<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 Three Months Ended: Commission File Number:
- ------------------------------ ---------------------------
MARCH 31, 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.)
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 March 31, 1996
===============================================================================
<PAGE>
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PAGE
Consolidated Condensed Balance Sheets
March 31, 1996 (unaudited) and December 31, 1995. . . . . . . . . 2
Consolidated Condensed Statements of Operations for the
Three months ended March 31, 1996 (unaudited) and 1995. . . . . . 3
Consolidated Condensed Statements of Cash Flows for the
Three months ended March 31, 1996 (unaudited) and 1995. . . . . . 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 - 23
PART II. OTHER INFORMATION
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
<PAGE>
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Condensed Balance Sheets
(UNAUDITED)
<TABLE>
<CAPTION>
March 31, 1996 December 31, 1995
--------------- -----------------
ASSETS
<S> <C> <C>
Cash $ 4,230,250 1,618,607
Interest bearing deposits - 51,154
Investment securities available for sale 15,788,391 15,918,376
Investment securities held to maturity 10,769 19,093
Loans receivable, net (net of allowance
for loan losses of $1,929,814 in
1996 and $2,060,568 in 1995) 111,788,901 112,905,740
Accrued interest receivable - Loans 871,662 824,330
Accrued interest receivable - Securities 93,354 179,874
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 2,018,920 3,293,108
Property and equipment, net 1,251,459 1,291,974
Prepaid expenses and other assets 395,640 358,465
Deferred income taxes 821,211 847,752
Income tax refund receivable 1,190,000 1,190,000
-------------- -----------
Total $ 140,313,757 140,389,438
-------------- -----------
-------------- -----------
LIABILITIES AND STOCKHOLDERS EQUITY
Deposit accounts and accrued interest on deposits $ 107,702,990 109,203,123
Official Checks 747,821 695,332
Federal Home Loan Bank advances 22,300,000 21,000,000
Debentures 250,000 420,000
Advance payments for taxes and insurance 564,955 330,504
Accrued expenses and other liabilities 765,633 680,353
-------------- -----------
Total Liabilities $ 132,331,399 132,329,312
-------------- -----------
Stockholders equity
Common stock, $.01 par value, 5,000,000 shares
authorized; 2,256,505 shares issued and
outstanding at March 31, 1996 and December 31, 1995 $ 22,565 22,565
Additional paid -in capital 11,143,659 11,143,659
Retained earnings (accumulated deficit) (2,246,228) (2,249,701)
Treasury stock (16,577 shares of common stock,
at cost at March 31, 1996 and December 31, 1995) (76,525) (76,525)
Unrealized loss on investment
securities available for sale, net (861,113) (779,872)
------------- -----------
Total stockholders equity 7,982,358 8,060,126
------------- -----------
Total Liabilities and Stockholders Equity $ 140,313,757 140,389,438
</TABLE>
See accompanying Notes to Consolidated Condensed Financial Statements.
