- --------------------------------------------------------------------------------
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 Three Months Ended: Commission File Number:
--------------------------- -----------------------
September 30, 1996 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.)
1211 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 30,1996
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<PAGE>
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Page
Consolidated Condensed Balance Sheets
September 30, 1996 (unaudited) and December 31, 1995 . . . . . .2
Consolidated Condensed Statements of Operations for the
Three months and Nine months ended
September 30, 1996 and 1995 (unaudited) . . . . . . . . . . . . 3
Consolidated Condensed Statements of Cash Flows for the
Three months and Nine months ended
September 30, 1996 and 1995 (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. . . . . . . . . . . . . . . 13-26
PART II. OTHER INFORMATION
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . .27
<PAGE>
<TABLE>
<CAPTION>
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Balance Sheets
(Unaudited)
September 30, 1996 December 31, 1995
------------------ -----------------
<S> <C> <C>
Assets
Cash $ 3,452,291 1,618,607
Interest bearing deposits -- 51,154
Investment securities available for sale 9,595,126 15,918,376
Investment securities held to maturity 6,283,082 19,093
Loans receivable, net (net of allowance for loan losses of
$1,536,055 in 1996 and $2,060,568 in 1995) 113,129,934 112,905,740
Accrued interest receivable - Loans 813,628 824,330
Accrued interest receivable - Securities 104,317 179,874
Notes Receivable 305,354 --
Federal Home Loan Bank of Atlanta stock, at cost 1,853,200 1,853,200
Loan Sale Proceeds receivable -- 37,765
Real Estate owned, net 1,571,903 3,293,108
Property and equipment, net 950,979 1,291,974
Prepaid expenses and other assets 336,656 358,465
Deferred income taxes 1,592,867 847,752
Income tax refund receivable $ -- 1,190,000
----------- -----------
Total 139,989,337 140,389,438
=========== ===========
Liabilities and Stockholders Equity
Deposit accounts and accrued interest on deposits $ 104,710,214 109,203,123
Official Checks 599,879 695,332
Federal Home Loan Bank advances 25,000,000 21,000,000
Debentures -- 420,000
Advance payments for taxes and insurance 1,287,435 330,504
Accrued expenses and other liabilities 1,260,132 680,353
----------- -----------
Total Liabilities
$ 132,857,660 $ 132,329,312
----------- -----------
Stockholders equity
Common stock, $.01 par value, 5,000,000 shares authorized;
2,256,505 shares issued and outstanding at
September 30, 1996 and December 31, 1995 $ 22,565 22,565
Additional paid -in capital 11,143,659 11,143,659
Retained earnings (accumulated deficit) (3,146,315) (2,249,701)
Treasury stock (16,577 shares of common stock, at cost at
September 30, 1996 and December 31, 1995) (76,525) (76,525)
Unrealized loss on investment securities available for sale, net (811,707) (779,872)
----------- -----------
Total stockholders equity 7,131,677 8,060,126
----------- -----------
Total Liabilities and Stockholders Equity $ 139,989,337 140,389,438
=========== ===========
See accompanying Notes to Consolidated Condensed Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
For Three Months and Nine Months Ended September 30, 1996 and 1995
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Interest income:
Loans $ 2,242,847 2,292,285 6,815,475 6,696,610
Securities 182,942 291,818 485,656 1,107,997
Interest-bearing deposits and other 61,395 64,302 175,581 256,943
------ ------ ------- -------
Total interest income 2,487,184 2,648,405 7,476,712 8,061,550
--------- --------- --------- ---------
Interest expense:
Deposit accounts 1,416,197 1,653,261 4,341,789 4,594,359
Federal Home Loan Bank advances & other
borrowings 329,130 446,743 920,820 1,400,034
------- ------- ------- ---------
Total interest expense 1,745,327 2,100,004 5,262,609 5,994,393
--------- --------- --------- ---------
Net interest income 741,857 548,401 2,214,103 2,067,157
Provision for loan losses 440,530 41,902 575,096 774,225
------- ------ ------- -------
Net interest income after provision 301,327 506,499 1,639,007 1,292,932
------- ------- --------- ---------
Other income:
Fees and service charges 23,233 31,254 76,901 108,774
Rents -- 29,787 7,706 125,906
Gain on sale of assets -- 51,372 153,321 193,806
Other miscellaneous 18,110 18,582 55,129 53,484
------ ------ ------ ------
Total other income 41,343 130,995 293,057 481,970
------ ------- ------- -------
Other expenses:
Employee compensation & benefits 288,222 367,857 977,926 1,174,632
Occupancy and equipment 140,830 169,753 625,903 514,117
Data procession expense 20,735 18,625 66,206 55,227
Professional fees 84,398 273,562 342,216 626,026
FDIC Insurance 795,060 79,066 955,010 224,997
Other miscellaneous 164,606 352,986 515,748 855,467
------- ------- ------- -------
Total other expense 1,493,851 1,261,849 3,483,009 3,450,466
--------- --------- --------- ---------
Net income before income tax (1,151,181) (624,355) (1,550,945) (1,675,564)
Income tax (414,425) (224,769) (654,536) (603,204)
-------- -------- -------- --------
Net income $ (736,756) (399,586) (896,409) (1,072,360)
======== ======== ======== ==========
Per share amounts:
Earnings per share (.33) (0.18) (.40) (0.48)
Cash dividends per share 0.00 0.00 0.00 0.00
Weighted average number of shares outstanding 2,239,928 2,239,928 2,239,928 2,239,928
--------- --------- --------- ---------
</TABLE>
See accompanying Notes to Consolidated Financial Statements
<PAGE>
<TABLE>
<CAPTION>
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Consolidated Condensed Statements of Cash Flows
For the Nine Months Ended September 30, 1996 and 1995
(Unaudited)
1996 1995
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ (896,409) (1,072,360)
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation & amortization of property & equipment 297,896 145,731
Amort. (net) of premiums, fees & disc. on loans & securities 26,991 254,980
(Increase) Decrease in prepaid expenses & other assets 449,867 1,076,591
Increase (Decrease) in accrued expenses & other liabilities 576,232 (10,086)
Provision for allowance on real estate owned 94,861 158,220
Provision (charge-off) for loan losses 554,036 774,225
(Increase) Decrease in accrued interest receivable 86,259 227,536
(Increased) Decrease in loan sale proceeds receivable 37,765 2,491,359
Increase (Decrease) in official checks (95,453) 526,489
Increase (Decrease) in accrued interest on deposit accounts 3,547 9,057
----- -----
Net cash provided by (used in) operating activities 1,135,592 4,581,742
--------- ---------
Cash flows from investing activities:
Acquisition of office properties and equipment (1,344) (15,145)
Sale (Purchase) of Federal Home Loan Bank of Atlanta stock -- 121,800
Proceeds collected from loan sales 4,084,252 2,726,652
(Acquisition) of real estate owned 1,626,344 (191,073)
Sale of securities, available for sale -- --
Principal collected on securities held to maturity 8,324 23,778
Principal collected on loans 17,967,352 18,718,714
Loans originated or purchased (23,082,012) (30,285,516)
----------- -----------
Net cash provided by (used in) investing activities 602,916 (8,900,790)
------- ----------
Cash flows from financing activities:
Increase (Decrease) in deposits, net (4,492,909) 8,375,725
Increase (Decrease) in Federal Home Loan Bank advances 4,000,000 (8,400,000)
Increase (Decrease) in other borrowings (420,000) --
Dividends -- --
Net increase in advance payments by borrowers for taxes &
insurance 956,931 607,604
------- -------
Net cash provided by (used in) financing activities 44,022 583,329
------ -------
Increase in cash and cash equivalents 1,782,530 (3,735,719)
Cash and cash equivalents at beginning of period 1,669,761 7,604,389
--------- ---------
Cash and cash equivalents at end of period 3,452,291 3,868,670
========= =========
</TABLE>
See accompanying Notes to Consolidated Condensed Financial Statements
<PAGE>
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 has been operating two non-bank subsidiaries, Federal Trust Properties
Corp. ("FTPC"), a real estate holding and development company, organized
December 12, 1994, 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. On July 1, 1996, the
Company sold FTPC to an unaffiliated third party and is renting the office space
previously occupied by the Company to FTPC. On September 26, 1996, the Company
dissolved 1270 Leasing Co.
