SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549-1004
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998 Commission File Number 33-27139
FEDERAL TRUST CORPORATION
(Exact name of registrant is specified in its charter)
Florida 59-2935028
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1211 Orange Avenue
Winter Park, Florida 32789
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(Address of principal (Zip Code)
executive office)
Registrant's telephone number, including area code: (407) 645-1201
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
The registrant's common stock is listed on the NASDBQ small cap market. The
number of shares of Common Stock outstanding as of March 1, 1999 was 4,941,547.
The number of shares of the voting common stock held by non-affiliates of the
registrant was 4,687,224.
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 and (2) has been subject to such filing requirements for
the past 90 days. YES X NO
DOCUMENTS INCORPORATED BY REFERENCE:
NONE
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PART I
ITEM 1. BUSINESS
General
Federal Trust Corporation ("Federal Trust" or the "Company" or the "Holding
Company") was organized in February 1989 for the purpose of becoming the unitary
savings and loan holding company of Federal Trust Bank (the "Bank"), a federally
chartered stock savings bank then headquartered in Amelia Island, Florida.
Federal Trust's and the Bank's headquarters are currently located in Winter
Park, Florida. Federal Trust 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, Federal Trust has greater
flexibility than the Bank to diversify and expand its business activities,
either through newly formed subsidiaries or through acquisitions.
Federal Trust'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 had been operating two non-bank subsidiaries, Federal Trust Properties
Corp. ("FTPC") , a real estate holding and development company, organized
December 12, 1994, which owned two office buildings in Amelia Island, Florida
until December, 1995 and a residential site in Augusta, Georgia; and 1270
Leasing Co. ("1270 LC"), a real estate leasing entity organized May 27, 1994,
which leased the Holding Company's office located in Winter Park, Florida. 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 Federal Deposit Insurance Corporation ("FDIC"), an agency of the United
States Government, insures through the Savings Association Insurance Fund
("SAIF"), all depositors of the Bank up to $100,000 in accordance with the rules
and regulations of the FDIC. The Bank is subject to comprehensive regulation,
examination and supervision by the Office of Thrift Supervision ("OTS") and the
FDIC, which is intended primarily for the benefit of depositors. See
"Regulation" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
Federal Trust is a legal entity separate from the Bank. The principal sources of
Federal Trust's revenues on an unconsolidated basis are earnings on its
investments and dividends from the Bank. Various regulatory restrictions and tax
considerations limit directly or indirectly the amount of dividends the Bank can
pay to Federal Trust. In addition, federal law restricts the Bank in the making
of investments in or loans to Federal Trust or its affiliates. See "Regulation."
Federal Trust's executive offices are located at 1211 Orange Avenue, Winter
Park, Florida 32789 and its telephone number is (407) 645-1201. As used herein,
references to "Federal Trust and the Bank" may include Federal Trust and its
consolidated subsidiaries (the Bank) unless the context otherwise indicates.
The Bank is primarily engaged in the origination of one-to-four family
residential mortgage loans, residential construction loans, multi-family loans,
commercial real estate loans, SBA loans, land acquisition and development loans,
consumer loans and the purchase of such loans and other assets,. The Bank
originates loans within its market area, defined generally as the state of
Florida. The Bank also invests in U.S. Government securities, federal funds and
other debt securities as well as mortgage-backed securities as appropriate.
Funding for these activities is primarily from customer deposits, Federal Home
Loan Bank ("FHLB") advances and other borrowings as well as normal amortization
and prepayments from its loan portfolio.
The Bank's current operating strategy includes loan origination, bulk loan/asset
purchases and core deposit generation in its local community. Adjustable rate
loans are originated and purchased to help the Bank manage its interest rate
spreads. The mortgage lending emphasis is on origination of residential loans in
its market area, retaining loans appropriate for portfolio and selling other
originated loans into the secondary market. Management intends, to the extent
possible, to control interest rates paid on deposits; however, outside factors
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such as economic, environmental, competitive and liquidity needs will have an
effect on the cost of deposits. The Bank's principal sources of earnings are
currently interest on real estate mortgage loans, investments, and overnight
deposits, fees on checking accounts and sales of loans. Its principal expenses
are interest paid on deposits, FHLB advances and operating expenses.
Market Area and Competition
The Company and the Bank are located in Winter Park, a city of 25,000 residents,
located approximately 7 miles northeast of downtown Orlando. Winter Park is in
the heart of the greater metropolitan Orlando area which encompasses Orange,
Seminole, Lake, and Osceola counties in central Florida. The total population of
the four county area is estimated at 1.473 million, with the majority in Orange
and Seminole counties. On October 30, 1998, the Bank opened a new branch in
downtown Sanford, Florida. Sanford is located approximately 12 miles northeast
of the Bank's main office in Winter Park, and is the second largest city in
Seminole County with a population estimated at 36,000. The bank's primary market
area is northeast Orange county and Seminole county, although its customers come
from the entire four county area. Although best known as a tourist destination,
with over 20 million visitors a year, the area has become a center for
industries such as aerospace and defense, electro-optics and lasers, computer
simulated training, computer networking and data management. In addition, motion
picture production, professional and amateur sports, and distribution make the
local economy more diverse each year. Many companies, including some in the
Fortune 500, have chosen the Orlando area as a base for corporate, regional, and
divisional headquarters. The area is also home to the University of Central
Florida with an enrollment of 26,000, one of the fastest growing schools in the
state university system, as well as Valencia Community College and Seminole
Community College whose combined enrollment exceeds 90,000. Winter Park is home
to Rollins College, the oldest college in Florida founded in 1885. According to
The Orlando Sentinel newspaper, the greater metropolitan Orlando area is
projected to be one of the fastest growing areas in the United States through
the year 2000.
The Bank experiences substantial competition in attracting and retaining
deposits and in lending funds. The primary factor in competing for deposits is
interest rates. Direct competition for deposits comes from other thrift
institutions and commercial banks. Additional significant competition for
deposits comes from corporate and government securities and money market funds.
The primary factors in competing for loans are interest rates and loan
origination points. The Bank is currently competing aggressively, due to the
current level of interest rates, for the origination of construction and
permanent residential mortgage loans. Competition for origination of real estate
loans normally comes from other thrift institutions, commercial banks, mortgage
bankers, insurance companies and real estate investment trusts.
In addition to competition from other thrifts, the Bank faces significant
competition from other financial services organizations. Commercial banks
continue to compete for loans and deposits, while finance companies and credit
unions compete in the important areas of consumer lending and deposit gathering.
Additionally, nontraditional financial service providers such as stock and
investment brokers, mutual funds and insurance companies have intensified
competition for savings and investment dollars in recent years.
Consolidation within the banking industry, and in particular within Florida, has
been dramatic. As of September 30, 1998, the four largest banking institutions
in the state controlled approximately 58% of the bank deposits. In 1980, the
four largest controlled less than 33% of the deposits.
Geographic deregulation also has had a material impact on the banking industry.
Recent legislation in Florida and on the national level will remove most of the
final barriers to interstate banking. Under Florida Law, bank holding companies
are permitted to acquire existing banks across state lines. A bank holding
company may now consolidate its interstate subsidiary banks into branches and
merge with a bank in another state, depending on state laws.
Risk Factors
Readers should note, in particular, that this document contains forward-looking
statements within the meaning of Section 21E of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), that involve substantial risks and
uncertainties. When used in this document, or in the documents incorporated by
reference herein, the words "anticipate", "believe", "estimate", "may", "intend"
and "expect" and similar expressions identify certain of such forward-looking
statements. Actual results, performance or achievements could differ materially
from those contemplated, expressed or implied by the forward-looking statements
contained herein. The considerations listed herein represent certain important
factors the Company believes could cause such results to differ. These
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considerations are not intended to represent a complete list of the general or
specific risks that may affect the Company. It should be recognized that other
risks, including general economic factors and expansion strategies, may be
significant, presently or in the future, and the risks set forth herein may
affect the Company to a greater extent than indicated.
Lending Activities
General. The primary lending activity of the Company is the acquisition and the
origination of government insured or guaranteed or conventional loans for the
purchase or construction of residential real property, which loans are secured
by first liens on such property. Conventional loans are loans which are not
insured by the Federal Housing Administration ("FHA") or partially guaranteed by
the Veterans Administration ("VA"). Within this category, the largest portion of
the Company's loans are made to homeowners on the security of single-family
dwellings. The Company has also, to a lesser extent, made commercial real
estate, and U.S. Small Business Administration ("SBA") guaranteed business
loans, home equity, and other consumer loans.
Loan Portfolio Composition. The Company's net loan portfolio, which is total
loans plus premiums paid for loans purchased less loans in process, unearned
discounts and loan origination fees and allowance for loan losses, totaled
$152.1 million at December 31, 1998, representing 87.2% of total assets at such
date. At December 31, 1997, the Company's total loan portfolio, net amounted to
$121.9 million.
Residential mortgage loans comprise the largest group of loans in the Company's
loan portfolio, amounting to $142.0 million or 89.4% of the total loan portfolio
at December 31, 1998, of which approximately 98.9% are first mortgage loans and
includes $11.5 million in loans for the construction of single-family homes and
$3.9 million which are either insured by the FHA or partially guaranteed by the
VA. The percentage of the Company's loan portfolio consisting of single-family
residential real estate loans has increased during the past few years.
In addition, commercial real estate loans, including land loans, amounted to
$14.9 million or 9.3% of the total loan portfolio, net at December 31, 1998.
Commercial real estate loans consist of $13.8 million of loans secured by other
non-residential property and $1.1 million of loans secured by undeveloped land
as of December 31, 1998. The percentage of the Company's loan portfolio
consisting of such loans has, in the past five years, ranged from 21.9% of the
total loan portfolio, in 1993, to 9.3% of the total loan portfolio in 1998. At
December 31, 1998, consumer and other loans, consisting of installment loans and
savings account loans, amounted to $2.2 million or 1.4% of the total loan
portfolio.
The following table sets forth information concerning the Company's loan
portfolio by type at the dates indicated.
<TABLE>
<CAPTION>
At December 31,
- --------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
Percent Percent Percent Percent Percent
------- ------- ------- ------- -------
Amount of Total Amount of Total Amount of Total Amount of Total Amount of Total
------ -------- ------ --------------- -------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
Permanent 141,518 88.8% 117,279 94.7% 109,012 94.8% 110,725 96.0% 103,659 92.2%
Construction 15,332 9.6 4,715 3.8% 3,795 3.3% 1,667 1.4% 1,342 1.2%
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total mortgage loans 156,850 98.4% 121,994 98.5% 112,807 98.1% 112,392 97.9% 105,001 93.4%
Consumer & other loans 999 0.6% 746 0.6% 154 0.1% 180 0.2% 503 0.5%
Commercial loans 35 0.2% 490 0.4% 1,350 1.2% 1,443 1.3% 891 0.8%
Lines of credit 1,243 0.8% 570 0.5% 686 0.6% 1,259 1.1% 2,385 2.1%
In substance foreclosure -- -- -- -- -- -- -- -- 3,592 3.2%
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total loans 159,446 100.0% 123,800 100.0% 114,997 100.0% 112,372 100.0% 112,372 100.0%
Premium on loans purchased 1,375 1,370 1,155 987 1,460
Less:
Loans in process 7,590 2,138 1,902 1,190 525
Unearned discounts & loan
origination fees 27 13 170 104 149
Loans held for sale -- -- -- -- --
Allowance for loan losses 1,136 1,110 1,533 2,061 1,975
------- ------- ------- ------- -------
Net loans 152,068 121,909 112,547 112,906 111,183
======= ======= ======= ======= =======
</TABLE>
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Contractual Repayments. Scheduled contractual principal repayments of loans do
not reflect the actual life of such assets. The average life of loans is
substantially less than their average contractual terms because of prepayments.
In addition, due-on-sale clauses on loans generally give the Bank the right to
declare a conventional loan immediately due and payable in the event, among
other things, that the borrower sells the real property subject to the mortgage
and the loan is not repaid. The average life of mortgage loans tends to
increase, however, when current mortgage loan rates are substantially higher
than rates on existing mortgage loans and, conversely, decrease when rates on
existing mortgages are substantially higher than current mortgage loan rates. As
of December 31, 1998, the Bank had $11.5 million in construction loans, all of
which mature in one year or less. Fifty-five percent (55%) of such loans have
fixed rates and 45% have adjustable rates.
Purchase, Origination, and Sale of Loans. Historically, Florida has experienced
a rate of population growth in excess of national averages. However, the real
estate development and construction industries in Florida have been sensitive to
cyclical changes in economic conditions and the demand for and supply of
residential units. The Company's real estate mortgage loan origination
activities will be affected by changes in the real estate development and
construction industries.
The Company's residential real estate loan volume has been primarily purchased
since 1991. The Company generally purchases loan packages of $2.0 million to
$10.0 million of single family residential mortgages which are primarily
seasoned one-year ARM loans. Approximately 70% of the single family residential
mortgages in the Company's loan portfolio are secured by properties located in
Florida. While the Company prefers to purchase loan packages comprised of
Florida real estate, because of pricing and the limited number of Florida loan
packages that are available, the Company also purchases packages of seasoned
loans outside of Florida. The loan packages undergo an individual loan
underwriting review prior to purchase.
The Company generally originates loans on real estate located in its primary
lending area of central Florida. Residential mortgage loan originations by the
Bank are attributable to direct solicitation by employed loan originators,
depositors, other existing customers, advertising and referrals from real estate
brokers, mortgage brokers and developers. The Company has authority within
regulatory limitations to originate loans secured by real estate throughout the
United States but the company does not actively originate outside of Florida.
The Bank's residential mortgage loans are originated in accordance with written
underwriting standards approved by the Board of Directors. Most fixed rate loan
originations are eligible for sale to Fannie Mae and other investors in the
secondary market. The Bank has engaged in the sale of whole loans.
The Company utilizes the sale of fixed rate loans and purchases of ARM loans to
improve its interest rate sensitivity and to ensure its future interest margin
against adverse economic conditions created by rising interest rates. Sale of
fixed rate loans can also provide liquidity and profits under certain market
conditions.
Consumer loan originations by the Bank are attributable largely to depositors
and walk-in customers and referrals. Commercial real estate loan originations
are also attributable largely to brokers, walk-in customers, and referrals. All
of the Bank's loan applications are evaluated by the Bank's staff at the main
office to ensure compliance with the Bank's underwriting standards. See "Lending
Activities - Loan Portfolio Composition - Loan Underwriting Policies."
[THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK.]
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The following table sets forth for the Bank total loans originated, purchased,
sold and repaid during the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996 1995 1994
--------- -------- ------- -------- ------
(In Thousands of Dollars)
<S> <C> <C> <C> <C> <C>
Originations:
Real Estate Loans:
Loans on existing property $ 19,238 $ 10,405 $ 4,955 $ 3,354 $ 3,739
Construction loans 10,168 2,758 621 186 1,466
Commercial loans 3,223 2,308 663 100 148
Lines of credit 704 409 -- 74 154
Consumer & other loans 683 285 515 47 54
-------- -------- -------- -------- --------
Total loans originated 34,016 16,165 6,754 3,761 5,561
Purchases: 51,266 23,675 25,082 36,913 36,913
-------- -------- -------- -------- --------
Total loans originated & purchased 85,282 39,840 31,836 32,766 42,474
Sales and principal reductions
Loans sold (9,250) (2,241) (7,761) (2,561) (4,620)
Principal on loan reductions (40,386) (28,796) (24,351) (27,296) (22,194)
-------- -------- -------- -------- --------
Total loans sold & principal reductions ($49,636) ($31,037) ($32,112) ($29,587) ($26,814)
-------- -------- -------- -------- --------
Increase (decrease) in loans receivable (before net items) 35,646 8,803 (276) 2,909 15,660
======== ======== ======== ======== ========
</TABLE>
Loan Underwriting Lending activities are subject to the bank's underwriting
standards and loan origination procedures prescribed by the Board of Directors
and management. Loan applications are obtained to determine the borrower's
ability to repay, and the more significant items on these applications are
verified through the use of credit reports, financial statements and
confirmations. The Company's lending policy for real estate loans generally
requires that collateral be appraised by an independent, outside appraiser
approved by the bank's board of directors.
Loans are approved at various management levels up to and including the Bank's
Board of Directors, depending on the amount of the loan. Loan approvals are made
in accordance with a Chart of Delegated Authority approved by the Board of
Directors. Generally, loans less than $250,000 are approved by authorized
officers or underwriters. Loans in excess of $250,000 to $400,000 require the
concurrence of two or more authorized officers. Loans over $400,000 require
approval by the Loan Committee or Board of Directors.
While the Company has always had underwriting standards and loan policies for
its lending programs, the management team has established an internal and an
external loan review process to ensure that the underwriting standards and loan
policies are being followed.
General lending policies. The policy of the Company for real estate loans is to
have a valid mortgage lien on real estate securing a loan and to obtain a title
insurance policy which insures the validity and priority of the lien. Borrowers
must also obtain hazard insurance policies prior to closing, and when the
property is in a flood prone area, flood insurance is required. Most real estate
loans also require the borrower to advance funds on a monthly basis together
with each payment of principal and interest to a mortgage escrow account from
which disbursements are made for items such as real estate taxes and property
insurance.
The Company is permitted to lend up to 100% of the appraised value of real
property securing a mortgage loan. However, if the amount of a conventional,
residential loan (including a construction loan or a combination construction
and permanent loan) originated or refinanced exceeds 90% of the appraised value,
the Company is required by federal regulations to obtain private mortgage
insurance on that portion of the principal amount of the loan that exceeds 80%
of the appraised value of the property. The Company will originate single family
residential mortgage loans up to a 97% loan-to-value ratio if the required
private mortgage insurance is obtained. Loans over 97% loan-to-value ratio, if
originated, would be under special community support programs or one of the
Federal Housing Administration, Veterans Administration or USDA Rural Housing
Service or insurance programs. The loan-to-value ratio on a home loan secured by
a junior lien generally does not exceed 100%, including the amount of the first
mortgage on the collateral. With respect to home loans granted for construction
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or combination construction/permanent financing, the Company will lend up to 95%
of the appraised value of the property on an "as completed" basis. The Company
generally limits the loan-to-value ratio on multi-family residential and
commercial real estate loans to 80% of value. Consumer loans are considered to
be loans to natural persons for personal, family or household purposes, and
these loans may be unsecured, secured by personal property or secured by liens
on real estate which, when aggregated with prior liens, equals or exceeds the
appraised value of the collateral property.
The maximum amount which the Company could have loaned to one borrower and the
borrower's related entities at December 31, 1998 was approximately $1.75
million. There are no loans in the Company's portfolio in excess of the loans to
one borrower limit.
Federal regulations also permit the Company to invest, in the aggregate, up to
four times its regulatory capital in loans secured by non-residential or
commercial real estate. At December 31, 1998, this limit allowed the Company to
invest in non-residential or commercial real estate loans in an aggregate amount
up to $46.7 million. Loans in the Company's loan portfolio secured by
non-residential or commercial real estate totaled $14.9 million at such date.
Interest rates charged on loans are affected principally by competitive factors,
the demand for such loans and the supply of funds available for lending
purposes. These factors are, in turn, affected by general economic conditions,
monetary policies of the federal government, including the Federal Reserve
Board, legislative tax policies and government budgetary matters.
Home Lending. The Company historically has been and continues to be primarily a
purchaser and an originator of one-to-four family residential real estate loans
secured by first mortgages. The Company generally purchases loan packages of
$2.0 million to $10.0 million of single-family residential mortgages comprised
primarily of seasoned one-year ARM loans. The loan packages undergo the same
underwriting standards as are applied to loans which the Company originates. The
Company currently originates fixed-rate residential mortgage loans and ARMS
loans for terms of up to 30 years. As of December 31, 1998, $139.8 million or
91.9% of the Company's total loan portfolio consisted of one-to-four family
residential real estate loans. As of such date, approximately $109.4 million, or
78.3%, of these loans were ARM loans and $30.4 million, or 21.7%, of the
residential loans were fixed-rate.
The home loans with adjustable rate terms currently offered by the bank have
interest rates that are fixed for a period of 1, 3 or 5 years and then after the
initial period, the interest rate is adjusted annually based upon an index such
as the yield on Treasury Securities adjusted to a one year maturity, plus a
margin. Most of the Company's ARM lending programs limit the amount of any
increase or decrease in the interest rate at each adjustment and over the life
of the loan. Typical limitations are 2% at each adjustment with a limit of 6%
over the life of the loan. The Company may offer ARMS with different annual and
life of loan interest change limits, shorter or longer adjustment periods and
different base indices as may be appropriate to meet market demand, portfolio
needs, and the Company's interest rate risk management goals. While the Company
usually offers an initial rate on ARM loans below a fully indexed rate, the loan
is always evaluated based on the borrower's ability to pay at the interest rate
which would be in effect after adjustment of the loan. Some ARM loans include
features that allow the borrower, under special conditions, to convert the loan
to a fixed rate at the then prevailing market rates.
ARM loans reduce the risks to the Company concerning changes in interest rates,
but involve other risks because as interest rates increase, the borrower's
required payments increase, thus increasing the potential for default.
Marketability of real estate is also affected by the level of interest rates.
Most fixed rate home loans are originated for 30 year amortization terms.
Borrowers requesting a term of 15 years or less are usually granted an interest
rate slightly lower than is offered for a 30 year amortizing loan. Fixed rate
home loans include a "Due on Sale" clause which provides the bank with the
contractual right to declare the loan immediately due and payable in the event
the borrower transfers ownership of the property without the bank's consent. It
is the bank's policy to enforce "Due on Sale" provisions.
Construction Lending. The Company has and continues to offer adjustable and
fixed rate residential construction loans to owners wishing to construct their
primary residence and to selected builders/developers acceptable to the bank to
build 1-4 family dwellings in the bank's primary market area. Loans to
builders/developers are for homes that are pre-sold or are constructed on a
speculative basis. Loans to builders for the construction of a home for which
there is no end buyer at the time of construction are considered speculative
loans. Construction loans to individuals usually are originated in connection
with a permanent loan on the property (a construction/permanent loan).
Construction- permanent loans typically provide for a construction term of six
months to one year followed by the permanent loan term of up to 30 years.
Speculative builder loans are typically for one year and provide for interest
only payments during the loan term. The Company reviews the financial capacity
of the builder, the experience and credit history of the builder, and present
market conditions before approving speculative loans. Speculative loans to one
builder are generally limited to a specific dollar amount in the aggregate. Loan
advances to borrowers during construction are made on a percentage of completion
basis, and funds are typically disbursed in four to six draws after an
inspection is made by bank personnel and/or authorized independent inspectors
and a written report of construction progress is received by the Company. At
December 31, 1998 construction loans amounted to $11.5 million or 7.2% of the
loan portfolio.
Construction financing is generally considered to involve a higher degree of
risk of loss than long-term financing on improved, owner-occupied real estate.
Risk of loss on a construction loan is dependent largely upon the accuracy of
the initial estimate of construction cost and of the initial estimate of the
property's value upon completion. During construction, a number of factors could
result in delays and cost overruns. If the estimate of construction costs proves
to be inaccurate, funds may be required to be advanced beyond the amount
originally committed to complete construction. If the estimate of value proves
to be high, the Company may be confronted with a project having a value which is
insufficient to assure full payment. Repayment of construction loans to builders
of single family homes usually depends upon the builder successfully negotiating
a sale for the property. Sales of homes are affected by market conditions and
the supply and demand for such products.
Consumer and Other Loans. Federal regulations permit the Company to make secured
and unsecured consumer loans up to 35% of the Bank's assets. The Company makes
various types of consumer loans, primarily home equity loans and second
mortgages. Consumer loans are originated in order to provide a wide range of
financial services to its customers and to create stronger ties to its customers
and because the shorter term and normally higher interest rates on such loans
help the bank increase the sensitivity of its interest earning assets to changes
in interest rates and maintain a profitable spread between its average loan
yield and its cost of funds. The terms of consumer loans generally range from
one to ten years. Underwriting standards for consumer loans include an
assessment of the applicant's payment history on other debts and ability to meet
existing obligations and payments on the proposed loans. Although the
applicant's creditworthiness is a primary consideration, the underwriting
process also includes a comparison of the value of the security, if any, to the
proposed loan amount. Consumer loans generally involve more credit risks than
mortgage loans because of the type and nature of the collateral or absence of
collateral. Consumer lending collections are dependent on the borrower's
continuing financial stability, and are likely to be adversely affected by job
loss, divorce and illness. Furthermore, the application of various federal and
state laws, including federal and state bankruptcy and insolvency laws, may
limit the amount which can be recovered on such loans. In most cases, any
repossessed collateral for a defaulted consumer loan will not provide an
adequate source of repayment of the outstanding loan balance. The bank believes
that the yields earned on consumer loans are commensurate with the credit risk
associated with such loans. At December 31, 1998 consumer loans amounted to $2.2
million or 1.4% of the loan portfolio.
Multi-family and Commercial Real Estate Loans. Multi-family real estate loans
are collateralized primarily by garden style apartments located in Florida.
