortgage ("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".
18
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.
According to the "1997 Florida Long Term Economic Forecast" published by the
Bureau of Economic and Business Research of the University of Florida, the
economic conditions will continue to be favorable in these markets through the
year 2001 based upon the demand for new home construction and the expanding
employment opportunities being generated by teh tourism industry. No assurance
can be given, however that economic conditions will continue to be favorable in
these markets based upon the demand for new home construction and the expanding
employment opportunities being generated by the tourism industry, 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
19
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 than
longer term deposits. As of June 30, 1997, the Company's cumulative gap with
respect to assets maturing or repricing within one year was a negative $23.7
million, or a negative 17.0% 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
20
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Asset/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 Federal
Trust intends to issue up to 2,701,619 shares of Common Stock in the Offering.
For a tabular presentation of the actual book value of a share of Common Stock
at June 30, 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
On August 22, 1997, James T. Bell, the former director, Chief Executive
Officer and President of Federal Trust, together with his wife and children
("Bells"), sold 295,741 shares or 13.3% of the common stock in Federal Trust to
the investment banking firm of William R. Hough & Company, St. Petersburg,
Florida ("Hough & Co."), reducing their beneficial ownership to 221,941 shares
or 9.9% of Federal Trust's outstanding stock. Of the shares sold to Hough & Co.,
100,000 shares (or 4.43% of Federal Trust's outstanding shares) are being held
21
in its trading account and 195,741 shares (or 8.67% of Federal Trust's
outstanding shares) are being held by WRH Mortgage, Inc. Based upon the terms of
the Rights Offering, the Bells would be entitled to exercise Subscription Rights
for the number of shares that they owned as of the Record Date. The Bells have
indicated that should they exercise their Subscription Rights they do not intend
to own more than 9.9% of the Company's outstanding shares following the
completion of the Offering. The sale of the shares acquired by Hough & Co. could
have a negative effect on the ability of Federal Trust to sell the Total Minimum
shares in the Offering should Hough & Co. decide to sell the shares held in its
trading account during the period of the Offering. See "MANAGEMENT - Beneficial
Ownership."
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".
22
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. Upon completion of the Offering, 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 its Common Stock on the Over the
Counter Bulletin Board and its price quotation will also be displayed on the
Electronic Pink Sheet System. 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.
Federal Trust intends to apply to the Nasdaq to have its securities
listed on the SmallCap Market as soon as the Company is able to meet Nasdaq's
qualification requirements. Federal Trust currently meets most of the
23
requirements to be listed on the SmallCap Market except for three
qualifications: (1) the Company's securities must be registered pursuant to
Section 12(g)(1) of the Exchange Act; (2) the listed securities are required to
have a minimum bid price of $4.00 per share; and (3) the Company must have at
least two market makers making a market in its securities. Federal Trust intends
to register its securities pursuant to Section 12(g)(1) of the Exchange Act
immediately following the Offering and expects that it will have at least two
market makers for its securities. The Company, however, will not be able to
apply for Nasdaq SmallCap Market listing until its Common Stock has minimum bid
price of $4.00 per share. There can be no assurance that the minimum bid price
for the Common Stock will ever reach $4.00 per share or if it does, that the
Company will be able to meet the other Nasdaq listing requirements. Investors,
therefore, should consider the potential illiquid and long-term nature of an
investment in the Common Stock. See "MARKET FOR COMMON STOCK AND DIVIDENDS."
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
24
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.
25
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 $3,677,428
========== ==========
Amount to be retained by Federal Trust $ 175,000 $1,225,809
========== ==========
CAPITALIZATION
The following table sets forth the consolidated capitalization of the Company as
of June 30, 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 $ 106,894 $ 106,894 $ 106,894
Advances from FHLB 23,500 23,50 23,500
--------- --------- ---------
Total deposits and borrowed funds $ 130,394 $ 130,394 $ 130,394
========= ========= =========
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 (3,100) (3,100) (3,100)
Treasury stock (16,577 shares of Common Stock at
cost at June 30, 1997) (77) (77) --
Unrealized loss on investment securities, net (148) (148) (148)
Unrealized loss on investment securities transferred
from available for sale to hold to maturity, net . (424) (424) (424)
Total stockholders' equity $ 7,418 $ 9,168 $ 12,482
========= ========= =========
Book value, per share . . . . . . . . . . . . . . . $ 3.29 $ 2.82 $ 2.50
========= ========= ---------
Subscription price as a percent
of pro forma book value, per share 71.92% 80.00%
Actual Minimum Maximum
------ ------- -------
Bank Capital Ratios (2)
Tangible 4.91% 6.20% 7.82%
Core 4.91 6.20 7.82
Risk-based (June 30, 1997) 10.15 12.50 15.44
- ------------------------------
(Footnotes on following page)
(1) 4,958,124 shares outstanding includes 16,577 shares held as Treasury Stock
which will be available for sale in the Offering.
(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.
26
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. RP Financial is a financial consulting firm
established in 1988 which provides financial advisory and evaluate services to
holding companies, commercial banks and savings institutions on a nationwide
basis. 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. The Subscription Price was determined after
considering several factors, including the Company's performance over the past
three years, the actual book value per share and the limited trading
characteristics of the Common Stock. The Common Stock is not listed on any
exchange or Nasdaq. The Common Stock is highly illiquid and, in the last four
years, management is aware of only four trades (occurring over the past year)
involving the sale of shares by the Company's major shareholder for the purpose
of reducing the major shareholders' ownership interest to below 10%. Three of
the sales in 1996 were at $3.25 per share. Federal Trust does not have knowledge
of the sale price for the fourth sale which was consummated on July 30, 1997,
but based upon discussions with the purchaser in connection with transferring
the shares, it is believed that the shares were sold at around $2.25 per share.
RP Financial reviewed with management and the Board of Directors the limited
trading activity in the Common Stock and, in addition, 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 a written opinion from RP Financial, dated
August 8, 1997, stating that as of such date, and based upon and subject to the
factors set forth in the opinion, the terms of the Offering, including the
Subscription Price and the number of shares offered in the Offering are fair to
Federal Trust's current shareholders from a financial point of view. RP
Financial's opinion 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 "DETERMINATION OF
SUBSCRIPTION PRICE - Opinion of RP Financial").
In approving the Subscription Price, the Board of Directors considered
the opinion 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
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
27
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. Opinion of RP Financial
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. Because the Offering could
result in ownership dilution and/or dilution in book value per share for the
current shareholders and because there is not an active public market for the
Common Stock by which a price for the Common Stock could be determined, the
Board of Directors sought the opinion of a qualified financial advisor to
provide assurance that the financial terms of the Offering were fair 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 August 8, 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 shareholders 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 analyses used to render its August 8,
1997 opinion, by performing procedures to confirm the appropriateness of such
analyses and by reviewing the assumptions on which such analyses 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 analyses: (1) the preliminary
Prospectus; (2) certain publicly available information concerning Federal Trust,
including annual reports (incorporating audited financial statements), Forms
10-K and Proxy Statements for the years ended December 31, 1994, 1995, and 1996,
and Forms 10-Q for March 31, 1997 and June 30, 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 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 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 institutions with financial, operating and market characteristics
which are relatively comparable to Federal Trust; (6) the terms and conditions
of the Orders for Federal Trust and the Bank; (7) the financial terms of other
rights offerings by savings institutions and savings institution holding
companies.
28
The opinion further states that in the course of its evaluation and
analyses, 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. Certain information
provided to RP Financial by Federal Trust included various internal estimates
and assumptions regarding potential future operations. Due to their prospective
nature, Federal Trust does not publicly disclose such internal estimates and
assumptions, and such information is not prepared with a view towards public
disclosure. 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 August 8, 1997, and
updated as of the date of this Prospectus, RP Financial performed a variety of
analyses, which are summarized below. The preparation of a fairness opinion is a
complex process involving subjective judgments and is not necessarily
susceptible to partial analyses or summary description. RP Financial stated that
its analyses must be considered as a whole and that selecting portions of such
analyses and of the factors considered by RP Financial without considering all
such analyses and factors could create an incomplete view of the process
underlying RP Financial's opinion. In its analyses, 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 on 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.
29
(b) Comparable Transactions Approach. In this analyses, 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 (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 analyses, 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 range of pro forma price-to-tangible book value multiples
of 72% to 80% indicated by the Subscription Price at the minimum and maximum
Offering. The average and median dilution in tangible book value per share
indicated by the Comparable Transactions was 33% and 28%, respectively, versus a
range of pro forma dilution in tangible book value per share of 14% to 23%
indicated by the Subscription Price at the minimum and maximum 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 69% and 75%, respectively, versus a range of pro
forma dilution in ownership (assuming that current shareholders did not exercise
their Subscription Rights in the Offering) of 31% to 54% indicated by the number
of shares offered in the minimum and maximum Offering. RP Financial stated that
the terms of the Comparable Transactions, specifically the comparable pro forma
price-to-tangible book value multiple indicated by the Subscription Price
relative to the average 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 analyses, 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 six public companies met these criteria
(the "Public Company Peers"). The Public Company Peers reported average and
median total assets of $309 million and $300 million, respectively, versus
assets of $139 million for Federal Trust; reported average and median equity-to
assets ratios of 6.9% and 6.7%, respectively, versus 5.3% for Federal Trust;
reported average and median and non-performing assets to assets ratios of 2.3%
and 2.1%, respectively, versus 3.5% for Federal Trust; and reported average and
median market capitalization of $22.9 million and $22.2 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 August 7, 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 range of pro forma
price to tangible book value ratios of 72% to 80% indicated by the Subscription
Price at the minimum and maximum Offering. Based on its comparative analyses, 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 forma 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 analyses 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 analyses because
Federal Trust's pro forma trailing 12 month earnings multiple was not meaningful
and was not subject to comparison. Federal Trust's pro forma price to book value
multiples of 72% to 80% at the minimum and maximum Offering are at a valuation
discount of 34% and 26%, relative to the average and median of the Public
Company Peers, respectively. A similar analyses of proforma price-to-assets
ratio indicated valuation discounts of 38% at the minimum Offering and 8% at the
maximum Offering, versus the average price-to-assets ratio of the public company
peers. RP Financial considered these discounts to be reasonable relative to the
comparative financial analyses 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.
30
(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
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. Upon completion of the Offering,
Federal Trust anticipates (based upon discussions with KBW) that it will be able
to secure at least two broker-dealers to match buy and sell orders for its
Common Stock on the Over the Counter Bulletin Board. The stock price quotation
will also be displayed on the Electronic Pink Sheet System. Making a market,
31
however, 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.
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.
Federal Trust intends to apply to the Nasdaq to have its securities
listed on the SmallCap Market as soon as the Company is able to meet Nasdaq's
qualification requirements. While Federal Trust meets most of the current
requirements to be listed on the SmallCap Market except for three
qualifications: (1) the Company's securities must be registered pursuant to
Section 12(g)(1) of the Exchange Act; (2) the listed securities are required to
have a minimum bid price of $4.00 per share; and (3) the Company must have at
least two market makers making a market in its securities. Federal Trust intends
to register its securities pursuant to Section 12(g)(1) of the Exchange Act
immediately following the Offering and expects that it will have at least two
market makers for its securities. The Company, however, will not be able to
apply for Nasdaq SmallCap Market listing until its Common Stock has a minimum
bid price of $4.00 per share. There can be no assurance that the minimum bid
price for the Common Stock will ever reach $4.00 per share or if it does, that
the Company will be able to meet the Nasdaq listing requirements.
As of August 31, 1997, there were 2,239,928 shares of Common Stock
outstanding, which were held by 436 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 - Regulation of the Company - 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 and interest paid on interest-bearing liabilities (i.e.,
deposits and borrowings) . 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
32
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
June 30, 1997, from $139.6 million as of December 31, 1996. Loans receivable
decreased by $474,000 from $112.5 million to $112.1 million as a result of the
net repayment of loans during the period.
Total deposits decreased by $775,000 to $106.8 million as of June 30,
1997, from $106.1 million as of December 31, 1996. The increase in deposits was
due to the continuing efforts to increase local deposits.
Total shareholders' equity increased slightly to $7.4 million as of
June 30, 1997, from $7.2 million as of December 31, 1996. This increase
primarily reflects the Company's earnings for the six months ended June 30,
1997.
