<PAGE>
==============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Nine Months Ended Commission File Number:
----------------------------- ---------------------------
SEPTEMBER 30, 1995 33-27139
FEDERAL TRUST CORPORATION
(Exact name of registrant as specified in its charter)
FLORIDA 59-2935028
----------------------------- ---------------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification No.)
1270 ORANGE AVENUE
WINTER PARK, FLORIDA 32789
-----------------------------------
(Address of principal executive offices)
Registrant's telephone number: (407) 645-5550
-----------------------------------
FEDTRUST CORPORATION
(Former name of registrant)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such quarterly reports), and (2) has been
subject to such filing requirements for the past 90 days:
YES X NO
------- -------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the last practicable date:
Common Stock, par value $.01 per share 2,239,928
- ------------------------------------------ ----------------------------
(class) Outstanding at September 30,
1995
==============================================================================
<PAGE>
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS PAGE
----
Consolidated Condensed Balance Sheets
September 30, 1995 (unaudited) and December 31, 1994..... 2
Consolidated Condensed Statements of Operations for the
Three months and Nine months ended September 30, 1995
and 1994 (unaudited)..................................... 3
Consolidated Condensed Statements of Cash Flows for the
Three months and Nine months ended September 30, 1995
and 1994 (unaudited)..................................... 4
Notes to Consolidated Condensed Financial Statements
(unaudited).............................................. 5-12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS...................... 13-24
PART II. OTHER INFORMATION
Signatures.................................................. 25
<PAGE>
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Condensed Balance Sheets
(UNAUDITED)
<TABLE>
<CAPTION>
September 30, 1995 December 31, 1994
------------------ -----------------
<S> <C> <C>
ASSETS
Cash 311,008 743,785
Interest bearing deposits 3,557,662 6,860,604
Securities available for sale - -
Investment securities (estimated market
value of $21,823,861 in 1995 and
$20,336,175 in 1994) 24,277,211 24,300,989
Loans receivable, net (net of allowance
for loan losses of $2,363,332 in 1995
and $1,769,073 in 1994) 116,682,437 111,182,894
Accrued interest receivable - Loans 841,837 664,784
Accrued interest receivable - Securities 158,665 563,254
Federal Home Loan Bank of Atlanta stock,
at cost 1,853,200 1,975,000
Notes receivable - -
Loan Sale Proceeds receivable - 2,491,359
Real Estate owned, net 3,082,552 2,891,479
Property and equipment, net 1,331,191 1,461,777
Prepaid expenses and other assets 1,897,429 820,838
----------- -----------
Total 153,993,192 153,956,763
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposit accounts and accrued interest on deposits 109,904,043 101,528,318
Official Checks 1,000,433 473,944
Federal Home Loan Bank advances 31,100,000 39,500,000
Debentures 420,000 420,000
Advance payments for taxes and insurance 1,044,413 436,809
Accrued expenses and other liabilities 578,843 579,872
----------- -----------
Total Liabilities 144,047,732 142,938,943
----------- -----------
Stockholders' equity
Common stock, $.01 par value, 5,000,000 shares
authorized; 2,256,505 shares issued and
outstanding at September 30, 1995 and
December 31, 1994 22,565 22,565
Additional paid -in capital 11,143,659 11,143,659
Retained earnings (1,097,258) -
Unrealized loss on investment securities available
available for sale, net (46,981) (71,879)
Treasury stock (16,577 shares of common stock, at
cost at September 30, 1995 and December
31, 1994) (76,525) (76,525)
----------- -----------
Total stockholders equity 9,945,460 11,017,820
----------- -----------
Total Liabilities and Stockholders' Equity 153,993,192 153,956,763
=========== ===========
</TABLE>
See accompanying Notes to Consolidated Condensed Financial Statements.
2
<PAGE>
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
For Three Months and Six Months Ended September 30, 1995 and 1994
(Unaudited)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
----------------------- -----------------------
1995 1994 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
INTEREST INCOME:
Loans $ 2,292,285 1,957,910 6,696,610 5,621,468
Securities 291,818 384,237 1,107,997 1,343,065
Interest-bearing deposits and other 64,302 161,628 256,943 250,286
----------- --------- --------- ---------
Total interest income 2,648,405 2,503,775 8,061,550 7,214,819
----------- --------- --------- ---------
INTEREST EXPENSE:
Deposit accounts 1,653,261 1,002,133 4,594,359 2,612,890
Federal Home Loan Bank advances and other borrowings 446,743 506,544 1,400,034 1,394,874
----------- --------- --------- ---------
Total interest expense 2,100,004 1,508,677 5,994,393 4,007,764
----------- --------- --------- ---------
NET INTEREST INCOME 548,401 995,098 2,067,157 3,207,055
Provision for loan losses 41,902 - 774,225 37,533
----------- --------- --------- ---------
NET INTEREST INCOME AFTER PROVISION 506,499 995,098 1,292,932 3,169,522
----------- --------- --------- ---------
OTHER INCOME:
Fees and service charges 31,254 35,990 108,774 136,597
Rents 29,787 598 125,906 598
Gain on sale of assets 51,372 8,780 193,806 10,376
Unrealized gain on investment securities - 21,710 - 21,710
Other miscellaneous 18,582 5,650 53,484 20,369
----------- --------- --------- ---------
Total other income 130,995 72,728 481,970 189,650
----------- --------- --------- ---------
OTHER EXPENSES:
Employee compensation & benefits 367,857 378,861 1,174,632 1,098,945
Occupancy and equipment 169,753 164,006 514,117 431,589
Data procession expense 18,625 14,421 55,227 72,986
Professional fees 273,562 97,916 626,026 376,295
FDIC Insurance 79,066 57,034 224,997 150,905
Other miscellaneous 352,986 294,843 855,467 614,401
----------- --------- --------- ---------
Total other expense 1,261,849 1,007,081 3,450,466 2,745,121
----------- --------- --------- ---------
NET INCOME BEFORE INCOME TAX (624,355) 60,745 (1,675,564) 614,051
Income tax (224,769) 20,957 (603,204) 211,847
----------- --------- --------- ---------
NET INCOME (399,586) 39,788 (1,072,360) 402,204
----------- --------- ---------- ---------
PER SHARE AMOUNTS:
Earnings per share (0.178) 0.018 (0.048) 0.19
---------- --------- --------- ---------
Cash dividends per share 0.000 0.030 0.000 0.09
---------- --------- --------- ---------
Weighted average number of shares outstanding 2,239,928 2,239,928 2,239,928 2,083,436
=========== ========= ========= =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
3
<PAGE>
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Consolidated Condensed Statements of Cash Flows
For the Nine Months Ended September 30, 1995 and 1994
(UNAUDITED)
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (1,072,360) 402,204
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation & amortization of property & equipment 145,731 92,461
Amortization (net) of premiums, fees & discounts on loans & securities 254,980 329,597
(Increase) Decrease in prepaid expenses & other assets 1,076,591 (39,317)
Increase (Decrease) in accrued expenses & other liabilities (10,086) (412,964)
Provision for allowance on real estate owned 158,220 -
Provision for loan losses 774,225 37,533
(Increase) Decrease in accrued interest receivable 227,536 256,351
(Increased) Decrease in loan sale proceeds receivable 2,491,359 -
Increase (Decrease) in official checks 526,489 (174,084)
Increase (Decrease) in accrued interest on deposit accounts 9,057 14,761
---------- ---------
Net cash provided by (used in) operating activities 4,581,742 506,542
---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Principal collected on notes receivable - 21,412
Acquisition of office properties and equipment (15,145) 220,728
Sale (Purchase) of Federal Home Loan Bank of Atlanta stock 121,800 540,300
Proceeds collected from loan sales 2,726,652 -
(Acquisition) of real estate owned (191,073) (504,189)
Sale of securities, available for sale - 12,170,844
Principal collected on securities held to maturity 23,778 -
Principal collected on loans 18,718,714 10,689,512
Loans originated or purchased (30,285,516) (34,154,975)
---------- ---------
Net cash used in investing activities (8,900,790) (11,016,368)
---------- ---------
Cash flows from financing activities:
Proceeds from common stock - 1,013,532
Increase (Decrease) in deposits, net 8,375,725 19,394,561
Increase (Decrease) in Federal Home Loan Bank advances (8,400,000) (9,800,000)
Increase (Decrease) in other borrowings - -
Dividends - (203,114)
Net increase in advance payments by borrowers for taxes & insurance 607,604 799,030
---------- ---------
Net cash provided by financing activities 583,329 11,204,009
---------- ---------
Increase in cash and cash equivalents (3,735,719) 694,183
Cash and cash equivalents at beginning of period 7,604,389 7,311,032
---------- ---------
Cash and cash equivalents at end of period 3,868,670 8,005,215
========== =========
</TABLE>
See accompanying Notes to Consolidated Condensed Financial Statements.