Commercial real estate loans are secured primarily by office, warehouse and
retail business properties located in Florida. These types of loans amounted to
$17.1 million or 10.7% of the total loan portfolio at December 31, 1998. These
loans may be for an amortization term of up to 30 years but frequently include a
maturity in 7 to 15 years. Commercial and multi-family loans are usually
originated with an interest rate that adjusts based upon an index such as the
prime rate or the yield on Treasury Securities adjusted to a maturity of 1, 3 or
5 years.
Loans secured by multi-family and commercial real estate are originated with
loan-to-value not exceeding 80% of the appraised value of the properties. Loans
on this type of collateral continue to be a part of the Company's future lending
programs.
Loans secured by multi-family and commercial real estate are generally larger
and involve a greater degree of risk than residential mortgage loans. Because
payments on loans secured by multi-family and commercial property depend to a
large degree on results of operations and management of the properties,
repayment of such loans may be subject to a greater extent to adverse conditions
in the real estate market or the economy. As of December 31, 1998 the bank had
$1.1 million in loans secured by land which is undeveloped or in the process of
development. The Company will originate multi-family residential real estate,
commercial real estate and business loans, and management estimates such lending
will be become a larger part of the bank's total loan portfolio in the future.
Business Loans with Government Guarantee. The Company originates loans where the
7
<PAGE>
principal balance is partially guaranteed by the U.S. Small Business
Administration (SBA). The bank expects to continue to originate loans to small
businesses with guarantee by the SBA or the U. S. Department of Agriculture
(USDA). These loans are underwritten consistent with the bank's policies but may
include a higher loan relative to the value of collateral than commercial loans
originated without a government guarantee. These lending programs help small
businesses to develop and/or expand and are an important tool in helping meet
the credit needs of the Company's lending area.
The Company is not a delegated SBA underwriter. Applications for SBA or USDA
guaranteed or insured loans are carefully underwritten and include an analysis
of the borrower's business plan, the value of collateral, financial capacity,
the experience of the borrower and market conditions. After the Company's
underwriting review, a complete application is submitted to the appropriate
agency which in turn performs its own underwriting analysis and makes a credit
decision authorizing guarantee or insurance of the loan. SBA usually guarantees
up to 75% of a loan, and some programs of USDA provide guarantees up to 90% of
the loan. Loans with government guarantees may be originated with fixed or
adjustable rates; however, the bank usually originates loans with adjustable
rate terms. Amortization terms for such loans are commensurate with the business
purpose and expected life of the collateral. Real estate secured loans are
usually offered for terms up to 25 years. SBA/USDA guaranteed loans are
originated on fully amortizing terms without a shorter maturity date and balloon
payment requirement. At December 31, 1998 SBA guaranteed loans amounted to $4.3
million or 2.8% of the total loan portfolio.
Income from Lending Activities. Fees are earned in connection with loan
commitments and originations, loan modifications, late payments, assumptions
related to changes of property ownership and for miscellaneous services related
to its loans. The Company also receives fees for servicing loans sold to others.
Income from these activities varies from period to period with the volume and
type of loans originated, sold and purchased, which in turn is dependent upon
prevailing mortgage interest rates and their effect on the demand for loans in
the Company's market area.
Loan fees typically are charged at the time of loan origination and may be a
flat fee or a percentage of the amount of the loan. Under current accounting
standards such fees cannot typically be recognized as income and are deferred
and taken into income over the contractual life of the loan, using a level yield
method. If a loan is prepaid or refinanced, all remaining deferred fees with
respect to such loan are taken into income at that time.
The accounting for non-refundable fees and costs associated with originating and
acquiring loans is governed by Statement of Financial Accounting Standards
("SFAS") 91, promulgated by the Financial Accounting Standards Board ("FASB").
SFAS 91 required that loan origination fees be offset against certain related
direct loan origination costs and that the resulting net amount be deferred and
amortized over the life of the related loans as an adjustment to the yield of
such related loans. In addition, commitment fees are required to be offset
against related direct costs, and the resulting net amount is recognized either
over the life of the related loans as an adjustment to the yield if the
commitment is exercised, or upon expiration of the commitment, if the commitment
expires unexercised.
Non-performing Loans and Real Estate Owned. When a borrower fails to make a
required payment on a loan, the Company attempts to collect the payment by
contacting the borrower. If a payment on a loan has not been received by the end
of a grace period (usually 15 days from the payment due date), notices are sent
at that time, with follow-up contacts made thereafter. In most cases, the
delinquencies are cured promptly. If the delinquency exceeds 90 days and is not
cured through the Company's normal collection procedures, the Company will
institute more formal measures to remedy the default, including the commencement
of foreclosure proceedings. The Company will attempt to negotiate with the
delinquent borrower to establish a satisfactory payment schedule.
If foreclosure is effected, the property is sold at a public auction in which
the Company may participate as a bidder. If the Company is the successful
bidder, the acquired real estate property is then included in the Company's
"real estate owned" account until it is sold. The Company is permitted under
federal regulations to finance sales of real estate owned by "loans to
facilitate," which may involve more favorable interest rates and terms than
generally would be granted under the bank's underwriting guidelines. At December
31, 1998 the Company had no loans to facilitate.
Loans are placed on non-accrual status when, in the judgment of management, the
probability of collection of interest is deemed to be insufficient to warrant
further accrual. When a loan is placed on non-accrual status, previously accrued
but unpaid interest is deducted from interest income. As a matter of policy, the
Company does not accrue interest on loans past due 90 days or more.
8
<PAGE>
Real estate acquired by the Company as a result of foreclosure or by
deed-in-lieu of foreclosure is classified as real estate owned until it is sold.
When property is acquired, it is recorded at the lower of cost or fair value
less cost to sell at the date of acquisition and any write-down resulting
therefrom is charged to the allowance for losses on loans.
The following table sets forth for the Company certain information regarding
non-accrual loans and real estate owned, the ratio of such loans and real estate
owned to total assets as of the date indicated, and certain other related
information. The Company did not have any troubled debt restructuring or
accruing loans more than 90 days delinquent at any of the dates presented.
<TABLE>
<CAPTION>
December 31,
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(In Thousands of Dollars)
<S> <C> <C> <C> <C> <C>
Non-accrual loans:
Residential:
Construction and land loans -- -- 548 2,035 1,025
Permanent loans (1-4 units) 1,359 1,283 322 807 1,029
All other mortgage loans -- -- -- 416 650
Commercial loans -- -- 47 -- --
Consumer and other loans 1 -- 73 69 77
In-substance foreclosures -- -- -- -- 3,592
----- ----- ----- ----- -----
Total non-accrual loans 1,360 1,283 991 3,327 6,373
===== ===== ===== ===== =====
Total non-accrual loans to total loans 0.9% 1.0% 0.9% 2.9% 5.7%
===== ===== ===== ===== =====
Total non-accrual loans to total assets 0.8% 0.9% 0.7% 2.4% 4.1%
===== ===== ===== ===== =====
Total allowance for loss to total non-accrual loans 83.5% 86.5% 154.7% 61.9% 31.0%
===== ===== ===== ===== =====
Real estate owned:
Real estate acquired by foreclosure 1,107 1,390 1,508 3,293 2,891
Total real estate owned 1,107 1,390 1,508 3,293 2,891
===== ===== ===== ===== =====
Total non-accrual loans and real estate owned to total assets 1.4% 1.9% 1.8% 4.7% 6.0%
===== ===== ===== ===== =====
</TABLE>
If the non-accrual loans at December 31, 1998 had been current in accordance
with their original terms for the entire year (or from the date of origination
if originated during such period), the total interest income on such loans for
the period ended December 31, 1998 would have been increased approximately
$161,500.
The $1.36 million of non-accruing single-family residential permanent loans at
December 31, 1998 consists of 19 loans. Such loans have an average loan balance
of approximately $71,500 and no loan exceeds $171,500.
The Company had no non-accruing land acquisition and development loans at
December 31, 1998.
At December 31, 1998, the Company had real estate owned of $1,107,295 acquired
by foreclosure consisting of twelve single family properties with an average
balance of $62,631, one vacant land property zoned residential with a balance of
$55,250, one vacant land property zoned commercial with a balance of $270,800,
and one acquisition and development project with a balance of $29,679.
Allowance for Losses on Loans
The Company follows a consistent procedural discipline and accounts for loan
loss contingencies in accordance with Statement of Financial Accounting
Standards No. 5, "Accounting for Contingencies" (Statement 5). The following is
a description of how each portion of the allowance for loan losses is
determined.
The Company segregates the loan portfolio for loan loss purposes into the
following broad segments: commercial real estate; residential real estate;
commercial business; and consumer loan. The Company provides for a general
allowance for losses inherent in the portfolio by the above categories, which
consists of two components. General loss percentages are calculated based upon
historical analyses. A supplemental portion of the allowance is calculated for
inherent losses which probably exist as of the evaluation date even though they
might not have been identified by the more objective processes used for the
portion of the allowance described above. This is due to the risk of error
and/or inherent imprecision in the process. This portion of the allowance is
particularly subjective and requires judgments based on qualitative factors
which do not lend themselves to exact mathematical calculations such as; trends
9
<PAGE>
in delinquencies and nonaccruals; migration trends in the portfolio; trends in
volume, terms, and portfolio mix; new credit products and/or changes in the
geographic distribution of those products; changes in lending policies and
procedures; loan review reports on the efficacy of the risk identification
process; changes in the outlook for local, regional and national economic
conditions; concentrations of credit; and peer group comparisons.
Specific allowances are provided in the event that the specific collateral
analysis on each classified loan indicates that the probable loss upon
liquidation of collateral would be in excess of the general percentage
allocation. The provision for loan loss is debited or credited in order to state
the allowance for loan losses to the required level as determined above.
Although management believes that it uses the best information available to
determine the allowance, unforeseen market conditions could result in
adjustments and net earnings could be significantly affected if circumstances
differ substantially from the assumptions used in making the final
determination. Future additions to the Company's allowance for loan losses will
be the result of periodic loan, property and collateral reviews and thus cannot
be predicted in advance. In addition, federal regulatory agencies, as an
integral part of the examination process, periodically review the Company's
allowance for loan losses. Such agencies may require the Company to recognize
additions to the allowance level based upon their judgment of the information
available to them at the time of their examination.
The following table sets forth information with respect to activity in the
Bank's allowance for loan losses during the periods indicated. The allowance
shown in the table below should not be interpreted as an indication that
charge-offs in future periods will occur in these amounts or proportions or that
the allowance indicates future charge-off amounts or trends.
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(In Thousands of Dollars)
<S> <C> <C> <C> <C> <C>
Average loans outstanding, net $135,617 $113,472 $112,288 $115,608 $108,771
Allowance at beginning of year, 1,111 1,533 2,061 1,975 1,850
Charge offs:,
Conventional loans 163 -- 794 267 4
Construction loans -- -- -- -- --
Commercial real estate loans -- 480 390 440 400
Consumer loans -- 50 39 -- 5
-------- -------- -------- -------- --------
Total loans charged off 163 530 1,233 707 409
-------- -------- -------- -------- --------
Recoveries 23 14 267 14 3
-------- -------- -------- -------- --------
Net charge-offs 140 516 956 694 406
Provision for loan losses charged to operating expenses 165 93 280 779 531
Transfer from allowance for real estate owned -- -- 149 -- --
-------- -------- -------- -------- --------
Allowance at end of year 1,136 1,110 1,533 2,061 1,975
======== ======== ======== ======== ========
Ratio of net charge-offs to average loans outstanding 0.10% 0.45% 0.85% 0.61% 0.37%
-------- -------- -------- -------- --------
Ratio of allowance to period-end total loans, net .75% .91% 1.36% 1.83% 1.78%
-------- -------- -------- -------- --------
Period-end total loans, net $152,068 $121,909 $112,547 $112,906 $111,183
-------- -------- -------- -------- --------
</TABLE>
The following table represents information regarding the Bank's total allowance
for losses as well as the allocation of such amounts to the various categories
of loans.
<TABLE>
<CAPTION>
s
Year Ended December 31,
1998 1997 1996 1995 1994
Percent of Percent of Percent of Percent of Percent of
Loans to Loans to Loans to Loans to Loans to
Total Total Total Total Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
(In Thousand of Dollars)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Residential real estate loans $ 502 87.7% $ 413 86.5% $ 283 88.3% $ 415 86.1% $ 421 83.6%
Commercial real estate loans
(Including multi-family & land l 431 11.4% 434 12.0% 946 9.8% 1,073 11.4% 1,318 13.1%
Non-mortgage loans 203 0.9% 263 1.5% 304 1.9% 573 2.5% 236 3.3%
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Total Allowance for loan losses $1,136 100.0% $1,110 100.0% $1,533 100.0% $2,061 100.0% $1,975 100.0%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
</TABLE>
10
<PAGE>
Investment Activities
The Company's investment portfolio currently consists of $6,468,411 in bonds
issued by the Federal Home Loan Bank. The Company purchases securities to meet
regulatory liquidity requirements, to invest excess funds resulting from excess
liquidity and to leverage capital through the use of borrowed funds. All of the
securities held at December 31, 1998 meet the liquidity requirements of the
Office of Thrift Supervision.
The Company's investment in obligations of U.S. government agencies consist of
dual indexed bonds issued by the Federal Home Loan Bank. At December 31, 1998,
the bonds had a market value of $6,680,625 and gross unrealized losses of
$319,375. The bonds have a par value of $7,000,000 and pay interest based on the
difference between two indices. The bonds pay interest at the 10 year constant
maturity treasury rate less the 6 month LIBOR rate plus a contractual amount of
4.00%. The Company purchased the bonds to offset some of its risk related to its
portfolio of adjustable rate mortgages and, as such, subjects the Company to a
certain degree of market risk as the indices change with prevailing market
interest rates. Generally, when short term interest rates are low and the yield
curve is in a normal slope, i.e., long term interest rates higher than short
term interest rates, the bonds will have a yield that is above the yields on
other agency securities of three or six month maturities, however, the Company's
portfolio of adjustable rate mortgage ("ARM") loans will have yields that are
declining due to the adjustment on these loans being based on a short term
index, primarily the one year Constant Maturity Treasury ("CMT"). When short
term rates are high and the yield curve is flat or inverted, the bonds will have
yields that are generally lower than the yields on other agency securities of
three or six month maturities, however, the Company's ARM loans will have yields
that are increasing since their adjustment is based on a short term index,
primarily the one year CMT. As a result, the yields on the dual indexed bonds
generally move in an inverse relationship to the movement in yields on the
Company's ARM loans and as a result, offset some of the risk related to the
movement of interest rates in the loan portfolio. The risk associated with
changes in the indices is that when the yield curve is flat, the bonds will
generally have yields that are below the yields on bonds that mature or reprice
in three or six months unless the general level of rates is very low in which
case the margin on the bonds would reduce or mitigate the effects of a flat
yield curve. If the yield curve is inverted, the bonds will generally have below
market yields. The Company does not currently have any investments in hedges to
offset the market risk for these securities. The effective rates earned for the
portfolio of dual indexed bonds for 1996, 1997, and 1998 were, 3.98%, 4.29%, and
3.76 % respectively. Market values for all securities were calculated using
published prices at December 31, 1998.
Based on Office of Thrift Supervision (OTS) Thrift Bulletin 65 - Structured
Notes, and other releases from the OTS, it is the opinion of management that the
OTS would prefer that the institutions that they regulate not hold structured
notes because many institutions do not clearly understand them, and the OTS had
directed that the Bank refrain from purchasing any dual indexed bonds, although
they continue to be a permissible investment for Thrifts.
At December 31, 1998, 1997, and 1996, the Bank had $- 0 -, $3,547,948, and
$6,284,377, respectively, in investments securities pledged to the Federal Home
Loan Bank as collateral under its short-term credit agreement with the Bank. On
November 30, 1995 the Company reclassified its entire portfolio of Federal Home
Loan Bank bonds from the held to maturity category to the available for sale
category, in accordance with the guidance issued by the Financial Accounting
Standards Board (FASB), which permitted the one-time opportunity to reassess the
designations of all securities between November 15, 1995 and December 31, 1995.
The transfer resulted in an increase in the unrealized loss on investment
securities available for sale, net (of the effect of income taxes), a component
of stockholders' equity, to $1,291,699 at November 30,1995. During December
1995, the Company sold $7,250,000, par value, of the Federal Home Loan Bank
bonds maturing in 2003, at a gross loss of $942,500, which decreased the
unrealized loss on investment securities available for sale, net (of the effect
of income taxes) account in stockholder's equity to $779,872 at December 31,
1995. On April 1, 1996, the Company transferred $7,000,000 par value of the
Federal Home Loan Bank bonds maturing in 2003 from the available for sale to the
held to maturity category, and during November, 1996, the Company sold
$1,000,000 par value of the Federal Home Loan Bank bonds that mature in 1998 at
a gross loss of $12,344. During 1998 the Company sold $3,350,000 par value of
the Federal Home Loan Bank bonds that mature in 1998 at a gross loss of $9,945.
The Company must maintain minimum liquidity levels specified by the OTS which
vary from time to time. The Company complies with such requirement primarily by
maintaining a significant amount of funds in interest-bearing deposits at the
FHLB of Atlanta and with the qualifying unpledged bonds in the investment
portfolio that have maturities of 5 years of less. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations Liquidity and
Capital Resources." Liquidity may increase or decrease depending upon the yields
11
<PAGE>
available on investment opportunities and upon management's judgment as to the
attractiveness of such yields and its expectation of the level of yields that
will be available in the future. The Company also has an investment in the
common stock of the FHLB of Atlanta in order to satisfy the requirement for
membership in such FHLB.
The following table sets forth the carrying value of the Bank's total
investments and liquidity as of the dates indicated.
<TABLE>
<CAPTION>
December 31,
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(In Thousands of Dollars)
<S> <C> <C> <C> <C> <C>
Short-term investments:
Interest-bearing deposits $ 5,048 $ 3,556 $ 4,837 $ 51 $ 6,861
Debt securities:
FHLB Notes 6,468 9,670 15,048 15,918 24,257
Orange County tax certificates -- -- 6 19 44
Mortgage-backed securities -- -- -- -- --
Equity securities:
FHLB stock 1,725 1,428 1,253 1,853 1,975
------- ------- ------- ------- -------
Total investment portfolio $13,241 $14,654 $21,144 $17,841 $33,137
======= ======= ======= ======= =======
</TABLE>
Sources of Funds
General. Deposits are the primary source of the Company's funds for use in
lending and for other general business purposes. In addition to deposits, the
Company obtains funds from normal loan amortization and prepayments and from
operations. Contractual loan payments are a relatively stable source of funds,
while deposit inflows and outflows and loan prepayments are significantly
influenced by general market interest rates and economic conditions. Borrowings
are also used on a short-term basis to compensate for seasonal or other
reductions in normal sources of funds. Borrowings may also be used on a longer
term basis to support expanded lending or investment activities. At December 31,
1998, the Bank had $18.5 million in FHLB Advances outstanding which are due in
one year or less.
Deposits. Due to changes in regulatory and economic conditions in recent years,
the Company has increasingly emphasized deregulated fixed-rate certificate
accounts and other types of deposits. The Company has a number of different
programs designed to attract both short-term and long-term deposits of the
general public by providing an assortment of accounts and rates. These programs
include statement savings accounts, NOW accounts, MMDAs and certificates of
deposit currently ranging in terms from 91 days to 120 months.
The Company's deposits are obtained from residents in its primary market area
and, to a much lesser extent, nationwide via a computer network and the
principal methods used by the Company to attract "in market" deposit accounts
include offering a wide variety of services and accounts, competitive interest
rates and a convenient office location, including access to automated teller
machines ("ATMs"). The Company currently operates no ATM's but issues cards
which have access to the Honor(R) and other shared ATM networks. The Company
utilizes very few brokered deposits and at times seeks some negotiated rate
certificates of deposit less than $100,000 through the CD Network(R) which
electronically allows the Company to display its rates on certificates to
individual investors nationwide. Company personnel then deal directly with
investors who telephone or write for information concerning certificates of
deposit.
[THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK.]
12
<PAGE>
The following table shows the distribution of, and certain other information
relating to, the Company's deposits by type as of the dates indicated.
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------------------------------------------------------------------------------------------------
Percent Percent Percent Percent Percent
of of of of of
Amount Deposits Amount Deposits Amount Deposits Amount Deposits Amount Deposits
------ -------- ------ -------- ------ -------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Non-interest bearing commercial
checking accounts $ 1,261 1.0% $ 126 .1% $ 59 .1% $ 209 .2% $ 257 .3%
Regular savings accounts 872 .7 1,035 1.0 1.364 1.3 2,158 2.0 4,234 4.2
MMDA's 11,235 8.7 7,246 6.9 7,429 7.0 6,601 6.1 9,247 9.1
NOW accounts 1,439 1.1 890 .9 654 .6 675 .6 857 .8
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Subtotal 14,807 11.5 9,297 8.9 9,506 9.0 9,643 8.9 14,595 14.4
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Certificate of Deposit:
1.00% to 3.99% 338 .3 443 .4 499 .5 1,219 1.0 5,431 5.4
4.00% to 4.99% 26,807 20.7 1,150 1.1 3,077 2.9 2,171 2.0 29,421 29.0
5.00% to 5.99% 82,135 63.5 79,490 75.8 78,123 73.5 54,847 49.9 29,165 28.7
6.00% to 7.99% 5,201 4.0 14,504 13.8 14,910 14.0 41,311 37.6 22,859 22.5
8.00% to 9.99% -- -- -- -- -- -- -- -- --
-------- ----- ------ ----- -------- ----- -------- ----- -------- -----
Total Certificates of D 114,481 88.5 95,587 91.1 96,609 91.0 99,548 90.5 86,922 85.6
-------- ----- ------ ----- -------- ----- -------- ----- -------- -----
Total Deposits $129,288 100.0% $104,884 100.0% $106,115 100.0% $109,191 100.0% $101,517 100.0%
======== ===== ======== ===== ======== ===== ======== ===== ======== =====
</TABLE>
The following table shows the average amount of and the average rate paid on
each of the following categories during the periods indicated.
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Average Average Average Average Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate Balance Rate Balance Rate
------- ---- ------- ---- ------- ---- ------- ---- ------- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
MMDA's, NOW and non-interest
bearing commercial checking
accounts $ 12,057 3.27% $ 8,174 3.69% $ 7,722 3.44% $ 7,587 3.56% $8,629 3.11%
Regular savings 924 2.60% 1,286 2.57% 1,641 2.62% 2,975 3.09% 6,227 3.40%
Certificates of Deposit 101,015 5.63% 95,652 5.67% 97,042 5.62% 99,716 5.88% 77,333 4.30%
-------- ---- -------- ---- -------- ---- -------- ---- ------- ----
Total Deposits $113,996 5.36% $105,112 5.48% $106,405 5.41% $110,278 5.63% $92,190 4.12%
======== ==== ======== ==== ======== ==== ======== ==== ======= ====
</TABLE>
The variety of deposit accounts offered by the Company has increased the
Company's ability to retain deposits and has allowed it to be competitive in
obtaining new funds, although the threat of disintermediation (the flow of funds
away from savings institutions into direct investment vehicles such as
government and corporate securities) still exists. Newer types of accounts,
however, have been more costly than traditional accounts during periods of high
interest rates. The Company's ability to attract and retain deposits and the
Company's cost of funds have been, and will continue to be, significantly
affected by market conditions.
Management periodically reviews rates offered by other savings institutions in
its market area and will adjust the rates it offers to be competitive with such
institutions. The Company has generally had to price its deposit products
competitively to attract deposits. During the year ended December 31, 1997 the
Company's deposits decreased $1.2 million and for the year ended December 31,
1998, deposits increased by $24.4 million.
The following table sets forth the net deposit flows of the Bank during the
periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net increase (decrease) before interest credited $28,602 ($5,006) ($6,675) $10,530 $23,902
Less:
Interest credited 4,200 3,777 3,599 2,945 1,113
------- ------- ------- ------- -------
Net deposit increase (decrease) $24,402 ($1,229) ($3,076) $ 7,585 $22,789
======= ======= ======= ======= =======
</TABLE>
13
<PAGE>
Borrowings. The Company is permitted to obtain advances from the FHLB of
Atlanta, upon the security of the capital stock of the FHLB of Atlanta it owns
and certain of its home mortgage loans and other assets (principally, securities
which are obligations of, or guaranteed by, the U.S. government or agencies
thereof), provided certain standards related to creditworthiness have been met.
Such advances may be made pursuant to several different credit programs. Each
credit program has its own interest rate and range of maturities, and the FHLB
of Atlanta prescribes the acceptable uses to which the advances pursuant to each
program may be made as well as limitations on the size of such advances.
Depending on the program, such limitations are based either on a fixed
percentage of the Company's regulatory capital or its liability for shares and
deposits or on the FHLB's assessment of the Company's creditworthiness. The FHLB
is required to review its credit limitations and standards at least once every
six months. Prepayment of FHLB of Atlanta advances would incur prepayment
penalties. At December 31, 1998, the Company had $28.5 million in borrowings
outstanding and at December 31, 1997, the Company had $23.0 million in
borrowings outstanding.