2
<PAGE>
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
For Three Months Ended March 31, 1996 and 1995
(Unaudited)
<TABLE>
<CAPTION>
Three Months
Ended March 31,
---------------------------
1996 1995
---- ----
<S> <C> <C>
INTEREST INCOME:
Loans $ 2,353,343 2,123,331
Securities 152,424 412,741
Interest-bearing deposits and other 52,055 112,219
------------ ----------
Total interest income 2,557,822 2,648,291
------------ ----------
INTEREST EXPENSE:
Deposit accounts 1,519,970 1,342,899
Federal Home Loan Bank advances and
other borrowings 296,904 521,210
------------ ----------
Total interest expense 1,816,874 1,864,109
------------ ----------
NET INTEREST INCOME 740,948 784,182
Provision for loan losses 18,356 (2,323)
------------ ----------
NET INTEREST INCOME AFTER PROVISION 759,304 781,859
------------ ----------
OTHER INCOME:
Fees and service charges 26,301 38,113
Rents 5,544 39,730
Gain on sale of assets 136,396 126,465
Other miscellaneous 20,846 11,551
------------ ----------
Total other income 189,087 215,859
------------ ----------
OTHER EXPENSES:
Employee compensation & benefits 344,225 417,418
Occupancy and equipment 169,471 163,426
Data procession expense 23,294 14,240
Professional fees 136,825 177,090
FDIC Insurance 80,390 72,965
Other miscellaneous 188,760 198,193
------------ ----------
Total other expense 942,965 1,043,332
------------ ----------
NET INCOME BEFORE INCOME TAX 5,426 (45,614)
Income tax 1,953 (16,421)
------------ ----------
NET INCOME $ 3,473 (29,193)
------------ ----------
------------ ----------
PER SHARE AMOUNTS:
Earnings per share .002 (0.013)
------------ ----------
Cash dividends per share - -
Weighted average number of shares
outstanding 2,239,928 2,239,928
------------ ----------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
3
<PAGE>
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Consolidated Condensed Statements of Cash Flows
For the three Months Ended March 31, 1996 and 1995
(Unaudited)
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES: $
Net income 3,473 (29,193)
Adjustments to reconcile net
income to net cash provided
by (used in) operating activities:
Depreciation & amortization of
property & equipment 50,271 47,732
Amortization (net) of premiums,
fees & discounts on loans &
securities 3,529 82,419
(Increase) Decrease in prepaid
expenses & other assets (16,242) (264,738)
Increase (Decrease) in accrued expenses
& other liabilities 81,494 60,896
Provision for allowance on real
estate owned 18,356 122,812
Provision (charge-off) for loan
losses (18,356) (120,368)
(Increase) Decrease in accrued
interest receivable 39,188 212,645
(Increased) Decrease in loan sale
proceeds receivable 37,765 2,491,359
Increase (Decrease) in official
checks 52,489 (73,367)
Increase (Decrease) in accrued
interest on deposit accounts 3,785 11,540
---------- ----------
Net cash provided by (used in)
operating activities 255,752 2,541,737
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of office properties
and equipment) (4,147) (7,249)
Sale (Purchase) of Federal Home
Loan Bank of Atlanta stock - 121,800
Proceeds collected from loan sales 4,084,252 1,866,639
(Acquisition) of real estate owned 1,255,832 224,406
Sale of securities, available for sale - 5,008
Principal collected on securities
held to maturity 8,324 -
Principal collected
on loans 6,423,873 5,255,046
Loans originated or purchased (9,327,715) (10,162,465)
---------- ----------
Net cash provided by (used
in) investing activities 2,440,419 (2,696,815)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (Decrease) in deposits, net (1,500,133) 6,893,346
Increase (Decrease) in Federal
Home Loan Bank advances 1,300,000 (6,100,000)
Increase (Decrease) in other
borrowings (170,000) -
Dividends - -
Net increase in advance payments
by borrowers for taxes & insurance 234,451 244,444
---------- ----------
Net cash provided by (used
in) financing activities (135,682) 1,037,790
---------- ----------
Increase in cash and cash equivalents 2,560,489 882,712
Cash and cash equivalents at beginning
of period 1,669,761 7,604,389
---------- ----------
Cash and cash equivalents at end of
period $ 4,230,250 8,487,101
---------- ----------
---------- ----------
</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, 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 March 31, 1996 and December 31, 1995 and the
statements of operations for the three-month period ended March 31, 1996 and
1995 and the statement of cash flows for the three-month period ended March
31, 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 March 31, 1996, the results of operations for the
three-month period ended March 31, 1996 and 1995 and cash flows for the
three-month period ended March 31, 1996 and 1995. The results of operations
for the three-month period ended March 31, 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 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.
5
(continued)
<PAGE>
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 three 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 March 31, 1996, there were no accruing impaired loans of this type.
At March 31, 1996, impaired loans amounted to $ 5.684 million. Included in
the allowance for loan losses is $ 1.146 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 March 31, 1996 all impaired loans were evaluated on the fair value method.
In the first three months of 1996, the average recorded investment in
impaired loans was $5.899 million and $69.9 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.