4
<PAGE>
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (unaudited)
1. GENERAL
Federal Trust Corporation ("Company" or "Holding Company") was organized in
February 1989 for the purpose of becoming the unitary savings and loan
holding company of Federal Trust Bank ("Bank"), a federally chartered stock
savings bank then headquartered in Amelia Island, Florida. The Company's and
the Bank's headquarters are currently located in Winter Park, Florida. The
Company is currently conducting business as a unitary savings and loan
holding company, and its principal asset is all of the capital stock of the
Bank. As a unitary holding company, the Company has greater flexibility than
the Bank to diversify and expand its business activities, either through
newly formed subsidiaries or through acquisitions.
The Company's primary investment is the ownership of the Bank. The Bank is
chartered as a federal stock savings bank and is primarily engaged in the
business of obtaining funds in the form of deposits and Federal Home Loan
Bank ("FHLB") advances and investing such funds in permanent loans on
residential and to a lesser extent commercial real estate primarily in
Florida, in various types of construction and other loans and in investment
securities. The Holding Company presently operates two non-bank subsidiaries,
Federal Trust Properties Corp. ("FTPC"), a real estate holding and
development company, organized December 12, 1994, which owns two office
buildings in Amelia Island, Florida and a residential site in Augusta,
Georgia; and 1270 Leasing, Co. ("1270 LC"), a real estate leasing entity
organized May 27, 1994, which leases the Holding Company's office located in
Winter Park, Florida. Prior to June 30, 1993, the Company operated three
other subsidiaries, First Coast Financial Corporation ("FCFC"), a residential
mortgage broker, FC Construction Services Corp. ("FCCSC"), a small commercial
construction and consulting company and FedTrust Building Corporation
("FTBC"), the owner of the First Coast Plaza office complex. The stock of
FCFC and the assets of FCCSC and FTBC were sold in June and July, 1993 and
the corporate entity of FCCSC and FTBC were dissolved in December, 1993.
The balance sheet as of September 30, 1995 and December 31, 1994 and the
statements of operations for the three-month and nine-month periods ended
September 30, 1995 and 1994 and the statement of cash flows for the
nine-month period ended September 30, 1995 and 1994 include the accounts and
operations of the Company and all subsidiaries. All material intercompany
accounts and transactions have been eliminated.
In the opinion of management of the Company, the accompanying consolidated
condensed financial statements contain all adjustments (principally
consisting of normal recurring accruals) necessary to present fairly the
financial position as of September 30, 1995, the results of operations for
the nine-month period ended September 30, 1995 and 1994 and cash flows for
the nine-month period ended September 30, 1995 and 1994. The results of
operations for the nine-month period ended September 30, 1995 are not
necessarily indicative of the results to be expected for the full year. These
statements should be read in conjunction with the financial statements
included in the Company's Annual Report on Form 10 - K for the year ended
December 31, 1994.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PER SHARE AMOUNTS:
Earnings per share has been computed by dividing net earnings by the weighted
average number of shares outstanding during the period.
(continued) 5
<PAGE>
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
REAL ESTATE:
Real estate acquired through foreclosure is recorded at the lower of cost
(unpaid loan balance plus foreclosure expenses) or net realizable value at
the time of acquisition. Net realizable value is based on current appraisals
reduced by an estimate of net holding costs, including interest and selling
expenses, for the period the property is expected to be held prior to sale.
3. LOANS
The Financial Accounting Standards Board (FASB) has issued Standard No. 114,
"Accounting by Creditors for Impairment of a Loan," which requires that all
creditors value all specifically reviewed loans for which it is probable that
the creditor will be unable to collect all amounts due according to the terms
of the loan agreement at the present value of expected cash flows, market
price of the loan, if available, or the fair value of the underlying
collateral. Expected cash flows are required to be discounted at the loan's
effective interest rate. FASB 114 does not apply to large groups of smaller
balance homogeneous loans that are collectively evaluated for impairment.
Loans collectively reviewed by the Bank for impairment include all
residential, consumer, and non-residential loans that are less than 90 days
delinquent, excluding loans which are individually reviewed based on specific
information or events, such as the condition of the collateral. The Standard
is required for fiscal years beginning after December 15, 1994.
The FASB also has issued Standard No. 118, "Accounting by Creditors for
Impairment of a Loan - Income Recognition and Disclosures," that amends FASB
Standard No. 114 to allow a creditor to use existing methods for recognizing
interest income on an impaired loan and by requiring additional disclosures
about how a creditor recognizes interest income related to impaired loans.
This Standard is to be implemented concurrently with Standard No. 114.
On January 1, 1995, the provisions of Standards No. 114 and 118 were adopted.
The adoption of the Standards required no increase to the allowance for loan
losses and had no impact on net income in the first six months of 1995.
As a matter of policy, the Bank classifies all loans 90 days or more past due
as non-performing and does not accrue interest on these loans and reverses
all accrued and unpaid interest, however, a non-performing loan is not
considered impaired if all amounts due including contractual interest are
expected to be collected. When the ultimate collectibility of an impaired
loan's principal is in doubt, wholly or partially, all cash receipts are
applied to principal. When this doubt does not exist, cash receipts are
applied under the contractual terms of the loan agreement first to interest
income and then to principal. Once the recorded principal balance has been
reduced to zero, future cash receipts are applied to interest income, to the
extent that any interest has been forgone. Further cash receipts are recorded
as recoveries of any amounts previously charged off.
A loan is also considered impaired if its terms are modified in a troubled
debt restructuring after January 1, 1995. For these accruing impaired loans,
cash receipts are typically applied to principal and interest receivable in
accordance with the terms of the restructured loan agreement. Interest
income is recognized on these loans using the accrual method of accounting.
As of September 30, 1995, there were no accruing impaired loans of this type.
At September 30, 1995, Impaired loans amounted to $9.708 million. Included
in the allowance for loan losses is $1.603 million related to the impaired
loans. The Bank measures impairment on collateralized loans using the fair
value of the collateral, and on unsecured loans using the present value of
expected future cash flows discounted at the loan's effective interest rate.
At September 30, 1995 all impaired loans were evaluated on the fair value
method.
(continued) 6
<PAGE>
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
In the first nine months of 1995, the average recorded investment in impaired
loans was $6.604 million and $217.7 thousand of interest income was
recognized on loans while they were impaired. All of this income was
recognized using a cash basis method of accounting.
4. ALLOWANCE FOR LOSSES
ALLOWANCE FOR LOAN LOSSES: The following is an analysis of the activity in
the allowance for loan losses for the periods presented:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
---------------------------- -------------------------------
1995 1994 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
Balance at beginning of period 2,378,838 1,768,949 1,974,950 1,850,000
Provision for loan losses 41,902 - 774,225 37,533
Transfer (to) from REO - - (283,774) (84,992)
Less Charge-offs (58,988) - (103,649) (33,592)
Plus recoveries 1,580 124 1,580 124
----------- ----------- ----------- -----------
Balance at end of period 2,363,332 1,769,073 2,363,332 1,769,073
=========== =========== =========== ===========
Loans Outstanding 116,682,43 118,016,160 116,682,437 118,016,160
Ratio of charge-offs to Loans
Outstanding .05% .00% .09% .03%
Ratio of allowance to Loans
Outstanding 2.26% 1.50% 2.03% 1.50%
</TABLE>
A provision for loan losses is generally charged to operations based upon
management's evaluation of the potential losses in its loan portfolio.