The following is an analysis of the advances from the Federal Home Loan Bank:
Amounts outstanding at December 31, 1998:
- --------------------------------------------------------------------------------
Maturity Date Rate Amount Type
- ------------- ---- ------ ----
12/02/99 5.15% $ 8,500,000 Variable Rate
12/01/99 5.09% 5,000,000 Fixed Rate
12/10/99 4.98% 5,000,000 Fixed Rate
12/01/00 5.09% 5,000,000 Fixed Rate
03/05/01 5.96% 5,000,000 Fixed Rate
----- ---------
Total 5.24% $28,500,000
==== ===========
Amounts outstanding at December 31, 1997:
- --------------------------------------------------------------------------------
Maturity Date Rate Amount Type
- ------------------ ------ ----
12/02/98 6.50% $ 5,500,000 Variable Rate
03/04/98 6.02% 2,500,000 Fixed Rate
06/30/98 6.00% 5,000,000 Fixed Rate
09/15/98 6.12% 5,000,000 Fixed Rate
10/16/98 5.88% 5,000,000 Fixed Rate
----- ---------
Total 6.12% $23,000,000
==== ===========
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.
Amounts outstanding at:
- --------------------------------------------------------------------------------
1998 1997
- ------------------------------------ -------------------------------------
Monthend Rate Amount Monthend Rate Amount
- -------- ---- ------ -------- ---- ------
01/31/98 5.94% 23,000,000 01/31/97 5.93% 24,800,000
02/28/98 5.97% 21,500,000 02/28/97 5.90% 27,300,000
03/31/98 6.04% 25,550,000 03/31/97 6.15% 27,250,000
04/30/98 5.93% 27,250,000 04/30/97 5.99% 27,250,000
05/31/98 5.96% 24,550,000 05/31/97 6.00% 23,250,000
06/30/98 6.14% 26,050,000 06/30/97 6.02% 23,500,000
07/31/98 5.89% 27,000,000 07/31/97 6.00% 23,500,000
08/31/98 5.95% 27,500,000 08/31/97 6.00% 22,500,000
09/30/98 5.93% 34,500,000 09/30/97 6.15% 24,000,000
10/31/98 5.50% 32,000,000 10/31/97 5.96% 24,250,000
11/30/98 5.56% 31,000,000 11/30/97 5.97% 23,000,000
12/31/98 5.24% 28,500,000 12/31/97 6.12% 23,000,000
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During the twelve-month periods ended December 31, 1998 and December 31, 1997,
average advances outstanding totaled $26.2 million and $23.2 million at an
average rate of 5.79% and 6.04%, respectively.
Advances from the FHLB are collateralized under a blanket floating lien by loans
and FHLB stock that totaled approximately $119.4 million and $1.7 million,
respectively at December 31, 1998.
Expansion Plans
As a result of raising additional capital in the fourth quarter of 1997, Federal
Trust planned to expand the Bank's operations by branching in the greater
Orlando market area and on October 30, 1998 the Bank opened a branch in downtown
Sanford, Florida At the current time, management does not have further specific
branch expansion plans, but does consider it likely that the bank will open
additional branches in the future.
Employees
At December 31, 1998, the Holding Company had no full-time employees and the
Bank had 38 full-time employees. Management considers its relations with its
employees to be excellent.
Federal Trust currently maintains a comprehensive employee benefit program
providing, among other benefits, hospitalization and major medical insurance,
long-term disability insurance, life insurance, education assistance and an
employee stock ownership plan ("ESOP"). In addition, during 1997 the bank began
offering its employees a 401k Plan. Such employee benefits are considered by
management to be generally competitive with employee benefits provided by other
major employers in Federal Trust's market areas. Federal Trust's employees are
not represented by any collective bargaining group.
Other Subsidiaries
At December 31, 1998, the Company had no subsidiaries other than Federal Trust
Bank.
Total Equity Investments at December 31, 1998
Federal Trust Bank $11,411,975
Thrift Subsidiaries
Current OTS regulations permit a thrift to invest up to 3% of its assets in
service corporations, provided any investment in excess of 2% must serve
primarily community, inner city or community development purposes. In addition,
a thrift can invest up to 20% of its net worth in conforming loans to service
corporations if net worth is equal to the minimum net worth requirement of the
thrift and scheduled items do not exceed 2.5% of specified assets. At December
31, 1998, the Bank had one subsidiary, FTB Financial Services, Inc.("FTBFS"),
that commenced operations in 1996. FTBFS is engaged in the business of selling
non-FDIC insured annuities, stocks, and bonds and its operations in 1998 were
minimal.
Legal Proceedings
There are no material pending legal proceedings to which Federal Trust or the
Bank or any other subsidiary of Federal Trust is a party or to which any of
their property is subject.
Asset Sales
Sale of Federal Trust Properties Corporation. Pursuant to a Purchase Agreement
dated June 30, 1996 the Company sold all of the stock of Federal Trust
Properties Corporation to an unaffiliated party 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 that was paid on September 2, 1997, a note for $25,000 that
was due and paid on December 31, 1998 and two notes for $25,000 each, due
December 31, 1999 and 2000, respectively. In addition, the Company is renting
the quarters it previously occupied to FTPC on a month to month basis. No gain
or loss was recognized on the sale.
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Dissolution of 1270 Leasing Company. 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.
Removal of Regulatory and Supervisory Actions
In October of 1994, the Holding Company and the Bank entered into individual
Voluntary Orders to Cease and Desist (collectively "Orders") with the OTS. The
Holding Company was primarily required to prepare a three-year business plan,
reimburse the Bank for Holding Company expenses, and develop a management
services agreement with the Bank. Dividend request from the Bank were also
limited. The Bank's Order centered around the strengthening of underwriting
procedures and policies, the development of new loan policies, the
implementation of a written plan for collection and reduction of for
non-performing assets, and the prohibition of paying above-market lease payments
to, or tax payments on behalf of, a Bank affiliate. In addition to the Order,
the Bank was placed under growth restrictions based upon its capital position.
The growth restrictions had a negative impact on the Company's earnings.
In December 1997, the Holding Company infused $3.7 million in capital to the
Bank. Recent examinations had indicated marked improvement in the operations of
both companies. The Holding Company and Bank requested that their respective
Orders be rescinded, along with the growth restrictions. The OTS granted the
requests to rescind the growth restrictions and the lifting of the individual
Orders, effective March 13, 1998 and June 1, 1998, respectively
TAXATION
Federal
Federal Trust files a consolidated calendar tax year federal income tax return
on behalf of itself and its subsidiaries. The Bank and the other companies
report income and expense for income tax purposes under the accrual method of
accounting.
Thrift institutions are generally taxed in the same manner as other
corporations. Unlike other corporations, however, qualifying savings
institutions such as the Bank that meet certain definitional tests relating to
the nature of their supervision, income, assets and business operations are
allowed to establish a reserve for bad debts and are permitted to deduct
additions to that reserve.
Until 1996, savings institutions that met certain definitional tests and other
conditions prescribed by the Internal Revenue Code of 1986 (the "Code") relating
primarily to the composition of their assets and the nature of their business
activities, were, within certain limitations, permitted to establish and deduct
additions to reserves for bad debts in amounts in excess of those which would
otherwise be allowable on the basis of actual loss experience. A qualifying
savings institution could elect annually to compute the addition to its bad debt
reserve for qualifying real property loans (generally, loans secured by
interests in improved real property) using the more favorable of the following
methods: (i) a method based on the institution's actual loss experience (the
"experience method") or (ii) a method based on specified percentage of the
institution's taxable income (the "percentage of taxable income method"), and
not be bound by the election in any subsequent year. The addition to the reserve
for nonqualifying loans was required to be computed under the experience method
and reduced by the current year's addition to the reserve for losses on
nonqualifying loans, unless that addition also was determined under the
experience method. The aggregate of the additions to each reserve for each year
was Federal Trust Bank's annual bad debt deduction. For years preceding 1996,
Federal Trust Bank utilized either the percentage of taxable income method or
the experience method in computing the tax-deductible addition to its bad debt
reserves.
The Small Business Job Protection Act of 1996 repealed the percentage of taxable
income method of accounting for bad debts for tax years beginning after 1995.
Federal Trust Bank switched solely to the experience method to compute its bad
debt deduction in 1996 and future years. Federal Trust Bank is required to
recapture into taxable income the portion of its bad debt reserves that exceed
its bad debt reserves calculated under the experience method from the bank's
inception. Accordingly, Federal Trust Bank will have to recapture approximately
$70,000 of bad debt reserves spread over six years beginning in 1998 as a result
of this law change. This will not have an effect on the consolidated financial
statements as deferred taxes have already been provided for. The recapture
amount resulting from the change in method of accounting for bad debt reserves
was deferred for 1996 and 1997 because Federal Trust Bank met the residential
loan requirement for those years.
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To the extent that (i) the Bank's reserve for losses on qualifying real property
loans exceeds the amount that would have been allowed under the experience
method and (ii) the Bank makes distributions to its stockholders that are
considered to result in withdrawals from that excess bad debt reserve, then the
amounts withdrawn will be included in the Bank's taxable income. The amount
considered to be withdrawn by a distribution will be the amount of the
distribution plus the amount necessary to pay the tax with respect to the
withdrawal. Dividends paid out of the Bank's current or accumulated earnings and
profits as calculated for federal income tax purposes, however, will not be
considered to result in withdrawals from the Bank's bad debt reserves.
Distributions in excess of the Bank's current and accumulated earnings and
profits, distributions in redemption of stock, and distributions in partial or
complete liquidation of the Bank will be considered to result in withdrawals
from the Bank's bad debt reserves. Because the Bank made no distributions to
Federal Trust during the year, it has no excess loss reserves that could be
subject to these provisions.
Depending on the composition of its items of income and expense, a thrift
institution may be subject to the alternative minimum tax. A thrift institution
must pay an alternative minimum tax equal to the amount (if any) by which 20% of
alternative minimum taxable income ("AMTI"), as reduced by an exemption varying
with AMTI, exceeds the regular tax due. AMTI equals regular taxable income
increased by certain tax preferences, including depreciation deductions in
excess of that allowable for alternative minimum tax purposes, tax-exempt
interest on most private activity bonds issued after August 7, 1986 (reduced by
any related interest expense disallowed for regular tax purposes), the amount of
the bad debt reserve deduction claimed in excess of the deduction based on the
experience method and, 75% of the excess of adjusted current earnings over AMTI.
The alternative minimum tax applicable to tax years after 1986 is significantly
broader in scope than the old minimum tax and substantially increases the
likelihood that savings institutions will have to pay alternative minimum tax.
The Bank's federal income tax returns have never been examined by the Internal
Revenue Service.
State
The State of Florida imposes a corporate income/franchise tax on banks and
thrift institutions which subjects the Florida taxable income of such
institutions to a 5.5% tax (or, if greater, an alternative minimum tax equal to
3.3% of alternative minimum taxable income). Florida taxable income is
substantially similar to federal taxable income less $5,000, except that it
includes interest income on obligations of any state or political subdivision
thereof which is not otherwise exempt under Florida laws, and net operating
losses cannot be carried back to prior taxable years. The Florida
income/franchise tax may be reduced by a credit equal to the lesser of (i)
intangible tax paid or (ii) 65% of the sum of the franchise tax due before the
credit and the emergency excise tax due. The Florida franchise tax is deductible
in determining federal taxable income.
REGULATION AND SUPERVISION
General
Federal Trust, as a registered savings and loan holding company within the
meaning of the Home Owners' Loan Act ("HOLA"), is subject to Office of Thrift
Supervision ("OTS") regulations, examinations, supervision and reporting
requirements. As a Florida Corporation, Federal Trust is also subject to the
Florida Business Corporations Act ("Act") and the regulation of the Florida
Department of State under its authority to administer and implement the Act. As
a subsidiary of a savings and loan holding company, the Bank is subject to
certain restrictions in its dealings with Federal Trust and affiliates thereof.
There are generally no restrictions on the activities of a savings and loan
holding company which holds only one subsidiary savings institution. However, if
the Director of OTS determines that there is reasonable cause to believe that
the continuation by a savings and loan holding company of an activity
constitutes a serious risk to the financial soundness, safety or stability of
its subsidiary savings institution, the Director may impose such restrictions as
deemed necessary to address such risk, including limiting: (i) payment of
dividends by the savings institution; (ii) transactions between the savings
institution and its affiliates; (iii) any activities of the savings institution
that might create a serious risk that the liabilities of the holding company and
its affiliates may be imposed on the savings institution. Notwithstanding the
above rules as to permissible business activities of unitary savings and loan
holding companies, if the savings institution subsidiary of such a holding
company fails to meet the QTL test (as defined below in Qualified Thrift Lender
Test ["QTL"]), then such unitary holding company becomes subject to the
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activities restrictions applicable to multiple savings and loan holding
companies and, unless the savings institution requalifies as a QTL within one
year thereafter, must register as, and become subject to the restrictions
applicable to a bank holding company.
If Federal Trust were to acquire control of another savings institution, other
than through merger or other business combination with the Bank, Federal Trust
would thereupon become a multiple savings and loan holding company. Except where
such acquisition is pursuant to the authority to approve emergency thrift
acquisitions and where each subsidiary savings institution, meets the QTL test,
as set forth below, the activities of the Company and any of its subsidiaries
(other than the Bank or other subsidiary savings institutions) would thereafter
be subject to further restrictions. Among other things, no multiple savings and
loan holding company or subsidiary thereof which is not a savings institution,
may commence or continue for a limited period of time after becoming a multiple
savings and loan holding company or subsidiary thereof any business activity,
upon prior notice to, and no objection by OTS, other than: (i) furnishing or
performing management services for a subsidiary savings institution; (ii)
conduction an insurance agency or escrow business; (iii) holding, managing, or
liquidating assets owned by or acquired from a subsidiary savings institution;
(iv) holding or managing properties used or occupied by a subsidiary savings
institution; (v) acting as trustee under deeds of trust; (vi) those activities
authorized by regulation as of March 5, 1987, to be engaged in by multiple
savings and loan holding companies; or (vii) unless the Director of OTS by
regulation prohibits or limits such activities for savings and loan holding
companies, those activities authorized by the Federal Reserve Board as
permissible for bank holding companies. Those activities described in (vii)
above also must be approved by the Director of OTS prior to being engaged in by
a multiple savings and loan holding company.
Regulation of the Holding Company
Restrictions on the Acquisition of Federal Trust. Section 1467a of the HOLA
provides that no holding company, "directly or indirectly" or acting in concert
with one or more persons, or through one or more subsidiaries, or through one or
more transactions, may acquire "control" of an insured savings institution at
any time without the prior approval of the OTS. In addition, any holding company
that acquires such control becomes a "savings and loan holding company" subject
to registration, examination and regulation under HOLA and the regulations
promulgated thereunder. "Control" in this context means ownership, control of,
or holding proxies representing more than 25% of the voting shares of, an
insured institution, the power to control in any manner the election of a
majority of the directors of such institution or the power to exercise a
controlling influence over the management or policies of the institution.
The OTS also has established certain rebuttable control determinations. An
acquiror must file for approval of control with the OTS, or file to rebut the
presumptions before surpassing a rebuttable control level of ownership. To rebut
the presumption, the acquiror must file a submission with the OTS setting forth
the reasons for rebuttal. The submission must be filed when the acquiror
acquires more than 25% of any class of voting stock of the savings bank and when
they have any of the control factors enumerated in 12 C.F.R. Section 574.4(c)
which include but are not limited to: (i) the acquiror would be one of the two
largest shareholders of any class of voting stock; (ii) the acquiror and/or the
acquiror's representative or nominees would constitute more than one member of
the savings bank's board of directors; and (iii) the acquiror or nominee or
management official of the acquiror would serve as the chairman of the board of
directors, chairman of the executive committee, chief executive officer, chief
operating officer, chief financial officer, or in any similar policy making
authority in the savings bank.
A rebuttable presumption of concerted action will occur in but is not limited to
these situations: (1) a person will be presumed to be acting in concert with
members of the person's immediate family (which includes a person's spouse,
father, mother, children, brothers, sisters and grandchildren; the father,
mother, brother and sisters of the person's spouse; and the spouse of the
person's child, brother or sister); (2) persons will be presumed to be acting in
concert with each other where: (i) both own stock in a savings bank and both are
also management officials, controlling shareholders, partners, or trustees of
another company; or (ii) one person provides credit to another or is
instrumental in obtaining financing for another person to purchase stock of the
savings bank; and (3) a person will be presumed to be acting in concert with any
trust for which such persons or company serves as a trustee.
Transactions with Affiliates. The authority of Federal Trust to engage in
transactions with related parties or "affiliates" or to make loans to certain
insiders, is limited by Sections 23A and 23B of the Federal Reserve Act ("FRA").
Section 23A limits the aggregate amount of transactions with any individual
affiliate to 10% of the capital and surplus of the savings institution and also
limits the aggregate amount of transactions with all affiliates to 20% of the
savings institution's capital and surplus. Certain transactions with affiliates
are required to be secured by collateral in an amount and of a type described in
the FRA and the purchase of low quality assets from affiliates is generally
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prohibited. Section 23B provides that certain transactions with affiliates,
including loans and asset purchases, must be on terms and circumstances,
including credit standards, that are substantially the same or at least as
favorable to the savings institution as those prevailing at the time for
comparable transactions with a non-related party or non-affiliated holding
company. In the absence of comparable transactions, such transactions may only
occur under terms and circumstances, including credit standards, that in good
faith would be offered to or would apply to non-related parties or
non-affiliated companies. Notwithstanding Sections 23A and 23B, savings
institutions are prohibited from lending to any affiliate that is engaged in
activities that are not permissible for bank holding companies under Section
4(c) of the Bank Holding Company Act of 1956. Further, no savings institution
may purchase the securities of any affiliate other than a subsidiary.
In addition, Sections 22(g) and 22(h) of the FRA and Regulation O (which set
limits on extensions of credit to executive officers, directors and 10%
shareholders, as well as companies which such persons control) apply to savings
institutions. Among other things, such loans must be made on terms, including
interest rates, substantially the same as loans to unaffiliated individuals and
which involve no more than the normal risk of collectibility. These regulations
also place limits on the amount of loans the Bank may make to such persons.
These restrictions apply in addition to certain restrictions on transactions
with affiliates contained in the OTS regulations.
Support of Subsidiary Depository Institutions. Under OTS policy, Federal Trust
is expected to act as a source of financial strength to and to commit resources
to support the Bank. This support may be required at times when, in the absence
of such OTS policy, Federal Trust might not be inclined to provide such support.
In addition, any capital loans by Federal Trust to the Bank must be subordinate
in right of payment to deposits and to certain other indebtedness of the Bank.
In the event of bankruptcy, any commitment by a holding company to a federal
bank regulatory agency to maintain the capital of a subsidiary depository
institution will be assumed by the bankruptcy trustee and will be entitled to a
priority of payment.
Under the FDIA, a depository institution of a holding company, can be held
liable for any loss incurred by, or reasonably expected to be incurred by, the
FDIC after August 9, 1989, in connection with (i) the default of a commonly
controlled FDIC-insured depository institution, or (ii) any assistance provided
by the FDIC to any commonly controlled FDIC-insured depository institution "in
danger of default". "Default" is defined generally as the appointment of a
conservator or a receiver and "in danger of default" is defined generally as the
existence of certain conditions indicating that a default is likely to occur in
the absence of regulatory assistance.
Payment of Dividends. Federal Trust is a legal business entity separate and
distinct from the Bank. To date, the principal source of cash flow of Federal
Trust, including cash flow to pay cash dividends, has been dividends from the
Bank. There are statutory and regulatory limitations on the payment of dividends
by the Bank. In general, the ability of the Bank to pay a dividend to Federal
Trust is governed by the OTS's capital distribution regulation. The OTS
regulation establishes three tiers of savings institutions based primarily on an
institution's capital level. A savings institution that exceeds all fully
phased-in capital requirements before and after the proposed capital
distribution ("Tier 1 association") and has not been advised by the OTS that it
is in need of more than normal supervision could, after prior notice but without
the approval of the OTS, make capital distribution during a calendar year equal
to the greater of (i) 100% of its net income to date during the calendar year,
plus the amount that would reduce by one-half its "surplus capital ratio" (the
excess capital over its fully phased-in capital requirements) at the beginning
of the calendar year, or (ii) 75% of the savings institution's net income for
the previous four quarters. Any additional capital distributions require prior
regulatory approval. The OTS can prohibit a proposed capital distribution by a
savings institution, which would otherwise be permitted by the regulation if the
OTS determines that such distribution would constitute an unsafe or unsound
practice. The Bank did not make a capital distribution to Federal Trust in 1998.
Earnings are currently being reinvested to support the Bank's current growth.
Regulation of the Bank
Bills are introduced from time to time in the United States Congress with
respect to the regulation of depository institutions. Recent banking
legislation, particularly the Financial Institution Reform, Recovery and
Enforcement Act of 1989 ("FIRREA") and the Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA"), has broadened the regulatory powers of the
federal bank regulatory agencies and restructured the nation's banking system.
FIRREA amended provisions of the Bank Holding Company Act of 1956 to
specifically authorize the Federal Reserve Board to approve an application by
bank holding company to acquire control of a depository savings institution.
FIRREA also authorized a bank holding company that controls a savings
institution with, or transfer assets and liabilities to, any subsidiary bank
which is a member of the Bank Insurance Fund with the approval of the
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appropriate federal banking agency and the Federal Reserve Board. As a result of
these provisions, there have been a number of acquisitions of savings
institutions by bank holding companies in recent years.
Prompt and Corrective Action. The FDICIA required the federal banking regulatory
agencies to set certain capital and other criteria which would define the
category under which a particular depository financial institution would be
classified. The FDICIA imposes progressively more restrictive constraints on
operations, management, and capital distributions depending on the category in
which a financial institution is classified. Among other things, the regulations
define the relevant capital measures for the five capital categories. (well
capitalized, adequately capitalized, undercapitalized, significantly under
capitalized and critically under capitalized). For example, a depository
institution is deemed to be "well capitalized" if it has a total risk-based
capital ratio (total capital to risk-weighted assets) of 10% or greater, a Tier
1 risk-based capital ratio (Tier 1 capital to risk-weighted assets) of 6% or
greater, and a Tier 1 leverage capital ratio (Tier 1 capital to adjusted total
assets) of 5% or greater, and is not subject to a regulatory order, agreement or
directive to meet and maintain a specific capital level for any capital measure.
The OTS has also established minimum tangible and minimum leverage capital
requirements for savings institutions. These requirements provide for a minimum
ratio of tangible capital of not less than 1.5% of the savings institutions
adjusted total assets. Tangible capital is defined as core capital minus any
"intangible assets (as defined by the regulation). The minimum leverage capital
(as defined by the regulation) ratio established by the regulation is 3% of
adjusted total assets.
A depository institution is deemed to be "adequately capitalized" if it has a
total risk-based capital ratio of 8% or greater, and (generally) a Tier 1
leverage capital ratio of 4% or greater, and the institution does not meet the
definition of a "well capitalized" institution. A depository institution is
deemed to be "critically undercapitalized" if it has a ratio of tangible equity
(as defined in the regulations) to total assets that is equal to or less than
2%. In addition, the OTS is authorized to downgrade a savings institution to a
lower capital category than the savings institution's capital ratios would
otherwise indicate, based upon safety and soundness considerations (such as when
the institution has received a less than satisfactory examination rating for any
of the equivalent CAMEL rating categories). Both the risk-based capital
guidelines and the leverage ratio are minimum requirements, applicable only to
top-rated savings institutions. Institutions operating at or near these levels
are expected to have well-diversified risk, excellent asset quality, high
liquidity, good earnings and in general, have to be considered strong banking
organizations and rated composite 1 under the CAMEL rating system adopted by the
OTS. Institutions with lower ratings and institutions with high levels of risk
or experiencing or anticipating significant growth would be expected to maintain
ratios 100 to 200 basis points above the state minimums. A savings institution
cannot make a capital distribution such as cash dividends, redemptions and other
purchases of stock, or pay management fees to any person having control of that
institution, if after doing so, the savings institution would be
undercapitalized.
Capital Requirements. Both OTS and FDIC have promulgated regulations setting
forth capital requirements applicable to depository institutions. The OTS
capital regulations require depository institutions to meet three capital
standards: (i) a 1.5% tangible capital ratio (defined as the ratio of tangible
capital to adjusted total assets); (ii) a 3% leverage (core capital) ratio
(defined as the ratio of core capital to adjusted total assets); and, (iii) an
8% risk-based capital standard as defined below. On April 1, 1999, an amendment
to OTS' capital requirements will become effective. The amended regulation will
raise the required leverage (core capital) ratio from 3% to 4%. Federal Trust is
currently in compliance with the new standard. Core capital is defined as common
stockholder's equity (including retained earning), certain noncumulative
perpetual preferred stock and related surplus, minority interests in equity
accounts of consolidated subsidiaries, certain goodwill and certain mortgage
servicing rights less certain intangible assets, mortgage servicing rights less
certain intangible assets, mortgage servicing rights and investments in
nonincludable subsidiaries. Tangible capital is defined in the same manner as
core capital, except that all intangible assets (excluding certain mortgage
servicing rights) must be deducted. Adjusted total assets is defined as GAAP
total assets, minus intangible assets (except those included in core capital).