6
(continued)
<PAGE>
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 Ended March 31,
----------------------------
1996 1995
---- ----
<S> <C> <C>
Balance at beginning of period $ 2,060,568 1,974,950
Provision for loan losses (18,356) 2,323
Less Charge-offs (115,681) (122,691)
Plus recoveries 3,283 -
------------ -----------
Balance at end of period $ 1,929,814 1,854,582
------------ -----------
------------ -----------
Loans Outstanding $111,788,901 113,335,701
Ratio of charge-offs to Loans Outstanding .10% .11%
Ratio of allowance to Loans Outstanding 1.73% 1.64%
</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 first quarter ended March 31, 1996, management did not make a
provision based on its evaluation of the loan portfolio, as compared to the
provision of $2,323 made in the quarter ended March 31, 1995. The negative
provision of $18,356 shown on the income statement is a transfer to the
provision for Real Estate Owned which is reflected in other miscellaneous
expense. (See "ALLOWANCE FOR REAL ESTATE LOSSES")
5. SUPPLEMENTAL DISCLOSURE OF CASH FLOW AND NON-CASH INVESTING AND FINANCING
ACTIVITIES
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1996 1995
---- ----
<S> <C> <C>
Cash paid during the period for:
Interest expense $ 921,320 1,331,762
Income taxes $ - 15,053
</TABLE>
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:
7
(continued)
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1996 1995
---- ----
<S> <C> <C>
Balance at beginning of period $ 3,293,108 3,322,529
Acquired through foreclosure 235,469 950,179
Add: Capitalized costs 13,180 -
Less: Sale of real estate (1,498,481) (224,406)
Less: Chargeoffs (24,356) (545,893)
Less: Allowance for losses - (7,968)
----------- ---------
Balance at end of period $ 2,018,920 3,494,441
----------- ---------
----------- ---------
</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 March 31,
----------------------------
1996 1995
---- ----
<S> <C> <C>
Balance at beginning of period $ - 431,050
Provision for REO losses 18,356 -
Add: Recoveries - -
Less: Chargeoffs (18,356) (423,082)
------ -------
Balance at end of period $ -0- 7,968
------ -------
------ -------
</TABLE>
7. INVESTMENT SECURITIES
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
Book Value Market Value
----------- ------------
<S> <C> <C>
HELD TO MATURITY:
Orange County, Florida Tax Certificates 10,769 10,769
AVAILABLE FOR SALE:
FHLB Floating Rate Note, 4.480% due 3/10/97 $ 495,156 495,156
FHLB Floating Rate Note, 4.930% due 3/16/98 486,875 486,875
FHLB Floating Rate Note, 3.000% due 6/17/98 937,188 937,188
FHLB Floating Rate Note, 3.000% due 6/25/98 1,665,234 1,665,234
FHLB Floating Rate Note, 3.080% due 7/15/98 1,413,750 1,413,750
FHLB Floating Rate Note, 3.080% due 7/15/98 1,413,750 1,413,750
FHLB Floating Rate Note, 3.237% due 7/28/98 3,157,375 3,157,375
FHLB Floating Rate Note, 4.433% due 7/30/03 6,219,063 6,219,063
----------- ----------
Total $15,788,391 15,788,391
----------- ----------
----------- ----------
</TABLE>
8
(continued)
<PAGE>
The Bank's investment in obligations of U.S. government agencies consist of
dual indexed bonds issued by the Federal Home Loan Bank. At March 31, 1996,
the bonds had a market value of $15,788,391 and gross unrealized pre-tax
losses of $1,311,609. 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 $14,806,000 at March 31, 1996, pay interest at the 10
year constant maturity treasury rate less the 3 month or 6 month LIBOR rate
plus a contractual amount ranging from 2.3% to 4.0%.
8. DEBENTURES
The balance in "Debentures" at March 31, 1996 and December 31, 1995 was
$250,000 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. The remainder of the Debentures mature in September,
October, and November 1996.