However, in May 1995, the OTS directed the Bank to increase its reserves for
loan and REO losses by $730,000. The increase was primarily the result of
the classification of the first mortgages on two loans on which the Bank has
a second mortgage position. Also, additional reserves were required on two
performing commercial loans whose classification was downgraded as a result
of financial information received from the borrower in the second quarter of
1995. During the third quarter ended September 30, 1995, management added
$41,902 to the provision based on its evaluation of the loan portfolio.
5. SUPPLEMENTAL DISCLOSURE OF CASH FLOW AND NON-CASH INVESTING AND
FINANCING ACTIVITIES
<TABLE>
<CAPTION>
Nine Months Ended September 30,
---------------------------------
1995 1994
---- ----
<S> <C> <C>
Cash paid during the period for:
Interest expense 3,899,475 3,502,954
Income taxes 15,053 502,592
</TABLE>
(continued) 7
<PAGE>
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
6. REAL ESTATE ACQUIRED THROUGH FORECLOSURE, OTHER REPOSSESSED ASSETS AND
ALLOWANCE FOR REAL ESTATE LOSSES
REAL ESTATE ACQUIRED THROUGH FORECLOSURE AND OTHER REPOSSESSED ASSETS: The
following is an analysis of the activity in real estate acquired through
foreclosure and other repossessed assets for the periods presented:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
----------------------- -----------------------
1995 1994 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
Balance at beginning of period 3,438,661 1,473,727 3,322,529 565,422
Acquired through foreclosure 379,118 112,620 2,572,836 1,120,925
Add: Capitalized Costs 39,187 - 53,343 -
Less: Sale of real estate (561,178) (435,644) (2,072,144) (535,644)
Less: Chargeoffs (213,236) - (794,012) -
Less: Allowance for losses - (81,092) - (81,092)
--------- --------- --------- ---------
Balance at end of period 3,082,552 1,069,611 3,082,552 1,069,611
========= ========= ========= =========
</TABLE>
ALLOWANCE FOR REAL ESTATE LOSSES: The following is an analysis of the
activity in allowance for real estate losses for the periods presented:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
----------------------- -----------------------
1995 1994 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
Balance at beginning of period 123 81,092 216,050 25,454
Provision for REO losses 158,220 47,647 158,220 71,306
Transferred (to) from Mortgage
Loans - - 283,774 84,992
Add: Recoveries - - 246 -
Less: Charge-offs (158,343) (47,647) (658,290) (100.660)
--------- --------- --------- ---------
Balance at end of period 0 81,092 0 81,092
--------- --------- --------- ---------
</TABLE>
(continued) 8
<PAGE>
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
7. INVESTMENT SECURITIES
<TABLE>
<CAPTION>
At September 30, 1995
------------------------------
<S> <C> <C>
AVAILABLE FOR SALE:
None
HELD TO MATURITY: Book Value Market Value
---------- ------------
FHLB Floating Rate Note, 4.480% due 3/10/97 491,705 492,656
FHLB Floating Rate Note, 4.930% due 3/16/98 486,678 481,406
FHLB Floating Rate Note, 3.000% due 6/17/98 981,430 915,313
FHLB Floating Rate Note, 3.000% due 6/25/98 1,717,398 1,632,969
FHLB Floating Rate Note, 3.080% due 7/15/98 1,500,000 1,384,688
FHLB Floating Rate Note, 3.080% due 7/15/98 1,500,000 1,384,688
FHLB Floating Rate Note, 3.237% due 7/28/98 3,350,000 3,094,563
FHLB Floating Rate Note, 4.433% due 7/30/03 14,250,000 12,437,578
---------- ----------
Total 24,277,211 21,823,861
========== ==========
</TABLE>
The Company does not have any investment securities classified as Available
for Sale, however, on January 1, 1994, the adoption date for SFAS 115, the
company classified securities with a book value of $3,752,662 as Available
for Sale. Subsequently on April 1, 1994, these investment securities were
classified as Held To Maturity, and pursuant to SFAS 115, were transferred at
their current market value and the unrealized loss as of the date of transfer
is being accreted into income over the remaining life of the securities.
8. DEBENTURES
The balance in "Debentures" at September 30, 1995 and December 31, 1994
consists of $420,000 in debentures with a 5 year maturity due in 1996 and an
interest rate of 10% per annum. The debentures are callable at any time and
interest is payable annually.
9. ADVANCES FROM FEDERAL HOME LOAN BANK
The following is an analysis of the advances from the Federal Home Loan Bank:
AMOUNTS OUTSTANDING AT SEPTEMBER 30, 1995:
<TABLE>
<CAPTION>
Maturity Date Rate Amount Type
------------- ---- ------ ----
<S> <C> <C> <C>
10/02/95 7.00% $ 500,000 Variable rate
10/17/95 6.23% 5,000,000 Fixed rate
10/31/95 7.00% 5,200,000 Variable rate
11/30/95 5.86% 1,900,000 Fixed rate
11/30/95 7.00% 3,500,000 Variable rate
12/15/95 6.36% 5,000,000 Fixed rate
09/15/96 5.83% 5,000,000 Fixed rate
09/15/98 6.12% 5,000,000 Fixed rate
----- ----------
Total 6.37% 31,100,000
===== ==========
</TABLE>
(continued) 9
<PAGE>
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
Variable rate advances reprice daily and may be repaid at any time without
penalty. Fixed rate advances incur a prepayment penalty if repaid prior to
maturity, and the interest rate is fixed for the term of the advance.
AMOUNTS OUTSTANDING AT:
<TABLE>
<CAPTION>
Month-end Rate Amount
--------- ---- ------
<S> <C> <C>
4/30/95 6.34% 30,100,000
5/31/95 6.36% 28,100,000
6/30/95 6.43% 28,600,000
7/31/95 6.30% 24,648,000
8/31/95 6.44% 30,445,000
9/30/95 6.55% 27,113,000
</TABLE>
During the six-month period ended September 30, 1995, average advances
outstanding totaled $28.2 million at an average rate of 6.40%.
Advances from the FHLB are collateralized by loans and securities that
totaled approximately $35.90 million and $14.25 million, respectively.
10. ACQUISITIONS
On April 3, 1992, the Bank acquired certain assets and liabilities of First
Federal Savings and Loan Association of Seminole County, F.A. from the RTC.
The Bank acquired approximately $77,988,000 of loans and assumed $120,227,000
in deposits and other liabilities. In addition, the Bank paid a net premium
of approximately $2,056,269 to the RTC and First Guaranty Mortgage
Corporation in connection with the acquisition. The Bank has amortized
$1,529,741 of the premium as of September 30, 1995 as an adjustment to
interest income. The acquisition was accounted for as a purchase.
11. SUPERVISION
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 Federal Deposit Insurance Corporation ("FDIC"). The Bank
is subject to examination and regulation by the Office of Thrift Supervision
("OTS") and the FDIC.
The OTS completed its regular examination of both the Company and the Bank in
June 1995. The OTS found that except for one technical violation wherein the
Bank renewed a loan that had matured, the Company and the Bank had complied
with their respective cease and desist orders which were entered into on
October 3, 1994 ("Orders"). Management consented to the issuance of the
Orders, without admitting or denying that grounds for such Orders existed.
In the 1995 examination, the OTS instructed the Holding Company's Board to
take action on certain operational concerns which management of the Company
is currently addressing. Management is examining the Company's general
operations in order to find ways to reduce overhead and expenses, including a
review of employee
(continued) 10
<PAGE>
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
compensation. One of the outcomes from this review has been the elimination
of the position of controller/treasurer which has been assumed by the Bank's
Chief Financial Officer. Management is also developing a plan to raise
additional capital to meet the Company's and the Bank's anticipated future
needs. In light of the Company's projected losses for the coming fiscal year,
the Company has reconsidered its dividend policy. The Board has decided to
suspend the payment of dividends for the calendar year 1995 to ensure that
sufficient funds are maintained to absorb any projected losses and to
promptly pay any tax refunds that might be due to the Bank pursuant to the
Tax Sharing Agreement between the Company and the Bank. In addition to these
actions, the Holding Company's Board was also instructed to: (I) provide the
OTS with quarterly financial reports and notification of new activities by
the Holding Company, including quarterly summary reports describing the
activities and progress on the HUD approved apartment projects; (ii) provide
the OTS with information on certain asset sales; (iii) require outside bids
to be obtained for services provided to the Holding Company in excess of
$10,000; and (iv) refund the Bank for any tax refunds. The Holding Company
has complied and submitted reports and other documentation in response to
these requests.