The OTS regulations also require that in calculating the leverage ratio,
tangible and risk- based capital standards, savings institutions must deduct
investments in and loans to subsidiaries engaged in activities not permissible
for a national bank. The Bank currently has one subsidiary, FTB Financial
Services, Inc., which is in the business of selling non-FDIC insured annuities.
The OTS risk-based capital standard for savings institutions requires that total
capital (comprised of core capital and supplementary capital) be at least 8% of
risk-weighted assets. In determining risk-weighted assets, all assets, including
certain off-balance sheet assets, are multiplied by a risk-weight of 0% to 100%,
as assigned by the OTS capital regulation based on the risks OTS believes are
inherent in the type of asset. Generally, zero weight is assigned to risk- free
assets, such as cash and unconditionally guaranteed United States government
securities. A weight of 20% is assigned to, among other things, certain
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obligations of United States government-sponsored agencies (such as the FNMA and
the FHLMC) and certain high quality mortgage-related securities. A weight of 50%
is assigned to qualifying mortgage loans and certain other mortgaged-related
Securities, repossessed assets and assets that are 90 days or more past due. The
components of core capital are equivalent to those discussed above. The
components of supplementary capital include permanent capital instruments (such
as cumulative perpetual preferred stock, mandatory convertible subordinated debt
and perpetual subordinated debt), maturing capital instruments (such as
mandatory convertible subordinated debt and intermediate-term preferred stock)
and the allowance for loan and lease losses. Allowance for loan and lease losses
includable in supplementary capital is limited to a maximum of 1.25% of
risk-weighted assets. Overall, the amount of capital counted toward
supplementary capital cannot exceed 100% of core capital.
The OTS issued an interim rule in August 1995 providing that the amount of
risk-based capital that may be required to be maintained by an institution for
recourse assets cannot be greater than the total of the recourse liability. The
interim rule provides that whenever the calculation of risk-based assets
(including assets sold with recourse) would result in a capital charge greater
than the institution's maximum recourse liability on the assets sold, instead of
including the assets sold in the savings institution's risk-weighted assets, the
institution may increase its risk-based capital by its maximum recourse
liability. In addition, qualified savings institutions may include in their
risk-weighted assets for the purpose of capital standards and other capital
measure, only the amount of retained recourse of small business obligation
transfers multiplied by the appropriate risk weight percentage. The interim rule
sets reserve requirements and aggregate limits for recourse held under the
modified treatment. Only well-capitalized savings institutions and adequately
capitalized savings institutions with OTS permission may use this reduced
capital treatment.
On August 16, 1996, the OTS and the other federal banking agencies jointly
proposed to revise their respective risk- based capital rules relating to
treatment of certain collateralized transactions. These types of transactions
generally include claims held by banks (such as loans and repurchase agreements)
that are collateralized by cash or securities issued by the U.S. Treasury or
U.S. Government agencies. If adopted, the proposal would permit certain
partially collateralized claims to qualify for the 0% risk category. To qualify
for the 0% risk category, the portion of the claim that will be continuously
collateralized must be specified either in terms of dollar amount or percentage
of the claim. For off-balance-sheet derivative contracts, the collateralized
portion of the transaction could be specified by dollar amount or percentage of
the current or potential future exposure.
The OTS incorporated an interest-rate component as part of the calculation of a
savings institution's regulatory capital. Savings institutions with "above
normal" interest-rate risk exposure are subject to a deduction from total
capital for purposes of calculating their risk-based capital requirements. A
savings institution's interest-rate risk is measured by the decline in the net
portfolio value of its assets (i.e. the difference between incoming and outgoing
discounted cash flows from assets, liabilities and off-balance sheet contracts)
that would result from a hypothetical 200 basis point increase or decrease in
market interest rates (except when the three-month Treasury bond equivalent
yield falls below 4%, then the decrease will be equal to one-half of that
Treasury rate) divided by the estimated economic value of the savings
institution's assets, as calculated in accordance with guidelines set forth by
the OTS. A savings institution whose measured interest-rate risk exposure
exceeds 2% must deduct an interest-rate component in calculating its total
capital under the risk-based capital rule. The interest-rate risk component is
an amount equal to one-half of the difference between the savings institution's
measured interest-rate risk and 2%, multiplied by the estimated economic value
of the savings institution's assets. That dollar amount is deducted from the
savings institution's total capital in calculating compliance with its
risk-based capital requirement. The interest rate-risk rule includes an
assessment of exposure to declines in the economic value of a savings
institution's capital due to changes in interest rates. Under the rule, there is
a three-quarter lag between the reporting date of an institution's financial
data and the effective date for the new capital requirement based on that data.
Each quarter, the OTS calculates a savings institution's interest-rate risk
exposure and advised the savings institution of any interest-rate risk capital
component resulting from greater than "normal" exposure. The rule also provides
that the Director of the OTS may waive or defer a savings institution's
interest-rate risk component on a case by case basis. The OTS, however, has
postponed the effective date of the interest rate component as a part of the
calculation of a savings institution's risk-based capital requirement.
As of December 31, 1998, the Bank's interest rate-risk exposure, according to
OTS calculations, would not have been above the threshold requiring an
additional capital component.
The FDICIA also required that the OTS (and other federal banking agencies)
revise the risk-based capital standards with appropriate transition rules to
take into account concentration of credit risks and risks of nontraditional
activities. The regulations explicitly identify concentration of credit risk and
21
<PAGE>
other risks from nontraditional activities, as well as an institution's ability
to manage these risks, as important factors in assessing an institution's
overall capital adequacy. These regulations do not contain any specific
mathematical formulas or capital requirements.
At December 31, 1998, the Bank met each of its capital requirements. The
following table sets forth the regulatory capital calculations of the Bank at
December 31, 1998:
Tier I Risk-Based
------ ----------
Percent Percent
of of
Amount Assets Amount Assets
------ ------ ------ ------
Regulatory Capital $11,681,513 6.69% $12,762,569 13.32%
Requirement $ 6,982,469 4.00% $ 7,660,557 8.00%
----------- ---- ----------- ----
Excess $ 4,699,044 2.69% $ 5,102,012 5.32%
Standards for Safety and Soundness. The FDICIA, as amended by the Reigle
Community Development and Regulatory Improvement Act of 1994, requires each
federal banking agency to prescribe for all insured depository institutions and
their holding companies standards relating to internal controls, information
systems and audit systems, loan documentation, credit underwriting, interest
rate risk exposure, asset growth, and compensation, fees and benefits and such
other operational and managerial standards as the agency deems appropriate. The
OTS and the other federal banking agencies adopted a rule establishing deadlines
for the agencies to submit and review safety and soundness compliance plans and
Interagency Guidelines Establishing Standards for Safety and Soundness. The
guidelines require depository institutions to maintain internal controls and
information systems and internal audit systems that are appropriate for the
size, nature and scope of the institution's business. The guidelines also
establish certain basic standards for loan documentation, credit underwriting,
interest rate-risk exposure, and asset growth. The guidelines further provide
that savings institutions should maintain safeguards to prevent the payment of
compensation, fees and benefits that are excessive or that could lead to
material financial loss, and that they should take into account factors such as
compensation practices at comparable institutions. In October 1996, the federal
banking agencies jointly adopted asset quality and earning standards to be added
to the Interagency Guidelines.
If the OTS determines that a savings institution is not in compliance with the
safety and soundness guidelines, it may require the institution to submit an
acceptable plan to achieve compliance with the guidelines. A savings institution
is required to submit an acceptable compliance plan to the OTS within 30 days
after receipt of a request for such a plan. Failure to submit or implement a
compliance plan may subject the institution to regulatory sanctions.
Insurance of Deposit Accounts. The FDIC is the administrator for the SAIF and
the Bank Insurance Fund ("BIF"), independently setting insurance premiums for
each Fund. The Bank's deposit accounts are insured by the SAIF which is also
administered by the FDIC. The Federal Deposit Insurance Act required the FDIC to
increase the reserves of the SAIF and the BIF to 1.25% of total insured
deposits. Both funds are now fully funded.
The FDIC applies a risk-based assessment system for insured depository
institutions that takes into account the risks attributable to different
categories and concentrations of assets and liabilities. In accordance with its
rule, the FDIC assigns a depository institution to one of three capital
categories based on the institution's financial information, as of the reporting
period ending seven months before the assessment period. A depository
institution's assessment rate depends on the capital category and supervisory
category to which it is assigned. There are nine assessment risk classifications
(i.e., combinations of capital groups and supervisory subgroups) to which
different assessment rates are applied.
In early December 1996, the FDIC adopted a rule that reduced regular semi-annual
SAIF assessments to a range of 0% - 0.27% of deposits. The new rates became
effective for SAIF-assessable institutions on January 1, 1997. The Bank's
assessment at December 31, 1998 was 3 basis points on deposits.
The Deposit Act also reduced the burden on SAIF-insured institutions in paying
bonds (the "FICO Bonds") issued by the FICO, the entity created in 1987 to
finance the recapitalization of the Federal Savings and Loan Insurance
Corporation, the SAIF's predecessor insurance fund. Prior to the Deposit Act, a
substantial amount of the SAIF assessment revenue was used to pay the interest
due on the FICO Bonds. Beginning with the semi-annual period after December 31,
1996, interest due on FICO Bonds will be covered by assessments against both
22
<PAGE>
SAIF and BIF insured institutions. Between January 1, 1997 and December 31,
1999, BIF-assessable deposits will be assessed at a rate of 20% of the
assessment rate applicable to SAIF-assessable deposits. After December 31, 1999,
FICO assessments are to be shared on a pro rata basis.
The Deposit Act also provides for the merger of the SAIF and the BIF into one
"Deposit Insurance Fund" on January 1, 1999, provided there are no state or
federally chartered FDIC-insured savings associations existing on that date. If
the SAIF and the BIF are not merged, the Deposit Act provides for creation of a
SAIF Special Reserve if the reserve ratio of the SAIF exceeds the designated
reserve ratio. The amount by which the SAIF reserve ratio exceeds the designated
reserve ratio will be deposited into the SAIF Special Reserve. Like the DIF
Special Reserve, the SAIF Special Reserve would be available for emergency
purposes if the reserve ratio of the SAIF is less than 50% of the designated
reserve ratio and the FDIC expects the reserve ratio to remain at less than 50%
of the designated reserve ratio for each of the next four calendar quarters.
Under the FDIA, insurance of deposits may be terminated by the FDIC upon a
finding that the depository institution has engaged in unsafe or unsound
practices, is in such an unsafe or unsound condition so as to warrant
discontinuation of operations or has violated any applicable law regulation,
rule, order or condition imposed by the FDIC or the OTS. Management does not
know of any practice, condition or violation that might lead to termination of
deposit insurance. At December 31, 1998, the Bank exceeded all of its capital
requirements.
Brokered Deposits. The FDIC has adopted regulations under FDICIA governing the
acceptance or retention of brokered deposits. Under these regulations, a
depository institution cannot accept, rollover or renew brokered deposits unless
(i) it is well capitalized or (ii) it is adequately capitalized and receives a
waiver from the FDIC. A depository institution that cannot receive brokered
deposits also cannot offer "pass-through" insurance on certain employee benefit
accounts. Whether or not it has obtained such a waiver, an adequately
capitalized depository institution may not pay an interest rate on any deposits
in excess of 75 basis points over certain prevailing market rates specified by
regulation. There are no such restrictions on a depository institution that is
well capitalized. As of December 31, 1998, the Bank had no brokered deposits.
Loans to One Borrower. Under the HOLA, savings institutions are subject to the
same limits on loans to one borrower as national banks. Generally, savings
institutions may lend to a single or related group of borrowers on an unsecured
basis an amount equal to 15% of its unimpaired capital and surplus. An
additional amount may be lent, equal to 10% of unimpaired capital and surplus,
if such loan is secured by readily-marketable collateral, which is defined to
include certain securities and bullion, but generally does not include real
estate.
The calculation of capital includes the Bank's total Tier 1 and Tier 2 capital,
plus the balance of the bank's allowance for loan and lease losses not included
in the total Tier 1 and Tier 2 capital. At December 31, 1998, the Bank had no
loans which exceeded the loans to one borrower limit.
Qualified Thrift Lender Test ("QTL"). The HOLA requires savings institutions to
meet a QTL test. The QTL test, as amended by the FDICIA, requires savings
institutions to maintain at least 65% of its "portfolio assets" (total assets
less [i] specified liquid assets up to 20% of total assets; [ii] intangibles,
including goodwill; and [iii] the value of property used to conduct business) in
qualified thrift investments, primarily residential mortgages and related
investments (including certain mortgage-backed and mortgage-related securities)
on a monthly basis in nine out of every 12 months.
A savings institution that fails to become or remain a qualified thrift lender
must convert to a bank charter or be subject to certain operating restrictions.
A savings institution that fails to meet the QTL test and does not convert to a
bank charter will be prohibited from: (i) making any new investment or engaging
in activities that would not be permissible for national banks; (ii)
establishing any new branch offices where a national bank located in the savings
institution's home state would not be able to establish a branch office; (iii)
obtaining new advances from any FHLB; and (iv) the payment of dividends except
as limited to the statutory and regulatory dividend restrictions applicable to
national banks. Also, beginning three years after the savings institution ceases
to be a qualified thrift lender, the savings institution would be prohibited
from retaining any investment or engaging in any activity not permissible for a
national bank and would be required to repay any outstanding advances to any
FHLB. A savings institution may requalify as a qualified thrift lender if it
thereafter complies with the QTL test.
As of December 31, 1998, the Bank exceeded the 65.0% QTL test, maintaining 92.7%
of its portfolio assets in qualified thrift investments.
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<PAGE>
Interstate Banking. Federally chartered savings institutions are allowed to
branch nationwide to the extent allowed by federal statute. This ability permits
savings institutions with interstate networks to diversify their loan portfolios
and lines of business. The OTS authority preempts any state law purporting to
regulate branching by federal savings institutions. Prior approval of the OTS is
required for a savings institution to branch interstate or intrastate. To obtain
supervisory clearance for branching, an applicant's regulatory capital must meet
or exceed the minimum requirements established by law and by the OTS
regulations. In addition, the savings institution must have a satisfactory
record under the Community Reinvestment Act ("CRA"). The Bank does not conduct
interstate branching operations and does not plan to do so in the foreseeable
future.
The Reigle-Neal Interstate Banking and Branching Efficiency Act of 1994
("Interstate Act") eliminated many existing restrictions on interstate banking
by authorizing interstate acquisitions of financial institutions by bank holding
companies without geographic limitations. Under the Interstate Act, existing
restrictions on interstate acquisitions of banks by bank holding companies were
repealed. Bank holding companies located in Florida are able to acquire any
Florida-based bank, subject to certain deposit percentage and other
restrictions. The legislation also provides that, unless an individual state
elects before hand either (i) to accelerate the effective date or (ii) to
prohibit out-of-state banks from operating interstate branches within its
territory, on or after June 1, 1997, adequately capitalized and managed bank
holding companies will be able to consolidate. De novo branching by an
out-of-state bank would be permitted only if it is expressly permitted by the
laws of the host state. The authority of a bank to establish and operate
branches within a state will continue to be subject to applicable state
branching laws. In 1996, the Florida Legislature adopted legislation which
permits interstate branching. Florida law, however, prohibits de novo branching
by out of state banks.
OTS Assessments. Savings institutions are required by OTS regulation to pay
assessments to the OTS to fund the operations of the OTS. The general
assessment, to be paid on a semiannually basis, is computed upon the savings
institution's total assets, including consolidated subsidiaries, as reported in
the institution's latest quarterly thrift financial report. The Bank paid
$43,573 in OTS assessments for the year-ended December 31, 1998.
Community Reinvestment. The Community Reinvestment Act of 1977 ("CRA") and the
implementing regulations of the Federal Reserve and the FDIC are intended to
encourage regulated financial institutions to help meet the credit needs of
their local community or communities, including low and moderate income
neighborhoods, consistent with the safe and sound operation of such financial
institutions. The CRA and such regulations provide that the appropriate
regulatory authority will access the records of regulated financial institutions
in satisfying their continuing and affirmative obligations to help meet the
credit needs of their local communities as part of their regulatory examination
of the financial institution. The results of such examinations are made public
and are taken into account upon the filing of any application to establish a
domestic branch or to merge or to acquire the assets or assume the liabilities
of a financial institution. In the case of a bank or savings and loan holding
company, the CRA performance recorded of the financial institutions involved in
the transaction are reviewed in connection with the filing of an application to
acquire ownership or control of shares or assets of a financial institution or
to merge with any other bank or savings and loan holding company. An
unsatisfactory record can substantially delay or block the transaction. The Bank
received a "Satisfactory" CRA Rating in its last CRA Examination.
On May 4, 1995, the OTS and the other federal banking agencies adopted new,
uniform CRA regulations that provide guidance to financial institutions on their
CRA obligations and the methods by which those obligations would be assessed and
enforced. The regulations establish three tests applicable to the Bank: (i) a
lending test to evaluate direct lending in low-income areas and indirect lending
to groups that specialize in community lending; (ii) a service test to evaluate
an institution's delivery of services to such areas; and (iii) an investment
test to evaluate an institution's investment in programs beneficial to such
areas. Reporting requirements became effective on January 1, 1997. The Bank's
operations and policies substantially comply with the new regulations and as
such, no material changes to operations or policies are expected.
Federal Home Loan Bank System
The Bank is a member of the Federal Home Loan Bank ("FHLB") System which
consists of 12 regional FHLBs. The FHLB provides a central credit facility
primarily for member institutions. As a member of the FHLB-Atlanta, the Bank is
required to acquire and hold shares of capital stock in that FHLB in an amount
at least equal to 1% of the aggregate principal amount of its unpaid residential
mortgage loans and similar obligations at the beginning of each year, or 1/20th
of its advances (borrowings) from the FHLB-Atlanta, whichever is greater. The
24
<PAGE>
Bank is in compliance with this requirement. FHLB advances must be secured by
specified types of collateral and may be obtained only for the purpose of
providing funds for residential housing finance.
The FHLBs are required to provide funds for the resolution of insolvent savings
institutions and to contribute funds for affordable housing programs. These
requirements could reduce the amount of dividends that the FHLBs pay to their
members and could also result in the FHLBs imposing a higher rate of interest on
advances to members. For the year ended December 31, 1998, dividends paid by the
FHLB-Atlanta to the Bank amounted $111,949 of the Bank's pre-tax income. Should
dividends be reduced, or interest on FHLB advances increased, the consolidated
net interest income might also be reduced for the Bank. Furthermore, there can
be no assurance that the value of the FHLB-Atlanta stock held by the Bank will
not decrease as a result of any new legislation.
Federal Reserve System
The Federal Reserve regulations require depository institutions to maintain
non-interest-earning reserves against their transaction accounts (primarily NOW
and regular checking accounts). The Federal Reserve regulations generally
require that reserves of 3% must be maintained against aggregate transaction
accounts of $52.0 million or less (subject to adjustment by the Federal Reserve)
and an initial reserve of $1,560,000 plus 10% (subject to adjustment by the
Federal Reserve between 11 3/4% and 16 1/4%) against that portion of total
transaction accounts in excess of $52 million. The first $4.3 million of
otherwise reversible balances (subject to adjustments by the Federal Reserve)
are exempted from the reserve requirements. The Bank is in compliance with the
foregoing requirements. The balances maintained to meet the reserve requirements
imposed by the Federal Reserve may be used to satisfy liquidity requirements
imposed by the OTS. Because required reserves must be maintained in the form of
either vault cash, a non-interest-bearing account at a Federal Reserve or a
pass-through account as defined by the Federal Reserve, the effect of this
reserve requirement is to reduce the Bank's interest-earning assets. FHLB System
members are also authorized to borrow from the Federal Reserve "discount
window", however, Federal Reserve regulations require institutions to exhaust
all FHLB sources before borrowing from a Federal Reserve.
ITEM 2. PROPERTIES
During 1990, Federal Trust entered into a long-term lease obligation with John
Martin Bell, a stockholder and former director of Federal Trust, and the wife of
a former director of Federal Trust, James T. Bell, for the use of the Federal
Trust Building located at 1211 Orange Avenue, Winter Park, Florida. The Federal
Trust Building serves as the headquarters for the Bank. and the Company. The
base annual rental paid in 1998 was $284,700 or $21.40 per square foot and
increases annually according to the CPI. The lease was restated in 1991 and
amended in 1992, 1993 and 1995 and expires in 2000, unless allowed to
automatically renew for two successive ten year periods. The lease is considered
an "affiliated party" transaction under Federal Reserve Board regulations.
The Company has an operating lease with its former chairman and major
stockholder relating to its main facility which minimum lease term expires in
December 2000 and which contains two ten-year renewal options. During the fourth
quarter of 1998, management changed its intentions with respect to the exercise
of the lease renewal option and determined it was no longer probable the renewal
option would be exercised as originally anticipated. As a result of such change
in estimate, the remaining estimated useful life of the associated leasehold
improvements has been reduced in order to amortize the remaining useful life of
such leasehold improvements over the minimum lease term. Accordingly, beginning
January 1, 1998, remaining leasehold improvements are being amortized over the
remaining three-year period minimum lease term amounting to approximately
$237,000 a year. The impact of this change in estimate on 1998 was to increase
occupancy and equipment expense and decrease net income by approximately
$178,000 and $111,000, respectively.
The offices leased by, and formerly occupied by, Federal Trust Corporation are
rented on a month to month basis by Federal Trust Properties Corporation, a
former subsidiary of the Corporation, for the same amount as the Corporation
pays.
The following table sets forth certain information on the Company's principal
offices, net carrying value and the expiration of leases when applicable at
December 31, 1998.
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<PAGE>
Net carrying value of real property
Lease
Owned Leased expiration
----- ------ ----------
Federal Trust Building - 0 - $475,191 12/31/00
1211 Orange Avenue
Winter Park, Florida 32789
Federal Trust Bank Sanford Office - 0 - $212,836 12/31/03
312 West First Street, Suite 100
Sanford, Florida 32771
Federal Trust Corporation - former offices - 0 - $ - 0 - 10/01/01
1270 Orange Avenue, Suite C
Winter Park, Florida 32789
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Company is a party
or to which any of its property is subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS
During the fourth quarter of the fiscal year ended December 31, 1998, no matters
were submitted to a vote of the security holders through a solicitation or
otherwise.
[THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK.]
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<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND
RELATED SECURITY HOLDER MATTERS
There had been no active or established public market in the common stock of the
Company, however, subsequent to the stock offering in the fourth quarter of
1997, which closed on December 4, 1997, the Company's stock began trading on the
Over-The-Counter Bulletin Board under the symbol FDTR and on June 17, 1998, the
Company's stock began trading on the NASDAQ Small Cap Market under the symbol
FDTR. As of January 2, 1999, there were 455 holders of common stock of the
Company, some of which are street name holders. The Company did not pay
dividends during 1996, 1997 or 1998.
On March 9, 1999 the closing sales price of the Company's common stock was
$2.59. From December 5, 1997 when the Company's stock began trading on the
Over-the-Counter Bulletin Board, through December 31, 1997, the range of sale
prices was $2.50 to $3.50. At December 31, 1997, the Company's stock was bid at
$2.75 with an asking price of $3.25.
Calendar Year 1998
------------------
Low $ High $
----- ------
First Quarter 3.00 4.38
Second Quarter 4.19 4.75
Third Quarter 2.50 4.44
Fourth Quarter 2.31 2.75
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial data for Federal Trust as of
the dates and for the periods indicated. Such information is qualified in its
entirety by the more detailed information set forth in the Financial Statements
and the notes thereto included elsewhere herein.