9. ADVANCES FROM FEDERAL HOME LOAN BANK
The following is an analysis of the advances from the Federal Home Loan Bank:
<TABLE>
<CAPTION>
AMOUNTS OUTSTANDING AT MARCH 31, 1996:
- ---------------------------------------------------------
Maturity Date Rate Amount Type
- ------------- ---- ----------- -------------
<S> <C> <C> <C>
04/01/96 5.85% $ 2,000,000 Variable rate
04/30/96 5.85% 5,300,000 Variable rate
05/09/96 5.26% 5,000,000 Fixed rate
09/15/96 5.83% 5,000,000 Fixed rate
09/15/96 6.12% 5,000,000 Fixed rate
---- -----------
Total 5.77% 22,300,000
----- -----------
----- -----------
</TABLE>
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.
<TABLE>
<CAPTION>
AMOUNTS OUTSTANDING AT:
- ----------------------------------------
Month-end Rate Amount
- ---------- ---- -----------
<S> <C> <C>
1/31/95 6.12% 20,500,000
2/29/95 5.81% 19,300,000
3/31/95 5.77% 22,300,000
</TABLE>
During the three-month period ended March 31, 1996, average advances
outstanding totaled $20.775 million at an average rate of 5.91%.
Advances from the FHLB are collateralized by loans and securities that
totaled approximately $33.5 million and $ 7.0 million, respectively.
9
(continued)
<PAGE>
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
$1,592,662 of the premium as of March 31, 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 following examinations of the Holding Company and the Bank, which were
completed in April, 1994, the OTS cited the Holding Company and the Bank with
certain deficiencies, many of which were the subject of the individual cease
and desist orders that were entered into on October 3, 1994 (collectively,
the "Orders"). The Bank's Order superseded the 1993 Supervisory Agreement
with the OTS. Management of the Holding Company and the Bank consented to
the issuance of the respective Orders, without admitting or denying that
grounds for such Orders existed.
The OTS examination directives which were not included in the Holding
Company's Order, require management of the Holding Company to amend the
Holding Company's office lease with an affiliated party to better reflect
market terms and conditions; discount certain notes receivable to better
reflect market rates; require officers to submit detailed expense reports to
the Board of Directors; discontinue use of the Bank's credit cards for
Holding Company expenditures; and obtain written approval from the Board of
Directors for all Holding Company expenses. The Board and management of the
Holding Company believe that the Holding Company has complied and is in
compliance with each of these directives.
The OTS examination directives that were not included in the Bank's Order,
required management of the Bank to ensure adequate documentation of
accounting information, modify loan relationships to comply with loans to one
10
(continued)
<PAGE>
borrower; obtain appraisals for certain collateral property; obtain Board of
Directors approval for changes to policies and procedures of the Bank;
increase the amount of the general valuation allowance to $1.85 million and
effectuate changes in the management of the lending department, establishing
guidelines and individual responsibility for monitoring loan maturities,
collection and foreclosures. The Board and management believe the Bank has
complied and is in compliance with each of these directives.
Under the Holding Company's Order, the Company: (I) cannot request dividends
from the Bank without written permission from the OTS; (ii) must reimburse
the Bank for the Holding Company's expenses; (iii) develop a Management
Services Agreement with the Bank which provides for the reimbursement for
employees who work for both the Bank and the Holding Company; (iv) must
appoint a Compliance Committee to report to the Board of Directors as to the
Company's compliance with the Order; and (v) the Board must report to the OTS
on a quarterly basis the Company's compliance with the Order.
The Bank's Order provides for the Board of Directors to: (I) develop, adopt
and adhere to policies and procedures to strengthen the Bank's underwriting,
administration, collection and foreclosure efforts; (ii) review and revise
underwriting policies and procedures to comply with regulatory requirements;
(iii) record minutes of the loan committee and grant loans only on procedures
to comply with regulatory requirements; (iv) record minutes of the loan
committee and grant loans only on terms approved by the loan committee; (v)
develop and implement a written plan to collect, strengthen and reduce the
risk of loss for all real estate owned and for certain loans at risk and
secured by real estate; (vi) comply with policies and procedures requiring
written inspection of development and construction loans; (vii) pay no more
than market rate, determined by a rent study approved by the OTS for lease of
the Bank's offices; (viii) make no payment of taxes owned by a person
affiliated with the Bank; (ix) seek a Management Services Agreement for work
performed for the Holding Company by Bank employees; (x) develop and submit
for approval a three year business plan; (xi) comply with loans to one
borrower policy; (xii) make no capital distribution to the Holding Company
without the consent of the OTS; (xiii) appoint a compliance committee; and
(xiv) refrain from purchasing additional dual indexed bonds.