Since the issuance of the Supervisory Agreement, management of the Bank has
been strengthened with the addition of a new Chief Financial Officer, a new
Chief Lending Officer and a Senior Problem Asset Officer. The Board and
Management of the Holding Company believe that the Bank's management is
taking the necessary corrective measures to ensure that the Bank is being
operated properly and that the level of classified assets are being carefully
monitored and managed in order to provide for the steady reduction of
classified assets. Management is committed to taking whatever steps it deems
necessary to have the Bank Order lifted as soon as possible.
The Order under which the Holding Company is operating essentially provides
that the Company cannot receive dividends from the Bank without prior
approval from the OTS or request or allow the Bank to pay for expenses
directed to the Company. It should be noted that in keeping with OTS
regulations, the Holding Company has always filed a written notice with the
OTS concerning any requests for capital distributions from the Bank and has
received written approval in each instance. In accordance with the Holding
Company Order, any inter-company employee costs are governed by a management
services agreement which provides for the reimbursement for the cost of
employees who work for both the Bank and the Company. Finally, the Company
must continue to have a standing Compliance Committee comprised of outside
directors who are responsible for monitoring and reporting to the Board of
Directors the Company's level of compliance with the Order. The Compliance
Committee meets with management every quarter to review the Company's
adherence to the Order. The Board of Directors then submits a quarterly
compliance certification to the OTS. The Holding Company has complied, and is
currently in compliance, with each of these provisions.
The Bank's Order contains 27 directives which are primarily directed toward
regulatory compliance issues, such as lending, limitations, establishment of
real estate lending standards, proper maintenance of records, appraisals,
strengthening of the Bank's policies for underwriting, administration,
collection and foreclosure of loans, as well as taking steps to avoid the
appearance of conflicts of interest with affiliated persons. Management of
the Bank has taken corrective action to address these concerns, including:
further amendments to the Bank's loan policies and procedures; taking a more
aggressive approach toward collection of delinquent loans and foreclosing
proceedings; and emphasis on loan documentation and better record keeping.
The remaining items of the Order which deal with other issues, had been
addressed and were complied with at the time the Order was entered into. The
Order also contained similar provisions to that of the Holding Company's
Order in that the Bank cannot make a capital distribution to the Company
without prior approval. The Bank is also required to have a standing
Compliance Committee consisting of outside directors which meets quarterly
and is responsible for monitoring and reporting to the Board of Directors on
the Bank's compliance with the Order. The Bank's Board of Directors is then
required to certify to the OTS on a quarterly basis that the Bank was in
compliance with the Order. The Bank has complied, and is currently in
compliance, with each
(continued) 11
<PAGE>
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
of the foregoing provisions. As an additional measure to ensure compliance
with the Bank's Order, the Bank has contracted with a company specializing in
the review of systems of internal control and operating procedures for
financial institutions.
In the Bank's recent OTS examination the OTS cited additional corrective
actions that needed to be addressed by the Bank's Board. No formal
regulatory action, however, was deemed necessary. While the OTS acknowledged
that the Bank is considered a "well-capitalized" institution under the OTS
regulation, the Board has been directed to develop and submit a capital plan
to increase the Bank's capital position, along with a written plan to reduce
the Bank's interest rate risk. The Board was also instructed to establish a
liquidity level above the minimum 5% regulatory requirement. In response,
the Board has established a range of between 8% and 10% as a minimum
liquidity level for the Bank. Additionally, the Board was instructed to fill
the current board vacancy with a local outside director and to make every
effort to increase the number of directors beyond the required minimum to
further strengthen the composition of the existing Board. The Bank expects
to add two additional directors to its Board prior to calendar year end 1995.
Finally, after reaching a consensus with the OTS examiners, the Bank has
increased its allowance for reserve for loan losses from $1,745,000 to
$2,475,000.
Management expects that the interest income of the Bank will be limited, as
long as the Bank's Order and current growth limitations remain in place.
Under the growth limitations, the Bank cannot increase its total assets
during any quarter in excess of an amount equal to net interest credited on
deposit liabilities during the quarter. Based upon the results of the 1995
examination, the Bank intends to make a request to the OTS to have the growth
limitations lifted. Management does not believe that the Holding Company or
the Bank Orders, or the current growth limitations on the Bank, will have a
material impact on the financial condition of the Holding Company or the
Bank.
12. 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. The options held by an
active director are canceled immediately if such director is removed for
"cause" as defined in the Plan.
12
<PAGE>
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Bank's net earnings have been adversely affected by the rise in interest
rates that has occurred during 1994 and 1995, due to its negative GAP
position, as its liabilities have repriced sooner than, and in greater
amounts than, its assets. As a result, the Bank's cost of funds has
increased faster than the yields earned on its assets, resulting in a
decrease in its interest rate spread and lower earnings. The Bank has
continued to concentrate on increasing its portfolio of adjustable rate loans
and, as interest rates have begun to decline in 1995, is increasing its
efforts to lengthen the maturities of its liabilities in order to reduce its
negative GAP position and the impact of higher interest rates in the future.
Should interest rates begin to rise before the Bank is able to further reduce
its negative GAP, the Bank's earnings would be adversely affected.
In addition, the Bank has had to increase its loss reserves as a result of a
higher level of non-performing loans. Although management believes that the
level of non-performing assets should begin decreasing in future periods,
unforeseen economic conditions and other circumstances beyond the Bank's
control could result in material additions to the loss reserves in future
periods if the level of non-performing assets increases. The Bank does
anticipate additions to the loss reserves in future periods as part of the
normal course of business, as the Bank's assets, consisting primarily of
loans, are continually evaluated and the loss allowances are adjusted to
reflect the potential losses in the portfolio on an ongoing basis.
The Company has projected losses for the remainder of, and for the full year
of 1995, based on the loss for the first nine months resulting from the
increase in the Bank's loss reserves, the continuing impact of current
interest rates on the Bank's net interest margin, and the projection of
reduced yields on the Bank's portfolio of structured notes resulting from the
current yield curve in which the spread between short term and longer term
interest rates is narrow.
GENERAL
Federal Trust Corporation ("Federal Trust" or "Company" or "Holding
Company"), formerly FedTrust Corporation, was incorporated as a unitary
savings and loan holding company in August 1988. Federal Trust was
capitalized on February 28, 1989 and acquired all outstanding common stock of
Federal Trust Bank, a federally chartered savings bank (the "Bank"), formerly
First Coast Savings Bank, F.S.B., in exchange for all the outstanding shares
of the Company. Five shares of the Company's common stock was exchanged for
each four shares of the Bank's common stock on that date. The acquisition of
the Bank was accounted for as a pooling of interests. The Bank is currently
the primary operating subsidiary of the Company and began operations on May
3, 1988.
Federal Trust presently operates two non-bank subsidiaries, Federal Trust
Properties Corp. ("FTPC"), a real estate holding and development company,
organized December 12, 1994, which owns two office buildings in Amelia
Island, Florida and a residential site in Augusta, Georgia, and 1270 Leasing
Co. ("1270 LC"), a real estate entity organized May 27, 1994, which leases
the Holding Company's office located in Winter Park, Florida. Three former
subsidiaries, First Coast Financial Corporation ("FCFC"), a mortgage broker,
FC Construction Services Corp. ("FCCSC"), a commercial construction company
and FedTrust Building Corporation ("FTBC"), which operated office buildings
in Amelia Island, Florida were all disposed of during fiscal year 1993. The
assets of FCCSC and FTBC were sold on July 31, 1993 and the companies were
dissolved in December 1993. The stock of FCFC was sold on June 30, 1993.