<TABLE>
<CAPTION>
Summary of Operations
Year Ended December 31,
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(In Thousands of Dollars except per share amounts)
<S> <C> <C> <C> <C> <C>
Interest income 11,016 10,159 9,937 10,609 9,847
Interest expense 7,618 7,176 7,038 8,029 5,781
Net interest income 3,398 2,983 2,899 2,583 4,066
Provision for loan losses 165 93 280 779 531
Net interest income after provision for loan losses 3,233 2,890 2,619 1,804 3,535
Non-interest income 874 852 427 505 483
Non-interest expenses 3,231 3,156 4,236 5,791 4,238
Earnings (loss) before income taxes 696 586 (1,190) (3,482) (220)
Income tax (benefit) expense 263 229 (214) (1,232) (41)
Net earnings (loss) 433 357 (977) (2,250) (179)
Net earnings (loss) per share .09 .15 (.43) (1.00) (0.08)
Average equity to average assets 7.28% 4.94% 5.13% 5.55% 6.22%
Return on average assets .35% .26% (.70%) (1.50%) (.12%)
Return on average equity 4.79% 5.24% (13.62%) (26.96%) (2.00%)
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
Summary of Financial Condition
At December 31,
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(In Thousands of Dollars)
<S> <C> <C> <C> <C> <C>
Cash, non-interest-bearing 2,118 446 629 1,619 744
Investments(2) 6,468 14,654 21,145 17,842 33,137
Loans, net 152,068 121,909 112,547 112,906 111,183
All other assets 13,811 5,575 5,261 8,022 8,893
------- ------- ------- ------- -------
Total assets 174,465 142,584 139,582 140,389 153,957
======= ======= ======= ======= =======
Deposits 129,292 104,890 106,119 109,203 101,528
Borrowings 28,500 23,000 24,800 21,000 39,500
All other liabilities 3,552 2,123 1,498 2,126 1,911
Stockholders' equity 13,121 12,571 7,165 8,060 11,018
------- ------- ------- ------- -------
Total liabilities and stockholders' equity 174,465 142,584 138,582 140,389 153,957
======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
For the Year Ended December 31,
Other Data 1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Return on average assets .35% .26% (.70%) (1.50%) (.12%)
Return on average equity 4.79% 5.24% (13.62%) (26.96%) (2.00%)
Dividend payout -- -- -- -- $ .12
Average equity to average assets ratio 7.28% 4.94% 5.13% 5.55% 6.22%
Average interest rate spread (1) 1.93% 2.12% 1.99% 1.58% 2.63%
Net yield on average interest-earning assets(2) 7.37% 7.71% 7.41% 7.41% 6.99%
Non-interest expenses to average assets 2.07% 2.28% 3.03% 3.79% 2.96%
Ratio of average interest-earning assets to average
interest-bearing liabilities 1.07 1.03 1.03 1.04 1.06
Residential mortgage loans (1-4), mortgage-backed
securities, US Government and agency
obligations, and interest-earning deposits
with the FHLB as a percentage of total assets 88.0% 88.5% 87.0% 76.5% 78.5%
Non-performing loans and real estate owned as a
percentage of total assets 1.41% 1.87% 1.79% 4.70% 6.02%
Allowance for loan losses as a percentage of total loans, net .75% .91% 1.36% 1.83% 1.78%
Total number of full service facilities 2 1 1 1 2
Total shares outstanding (in thousands) 4,942 4,942 2,240 2,240 2,240
Earnings (loss) per share $ .09 $ .15 ($ .43) ($ 1.00) ($ .08)
Book value per share 2.66 $2.54 $ 3.20 $ 3.60 $ 4.92
</TABLE>
(1) Difference between weighted average yield on all interest-earning assets
and weighted average rate on all interest-bearing liabilities.
(2) Includes interest-earning balances in other banks, federal funds sold,
U.S. government and agency obligations, FHLB Stock and marketable equity
securities.
28
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF
FEDERAL TRUST CORPORATION
RESULTS OF OPERATIONS
Overview
The Bank's net earnings were positively affected by the decline in interest
rates that occurred during 1997, 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 decreased faster than the yields earned on its
assets, resulting in an increase in its interest rate spread and higher
earnings. The Bank has continued to concentrate on increasing its portfolio of
adjustable rate loans and as interest rates declined in 1998 the Bank shortened
the maturities of its liabilities to take advantage of falling interest rates.
The decline in interest rates, however, increased the amount of loans held by
the Bank that were prepaid as borrowers refinanced their mortgages to take
advantage of the lower rates, resulting in an increase in the premium writeoff
by the Bank. These premiums were paid when the Bank purchased loans from third
parties. In addition, the Bank has experienced some resistance by customers to
purchase time deposits at the lower interest rates and has had to adjust its
rates upward somewhat to attract and retain deposits. As a result, the Bank's
interest rate spread increased in dollars during 1998 due primarily to growth,
but decreased in percentage terms as the interest rate spread narrowed. A
portion of the increase in interest income was the continued reduction in the
amount of non-performing assets.
During 1998 the Bank increased the amount of its addition to its loss reserves.
Although the level of non-performing assets decreased slightly in 1998, the
Bank's loan portfolio grew by over $30 million, necessitating increased loan
loss reserves. Although management believes that the level of non-performing
assets will continue to decrease somewhat 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. In addition, the Bank has been increasing the
amount of commercial loans in its portfolio consisting primarily of loans
insured by the SBA in its efforts to increase the yields earned on loans through
the diversification of the loan portfolio, but has continued is concentration on
residential mortgage loans, which tend to have a lower risk of loss and, as a
result, lower yields. During 1998 the Bank expanded its residential loan
production department with the addition of seven people as a part of its growth
plan and increased its production of residential mortgage and construction loans
in excess of $16 million over 1997. 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.
In 1998 the Company increased its profit by over 20% from 1997, as a result of
increased net interest income resulting from growth in the Company's asset size,
increased non-interest income, and decreased FDIC premiums and real estate owned
expenses. The Company made a profit in 1997 after incurring a loss for 1996,
primarily as a result of the reduced legal expenses and other costs associated
with repossessed assets, the increase in the net interest margin, profits on the
sale of real estate owned, and a reduction in other expenses. Also in 1996,
there was a one time special assessment that was charged to all SAIF insured
institutions to fully capitalize the SAIF at 1.25 percent of insured deposits,
which amounted to $716,498 for the Bank.
General
Federal Trust Corporation ("Federal Trust" or the "Company" or the "Holding
Company"), formerly FedTrust Corporation, was incorporated as a unitary savings
and loan holding company in August, 1988. Federal Trust was capitalized on
February 28, 1989 and acquired all outstanding common stock of Federal Trust
Bank, a federally chartered savings bank (the "Bank"), formerly First Coast
Savings Bank, F.S.B., in exchange for all the outstanding shares of Federal
Trust. Five shares of Federal Trust'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 Federal Trust and began operations on May 3, 1988.
During 1995 and the first half of 1996 Federal Trust Properties Corporation
("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
29
<PAGE>
$60,000in cash, a note for $60,000 which was paid on August 8, 1996, a note for
$230,354 which was paid on September 2, 1997, a note for $25,000 that was due
and paid on December 31, 1998, and two notes for $25,000 each, due December 31,
1999 and 2000, respectively. In addition, the Company is renting the quarters it
previously occupied to FTPC on a month to month basis. 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,
in June 1996 Mr. James T. Bell resigned as Chairman, President and Chief
Executive Officer of the Company and did not stand for reelection to the Board
of Directors when his term expired in 1997. The Board named James V. Suskiewich,
the Chairman, President and Chief Executive Officer of the Bank, to the
positions previously held by Mr. Bell.
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 annual lease
payment on this facility was $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 had 16 years remaining. The sale closed in September and the Company
incurred a loss of $34,262, which was the lease termination fee and closing
costs on the sale. 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.
The following table sets forth, for the periods indicated, information regarding
(i) the total dollar amount of interest and dividend income of Federal Trust
from interest-earning assets and the resultant average yields; (ii) the total
dollar amount of interest expense on interest-bearing liabilities and the
resultant average cost; (iii) net interest income; (iv) interest rate spread;
(v) net interest margin; and (vi) weighted average yields and rates.
Average balances are based on average daily balances.
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996
Average Average Average
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans(1) 135,617 10,438 7.70% 113,472 9,303 8.20% 112,288 9,040 8.05%
Investment securities 8,055 303 3.76% 14,454 619 4.28% 15,728 675 4.29%
Other interest-earning assets 5,869 275 4.69% 3,780 237 6.27% 6,029 222 3.66%
------- ------ ---- ------- ----- ---- ------- ----- ----
Total interest-earning assets 149,541 11,016 7.37% 131,706 10,159 7.71% 134,062 9,937 7.41%
Non-interest-earning assets 6,520 6,525 5,719
------- ------- -------
Total assets 156,061 138,231 139,781
======= ======= =======
Interest-bearing liabilities:
Non-interest bearing demand deposits 886 -- 0.00% 271 -- 0.00% 239 -- 0.00%
Interest bearing demand deposits 11,171 394 3.53% 7,903 303 3.82% 7,483 266 3.55%
Savings deposits 924 24 2.60% 1,286 33 2.57% 1,641 43 2.62%
Time deposits 101,015 5,687 5.63% 95,652 5,439 5.69% 97,042 5,451 5.62%
------- ----- ---- ------ ----- ---- ------ ----- ----
Total Deposit accounts 113,996 6,105 5.36% 105,112 5,775 5.49% 106,405 5,760 5.41%
FHLB advances & other borrowings 26,150 1,513 5.79% 23,209 1,401 6.04% 23,529 1,277 5.43%
------ ----- ---- ------ ----- ---- ------ ----- ----
Total interest-bearing liabilitie 140,146 7,618 5.44% 128,321 7,176 5.59% 129,934 7,037 5.42%
Non-interest-bearing liabilities 4,551 3,084 2,677
Retained earnings and stockholder's equity 11,364 6,826 7,170
------ ----- -----
Total liabilities & retained earn 156,061 138,231 139,781
======= ======= =======
Net interest/dividend income 3,398 2,983 2,899
===== ===== =====
Interest rate spread(3) 1.93% 2.12% 1.99%
==== ==== ====
Net interest margin(4) 2.27% 2.28% 2.16%
==== ==== ====
Ratio of average interest-earning assets to
average interest-bearing liabilities 1.07% 1.03% 1.03%
==== ==== ====
</TABLE>
(1) Includes non-accrual loans.
(2) Includes interest-earning deposits and FHLB of Atlanta stock
(3) Interest rate spread represents the difference between the average
yield on interest-earning assets and the average cost of
interest-liabilities.
(4) Net interest margin is net interest income dividend divided by average
stock interest-earning assets.
30
<PAGE>
Rate/Volume Analysis: The following table sets forth certain information
regarding changes in interest income and interest income expense of Federal
Trust for the periods indicated. For each category of interest-earning assets
and interest-bearing liabilities, information is provided on changes
attributable to (1) changes in rate (change in rate multiplied by prior volume,
(2) changes in volume multiplied by prior rate and (3) changes in rate-volume
(change in rate multiplied by change in volume).
<TABLE>
<CAPTION>
Year Ended December 31, 1998 Year Ended December 31, 1997 Year Ended December 31, 1996
vs. 1997 vs. 1996 vs. 1995
Increase (Decrease) Due to Increase (Decrease) Due Increase (Decrease) Due to
Rate/ Rate/ Rate/
Rate Volume Volume Total Rate Volume Volume Total Rate Volume Volume Total
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans (569) 1,816 (112) 1,135 166 95 2 263 315 (258) (19) 38
Investment securities (75) (274) 33 (316) (1) (55) -- (56) (284) (423) 93 (614)
Other interest-earning assets (60) 131 (33) 38 157 (83) (59) 15 (92) (19) 15 (96)
---- ----- --- --- -- -- --- -- --- ---- -- ---
Total (704) 1,673 (112) 857 322 (43) (57) 222 (61) (700) 89 (672)
Interest-bearing liabilities:
Deposit accounts (146) 488 (12) 330 86 (70) (2) 14 (260) (218) 25 (453)
FHLB Advances &
other borrowings (58) 178 (8) 112 143 (17) (2) 124 (151) (368) (16) (535)
---- ----- --- --- -- -- --- -- --- ---- -- ---
Total (204) 666 (20) 442 229 (87) (4) 138 (411) (586) 9 (988)
Net change in net interest
income before provision
for loan losses (500) 1,007 (92) 415 93 44 (53) 84 350 (114) 80 316
==== ===== === === == == === == === ==== == ===
</TABLE>
Impact of Interest Rates on Investment Portfolio
During 1998 the Federal Reserve decreased interest rates as the economy slowed.
As a result of the higher interest rates prior to 1998, the Bank's portfolio of
investments consisting primarily of Federal Home Loan Bank Bonds ("Bonds"), was
adversely affected as to their market value, but the market value has improved
as a result of decreased interest rates and the decrease in the time to
maturity. In addition, the Bank has sold some of the bonds in each of the years
since 1995. At December 31,1996 the unrealized losses were $1,069,171, at
December 31, 1997 the unrealized losses had decreased to $623,468, and at
December 31, 1998 the unrealized losses had further decreased to $319,375.
Pursuant to Financial Accounting Standards Board (FASB), Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
equity Securities", which requires that investments be classified into three
categories, the Bank had classified the Bonds as Held-to-maturity securities,
and, as a result, the Bonds were reported at amortized cost. However, on
November 30, 1995 the bank reclassified its entire portfolio of Federal Home
Loan Bank bonds from the held to maturity category to the available for sale
category, in accordance with the guidance issued by the Financial Accounting
Standards Board (FASB), which permitted the one-time opportunity to reassess the
designations of all securities between November 15, 1995 and December 31, 1995.
The transfer resulted in an increase in the unrealized loss on investment
securities available for sale, net of the effect of income taxes as a component
of stockholders' equity, to $1,291,699 at November 30,1995. During December
1995, the bank sold $7,250,000, par value, of the Federal Home Loan Bank bonds
maturing in 2003, at a gross loss of $942,500, which decreased the unrealized
loss on investment securities available for sale, net of the effect of income
taxes as a separate component of stockholder's equity to $779,872 at December
31, 1995. On April 1, 1996, the Company transferred $7,000,000 par value of the
Federal Home Loan Bank bonds maturing in 2003 from the available for sale to the
held to maturity category. During 1996 the Bank sold $1,000,000 par value, of
the Federal Home Loan Bank bonds maturing in 1997 and 1998 at a gross loss of
$12,344. In 1997 the Bank sold $5,750,000 par value of the bonds at a gross loss
of $125,625. During 1998 the Bank sold $3,350,000 par value of the bonds at a
gross loss of $9,945. As a result of these sales, the Bank no longer has any
investment securities classified as available for sale. (See "Impact of
Accounting Requirements").
31
<PAGE>
The one remaining bond, which is classified as held to maturity, is issued by,
and is the joint and several obligation of, the Federal Home Loan Banks, which
are instrumentalities of the U.S. Government and are rated AAA by Moody's. As a
result, management is of the opinion that the Bond carries little, if any, risk
of default. The market value of the bond, has been and will continue to be,
affected by the overall level of interest rates until it matures. The one
remaining bond will mature in 2003.
Liquidity
The Bank is required by the OTS to maintain a daily average balance of liquid
assets equal to a specified percentage (currently 4%) of 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. In December 1998, the
Bank's average liquidity was 7.71%.
Federal Trust expects the Bank to generate sufficient deposits to provide
liquidity for expected loan growth and other investments. The Asset/Liability
Management Committee of the Bank meets regularly and, in part, reviews liquidity
levels to ensure that funds are available as needed.
Provisions for Loan Losses
A provision for loan losses is generally charged to operations based upon
management's evaluation of the losses in its loan portfolio and as a result, the
Bank charged $165,000 to its provision for loan losses during 1998.
The Bank's net loans increased by $30.2 million during 1998. Although management
believes that its present allowance for loan losses is adequate as of December
31, 1998, the Bank's provisions are based on the current and currently
anticipated future operating conditions, thereby causing these estimates to be
susceptible to changes that could result in a material adjustment to results of
operations in the near term. The amount needed in the allowance for loan losses
is based on the particular circumstances of the individual non-performing loans,
including the type, amount, and value of the collateral, if any, and the overall
composition and amount of the performing loans in the portfolio at the time of
evaluation, and, as a result, will vary over time. The composition of the loan
portfolio continued to change in 1998 as the Bank continued to reduce the amount
of commercial loans in its portfolio, with the exception of those loans insured
by the SBA which have increased, and concentrated primarily on residential
mortgage loans, which tend to have a lower risk of loss. Recovery of the
carrying value of loans is dependent to a great extent on economic, operating
and other conditions that may be beyond the Bank's control. Therefore, actual
losses in future periods could differ materially from amounts provided in the
current period and could result in a material adjustment to operations.
The allowance for loan losses at December 31, 1998 was $1,136,056 or 83.5% of
non-performing loans and .75% of net loans receivable compared to $1,110,521 or
86.5% of non-performing loans and .91% of net loans at December 31, 1997. The
allowance at December 31, 1998 consisted of reserves for the performing loans in
the portfolio and reserves against certain loans based on management's
evaluation of these loans. During 1997, a portion of the reserves were utilized
to write down the loans when they became real estate owned and were subsequently
sold by the Bank. The lower level of reserves at December 31, 1998, reflects the
reduction in non-residential loans in the Bank's portfolio as the Bank has
reduced the amount of commercial loans in its portfolio with the exception of
those loans insured by the SBA, and concentrated primarily on residential
mortgage loans, which tend to have a lower risk of loss.
In addition to the continuing internal assessment of the loan portfolio, the
Bank's loan portfolio is also subject to examination by the OTS. The most recent
OTS regular examination was as of September 30, 1998 and concluded February 9,
1999. See "Supervision".
During 1998, the Bank's total non-accrual loans increased by approximately
$77,000.
Credit Risk
The Bank's primary business is the origination and acquisition of loans to
families and businesses. That activity entails potential credit losses, the
magnitude of which depends on a variety of economic factors affecting borrowers
32
<PAGE>
which are beyond the control of the Bank. While the Bank has instituted
guidelines and credit review procedures to protect it from 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
he Holding Company and the Bank are subject to extensive regulation, supervision
and examination by the OTS, their 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 depositors and the SAIF.
On October 3, 1004, Federal Trust and the Bank voluntarily entered into
individual Cease and Desist Orders (collectively, the "Orders") with the OTS.
The Bank Order superseded a prior Supervisory Agreement with the Bank. Under the
Holding Company's Order, Federal Trust; (i) could not request dividends from the
Bank without written permission from the OTS; (ii) was required to reimburse the
Bank for the Holding Company's expenses; (iii) had to 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; and (iv) was
required to report to the OTS on a quarterly basis the Company's compliance with
the Order. The Bank's initial Order contained 27 provisions which were directed
at the Bank's operations, particularly in the areas of loan underwriting and
loan administration. The Bank was required to, amongst other directives, (i)
develop and implement a written plan to collect, (ii) strengthen and reduce the
risk of loss for all real estate owned and for certain loans at risk and secured
by real estate; (iii) pay no more than market rate for the lease of the Bank's
offices: (iv) make no payment of taxes on behalf of a person deemed to be an
affiliate of the Bank; (v) make no capital distribution to the Holding Company
without the consent of the OTS; and (vi) was required to report to the OTS on a
quarterly basis the Bank's compliance with the Order.
The Compliance Committees of the Holding Company and the Bank met monthly to
ensure that the Holding Company and the Bank were in compliance with the terms
of the Orders. The Bank also contracted with a company specializing in the
review of internal controls and operating procedures of financial institutions,
including compliance with internal policies and procedures. In the 1996
examinations of Federal Trust and the Bank, the OTS found the companies to be in
compliance with the Orders and upgraded the supervisory rating of Federal Trust
to an acceptable level. In light of the improvement in the Bank's operations,
the OTS reduced the number of provisions in the Bank's Order from 27 to 23.
In connection with the Rights and Community Offering ("Offering"), management
requested that the OTS perform an examination on the Bank's loan underwriting
and classification, and allocated for loan losses. The OTS did not take
exception to the Bank's classifications or its allocation for loan losses. This
portion of the examination was completed in the first week of August 1997. In
October 1997, the OTS undertook the second phase of the examination which was
directed at the Bank's operation and included a separate examination of the
Holding Company. The examinations showed marked improvement on the operations of
the Holding Company and the Bank.
In December 1997, the Bank formally requested that the OTS remove the growth
restrictions. In January 1998, management requested that the OTS rescind the
Orders against the Holding Company and the Bank. The OTS granted the requests,
rescinding the Bank's growth restrictions on March 13, 1998, and lifting the
Orders on June 1, 1998.
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
33
<PAGE>
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 Federal Trust are monetary in
nature. As a result, interest rates have a more significant impact on Federal
Trust's performance than the effects of general levels of inflation. Interest
rates do not necessarily move in the same direction or in the same magnitude as
the prices of goods and services, since such prices are affected by inflation to
a larger extent than interest rates.
Impact of Accounting Requirements
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information". This statement requires that a public
business enterprise report financial and descriptive information about its
reportable operating segments. Operating segments are components of an
enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performance. This Statement is effective for
fiscal years beginning after December 15, 1997. The Company adopted the
Statement effective January 1, 1998, however, the Company has only one
reportable segment.
In June 1998 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedge Activities" (FASB 133). This statement, which is effective for all
fiscal quarters and all fiscal years beginning after June 15, 1999, requires all
derivatives be measured at fair value and be recognized as assets and
liabilities in the statement of financial position. This Statement sets forth
the accounting for changes in fair value of a derivative depending on the
intended use and designation of the derivative. The Company does not expect the
adoption of this Statement to have any impact on its consolidated financial
statements.
In October 1998, the FASB issued Financial Accounting Standards No. 134,
"Accounting for Mortgage-Backed Securities Retained after the Securitization of
Mortgage Loans Held for Sale by a Mortgage Banking Enterprise." This Statement
requires that after the securitization of a mortgage loan held for sale, an
entity engaged in mortgage banking activities classify the resulting
mortgage-backed security as a trading security. The Statement is effective for
the first fiscal quarter beginning after December 15, 1998. The Company does not
expect the adoption of this Statement to have any impact on its consolidated
financial statements.
Year 2000 Considerations
As in the case for all businesses that rely on computers for their business and
record keeping, the concern is whether the Company's software and hardware
systems will be able to "read" the Year 2000. The Company has formulated a Year
2000 Action Plan ("Year 2000 Plan") which has been approved by the Board of
Directors. Management believes that all affected systems have been identified
and steps are being taken to ensure that all necessary changes are accomplished
by July 31, 1999. An OTS off-site examination was performed on the Year 2000
Plan in September 1997 and required certain changes be made to the Plan. The OTS
conducted an on-site examination in January 1999 and did not require any further
changes to the plan. The Board of Directors receives quarterly reports regarding
the progress made on the implementation of the Year 2000 Plan. Management has
concluded that the additional costs for Year 2000 compliance will be
approximately $50,000, in addition to already budgeted purchases of new
equipment and software.
The Year 2000 Action Plan consists of five phases which are awareness,
assessment, renovation, validation, and implementation. The awareness phase
consists of defining the Year 2000 problem and committing the necessary
resources to perform the required compliance work. The assessment phase consists
of determining the size and complexity of the problem, as well as the magnitude
of the effort necessary to address the Year 2000 issues. The renovation phase
includes software enhancements, hardware and software upgrades or replacements,
and other changes necessary to achieve Year 2000 readiness. The validation phase
involves testing the renovated or replaced hardware and software components for
Year 2000 compliance. The implementation phase consists of certifying the system
as Year 2000 compliant and beginning the use of the renovated system. There is
one additional item that should be included in a Year 2000 Action Plan which is
a contingency plan. Even when the systems involved have completed each of the
five phases, a contingency plan is necessary inasmuch as there is always the
chance that a system may still fail when the Year 2000 arrives as a result of
unforeseen problems.
34
<PAGE>
The Company has identified what it believes are the information technology
systems which are "mission critical" to the operation of the Company's business.
The Company's primary information technology system is the Fiserv service bureau
which process the Company's deposit accounts, loan accounts, and general ledger
accounts. The Company interfaces with Fiserv through a local area network
consisting of two network servers which in turn are connected to the personal
computers (PC's) at the Company's two locations. In addition to Fiserv, the
Company has identified the Federal Reserve Bank (FRB) FedWire system, and the
Federal Home Loan Bank (FHLB) DIAL system as "mission critical". The Company
interfaces with the FRB and FHLB systems with PC's at its main office.
In addition to the "mission critical" systems, the Company identified and
assessed various other systems that could potentially be affected by the Year
2000. These systems included the Company's telephone systems, security systems,
cooling and heating systems, fax machines, and postage meter. The Company
currently does not own or use any Automated Teller Machines or elevators, since,
if it did, these systems could also be potentially affected by the Year 2000. In
the assessment phase it has been determined that these other systems should not
be affected by the Year 2000 date issue, since these systems, with the exception
of the fax machines and the postage meter, do not use a date. The fax machines
and the postage meter will show the date in the Year 2000 as "00", which the
Company believes is acceptable.
In late 1997, the Company began the replacement of all of its personal computers
which was completed in the fourth quarter of 1998. This replacement of PC's was
a part of the Company's plan to convert from the Tampa service bureau of Fiserv
to the Orlando service bureau of Fiserv. This conversion required the Company to
have a local area network at its offices and the PC's owned by the Company prior
to conversion did not meet the requirements of the new service bureau. The
conversion to the Orlando service bureau was completed in September 1998. The
new PC's and the network servers that were purchased in 1997 and 1998 were
tested at purchase to verify that they were Year 2000 compliant. In addition,
the purchase of the new PC's necessitated the purchase of new operating system
software, new word processing software, and new spreadsheet software. Each of
the manufacturers of the various software packages had stated that the software
was Year 2000 compliant and the Company has tested each of the software packages
with the new PC's, and the tests have indicated that the hardware and software
are able to process data in the Year 2000.