The balance sheets as of September 30, 1996 and December 31, 1995, and the
statements of operations for the three-month and nine-month periods ended
September 30, 1996 and 1995, and the statement of cash flows for the nine-month
period ended September 30, 1996 and 1995 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, 1996, the results of operations for the nine-month period
ended September 30, 1996 and 1995 and cash flows for the nine-month period ended
September 30, 1996 and 1995. The results of operations for the nine-month period
ended September 30, 1996 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, 1995.
2. Summary of Significant Accounting Policies
Per Share Amounts:
Earnings per share is computed using the weighted average number of common
shares outstanding during the period.
Real Estate:
Real estate acquired through foreclosure is recorded at the lower of cost
(unpaid loan balance plus foreclosure expenses) or estimated fair value at the
time of acquisition. Subsequently, such real estate acquired is carried at the
lower of cost or fair market value less estimated costs to sell. Fair market
value is based on current appraisals reduced by estimated costs to sell.
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 nine months of 1995 or 1996.
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, 1996, there were no accruing impaired loans of this type.
At September 30, 1996, impaired loans amounted to $4.47 million. Included in the
allowance for loan losses is $934 thousand 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,
1996 all impaired loans were evaluated on the fair value method.
In the first nine months of 1996, the average recorded investment in impaired
loans was $5.32 million and $197.2 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,
------------------- -------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Balance at beginning of period 1,092,024 2,378,838 2,060,568 1,974,950
Provision for loan
losses 440,530 41,902 554,036 774,225
Transfer (to) from REO -- -- -- (283,774)
Less Charge-offs -- (58,988) (1 ,088,535) (103,649)
Plus recoveries 3,501 1,580 9,986 1,580
----- ----- ----- -----
Balance at end of period 1,536,055 2,363,332 1,536,055 2,363,332
========= ========= ========= =========
Loans Outstanding 113,129,934 116,682,437 113,129,934 116,682,437
Ratio of charge-offs to Loans Outstanding - 0 -% .05% .96% .09%
Ratio of allowance to Loans Outstanding 1.36% 2.03% 1.36% 2.03%
</TABLE>
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 ended September 30, 1996, management made a provision for $440,530
based on its evaluation of the loan portfolio, as compared to the provision of
$41,902 made in the quarter ended September 30, 1995. The increase was primarily
the result of a new appraisal obtained at the direction of the OTS on the
collateral for a loan that has been at the Bank since 1990. Although the loan is
current, the appraisal indicated an additional reserve was required on the loan
to properly reserve it at its current market value.
5. Supplemental Disclosure of Cash Flow and Non-Cash Investing and Financing
Activities
Nine Months Ended September 30,
-------------------------------
1996 1995
---- ----
Cash paid during the period for:
Interest expense $ 2,588,978 3,899,475
Income taxes $ -- 15,053
6. Real Estate Acquired through Foreclosure, Other Repossessed Assets and
Allowance for Real Estate Losses
Real Estate Acquired through Foreclosure, 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:
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Balance at beginning of period 1,757,042 3,438,661 3,293,108 3,322,529
Acquired through foreclosure 71,639 379,118 399,392 2,572,836
Add: Capitalized costs 13,556 39,187 26,736 53,343
Less: Sale of real estate (201,574) (561,178) (2,052,472) (2,072,144)
Less: Chargeoffs (68,760) (213,236) (94,861) (794,012)
Less: Allowance for losses -- -- -- --
--------- --------- --------- ---------
Balance at end of period 1,571,903 3,082,552 1,571,903 3,082,552
========= ========= ========= =========
</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 Ended Nine Months Ended
September 30, September 30,
------------- -------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Balance at beginning of period - 0 - 123 - 0 - 216,050
Provision for REO losses 68,760 158,220 94,861 158,220
Transfer from Mortgage Loans -- -- -- 283,774
Add: Recoveries -- -- -- 246
Less: Chargeoffs (68,760) (158,343) (94,861) (658,290)
------- -------- ------- --------
Balance at end of period - 0 - - 0 - - 0 - - 0 -
======= ======== ======= ========
</TABLE>
7. Investment Securities
At September 30, 1996
---------------------
Book Value Market Value
---------- ------------
Held to maturity:
Orange County, Florida Tax Certificates 10,769 10,769
FHLB Floating Rate Note, 4.3075% due 7/30/03 6,272,313 6,046,250
--------- ---------
Total 6,283,082 6,057,019
========= =========
<PAGE>
At September 30, 1996
---------------------
Available for sale:
FHLB Floating Rate Note, 5.020% due 3/10/97 $ 497,969 497,969
FHLB Floating Rate Note, 4.250% due 3/16/98 486,094 486,094
FHLB Floating Rate Note, 3.572% due 6/17/98 942,500 942,500
FHLB Floating Rate Note, 4.132% due 6/25/98 1,666,875 1,666,875
FHLB Floating Rate Note, 3.515% due 7/15/98 1,417,969 1,417,969
FHLB Floating Rate Note, 3.515% due 7/15/98 1,417,969 1,417,969
FHLB Floating Rate Note, 3.782% due 7/28/98 3,165,750 3,165,750
--------- ---------
Total $ 9,595,126 9,595,126
========= =========
The Bank's investment in obligations of U.S. government agencies consists of
dual indexed bonds issued by the Federal Home Loan Bank. At September 30, 1996,
the bonds had a market value of $15,641,376 and gross unrealized pre-tax losses
of $1,458,624. The bonds have a par value of $17,100,000 and pay interest based
on the difference between two indices. The majority of the bonds, approximately
$14,883,600 at September 30, 1996, pay interest at the 10 year constant maturity
treasury ( CMT ) rate less the 3 month or 6 month LIBOR rate plus a contractual
amount ranging from 2.3% to 4.0%. The remaining Orange County, Florida tax
certificates, totaling $10,769, have been reserved at 100% of book value in
accordance with bank policy which requires the certificates to be fully reserved
after three years.