The Orders require the Holding Company and the Bank to establish separate
Compliance Committees. The Compliance Committees meet monthly to review, in
detail, the terms of the Orders to ensure that the respective companies are
in compliance with their Orders. The Bank also contracted with a company
specializing in the review of the system of internal controls and operating
procedures of financial institutions, including compliance with internal
policies and procedures.
In the most recent examinations of the Holding Company and the Bank, which
were concluded in June, 1995, the OTS found the companies to be in compliance
with their Orders. With regard to the Bank, improvement was noted in a
number of areas, including underwriting procedures, documentation,
disposition of problem assets, reduction in the dependency on wholesale funds
and a reduction in operating expenses. In August, 1995 the OTS informed the
Holding Company that it was conducting an expanded examination of the Holding
Company with regard to certain transactions that were entered into by prior
Bank management in 1990 and 1991. As of the date of this filing, the
examination had not been concluded.
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
11
(continued)
<PAGE>
assets. The respective management's are committed to taking the appropriate
steps to have the Orders lifted as soon as possible.
Management expects that the interest income of the Bank will continue to be
limited, so long as the Bank's Order and current growth limitations remain in
place. Under the growth limitations, the Bank cannot increase its total
assets during any quarter in excess of an amount equal to net interest
credited on deposit liabilities during the quarter. Management of the
Holding Company and the Bank, however, do not believe that the respective
Orders, or the current growth limitations on the Bank, will have a material
impact on the financial condition of the Holding Company or the Bank. Changes
in banking regulation by the U.S. Congress, or changes in the banking
regulations by the OTS or the FDIC could, however, have a significant impact
on the Holding Company and the Bank and their operations.
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 March 31, 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 March 31, 1996 and 1995, options for 58,453 shares
had been granted to various sales representatives.
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 were adversely affected by the rise in interest rates
that occurred during 1994 and 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. 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.
The Company has 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, should interest rates rise during
1996 or non-performing assets increase due to unforeseen circumstances, the
Company earnings could be adversely affected. In addition, during 1995,
Congress considered various proposals 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 proposed amount of the special assessment has been as
high as $0.85 per $100 of SAIF deposits. Assuming that a special assessment
was applied at the $0.85 rate based upon SAIF insured deposits at December
31, 1995, the Bank would incur additional deposit insurance premium expense
of approximately $0.93 million which would be charged against current period
income. The timing and amount of such an assessment cannot be accurately
predicted at this time.
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 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.
The Company presently operates 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
13
(continued)
<PAGE>
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
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. FTPC sold the Georgia property in January
1995 to an unaffiliated party for cash and realized a loss of $1,647.
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.
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
14
(contineud)
<PAGE>
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
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 December 31, 1995, the most recent report
available, was -23%, as compared to -38% at March 31, 1995 and -26% at
September 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 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.
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.
15
(continued)
<PAGE>
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
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
-----------------------------------
March 31, December 31, March 31,
1996 1995 1995
---- ---- ----
<S> <C> <C> <C>
Yields on:
Loan portfolio 8.76% 7.78% 7.97%
Other interest-earning assets 3.90% 5.42% 4.23%
---- ---- ----
Interest-earning assets 7.99% 7.29% 7.18%
Cost of:
Deposits 5.58% 5.64% 5.96%
FHLB advances and other 5.77% 5.94% 6.55%
interest-bearing ----- ----- -----
liabilities 5.61% 5.71% 6.08%
Interest-bearing liabilities 2.38% 1.58% 1.10%
---- ---- ----
---- ---- ----
Interest rate spread
</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 three-month period ended March 31, 1996, the Company used funds
primarily from principal collected on loans, $6,423,873; proceeds from FHLB
advances, $1,300,000, proceeds from loan sale receivable, $37,765; proceeds
from the sale of real estate owned, $1,255,832, and proceeds from loan sales,
$4,084,252, to fund the origination and purchase of loans, $9,327,715;
decreases in net deposits, $1,500,133; decreases in other borrowings,
$170,000; and an increase in cash, $2,611,643. As of March 31, 1996, the
Bank had outstanding FHLB advances of $22,300,000. Management believes that
in the future funds will be obtained from the above sources.