Results of Operations for the Six Months Ended June 30, 1997 and 1996
The Company reported net income for the six months ended June 30, 1997,
of $126,039, or $.06 per share, as compared to net loss of $159,653 or $.07 per
share for the same period in 1996. The increase in earnings is due to improved
net interest income, the reduction of other expenses, and a decrease in the
allowance for loan losses.
Interest Income and Expense. Net interest income increased by $48,575
for the six months ended June 30, 1997. Interest income increased by $55,278 to
$5,044,806 for the six months ended June 30, 1997, from $4,989,528 for the same
period in 1996. Interest income on loans increased to $4,616,031 in 1997 from
$4,572,628 in 1996, primarily as a result of an increase in the yield on loans
outstanding, which was attributable to interest income received on a loan
originated in 1996. In the first quarter of 1997 the Company sold a
participation interest in a loan originated in March 1996 in conjunction with
the sale of a previously foreclosed property, resulting in the recognition of
income of $153,000 (consisting of 122,007 of interest income and $30,993 of gain
on the sale). When the property was sold, the buyer's payment was made in the
form of a participation interest in a pool of student loans that the buyer had
originated in the normal course of its business as a technical school, and a
mortgage loan by the Bank. In accordance with Statement of Financial Accounting
Standards ("SFAS") No. 66, when the buyer's initial investment is other non-cash
consideration, such other consideration can only be included as a part of the
buyer's initial investment when that consideration is sold or otherwise
converted to cash without recourse to the seller. Until such time as the other
consideration is converted to cash, the profit on the sale shall not be
recognized by the full accrual method. The sale by the Bank of a non recourse
participation interest in the loan during the quarter ended March 31, 1997, for
cash, allowed the Bank to recognize the profit and interest income that had been
previously deferred. Interest income on the securities portfolio increased by
$30,735 for the six months ended June 30, 1997, over the same period in 1996, as
a result of an increase in the average yield on securities owned. Other interest
and dividends decreased $18,860 during the same six-month period in 1997 from
1996 as a result of a decrease in the average volume of other interest-earning
assets. Management expects the rates earned on the portfolio to fluctuate with
general market conditions.
33
Interest expense decreased by $6,703 to $3,523,984 during the six-month
period ended June 30, 1997, from $3,517,281 for the same period in 1996
primarily due to an increase in the total average amount of FHLB advances
outstanding, offset by a decrease in interest-bearing deposits. Interest on
deposits decreased by $116,771 to $2,808,821 in 1997 from $2,925,592 in 1996 as
a result of decreased deposits and a decrease in the average rate paid, and
interest on FHLB advances increased to $715,163 in 1997 from $591,689 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 six months of 1997, management made a $37,748 provision for loan losses
based on its evaluation of the loan portfolio. The Company's provision for loan
losses was $113,506 during the same period in 1996. There were net charge-offs
of $387,689 during the six-month period ended June 30, 1997, as compared to net
charge offs of $1,088,535 during the six-month period ended June 30, 1996. Total
non-performing loans at June 30, 1997, were $1,751,724 compared to $3,470,920 at
June 30, 1996. The allowance for loan losses at June 30, 1997, was $1,190,875,
or 68% of non-performing loans and 1.06% of net loans outstanding.
Total Other Income. Other income decreased from $251,715 for the
six-month period ended June 30, 1996, to $248,910 for the same period in 1997.
The decrease in other income was primarily due to a decrease of $85,137 in gains
on the sale of assets, a decrease of $2,738 in fees and service charges, offset
partially by an increase in rental income of $62,126 on a repossessed rental
property and an increase in other miscellaneous income of $22,944. Gains on the
sale of assets decreased as a result of fewer asset sales, and fees and service
charges decreased primarily because of a decrease in the fees and charges earned
on deposit accounts. Rental income increased as a result of an increase in the
amount of income producing repossessed properties at the Bank and a previously
foreclosed property beginning to generate rental income. Other miscellaneous
income increased for the six-month period ended June 30, 1997, due primarily to
increased loan servicing fees and increased other loan income.
Total Other Expense. Other expense decreased to $1,489,145 for the
six-month period ended June 30, 1997, from $2,010,220, for the same period in
1996. The decrease in 1997 was primarily the result of decreased employee
compensation expense, decreased occupancy and equipment expense, decreased data
processing expense, decreased professional fees, decreased FDIC insurance
expense and decreased miscellaneous expense. Compensation decreased to $660,251
in 1997 from $689,704 in 1996 as a result of reductions in staff. Occupancy and
equipment expense decreased by $222,046 in 1997 to $263,028 due to the one time
charge, totaling $149,567, taken in 1996 to write off the leasehold improvements
at the Company's office in the amount of $114,646, and to write off the
leasehold improvements at the closed drive-in facility in the amount of $34,921.
The remainder of the decrease in occupancy and equipment expense was the result
of reduced rental expense, resulting from the sale of the drive-in facility
which was previously rented, and the subletting of the Company's former office.
Professional fees decreased by $148,741 primarily as a result of decreased legal
costs associated with non-performing loans. FDIC insurance expense decreased by
$35,644 as a result of a reduction in the premium rate charged by FDIC. Other
miscellaneous expense decreased by $84,249 primarily due to reduced costs
associated with repossessed assets.
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
34
institutions in order to fully capitalize the SAIF to its required reserve level
of 1.25% 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.
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 of legal and professional
expenses of $490,556, a decrease of $402,620 in REO expenses, a decrease of
general and administrative expenses of $124,442, a decrease of $930,156 in
losses on sale of investment securities, a decrease of $122,222 in losses on the
35
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
was 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
Federal Trust Properties Corporation ("Properties Corp."), 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 independent 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 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.
36
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
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 REO,
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 Federal Trust 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 near the Bank's
main office. General and administrative expenses decreased by $56,804,
stationary, printing and supplies expense decreased by $12,757, telephone
expense decreased by $4,390, and 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 June 30, 1997, the most recent
report available, was -17%, 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 investment portfolio during the fourth quarters of
1995 and 1996. In addition, the Company sold fixed rate loans in the first half
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, net interest income should
improve as the rates paid on its liabilities will fall faster than the rates
earned on its assets.
37
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 June
30, 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]
38
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) $ 8,400 $ 11,096 $ 66,263 $ 15,733 $ 3,518 $ 9,462
Other interest-bearing assets(2) 2,430 - - 6 16,100 --
------- ----------- ---------- ---------- ------- ---------
Total interest-earning assets 10,830 11,096 62,202 15,739 19,618 9,462
Non-interest bearing demand deposits(3) 101 90 152 314 84 186
Interest bearing demand deposits(3) 101 90 151 312 84 185
Money Market Demand Deposits(3) 2,163 1,464 1,662 737 351 319
Savings deposits(3) 78 74 139 443 289 692
Time deposits 17,730 - 59,809 17,140 2,465 -
FHLB advances and other 6,472 24 17,547 164 131 532
------ --------- ---------- -------- ------ ------
Total interest-bearing liabilities 26,645 1,742 79,460 19,110 3,404 1,914
------ ------ ------ ------ ------ -----
Interest rate sensitivity gap $(15,815) $9,354 $(17,258) $(3,371) $16,214 $7,548
========= ====== ==== ======== ======== ======
Cumulative interest rate sensitivity gap $(15,815) $ (6,461) $(23,179) $(27,090) $(10,876) $(3,328)
========= ========= ========= ========= ======== ======
Cumulative interest rate sensitivity gap
as a percentage of total assets (11.35)% (4.64)% (17.03)% (19.45)% (7.81)% (2.39)%
========= ======= ======== ======== ======= =====
Cumulative interest rate sensitivity GAP
as a percentage of total interest
earning assets (12.26)% (5.01)% (18.39)% (21.01)% (8.43)% (2.58)%
Cumulative net interest-earning assets as
a percentage of cumlative
interest-bearing liabilities (40.65)% 77.24% (78.01)% 78.66% 91.66% 97.48%
Cumulative interest-earning assets $10,830 $21,926 $84,128 $99,867 $119,485 $128,947
Cumulative interest-bearing liabilities 26,645 28,387 107,847 126,957 130,361 132,275
(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
39
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.
Six Months Ended June 30,
1997 1996
------------------------------------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
(Dollars in thousands)
Interest-earning assets:
Loans(1) $113,299 $ 4,617 8.15% $111,651 $ 4,572 8.19%
Investment securities 15,088 333 4.41 15,845 303 3.82
Other interest-earning assets 3,653 95 5.20 6,136 114 3.72
--------- ------- ---- --------- ------- ----
Total interest-earning assets 132,040 5,045 7.64 133,632 4,989 7.47
Non-interest earning assets 5,848 7,125
---------- ---------
Total assets $137,888 $140,757
======= ========
Interest -bearing liabilities:
Non-interest bearing demand deposits $216 - - $ 239 - -
Interest bearing demand deposits 7,946 151 3.80 7,207 127 3.52
Savings deposits 1,335 17 2.55 1,776 23 2.59
Time Deposits 95,100 2,641 5.55 98,139 2,775 5.66
------ ----- ---- ------- ----- ----
Total deposit accounts 104,597 2,809 5.37 107,361 2,925 5.45
FHLB advances & other borrowings 23,853 715 6.00 22,850 592 5.18
------ --- ---- ------ --- ----
Total interest-bearing liabilities 128,450 3,524 5.49 130,211 3,517 5.40
Non-interest bearing liabilities 2,753 3,825
Retained earnings and stockholder's equity 6,685 6,721
----------- ------------
Total liabilities & retained earnings $137,888 $ 140,757
========== =========
Net interest income $ 1,521 $ 1,472
======= =======
Interest rate spread(3) 2.15% 2.07%
===== =====
Net interest margin(4) 2.30% 2.20%
===== =====
Ratio of average interest-earning assets to average
interest -bearing liabilities 1.03% 1.03%
===== =====
(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.
40
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)
41
(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).
Six Months Ended June 30, 1997 Year Ended December 31, 1996
vs. 1996 vs. 1995
Increase (Decrease) Due to Increase (Decrease) Due to
---------------------------------- -----------------------------------
Rate/ Rate/
Rate Volume Volume Total Rate Volume Volume Total
---- ------ ------ ----- ---- ------ ------ -----
(In thousands)
Interest-earning assets:
Loans(1) $ (44) $ 135 $ (46) $ 45 $ 315 $ (258) $ (19) $ 38
Investment securities 93 (29) (34) 30 (284) (423) 93 (614)
Other interest-earning assets 91 (92) (18) (19) (92) (19) 15 (96)
------- ------- ------- ------- ------- ------- ------- -------
Total interest-earning assets 140 14 (98) 56 (61) (700) 89 (672)
Interest -bearing liabilities:
Non-interest bearing
demand deposit $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ --
Interest bearing demand deposits 20 26 (22) 24 5 7 (3) 9
Savings deposits (1) (11) 6 (6) -- (35) -- (35)
Time Deposits (99) (172) 137 (134) (265) (190) 28 (427)
Total deposit accounts (80) (157) 121 (116) (260) (218) 25 (453)
FHLB advances &
other borrowings 186 52 (115) 123 (151) (368) (16) (535)
------- ------- ------- ------- ------- ------- ------- -------
Total interest-bearing
liabilities 106 (105) 6 7 (411) (586) 9 (988)
------- ------- ------- ------- ------- ------- ------- -------
Net change in net interest income
before provision for loan losses $ 34 $ 119 $ (104) $ 49 $ 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 25 (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)
======= ======= ======= =======
(footnotes on following page)
42
- ----------------------------
(1) The change in interest due to both volume and yield/rate has been
allocated to change due to volume and change due to yield/rate in
proportion to the absolute value of the change in each.
(2) Balances of nonaccrual loans and related income recognized have been
included for computational purposes.
Rate/Volume Analyses: The preceding 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).
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 six-month period ended June 30, 1997, the Company used funds
primarily from principal collected on loans, $8,854,986; proceeds from the sale
of REO, $437,787; proceeds from loan sales, $705,564; advance payments by
borrowers, $702,375; an increase in net deposits, $775,477; and a decrease in
cash, $2,236,155; to fund the origination and purchase of loans, $11,591,612; a
decrease in FHLB advances, $1,300,000; and the purchase of FHLB stock, $174,300.