8. Debentures
The balance in Debentures at September 30, 1996 and December 31, 1995 was $0 and
$420,000, respectively. These debentures have a 5 year maturity and an interest
rate of 10% per annum. They are callable at any time and interest is payable
annually. $170,000 of the debentures were called on January 10, 1996, and
$250,000 were called on August 31, 1996.
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, 1996:
Maturity Date Rate Amount Type
------------- ---- ------ ----
10/01/96 6.05% $ 1,400,000 Variable rate
10/31/96 6.05% 8,600,000 Variable rate
06/28/97 6.01% 5,000,000 Fixed rate
09/16/97 6.01% 5,000,000 Fixed rate
09/15/98 6.12% 5,000,000 Fixed rate
---- ---------
Total 6.05% 25,000,000
==== ==========
Variable rate advances reprice daily and may be repaid at any time without
penalty. Fixed rate advances incur a prepayment penalty if repaid prior to
maturity, and the interest rate is fixed for the term of the advance.
<PAGE>
Amounts Outstanding at:
-----------------------
Month-end Rate Amount
--------- ---- ------
7/31/96 5.93% 22,800,000
8/31/96 5.78% 24,100,000
9/30/96 6.05% 25,000,000
During the three-month and nine-month periods ended September 30, 1996, average
advances outstanding totaled $24.0 and $23.1 million, at average rates of 5.92%
and 5.86%, respectively.
Advances from the FHLB are collateralized by loans and securities that totaled
approximately $31.2 million and $7.0 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 $1,616,237 of the
premium as of September 30 , 1996 as an adjustment to interest income. The
acquisition was accounted for as a purchase.
11. Supervision
The Holding Company and the Bank are subject to extensive regulation,
supervision and examination by the OTS, the primary federal regulator, by the
FDIC with regard to the insurance of deposit accounts and, to a lesser extent,
the Federal Reserve. Such regulation and supervision establishes a comprehensive
framework of activities in which a savings and loan holding company and its
financial institution subsidiaries may engage and is intended primarily for the
protection of the SAIF administered by the FDIC and depositors.
The first significant supervisory concerns regarding the Bank's operation and
underwriting policy were cited by the OTS in the Bank's December 1992
examination. In response to the supervisory concerns, in January 1993, the Bank
hired a new Chief Executive Officer/President who was given the responsibility
of evaluating existing personnel, policies and procedures and the development of
new operating strategies for the Bank.
In May 1993, the OTS and the Bank entered into a Supervisory Agreement which was
mainly directed at correcting loan underwriting deficiencies; limiting certain
affiliated party transactions, including taking measures to avoid the appearance
of conflicts of interest in transactions with affiliated persons; amending the
Bank's main office lease with an affiliate to more accurately reflect market
rates; developing plans for the disposition of classified assets; and better
monitoring and documenting of loans to borrowers to ensure compliance with the
Bank's loan to one borrower limits. To ensure compliance with the terms of the
Supervisory Agreement, the Bank hired its outside independent auditors, KPMG
Peat Marwick LLP, to report to management on a quarterly basis their assessment
of the Bank's performance. The independent auditors reviewed the operations of
the Bank in connection with the Supervisory Agreement and certified to
management that the Bank was in compliance with the Supervisory Agreement.
In the examinations of the Holding Company and the Bank, which were completed in
April, 1994, the OTS cited the Holding Company and the Bank with certain
deficiencies, many of which were the subject of individual Cease and Desist
Orders that were entered into on October 3, 1994 (collectively, the Orders ).
The Bank's Order superseded the 1993 Supervisory Agreement with the OTS.
Management of the Holding Company and the Bank consented to the issuance of the
respective Orders, without admitting or denying that grounds for such Orders
existed.
Certain OTS examination directives which were not included in the Holding
Company's Order, require management of the Holding Company to amend the Holding
Company's office lease with an affiliated party to better reflect market terms
and conditions; discount certain notes receivable to better reflect market
rates; require officers to submit detailed expense reports to the Board of
Directors; discontinue use of the Bank's credit cards for Holding Company
expenditures; and obtain written approval from the Board of Directors for all
Holding Company expenses. The Board and management of the Holding Company
believe that the Holding Company has complied and is in compliance with each of
these directives.
Certain OTS examination directives that were not included in the Bank's Order,
required management of the Bank to ensure adequate documentation of accounting
information, modify loan relationships to comply with loans to one borrower;
obtain appraisals for certain collateral property; obtain Board of Directors
approval for changes to policies and procedures of the Bank; increase the amount
of the general valuation allowance to $1.85 million and effectuate changes in
the management of the lending department, establishing guidelines and individual
responsibility for monitoring loan maturities, collection and foreclosures. The
Board and management believe the Bank has complied and is in compliance with
each of these directives.
Under the Holding Company's Order, the Company: (i) cannot request dividends
from the Bank without written permission from the OTS; (ii) must reimburse the
Bank for the Holding Company's expenses; (iii) develop a Management Services
Agreement with the Bank which provides for the reimbursement of employees who
work for both the Bank and the Holding Company; (iv) must appoint a Compliance
Committee to report to the Board of Directors as to the Company's compliance
with the Order; and (v) the Board must report to the OTS on a quarterly basis
the Company's compliance with the Order.
The Bank's Order provides for the Board of Directors to: (i) develop, adopt and
adhere to policies and procedures to strengthen the Bank's underwriting,
administration, collection and foreclosure efforts; (ii) review and revise
underwriting policies and procedures to comply with regulatory requirements;
(iii) record minutes of the Loan Committee and grant loans only on procedures to
comply with regulatory requirement; (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 the Holding Company
by Bank employees; (x) develop and submit for approval a three year business
plan; (xi) comply with loans to one borrower policy; (xii) make no capital
distribution to the Holding Company without the consent of the OTS; (xiii)
appoint a compliance committee; (xiv) refrain from purchasing additional dual
indexed bonds.
The Orders require the Holding Company and the Bank to establish separate
Compliance Committees. The Compliance Committee meets monthly to review, in
detail, the terms of the Orders to ensure that the respective companies are in
compliance with their Orders. The Bank also contracted with a company
specializing in the review of the system of internal controls and operating
procedures of financial institutions, including compliance with internal
policies and procedures.
In the OTS examinations of the Company and the Bank which were completed by OTS
in June 1995, the OTS found the companies to be substantially in compliance with
their Orders. With regard to the Bank, the OTS found improvement is a number of
areas. In August 1995, the OTS informed the Company that it was conducting an
expanded examination of the Company with regard to certain transactions that
were entered into by prior Bank management in 1990 and 1991. As of the date of
this filing, the OTS has not advised the Company whether the expanded
examination has been concluded.