Operations of these subsidiaries were not significant to the consolidated
entity.
Federal Trust acquired FCFC on February 17, 1989. The acquisition of FCFC
was accounted for as a purchase and goodwill of $193,585 resulted. The
Company sold the stock of FCFC on June 30, 1993 for $200,000 comprised of
(continued) 13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
$1,000 in cash and a $199,000 note secured by FCFC stock payable over ten
(10) years. No loss was reported on the sale. Subsequent to the sale, the
operations of the company and its profitability declined and the purchaser
was unable to make the required payments on the note held by Federal Trust
Corporation (FTC). In December 1994, the purchaser defaulted on the note and
FTC's subsidiary FTPC acquired the personal property consisting of furniture
and equipment valued at $12,410. FTPC chose not to acquire the stock of
FCFC, as it had determined that the operations of the company had essentially
ceased and could not be restarted without an investment of significant
resources, if at all. The Company recognized a loss on the note in the
amount of $187,028.
Federal Trust also formed FCCSC, a commercial construction company, during
1989. FCCSC actively marketed its services during 1989 by building and
selling an office building, and during 1990 by buying and selling an office
building site, developing and licensing plans for residential townhouse
units, and providing technical and consulting services to a real estate
contractor/developer, and in 1991 by continuing to provide significant
technical and consulting services to real estate contractors and developers.
During 1992, FCCSC continued to license plans for residential townhouse
units, but no significant marketing of services of FCCSC occurred in 1992 or
during 1993. In July 1993, the Company sold substantially all of the assets
held by FCCSC to two unrelated third parties and ceased operations of FCCSC
and the company was dissolved. During 1994, the purchaser of a portion of
FCCSC's assets defaulted on its note which had been assigned to FTC and, in
December 1994, FTPC, to whom FTC had assigned the note, acquired Georgia
property through a deed in lieu of foreclosure and a Note through a voluntary
assignment.
The Company previously operated FTBC, whose primary business was the
ownership of commercial rental property comprising the office complex where
the Amelia Island offices of the Company were located. In December 1992, the
building which housed the bank was conveyed to the Bank, which sold the
property to another bank as part of the sale of its Amelia Island deposits
and branch office. In July 1993, the remaining property was sold by FTBC to
an unrelated third party and Federal Trust ceased operations of FTBC and the
company was dissolved. During 1994, the purchaser of the remaining property
defaulted on its notes, which had been assigned to FTC, and, in December
1994, FTPC, to whom FTC had assigned the notes, acquired the property through
a deed in lieu of foreclosure and the deferred gain was offset against the
secured promissory note.
On November 20, 1992 the Board of Directors authorized a five-for-four stock
split for stockholders of record on November 30, 1992. All per share amounts
have been restated to give effect to this split.
ASSET/LIABILITY MANAGEMENT
The operating results of the Company depend primarily on the Bank's 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, debentures 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 Bank's interest rate spread is affected by
regulatory, economic and competitive factors that influence interest rates,
loan demand and deposit flows. In addition, the Company's net earnings are
also affected by the level of non-performing loans and real estate owned, as
well as the level of its non-interest income, including loan related fees,
and its non-interest expenses, such as salaries and employee benefits,
occupancy and equipment costs and provisions for losses on real estate owned
and income taxes.
The Bank's one year GAP position at June 30, 1995, the most recent report
available, was -37%, as compared to -38% at March 31, 1995 and -22% at
December 31, 1994. The primary reason for the increase in the one year GAP
has been
(continued) 14
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
the shorter maturities of the Bank's liabilities which has resulted from an
increase in shorter term deposits due to the preferences of the Bank's
customers during a rising interest rate environment. As interest rates have
risen in 1994 and 1995, the Bank's negative GAP has resulted in lower
earnings due to the narrowing of the Bank's net interest spread. Should
interest rates continue to rise the Bank's net interest income will continue
to be adversely affected as a result of its negative GAP, however, should
interest rates decline the Bank's net interest income will improve, as the
rates paid on its liabilities will fall faster than the rates earned on its
assets. In the most recent OTS examination, the Board was directed to
develop and submit a plan to reduce the Bank's interest rate risk, as a
result of the Bank's sensitivity to rising interest rates and the continued
decline in its net interest spread. See "Supervision."
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 Bank 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 of the Bank to protect
earnings over the interest rate cycle, ii) the maximum allowable percentage
changes in net interest income and net portfolio value over eight interest
rate scenarios (+100, +200, +300, +400 and -100, -200, -300, -400 basis
points), iii) for the Asset/Liability Management Committee ("ALCO"), and iv)
for quarterly reporting to the Board of Directors. The ALCO monitors the
Bank's interest rate risk position and manages the asset and liability mix in
order to better match the maturities and repricing terms of the Bank'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 adjustable-rate
mortgage loans ("ARMs"), (ii) extending the term of the Bank's deposits and
borrowings and (iii) maintaining an adequate amount of liquid assets (cash
and interest-earning assets). As a result the Bank has continued to
originate and purchase ARM loans throughout this period, and has extended
deposits to longer terms whenever possible through its pricing practices.
While the bank has had some success in these efforts, it has not been able to
achieve a level of success great enough to improve its negative GAP position.
Until such time as the Bank is able to reduce its negative GAP position, it
will be subject to a declining net interest spread when interest rates are
rising. As interest rates have begun to decline in the second and third
quarters of 1995, the bank has increased its efforts to lengthen liabilities
and shall continue to do so.
(continued) 15
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
The following table sets forth information about rates and yields:
<TABLE>
<CAPTION>
Yields and Rates at
--------------------------------------------------
September 30, December 31, September 30,
1995 1994 1994
---- ---- ----
<S> <C> <C> <C>
Yields on:
Loan portfolio 7.97% 7.67% 7.43%
Other interest-earning assets 4.23% 6.63% 6.84%
----- ----- -----
Interest-earning assets 7.18% 7.44% 7.30%
Cost of:
Deposits 5.96% 4.93% 4.26%
FHLB advances and other 6.55% 5.87% 5.66%
----- ----- -----
Interest-bearing liabilities 6.08% 5.17% 4.66%
----- -----
Interest rate spread 1.10% 2.27% 2.64%
===== ===== =====
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
GENERAL
Like other financial institutions, the Bank must ensure that sufficient funds
are available to meet deposit withdrawals, loan commitments, investment needs
and expenses. Control of the Bank's cash flow requires the anticipation of
deposit flows and loan payments. The Bank's primary sources of funds are
deposit accounts, FHLB advances and principal and interest payments on loans.
The Bank requires funds in the short-term to finance ongoing operating
expenses, pay liquidating deposits, purchase temporary investments in
securities and invest in loans. The Bank funds short-term requirements
through short-term advances from the FHLB, the sale of temporary investments,
deposit growth and loan principal payments. The Bank requires funds in the
long-term to invest in loans for its portfolio, purchase fixed assets and
provide for the liquidation of deposits maturing in the future. The Bank
funds its long-term requirements with proceeds from maturing loans, the sale
of loans, the sale of investments in securities, deposits, long-term advances
from the FHLB and the sale of real estate. In addition, management has no
plans to significantly change long-term funding requirements.
During the nine-month period ended September 30, 1995, the Company used funds
primarily from principal collected on loans, $18,718,714; net deposit
inflows, $8,375,725, proceeds from loan sale receivable, $2,491,359; and
proceeds from loan sales, $2,726,652, to fund the origination or purchase of
loans, $30,285,516; decreases in FHLB advances, $8,400,000; and decreases in
cash and cash equivalents, $3,735,719. As of September 30, 1995, the Bank
had outstanding FHLB advances of $31,100,000. Management believes that in
the future funds will be obtained from the above sources
At September 30, 1995, loans-in-process, or closed loans scheduled to be
funded over a future period of time, totaled $1,180,922. Loans committed,
but not closed, totaled 1,295,929 and available lines of credit totaled $752.