As of June 30, 1997, there was $23,500,000 outstanding FHLB advances. The
Company's total borrowing capacity with the FHLB of Atlanta is currently
$35,000,000.
At June 30, 1997, loans-in-process, or closed loans scheduled to be
funded over a future period of time, totaled $771,447. Loans committed, but not
closed, totaled $2,758,452 and available lines of credit totaled $283,061.
During the six-month period ended June 30, 1997, the Company acquired $7.0
million, net in primarily residential mortgage loans. The Company expects to
make other loan acquisitions of this size in the future, depending upon
availability.
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 June 30, 1997, certificates of deposit scheduled to mature by June
30, 1998, or sooner totaled $77.7 million. Management believes that the Company
can adjust the rates offered for certificates of deposit to retain deposits in a
changing interest rate environment.
At June 30, 1997, the Bank's capital totaled $7.4 million, or 5.3% of
total assets.
43
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 Financial Accounting Standards Board ("FASB") issued
SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities". SFAS No. 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 No. 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 No. 125 to delay the effective date of certain provisions of
the standard to transfers occuring after December 31, 1997. The Company adopted
SFAS No. 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
No. 125, as amended.
In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share".
SFAS No. 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 No. 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 No. 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 No. 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.
44
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.
In June 1997 the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." This statement establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains, and losses)
in a full set of general-purpose financial statements. This statement requires
that all items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement this is
displayed with the same prominence as other financial statement. The statement
also requires that an enterprise (a) classify items of other comprehensive
income by their nature in a financial statement and (b) display the accumulated
balance of other income separately from retained earnings and additional paid-in
capital in the equity section of a statement of financial position. The
statement is required for fiscal years beginning after December 15, 1997. The
adoption of this standard will require the Company to disclose as a component of
comprehensive income the activity in its unrealized gain or loss on investment
securities available for sale.
In June 1997 the FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information." This statement establishes standards
for the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to shareholders. The statement is required for fiscal years
beginning after December 15, 1997. The Company does not anticipate adoption of
this standard will have a significant impact on its consolidated financial
statements.
BUSINESS
The Company
General. Federal Trust is a Florida corporation which was established
in August 1988. Federal Trust became a unitary savings and loan holding company
in February 1989, when it completed its reorganization with its wholly-owned
subsidiary, Federal Trust Bank (a federally-chartered stock savings bank which
commenced operations in February 1988). The address for Federal Trust is 1211
Orange Avenue, Winter Park, Florida 32789 and the telephone number is (407)
645-1201. See "CERTAIN TRANSACTION - Transaction With Certain Related Persons."
At June 30, 1997, the Company had total consolidated assets of $140.0 million
and stockholders' equity of $ 7.4 million.
Federal Trust's sole subsidiary is the Bank.
Throughout the first five years of its existence the Company focussed
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 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.
45
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 1994, 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 June 30, 1997, deposits totaled $106.9 million, of which
$3.1 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
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.
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.
46
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, regarding 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 last full scope 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, 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. 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. The OTS Regional Director subsequently advised the Company that the OTS
had decided to upgrade Federal Trust's 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.
At the request of management, in July 1997, the OTS conducted an
examination of the Bank's loan portfolio, loan classifications and the allowance
for loan loss reserves. As a result of the examination , the Bank was advised
that the OTS will give serious consideration in eliminating all of the
conditions of the Bank's Order dealing with operational issues, reconsider the
Bank's current CAMELS rating, as well as lift the Bank's current growth
restrictions; provided the Bank receives a capital infusion of $3.7 million, and
the scheduled October 1997 full examination does not reveal any material
problems. While management believes that these conditions can be satisfied, no
assurance can be given that the Total Maximum will be sold or that the OTS will
take any of the foregoing actions.
47
On August 5, 1997, the OTS advised management that it was conducting a
Formal Proceeding with respect to the Bank and its affiliates. Although the OTS
has not informed the Bank of the specific subject of the Formal Proceeding,
based upon management's review of the circumstances surrounding the Formal
Proceeding, management has no reason to believe that the Bank or any member of
current management is the subject of the Formal Proceeding or will be subject to
any additional enforcement action stemming from the Formal Proceeding.
Management does not know when the Formal Proceeding will be concluded.
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
48
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 - Regulation of the Bank -
Interstate Branching".
49
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 $98.6
million or 80% of the total loan portfolio as of June 30, 1997, of which
approximately 98.4% are first mortgage loans and includes $2.2 million in loans
for the construction of single-family homes and $909,000 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
$12.2 million, or 10.9% of the total loan portfolio as of June 30, 1997.
Commercial real estate loans consist of $11.3 million of loans secured by other
non-residential property and $955,000 of loans secured by undeveloped land as of
June 30, 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 June 30,
1997, consumer and other loans, consisting of installment loans and savings
account loans, amounted to $193,000, or 0.2% of the total loan portfolio.
[Intentionally Left Blank]
50
The following table sets forth information concerning the Bank's loan
portfolio by type at the dates indicated.
At June 30, 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 $ 12,226 10.91% $ 11,295 10.04% 13,112 11.61% 14,675 13.20%
Residential 96,380 86.00% 97,718 86.82% 97,613 86.46% 88,984 80.03%
Residential construction
conventional 2,183 1.94 % 3,795 3.37 % 1,667 1.48 % 1,342 1.21%
----- ---- ----- ---- ----- ---- ----- -----
Total mortgage loans 110,789 98.85 % 112,808 100.23 % 112,392 99.55 % 105,001 94.44%
Commercial loans 1,216 1.09 % 1,349 1.19 % 1,443 1.28 % 891 0.80 %
Consumer loans 193 0.17 % 154 0.14 % 180 0.16 % 503 0.45 %
Lines of credit 736 0.66 % 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 112,934 100.77 % 114,997 102.17 % 115,273 102.10 % 112,372 101.07 %
Net premium on mortgage
loans purchased 1,130 1.00 % 1,155 1.03 % 987 0.87 % 1,460 1.31 %
Deduct:
Loans in Process - 0.00 2 - - - - -
Unearned discounts &
loan origination fees 27 0.02 % 170 0.15 % 104 0.09 % 149 0.13 %
Undisbursed portion of loans 773 0.69 % 1,902 1.69 % 1,190 1.05 % 525 0.47 %
Allowance for loan losses 1,191 1.06 % 1,533 1.36 % 2,060 1.83 % 1,975 1.78 %
----- ---- ----- ---- ----- ---- ----- ----
Loans receivable, net $112,073 100.00 % $112,547 100.00 % $112,906 100.00 % $111,183 100.00 %
======== ====== ======== ====== ======== ====== ======== ======
51
The following table sets forth as of June 30, 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 $ 6,574 $ 1,933 $ 100,099 $ 108,606
Construction 2,183 - - 2,183
------- --------- ---------- ----------
Total mortgage loans 8,757 1,933 100,099 110,789
Total loans receivable $ 10,491 $ 2,190 $ 100,253 $ 112,934
============== ============ ========= =========
Loans maturing after one year:
Fixed interest rates - $ 1,283 $ 17,293 -
Adjustable interest rates - 907 82,960 -
------- --------- ---------- ----------
Total - $ 2,190 $ 100,253 -
============== ============ ========= =========
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 June 30, 1997, the
Company had $2.2 million in construction loans, all of which mature in one year
or less. Of these construction loans, 6% have fixed rates and 94% have
adjustable rates.
52
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 packages of
seasoned loans 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 the Federal National Mortgage Association ("Fannie
Mae") and other investors in the secondary market. The Company has engaged in
the sale of whole loans and participation.
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
"BUSINESS - Lending Activities - Loan Portfolio Composition and "BUSINESS -
Lending Activities - Loan Underwriting."
[Table Follows On Next Page]
53
The following table sets forth for the Company total loans originated,
purchased, sold and repaid during the periods indicated.
Six Months
Ended June 30, Year Ended December 31,
-------------------- ---------------------------------------------------
1997 1996 1995 1994 1993 1992
-----------------------------------------------------------------------------
(In thousands)
Originations:
Real Estate Loans:
Loans on existing property $ 4,046 $ 4,955 $ 3,354 $ 3,739 $ 5,600 4,586
Construction loans 350 621 186 1,466 1,500 2,891
Commercial loans -- 663 100 148 1,196 369
Lines of credit 50 -- 74 154 933 2,143
Consumer and other loans 61 515 47 54 275 123
-------- -------- -------- -------- -------- --------
Total loans originated 4,507 6,754 3,761 5,561 9,504 10,112
Purchases: 7,023 25,082 29,005 36,913 22,880 77,988
Total loans originated
and purchased 11,530 31,836 32,766 42,474 32,384 88,100
Sales and principal reductions
Loans sold 699 (7,761) (2,561) (4,620) (30,422) (12,480)
Principal on loan reductions 12,894 (24,351) (27,296) (22,194) (30,127) (27,396)
-------- -------- -------- -------- -------- --------
Total loans sold
and principal reductions $ 13,593 (32,112) (29,857) (26,814) (60,549) (39,876)
-------- -------- -------- -------- -------- --------
Increase (decrease) in loans
receivable (before net items) $(2,063) $ (276) $ 2,909 $ 15,660 $(28,165) $ 48,224
======== ======== ======== ======== ======== ========
54
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 FHA,
VA, or Farmers Home Administration ("FmHA") 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.
The maximum amount which the Company could have loaned to one borrower
and the borrower's related entities as of June 30, 1997, was approximately $1.1
million. The Company currently has two loan relationships in excess of this
amount. See "REGULATION AND SUPERVISION - Regulation of the Bank."
55
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 June 30, 1997, the Company was allowed to invest
an aggregate amount up to $29.7 million in non-residential or commercial real
estate loans. As of June 30, 1997, loans secured by non-residential or
commercial real estate totaled $11.5 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 June 30, 1997, $98.6 million or 88% of the
Company's total loan portfolio consisted of one-to-four family residential real
estate loans. As of such date, approximately $79.9 million or 81% of these loans
were ARM loans and $18.7 million or 19% 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.
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 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
56
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 June 30, 1997, construction lending amounted to $2.2 million,
or 2% of the 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 June 30, 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
to be 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 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 10 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
57
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
June 30, 1997, consumer loans amounted to $193,000, or 0.17% 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 $12.2 million or 10.9% of the total
loan portfolio as of June 30, 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 June 30, 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 June 30, 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
former Chairman and President of Federal Trust. The Loan is current, but has
been classified as Doubtful. 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 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 not a delegated SBA underwriter. Applications for SBA or
FmHA guaranteed or insured loans are carefully underwritten and include an
58
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 June 30,
1997, SBA guaranteed loans amounted to $1.1 million or 0.96% 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 June 30, 1997,
the Company was servicing $8.0 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
59
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 REO at its net book value of $2,350,000. The property was
subsequently written down in the quarter ended June 30, 1997, to its fair value
of $2,340,000. 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 began 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
closed eight sales and had 17 units under contract for sale. 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.
60
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.
At June 30, 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 1,174 323 800 1,029 704 748
Residential Construction -- -- -- -- 333 --
Total mortgage loans 1,722 871 3,257 2,464 3,095 1,943
Commercial loans -- 47 -- 240 -- 64
Consumer loans 30 73 69 77 30 53
In-substance foreclosures -- -- -- 3,592 108 298
------ ------ ------ ------ ------ ------
Total non-accrual loans $1,752 $ 991 $3,326 $6,373 $3,233 $2,358
====== ====== ====== ====== ====== ======
Total non-accrual loans to total loans 1.6% 0.88% 2.95% 5.73% 3.39% 1.93%
====== ====== ====== ====== ====== ======
Total non-accrual loans to total assets 1.3% 0.71% 2.37% 4.14% 2.20% 1.69%
====== ====== ====== ====== ====== ======
Total allowance for loss to total
non-accrual loans 68.0% 154.69% 61.95% 30.99% 57.22% 54.77%
====== ====== ====== ====== ====== ======
Real estate owned:
Total real estate owned $3,429 $1,508 $3,293 $2,891 $ 565 $ 594
====== ====== ====== ====== ====== ======
Total non-accrual loans and real estate
owned to total assets 3.7% 1.78% 4.7% 6.02% 2.59% 2.1%
====== ====== ====== ====== ====== ======
61
If non-accrual loans at June 30, 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 six-month period ended June 30, 1997, would have been increased
approximately $84,890.