At March 31, 1996, loans-in-process, or closed loans scheduled to be funded
over a future period of time, totaled $1,212,316. Loans committed, but not
closed, totaled $3,015,673 and available lines of credit totaled $109,775.
16
(continued)
<PAGE>
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
During the three-month period ended March 31, 1996, the Bank acquired $7.65
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
$1,592,662 of the premium as of March 31, 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 March 31, 1996, average liquidity was 9.77%.
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.
17
(continued)
<PAGE>
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
SUPERVISION
The Company and the Bank are subject to extensive regulation, supervision and
examination by the OTS, the primary federal regulator, by the FDIC with
regard to the insurance of deposit accounts and, to a lesser extent, the
Federal Reserve. Such regulation and supervision establishes a comprehensive
framework of activities in which a savings and loan holding company and its
financial institution subsidiaries may engage and is intended primarily for
the protection of the SAIF administered by the FDIC and depositors.
The first significant supervisory concerns regarding the Bank's operation and
underwriting policy were cited by the OTS in the Bank's December 1992
examination. In response to the supervisory concerns, in January 1993, the
Bank hired a new Chief Executive Officer/President who was given the
responsibility of evaluating existing personnel, policies and procedures, and
the development of new operating strategies for the Bank.
In May 1993, the OTS and the Bank entered into a Supervisory Agreement which
was mainly directed at correcting loan underwriting deficiencies; limiting
certain affiliated party transactions, including taking measures to avoid the
appearance of conflicts of interest in transactions with affiliated persons;
amending the Bank's main office lease with an affiliate to more accurately
reflect market rates; developing plans for the disposition of classified
assets; and better monitoring and documenting of loans to borrowers to ensure
compliance with the Bank's loan to one borrower limits. To ensure compliance
with the terms of the Supervisory Agreement, the Bank hired its outside
independent auditors, KPMG Peat Marwick LLP, to report to management on a
quarterly basis their assessment of the Bank's performance. The independent
auditors reviewed the operations of the Bank in connection with the
Supervisory Agreement and certified to management that the Bank was in
compliance with the Supervisory Agreement.
In the following examinations of the Holding Company and the Bank, which were
completed in April, 1994, the OTS cited the Company and the Bank with certain
deficiencies, many of which were the subject of the individual cease and
desist orders that were entered into on October 3, 1994 (collectively, the
"Orders"). The Bank's Order superseded the 1993 Supervisory Agreement with
the OTS. Management of the Company and the Bank consented to the issuance of
the respective Orders, without admitting or denying that grounds for such
Orders existed.
The OTS examination directives which were not included in the Company's
Order, require management of the Company to amend the 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 Company expenditures; and
obtain written approval from the Board of Directors for all Company expenses.
The Board and management of the Company believe that the Company has
complied and is in compliance with each of these directives.
The OTS examination directives that were not included in the Bank's Order,
required management of the Bank to ensure adequate documentation of
accounting information, modify loan relationships to comply with loans to one
borrower; obtain appraisals for certain collateral property; obtain Board of
Directors approval for changes to policies and procedures of the Bank;
increase the amount of the general valuation allowance to $1.85 million and
effectuate changes in the management of the lending department, establishing
guidelines and individual responsibility for monitoring loan maturities,
collection and foreclosures. The Board and management believe the Bank has
complied and is in compliance with each of these directives.