The OTS completed its most recent examination of both the Company and the Bank
in September, 1996. The examination of the Company focused on the interaction
between the Bank and Company and the effect of that interaction on the operation
of the Bank. The OTS cited two instances which it characterized as having an
appearance of a conflict of interest involving the Company's former President.
The Company s Board of Directors disagrees with the conclusions and findings in
the examination report. The first such instance was the sale of Federal Trust
Properties Corporation ( FTPC ). The Board believes that the sale of FTPC to an
unrelated third-party which was conducted in an arms-length transaction, was in
the best interests of the Company's shareholders. The OTS contends that this
transaction raised certain issues including the Board's failure to operate the
Company in a safe and sound manner by failing to prevent the appearance of
conflicts of interest in violation of the Company's Order. The Board does not
believe that the sale violated any federal regulations, the Order, or was an
unsafe or unsound transaction. The decision to sell FTPC was part of the
Company's strategy to downsize its activities with the sole focus being the
operations of the Bank, while at the same time recouping its investment in FTPC.
The second instance cited by the OTS as an appearance of a conflict of interest
was the manner in which the potential sale of the Company was handled. The Board
engaged the services of an experienced investment banking firm to explore
opportunities to sell the Company. No acceptable definitive sale opportunities
were presented to the Board by the investment banker. The OTS stated that the
former President controlled all offers with little reporting to or input from
other Board members. The OTS was also critical of the fact that it appeared the
marketing materials required the purchase of the Bank's headquarters building as
part of any sale/purchase of the Company. The office building in which the Bank
is headquartered is owned by the wife of the former President. The current lease
for the Bank's headquarters was approved by the OTS. The OTS stated that the
former President's conduct in connection with the potential sale of the Company
is indicative of the degree of control he exerted over the Company at that time.
The Board disagrees with this conclusion. The purchase of the Bank's
headquarters was not a condition for the sale. The Board has determined that it
is not in the best interest of the stockholders to sell the company or Bank at
this time.
The Company has appealed in writing the findings contained in the Company's
examination report to the Regional Director of the Southeast Region. As of the
date of this report, no response has been received. It is the Board's goal to
take whatever actions are necessary to have the respective Orders removed from
the Company and the Bank and to assist the Bank in its continued shift to a more
traditional financial institution with consistent core earnings.
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 the overall condition of the bank improved
modestly and that the Bank meets the FDICIA definition of well-capitalized, the
Company and the Bank are required to establish a plan for raising additional
capital. The OTS noted that while classified assets have declined 37% from the
prior examination, classified assets still represent 6.3% of total assets and
continue to have an adverse effect on earnings and capital. The OTS further
noted that while interest rate risk is moderating, it is still high relative to
capital due to cost of deposits and borrwings. The examination did not disclose
any violations of the Order, law or regulation.
Since the issuance of the 1993 Supervisory Agreement, the Board of Directors of
the Bank has strengthened the overall management of the Bank with the hiring of
a Chief Executive Officer/President in January 1993, the addition of a new Chief
Financial Officer in June 1993, the reorganization of the Loan Department and
the establishment of a new credit culture, coupled with the addition of a new
Chief Lending Officer/Senior Problem Asset Officer in March, 1995. The Board and
management of the Holding Company and the Bank believe that the Bank's
management is taking the necessary corrective measures to ensure that the Bank
is being operated properly and that the level of classified assets are being
carefully monitored and managed in order to provide for the steady reduction of
classified assets. The respective managements are committed to taking the
appropriate steps to have the Orders lifted as soon as possible.
Management expects that the interest income of the Bank will continue to be
limited, so long as the Bank's Order and current growth limitations remain in
place. Under the growth limitations, the Bank cannot increase its total assets
during any quarter in excess of an amount equal to net interest credited on
deposit liabilities during the quarter. Management of the Holding Company and
the Bank, however, do not believe that the respective Orders, or the current
growth limitations on the Bank, will have a material impact on the financial
condition of the Holding Company or the Bank. Changes in banking regulation by
the U.S. Congress, or changes in the banking regulations by the OTS or the FDIC
could, however, have a significant impact on the Holding Company and the Bank
and their operations.
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. No options have been exercised under the Plan at September
30, 1996.
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 September 30, 1996 and 1995, options for 58,453 shares had been
granted to various sales representatives, none of which have been exercised.
<PAGE>
Overview
The Bank's net earnings were adversely affected by the rise in interest rates
that occurred during 1995, due to its negative GAP position, as its liabilities
repriced sooner than, and in greater amounts than, its assets. As a result, the
Bank's cost of funds 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 began to decline in 1995 and continued declining
into 1996, 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. The Bank's net interest income has improved
in 1996 as a result of a decrease in the cost of funds and an increase in the
yield on loans. In addition, the Bank's nonearning assets have decreased. 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 had to increase its loss reserves in 1994 and 1995 as a
result of a higher level of non-performing loans. Although management believes
that the level of non-performing assets should continue to decease 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. During the quarter ended
September 30, 1996, the bank made an addition to its loan loss reserves based on
its evaluation of the loan portfolio.
The Company had projected an operating profit for the full year of 1996, as a
result of the improved interest rate spread, and the decrease in non-performing
assets at the Bank, however, costs incurred in the second quarter of 1996 from
the sale of the Company's remote drive-in facility, which it had assumed from
the Bank, and the corporate reorganization of the Company, also in the second
quarter, resulted in a second quarter and year to date loss. During the third
quarter Congress approved legislation, which the President signed on September
30, 1996, for a one-time special assessment to be charged on all SAIF deposits
to fully capitalize the SAIF at 1.25 percent of insured deposits. The assessment
will be determined by the FDIC in November, but is estimated at $0.657 per $100
of SAIF deposits and will be assessed on the Bank s insured deposits as of March
31, 1995, and paid on November 27, 1996. As a result the Bank charged $716,498
against third quarter earnings, which resulted in a $448,198 or $.20 per share
after tax reduction in third quarter earnings for the Company. In addition,
should interest rates rise during the remainder of the year or non-performing
assets increase due to unforeseen circumstances, the Company earnings could be
adversely affected.
General
Federal Trust Corporation ("Company" or "Holding Company"), formerly FedTrust
Corporation, was incorporated as a unitary savings and loan holding company in
August 1988. The Company 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 were exchanged for each four shares of the Bank's common stock on that
date. The acquisition of the Bank was accounted for as a pooling of interests.
The Bank is currently the only operating subsidiary of the Company and began
operations on May 3, 1988.
The Company has been operating two non-bank subsidiaries, Federal Trust
Properties Corp. ("FTPC"), a real estate holding and development company,
organized December 12, 1994, 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.
The Company 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 $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 the Company. In December 1994, the purchaser
defaulted on the note and the Company 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.
The Company 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 the Company and, in December 1994, FTPC, to whom the Company had
assigned the note, acquired Georgia property through a deed in lieu of
foreclosure and a Note through a voluntary assignment. In January 1996 FTPC sold
the Georgia property with a book value of $17,350 for a purchase price of
$15,703, resulting in a loss of $1,646. The property was sold to an unaffiliated
party for cash.