The $1.2 million of non-accruing single-family residential permanent
loans at June 30, 1997, consists of 19 loans, which have an average loan balance
of approximately $61,800. No loan exceeds $134,000. The Company had one
non-accruing land acquisition and development loan at June 30, 1997, in the
amount of $547,930.
At June 30, 1997, the Company had $3.4 million in REO acquired by
foreclosure (or deed in lieu) consisting of four single family properties with
an average balance of $42,852 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, and one 44-unit condominium project with a balance
of $2.3 million.
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 June 30, 1997, the Company had $7.9 million in loans classified as
Substandard, $509,555 classified as Doubtful, and none 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
62
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 June 30, 1997, the
Company had a total allowance for loan losses of $1.2 million representing 1.06%
of total loans. See Note 1 of the Notes to Consolidated Financial Statements.
[Table Follows On Next Page]
63
The following table sets forth information regarding the Company's
allowance for loan losses during the periods indicated.
Six Months
Ended June 30, 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 -- 843 390 440 400 -- --
Residential loans 340 207 794 267 4 27 37
Residential construction -- -- -- -- -- -- --
Consumer loans 48 39 39 -- 5 5 --
--------- --------- --------- --------- --------- --------- ---------
Total loans charged off 388 1,089 1,223 707 409 32 37
Recoveries 8 6 267 13 3 -- --
--------- --------- --------- --------- --------- --------- ---------
Net charge-offs 380 1,083 956 694 406 32 37
Provision for loan losses charged to
operating expenses 38 114 280 779 531 590 140
Transfer from allowance for real
estate owned -- -- 149 -- -- -- --
General reserves acquired as part of
loan package purchases -- -- -- -- -- -- 830
--------- --------- --------- --------- --------- --------- ---------
Allowance at end of year $ 1,191 $ 1,092 $ 1,533 $ 2,061 $ 1,975 $ 1,850 $ 1,292
========= ========= ========= ========= ========= ========= =========
Ratio of net charge-offs to average
loans outstanding 0.34% 0.97% 0.85% 0.61% 0.37% 0.03% 0.03%
Ratio of allowance to period-end
total loans, net 1.06% 0.97% 1.36% 1.83% 1.78% 1.94% 1.06%
Period-end total loans, net $ 112,073 $ 113,116 $ 112,547 $ 112,906 $ 111,183 $ 95,374 $ 122,476
========= ========= ========= ========= ========= ========= =========
Average loans outstanding, net $ 113,299 $ 111,651 $ 112,288 $ 115,608 $ 108,771 $ 109,063 $ 124,107
========= ========= ========= ========= ========= ========= =========
64
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 June 30, 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 $ 384 32.2% $ 283 83.3% $ 415 86.1% $ 421 83.6% $ 983 72.6% $1,076 76.7%
Commercial
real estate loans
(Including multi-family loans) 537 45.1% 946 9.8 1,073 11.4 1,318 13.1 772 21.0 178 23.3
Non-mortgage loans 270 22.7% 304 1.9 573 2.5 236 3.3 95 6.4 38 --
------ ----- ------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Total allowance for loan losses $1,191 100.0% $1,533 100.0% $2,061 100.0% $1,975 100.0% $1,850 100.0% $1,292 100.0%
====== ===== ====== ===== ====== ===== ====== ===== ====== ===== ====== =====
65
Investment Activities
The Company's investment in obligations of United States Government
agencies consist of dual indexed bonds issued by the FHLB. At June 30, 1997, the
bonds had a market value of $15.1 million and gross unrealized losses of $1.0
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 June 30, 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 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.
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 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 June 30, 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 $ 2,602 13.54% $ 4,837 22.9% $ 51 0.3% $ 6,861 20.7%
Debt Securities -- -- -- -- -- -- --
FHLB notes 15,185 79.03 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 7.43 1,253 5.9 1,853 10.4 1,975 6.0
------- ----- ------- --- ------- --- ------- ---
Total . . . . . . . $19,216 100.0% $21,144 100.0% $17,841 100.0% $33,137 100.0%
======= ===== ======= ===== ======= ===== ======= =====
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 June 30, 1997.
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 $ -- $ -- $-- $2,750 $2,684 3.61%
1 to 5 years -- -- -- 6,350 6,179 3.79%
5 to 10 years 6,321 6,234 4.87 -- -- --
------ ------ ----
More than 10 years -- -- -- -- -- --
------ ------ ----- ------ ------ ----
Total $6,321 $6,234 4.87 $9,100 $8,863 3.74%
====== ===== ====== ====== ====
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 June 30,
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 ATMs, 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 June 30, 1997, deposits totaled $106.9 million of which $3.1
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 June 30, 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 $ 168 0.2% $ 59 .1% $ 209 0.2% $ 257 0.3%
MMDA's 1,359 1.3 1,364 1.3 2,158 2.0 4,234 4.2
Now accounts 6,695 6.3 7,429 7.0 6,601 6.1 9,247 9.1
Subtotal 992 0.9 654 .6 675 0.6 857 0.8
--- --- --- -- --- --- --- ---
9,214 8.7 9,506 9.0 9,643 8.9 14,595 14.4
----- --- ----- --- ----- --- ------ ----
Certificates of deposit:
1.00% to 3.99% 354 0.3 499 .5 1,219 1.1 5,431 5.4
4.00% to 4.99% 2,164 2.0 3,077 2.9 2,171 2.0 29,421 29.0
5.00% to 5.99% 75,504 70.6 78,123 73.5 54,847 50.2 29,165 28.7
6.00% to 7.99% 19,658 18.4 14,910 14.0 41,311 37.8 22,859 22.5
8.00% to 9.99% - - - - - - 46 -
-------------- ------ -------- ----- --------- ----- --------- -----
Total Certificates of Deposit 97,682 91.3 96,609 91.0 99,548 91.1 86,922 85.6
-------------- ------ -------- ----- --------- ----- --------- -----
Total Deposits $ 106,894 100.0% $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 June 30, 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 $ 8,163 3.70% $ 7,722 3.72% $ 7,587 3.68% $ 8,629 3.11%
Statement savings accounts 1,335 2.55 1,641 2.62 2,975 2.62 6,227 3.40
Certificates of deposit 95,100 5.55 97,042 5.60 99,716 5.90 77,333 4.30
-------- ---- -------- ---- --------- ---- ------- ----
Total Deposits $104,598 5.37% $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 June 30, 1997
-----------------
Amount % of Total
------ ----------
(Dollars in thousands)
Three months or less $ 3,839 19.59%
Over three months to six months 3,896 19.88
Over six months to twelve months 7,020 35.81
Over twelve months 4,846 24.72
------- -----
$19,601 100.00%
======= ======
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.
Six Months
Ended June 30, Years Ended December 31,
--------------- --------------------------
1997 1996 1996 1995 1994
--------------- --------------------------
(Dollars in thousands)
Net increase (decrease) before interest
credited $ 2,579 $(2,739) $ 523 $10,619 $23,902
Less:
Interested credited 1,804 (1,761) 3,599 2,945 1,113
------- ------- ------- ------- -------
Net deposit increase (decrease) $ 775 $(4,500) $(3,076) $ 7,674 $22,789
======= ======= ======= ======= =======
70
Borrowings. The Company is permitted to obtain advances from the FHLB
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 June 30, 1997, the Company had $23.5 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 June 30, 1997:
- -------------------------------------------------------------------------------
Maturity Date Rate Amounts Type
------------- ---- ------- ----
(Dollars in thousands)
09/16/97 6.01 $ 5,000 Fixed Rate
10/16/97 5.86 5,000 Fixed Rate
12/31/97 6.48 1,000 Variable Rate
03/04/98 6.02 2,500 Fixed Rate
06/30/98 6.00 5,000 Fixed Rate
09/15/98 6.12 5,000 Fixed Rate
---- -----
Total 6.02% $23,500
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.
Maximum Amount outstanding:
- --------------------------------------------------------------------------------
Month-end Amount
- --------- ------
01/31/97 $24,800,000
02/28/97 27,300,000
03/31/97 27,250,000
04/30/97 27,250,000
05/31/97 23,250,000
06/30/97 23,500,000
The maximum amount of borrowings outstanding at any month end during
the six-month period ended June 30, 1997 was $27.3 million. During the six month
period ended June 30, 1997, average advances outstanding totaled $23.9 million,
with an average rate of 5.99%.
Amounts outstanding at:
- ---------------------------------------------------------------------------------------------------------------------
1996 1995
- ------------------------------------------------------ -------------------------------------------------------
Month-end Rate Amount Month-end Rate Amount
- --------- ---- ------ --------- ---- ------
(Dollars in thousands)
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 June 30, 1997, Federal Trust had no subsidiaries other than the
Bank. The total equity investment in the Bank at June 30, 1997 was $6.7 million.
During the first half of 1996, Federal Trust operated two non-bank subsidiaries,
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 on June 30, 1996, to WJH, Inc.,
Atlanta, Georgia (a non-related third party) for $425,354 (the book value),
consisting of $60,000 in cash, a note for $60,000, which was paid on August 8,
1996, and four notes totaling $305,354. On September 2, 1997, Properties Corp.
paid $230,354 reducing the outstanding balance to $75,000 on the remaining three
notes. Federal Trust had $421,698 invested in 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 June 30, 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.
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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"). In
addition, Federal Trust is a reporting company and files its Forms 10-Q and
Forms 10-K with the SEC, pursuant to Section 15(d) of the Exchange 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
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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
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 six months 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.
75
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
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.
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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 Fannie Mae and the FHLMC) and certain high quality mortgage-related
securities. A weight of 50% is assigned to qualifying mortgage loans and certain
other mortgaged- related securities, repossessed assets and assets that are 90
days or more past due. The components of core capital are equivalent to those
discussed above. The components of supplementary capital include permanent
capital instruments (such as cumulative perpetual preferred stock, mandatory
convertible subordinated debt and perpetual subordinated debt), maturing capital
instruments (such as mandatory convertible subordinated debt and
intermediate-term preferred stock) and the allowance for loan and lease losses.
Allowance for loan and lease losses 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.
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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
United States 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
postponed the effective date of the interest-rate component as part of the
calculation of a savings institutions risk-based capital requirement.
As of June 30, 1997, the Bank's interest-rate risk exposure, according
to OTS calculations, would not 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 June 30, 1997, the Bank met each of its capital requirements as set
forth in the following table:
Tangible Core Risk-Based
-------- ---- ----------
(Dollars in thousands)
Percent Percent
of of Weighted
Amount Assets Amount Assets Amount Assets
------ ------ ------ ------ ------ ------
Regulatory Capital $ 6,844 4.91% $ 6,844 4.91% $ 7,779 10.15%
Requirement 2,091 1.50 4,182 3.00 6,130 8.00
----- ---- ----- ---- ----- ----
Excess $ 4,753 3.41% $ 2,662 1.91% $ 1,649 2.15%
===== ==== ===== ==== ===== ====
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
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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 DIF 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
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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 be at $.24 oer $100 of insured deposits for the second half
of 1997.
The DIF 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 DIF 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 DIF 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 Act 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 June 30, 1997,
the Bank exceeded all of the fully phased-in capital requirements.
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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 June 30, 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 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 June 30, 1997, the Bank had
two loans which exceeded the loans to one borrower limit, totaling $3.1 million.
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 June 30, 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 CRA. 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 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
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 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 of 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 of 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.
83
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 of 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 that the value of the FHLB of 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 reservable 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 more favorable of the
following methods: (i) a method based on the institution's actual loss
experience (the "experience method") or (ii) a method based on a specified
percentage of an institution's taxable income (the "percentage of taxable income
method") 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 Orlando, 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 Other Annual
Position Year Salary(3)(4) Bonus Compensation (5)
--------------------------- ---- ------------ ------- ----------------
James T. Bell, 1996 $ 33,033 $ - $ 25,290
CEO and President(2) 1995 151,508 - 27,279
1994 182,327 5,563 21,870
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.
89
(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
90
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,
at retirement (age 65) Mr. Suskiewich will receive an annual benefit of $60,000
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 is 17 years. Should the
senior executive become disabled or elect early retirement, he will vest 100% in
the accrued balance. For example, in the first-three years of the Plan Mr.