During the nine-month period ended September 30, 1995, the Bank acquired
$30.042 million in primarily domestic residential
(continued) 16
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
mortgage loans. The Company anticipates that other loan acquisitions will
occur in the future. Funding for these amounts is expected to be provided by
the sources described above.
The Company last declared a dividend to its stockholders on September 30,
1994, which was paid on November 14, 1994. As a result of the net losses
that have been incurred by the Company since the fourth quarter of 1994, no
additional dividends have been declared and the Board of Directors has
decided to suspend the payment of dividends for calendar year 1995. In
addition, although the Company does not require OTS approval for the granting
of dividends, the Bank is prohibited from granting dividends without OTS
approval and Bank does not anticipate the payment of dividends to the Company
for calendar year 1995. The payment of dividends in subsequent years will
depend on general economic conditions, the overall performance of the
Company, and the capital needs of the Company.
ACQUISITIONS
On April 3, 1992, the Bank acquired certain assets and liabilities of First
Federal Savings and Loan Association of Seminole County, F.A. from the RTC.
The Bank acquired approximately $77,988,000 of loans and assumed $120,227,000
in deposits and other liabilities. In addition, the Bank paid a net premium
of approximately $2,056,269 to the RTC and First Guaranty Mortgage
Corporation in connection with the acquisition. The Bank has amortized
$1,529,741 of the premium as of September 30, 1995 as an adjustment to
interest income. The acquisition was accounted for as a purchase.
LIQUIDITY
As a member of the Federal Home Loan Bank system, the Bank is required to
maintain a daily average balance of liquid assets equal to a specified
percentage (currently 5%) of net withdrawable deposit accounts and borrowings
payable in one year or less. Federal regulations also require that each
member institution maintain short-term liquid assets of at least 1% of its
net withdrawable deposit accounts and borrowings payable in one year or less.
Generally, the Bank's management seeks to maintain its liquid assets at
comfortable levels above the minimum requirements imposed by its regulators.
At September 30, 1995, average liquidity was 9.18%.
The Asset/Liability Management Committee of the Bank meets regularly and, in
part, reviews liquidity levels to ensure that funds are available as needed.
CREDIT RISK
The Bank's primary business is the origination and acquisition of loans to
families and businesses. That activity entails potential credit losses, the
magnitude of which depends on a variety of economic factors affecting
borrowers which are beyond the control of the Bank. While the Bank has
instituted guidelines and credit review procedures to protect it from
avoidable credit losses, some losses may inevitably occur.
Short-term balloon mortgage loans are sometimes used to allow borrowers the
option of waiting until interest rates are more favorable for a long term
fixed rate loan. If interest rates rise, these loans may require renewals if
borrowers fail to qualify for a long term fixed rate loan at maturity and
there is no assurance that a borrower's income will be sufficient to service
the renewal. Management recognizes the risks associated with this type of
lending and believes that the policies and procedures it applies to such
loans lowers the general risk.
(continued) 17
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
SUPERVISION
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 Federal Deposit Insurance Corporation ("FDIC"). The Bank
is subject to examination and regulation by the Office of Thrift Supervision
("OTS") and the FDIC.
The OTS completed its regular examination of both the Company and the Bank in
June 1995. The OTS found that except for one technical violation wherein the
Bank renewed a loan that had matured, the Company and the Bank had complied
with their respective cease and desist orders which were entered into on
October 3. 1994 ("Orders"). Management consented to the issuance of the
Orders, without admitting or denying that grounds for such Orders existed.
In the 1995 examination, the OTS instructed the Holding Company's Board to
take action on certain operational concerns which management of the Company
is currently addressing. Management is examining the Company's general
operations in order to find ways to reduce overhead and expenses, including a
review of employee compensation. One of the outcomes from this review has
been the elimination of the position of controller/treasurer which has been
assumed by the Bank's Chief Financial Officer. Management is also developing
a plan to raise additional capital to meet the Company's and the Bank's
anticipated future needs. In light of the Company's projected losses for the
coming fiscal year, the Company has reconsidered its dividend policy. The
Board has decided to suspend the payment of dividends for the calendar year
1995 to ensure that sufficient funds are maintained to absorb any projected
losses and to promptly pay any tax refunds that might be due to the Bank
pursuant to the Tax Sharing Agreement between the Company and the Bank. In
addition to these actions, the Holding Company's Board was also instructed
to: (I) provide the OTS with quarterly financial reports and notification of
new activities by the Holding Company, including quarterly summary reports
describing the activities and progress on the HUD approved apartment
projects; (ii) provide the OTS with information on certain asset sales; (iii)
require outside bids to be obtained for services provided to the Holding
Company in excess of $10,000; and (iv) refund the Bank for any tax refunds.
The Holding Company has complied and submitted reports and other
documentation in response to these requests.
Since the issuance of the Supervisory Agreement, management of the Bank has
been strengthened with the addition of a new Chief Financial Officer, a new
Chief Lending Officer and a Senior Problem Asset Officer. The Board and
Management of the Holding Company believe that the Bank's management is
taking the necessary corrective measures to ensure that the Bank is being
operated properly and that the level of classified assets are being carefully
monitored and managed in order to provide for the steady reduction of
classified assets. Management is committed to taking whatever steps it deems
necessary to have the Bank Order lifted as soon as possible.
The Order under which the Holding Company is operating essentially provides
that the Company cannot receive dividends from the Bank without prior
approval from the OTS or request or allow the Bank to pay for expenses
directed to the Company. It should be noted that in keeping with OTS
regulations, the Holding Company has always filed a written notice with the
OTS concerning any requests for capital distributions from the Bank and has
received written approval in each instance. In accordance with the Holding
Company Order, any inter-company employee costs are governed by a management
services agreement which provides for the reimbursement for the cost of
employees who work for both the Bank and the Company. Finally, the Company
must continue to have a standing Compliance Committee comprised of outside
directors who are responsible for monitoring and reporting to the Board of
Directors the Company's level of compliance with the Order. The Compliance
Committee meets with management every quarter to review the Company's
adherence to the Order. The Board of Directors then submits a quarterly
compliance certification to the OTS. The Holding Company has complied, and is
currently in compliance, with each of these provisions.
(continued) 18
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
The Bank's Order contains 27 directives which are primarily directed toward
regulatory compliance issues, such as lending, limitations, establishment of
real estate lending standards, proper maintenance of records, appraisals,
strengthening of the Bank's policies for underwriting, administration,
collection and foreclosure of loans, as well as taking steps to avoid the
appearance of conflicts of interest with affiliated persons. Management of
the Bank has taken corrective action to address these concerns, including:
further amendments to the Bank's loan policies and procedures; taking a more
aggressive approach toward collection of delinquent loans and foreclosing
proceedings; and emphasis on loan documentation and better record keeping.
The remaining items of the Order which deal with other issues, had been
addressed and were complied with at the time the Order was entered into. The
Order also contained similar provisions to that of the Holding Company's
Order in that the Bank cannot make a capital distribution to the Company
without prior approval. The Bank is also required to have a standing
Compliance Committee consisting of outside directors which meets quarterly
and is responsible for monitoring and reporting to the Board of Directors on
the Bank's compliance with the Order. The Bank's Board of Directors is then
required to certify to the OTS on a quarterly basis that the Bank was in
compliance with the Order. The Bank has complied, and is currently in
compliance, with each of the foregoing provisions. As an additional measure
to ensure compliance with the Bank's Order, the Bank has contracted with a
company specializing in the review of systems of internal control and
operating procedures for financial institutions.
In the Bank's recent OTS examination the OTS cited additional corrective
actions that needed to be addressed by the Bank's Board. No formal
regulatory action, however, was deemed necessary. While the OTS acknowledged
that the Bank is considered a "well-capitalized" institution under the OTS
regulation, the Board has been directed to develop and submit a capital plan
to increase the Bank's capital position, along with a written plan to reduce
the Bank's interest rate risk. The Board was also instructed to establish a
liquidity level above the minimum 5% regulatory requirement. In response,
the Board has established a range of between 8% and 10% as a minimum
liquidity level for the Bank. Additionally, the Board was instructed to fill
the current board vacancy with a local outside director and to make every
effort to increase the number of directors beyond the required minimum to
further strengthen the composition of the existing Board. The Bank expects
to add two additional directors to its Board prior to calendar year end 1995.