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 the Company ceased operations and dissolved FTBC. During 1994, the purchaser
of the remaining property defaulted on its notes, which had been assigned to the
Company, and, in December 1994, FTPC, to whom the Company 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. In December, 1995,
FTPC sold the personal property, the office buildings and all of the common area
located in Amelia Island, Florida with a book value of $677,605 for a purchase
price of $583,334, resulting in a loss on the sale of $94,271. The properties
were sold to an unaffiliated party for cash.
During the past year FTPC had been in the initial stages of a HUD insured
apartment development project, which during the quarter ended June 30, 1996, had
advanced to the stage of applying for a mortgage insurance commitment. Based on
the anticipated cash needs and continuing overhead for such a project, the
Company concluded that it would be in the best interest of the Company, and its
banking subsidiary, to sell FTPC, in order to focus the Company's efforts and
resources on the Bank. On July 1, 1996, the Company sold the stock of FTPC for
$425,354 consisting of $60,000 in cash, a note for $60,000 which was due and
paid on August 8, 1996, a note for $230,354 due upon the earlier of certain
events, but in any event due no later than July 31, 1997, and three notes for
$25,000 each, due December 31, 1998, 1999 and 2000, respectively. In addition,
the Company is renting the quarters it previously occupied to FTPC on a month to
month basis, and plans to sub-lease the space to a long term tenant. The Company
dissolved 1270 LC on September 26, 1996, as it was no longer necessary to
maintain the entity for purposes of the lease on the office space previously
occupied by the Company.
As a result of the sale of FTPC and the dissolution of 1270 LC, the only
remaining subsidiary of the Company is the Bank, and the Company's expenses have
been reduced to minimal levels, as there are no longer any salaried employees in
the Company and its offices have been sub-let. As a part of this reorganization,
Mr. James T. Bell resigned as Chairman, President and Chief Executive Officer of
the Company, although he remains on the Board of Directors. The Board has named
James V. Suskiewich, the Chairman, President and Chief Executive Officer of the
Bank, to the positions previously held by Mr. Bell. Employees of the Bank
perform all necessary functions needed by the Company, and the Company
reimburses the Bank for the time they spend on Company business.
On June 1, 1995, the Company assumed the lease from the Bank on the remote
drive-in facility that had been previously used by the Bank. The current annual
lease payment on this facility is $40,063. During the second quarter of 1996,
the Company entered into a contract to sell this facility under the purchase
option in the lease. This was done in order to terminate the remaining lease
obligation which has 16 years remaining. The sale closed in September and the
Company had provided for the lease termination fee of $30,000 and the estimated
closing costs of $8,000, in the second quarter of 1996. In addition, the Company
wrote off the remaining balance of the leasehold improvements at the facility,
totaling $34,921, during the second quarter of 1996.
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, 1996, the most recent report
available, was -24%, as compared to -37% at June 30, 1995. The primary reason
for the decrease in the one year GAP has been the ability of the Bank to extend
the maturities of its liabilities and the sale of a portion of the dual-indexed
bonds from the Bank s investment portfolio during the fourth quarter of 1995. As
interest rates have declined in 1995 and 1996, the Bank's net interest spread
has improved. Should interest rates begin to rise, the Bank's net interest
income will be adversely affected as a result of its negative GAP, however,
should interest rates decline further 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 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 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 Bank is able to further reduce its negative GAP position, it will be subject
to a declining net interest spread when interest rates are rising. As interest
rates began to decline in 1995, the Bank increased its efforts to lengthen
liabilities and shall continue to do so.
The following table sets forth information about rates and yields:
<TABLE>
<CAPTION>
Yields and Rates at
-------------------
September 30, December 31, September 30,
1996 1995 1995
---- ---- ----
<S> <C> <C> <C>
Yields on:
Loan portfolio 8.38% 7.78% 7.97%
Other interest-earning assets 5.00% 5.42% 4.23%
---- ---- ----
Interest-earning assets 7.87% 7.29% 7.18%
Cost of:
Deposits 5.42% 5.64% 5.96%
FHLB advances and other
interest-bearing liabilities 6.00% 5.94% 6.55%
---- ---- ----
Interest-bearing liabilities 5.52% 5.71% 6.08%
Interest rate spread 2.35% 1.58% 1.10%
==== ==== ====
</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, 1996, the Company used funds
primarily from principal collected on loans, $17,967,352; proceeds from FHLB
advances, $4,000,000; proceeds from loan sale receivable, $37,765; proceeds from
the sale of real estate owned, $1,626,344; proceeds from loan sales, $4,084,252;
and funds collected from advance payments of borrowers, $956,931; to fund the
origination and purchase of loans, $23,082,012; decreases in net deposits,
$4,492,909; decreases in other borrowings, $250,000; and an increase in cash,
$1,782,530. As of September 30, 1996, the Bank had outstanding FHLB advances of
$25,000,000. Management believes that in the future funds will be obtained from
the above sources.
At September 30, 1996, loans-in-process, or closed loans scheduled to be funded
over a future period of time, totaled $1,152,445. Loans committed, but not
closed, totaled $3,689,181 and available lines of credit totaled $178,790.
During the nine-month period ended September 30, 1996, the Bank acquired $19.9
million in primarily domestic residential 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 decided to suspend the
payment of dividends for calendar year 1995, and does not anticipate the payment
of dividends during 1996. 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 1996. The payment of dividends in
subsequent years will depend on general economic conditions, the overall
performance of the Company, and the capital needs of the Company.
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 $1,616,237 of the
premium as of September 30, 1996 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, 1996 , average liquidity was 9.70%.
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. This activity entails potential credit losses, the
magnitude of which depends on a variety of economic factors affecting borrowers
which are beyond the control of the Bank. While the Bank has instituted
guidelines and credit review procedures to protect it from avoidable credit
losses, some losses may inevitably occur.
Short-term balloon mortgage loans are sometimes used to allow borrowers the
option of waiting until interest rates are more favorable for a long term fixed
rate loan. If interest rates rise, these loans may require renewals if borrowers
fail to qualify for a long term fixed rate loan at maturity and there is no
assurance that a borrower's income will be sufficient to service the renewal.
Management recognizes the risks associated with this type of lending and
believes that the policies and procedures it applies to such loans lowers the
general risk.
Supervision
The Holding Company and the Bank are subject to extensive regulation,
supervision and examination by the OTS, the primary federal regulator, by the
FDIC with regard to the insurance of deposit accounts and, to a lesser extent,
the Federal Reserve. Such regulation and supervision establishes a comprehensive
framework of activities in which a savings and loan holding company and its
financial institution subsidiaries may engage and is intended primarily for the
protection of the SAIF administered by the FDIC and depositors.
The first significant supervisory concerns regarding the Bank's operation and
underwriting policy were cited by the OTS in the Bank's December 1992
examination. In response to the supervisory concerns, in January 1993, the Bank
hired a new Chief Executive Officer/President who was given the responsibility
of evaluating existing personnel, policies and procedures and the development of
new operating strategies for the Bank.