Suskiewich's vested accrued benefit is $9,938, $21,145 and $33,802,
respectively, which Mr. Wright's vested accrued benefit is $4,819, $10,254 and
$16,395, respectively. In the event of a change of control, the senior executive
is entitled to the full amount of the retirement benefit (the amount accrued had
the senior executive retirement at age 65) based upon the present value of the
retirement benefit. Should a change of control occur in the first year of the
Plan, Messrs. Suskiewich and Wright would each receive $162,476 and $73,115,
respectively.
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 1990 Public Offering, Federal Trust issued stock
options to certain registered sales representatives of the broker/dealer engaged
to sell the securities. 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 June 30, 1997, none of the stock options for 58,453 shares had
been exercised.
91
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, which became effective September 1, 1995, were amended on
August 22, 1997. The employment agreements with Messrs. Suskiewich and Wright
are substantially the same except as noted herein. On August 22, 1997, the Bank
also entered into a Employee Severance Agreement with Mr. Louis E. Laubscher,
it's Chief Lending Officer, the material aspects of which are discussed herein.
Employment Agreements. Messrs. Suskiewich and Wright each are entitled
to receive a base salary, plus reimbursement of reasonable business expenses.
The employment agreements Messrs. Suskiewich and Wright provide for a three-year
terms. Mr. Suskiewich is entitled to a fixed performance bonus equal to 3% of
the Company's quarterly consolidated income before taxes and may be granted on
an annual performance bonus which is solely at the discretion of the Board of
Directors, both of which are payable for the duration of his employment
agreement. The 3% fixed performance bonus is paid when the Bank meets the
"Well-Capitalized" definition under OTS regulations and attains quarterly
after-tax earnings of 0.5% or more of the average quarterly assets on an
annualize basis. The fixed performance bonus is paid within 45 days of the end
of a quarter. The Bank is currently considered to be "Adequately Capitalized"
under OTS regulations and does not currently meet the 0.5% after-tax minimum
earnings requirement. For the year ended December 31, 1996, Mr. Suskiewich
received a discretionary performance bonus of $11,000.
Mr. Wright is entitled to a 1% fixed performance bonus and may be
granted an annual discretionary performance, both of which are payable for the
duration of his agreement. The payment of the 1% fixed performance bonus is
based upon the same terms and conditions as provided for Mr. Suskiewich's fixed
performance bonus. For the year ended December 31, 1996, Mr.
Wright received a discretionary performance bonus of $7,500.
Under the employment agreements, 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 each September 15, 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 the employment agreements is within
the sole discretion of the Board of Directors.
The employment agreements provide for termination by the Bank for
"cause". 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
respective 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 three times his annual compensation, times the price/book value ratio
at which Federal Trust or the Bank is acquired while
92
Mr. Wright will be entitled to a special incentive bonus equal to two times his
annual compensation then in effect, times the price/book value ratio at which
Federal Trust or the Bank is acquired. For example, if Federal Trust was
acquired on June 30, 1997, for 1.5 times book value, Mr. Suskiewich would
receive $607,500 ($135,000 x 3 x 1.5), while Mr. Wright would receive $255,000
($85,000 x 2 x 1.5). The special incentive bonus is payable by either Federal
Trust or the Bank.
In the event Messrs. Suskiewich or Wright voluntary terminate their
employment other than for the reasons mentioned herein, all rights and benefits
under the respective employment agreements shall immediately terminate upon the
effective date of termination.
Employee Severance Agreement. On September 8, 1997, the Bank entered
into an employee severance agreement with Louis E. Laubscher. According to the
severance agreement, Mr. Laubscher is entitled to receive a base salary and a
discretionary performance bonus payable annually, plus reimbursement for
reasonable business expenses. The base salary and any discretionary performance
bonus is paid by the Bank. Mr. Laubscher may participate in all employee benefit
plans, stock option plans, and pension plans that are offered to employees of
the Bank. The term of the employee severance agreement is for one year. The
Board of Directors, at their sole discretion, may extend the employee severance
agreement for an additional year. In the event of a change of control, Mr.
Laubscher would be entitled to one year's base salary as his severance payment,
regardless of whether he continues his employment with the Bank. Should Mr.
Laubscher be terminated other than for just cause or as a result of a change of
control, Mr. Laubscher would be entitled to a four month's severance payment
based on his base salary at the time of termination. If Mr. Laubscher
voluntarily terminates his employment other than for the reasons previously
described herein, all rights and benefits under the employee severance agreement
shall immediately terminate upon the effective date 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.
The current policy is generally not to make loans to directors and officers, but
permits loans to 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
93
considered to be an "affiliate," as that term is defined by SEC regulations. The
largest outstanding balance during 1996 was $737,128. As of June 30, 1997, the
balance on the loan was $472,179.
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
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% or more
than 6%. The terms of this transaction are no less favorable to Federal Trust
than transactions obtainable from unaffiliated parties. When a transaction
involves the Company and an officer, director, principal shareholder or
affiliate, the policy of the Company is that the transaction will be on terms no
less favorable to the Company than could be obtained from an unaffiliated party.
Any such transactions must be approved in advance by a majority of the
disinterested directors.
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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 %
- --- ====== ====== ======= ======= =====
- --------------------------
(Footnotes for Table on Prior Page)
(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.
Principal Holders of Voting Securities. The following table sets forth
information as of August 31, 1997, with respect to the ownership of shares of
Common Stock by beneficial owners of more than 5% of the Common Stock of Federal
Trust.
Amount owned % of Common Stock
Name and Address at August 31, 1997 issued & outstanding(3)
- ---------------- ------------------ -----------------------
James T. Bell and/or 221,941 9.9%
John M. Bell
675 Osceola Avenue
Winter Park, FL 32789
WRH Mortgage, Inc. 195,741(2) 8.6%
100 Second Avenue South
St. Petersburg, FL 33701-4386
- ---------------------
(1) Includes 12,500 shares held as trustee with respect to which Mr. Bell
exercises sole voting and investment power and 209,441 shares held by
Mrs. Bell in her name with respect to which Mrs. Bell exercises sold
voting and investment power.
(2) Amount does not include 100,000 shares held in the trading account of
Hough & Co. Mr. William R. Hough is the President of WRH Mortgage, Inc.
and Hough & Co. See "RISK FACTORS - Major Shareholders."
(3) Federal Trust does not have knowledge of whether the Bells or WRH
Mortgage, Inc. intend to purchase shares in the Offering.
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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 June 30, 1997, 2,239,928 shares of Common Stock
were issued and outstanding and 16,577 shares were held as Treasury Stock. The
1994 Amended and Restated Articles of Incorporation of Federal Trust 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. See "THE OFFERING
- - The Rights 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 is a summary of all of the material provisions of the
1996 Amended Federal Trust Articles of Incorporation and the 1994 Amended and
Restated Articles of Incorporation ("Federal Trust Articles") and the 1995
Amended and Restated Bylaws ("Federal Trust Bylaws"). The complete documents are
incorporated by reference as an Exhibit to the Registration Statement of which
this Prospectus is a part. See "AVAILABLE INFORMATION".
The power to issue additional shares of Common Stock rests with the
Board of Directors of Federal Trust 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 may also have the
effect of preventing, discouraging or delaying 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.
The Federal Trust Articles provide that any action required or
permitted to be taken by the shareholders may be taken only at an annual meeting
and prohibits shareholder action by written consent in lieu of a meeting.
Special meetings of the Stockholders may be called only by 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 (i.e., the Board of Directors as comprised
of all directorships authorized at a given time being the "Full Board").
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
97
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
(which includes 16,577 Treasury Stock available for sale in the Offering) (the
"Total Maximum"), on a priority basis to Shareholders as of the 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 Advisors
RP Financial. On January 27, 1997, Federal Trust entered into agreement
with RP Financial to serve as the Company's financial consultant. RP Financial
has 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. RP Financial has been retained to
solicit the sale or purchase of the Common Stock being offered in this Offering.
Neither RP Financial nor any principal of RP Financial has had any prior
financial transactions with the Company or are in any manner affiliated with the
Company. See "DETERMINATION OF SUBSCRIPTION PRICE".
Carruthers & Co. On July 7, 1997, Federal Trust engaged Carruthers &
Co. as a financial advisor to assist the Company with its marketing efforts and
shareholder relations. Carruthers & Co. is a diversified consulting firm
providing financial, economic and management consulting services to the
financial services industry. Carruthers & Co. is providing financial advise to
Federal Trust in connection with the Offering and has been retained to provide
post-capitalization strategic planning services. Carruthers & Co. was chosen
because of its specific expertise in the financial services industry and
experience in corporate recapitalizations, including transactions involving
shareholder rights offerings and community offerings. Following the Offering,
Carruthers & Co. will assist management and the Board of Directors in the
post-capitalization phase by analyzing and monitoring the Company's progress in
implementing its new corporate strategies.
99
Carruthers & Co. has not been retained to, and will not, solicit the
sale or purchase nor will it purchase or sell Common Stock in connection with
the Offering and will not otherwise act as an underwriter with respect to the
Offering. In addition, neither Carruthers & Co. nor any principal of Carruthers
& Co. had any prior financial transactions with the Company and is not related
or affiliated with the Company in any manner. Federal Trust has also agreed to
indemnify Carruthers & Co. against certain civil liabilities.
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 f
airness 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
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 October
25, 1997 (the "Rights Offering Expiration Date"). After the Rights Offering
Expiration Date, unexercised Subscription Rights will be null and void. Federal
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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 November
17, 1997, unless extended at the sole discretion the Board of Directors of
Federal Trust to a date not later than December 17, 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
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 SunTrust Bank, Central Florida, N.A. ("SunTrust") as Escrow
Agent for Federal Trust, or (b) wire transfer of funds to the account maintained
by the Escrow Agent for such purpose at SunTrust. 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 United States 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. The Total Minimum (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, earnings on such funds
(which are not expected to be material) will be retained by Federal Trust. 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:
SunTrust Bank, Central Florida, N.A.
Attention: Trust Department
200 S. Orange Avenue
Orlando, Florida 32801-3410
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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) 237-6741 and the telecopy number is
(407) 237-1735. The contact person is Vice President Jonathan Fox.
If the aggregate Subscription Price paid by a Shareholder is
insufficient to purchase the number of shares of Common Stock that the
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 "THE OFFERING - 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 "THE OFFERING -
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 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
102
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 the Company will provide
limited assistance in the Offering by participating with KBW in shareholder and
community informational meetings regarding the 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.
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The Rights Offering
Shareholders, defined herein as the holders of shares of Common Stock
at the close of business as of the Record Date are being provided, on a priority
basis, non transferable Subscription Right to purchase at the Subscription Price
one share of Common Stock for each whole share of Common Stock owned on the
Record Date. 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 (limited to existing shareholders), 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 and North Dakota is 500,000. The total maximum number of
shares being offered in Ohio and Indiana is 250,000. The total maximum number of
shares being offered
104
in the states of Michigan and Texas is 50,000. The Company, however, reserves
the right to increase the maximum number of shares to be offered in any state,
to the extent that such increase in offering is permitted by the securities laws
and regulations of any such state.
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.
105
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.
106
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 (which includes 16,577
shares of Treasury Stock available for sale in the Offering). These shares will
be freely tradeable without restriction or further registration under the
Exchange Act, except for shares held or purchased by "affiliates" of the
Company, defined in Rule 144 promulgated under the Exchange Act to mean 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.
Federal Trust and its executive officers and directors, and certain
officers of the Bank holding, in the aggregate, 145,287 shares of Common Stock
(assuming full exercise of their intended purchases in this Offering) 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 Exchange 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 (32,399 shares based on the
Total Minimum and 49,415 shares based on the Total Maximum), 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., Tallahassee, Florida, counsel to the Company. The tax aspects
of the Subscription Rights for existing shareholders will be passed upon by
Wetherington, LeFloch & Hamilton, P.A., Tampa, Florida. Certain legal matters
will be passed upon for KBW by Breyer & Aguggia, Washington, D.C.
107
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. 333- 30883) filed by Federal Trust with the Commission under the
Exchange 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.