The Fiserv Orlando service bureau has been expending significant resources in
addressing the Year 2000 issue since 1997. It has completed the evaluation phase
on all its systems and has completed the renovation phase on nine of its eleven
systems. The testing phase and implementation phase has been completed on five
systems, and all systems are scheduled to be finished with the testing and
implementation phases by June 30, 1999. On November 8, 1998, the Company
participated in the test of the primary Fiserv system and has received a report
that states that the testing was successful and the remediated software has been
implemented.
The FRB Fedwire has renovated its system for Year 2000 compliance and the
Company participated in several tests of the system in the first quarter of
1999, but as yet has not received the results of the tests. The FHLB DIAL system
has issued a new software package in conjunction with its Year 2000 compliance
program which the Company received and implemented in the first quarter of 1999.
The upgrade of the FHLB DIAL system necessitated the purchase of a new PC.
While the testing and implementation phases continue on the affected systems,
the Company developed its contingency plans in the fourth quarter of 1998 which
the OTS reviewed as part of their Year2000 examination in January 1999. The
Company will test the plan during the first quarter of 1999. The contingency
plan provides for the manual capture of data and the manual updating of the
deposit, loan, and general ledger accounts. In addition, the plan provides for
utilizing the services of the Federal Reserve and the FHLB by telephone.
While the Company believes that it is taking the necessary steps to achieve Year
2000 compliance, there can be no assurance that every contingency can be
foreseen or corrected prior to the arrival of the Year 2000. The Company is of
the opinion that the greatest risk it faces is the failure of its service bureau
to function properly or at all when the Year 2000 arrives. The failure of the
service bureau would cause a severe hardship on the Company in being able to
serve its customers fully and could have a very significant negative impact on
the Company's earnings. The Company's contingency plan addresses this possible
worst case scenario and provides for continuing the operations of the Company
should this occur.
35
<PAGE>
Results of Operations
Comparison of the Years Ended December 31, 1998 and 1997 and 1996
General. The Company had a net profit for 1998 of $432,601 or $.09 per share
compared to a net profit of $357,432 or $.15 per share for 1997, and a net loss
of $976,503 or $.43 per share in 1996. The improvement from a net loss for 1996
to a net profit in 1997 and 1998 was due to an increase in net interest income,
decreased provisions for loan losses, an increase in other income, and decreased
other expenses.
Interest Income and Expense. Interest income was $11,015,899 in 1998 compared to
$10,159,346 in 1997 and $9,936,960 in 1996. Interest income on loans increased
to $10,437,822 in 1998 from $9,302,807 in 1997 compared to $9,039,426 in 1996.
The increase in interest income on loans in 1998 was primarily attributable to
an increase in the average amount of loans outstanding during the year, however,
this was partially offset by a decrease in rates earned on loans. The decrease
in interest rates on loans was partly the result of loans held by the Bank that
were prepaid as borrowers refinanced their mortgages to take advantage of the
lower interest rates available on mortgages during 1998, resulting in an
increase in the premium writeoff by the Bank. These premiums were paid when the
Bank purchased loans from third parties. The increase in interest income on
loans in 1997 as compared to 1996 was attributable to increased interest rates
on the loans and an increase in the average amount of loans outstanding during
the year. Interest income on investment securities decreased to $302,728 in 1998
from $619,706 in 1997 as a result of a decrease in the average balance of
investment securities held by the Bank. Interest income on investment securities
decreased from $675,279 in 1996 to $619,706 in 1997 as a result of a decrease in
the average amount of investment securities and a decrease in the interest rates
earned on the securities. Other interest and dividends increased from $236,833
in 1997 to $275,349 during 1998 due to an increase in the average amount
outstanding, offset partially by a decrease in rates earned on the assets, and
other interest and dividends increased from $222,255 in 1996 to $236,833 in 1997
as a result of an increase in the interest rates earned, offset partially by a
decrease in the average balance of other interest-bearing assets. Management
expects the rates earned on the portfolios to fluctuate with general market
conditions.
Interest expense increased during 1998 to $7,617,728 compared to $7,175,978 in
1997 primarily due to an increase in the average amount of deposit accounts and
FHLB advances outstanding, offset partially by a decrease in the interest rates
paid. Interest expense increased during 1997 to $7,175,978 compared to
$7,037,882 in 1996 due to an increase in interest rates, offset partially by a
decrease in the average amount of deposit accounts and FHLB advances
outstanding. Interest expense on deposits increased by $330,044 in 1998 as a
result of an increase in the average amount of deposits, offset partially by a
decrease in the rates paid on deposits. There was a increase of $14,294 in
interest expense in 1997 from 1996, as a result of an increase in the rates paid
on the deposits, although the average amount of deposits decreased slightly.
Interest expense on these accounts will increase or decrease according to the
general level of interest rates. Interest on FHLB advances and other borrowings
increased to $1,513,000 in 1998 from $1,401,294 in 1997 due to an increase in
the amount of advances outstanding, offset partially by a decrease in the
average rates paid on FHLB advances, and interest expense increased from
$1,277,492 in 1996 to $1,401,294 in 1997 as a result of an increase in the
average rates paid, offset partially by a decrease in the amount of advances
outstanding.. Management expects to continue to use such 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 losses in its loan
portfolio. The Bank's provision for loan losses for 1997 was $93,132 compared to
$279,596 in 1996. In 1998 the provision increased by $71,868 to $165,000 for the
year, primarily as a result of the increase in the amount of loans held by the
Bank. The Bank's gross loan portfolio grew by $35.6 million in 1998. Of this
amount, $34.9 million were mortgage loans, of which $32.9 million were
residential mortgage loans. As of December 31, 1998, 89.0% of the Bank's gross
loan portfolio was residential mortgage loans, which historically have had the
lowest risk of loss in the overall portfolio, and as a result have had a lower
reserve percentage applied to them based on historical loss percentages. In
previous years, a larger percentage of the allowance for loan losses was
designated for classified assets than was the case in 1998 as a result of the
resolution of a large amount of these classified assets. As a result, although
the gross loan portfolio increased by $35.6 million in 1998, the allowance for
loan losses only increased by $25,535 as a direct result of the resolution of
classified assets and the increase in the size of the portfolio being 92%
attributable to residential loans. Should the mix in the loan portfolio change
36
<PAGE>
from being primarily residential mortgage loans, the level of the allowance for
loan losses will also change based on the historical loss factors applied to the
various types of other loans added to the portfolio.
Gross charge-offs totaled $162,788 in 1998 compared to $529,777 for 1997 and
$1,223,240 for 1996. Total non-performing loans at December 31, 1998 were
$1,360,008 compared to $1,283,000 at December 31, 1997 and $991,000 at December
31, 1996. The allowance for loan losses at December 31, 1998 was $1,136,056 or
83.5% of non-performing loans and .75% of net loans receivable compared to
$1,110,521 or 86.5% of non-performing loans and .91% of net loans receivable at
December 31, 1997 compared to $1,533,003 or 154.7% of non-performing loans and
1.36% of net loans receivable at December, 31, 1996. The amount needed in the
allowance for loan losses for non-performing loans is based on the particular
circumstances of the individual loan, including the type, amount, and value of
the collateral, if any, and the overall composition and amount of the performing
loans in the portfolio at the time of evaluation, and, as a result, will vary
over time.
Total Other Income. Other income increased from $852,346 in 1997 to $873,762 for
the year ended December 31, 1998. The increase in 1998 was the result of
increased fees and service charges, increased gains on the sale of mortgage
loans, and increased other income, offset partially by decreased gains on the
sale of other real estate owned. Fees and service charges increased by $33,293
as a result of more deposit accounts at the Bank during the year. Gains on the
sale of loans increased by $92,603 as a result of the increase in the number of
fixed rate mortgage loans originated by the Bank which were then sold, as the
Bank adds adjustable rate mortgage loans to its portfolio and sells fixed rate
loans in order to reduce the Bank's interest rate risk. Gains on the sale of
other real estate owned decreased by $334,182 as a result of the decrease in the
amount of foreclosed real estate owned by the Bank. Other income increased by
$229,702 as a result of increases in loan servicing fees and loan application
fees, as a result of an increase in the number of loans originated.
Other income increased from $426,707 in 1996 to $852,346 in 1997 as the result
of gains on the sale of real estate owned of $490,049, primarily from the sale
of the 44 condominium units which the Company received title to in April 1997
and an increase of $167,919 in other income, offset partially by a decrease of
$57,328 in fees and service charges and a decrease of $126,427 in gains on the
sale of loans. Other income decreased as a result of decreases in loan servicing
fees and loan application fees.
Total Other Expense. Other expense increased to $3,410,748 in 1998 from
$3,156,502 in 1997. The increase was the result of increased salary and employee
benefits expense, increased office occupancy, increased general and
administrative expenses and increased other expense, offset partially by
decreased deposit insurance premiums, decreased legal and professional expense,
and decreased losses on the sale of investment securities. The increase in
salary and employee benefits of $237,805 was the result of additions to staff
during 1998. Staff was added in the loan department to increase the number of
loans originated, and staff was added in September for the new branch in Sanford
that opened in October. Office occupancy expense increased by $263,068 as a
result of the cost of living adjustment on the lease at the Winter Park office,
the addition of the Sanford branch office, and as a result of a change in the
estimated useful life of the leasehold improvements at the Winter Park office,
in order to amortize the remaining useful life of such leasehold improvements
over the minimum lease term (see "Item 2. Properties").. General and
administrative expenses increased by $5,429 as a result of increased personnel.
Other expense increased by $36,952 as a result of the increase in loans
originated. Deposit insurance premiums decreased by $73,787 as a result of the
reduction in the premium charged by the FDIC from 24 basis points to 3 basis
effective July 1, 1998, due to the improvement in the Bank's regulatory rating.
Legal and professional expense decreased by $999 due to reduced legal fees
associated with classified loans and real estate owned. The loss on sale of
investment securities decreased by $115,680 as a result of the sale of less
bonds in 1998.
Other expense decreased from $4,236,495 in 1996 to $3,156,502 in 1997. The
decrease of $1,079,990 in 1997 was attributable to a decrease in deposit
insurance premiums of $733,174, a decrease of $203,094 in legal and professional
fees, a decrease of $152,621 in the loss on the disposal of fixed assets, a
decrease of $139,308 in other expense, a decrease of $127,787 in real estate
owned expense, and a decrease of $106,535 in occupancy and equipment expense.
These decreases were offset partially by increases of $246,230 in salary and
employee benefits expense, an increase of $113,281 in loss on the sale of
investment securities, and an increase of $23,018 in general and administrative
expenses. The decrease in deposit insurance premiums was the result of the
37
<PAGE>
one-time special assessment that was charged by the FDIC on all SAIF insured
deposits as a result of legislation approved by Congress which the President
signed on September 30, 1996. The special assessment was paid in November 1996
at the rate of $0.657 per $100 and the Bank charged $716,498 against third
quarter earnings in 1996. The decrease in legal and professional fees was the
result of the reduction in the amount and number of non-performing loans. The
decrease in the loss on the disposal of fixed assets was the result of the
write-offs by the Holding Company in 1996 of the leasehold improvements in
conjunction with the sale of the drive-in facility, and the write-off of the
leasehold improvements at the Holding Company's office which it no longer uses.
The decrease in other expense was primarily the result of the Holding Company
becoming inactive in mid 1996, with all necessary functions performed by bank
personnel. The decrease in real estate owned expenses was due to the reduced
numbers of repossessed properties owned by the bank during the year. The
decrease in occupancy and equipment was the result of the sale of the drive-in
facility previously used by the bank and the subletting of the Holding Company
former offices. The increase in salary and employee benefits was primarily the
result of normal annual salary increases, increased staff, the commencement of
the 401k plan, the implementation of an executive supplemental retirement plan,
and increased group insurance costs. The increase in losses on the sale of
investments was the result of the sale of additional bonds from the investment
portfolio in order to reinvest the proceeds in higher yielding loans. The
increase in general and administrative expenses was primarily the result of
increased personnel.
Liquidity and Capital Resources at December 31, 1998
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 advances from
the FHLB, the sale of temporary investments, deposit growth and loan principal
payments. Management has no plans to significantly change long-term funding
requirements. 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
and deposits and the sale of real estate.
During the year ended December 31, 1998, the Company used funds primarily from
sale of loans of $9,094,996; proceeds from the sale of investment securities of
$3,340,055; proceeds from the sales of real estate owned of $1,260,317; proceeds
from the increase in certificate accounts and deposits of $24,403,675; and the
proceeds from FHLB advances of $5,500,000; to fund $40,662,868 in loan
originations and purchases, net; the funding of an executive supplemental income
plan for $1,330,000; the purchase of premises and equipment for $502,757; and
the purchase of FHLB stock for $297,500. Management believes that in the future,
funds will be obtained from the above sources. The weighted average cost of
interest-bearing liabilities at December 31, 1998 was 5.26% compared to 5.50% at
December 31, 1997.
At December 31, 1998, loans-in-process, or closed loans scheduled to be funded
over a future period of time, totaled $7,589,414. Loans committed, but not
closed, totaled $13,510,122 and available lines of credit totaled $681,054.
Funding for these amounts is expected to be provided by the sources described
above. As of December 31, 1998, the Bank had outstanding FHLB advances of
$28,500,000 compared to $23,000,000 in 1997.
During 1997, the Company sold common stock through a rights/community offering.
The offering provided for the sale of a maximum of 2,701,619 shares (minimum of
1,000,000 shares). The offering ended on December 4, 1997. The number of shares
sold in the offering was 2,701,619 and generated $4,773,879, for the Company
after payment of offering expenses. Of the monies raised, $3,700,000 was
contributed to the Bank through the purchase of common stock in the Bank. No
securities were sold during 1996 or 1998.
OTS regulations require the Bank to maintain a daily average balance of liquid
assets equal to a specified percentage (currently 4%) of net withdrawable
deposit accounts and borrowings payable in one year or less. Generally, the
38
<PAGE>
Bank's management seeks to maintain its liquid assets at comfortable levels
above the minimum requirements imposed by its regulators. For the month ending
December 31, 1998, liquidity averaged 7.71%.
The Company expects the Bank's two central Florida offices to generate
sufficient deposits to provide liquidity for expected loan originations and
other investments. The Asset/Liability Management Committee of the Bank meets
regularly and, in part, reviews liquidity levels to ensure that funds are
available as needed.
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 were
incurred by the Company from the fourth quarter of 1994 through the third
quarter of 1996, no additional dividends have been declared and the Board of
Directors decided to suspend the payment of dividends for calendar year 1995,
1996, 1997 and 1998. Although the Company was profitable during 1998 and
projects a profit for 1999, the Board of Directors does not anticipate the
payment of dividends in 1999, as the earnings are being retained in order to
permit the bank to continue to grow. 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
At December 31, 1998 the Holding Company's liquidity consisted of $1.35 million
of cash which was the portion of the proceeds from the stock offering that were
not invested in the Bank. The earnings from this cash are used to pay the
expenses of the Holding Company.
The following table is a reconciliation of the Bank's stockholder's equity
calculated in accordance with generally accepted accounting principles to
regulatory capital:
At December 31, 1998
Tier I Risk-Based
------ ----------
Stockholders' equity as shown in the accompanying
financial statements 11,371 11,371
Other:
Unrealized loss on investments 332 332
General valuation allowances -- 1,136
Less: Excess mortgage servicing rights and
Excess net deferred tax assets (21) (21)
Less: Assets required to be deducted -- (55)
------- -------
Regulatory capital 11,682 12,763
======= =======
At December 31, 1998, the Bank met each of its capital requirements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk and Asset/Liability Management
Readers should note, in particular, that this document contains forward-looking
statements within the meaning of Section 21E of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), that involve substantial risks and
uncertainties. When used in this document, or in the documents incorporated by
reference herein, the words "anticipate", "believe", "estimate", "may", "intend"
and "expect" and similar expressions identify certain of such forward-looking
statements. Actual results, performance or achievements could differ materially
from those contemplated, expressed or implied by the forward-looking statements
contained herein. The considerations listed herein represent certain important
factors the Company believes could cause such results to differ. These
considerations are not intended to represent a complete list of the general or
specific risks that may affect the Company. It should be recognized that other
risks, including general economic factors and expansion strategies, may be
significant, presently or in the future, and the risks set forth herein may
affect the Company to a greater extent than indicated.
39
<PAGE>
The Company's net income is dependent to a large extent on its net interest
income, which is susceptible to interest rate risk to the extent that
interest-bearing liabilities mature or reprice on a different schedule than
interest-earning assets. In order to minimize the potential for adverse effects
of material and prolonged increases in interest rates on Federal Trust's results
of operations, Federal Trust's management has implemented and continues to
monitor asset and liability management policies to better match the maturities
and repricing terms of Federal Trust's interest-earning assets and
interest-bearing liabilities. Such policies have consisted primarily of: (i)
emphasizing the origination and purchase of single-family residential
adjustable-rate mortgage loans ("ARMs"); (ii) maintaining a stable core deposit
base with a relatively high percentage of low-cost deposits; and (iii)
maintaining an adequate portion of liquid assets (cash and interest-bearing
deposits).
The matching of assets and liabilities may be analyzed by examining the extent
to which such assets and liabilities are "interest rate sensitive" and by
monitoring an institution's interest rate sensitivity "gap." An asset or
liability is said to be interest rate sensitive within a specific time period if
it will mature or reprice within that time period. The interest rate sensitivity
gap is defined as the difference between interest-earning assets and
interest-bearing liabilities maturing or repricing within a given time period. A
gap is considered positive when the amount of interest rate sensitive assets
exceeds interest rate sensitive liabilities. A gap is considered negative when
the amount of interest rate sensitive liabilities exceeds interest rate
sensitive assets. During a period of rising interest rates, a negative gap would
adversely affect net interest income, while a positive gap would result in an
increase in net interest income. During a period of falling interest rates, a
negative gap would result in an increase in net interest income, while a
positive gap would adversely affect net interest income.
Due to the generally lower interest rates which have prevailed during the past
few years, Federal Trust's originations of ARMs have decreased, due to the
preference of Federal Trust's customers for fixed-rate residential mortgage
loans. As of December 31, 1998, $109.4 million or 78.2% of the Bank's portfolio
of single-family residential mortgage loans consisted of ARMs.
The Bank also seeks to maintain a stable core deposit base by providing quality
service to its customers without significantly increasing its cost of funds or
operating expenses. At December 31, 1998 money market demand ("MMDA"), passbook,
regular savings, checking and negotiable order of withdrawal ("NOW") accounts,
totaled $14.8 million or 11.5% of total deposits. These accounts bore a weighted
average nominal rate of 3.51% at December 31, 1998.
The Bank has also maintained a portfolio of short-term liquid assets (cash and
assets maturing in one year or less) in order to reduce its vulnerability to
shifts in market rates of interest. At December 31, 1998, 4.10 % of Federal
Trust's total assets consisted of cash, interest-earning deposits, and
securities maturing in one year or less. Furthermore, as of such date, Federal
Trust's overall average liquidity ratio was 7.71%.
Based upon the assumptions set forth below, the Bank's one-year negative
interest rate sensitivity gap amounted to $79.7 million or 45.1% of total assets
as of December 31, 1998. At December 31, 1997, the one-year negative interest
rate sensitivity gap was $1.4 million or 1.0% of total assets based on the
assumptions in effect on such date. During 1998, the Bank's one-year negative
interest rate sensitivity gap increased and Bank's interest rate spread
decreased from 2.12% in 1997 to 1.93% in 1998. During 1998, short-term interest
rates declined until the latter part of the year and the average volume of
interest-earning assets increased $17.8 million and the average yield on these
assets decreased by .34%. This decrease was primarily the result of the
prepayment of loans by customers desiring to refinance their mortgages at lower
rates, and the resulting write-off of the remaining premiums that were paid when
many of the loans were purchased.
For the same period, interest-bearing liabilities increased $11.8 million and
the average rate on these liabilities decreased .15% due to decline in short
term interest rates, however this decrease in rates was tempered somewhat by the
competitive factors in the local market which kept the rates paid on deposits
higher than expected. Although management believes that the Bank's current asset
and liability management strategies reduce the potential adverse effects of
changes in interest rates on the Bank's results of operations, any substantial
and prolonged increases in market rates of interest would have an adverse impact
40
<PAGE>
on the Bank's results of operations, since the rates on loans adjust on a
lagging basis and are subject to annual and life-time limits on the amount of
increase. Management monitors the Bank's interest rate sensitivity and believes
that its present gap position is appropriate for the current interest rate
environment.
In preparing the tables below, the following assumptions have been made, which
are based upon assumptions used by the FHLB of Atlanta during 1998. The FHLB's
prepayment estimates are based upon a major Wall Street firm's prepayment model
and the specific prepayment speeds applied to the bank's mortgages are a
function of their underlying coupons, maturities and lifetime rate caps.
Adjustable-rate mortgages are separated into 160 individual buckets by current
versus lagging market index, coupon reset frequency, teaser versus non-teaser,
distance to lifetime cap and periodic rate caps. The one-year decay rates for
NOW, money market, passbook and non-interest demand deposits are 37%, 79%, 17%
and 37%, respectively, based on a study done by the Office of Thrift
Supervision. The above assumptions should not be regarded as indicative of the
actual prepayments or withdrawals which may be experienced by Federal Trust in
the future. The interest rate sensitivity gaps as of December 31, 1998, 1997 and
1996 were based on the assumptions for 1998, 1997 and 1996 and were based on
economic and interest rate conditions during such years including the then
prevailing prepayment experience and decay rate levels.
The following table shows the difference in the amounts of assets and
liabilities that mature or reprice within one year in dollars and as a
percentage of total assets, as well as the ratio of assets to liabilities
repricing or maturing with one year.
<TABLE>
<CAPTION>
December 31
1998 1997 1996
(In Thousands of Dollars)
<S> <C> <C> <C>
Interest-earning assets maturing or repricing within one year 45,127 106,583 86,677
Interest-bearing liabilities maturing or repricing within one year 124,810 107,942 104,845
-------- -------- --------
Excess (deficiency) of interest-earning assets over interest-bearing liabilities (79,683) (1,359) (18,168)
Excess (deficiency) of interest-earning assets over interest-bearing liabilities
maturing or repricing within one year as a percentage of total assets (45.13)% (.96%) (13.08%)
Percentage of assets to liabilities maturing or repricing within one year 36.16% 98.74% 82.67%
</TABLE>
Interest rate sensitivity analysis is one approach to measure the Company's
interest rate risk by computing estimated changes in the net portfolio value
("NPV"). This analysis calculates the difference between the present value of
liabilities and the present value of expected cash flows from assets. NPV
represents the market value of portfolio equity and is equal to the market value
of assets minus the market value of liabilities, with adjustments made for
off-balance sheet items. This analysis assesses the risk of loss in market
sensitive instruments in the event of a sudden and sustained one-hundred, two
hundred, three hundred and four-hundred basis points increase or decrease in
market interest rates. The following table sets forth, as of December 31, 1998,
an analysis of the Company's interest rate risk as measured by the estimated
changes in NPV resulting from instantaneous and sustained parallel shifts in the
yield curve, as calculated by the OTS.
Change in Estimated Net Portfolio Value
Interest Rates $ Amount$ Change % Change
- -------------- --------- ------- --------
(Basis Points) (Dollars in Thousands)
+400 $ 3,038 $(10,057) (77%)
+300 6,149 (6,945) (53%)
+200 8,909 (4,186) (32%)
+100 11,247 (1,847) (14%)
0 13,095
-100 14,570 1,476 11%
-200 16,193 3,099 24%
-300 18,234 5,140 39%
-400 20,491 7,397 56%
41
<PAGE>
Certain assumptions utilized by the OTS in calculating the interest rate risk of
thrift institutions were used in preparing the data for the Bank included in the
preceding table. These assumptions relate to interest rates, loan prepayment
rates, deposit decay rates, and the market values of certain assets under the
various interest rate scenarios. It was also assumed that delinquency rates will
not change as a result of changes in interest rates, although there can be no
assurance that this will be the case. Even if interest rates changed as shown
above there can be no assurance that the Bank's assets and liabilities would
perform as set forth above.
Interest rate risk is the most significant market risk affecting the Company.
Other types of market risk, such as foreign currency exchange rate risk and
commodity price risk, do not arise in the normal course of the Company's
business activities.
[THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK.]
42
<PAGE>
ITEM I. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
43
<PAGE>
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Consolidated Financial Statements
December 31, 1998, 1997 and 1996
(With Independent Auditor's Report Thereon)
44
<PAGE>
Independent Auditors' Report
Board of Directors
Federal Trust Corporation and Subsidiaries:
We have audited the consolidated balance sheets of Federal Trust Corporation and
subsidiaries as of December 31, 1998 and 1997, and the related consolidated
statements of operations, stockholders' equity and comprehensive income and cash
flows for each of the years in the three-year period ended December 31, 1998.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Federal Trust
Corporation and subsidiaries at December 31, 1998 and 1997 and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1998 in conformity with generally accepted accounting
principles.