Finally, after reaching a consensus with the OTS examiners, the Bank has
increased its allowance for reserve for loan losses from $1,745,000 to
$2,475,000.
Management expects that the interest income of the Bank will be limited, as
long as the Bank's Order and current growth limitations remain in place.
Under the growth limitations, the Bank cannot increase its total assets
during any quarter in excess of an amount equal to net interest credited on
deposit liabilities during the quarter. Based upon the results of the 1995
examination, the Bank intends to make a request to the OTS to have the growth
limitations lifted. Management does not believe that the Holding Company or
the Bank Orders, or the current growth limitations on the Bank, will have a
material impact on the financial condition of the Holding Company or the Bank.
(continued) 19
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
CAPITAL REQUIREMENTS
The Bank is required to meet certain minimum regulatory capital requirements.
The following table presents a summary of the capital requirements for
adequately capitalized banks, the Bank's capital and the amounts in excess as
of September 30, 1995:
<TABLE>
<CAPTION>
At September 30, 1995
--------------------------------------------------------------------
Tangible Core Risk-Based
------------------ ------------------ --------------------
(Dollars in Thousands)
Percent Percent Percent
Amount of Assets Amount of Assets Amount of Assets
------ --------- ------ --------- ------ ---------
<S> <C> <C> <C> <C> <C> <C>
Regulatory Capital 8,263 5.44% 8,263 5.44% 9,135 11.20%
Requirement 2,280 1.50% 4,560 3.00% 6,524 8.00%
----- ----- ----- ----- ----- -----
Excess 5,983 3.94% 3,703 2.44% 2,611 3.20%
</TABLE>
IMPACT OF INFLATION AND CHANGING PRICES
The financial statements and related data presented herein have been prepared
in accordance with Generally Accepted Accounting Principles ("GAAP"), which
require the measurement of financial position and operating results in terms
of historical dollars, without considering changes in the relative purchasing
power of money over time due to inflation. Unlike most industrial companies,
substantially all of the assets and liabilities of 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 December 1991, FASB issued Statement of Financial Accounting No. 107
("SFAS No. 107") which extends existing fair value disclosure practices for
some instruments by requiring all entities to disclose the fair value of
financial instruments, both assets and liabilities, recognized and not
recognized, in the statement of financial position, for which it is
practicable to estimate fair value. This Statement is effective for
financial statements issued for fiscal years ending after December 15, 1992
for institutions with greater than $150 million in assets and is effective
for institutions with less than $150 million in assets for fiscal years
ending after December 15, 1993, and will be applicable to the Company in 1995.
On May 31, 1993, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 114, "Accounting by Creditors
for Impairment of a Loan". This Statement applies to all creditors (not just
financial institutions) and amends FASB Statements Nos. 5, "Accounting for
Contingencies," and 15, "Accounting by Debtors and Creditors for Troubled
Debt Restructurings". It prescribes the recognition criterion for loan
impairment and the measurement methods for certain impaired loans and loans
whose terms are modified in troubled-debt Restructurings (a "restructured
loan"). Statement 114 is effective for financial statements issued for
fiscal years beginning after December 15, 1994; therefore, it is required to
be implemented in the first quarter of 1995 for calendar year companies.
(continued) 20
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
In October, 1994, the Financial Accounting Standards Board issued SFAS No.
118, "ACCOUNTING FOR IMPAIRMENT OF A LOAN-INCOME RECOGNITION OF DISCLOSURES."
Statement 118 amends FASB Statement No. 114, to allow a creditor to use
existing methods for recognizing interest income on impaired loans. This
statement amends the disclosure requirements in Statement 114 to require
information about the recorded investment in certain impaired loans and about
how a creditor recognizes interest income related to those impaired loans.
This statement is effective for financial statements for fiscal years
beginning after December 15, 1994 and is applicable to the Company in 1995.
In October, 1994, the Financial Accounting Standards Board issued SFAS No.
119, "DISCLOSURE ABOUT DERIVATIVE FINANCIAL INSTRUMENTS AND FAIR VALUE
FINANCIAL INSTRUMENTS." Statement 119 requires disclosures abut derivative
financial instruments, futures, forward, swap and options contracts, and
other financial instruments with similar characteristics. It amends existing
requirements of FASB Statement No. 119 and FASB Statement No. 107. This
statement is effective for financial statements issues for fiscal year ending
after December 15, 1994, except for entities with less than $150 million in
total assets. For those entities, this statement is effective for financial
statements issued for fiscal year ending December 15, 1995. In 1994, the
Bank made proper disclosure in the Company's accompanying financial
statements in accordance with SFAS No. 119.
On March 31, 1995, the Financial Accounting Standards Board issued Statement
of Accounting Standards No. 121, "Accounting for the Impairment of long-lived
Assets and for long-lived assets to be disposed of." This Statement
establishes accounting standards for the impairment of long-lived assets,
assets to be held and used for long-lived assets and certain identifiable
intangibles to be disposed of. It requires that long-lived assets and
certain identifiable intangibles to be held and used by an entity be reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. It also prescribes the
value of these assets to be disposed be reported at the lower of carrying
amount or fair value less cost to sell. Statement 121 is effective for
financial statements issued for fiscal years beginning after December 15,
1995; therefore, it is required to be implemented in the first quarter of
1996 for calendar year companies as is the Company. Management does not
expect this to have a significant impact on its financial statements.
On May 31, 1995, the Financial Accounting Standards Board issued Statement of
Accounting Standards No. 122, "Accounting for Mortgage Servicing Rights."
This Statement amends FASB Statement No. 65, "Accounting for Certain Mortgage
Banking Activities". This Statement requires that a mortgage banking
enterprise assess its capitalized mortgage servicing rights for impairment
based on the fair value of those rights. Statement 122 is effective
prospectively for financial statements issued for fiscal years beginning
after December 15, 1995; therefore, it is required to be implemented in the
first quarter of 1996 for calendar year companies as is the Company.
Management does not expect this to have a significant impact on its financial
statements.
The Securities and Exchange Commission has requested that the FASB develop
new accounting standards that could require financial institutions to carry
all financial instruments at their fair market value. Implementation of the
standard would more than likely produce significant volatility in the
measurement of periodic net earnings and capital.
RESULTS OF OPERATIONS
COMPARISON OF THE THREE-MONTH PERIOD ENDED SEPTEMBER 30, 1995 AND 1994
GENERAL. The Company had a net loss for the three-month period ended
September 30, 1995 of $399,586 or $.18 per share, compared to net earnings of
$39,788 or $.02 per share for the same period in 1994. The decrease in net
earnings was due primarily to the increase in the provision for loan losses,
a decrease in net interest income, an increase in other expense, offset
partially by an increase in other income and a decrease in income tax expense.
(continued) 21
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
INTEREST INCOME AND EXPENSE. Interest income increased to 2,648,405 for the
three-month period ended September 30, 1995 from $2,503,775 for the same
period in 1994. Interest income on loans increased to $2,292,285 in 1995
from $1,957,910 in 1994, primarily as a result of increased loans outstanding
and an increase in the average yield on the loan portfolio. Interest income
on the securities portfolio decreased by $92,419 for the three-month period
ended September 30, 1995 over the same period in 1994, as a result of a
decrease in the average yield on securities held. Other interest and
dividends decreased $97,326 during the same three-month period in 1995 from
1994 as a result of a decrease in the average volume of other
interest-bearing assets. Management expects the rates earned on the
portfolios to fluctuate with general market conditions.
Interest expense increased to $2,100,004 during the three-month period ended
September 30, 1995 from $1,508,677 for the same period in 1994 primarily due
to an increase in the average rate paid on such deposits and FHLB advances.
Interest on deposits increased to $1,653,261 in 1995 from $1,002,133 in 1994
and interest on FHLB advances decreased to $446,743 in 1995 from $506,544 in
1994. Management expects to continue to use FHLB advances when the proceeds
can be invested wisely.