Signatures
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Amendment No. 2 to the Form S-1 Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Winter Park, State of Florida, on September 30, 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
Amendment No. 2 to the Form S-1 Registration 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, September 30, 1997
- -------------------------
James V. Suskiewich Chief Executive Officer and
(As Attorney-in-fact) President
/s/Aubrey H. Wright, Jr. Director, Senior Vice President September 30, 1997
Aubrey H. Wright, Jr. And Chief Financial Officer
(At Attorney-in-fact) (Principal Financial Officer)
* Director September 30, 1997
Dr. Samuel C. Certo
* Director September 30, 1997
George W. Foster
* Director September 30, 1997
Kenneth W. Hill
* Pursuant to Power of Attorney dated July 1, 1997.
108
INDEX TO FINANCIAL STATEMENTS
Report of Independent Public Accountants........................................................................ F-2
Consolidated Balance Sheets - June 30, 1997 (unaudited) and
December 31, 1996 and 1995................................................................................. F-3
Consolidated Statements of Operations for the six months ended June 30, 1997 and
1996 (unaudited) and for the years ended
December 31, 1996, 1995 and 1994........................................................................... F-4
Consolidated Statements of Stockholders' Equity for the
six months ended June 30, 1997 (unaudited) and for the
years ended December 31, 1996, 1995 and 1994............................................................... F-5
Consolidated Statements of Cash Flows for the six months ended June 30, 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
Independent Auditors' Report
--------------------------
Board of Directors
Federal Trust Corporation and Subsidiaries:
We have audited the consolidated balance sheets of Federal Trust
Corporation and subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of operations, stockholders' equity and
cash flows for each of the years in the three-year period ended
December 31, 1996. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Federal Trust Corporation and subsidiaries at December 31, 1996 and
1995 and the results of their operations and their cash flows for each
of the years in the three year period ended December 31, 1996, in
conformity with generally accepted accounting principles.
/s/KPMG Peat marwick LLP
Orlando, Florida
February 7, 1997, except as to note 18,
which is as of March 7, 1997
F-2
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
June 30, December 31,
Assets 1997 1996 1995
----- ---- ---- ----
(Unaudited)
Cash $ 628,015 628,648 1,618,607
Interest-bearing deposits 2,601,592 4,837,114 51,154
Investment securities available for sale 8,863,375 8,763,641 15,918,376
Investment securities held to maturity 6,322,864 6,290,610 19,093
Loans, less allowance for loan losses 111,118,646 112,547,266 112,905,740
Loans held for sale (market value $977,691) 954,404 - -
Accrued interest receivable on loans 812,850 833,458 824,330
Accrued interest receivable on investment securities 188,566 196,171 179,874
Accounts receivable - 143,048 -
Note receivable 305,354 305,354 -
Loan sale proceeds receivable - - 37,765
Office facilities and equipment, net 856,013 917,572 1,291,974
Real estate owned 3,429,185 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 1,508,603 228,113 358,465
Deferred income taxes 1,004,116 1,129,696 964,499
Income tax refund receivable - - 1,073,253
---------- ---------- ----------
$ 140,021,083 139,582,057 140,389,438
---------- ---------- ----------
Liabilities and Stockholders' Equity
-------------------------------
Liabilities:
Deposits $ 106,894,483 106,119,006 109,203,123
Official checks 685,228 646,235 695,332
Federal Home Loan Bank advances 23,500,000 24,800,000 21,000,000
Debentures - - 420,000
Advance payments by borrowers for taxes and insurance 1,050,149 347,774 330,504
Accrued expenses and other liabilities 473,669 504,414 680,353
---------- ---------- ----------
Total liabilities 132,603,529 132,417,429 132,329,312
---------- ---------- ----------
Stockholders' equity:
Common stock, $.01 par value, 5,000,000 shares authorized;
2,256,505 shares
issued and outstanding at June 30,
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 (3,100,165) (3,226,204) (2,249,701)
Treasury stock (16,577 shares of common stock, at cost,
at June 30, 1997 and December 31, 1996 and 1995) (76,525) (76,525) (76,525)
Unrealized loss on investment securities, net (147,890) (210,224) (779,872)
Unrealized loss on investment securities transferred from
available for sale to held to maturity, net (424,090) (488,643) -
---------- ---------- ----------
Total stockholders' equity 7,417,554 7,164,628 8,060,126
Commitments and contingencies
---------- ---------- ----------
Total liabilities and stockholders' equity $140,021,083 139,582,057 140,389,438
---------- ---------- ----------
See accompanying notes to consolidated financial statements.
F-3
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
Six months ended Years ended
June 30, December 31,
----------------- ----------------------
1997 1996 1996 1995 1994
---- ---- ---- ---- ----
(Unaudited)
Interest income:
Loans $4,616,031 4,572,628 9,039,426 9,001,646 7,731,077
Investment securities 333,449 302,714 675,279 1,289,085 1,753,625
Interest-bearing deposits and other 95,326 114,186 222,255 318,656 361,971
-------- -------- -------- --------- --------
Total interest income 5,044,806 4,989,528 9,936,960 10,609,387 9,846,673
-------- -------- -------- --------- --------
Interest expense:
Deposit accounts 2,808,821 2,925,592 5,760,390 6,213,679 3,802,350
FHLB advances, notes payable
and other borrowings 715,163 591,689 1,277,492 1,812,655 1,978,219
-------- -------- -------- --------- --------
Total interest expense 3,523,984 3,517,281 7,037,882 8,026,334 5,780,569
-------- -------- -------- --------- --------
Net interest income 1,520,822 1,472,247 2,899,078 2,583,053 4,066,104
Provision for loan losses 37,748 113,506 279,596 779,415 531,483
-------- -------- -------- --------- --------
Net interest income after provision
for loan losses 1,483,074 1,358,741 2,619,482 1,803,638 3,534,621
-------- -------- -------- --------- --------
Other income:
Fees and service charges 50,930 53,668 163,010 187,782 193,866
Rent income 69,833 7,707 - 88,171 2,351
Gain of sale of loans 9,821 153,321 182,045 150,664 263,707
Gain on sale of other real estate, net 58,363 - 48,574 43,056 -
Other 59,963 37,019 33,078 35,751 23,353
-------- -------- -------- --------- --------
Total other income 248,910 251,715 426,707 505,424 483,277
-------- -------- -------- --------- --------
Other expenses:
Salary and employee benefits 660,251 689,704 1,173,742 1,437,633 1,436,387
Deposit insurance premiums 124,306 159,950 1,017,902 307,487 207,939
Occupancy and equipment 263,028 485,074 594,703 713,086 585,087
Legal and professional 109,077 257,818 392,775 883,331 618,695
Real estate owned expenses 42,430 78,624 251,156 653,776 392,884
General and administrative expenses 90,640 85,703 172,430 296,872 353,676
Loss on disposal of fixed assets, net - 152,621 152,621 - -
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 199,413 100,726 468,819 433,684 400,161
-------- -------- -------- --------- --------
Total other expenses 1,489,145 2,010,220 4,236,492 5,790,591 4,238,071
-------- -------- -------- --------- --------
Net income (loss) before income taxes 242,839 (399,764) (1,190,303) (3,481,529) (220,173)
Income tax expense (benefit) 116,800 (240,111) (213,800) (1,231,828) (41,000)
-------- -------- -------- --------- --------
Net income (loss) $ 126,039 (159,653) (976,503) (2,249,701) (179,173)
-------- -------- -------- --------- --------
Earnings (loss) per share $ 0.06 (.07) (.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) -- -- 126,039 -- -- 126,039
Amortization of unrealized loss on investment
securities held to maturity
(unaudited) -- -- -- -- 32,254 32,254
Change in unrealized loss on investment
securities available for sale,
net (unaudited) -- -- -- -- 94,633 94,633
----------- ----------- ----------- ----------- ----------- -----------
Balances at June 30, 1997 (unaudited) $ 22,565 11,143,659 (3,100,165) (76,525) (571,980) 7,417,554
----------- ----------- ----------- ----------- ----------- -----------
See accompanying notes to consolidated financial statements
F-5
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Six months ended Years ended
June 30, December 31,
------------------- -------------------------------
1997 1996 1996 1995 1994
---- ---- ---- ---- ----
(Unaudited)
Cash flows provided by (used in)
operating activities:
Net income (loss) $ 126,039 (159,653) (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 37,748 113,506 428,897 1,098,119 838,267
Amortization of premium on
purchased loans 121,559 105,839 241,747 428,853 427,201
Deferred income taxes 115,599 (240,111) (213,800) (171,747) (371,000)
Depreciation of office facilities
and equipment 80,556 85,738 159,564 179,416 210,872
Gain on sale of loans (9,821) (153,321) (182,045) (150,664) (263,707)
Net amortization of fees and
discounts on loans 5,792 (39,028) (89,405) (84,930) 7,137
Net (gain) loss on the sale of
real estate owned (58,363) -- (48,574) 75,374 37,507
Write-down on other real estate owned 72,252 26,101 257,921 -- --
Net amortization of premiums and
accretion of discounts on
investment securities -- -- -- 14,574 --
Net loss on disposal of office
facilities and equipment -- 152,621 155,347 371 --
Loss on foreclosure of notes receivable -- -- -- -- 187,028
Cash provided by (used in) changes in:
Accrued interest receivable on loans 20,608 87,915 (9,128) (159,546) (45,625)
Accrued interest receivable on
investment securities 7,605 8,619 (16,297) 383,380 13,263
Accounts receivable 143,048 -- (143,048) 19,787 48,312
Loan sale proceeds receivable -- 37,765 37,765 2,453,594 (2,491,359)
Prepaid expenses and other assets (1,280,490) (125,094) 130,352 (80,877) 179,753
Income tax refund receivable -- -- 1,073,253 (976,558) --
Official checks 38,993 (96,687) (49,097) 221,388 (125,436)
Accrued expenses and other liabilities (30,745) 65,322 (175,939) 100,481 (203,293)
Accrued interest on deposit accounts 15,870 2,534 (7,831) 947 (2,283)
Income tax payable -- -- -- -- (221,049)
----------- ----------- ----------- ----------- -----------
Net cash provided by (used in)
operating activities (593,750) (127,934) 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 (2,736,626) (4,701,473) (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 437,787 1,903,114 1,014,345 3,139,470 461,554
Proceeds from loans sold 705,564 4,084,252 7,942,943 2,855,234 4,620,485
Capitalized costs on other real estate owned (22,695) (13,180) (27,504) (154,961) --
Notes receivable originated, net of repayments -- -- (305,354) -- --
(Purchase of) proceeds from the sale of Federal
Home Loan Bank stock (174,300) -- 600,000 121,800 840,300
Purchase of premises and equipment (18,997) (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 8,323 12,826 24,968 --
----------- ----------- ----------- ----------- -----------
Net cash provided by (used in)
investing activities (1,804,387) 1,276,889 2,889,494 2,953,058 (5,705,298)
----------- ----------- ----------- ----------- -----------
(Continued)
F-6
2
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
Six months ended Years ended
June 30, December 31,
------------------- ------------------------------
1997 1996 1996 1995 1994
---- ---- ---- ---- ----
(Unaudited)
Cash flows provided by (used in)
financing activities: Deposit accounts:
(Decrease) increase in certificate accounts $ 1,073,308 (648,601) (3,613,173) 12,625,716 19,936,747
Net increase (decrease) in deposits (313,701) (3,851,123) 536,887 (4,951,858) 2,852,143
Proceeds from (repayment) of FHLB advances (1,300,000) 4,500,000 3,800,000 (18,500,000) (15,800,000)
Net increase (decrease) in advance payments by
borrowers for taxes and insurance 702,375 534,158 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 161,982 364,434 320,984 (10,932,447) 7,942,313
----------- ----------- ----------- ----------- -----------
Net increase (decrease) in cash
and cash equivalents (2,236,155) 1,513,389 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 $ 3,229,607 3,183,150 5,465,762 1,669,761 7,604,389
----------- ----------- ----------- ----------- -----------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 1,718,697 6,751,136 7,003,551 8,291,649 5,881,345
----------- ----------- ----------- ----------- -----------
Income taxes $ 10,000 -- -- -- 685,417
----------- ----------- ----------- ----------- -----------
Supplemental disclosures of non-cash transactions:
Real estate acquired in settlement of loans $ 2,350,000 327,753 860,613 3,780,216 2,629,056
----------- ----------- ----------- ----------- -----------
Market value adjustment - investment securities
available for sale:
Market value adjustment - investments $ (236,625) (567,203) (336,359) (1,181,624) (107,647)
Deferred income tax asset (88,735) (194,950) (126,135) (401,752) (35,768)
----------- ----------- ----------- ----------- -----------
Unrealized loss on investment
securities available for sale, net $ (147,890) (372,253) (210,224) (779,872) (71,879)
----------- ----------- ----------- ----------- -----------
Unrealized loss on investment
securities transferred from
available for sale to
held to maturity $ (678,523) (754,312) (715,657) -- --
Deferred income tax asset (254,433) (254,261) (227,014) -- --
----------- ----------- ----------- ----------- -----------
Unrealized loss on investment
securities transferred from
available for sale to
held to maturity $ (424,090) (495,051) (488,643) -- --
----------- ----------- ----------- ----------- -----------
Amortization of the unrealized holding loss
for the investment securities transferred
from available for sale to held to maturity $ (32,254) (16,315) -- -- --
----------- ----------- ----------- ----------- -----------
Loans acquired in settlement of
other real estate sold $ 63,000 1,212,882 (1,300,066) -- --
----------- ----------- ----------- ----------- -----------
Loans transferred to loans held for sale $ 1,650,147 -- -- -- --
----------- ----------- ----------- ----------- -----------
(Continued)
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
operations 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
The Bank, considering current information and events regarding the
borrower's ability to repay their obligations, considers a loan to
be impaired when it is probable that the Bank will be unable to
collect all amounts due according to the contractual terms of the
loan agreement. When a loan is considered to be impaired, the
amount of the impairment is measured based on the present value of
expected future cash flows discounted at the loan's effective
interest rate, the secondary market value of the loan, or the fair
value of the collateral for collateral dependent loans. Impaired
loans are written down to the extent that principal is judged to
be uncollectible and, in the case of impaired collateral dependent
loans where repayment is expected to be provided solely by the
underlying collateral and there is no other available and reliable
sources of repayment, are written down to the lower of cost or
collateral value. Impairment losses are included in the allowance
for loan losses through a charge to the provisions for loan
losses. Cash receipts on impaired loans are applied to reduce the
principal amount of such loans until the principal has been
recovered and are recognized as interest income thereafter.