February 19, 1999
Orlando, Florida
<PAGE>
<TABLE>
<CAPTION>
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1998 and 1997
Assets 1998 1997
---- ----
<S> <C> <C>
Cash $ 2,117,564 446,134
Interest-bearing deposits 5,047,869 3,555,916
Investment securities available for sale -- 3,301,844
Investment securities held to maturity 6,468,411 6,368,111
Loans, less allowance for loan losses of $1,136,056 and
$1,110,521 in 1998 and 1997, respectively 152,068,234 121,908,816
Accrued interest receivable on loans 949,185 846,396
Accrued interest receivable on investment securities 138,654 157,155
Office facilities and equipment, net 990,330 814,325
Real estate owned 1,107,295 1,389,900
Federal Home Loan Bank stock, at cost 1,725,000 1,427,500
Prepaid expenses and other assets 856,318 492,015
Executive supplemental income plan - cash surrender value
life insurance policies 2,490,319 1,071,443
Deferred income taxes 506,144 803,977
------------- -----------
$ 174,465,323 142,583,532
============= ===========
Liabilities and Stockholders' Equity
Liabilities:
Deposits $ 129,292,337 104,890,163
Official checks 2,103,387 1,208,607
Federal Home Loan Bank advances 28,500,000 23,000,000
Advance payments by borrowers for taxes and insurance 607,144 336,406
Accrued expenses and other liabilities 841,079 577,694
------------- -----------
Total liabilities 161,343,947 130,012,870
------------- -----------
Stockholders' equity:
Common stock, $.01 par value, 5,000,000 shares
authorized; 4,941,547 and 4,941,547 shares issued and
outstanding at December 31, 1998 and 1997, respectively 49,416 49,416
Additional paid-in capital 15,883,053 15,857,532
Accumulated deficit (2,479,541) (2,912,142)
Accumulated other comprehensive income -- (30,035)
Accumulated other comprehensive income-investment securities
transferred from available for sale to held to maturity (331,552) (394,109)
------------- -----------
Total stockholders' equity 13,121,376 12,570,662
Commitments and contingencies
Total liabilities and stockholders' equity $ 174,465,323 142,583,532
============= ===========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
For each of the years in the three-year period ended December 31, 1998
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Interest income:
Loans $10,437,822 9,302,807 9,039,426
Investment securities 302,728 619,706 675,279
Interest-bearing deposits and other 275,349 236,833 222,255
---------- ---------- ---------
Total interest income 11,015,899 10,159,346 9,936,960
---------- ---------- ---------
Interest expense:
Deposit accounts 6,104,728 5,774,684 5,760,390
FHLB advances, notes payable and other borrowings 1,513,000 1,401,294 1,277,492
---------- ---------- ---------
Total interest expense 7,617,728 7,175,978 7,037,882
---------- ---------- ---------
Net interest income 3,398,171 2,983,368 2,899,078
Provision for loan losses 165,000 93,132 279,596
Net interest income after provision for loan losses 3,233,171 2,890,236 2,619,482
---------- ---------- ---------
Other income:
Fees and service charges 138,975 105,682 163,010
Gain on sale of loans 148,221 55,618 182,045
Gain on sale of other real estate, net 155,867 490,049 48,574
Other 430,699 200,997 33,078
---------- ---------- ---------
Total other income 873,762 852,346 426,707
---------- ---------- ---------
Other expenses:
Salary and employee benefits 1,657,777 1,419,972 1,173,742
Deposit insurance premiums 210,941 284,728 1,017,902
Occupancy and equipment 751,236 488,168 594,703
Legal and professional 188,682 189,681 392,775
Real estate owned expenses 24,827 123,369 251,156
General and administrative expenses 200,877 195,448 172,430
Loss on disposal of fixed assets, net" -- -- 152,621
Loss on sale of investment securities available for sale 9,945 125,625 12,344
Other 366,463 329,511 468,819
---------- ---------- ---------
Total other expenses 3,410,748 3,156,502 4,236,492
---------- ---------- ---------
Net income (loss) before income taxes 696,185 586,080 (1,190,303)
Income tax expense (benefit) 263,584 228,648 (213,800)
---------- ---------- ---------
Net income (loss) $ 432,601 357,432 (976,503)
========== ========== =========
Basic and diluted earning (loss) per share $ 0.09 0.15 (0.43)
========== ========== =========
Weighted average shares outstanding 4,941,547 2,455,125 2,256,505
========== ========== =========
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE>
<TABLE>
<CAPTION>
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For each of the years in the three year period ended December 31, 1998
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Cash flows provided by (used in) operating activities:
Net income (loss) $ 432,601 357,432 (976,503)
Adjustments to reconcile net income (loss) to net
cash flows from operations:
Loss on sale of investment securities
available for sale 9,945 125,625 12,344
Provision for losses on loans and real
estate owned 165,000 93,132 428,897
Amortization of premium on purchased
loans 535,275 214,375 241,747
Deferred income taxes 241,969 228,471 (213,800)
Depreciation of office facilities and equipment 326,752 157,154 159,564
Gain on sale of loans (148,221) (55,618) (182,045)
Net amortization of fees and discounts
on loans (88,774) (49,689) (89,405)
Net gain on the sale of real estate owned (155,867) (490,049) (48,574)
Write-down on other real estate owned 123,329 86,868 257,921
Net loss on disposal of office facilities
and equipment -- -- 155,347
Executive supplemental income plan (88,876) (6,443) --
Accretion of stock option expense 25,521 -- --
Cash provided by (used in) changes in:
Accrued interest receivable on loans (102,789) (12,938) (9,128)
Accrued interest receivable on
investment securities 18,501 39,016 (16,297)
Loan sale proceeds receivable -- -- 37,765
Prepaid expenses and other assets (364,303) 184,500 (318,050)
Income tax refund receivable -- -- 1,073,253
Official checks 894,780 562,372 (49,097)
Accrued expenses and other liabilities 263,385 73,280 (175,939)
Accrued interest on deposit accounts (1,501) 1,891 (7,831)
--------- --------- -------
Net cash provided by operating activities 2,086,727 1,509,379 280,169
--------- --------- -------
</TABLE>
(Continued)
<PAGE>
<TABLE>
<CAPTION>
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For each of the years in the three year period ended December 31, 1998
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Cash flows provided by (used in) investing activities:
Loans originated, net of principal repayments 11,441,862 9,305,316 17,932,004
Purchase of loans (52,104,730) (26,926,361) (25,326,913)
Proceeds from sale of investment securities,
available for sale 3,340,055 5,624,375 987,656
Purchase of cash surrender value life insurance
policies to fund executive supplemental income (1,330,000) (1,065,000) --
Proceeds from the sale of other real estate owned 1,260,317 1,375,614 1,014,345
Proceeds from loans sold 9,094,996 7,245,627 7,942,943
Capitalized costs on other real estate owned -- (42,499) (27,504)
Proceeds from the sale (purchase) of
Federal Home Loan Bank stock (297,500) (174,300) 600,000
Purchase of premises and equipment (502,757) (53,907) (21,353)
Proceeds from sale of property and equipment -- -- 80,844
Maturities of investment securities held to maturity -- 6,267 12,826
------------ ------------ ------------
Net cash provided by (used in) investing
activities (29,097,757) (4,704,868) 3,194,848
------------ ------------ ------------
Cash flows provided by (used in) financing activities:
Deposit accounts:
(Decrease) increase in certificate accounts 18,894,160 (1,022,039) (3,613,173)
Net increase (decrease) in deposits 5,509,515 (208,695) 536,887
Proceeds from (repayment) of FHLB advances 5,500,000 (1,800,000) 3,800,000
Net increase (decrease) in advance payments
by borrowers for taxes and insurance 270,738 (11,368) 17,270
Repayment of debentures -- -- (420,000)
Issuance of capital stock, net of stock issuance costs -- 4,773,879 --
------------ ------------ ------------
Net cash provided by financing activities 30,174,413 1,731,777 320,984
------------ ------------ ------------
Net increase (decrease) in cash and cash
equivalents 3,163,383 (1,463,712) 3,796,001
Cash and cash equivalents at beginning of period 4,002,050 5,465,762 1,669,761
------------ ------------ ------------
Cash and cash equivalents at end of period $ 7,165,433 4,002,050 5,465,762
============ ============ ============
</TABLE>
(Continued)
<PAGE>
<TABLE>
<CAPTION>
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For each of the years in the three year period ended December 31, 1998
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 7,619,229 7,130,106 7,003,551
=========== ========= =========
Income taxes $ -- 10,000 --
=========== ========= =========
Supplemental disclosures of non-cash transactions:
Real estate acquired in settlement of loans $ 945,174 2,995,488 860,613
=========== ========= =========
Loans acquired in settlement of other real
estate owned $ -- 2,043,890 1,300,066
=========== ========= =========
Market value adjustment - investment securities
available for sale:
Market value adjustment - investments -- (48,156) (336,359)
Deferred income tax asset -- (18,121) (126,135)
----------- --------- ---------
Unrealized loss on investment securities
available for sale, net $ -- (30,035) (210,224)
=========== ========= =========
Unrealized loss on investment securities
transferred from available for sale to held
to maturity (531,589) (631,889) (715,657)
Deferred income tax asset (200,037) (237,780) (227,014)
----------- --------- ---------
Unrealized loss on investment securities
transferred from available for sale to
held to maturity $ (331,552) (394,109) (488,643)
=========== ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
(1) Organization and Summary of Significant Accounting Policies
(a) Organization
Federal Trust Corporation (the "Holding Company"), is the sole
shareholder of Federal Trust Bank (the "Bank"). The Holding Company
operates as a unitary savings and loan holding company. The Holding
Company's business activities primarily include the operation of the
Bank.
The Bank is chartered as a federal stock savings bank. The Bank
provides a wide range of banking services to individual and corporate
customers.
(b) Basis of Financial Statement Presentation
The consolidated financial statements include the accounts of the
Holding Company and its subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation.
The accounting and reporting policies of Federal Trust Corporation
and subsidiaries (collectively called the "Company") conform to
generally accepted accounting principles. The following summarizes
the more significant of these policies and practices.
(c) Reclassification
Certain amounts in the 1997 and 1996 consolidated financial
statements have been reclassified to conform with the 1998
presentation.
(d) Cash and Cash Equivalents
For the purposes of reporting cash flows, cash and cash equivalents
includes cash and interest-bearing deposits with maturities of three
months or less.
(e) Federal Home Loan Bank ("FHLB") Stock
This asset is owned due to regulatory requirements and is carried at
cost.
<PAGE>
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
(f) Investment Securities Held to Maturity and Investment Securities
Available for Sale
Certain securities are reported at fair value except for those
securities which the Company has the positive intent and ability to
hold to maturity. Investments to be held for indefinite periods of time
and not intended to be held to maturity are classified as available for
sale and are carried at fair value. Unrealized holding gains and losses
are included as a separate component of stockholders' equity net of the
effect of income taxes. Realized gains and losses on investment
securities available for sale are computed using the specific
identification method.
Securities that management has the intent and the Company has the
ability at the time of purchase or origination to hold until maturity
are classified as investment securities held to maturity. Securities in
this category are carried at amortized cost adjusted for accretion of
discounts and amortization of premiums using the level yield method
over the estimated life of the securities.
If a security has a decline in fair value below its amortized cost that
is other than temporary, then the security will be written down to its
new cost basis by recording a loss in the consolidated statements of
operations.
(g) Loans
Loans receivable that management has the intent and the Bank has
ability to hold until maturity or payoff are reported at their
outstanding unpaid principal balance increased for premiums on loans
purchased and reduced by any charge-offs or specific valuation
accounts, net of any deferred fees on originated loans.
Loan origination fees and certain direct loan origination costs are
capitalized and recognized in income over the contractual life of the
loans, adjusted for estimated prepayments based on the Bank's
historical prepayment experience. If the loan is prepaid, the remaining
unamortized fees and costs are charged to operations. Amortization is
ceased on nonaccrual loans.
Commitment fees and costs relating to the commitments are recognized
over the commitment period on a straight-line basis. If the commitment
is exercised during the commitment period, the remaining unamortized
commitment fee at the time of exercise is recognized over the life of
the loan as an adjustment of yield.
Loans are placed on nonaccrual status when the loan becomes more than
90 days past due as to interest or principal, unless the loan is both
well secured and in the process of collection, or when the full timely
collection of interest or principal becomes uncertain. When a loan is
placed on nonaccrual status, the accrued and unpaid interest receivable
is written off and the loan is accounted for on the cash or cost
recovery method thereafter until qualifying for return to accrual
status.
<PAGE>
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
The Company considers a loan to be impaired when it is probable that
the Company will be unable to collect all amounts due, both principal
and interest, according to the contractual terms of the loan agreement.
When a loan is impaired, the Company may measure impairment based on
(a) the present value of the expected future cash flows of the impaired
loan discounted at the loan's original effective interest rate, (b) the
observable market price of the impaired loans, or (c) the fair value of
the collateral of a collateral-dependent loan. The Company selects the
measurement method on a loan-by-loan basis, except for
collateral-dependent loans for which foreclosure is probable must be
measured at the fair value of the collateral. In a troubled debt
restructuring involving a restructured loan, the Company measures
impairment by discounting the total expected future cash flows at the
loan's original effective rate of interest.
(h) Allowance for Loan Losses
The Company follows a consistent procedural discipline and accounts for
loan loss contingencies in accordance with Statement of Financial
Accounting Standards No. 5, "Accounting for Contingencies" (Statement
5). The following is a description of how each portion of the allowance
for loan losses is determined.
The Company segregates the loan portfolio for loan loss purposes into
the following broad segments: commercial real estate; residential real
estate; commercial business; and consumer loan. The Company provides
for a general allowance for losses inherent in the portfolio by the
above categories, which consists of two components. General loss
percentages are calculated based upon historical analyses. A
supplemental portion of the allowance is calculated for inherent losses
which probably exist as of the evaluation date even though they might
not have been identified by the more objective processes used for the
portion of the allowance described above. This is due to the risk of
error and/or inherent imprecision in the process. This portion of the
allowance is particularly subjective and requires judgments based on
qualitative factors which do not lend themselves to exact mathematical
calculations such as; trends in delinquencies and nonaccruals;
migration trends in the portfolio; trends in volume, terms, and
portfolio mix; new credit products and/or changes in the geographic
distribution of those products; changes in lending policies and
procedures; loan review reports on the efficacy of the risk
identification process; changes in the outlook for local, regional and
national economic conditions; concentrations of credit; and peer group
comparisons.
Specific allowances are provided in the event that the specific
collateral analysis on each classified loan indicates that the probable
loss upon liquidation of collateral would be in excess of the general
percentage allocation. The provision for loan loss is debited or
credited in order to state the allowance for loan losses to the
required level as determined above.
<PAGE>
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
(i) Mortgage Servicing Rights
The Bank originates mortgage servicing rights by selling loans and
retaining servicing rights. The carrying value of mortgage servicing
rights is included in prepaid expense and other assets on the
consolidated balance sheets and is being amortized over the life of the
related loan portfolio using the effective interest method.
(j) Real Estate Owned
Real estate acquired in the settlement of loans is initially recorded
at the lower of cost (principal balance of the former loan plus costs
of obtaining title and possession) or estimated fair value at the date
of acquisition. Subsequently, such real estate acquired is carried at
the lower of cost or fair value less estimated costs to sell. Costs
relating to development and improvement of the property are
capitalized, whereas those relating to holding the property are charged
to operations.
(k) Office Facilities and Equipment
Office facilities and equipment are stated at cost less accumulated
depreciation and amortization. Depreciation is computed using the
straight-line method over the estimated useful lives of the related
assets. Leasehold improvements are stated at cost less accumulated
amortization. Amortization of leasehold improvements is computed using
the straight-line method over the lesser of the estimated useful life
or the respective lease terms.
(l) Comprehensive Income
In June 1997, the Financial Accounting Standards Board established
Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income." This Statement establishes standards for
reporting and display of comprehensive income and its components in a
full set of financial statements. This Statement requires that an
enterprise classify items or other comprehensive income by nature in a
financial statement, and display the accumulated balance of other
comprehensive income separately from retained earnings and additional
paid-in capital in the equity section of a consolidated balance sheet.
The Company adopted this Statement effective January 1, 1998 with all
prior year consolidated financial statements presented reclassified to
reflect the adoption. The Bank's other comprehensive income is the
unrealized gain/(loss) on investment securities available for sale and
investment securities transferred from available for sale to held to
maturity.
<PAGE>
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
(m) Income Taxes
The Holding Company and its subsidiaries file a consolidated income tax
return. Income taxes are allocated proportionately to the Holding
Company and its subsidiaries as though separate income tax returns were
filed.
The Company accounts for income taxes under the asset and liability
method. Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities
and their respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in
the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities
of a change in tax rates is recognized in income in the period that
included the enactment date.
(n) Derivative Instruments
The Company does not purchase, sell or enter into derivative financial
instruments or derivative commodity instruments as defined by Statement
of Financial Accounting Standards No. 119, "Disclosures about
Derivative Financial Instruments and Fair Value of Financial
Instruments", except for fixed rate loan commitments which the Company
believes are at market value, and dual index bonds disclosed in note 2.
(o) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amount of revenues
and expenses during the reporting period. The most significant
estimates made by management are the determination of the adequacy of
the allowance for loan losses, that real estate owned is stated at the
lower of cost or fair value, and the recoverability of the deferred tax
asset. Actual results could differ from these estimates.
<PAGE>
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
(p) Effect of New Accounting Pronouncements
In June 1997, the FASB issued Financial Accounting Standards No. 131,
"Disclosure about Segments of an Enterprise and Related Information".
This Statement requires that a public business enterprise report
financial and descriptive information about its reportable operating
segments. Operating segments are components of an enterprise about
which separate financial information is available that is evaluated
regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performance. This Statement is
effective for fiscal years beginning after December 15, 1997. The
Company adopted the Statement effective January 1, 1998, however, the
Company has only one reportable segment.
In June 1998, the FASB issued Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedge
Activities". This Statement, which is effective for all fiscal quarters
and all fiscal years beginning after June 15, 1999, requires all
derivatives be measured at fair value and be recognized as assets and
liabilities in the statement of financial position. This Statement sets
forth the accounting for changes in fair value of a derivative
depending on the intended use and designation of the derivative. The
Company does not expect this Statement to have any impact on its
consolidated financial statements, upon adoption.
In October 1998, the FASB issued Financial Accounting Standards No.
134, "Accounting for Mortgage-Backed Securities Retained after the
Securitization of Mortgage Loans Held for Sale by a Mortgage Banking
Enterprise." This Statement requires that after the securitization of a
mortgage loan held for sale, an entity engaged in mortgage banking
activities classify the resulting mortgage-backed security as a trading
security. The Statement is effective for the first fiscal quarter
beginning after December 15, 1998. The Company does not expect this
Statement to have any impact on its consolidated financial statements,
upon adoption.
(2) Investment Securities Held to Maturity and Investments Securities Available
for Sale
The amortized cost and estimated market values of investment securities
held to maturity and available for sale at December 31, 1998 and 1997 are
as follows:
<PAGE>
<TABLE>
<CAPTION>
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
Investment securities held to maturity:
Gross Estimated
Amortized unrealized market
cost gain (loss) value
--------- ---------- ------
<S> <C> <C> <C>
1998:
Obligation of U.S. government
agencies
$6,468,411 212,214 6,680,625
========== ======= =========
1997:
Obligation of U.S. government
agencies
$6,368,111 56,577 6,424,688
========== ======= =========
Investment securities available for sale:
1997:
Obligation of U.S. government
agencies $3,350,000 (48,156) 3,301,844
========== ======= =========
</TABLE>
The amortized cost and estimated market value of investment securities held to
maturity at December 31, 1998, by contractual maturity, are below. Expected
maturities will differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without call or prepayment
penalties.
Estimated
Amortized market
cost value
--------- ------
Investment securities held to maturity:
Due after one year through five years $6,468,411 6,680,625
========== =========
Market values for all securities were calculated using published prices at
December 31, 1998.
The Company's investment in obligations of U.S. government agencies consist of a
dual indexed bond issued by the Federal Home Loan Bank. The bond has a par value
of $7,000,000 and pays interest based on the difference between two indices. The
bond at December 31, 1998, pays interest at the 10 year constant maturity
treasury rate less the 6 month LIBOR rate plus a contractual amount of 4.0%. The
Company purchased the bonds to partially offset its risk related to its
portfolio of adjustable rate mortgages and as such subjects the Company to a
certain degree of market risk as the indices change with prevailing market
interest rates.
<PAGE>
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
Proceeds from sales of investment securities available for sale were $3,340,055,
$5,624,375 and $987,656 in 1998, 1997 and 1996, respectively. Gross realized
losses on sales of investment securities available for sale during 1998, 1997
and 1996 were $9,945, $125,625 and $12,344, respectively.
In March 1996, the Company transferred securities in the amount of $7,000,000
from the available for sale category to the held to maturity category resulting
in an unrealized loss of $780,937 which remains in equity, net of amortization
and income tax. Amortization is an adjustment to yield over the remaining term
of the investments.
(3) Loans Receivable, Net
<TABLE>
<CAPTION>
A summary of loans receivable at December 31, 1998 and 1997 follows:
1998 1997
---- ----
<S> <C> <C>
Mortgage loans:
Permanent conventional:
Commercial $ 14,883,511 12,891,454
Residential 130,448,017 105,943,147
Residential construction 11,518,308 3,159,774
------------ -----------
Total mortgage loans 156,849,836 121,994,375
Commercial loans 354,686 490,417
Consumer loans 998,826 745,806
Lines of credit 1,242,968 569,604
------------ -----------
Total loans receivable 159,446,316 123,800,202
Net premium on mortgage loans purchased 1,374,559 1,370,337
Deduct:
Unearned loan origination fees, net of direct loan
origination costs 27,171 13,577
Undisbursed portion of loans in process 7,589,414 2,137,625
Allowance for loan losses 1,136,056 1,110,521
------------ -----------
Loans receivable, net $152,068,234 121,908,816
============ ===========
</TABLE>
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
The following is a summary of information regarding nonaccrual and impaired
loans as of December 31:
1998 1997 1996
---- ---- ----
Nonaccrual loans $1,360,008 1,283,000 991,000
========== ========= =========
Recorded investment in impaired loans $1,710,827 1,819,285 4,078,174
========== ========= =========
Allowance for loan losses related to
impaired loans $ 240,189 349,452 626,435
========== ========= =========
Interest
income not Interest Average
recognized income recorded
on recognized investment
nonaccrual on impaired in impaired
loans loans loans
---------- ----------- -----------
For the years ended December 31:
1998 $161,510 56,108 1,809,013
======== ======= =========
1997 $149,000 89,077 2,136,289
======== ======= =========
1996 $181,000 259,263 5,072,872
======== ======= =========
The activity in the allowance for loan losses for the years ended December 31,
1998, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Balance at beginning of period $ 1,110,521 1,533,003 2,060,568
Charge-offs (162,788) (529,777) (1,223,240)
Provision for loan losses 165,000 93,132 279,596
Recoveries 23,323 14,163 266,778
Transfer from allowance of real estate owned -- -- 149,301
----------- --------- ----------
Balance at end of period $ 1,136,056 1,110,521 1,533,003
=========== ========= ==========
</TABLE>
<PAGE>
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
Loan customers of the Bank include certain executive officers and directors
and their related interests and associates. All loans to this group were
made in the ordinary course of business at prevailing terms and conditions.
There were no outstanding loans to executive officers, directors and
affiliates at December 31, 1998 and 1997.
(4) Loan Servicing
Mortgage loans serviced for others are not included in the accompanying
consolidated balance sheets. The unpaid principal balances of these loans
were $17,390,004 and $9,749,927 at December 31, 1998 and 1997,
respectively. Servicing fees earned were $10,426, $28,633 and $22,086 for
the years ended December 31, 1998, 1997 and 1996, respectively.
(5) Mortgage Servicing Rights
An analysis of the activity for originated mortgage servicing rights for
the year ended December 31, 1998 is as follows:
Balance, January 1, 1997 $ 67,631
Originations 28,811
Amortization (8,773)
---------
Balance, December 31, 1997 87,669
Originations 155,059
Amortization (31,888)
---------
Balance, December 31, 1998 $ 210,840
=========
Mortgage servicing rights are included in prepaid expenses and other assets
in the consolidated balance sheets.