In May 1993, the OTS and the Bank entered into a Supervisory Agreement which was
mainly directed at correcting loan underwriting deficiencies; limiting certain
affiliated party transactions, including taking measures to avoid the appearance
of conflicts of interest in transactions with affiliated persons; amending the
Bank's main office lease with an affiliate to more accurately reflect market
rates; developing plans for the disposition of classified assets; and better
monitoring and documenting of loans to borrowers to ensure compliance with the
Bank's loan to one borrower limits. To ensure compliance with the terms of the
Supervisory Agreement, the Bank hired its outside independent auditors, KPMG
Peat Marwick LLP, to report to management on a quarterly basis their assessment
of the Bank's performance. The independent auditors reviewed the operations of
the Bank in connection with the Supervisory Agreement and certified to
management that the Bank was in compliance with the Supervisory Agreement.
In the examinations of the Holding Company and the Bank, which were completed in
April, 1994, the OTS cited the Holding Company and the Bank with certain
deficiencies, many of which were the subject of individual Cease and Desist
Orders that were entered into on October 3, 1994 (collectively, the "Orders").
The Bank's Order superseded the 1993 Supervisory Agreement with the OTS.
Management of the Holding Company and the Bank consented to the issuance of the
respective Orders, without admitting or denying that grounds for such Orders
existed.
Certain OTS examination directives which were not included in the Holding
Company's Order, require management of the Holding Company to amend the Holding
Company's office lease with an affiliated party to better reflect market terms
and conditions; discount certain notes receivable to better reflect market
rates; require officers to submit detailed expense reports to the Board of
Directors; discontinue use of the Bank's credit cards for Holding Company
expenditures; and obtain written approval from the Board of Directors for all
Holding Company expenses. The Board and management of the Holding Company
believe that the Holding Company has complied and is in compliance with each of
these directives.
Certain OTS examination directives that were not included in the Bank's Order,
required management of the Bank to ensure adequate documentation of accounting
information, modify loan relationships to comply with loans to one borrower;
obtain appraisals for certain collateral property; obtain Board of Directors
approval for changes to policies and procedures of the Bank; increase the amount
of the general valuation allowance to $1.85 million and effectuate changes in
the management of the lending department, establishing guidelines and individual
responsibility for monitoring loan maturities, collection and foreclosures. The
Board and management believe the Bank has complied and is in compliance with
each of these directives.
Under the Holding Company's Order, the Company: (i) cannot request dividends
from the Bank without written permission from the OTS; (ii) must reimburse the
Bank for the Holding Company's expenses; (iii) develop a Management Services
Agreement with the Bank which provides for the reimbursement of employees who
work for both the Bank and the Holding Company; (iv) must appoint a Compliance
Committee to report to the Board of Directors as to the Company's compliance
with the Order; and (v) the Board must report to the OTS on a quarterly basis
the Company's compliance with the Order.
The Bank's Order provides for the Board of Directors to: (i) develop, adopt and
adhere to policies and procedures to strengthen the Bank's underwriting,
administration, collection and foreclosure efforts; (ii) review and revise
underwriting policies and procedures to comply with regulatory requirements;
(iii) record minutes of the Loan Committee and grant loans only on procedures to
comply with regulatory requirement; (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 the Holding Company
by Bank employees; (x) develop and submit for approval a three year business
plan; (xi) comply with loans to one borrower policy; (xii) make no capital
distribution to the Holding Company without the consent of the OTS; (xiii)
appoint a compliance committee; (xiv) refrain from purchasing additional dual
indexed bonds.
The Orders require the Holding Company and the Bank to establish separate
Compliance Committees. The Compliance Committee meets monthly to review, in
detail, the terms of the Orders to ensure that the respective companies are in
compliance with their Orders. The Bank also contracted with a company
specializing in the review of the system of internal controls and operating
procedures of financial institutions, including compliance with internal
policies and procedures.
In the OTS examinations of the Company and the Bank which were completed by OTS
in June 1995, the OTS found the companies to be substantially in compliance with
their Orders. With regard to the Bank, the OTS found improvement is a number of
areas. In August 1995, the OTS informed the Company that it was conducting an
expanded examination of the Company with regard to certain transactions that
were entered into by prior Bank management in 1990 and 1991. As of the date of
this filing, the OTS has not advised the Company whether the expanded
examination has been concluded.
The OTS completed its most recent examination of both the Company and the Bank
in September, 1996. The examination of the Company focused on the interaction
between the Bank and Company and the effect of that interaction on the operation
of the Bank. The OTS cited two instances which it characterized as having an
appearance of a conflict of interest involving the Company's former President.
The Company's Board of Directors disagrees with the conclusions and findings in
the examination report. The first such instance was the sale of Federal Trust
Properties Corporation ( FTPC ). The Board believes that the sale of FTPC to an
unrelated third-party which was conducted in an arms-length transaction, was in
the best interests of the Company's shareholders. The OTS contends that this
transaction raised certain issues including the Board's failure to operate the
Company in a safe and sound manner by failing to prevent the appearance of
conflicts of interest in violation of the Company's Order. The Board does not
believe that the sale violated any federal regulations, the Order, or was an
unsafe or unsound transaction. The decision to sell FTPC was part of the
Company's strategy to downsize its activities with the sole focus being the
operations of the Bank, while at the same time recouping its investment in FTPC.
The second instance cited by the OTS as an appearance of a conflict of interest
was the manner in which the potential sale of the Company was handled. The Board
engaged the services of an experienced investment banking firm to explore
opportunities to sell the Company. No acceptable definitive sale opportunities
were presented to the Board by the investment banker. The OTS stated that the
former President controlled all offers with little reporting to or input from
other Board members. The OTS was also critical of the fact that it appeared the
marketing materials required the purchase of the Bank's headquarters building as
part of any sale/purchase of the Company. The office building in which the Bank
is headquartered is owned by the wife of the former President. The current lease
for the Bank's headquarters was approved by the OTS. The OTS stated that the
former President's conduct in connection with the potential sale of the Company
is indicative of the degree of control he exerted over the Company at that time.
The Board disagrees with this conclusion. The purchase of the Bank's
headquarters was not a condition for the sale. The Board has determined that it
is not in the best interest of the stockholders to sell the company or Bank at
this time.
The Company has appealed in writing the findings contained in the Company's
examination report to the Regional Director of the Southeast Region. As of the
date of this report, no response has been received. It is the Board's goal to
take whatever actions are necessary to have the respective Orders removed from
the Company and the Bank and to assist the Bank in its continued shift to a more
traditional financial institution with consistent core earnings.
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 the overall condition of the bank improved
modestly and that the Bank meets the FDICIA definition of well-capitalized, the
Company and the Bank are required to establish a plan for raising additional
capital. The OTS noted that while classified assets have declined 37% from the
prior examination, classified assets still represent 6.3% of total assets and
continue to have an adverse effect on earnings and capital. The OTS further
noted that while interest rate risk is moderating, it is still high relative to
capital due to cost of deposits and borrwings. The examination did not disclose
any violations of the Order, law or regulation.