(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.
(Continued)
F-10
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(j) Real Estate Owned
Real estate acquired in the settlement of loans is initially
recorded at the lower of cost (principal balance of the former
loan plus costs of obtaining title and possession) or estimated
fair value at the date of acquisition. Subsequently, such real
estate acquired is carried at the lower of cost or fair value less
estimated costs to sell. Costs relating to development and
improvement of the property are capitalized, whereas those
relating to holding the property are charged to operations.
(k) Office Facilities and Equipment
Office facilities and equipment are stated at cost less
accumulated depreciation and amortization. Depreciation is
computed using the straight-line method over the estimated useful
lives of the related assets. Leasehold improvements are stated at
cost less accumulated amortization. Amortization of leasehold
improvements is computed using the straight-line method over the
lesser of the estimated useful life or the respective lease terms.
(l) Income Taxes
The Holding Company and its subsidiaries file a consolidated
income tax return. Income taxes are allocated proportionately to
the Holding Company and its subsidiaries as though separate income
tax returns were filed.
The Company accounts for income taxes under the asset and
liability method. Deferred tax assets and liabilities are
recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that
included the enactment date.
(m) Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
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.
(Continued)
F-11
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(n) Effect of New Accounting Pronouncements
In October 1995, the FASB issued Statement No. 123, Accounting for
Stock-Based Compensation. The Statement provides that companies
must either charge the value of stock options granted to their
income statement or provide pro forma equivalent information in a
footnote disclosure and continue to account for the value of the
stock options in accordance with APB Opinion No. 25. The Company
adopted this standard effective January 1, 1996 by accounting for
employee stock-based compensation under APB Opinion No. 25.
(2) Investment Securities Held to Maturity and Investments Securities
Available for Sale
The amortized cost and estimated market values of investment securities
held to maturity and available for sale at June 30, 1997 and December 31,
1996 and 1995 are as follows:
Investment securities held to maturity:
Gross
Amortized unrealized Estimated
cost loss market value
---- ---- -----------
June 30, 1997 (unaudited):
Obligation of U.S. government agencies $ 6,321,477 (87,102) 6,234,375
Other 1,387 -- 1,387
------------ ------------ ------------
$ 6,322,864 (87,102) 6,235,762
------------ ------------ ------------
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
---- ---- -----------
June 30, 1997 (unaudited):
Obligation of U.S. government agencies $ 9,100,000 (236,625) 8,863,375
------------ ------------ ------------
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 June 30, 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.
June 30, 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 6,321,477 6,234,375 6,284,343 6,267,188
---------- ---------- ---------- ----------
$6,322,864 6,235,762 6,290,610 6,273,455
---------- ---------- ---------- ----------
Investment securities available for sale:
Due after one year through five years $9,100,000 8,863,375 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 six months
ended June 30, 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:
June 30, December 31,
1997 1996 1995
---- ---- ----
(Unaudited)
Mortgage loans:
Permanent conventional:
Commercial $ 12,226,021 11,294,679 13,112,448
Residential 95,425,574 97,717,708 97,612,560
Residential construction conventional 2,183,100 3,795,050 1,666,960
------------ ------------ ------------
Total mortgage loans 109,834,695 112,807,437 112,391,968
Commercial loans 1,216,039 1,349,483 1,442,811
Consumer loans 192,782 154,445 180,194
Lines of credit 736,440 686,072 1,258,501
------------ ------------ ------------
Total loans receivable 111,979,956 114,997,437 115,273,474
Net premium on mortgage loans purchased 1,130,252 1,154,942 986,918
Deduct:
Unearned loan origination fees,
net of direct loan origination costs 29,240 169,854 104,132
Undisbursed portion of loans in process 771,447 1,902,256 1,189,952
Allowance for loan losses 1,190,875 1,533,003 2,060,568
------------ ------------ ------------
Loans receivable, net $111,118,646 112,547,266 112,905,740
------------ ------------ ------------
(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:
June 30, December 31,
1997 1996 1995
---- ---- ----
(Unaudited)
Nonaccrual loans $1,751,724 991,000 3,326,600
---------- ---------- ----------
Recorded investment in impaired loans $1,785,830 4,078,174 6,122,356
---------- ---------- ----------
Allowance for loan losses related to
impaired loans $ 439,323 626,435 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 six months ended June 30:
1997 $ 84,890 2,707,690 15,432
-------- -------- --------
1996 $ 130,472 5,653,276 63,635
-------- -------- --------
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:
Six months ended Years ended
June 30, 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 (387,689) (1,088,535) (1,223,240) (707,222) (409,329)
Provision for loan losses 37,748 113,506 279,596 779,415 531,483
Recoveries 7,813 6,485 266,778 13,425 2,796
Transfer from allowance for real estate owned -- -- 149,301 -- --
----------- ----------- ----------- ----------- -----------
Balance at end of period $ 1,190,875 1,092,024 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 and directors at
June 30, 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 $11,009,783, $7,915,631 and $1,301,078 at June 30, 1997 (unaudited)
and December 31, 1996 and 1995, respectively. Servicing fees earned were
$13,644, $9,312, $22,086, $22,026 and $52,144 for the unaudited six
months ended June 30, 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 as of adoption of Statement of Financial Accounting
Standards No. 122 on January 1, 1996 $ --
Originations 70,303
Amortization (2,672)
--------
Balance, December 31, 1996 67,631
Originations (unaudited) 3,856
Amortization (unaudited) (4,248)
--------
Balance, June 30, 1997 (unaudited) $ 67,239
--------
(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:
June 30, 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 547,014 542,727 651,910 3-7 years
Automobiles - - 33,841 5 years
-------- -------- --------
1,585,005 1,578,588 1,937,163
Less accumulated depreciation
and amortization 728,992 661,016 645,189
-------- -------- --------
Office facilities and
equipment, net $ 856,013 917,572 1,291,974
-------- -------- --------
(7) Deposits
A summary of deposits follows:
Weighted Weighted Weighted
average average average
June 30, interest December 31, interest December 31, interest
1997 rate 1996 rate 1995 rate
---- ---- ---- ---- ---- ----
(Unaudited)
Commercial checking accounts
noninterest-bearing $ 164,487 - % $ 58,994 - % $ 209,637 - %
NOW accounts 992,100 2.24 654,473 1.79 674,556 .68%
Money market deposit accounts 6,676,167 4.02 7,428,630 4.02 6,601,689 4.02%
Statement savings accounts 1,359,393 2.60 1,363,750 2.58 2,157,600 2.60%
---------- ---- ---------- ---- ---------- ----
9,192,147 3.55 9,505,847 3.59 9,643,482 3.42%
---------- ---- ---------- ---- ---------- ----
Certificate accounts by
interest rates:
1.00% - 3.99% $ 354,134 $ 499,355 $ 1,219,498
4.00% - 4.99% 2,164,067 3,076,939 2,170,725
5.00% - 5.99% 75,506,207 78,123,278 54,846,938
6.00% - 7.99% 19,658,164 14,909,692 41,310,738
---------- ---- ---------- ---- ---------- ----
Total certificate accounts 97,682,572 5.68% 96,609,264 5.56% 99,547,899 5.89%
---------- ---- ---------- ---- ---------- ----
Accrued interest 19,764 3,895 11,742
---------- ---- ---------- ---- ---------- ----
Total deposits $ 106,894,483 5.49% $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
- ------------- ---- ---- ---- ---- ---- -----
.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:
June 30, 1997 December 31, 1996 December 31, 1995
------------- ----------------- -----------------
Amount % total Amount % total Amount % total
------ ------- ------ ------- ------ -------
(Unaudited)
Three months or less $ 3,839,434 19.6% $ 3,952,908 21.5% $4,143,788 27.1%
Over three months to six months 3,896,212 19.9% 5,844,172 31.9% 4,038,318 26.4%
Over six months to twelve months 7,019,885 35.8% 4,707,383 25.7% 4,648,096 30.4%
Over twelve months 4,845,820 24.7% 3,829,936 20.9% 2,446,328 16.1%
----------- ------ ----------- ------ ----------- ------
$19,601,351 100.0% $18,334,399 100.0% $15,276,530 100.0%
----------- ------ ----------- ------ ----------- ------
Interest expense on deposits is as follows:
Six months ended Years ended
June 30, December 31,
------------------------ ---------------------------------
1997 1996 1996 1995 1994
---- ---- ---- ---- ----
(Unaudited)
Interest on NOW and Super NOW accounts $ 5,947 3,521 9,510 5,624 6,876
Interest on money market accounts 144,495 124,391 256,130 254,271 260,832
Interest on savings accounts 17,104 23,403 43,335 91,557 211,787
Interest on certificate accounts, net of penalties 2,641,275 2,774,277 5,451,415 5,862,227 3,322,855
---------- ---------- ---------- ---------- ----------
$2,808,821 2,925,592 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 follows:
Maturing in year Interest rate
ending December 31, (variable rates) June 30, 1997
------------------ ------------- -------------
(Unaudited)
1997 6.01 $ 5,000,000
1997 5.86 5,000,000
1997 (6.48) 1,000,000
1998 6.00 5,000,000
1998 6.02 2,500,000
1998 6.12 5,000,000
---------
$ 23,500,000
---------
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:
June 30, December 31,
1997 1996 1995
---- ---- ----
(Unaudited)
FHLB stock $ 1,427,500 1,253,200 1,853,200
Qualifying mortgage loans 35,761,344 34,588,904 35,277,703
Investment securities:
Amortized cost 6,321,477 6,284,373 7,000,000
Market value 6,234,375 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:
Six months ended Years ended
June 30, December 31,
------------------ ------------------------------
1997 1996 1996 1995 1994
---- ---- ---- ---- ----
(Unaudited)
Current:
Federal $ 1,201 - - (1,060,081) 294,000
State - - - - 36,000
------- ------- ------- -------- -------
$ 1,201 - - (1,060,081) 330,000
------- ------- ------- -------- -------
Deferred:
Federal $ 98,499 (205,011) (213,800) (152,747) (328,000)
State 17,100 (35,100) - (19,000) (43,000)
------- ------- ------- -------- -------
$ 115,599 (240,111) (213,800) (171,747) (371,000)
------- ------- ------- -------- -------
Total:
Federal $ 99,700 (205,011) (213,800) (1,212,828) (34,000)
State 17,100 (35,100) - (19,000) (7,000)
------- ------- ------- -------- -------
$ 116,800 (240,111) (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:
June 30, December 31,
1997 1996 1995
---- ---- ----
(Unaudited)
Deferred tax assets:
Allowance for loan losses $ 374,220 411,600 642,000
Unrealized loss on investment securities
available for sale 344,370 353,149 401,752
Deferred loan fees 4,566 14,008 41,000
AMT credit carryforward 66,057 44,294 44,294
Other 3,274 1,133 --
Net operating loss carryforward 760,267 782,467 251,684
----------- ----------- -----------
Gross deferred tax asset 1,552,754 1,606,651 1,380,730
Less valuation allowance (474,657) (432,526) (179,231)
----------- ----------- -----------
1,078,097 1,174,125 1,201,499
----------- ----------- -----------
Deferred tax liabilities:
FHLB stock (18,845) (18,846) (71,000)
Amortization of discount on loans -- -- (70,000)
Accrual to cash -- -- (68,000)
Depreciation (29,067) (25,583) (28,000)
Mortgage servicing (26,069) -- --
----------- ----------- -----------
(73,981) (44,429) (237,000)
----------- ----------- -----------
Total $ 1,004,116 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.