Under the 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 Company's expenses; (iii) develop a Management Services
18
(continued)
<PAGE>
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
Agreement with the Bank which provides for the reimbursement for employees
who work for both the Bank and the 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 requirements; (iv) record minutes of the loan
committee and grant loans only on terms approved by the loan committee; (v)
develop and implement a written plan to collect, strengthen and reduce the
risk of loss for all real estate owned and for certain loans at risk and
secured by real estate; (vi) comply with policies and procedures requiring
written inspection of development and construction loans; (vii) pay no more
than market rate, determined by a rent study approved by the OTS for lease of
the Bank's offices; (viii) make no payment of taxes owned by a person
affiliated with the Bank; (ix) seek a Management Services Agreement for work
performed for the 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 Company without the consent
of the OTS; (xiii) appoint a compliance committee; and (xiv) refrain from
purchasing additional dual indexed bonds.
The Orders require the Company and the Bank to establish separate Compliance
Committees. The Compliance Committees meet monthly to review, in detail, the
terms of the Orders to ensure that the respective companies are in compliance
with their Orders. The Bank also contracted with a company specializing in
the review of the system of internal controls and operating procedures of
financial institutions, including compliance with internal policies and
procedures.
In the most recent examinations of the Company and the Bank, which were
concluded in June, 1995, the OTS found the companies to be in compliance with
their Orders. With regard to the Bank, improvement was noted in a number of
areas, including underwriting procedures, documentation, disposition of
problem assets, reduction in the dependency on wholesale funds and a
reduction in operating expenses. In August, 1995 the OTS informed the
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 examination
had not been concluded.
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 Company and the Bank believe
that the Bank's management is taking the necessary corrective measures to
ensure that the Bank is being operated properly and that the level of
classified assets are being carefully monitored and managed in order to
provide for the steady reduction of classified assets. The respective
management's are committed to taking the appropriate steps to have the Orders
lifted as soon as possible.
Management expects that the interest income of the Bank will continue to be
limited, so long as the Bank's Order and current growth limitations remain in
place. Under the growth limitations, the Bank cannot increase its total
assets during any quarter in excess of an amount equal to net interest
credited on deposit liabilities during the quarter. Management of the
Company and the Bank, however, do not believe that the respective Orders, or
the current growth
19
(continued)
<PAGE>
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
limitations on the Bank, will have a material impact on the financial
condition of the 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 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 March 31, 1996:
<TABLE>
<CAPTION>
At March 31, 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 7,548 5.39% 7,548 5.39% 8,330 11.05%
Requirement 2,099 1.50% 4,198 3.00% 6,033 8.00%
------ --------- ------ --------- ------ ---------
Excess 5,449 3.89% 3,350 2.39% 2,297 3.05%
------ --------- ------ --------- ------ ---------
------ --------- ------ --------- ------ ---------
</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
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.
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
20
(continued)
<PAGE>
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
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 was 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.
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.
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.
21
(continued)
<PAGE>
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
RESULTS OF OPERATIONS
COMPARISON OF THE THREE-MONTH PERIOD ENDED MARCH 31, 1996 AND 1995
GENERAL. The Company had a net profit for the three-month period ended March
31, 1996 of $3,473 or $.002 per share, compared to net loss of $29,193 or
$(.013) per share for the same period in 1995. The increase in net earnings
was due primarily to the decrease in non-interest expenses, offset partially
by decreased net interest income and a decrease in other income.
INTEREST INCOME AND EXPENSE. Interest income decreased to $2,557,822 for the
three-month period ended March 31, 1996 from $2,648,291 for the same period
in 1995. Interest income on loans increased to $2,353,343 in 1996 from
$2,123,331 in 1995, primarily as a result of decreases in non-performing
loans and an increase in the average yield on the loan portfolio. Interest
income on the securities portfolio decreased by $260,317 for the three-month
period ended March 31, 1996 over the same period in 1995, as a result of a
decrease in the average yield on securities held. Other interest and dividends
decreased $60,164 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 $1,816,874 during the three-month period ended
March 31,1 996 from $1,864,109 for the same period in 1995 primarily due to a
decrease in the average rate paid on such deposits and FHLB advances.