Since the issuance of the 1993 Supervisory Agreement, the Board of Directors of
the Bank has strengthened the overall management of the Bank with the hiring of
a Chief Executive Officer/President in January 1993, the addition of a new Chief
Financial Officer in June 1993, the reorganization of the Loan Department and
the establishment of a new credit culture, coupled with the addition of a new
Chief Lending Officer/Senior Problem Asset Officer in March, 1995. The Board and
management of the Holding Company and the Bank believe that the Bank's
management is taking the necessary corrective measures to ensure that the Bank
is being operated properly and that the level of classified assets are being
carefully monitored and managed in order to provide for the steady reduction of
classified assets. The respective managements are committed to taking the
appropriate steps to have the Orders lifted as soon as possible.
Management expects that the interest income of the Bank will continue to be
limited, so long as the Bank's Order and current growth limitations remain in
place. Under the growth limitations, the Bank cannot increase its total assets
during any quarter in excess of an amount equal to net interest credited on
deposit liabilities during the quarter. Management of the Holding Company and
the Bank, however, do not believe that the respective Orders, or the current
growth limitations on the Bank, will have a material impact on the financial
condition of the Holding Company or the Bank. Changes in banking regulation by
the U.S. Congress, or changes in the banking regulations by the OTS or the FDIC
could, however, have a significant impact on the Holding Company and the Bank
and their operations.
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, 1996:
<TABLE>
<CAPTION>
At September 30, 1996
------------------------------------------------------------------
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 6,953 4.97% 6,953 4.97% 7,834 10.26%
Requirement 2,098 1.50% 4,196 3.00% 6,108 8.00%
----- ---- ----- ---- ----- ----
Excess 4,855 3.47% 2,757 1.97% 1,726 2.26%
===== ==== ===== ==== ===== ====
</TABLE>
<PAGE>
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
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.
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.
In October 1995, the Financial Accounting Standards Board issued SFAS No. 123,
Accounting for Stock Based Compensation. This Statement establishes financial
accounting and reporting standards for stock-based employee compensation plans.
Those plans include all arrangements by which employees receive shares of stock
or other equity instruments of the employer or the employer incurs liabilities
to employees in amounts based on the price of the employer s stock. Examples are
stock purchase plans, stock options, restricted stock and stock appreciation
rights. This Statement also applies to transactions in which an entity issues
its equity instruments to acquire goods or services from nonemployees. Those
transactions must be accounted for based on the fair value of the consideration
received or the fair value of the equity instruments issued, whichever is more
reliably measurable. This Statement is effective for transactions entered into
in fiscal years that begin after December 15, 1995.
In June 1996, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 125 Accounting for Transfers and Servicing of
Financial Assets and Extinguishment of Liabilities. This Statement provides
accounting and reporting standards for transfers and servicing of financial
assets and extinguishment of liabilities. Those standards are based on
consistent application of a financial-components approach that focuses on
control. Under that approach, after a transfer of financial assets, an entity
recognizes the financial and servicing assets it controls and the liabilities it
has incurred, derecognizes financial assets when control has been surrendered,
and derecognizes liabilities when extinguished. This Statement provides
consistent standards for distinguishing transfers of financial assets that are
sales from transfers that are secured borrowings. This Statement is effective
for transfers and servicing of financial assets and extinguishment of
liabilities occurring after December 31, 1996, and is to be applied
prospectively. Earlier or retroactive application is not permitted.
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, 1996 and 1995 General.
The Company had a net loss for the three-month period ended September 30, 1996
of $736,756 or $.33 per share , compared to net loss of $399,586 or $.18 per
share for the same period in 1995. The increase in the net loss was due
primarily to the increase in provision for loan losses and the one time special
assessment by the FDIC on SAIF deposits.
Interest Income and Expense. Interest income decreased to $2,487,847 for the
three-month period ended September 30, 1996 from $2,648,405 for the same period
in 1995. Interest income on loans decreased to $2,242,847 in 1996 from
$2,292,285 in 1995, primarily as a result of a decrease in the average amount of
loans outstanding. Interest income on the securities portfolio decreased by
$108,876 for the three-month period ended September 30, 1996 over the same
period in 1995, as a result of a decrease in the amount of securities owned and
a decrease in the average yield on securities held. Other interest and dividends
decreased $2,907 during the same three-month period in 1996 from 1995 as a
result of a decrease in the average volume of other interest-bearing assets.
Management expects the rates earned on the portfolio to fluctuate with general
market conditions.
Interest expense decreased to $1,745,327 during the three-month period ended
September 30, 1996 from $2,100,004 for the same period in 1995 due to a decrease
in the amount of, and the average rate paid on, such deposits and FHLB advances.
Interest on deposits decreased to $1,416,196 in 1996 from $1,653,261 in 1995 as
a result of decreased deposits and a decrease in the average rate paid, and
interest on FHLB Advances decreased to $329,130 in 1996 from $446,743 in 1995 as
a result of the decrease in the average amount of advances outstanding and a
decrease in the rates paid on advances. 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 managements evaluation of the potential losses in its loan
portfolio. During the quarter, management did make a provision for loan losses
of $440,530 based on its evaluation of the loan portfolio. The increase was
primarily the result of a new appraisal obtained at the direction of the OTS on
the collateral for a loan that has been at the Bank since 1990. Although the
loan is current, the appraisal indicated an additional reserve was required on
the loan to properly reserve it at its current market value. The Bank's total
provision for loan losses was $41,902 during the same period in 1995. There were
no charge-offs on loans during the three-month period ended September 30, 1996
as compared to net charge off of $57,408 during the three-month period ended
September 30, 1995. Total non-performing loans at September 30, 1996 were
$1,618,075 compared to $2,959,456 at September 30, 1995. The allowance for loan
losses at September 30, 1996 was $1,536,055 or 95% of non-performing loans and
1.36% of net loans outstanding.
Total Other Income. Other income decreased from $130,995 for the three-month
period ended September 30, 1995 to $41,344 for the same period in 1996. The
decrease in other income was due to a decrease of $51,372 in gains on the sale
of assets, a decrease in rental income of $29,787 on the commercial rental
property repossessed by the Company, a decrease of $8,021 in fees and services
charges, and a decrease of $472 in other miscellaneous income. Rental income
decreased as a result of the sale of the rental property owned by the Company,
and fees and service charges decreased primarily because of a decrease in the
fees and charges earned by the Bank on deposit accounts. Other miscellaneous
income decreased for the three-month period ended September 30, 1996 due
primarily to decreased other loan income, and there were no gains on the sale of
assets during the three month period.