The Small Business Job Protection Act of 1996 repealed the percentage of
taxable income method of accounting for bad debts for tax years beginning
after 1995. 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.
(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:
Six months ended June 30,
1997 % 1996 %
---- --- ---- ---
(Unaudited) (Unaudited)
Tax (benefit) provision at
statutory rate $ 82,905 34.0% $(135,920) (34.0)%
Increase (decrease) in tax
resulting from:
Operating loss carryforward 50,909 20.9 (65,796) (16.4)
State income taxes net of
federal income tax benefit 8,851 3.6 (14,510) (3.6)
Other (25,865) (23,885) (6.0)
--------- -------- --------- ----
$ 116,800 47.9% $(240,111) (60.0)%
--------- -------- --------- ----
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 $140,151, $179,808, $351,150, $334,834 and
$282,868, for the unaudited six months ended June 30, 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
-----------------------
June 30, December 31,
1997 1996 1995
---- ---- ----
(Unaudited)
Assets:
Cash, deposited with subsidiary $ 18,665 115,099 242
Prepaid expenses and other assets 92,151 79,303 315,186
Property, plant and equipment, net 354,984 377,678 655,237
Note receivable 305,354 305,354 -
Investment in subsidiaries 6,724,020 6,401,425 7,764,936
-------- -------- --------
$ 7,495,174 7,278,859 8,735,601
-------- -------- --------
Liabilities and stockholders' equity:
Due to subsidiaries $ - - 103,000
Accounts payable and accrued expenses 77,620 114,231 152,475
Capital debentures - - 420,000
Stockholders' equity 7,417,554 7,164,628 8,060,126
-------- -------- --------
$ 7,495,174 7,278,859 8,735,601
-------- -------- --------
(Continued)
F-25
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Condensed Statements of Operations
-------------------------------
Six months ended Years ended
June 30, December 31,
------------------- -----------------------------
1997 1996 1996 1995 1994
---- ---- ---- ---- ----
(Unaudited)
Revenues:
Interest and dividend income $ 3,996 8,725 17,579 8,280 25,997
Other income 140,151 137,660 308,770 250,485 205,764
------- ------- ------- -------- --------
Total income 144,147 146,385 326,349 258,765 231,761
------- ------- ------- -------- --------
Expenses:
Compensation 7,427 62,230 114,985 230,279 279,680
Occupancy 163,010 228,879 442,483 420,285 329,159
Other expense 43,379 375,092 382,926 473,678 795,703
------- ------- ------- -------- --------
Total expenses 213,816 666,201 940,394 1,124,242 1,404,542
------- ------- ------- -------- --------
Loss before income
from subsidiaries (69,669) (519,816) (614,045) (865,477) (1,172,781)
(Loss) income from subsidiaries 312,508 216,248 (362,458) (1,597,758) 586,029
------- ------- ------- -------- --------
Net loss before income taxes 242,839 (303,568) (976,503) (2,463,235) (586,752)
Income tax (benefit) expense 116,800 (143,915) - (213,534) (407,579)
------- ------- ------- -------- --------
Net income (loss) $ 126,039 (159,653) (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
--------------------------------
Six months ended Years ended
June 30, December 31,
----------------- ------------------------------
1997 1996 1996 1995 1994
---- ---- ---- ---- ----
(Unaudited)
Cash flows provided by (used in) operating activities:
Net loss $ 126,039 (159,653) (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 -- 154,327 154,327 371 --
Depreciation 22,694 36,632 59,800 74,672 56,706
Equity in undistributed loss (earnings)
of subsidiaries (195,708) (171,300) 362,458 1,597,758 (586,029)
Cash provided by (used in) changes in:
Prepaid expenses and other assets (12,848) (286,778) 235,883 (95,498) (25,919)
Investment in subsidiaries -- 668,413 1,082,058 -- --
Due to subsidiaries -- (102,996) (103,000) (284,800) 17,800
Due from subsidiary -- -- -- -- 675,884
Accounts payable and accrued expenses (36,611) 63,773 (38,244) 152,475 (3,721)
---------- ---------- ---------- ---------- ----------
Net cash provided by (used in) by
operating activities (96,434) 202,418 776,779 (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 -- 56,022 68,191 13,353 --
---------- ---------- ---------- ---------- ----------
Net cash provided by (used in)
investing activities -- 56,022 (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 (96,434) 88,440 114,857 (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 $ 18,665 88,682 115,099 242 791,612
========== ====== ======= === =======
(Continued)
F-27
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Condensed Statements of Cash Flows (Continued)
-------------------------------------------
Six months ended Years ended
June 30, 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 $ (236,625) (567,203) (336,359) (1,181,624) (107,647)
Deferred income tax asset (88,735) (194,950) (126,135) (401,752) (35,768)
---------- ---------- ---------- ---------- ----------
Unrealized loss on investment securities
available for sale, net $ (147,890) (372,253) (210,224) (779,872) (71,879)
---------- ---------- ---------- ---------- ----------
Unrealized loss on investment securities
transferred from available for sale to
held to maturity $ (424,090) (495,051) (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
$140,151, $137,322, $291,767, $247,923 and $223,552 were made during the
unaudited six months ended June 30, 1997 and 1996 and the years ended
December 31, 1996, 1995 and 1994, respectively.
During the unaudited six months ended June 30, 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.
In addition, the Company has commercial loans with a related party. The
following summarizes the activity of these loans:
June 30, December 31,
1997 1996 1995
---- ---- ----
(Unaudited)
Balance at beginning of period $478,128 737,472 742,091
New loans -- 100,000 --
Principal repayments 5,949 359,344 4,619
-------- -------- --------
Balance at end of period $472,179 478,128 737,472
======== ======= =======
(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.
(Continued)
F-30
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(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 June 30, 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.
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 June 30, 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:
June 30, December 31,
1997 1996 1995
---- ---- ----
(Unaudited)
Available lines of credit $ 283,058 179,283 9,500
============== ========= =========
Standby letters of credit $ 500,000 500,000 500,000
============== ========= =========
Outstanding mortgage loan commitments,
exclusive of loans in process:
Net fixed rates $ 579,868 584,097 1,810,038
Net variable rates 2,949,526 2,375,844 352,500
-------- -------- --------
$ 3,529,394 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-34
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.
The Bank manages its credit risk by limiting the total amount of
arrangements outstanding with individual customers, by monitoring the
size and maturity structure of the loan portfolio, by obtaining
collateral based on management's credit assessment of the customers, and
by applying a uniform credit process for all credit exposures.
F-35
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 45,000
Blue Sky qualifications 30,000
Miscellaneous 5,000
--------
Total $205,677
Item 15: Indemnification of Directors and Officers
The Florida Business Corporation Act (Chapter 607, Florida Statutes)
"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 appear 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
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 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 be 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, sunless it is
ultimately determined that such director is not entitled to indemnification.
Item 16: Exhibits
(a) Listing of Exhibits
Exhibit
* 1.0 Form of Sale 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 Wetherington, LeFloch & Hamilton, P.A. regarding tax
matters.
***10.1 Sample Stock Options for prior Stock Sales ("Option for the Purchase
of Common Stock").
* 10.2 Employment Agreement between Federal Trust Corporation 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.
*** 10.7 Agreement between Carruthers & Company and Federal Trust Corporation.
*** 10.8 Escrow Agreement with SunTrust.
*** 10.9 Amended and Restated Employment Agreement between Federal Trust
Corporation and James V. Suskiewich.
*** 10.10 Amended and Restated Employment Agreement between Federal Trust
Corporation and Aubrey H. Wright, Jr.
*** 10.11 Employee Severance Agreement between Federal Trust Corporation and
Louis E. Laubscher.
*** 12.0 Statement Regarding Computation of Ratios.
*** 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.
*** 23.5 Consent of Wetherington, LeFloch & Hamilton, P.A.
* 24.0 Power of Attorney.
*** 99.1 Letter to Shareholders regarding Subscription Right.
*** 99.2 Letter to Prospective Investor
*** 99.3 Question and Answers Brochure regarding the Offering.
** 99.4 Subscription Order Form.
- ------------
* Previously filed with the Securities and Exchange Commission of July 8,
1997 under this form S-1 Registration Statement.
** Filed supplementally via hard copy
*** Previously filed with the Securities and Exchange Commission on
September 26, 1997
Item 17: Undertakings
(a) The undersigned Registrant hereby undertakes that
(1) for purposes of determining any liability under the
Securities Act of 1933 ("Exchange 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.
Board of Directors
August 8, 1997
Page
August 8, 1997
Board of Directors
Federal Trust Corporation
1211 Orange Avenue
Winter Park, Florida 32789
Gentlemen:
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 shares 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 banks 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 institutions 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 of 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 shares 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 increased market capitalization and
potential stock liquidity benefits of the Offering, the increased capital ratios
and leverage possibilities of the Offering, and the potential risks of
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.
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 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 ..................................23
Capitalization ...................................24
Determination of Subscription Price...............25
Market for Common Stock and Dividends.............30
Management's Discussion and Analysis of
Financial Condition and
Results of Operations ........................31
Business..........................................46
Regulation and Supervision........................75
Taxation..........................................85
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.......................95
The Offering......................................97
Shares Eligible for Future Sale .................105
Legal Matters....................................105
Experts..........................................105
Available Information ...........................106
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.
October _____, 1997
AMENDMENT NO. 2 REGISTRATION
STATEMENT FORM S-1
Sequentially
Exhibit Numbered Page
* 1.0 Form of Sale 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 Wetherington, LeFloch & Hamilton, P.A.
regarding tax matters. ........................................................................
***10.1 Sample Stock Options for prior Stock Sales ("Option for the
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.
***10.7 Agreement between Carruthers & Company and Federal Trust Corporation.
***10.8 Escrow Agreement with SunTrust. ..............................................................
***10.9 Amended and Restated Employment Agreement between
Federal Trust Corporation and James V. Suskiewich. ..........................................
***10.10 Amended and Restated Employment Agreement between
Federal Trust Corporation and Aubrey H. Wright, Jr. ...........................................
***10.11 Employee Severance Agreement between Federal Trust Corporation
and Louis E. Laubscher. .......................................................................
***12.0 Statement Regarding Computation of Ratios. ....................................................
***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. ..............................................................
***23.5 Consent of Wetherington, LeFloch & Hamilton, P.A. .............................................
* 24.0 Power of Attorney. ............................................................................
***99.1 Letter to Shareholders regarding Subscription Right. ..........................................
***99.2 Letter to Prospective Investor
***99.3 Question and Answers Brochure regarding the Offering.
** 99.4 Subscription Order Form. ......................................................................
- ----------
* Previously filed with the Securities and Exchange Commission of July 8,
1997 under this form S-1 Registration Statement.
** Filed supplementally via hard copy
*** Previously filed with the Securities and Exchange Commission on
September 26, 1997