Interest on deposits increased to $1,519,970 in 1996 from $1,342,899 in 1995
as a result of increased deposits and interest on FHLB Advances decreased to
$296,904 in 1996 from $521,210 in 1995 as a result of the decrease in the
amount of advances outstanding. 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 did not make a provision
for loan losses based on its evaluation of the loan portfolio, however
$18,356 was transferred from the provision for loan losses to the provision
for losses on real estate owned. The Bank's total provision for loan losses
was $2,323 during the same period in 1995 and there was no provision during
the same period in 1994. Net charge-offs on loans totaled $112,398 during
the three-month period ended March 31, 1996, $122,691 during the three-month
period ended March 31,1995, $4,121 for 1994, and $31,361 for 1993. There
were no charge-offs prior to 1991. Total non-performing loans at March
31,1996 were $3,215,300 compared to $ 5,705,888 at March 31, 1995. The
allowance for loan losses at March 31, 1996 was $1,929,814 or 60% of
non-performing loans and 1.73% of net loans outstanding.
TOTAL OTHER INCOME. Other income decreased from $215,859 for the three-month
period ended March 31, 1995 to $189,087 for the same period in 1996. The
decrease in other income was due to a decrease in rental income of $34,186 on
the commercial rental property repossessed by the Company and a decrease of
$11,812 in fees and services charges, partially offset by increased
miscellaneous income and increased gains on the sale of assets. 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. Other
miscellaneous income increased by $9,295 for the three-month period ended
March 31, 1996 due primarily to increased other loan income, and gains on the
sale of assets increased by 9,931 for the three month period.
TOTAL OTHER EXPENSE. Other expense decreased to $942,965 the three-month
period ended March 31, 1996 from $1,043,332 for the same period in 1995. The
decrease in 1996 was the result of decreased employee compensation
22
<PAGE>
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
expense, decreased professional fees, and decreased miscellaneous expense,
partially offset by increased occupancy and equipment expense, data
processing expense, and FDIC insurance expense. Compensation decreased to
$344,225 in 1996 from $417,418 in 1995 as a result of reductions in staff.
Professional fees decreased by $40,265 primarily as a result of decreased
legal costs associated with non-performing loans. Other miscellaneous
expense decreased by $9,433 due to reduced costs associated with repossessed
assets. Occupancy and equipment expense increased by $6,045 in 1996 to
$169,471 in 1996 primarily due to the normal annual adjustments in rental
rates. Data processing expense increased by $9,054 as a result of an
increase in the number of customer accounts at the bank. FDIC Insurance
expense increased by $7,425 as a result of increased deposits in 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.
23
<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: May 13, 1996 By: /s/ Aubrey H. Wright, Jr.
---------------------------- ------------------------------
Aubrey H. Wright, Jr.
Chief Financial Officer and
duly authorized
Officer of the Registrant
24
<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 CONPANY'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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 4,230
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 15,788
<INVESTMENTS-CARRYING> 11
<INVESTMENTS-MARKET> 11
<LOANS> 111,789
<ALLOWANCE> 1,930
<TOTAL-ASSETS> 140,314
<DEPOSITS> 107,703
<SHORT-TERM> 17,550
<LIABILITIES-OTHER> 2,078
<LONG-TERM> 5,000
0
0
<COMMON> 23
<OTHER-SE> 7,959
<TOTAL-LIABILITIES-AND-EQUITY> 140,314
<INTEREST-LOAN> 2,353
<INTEREST-INVEST> 204
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<INTEREST-TOTAL> 2,558
<INTEREST-DEPOSIT> 1,520
<INTEREST-EXPENSE> 1,817
<INTEREST-INCOME-NET> 741
<LOAN-LOSSES> (18)
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 943
<INCOME-PRETAX> 5
<INCOME-PRE-EXTRAORDINARY> 3
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3
<EPS-PRIMARY> .002
<EPS-DILUTED> .002
<YIELD-ACTUAL> 7.99
<LOANS-NON> 3,215
<LOANS-PAST> 0
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<LOANS-PROBLEM> 9,570
<ALLOWANCE-OPEN> 2,061
<CHARGE-OFFS> 116
<RECOVERIES> 3
<ALLOWANCE-CLOSE> 1,930
<ALLOWANCE-DOMESTIC> 1,820
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</TABLE>