Total Other Expense. Other expense increased to $1,493,851 for the three-month
period ended September 30, 1996 from $1,261,849 for the same period in 1995. The
increase in 1996 was primarily the result of the one time special assessment by
the FDIC on SAIF deposits totaling $716,498, in accordance with the legislation
signed by the President on September 30, 1996. This increase in other expense
was partially offset by decreased employee compensation expense, decreased
occupancy and equipment expense, decreased professional fees, and decreased
other expense. Compensation decreased to $288,222 in 1996 from $367,857 in 1995
as a result of reductions in staff. Professional fees decreased by $189,164
primarily as a result of decreased legal costs associated with non-performing
loans. Other miscellaneous expense decreased by $188,380 due to reduced costs
associated with repossessed assets. Occupancy and equipment expense decreased by
$28,923 to $140,830 in 1996 due to the subletting of the Company's offices. Data
Processing expense increased by $2,110 due to the increased number of accounts
at the Bank. Management expects professional fees and other miscellaneous
expenses to decrease further as non-performing loans are resolved and
repossessed assets are disposed of.
Comparison of the Nine-Month Period Ended September 30, 1996 and 1995
General. The Company had a net loss for the nine-month period ended September
30, 1996 of $896,409 or $.40 per share, compared to net loss of $1,072,360 or
$.48 per share for the same period in 1995. The decrease in the net loss was due
primarily to increased net interest income and the decrease in provision for
loan losses offset partially by decreased other income and increased other
expense.
Interest Income and Expense. Interest income decreased to $7,476,712 for the
nine-month period ended September 30, 1996 from $8,061,550 for the same period
in 1995. Interest income on loans increased to $6,815,475 in 1996 from
$6,696,610 in 1995, primarily as a result of an increase in the yield on loans
outstanding. Interest income on the securities portfolio decreased by $622,341
for the nine-month period ended September 30, 1996 over the same period in 1995,
as a result of a decrease in the amount of securities owned and a decrease in
the average yield on the securities. Other interest and dividends decreased
$81,362 during the same nine-month period in 1996 from 1995 as a result of a
decrease in the average volume of other interest-bearing assets. Management
expects the rates earned on the portfolio to fluctuate with general market
conditions.
Interest expense decreased by $731,784 from $5,994,393 during the nine-month
period ended September 30, 1995 to $5,262,609 for the same period in 1996 due to
a decrease in the amount of, and the average rate paid on, such deposits and
FHLB advances. Interest on deposits decreased to $4,341,789 in 1996 from
$4,594,359 in 1995 as a result of decreased deposits and a decrease in the
average rate paid, and interest on FHLB Advances decreased to $920,820 in 1996
from $1,400,034 in 1995 as a result of the decrease in the amount of advances
outstanding and a decrease in the rates paid on advances. 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 first nine months of 1996 management did make a
provision for loan losses of $554,036 based on its evaluation of the loan
portfolio. The Bank's total provision for loan losses was $774,225 during the
same period in 1995. Net charge-offs on loans totaled $1,078,549 during the
nine-month period ended September 30, 1996 and $102,069 during the nine-month
period ended September 30,1995. Total non-performing loans at September 30,1996
were $1,618,075 compared to $2,959,456 at September 30, 1995. The allowance for
loan losses at September 30, 1996 was $1,536,055 or 95% of non-performing loans
and 1.36% of net loans outstanding.
Total Other Income. Other income decreased from $481,970 for the nine-month
period ended September 30, 1995 to $293,057 for the same period in 1996. The
decrease in other income was due to a decrease in rental income of $118,200 on
the commercial rental property repossessed by the Company, a decrease of $31,873
in fees and services charges, and a decrease of $40,485 in gains on the sale of
assets, offset partially by an increase in other miscellaneous income of $1,645.
Rental income decreased as a result of a reduction in the amount of rental
property owned by the Company, and fees and service charges decreased primarily
because of a decrease in the fees and charges earned by the Bank on deposit
accounts. Gains on the sale of assets decreased as a result of fewer asset
sales. Other miscellaneous income increased for the nine-month period ended
September 30, 1996 due primarily to increased other loan income.
Total Other Expense. Other expense increased to $3,504,069 for the nine-month
period ended September 30, 1996 from $3,450,466 for the same period in 1995. The
increase in 1996 was the result of increased FDIC insurance expense, increased
occupancy and equipment expense, and increased data processing expense,
partially offset by decreased employee compensation expense, decreased
professional fees, and decreased other expense. FDIC Insurance expense increased
by $730,013 primarily as the result of the one time special assessment by the
FDIC on SAIF deposits totaling $716,498, in accordance with the legislation
signed by the President on September 30, 1996. Occupancy and equipment expense
increased by $111,786 in 1996 to $625,903 in 1996 due to the one time charges to
writeoff the leasehold improvements at the Company's office in the amount of
$114,646 and to writeoff the leasehold improvements at the closed drive-in
facility in the amount of $34,921, partially offset by decreased rent resulting
from the subletting of the Company s offices. Data processing expense increased
by $10,979 as a result of an increase in the charges from the service bureau
that process customer accounts at the bank and an increase in the number of
accounts at the bank. Compensation decreased to $977,926 in 1996 from $1,174,632
in 1995 as a result of reductions in staff. Professional fees decreased by
$283,810 primarily as a result of decreased legal costs associated with
non-performing loans. Other miscellaneous expense decreased by $318,659 due to
reduced costs associated with repossessed assets. Management expects
professional fees and other miscellaneous expenses to decrease further as
non-performing loans are resolved and repossessed assets are disposed of.
<PAGE>
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
PART II. OTHER INFORMATION
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 12, 1996 By: /s/ Aubrey H. Wright, Jr.
Aubrey H. Wright, Jr.
Chief Financial Officer and
duly authorized Officer
of the Registrant
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS FOUND ON
PAGES AND 3 OF THE COMPANY'S FORM 10Q FOR THE YEAR TO DATE.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JUL-01-1996
<PERIOD-END> SEP-30-1996
<EXCHANGE-RATE> 1
<CASH> 3,452
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 9,595
<INVESTMENTS-CARRYING> 6,283
<INVESTMENTS-MARKET> 6,057
<LOANS> 113,130
<ALLOWANCE> 1,536
<TOTAL-ASSETS> 139,989
<DEPOSITS> 104,710
<SHORT-TERM> 20,000
<LIABILITIES-OTHER> 3,147
<LONG-TERM> 5,000
0
0
<COMMON> 23
<OTHER-SE> 7,109
<TOTAL-LIABILITIES-AND-EQUITY> 139,989
<INTEREST-LOAN> 2,243
<INTEREST-INVEST> 183
<INTEREST-OTHER> 61
<INTEREST-TOTAL> 2,487
<INTEREST-DEPOSIT> 1,416
<INTEREST-EXPENSE> 1,745
<INTEREST-INCOME-NET> 742
<LOAN-LOSSES> 441
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,494
<INCOME-PRETAX> (1,151)
<INCOME-PRE-EXTRAORDINARY> (1,151)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (737)
<EPS-PRIMARY> (0.33)
<EPS-DILUTED> (0.33)
<YIELD-ACTUAL> 7.87
<LOANS-NON> 1,618
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 8,620
<ALLOWANCE-OPEN> 1,092
<CHARGE-OFFS> 0
<RECOVERIES> 4
<ALLOWANCE-CLOSE> 1,536
<ALLOWANCE-DOMESTIC> 1,536
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