PROVISIONS FOR LOAN LOSSES. A provision for loan losses is generally charged
to operations based upon management's evaluation of the potential losses in
its loan portfolio. During the quarter, management added $41,902 to the
provision for loan losses based on its evaluation of the loan portfolio. The
Bank's total provision for loan losses was $531,483 during 1994, $589,861
during 1993, $140,000 in 1992 and $117,000 in 1991. Net charge-offs on loans
have totaled $57,408 during the three-month period ended September 30, 1995,
no charge-offs during the three-month period ended September 30, 1994,
$31,361 for 1993, $37,232 for 1992 and $60,637 for 1991. There were no
charge-offs prior to 1991. Total non-performing loans at September 30, 1995
were $2,959,456 compared to $3,491,328 at June 30, 1995. The allowance for
loan losses at September 30, 1995 was $2,363,332 or 79.86% of non-performing
loans and 2.26% of net loans receivable.
TOTAL OTHER INCOME. Other income increased from $72,728 for the three-month
period ended September 30, 1994 to $130,995 for the same period in 1995. The
increase in other income is primarily due to increases in rental income of
$29,189 on the commercial rental property repossessed by the Company, and
gains on the sale of repossessed assets and loans of $42,592. Fees and
service charges decreased $4,736 for the same period in 1995 primarily
because of a decrease in the fees and charges earned by the Bank. Other
miscellaneous income increased by $12,932 for the same period in 1995 due
primarily to increased other loan income.
TOTAL OTHER EXPENSE. Other expense increased to $1,261,849 the three-month
period ended September 30, 1995 from $1,007,081 for the same period in 1994.
The increase in 1995 was the result of increased occupancy and equipment
expenses, data processing expense, professional fees, FDIC Insurance expense,
and other miscellaneous expenses, offset partially by decreased compensation
expense. Compensation decreased to $367,857 in 1995 from $378,861 in 1994.
Occupancy and equipment expense increased from $164,006 in 1994 to $169,753
in 1995 primarily due to additional space rented. Data processing expense
increased by $4,204 as a result of an increase in the number of customer
accounts at the bank. FDIC Insurance expense increased by $22,032 as a
result of increased deposits in the bank. Other miscellaneous expense
increased by $58,143 primarily due to the costs associated with repossessed
assets. Professional fees increased by $175,646 primarily as a result of
increased legal costs associated with non-performing loans. Management
expects professional fees and other miscellaneous expenses to decrease as
non-performing loans are resolved and repossessed assets are disposed of.
(continued) 22
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
COMPARISON OF THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1995 AND 1994
GENERAL. The Company had a net loss for the nine-month period ended
September 30, 1995 of $1,072,360 or $.48 per share, compared to net earnings
of $402,204 or $.19 per share for the same period in 1994. The decrease in
net earnings was due primarily to the increase in the provision for loan
losses, a decrease in net interest income, an increase in other expense,
partially offset by an increase in other income and a decrease in income tax
expense.
INTEREST INCOME AND EXPENSE. Interest income increased to $8,061,550 for the
nine-month period ended September 30, 1995 from $7,214,819 for the same
period in 1994. Interest income on loans increased to $6,696,610 in 1995
from $5,621,468 in 1994, primarily as a result of an increase in the average
yield on the loan portfolio. Interest income on the securities portfolio
decreased by $235,068 for the nine-month period ended September 30, 1995 over
the same period in 1994, as a result of a decrease in the average yield on
securities owned. Other interest and dividends increased $6,657 during the
same nine-month period in 1995 as a result of an increase in the average
volume of other interest-bearing assets. Management expects the rates earned
on the portfolios to fluctuate with general market conditions
Interest expense increased to $5,994,393 during the nine-month period ended
September 30, 1995 from $4,007,764 for the same period in 1994 primarily due
to an increase in the average rate paid on deposits and FHLB advances.
Interest on deposits increased to $4,594,359 in 1995 from $2,612,890 in 1994
and interest on FHLB advances increased to $1,400,034 in 1995 from $1,394,874
in 1994. Management expects to continue to use FHLB advances when the
proceeds can be invested wisely.
PROVISIONS FOR LOAN LOSSES. A provision for loan losses is generally charged
to operations based upon management's evaluation of the potential losses in
its loan portfolio. However, in May, 1995, the OTS directed the Bank to
increase its reserves for loan and REO losses by $730,000. The increase was
primarily the result of the classification of the first mortgages on two
loans on which the Bank has a second mortgage position. Also, additional
reserves were required on two commercial loans whose classification was
downgraded. For the nine months ended September 30, 1995, the Bank has added
a total of $774,225 to the provision for loan losses. The Bank's total
provision for loan losses was $531,483 during 1994, $589,861 during 1993,
$140,000 in 1992 and $117,000 in 1991. Net charge-offs on loans have totaled
$102,069 during the nine-month period ended September 30, 1995, $33,468
during the nine month period ended September 30, 1994, $31,361 for 1993,
$37,232 for 1992 and $60,637 for 1991. There were no charge-offs prior to
1991. Total non-performing loans at September 30, 1995 were $2,959,456
compared to $6,373,024 at December 31, 1994. The allowance for loan losses at
September 30, 1995 was $2,363,332 or 79.86% of non-performing loans and 2.26%
of net loans receivable.
TOTAL OTHER INCOME. Other income increased from $189,650 for the nine-month
period ended September 30, 1994 to $481,970 for the same period in 1995. The
increase in other income is primarily due to increases in rental income, a
gain on the sale of assets, and an increase in other miscellaneous income,
partially offset by a decrease in fees and service charges earned by the bank
and a decrease in unrealized gains on investment securities. Rents and other
miscellaneous income increased by $125,308 and $33,115, respectively, for the
same period in 1995 due to the rental income collected on a commercial rental
property repossessed by the Company and increased other loan income. Fees
and service charges decreased $27,823 from the same period in 1994. Gains on
the sale of assets increased by $183,430 as the result of gains on the sale
of repossessed assets and gains on loans sold.
TOTAL OTHER EXPENSE. Other expense increased to $3,450,466 for the
nine-month period ended September 30, 1995 from $2,745,121 for the same
period in 1994. The increase in 1995 was the result of increased compensation
expenses, occupancy and equipment expenses, professional fees, FDIC Insurance
expense and other miscellaneous expenses, offset partially by decreased data
processing expense. Compensation increased to $1,174,632 in 1995 from
$1,098,945 in 1994
(continued) 23
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(continued)
primarily because increased staffing levels. Occupancy and equipment expense
increased to $514,117 in 1995 from $431,589 primarily due to additional space
rented. Professional fees increased by $249,731 primarily due to the legal
costs associated with non-performing loans. FDIC Insurance expense increased
by $74,092 as a result of increased deposits in the bank. Other miscellaneous
expense increased by $241,066 primarily due to the costs associated with
repossessed assets. Management expects professional fees and other
miscellaneous expenses to decrease as non-performing loans are resolved and
repossessed assets are disposed of.
24
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused the report to be signed on its behalf by the
undersigned thereunto duly authorized.
FEDERAL TRUST CORPORATION
(Registrant)
Date: November 7,1995 By: /s/ AUBREY H. WRIGHT, JR.
--------------- --------------------------------------
Aubrey H. Wright, Jr.,
Chief Financial Officer and duly
authorized Officer of the Registrant
25
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS FOUND ON
PAGES 2 AND 3 OF THE COMPANY'S FORM 10-Q FOR THE YEAR TO DATE, AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> SEP-30-1995
<CASH> 311
<INT-BEARING-DEPOSITS> 3,558
<FED-FUNDS-SOLD> 0
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<INVESTMENTS-CARRYING> 24,277
<INVESTMENTS-MARKET> 21,824
<LOANS> 116,682
<ALLOWANCE> 2,363
<TOTAL-ASSETS> 153,993
<DEPOSITS> 109,904
<SHORT-TERM> 26,100
<LIABILITIES-OTHER> 2,624
<LONG-TERM> 5,420
<COMMON> 11,166
0
0
<OTHER-SE> (1,221)
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<EPS-PRIMARY> .048
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