<PAGE>
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
(6) Office Facilities and Equipment
Office facilities and equipment and their related accumulated depreciation
and amortization at December 31, 1998 and 1997 are summarized as follows:
<TABLE>
<CAPTION>
Estimated
useful
1998 1997 lives
---- ---- -----
<S> <C> <C> <C>
Leasehold improvements $ 1,259,179 1,037,991 3-25 years
Furniture and fixtures 851,341 569,772 3-7 years
---------- --------
Total 2,110,520 1,607,763
Less accumulated depreciation and amortization (1,120,190) (793,438)
---------- --------
Office facilities and equipment, net $ 990,330 814,325
========== ========
</TABLE>
(7) Deposits
A summary of deposits at December 31, 1998 and 1997 follows:
Weighted Weighted
average average
interest interest
1998 rate 1997 rate
---- ---- ---- ----
Commercial checking
accounts - noninterest-
bearing $ 1,261,170 --% 125,870 --%
NOW accounts 1,439,135 2.00% 889,551 1.58%
Money market deposit
accounts 11,234,844 4.10% 7,246,449 4.02%
Statement savings accounts 871,518 2.58% 1,035,282 2.57%
14,806,667 3.51% 9,297,152 3.60%
<PAGE>
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Weighted Weighted
average average
interest interest
1998 rate 1997 rate
---- ---- ---- ----
<S> <C> <C> <C> <C>
Certificate accounts by
interest rates:
1.00% - 3.99% 338,031 442,782
4.00% - 4.99% 26,806,630 1,149,652
5.00% - 5.99% 81,135,398 79,489,822
6.00% - 7.99% 5,201,326 14,504,969
---------- ----------
Total certificate
accounts 114,481,385 5.51% 95,587,225 5.69%
----------- ---- ---------- ----
Accrued interest 4,285 5,786
---------- ----------
Total deposits $129,292,337 5.26% 104,890,163 5.48%
============ ==== =========== ====
</TABLE>
The following table presents, by various interest rate categories, the
amount of certificate accounts maturing during the periods reflected below:
<TABLE>
<CAPTION>
Interest rate 1999 2000 2001 2002 2003 2004 Total
- ------------- ---- ---- ---- ---- ---- ---- -----
<S> <C> <C> <C> <C> <C> <C>
1.00% - 3.99% $ 322,564 4,226 3,530 946 6,765 -- 338,031
4.00% - 4.99% 25,243,862 955,480 607,288 -- -- -- 26,806,630
5.00% - 5.99% 74,817,168 4,858,653 1,605,722 442,903 410,952 -- 82,135,398
6.00% - 6.99% 4,234,993 754,008 212,325 -- -- -- 5,201,326
------------ --------- --------- ------- ------- -----------
$104,618,587 6,572,367 2,428,865 443,849 417,717 -- 114,481,385
============ ========= ========= ======= ======= ===========
</TABLE>
<PAGE>
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
The Company's large denomination ($100,000 and over) deposits included in
certificate accounts mature as follows:
At December 31, 1998 At December 31, 1997
-------------------- --------------------
Amount % total Amount % total
------ ------- ------ -------
Three months or less $ 8,059,847 33.4% $ 4,214,446 22.1%
Over three months to six
months 7,117,409 29.4% 5,303,940 27.8%
Over six months to twelve
months 7,814,101 32.4% 5,351,174 28.0%
Over twelve months 1,157,205 4.8% 4,207,654 22.1%
----------- ----- ----------- -----
$24,148,562 100.0% $19,077,214 100.0%
=========== ===== =========== =====
Interest expense on deposits for the years ended December 31, 1998, 1997
and 1996 is as follows:
1998 1997 1996
---- ---- ----
Interest on NOW and Super NOW accounts $ 19,598 13,187 9,511
Interest on money market accounts 374,678 256,130 256,130
Interest on savings accounts 23,676 32,708 43,335
Interest on certificate accounts, net of
penalties 5,686,776 5,472,659 5,451,414
---------- --------- ---------
$6,104,728 5,774,684 5,760,390
========== ========= =========
<PAGE>
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
(8) Federal Home Loan Bank Advances
A summary of advances from the Federal Home Loan Bank of Atlanta at December 31,
1998 and 1997 follows:
Maturing in year Interest rate December 31,
ending December 31, (variable rates) 1998
- ------------------- ---------------- ----
1999 (5.15) $ 8,500,000
1999 5.09 5,000,000
1999 4.98 5,000,000
2000 5.09 5,000,000
2001 5.96 5,000,000
-----------
$28,500,000
===========
1998 (6.50) $ 5,500,000
1998 6.00 5,000,000
1998 6.02 2,500,000
1998 6.12 5,000,000
1998 5.88 5,000,000
-----------
$23,000,000
===========
Pursuant to collateral agreements with the Federal Home Loan Bank ("FHLB"),
advances are secured by the following at December 31:
1998 1997
---- ----
FHLB stock $ 1,725,000 1,427,500
Qualifying mortgage loans 119,390,491 31,139,250
Investment securities:
Amortized cost -- 3,547,948
Market value -- 3,579,469
=========== ==========
As of December 31, 1998, the Bank has a blanket lien on all qualifying
mortgage loans as noted above.
<PAGE>
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
(9) Fair Value of Financial Instruments
The following methods and assumptions were used by the Company in
estimating fair values of financial instruments as disclosed herein:
Cash and Cash Equivalents - The carrying amount of cash and cash
equivalents (demand deposits maintained by the Company at various
financial institutions) and interest bearing deposits represents fair
value.
Investment Securities Available for Sale and Held to Maturity - The
Company's investment securities available for sale represent investments
in Federal Home Loan Bank ("FHLB") bonds. The fair value of the FHLB
bonds was based on quoted market prices. The Company's investments held
to maturity represent investments in Orange County, Florida Tax
Certificates and FHLB bonds. The carrying value of tax certificates
approximates the fair value. The fair value of FHLB bonds was based on
quoted market prices.
Federal Home Loan Bank Stock - Fair value approximates carrying value.
Loans - For variable rate loans that reprice frequently and have no
significant change in credit risk, fair values are based on carrying
values. Fair values for commercial real estate, commercial and consumer
loans other than variable rate loans are estimated using discount cash
flow analysis, using interest rates currently being offered for loans
with similar terms to borrowers of similar credit quality. Fair values of
impaired loans are estimated using discounted cash flow analysis or
underlying collateral values, where applicable.
Deposits - The fair values disclosed for demand deposits are, by
definition, equal to the amount payable on demand at December 31, 1998
(that is their carrying amounts). The carrying amounts of variable rate,
fixed term money market accounts and certificates of deposit (CDs)
approximate their fair value at the reporting date. Fair values for fixed
rate CDs are estimated using a discounted cash flow calculation that
applies interest rates currently being offered on certificates to a
schedule of aggregated expected monthly maturities on time deposits.
Federal Home Loan Bank Advances - Fair value of Federal Home Loan Bank
advances are estimated using discounted cash flow analysis based on the
Company's current borrowing rates for similar types of borrowing
arrangements.
Commitments - Fair values for off-balance-sheet lending commitments are
based on fees currently charged to enter into similar agreements, taking
into account the remaining terms of the agreements and the
counterparties' credit standing.
<PAGE>
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
The estimated fair values of the Company's financial instruments are as
follows:
December 31, 1998
-----------------
Carrying amount Fair value
--------------- ----------
Financial assets:
Cash and cash equivalents $ 7,165,433 7,165,433
Investment securities held to maturity 6,468,411 6,680,625
Loans (carrying amount less allowance
for loan loss of $1,136,056) 152,068,234 153,453,456
Federal Home Loan Bank stock 1,725,000 1,725,000
Financial liabilities:
Deposits:
Without stated maturities $ 14,806,667 14,806,667
With stated maturities 114,481,385 114,894,826
Federal Home Loan Bank advances 28,500,000 28,580,427
Commitments:
Letters of credit $ -- --
Loan commitments -- --
December 31, 1997
-----------------
Carrying amount Fair value
--------------- ----------
Financial assets:
Cash and cash equivalents $ 4,002,050 4,002,050
Investment securities available for sale 3,301,844 3,301,844
Investment securities held to maturity 6,368,111 6,424,688
Loans (carrying amount less allowance
for loan loss of $1,110,521) 121,908,816 123,050,866
Federal Home Loan Bank stock 1,427,500 1,427,500
Financial liabilities:
Deposits:
Without stated maturities $ 9,297,152 9,297,152
With stated maturities 95,587,225 95,866,182
Federal Home Loan Bank advances 23,000,000 23,026,953
Commitments:
Letters of credit $ -- --
Loan commitments -- --
<PAGE>
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
The carrying amounts shown in the table are included in the consolidated
balance sheets under the indicated captions.
(10) Income Taxes
Income tax for the years ended December 31, 1998, 1997 and 1996 consists
of:
Current Deferred Total
------- -------- -----
1998:
Federal $ 19,402 211,972 231,374
State 2,213 29,997 32,210
-------- ------- -------
Total $ 21,615 241,969 263,584
======== ======= =======
1997:
Federal $ 177 195,052 195,229
State -- 33,419 33,419
-------- ------- -------
Total $ 177 228,471 228,648
======== ======= =======
1996:
Federal $ -- $-- (213,800)
State -- -- --
-------- ------- -------
Total $ -- (213,800) (213,800)
======== ======= =======
<PAGE>
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
The tax effects of temporary differences between the tax basis of assets
and liabilities and their financial reporting amounts which give rise to
significant portions of deferred tax assets and liabilities are as
follows:
1998 1997
---- ----
Deferred tax assets:
Allowance for loan losses $ 108,850 206,279
Unrealized loss on investment
securities available for sale 200,037 255,901
Deferred loan fees 8,355 --
AMT credit carryforward 72,349 65,878
Real estate owned 3,054 55,710
Depreciation 35,973 --
Other -- 1,396
Net operating loss carryforward 592,447 750,255
--------- ---------
Gross deferred tax asset 1,021,065 1,335,421
Less valuation allowance (432,526) (432,526)
--------- ---------
588,539 902,895
--------- ---------
Deferred tax liabilities:
FHLB stock dividend (18,845) (17,840)
Mortgage servicing rights (63,550) (32,989)
Deferred loan fees -- (14,014)
Depreciation -- (34,075)
--------- ---------
(82,395) (98,918)
--------- ---------
Total $ 506,144 803,977
========= =========
At December 31, 1998, the Company has net operating loss carryovers
(NOL's) of approximately $1,456,000 for federal and $4,521,000 state tax
purposes, which expire between 2009 and 2011. In addition, the Company
has approximately $72,000 in alternative minimum tax (AMT) credit
carryforwards. A valuation allowance has been established relating to
these NOL and AMT carryovers that management believes are more likely
than not to be utilized prior to their expiration through future
profitable operations.
<PAGE>
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
The Company's effective tax rate on pretax (loss) income for 1998, 1997
and 1996 differs from the statutory Federal income tax rate as follows:
1998 % 1997 % 1996 %
--------- ----- --------- ---- --------- -----
<S> <C> <C> <C> <C> <C> <C>
Tax (benefit) provision at
statutory rate $ 236,702 34.00% $ 199,268 34.0% $ (404,703) (34.0)%
Increase (decrease) in tax
resulting from:
Increase in valuation
allowance -- -- -- -- 211,702 17.8
State income taxes
net of federal
income tax benefit 23,365 3.36 21,275 3.6 -- --
Other 3,517 .40 8,105 1.4 (20,799) (1.7)
--------- ----- --------- ---- --------- -----
$ 263,584 37.76% $ 228,648 39.0% $(213,800) (17.9)%
========= ===== ========= ==== ========= =====
</TABLE>
(11) Regulatory Capital
The Bank is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a
direct material effect on the Bank's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective
action, the Bank must meet specific capital guidelines that involve
quantitative measures of the Bank's assets, liabilities and certain
off-balance-sheet items as calculated under regulatory accounting
practices. The Bank's capital amounts and classification are also subject
to qualitative judgments by the regulators about components, risk
weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the
table below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets.
<PAGE>
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
The following table summarizes the capital thresholds for each prompt
corrective action capital category. An institution's capital category is
based on whether it meets the threshold for all three capital ratios within
the category:
<TABLE>
<CAPTION>
To be adequately
capitalized
under prompt
corrective
For capital action
Actual adequacy purposes provisions
------ ----------------- ----------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1998:
Total capital (to risk
weighted assets) $12,762,569 13.32 $ 7,660,557 8.0% or greater $7,660,557 8.0% or greater
Tier I capital (to risk
weighted assets) 11,681,513 12.20% 3,830,279 4.0% or greater 3,830,279 4.0% or greater
Tier I capital (to average
assets) 11,681,513 6.69% 6,982,469 4.0% or greater 6,982,469 4.0% or greater
As of December 31, 1997:
Total capital (to risk
weighted assets) $12,062,756 14.99%$ 6,438,476 8.0% or greater $ 6,438,476 8.0% or greater%
Tier I capital (to risk
weighted assets) 11,055,454 13.73% 3,218,881 4.0% or greater 3,218,881 4.0% or greater
Tier I capital (to average
assets) 11,055,454 7.77% 5,693,782 4.0% or greater 5,693,782 4.0% or greater
</TABLE>
Management believes, as of December 31, 1998, that the Bank meets all
capital adequacy requirements to which it is subject.
<PAGE>
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
(12) Stock Option Plans
The Company issued stock options to certain sales representatives for their
commitment in selling Federal Trust Corporation stock. These options have a
strike price of $5.63 per share, as amended as a result of the 1997 stock
offering, and will expire on October 26, 1999. At December 31, 1998 and
1997, options for 58,453 shares were outstanding to various sales
representatives.
Pursuant to the Company's stock option plans, certain directors have been
granted options to purchase 25,000 shares at $4.00 per share not to exceed
a combined total of 75,000 shares. This exercise price was established at
$4.00 to reflect the market price for the Company's shares at the time the
stock option plan was initially adopted on January 30, 1998. The options
are exercisable from November 22, 1998 to November 22, 2008. Furthermore,
pursuant to the Plan, employees of the Company were granted an incentive
stock option to purchase 275,000 shares of common stock at $4.00 per share
of which the President of the Company has the option to purchase 120,000
shares. The employee shares are exercisable from November 22, 1998 to
November 22, 2008. The Plans were approved on May 22, 1998, and at that
time the stock price had risen to $4.625. The Company is accreting the
difference ratably over five years, the vesting period. Compensation cost
at December 31, 1998 was $25,521. At December 31, 1998, the number of
options vested and exercisable was -0-.
The Company applies APB Opinion No. 25 and related interpretations in
accounting for its plan. Accordingly, compensation cost has been recognized
for its stock option plans as noted above. Had compensation cost for the
Company's stock-based compensation plans been determined consistent with
FASB Statement No. 123, the Company's net income and earnings per share
would have been reduced to pro forma amounts as indicated below:
1998
----
Net income:
As reported $432,601
Pro forma $412,991
Earnings per share:
As reported $ .09
Pro forma $ .09
The fair value of each option granted is estimated on the date of grant
using the Black-Scholes Option Pricing Formula with the following
weighted-average assumptions used for grants in 1998, dividend yield of -0-
percent; expected volatility of 50 percent; risk-free interest rates of
4.73% and 5.77% and expected lives of 7 years for the plan options.
<PAGE>
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
A summary of the status of the Company's stock option plan as of December
31, 1998 and 1997 and changes during the year ended on that date is
presented below:
Fixed options 1998 1997
- ------------- ---- ----
Outstanding at beginning of year: 58,453 58,453
Granted 350,000 --
Exercised -- --
Forfeited -- --
------- ------
Outstanding at end of year 408,453 58,453
------- ------
Options exercisable at year-end -- --
======= ======
Weighted-average fair value of options
granted during the year per share $ 1.00 $ --
======= ======
<TABLE>
<CAPTION>
Number Weighted Weighted Number Weighted average
Range of outstanding at remaining average exercisable at exercise price at
exercise December 31, contractual exercise December 31, December 31,
prices 1998 life price 1998 1998
------ ---- ---- ----- ---- ----
<S> <C> <C> <C> <C>
$4.00 - $5.63 408,453 10 years $4.25 -- $4.25
</TABLE>
(13) Commitments and Related Party Transactions
Future minimum lease payments under noncancelable leases, at December 31,
1998 are as follows:
Year ending
December 31,
------------
1999 $332,980
2000 332,980
2001 47,041
--------
Total minimum lease payments $713,001
========
Rent expense amounted to $298,193, $285,214 and $351,150 and for the years
ended 1998, 1997 and 1996, respectively.
<PAGE>
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
During 1990, the Company entered into a long-term lease obligation with
John Martin Bell, wife of the former president of the Company, James T.
Bell, and a stockholder and director of the Company for the use of the
building in Winter Park, Florida. Rent payments in the amount of $308,233,
$296,339 and $291,767 were made during the years ended December 31, 1998,
1997 and 1996, respectively.
The Company has an operating lease with its former chairman and major
stockholder relating to its main facility which minimum lease term expires
in December 2000 and which contains two ten-year renewal options. During
the fourth quarter of 1998, management changed its intentions with respect
to the exercise of the lease renewal option and determined it was no longer
probable the renewal option would be exercised as originally anticipated.
As a result of such change in estimate, the remaining estimated useful life
of the associated leasehold improvements has been reduced in order to
amortize the remaining useful life of such leasehold improvements over the
minimum lease term. Accordingly, beginning January 1, 1998, remaining
leasehold improvements are being amortized over the remaining three-year
period minimum lease term amounting to approximately $237,000 a year. The
impact of this change in estimate on 1998 was to increase occupancy and
equipment expense and decrease net income by approximately $178,000 and
$111,000, respectively.
(14) Parent Company Financial Information
The parent company financial information is as follows at December 31, 1998
and 1997:
Condensed Balance Sheets
------------------------
1998 1997
---- ----
Assets:
Cash, deposited with subsidiary $ 1,352,416 1,390,821
Prepaid expenses and other assets 88,832 41,000
Property, plant and equipment, net 220,893 332,290
Note receivable 50,000 75,000
Investment in subsidiaries 11,411,975 10,803,792
----------- ----------
$13,124,116 12,642,904
=========== ==========
<PAGE>
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Condensed Balance Sheets, Continued
-----------------------------------
1998 1997
---- ----
<S> <C> <C>
Liabilities and stockholders' equity:
Accounts payable and accrued expenses $ 2,740 72,241
------------ ----------
Stockholders' equity:
Common stock 49,416 49,416
Additional paid-in capital 15,883,053 15,857,532
Accumulated deficit (2,479,541) (2,912,142)
Accumulated other comprehensive income -- (30,035)
Accumulated other comprehensive income-investment
securities transferred from available for sale to held
to maturity (331,552) (394,109)
------------ ----------
Total stockholders' equity 13,121,376 12,570,662
------------ ----------
$ 13,124,116 12,642,904
============ ==========
</TABLE>
<TABLE>
<CAPTION>
Condensed Statements of Operations
' ----------------------------------
1998 1997 1996
---- ---- ----
Revenues:
<S> <C> <C> <C>
Interest and dividend income $ 52,900 5,918 17,579
Other income 356,271 334,883 308,770
-------- -------- --------
Total income 409,717 340,801 326,349
-------- -------- --------
Expenses:
Compensation 34,284 42,372 114,985
Occupancy 420,357 343,810 442,483
Other expense 88,927 67,192 382,926
-------- -------- --------
Total expenses 543,568 453,374 940,394
-------- -------- --------
Loss before income from subsidiaries (133,851) (112,573) (614,045)
(Loss) income from subsidiaries 515,591 427,644 (362,458)
-------- -------- --------
Net income (loss) before income taxes 381,740 315,071 (976,503)
Income tax (benefit) expense (50,861) (42,361) --
-------- -------- --------
Net income (loss) $ 432,601 357,432 (976,503)
======== ======== ========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
Condensed Statements of Cash Flows
----------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Cash flows provided by (used in) operating activities:
Net income (loss) $ 432,601 357,432 (976,503)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Loss on disposal of premises and equipment -- -- 154,327
Depreciation 111,397 69,693 59,800
Accretion of stock option expense 25,521 -- --
Equity in undistributed loss (earnings)
of subsidiaries (515,591) (427,644) 362,458
Cash provided by (used in) changes in:
Prepaid expenses and other assets (47,832) 13,999 235,883
Investment in subsidiaries -- (3,700,000) 1,082,058
Due to subsidiaries -- -- (103,000)
Accounts payable and accrued expenses (69,501) (41,989) (38,244)
---------- ------- --------
Net cash provided by (used in) operating
activities (63,405) (3,728,509) 776,779
---------- ------- --------
Cash flows provided by (used in) investing activities:
Notes receivable originated, net of repayments 25,000 230,354 (305,354)
Purchase of property and equipment -- -- (4,759)
Proceeds from sale of property and equipment -- -- 68,191
---------- ------- --------
Net cash provided by (used in) investing activities 25,000 230,354 (241,922)
---------- ------- --------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
Condensed Statements of Cash Flows, Continued
---------------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Cash flows (used in) provided by financing activities:
Proceeds from sale of stock, net of issuance costs $ -- 4,773,877 --
Repayment of debentures -- -- (420,000)
----------- --------- -------
Net cash (used in) provided by financing
activities -- 4,773,877 (420,000)
----------- --------- -------
Net increase (decrease) in cash and cash
equivalents (38,405) 1,275,722 114,857
Cash and cash equivalents at beginning of year 1,390,821 115,099 242
----------- --------- -------
Cash and cash equivalents at end of year $ 1,352,416 1,390,821 115,099
=========== ========= =======
Supplemental disclosures of non-cash transactions:
Market value adjustment -investment securities
available for sale:
Market value adjustments - investments -- (48,156) (336,359)
Deferred income tax asset -- (18,121) (126,135)
----------- --------- -------
Unrealized loss on investment securities
available for sale, net $ -- (30,035) (210,224)
=========== ========= =======
Unrealized loss on investment securities
transferred from available for sale to held
to maturity $ (531,589) (631,889) (715,657)
=========== ========= =======
</TABLE>
The major sources of funds available to the Company for payment of
dividends are dividends from the Bank. The ability of the Bank to pay
dividends to the Holding Company is subject to the approval of the Office
of Thrift Supervision.
<PAGE>
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
(15) Selected Quarterly Financial Data (Unaudited)
Summarized quarterly financial data follows (in thousands, except for per
share amounts):
Fourth quarter
--------------
1998 1997 1996
---- ---- ----
Interest income $ 3,265 2,639 2,460
Net interest income 909 824 685
Provision for loan losses (54) (115) (311)
Income (loss) before income taxes (333) 189 361
Net income (loss) 195 141 16
======= ===== =====
Basic and diluted earnings (loss)
per share $ .04 .05 .01
======= ===== =====
Third quarter
-------------
1998 1997 1996
---- ---- ----
Interest income $ 2,728 2,475 2,487
Net interest income 914 659 742
Provision for loan losses 45 30 441
Income (loss) before income taxes 210 154 (1,151)
Net income (loss) 179 90 (737)
======= ===== =====
Basic and diluted earnings (loss) per share $ .04 .04 (.33)
======= ===== =====
Second quarter
--------------
1998 1997 1996
---- ---- ----
Interest income $ 2,468 2,495 2,432
Net interest income 784 694 731
Provision for loan losses 21 41 132
Income (loss) before income taxes 142 66 (405)
Net income (loss) 129 25 (259)
======= ===== =====
Basic and diluted earnings (loss) per share $ .03 .01 (.11)
======= ===== =====
<PAGE>
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
First quarter
-------------
1998 1997 1996
---- ---- ----
Interest income $2,555 2,550 2,558
Net interest income 791 827 741
Provision for loan losses 30 (3) 18
Income (loss) before income taxes 101 177 5
Net income (loss) 109 101 3
======= ===== =====
Basic and diluted earnings (loss) per share $.02 .05 --
======= ===== =====
The first three quarters have been restated to reflect the change in
accounting estimates.
(16) Employee Stock Ownership Plan
The Company maintains a qualified employee stock ownership plan (the
"Plan"). The Plan is qualified under Section 4975(e)(7) of the Internal
Revenue Code, under which all of its subsidiaries may act as participating
employees. In addition, the Plan meets all applicable requirements of the
Tax Reform Act of 1986 and is qualified under Section 401(c) of the
Internal Revenue Code.
At the discretion of the Board of Directors, the Company may make a
contribution to the Plan of up to 15% of total compensation paid to
employees during the year. Employees are 100% vested after five years of
service. For the years ended December 31, 1998, 1997 and 1996, the Company
contributed cash to the Plan of $-0-, $50,782 and $38,000, respectively.
(17) Regulation and Supervisory Agreement
The Bank is subject to extensive regulation, supervision and examination by
the Office of Thrift Supervision ("OTS"), its primary federal regulator,
and by the FDIC, which insures deposits up to applicable limits. Such
regulation and supervision establishes a comprehensive framework of
activities in which a bank may engage and is intended primarily for the
protection of the SAIF administered by the FDIC and depositors. During the
year ended December 31, 1996, the FDIC imposed a one-time assessment on all
SAIF-insured deposits in the amount of 65.7 cents per $100 of insured
deposits, held as of March 31, 1995. The effect of this assessment resulted
in a pre-tax charge to income of $716,498. As a thrift holding company, the
Holding Company also is subject to extensive regulation, supervision and
examination by the OTS and, to a lesser extent, the FDIC.
<PAGE>
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
The regulatory structure governing savings associations and savings and
loan holding companies gives the regulatory authorities extensive
discretion in connection with their supervisory and enforcement activities.
Any change in such regulation, whether by the OTS, the FDIC or the U.S.
Congress, could have a significant impact on the Bank and the Holding
Company and their operations.
The Bank and the Holding Company are subject to periodic examinations by
the OTS. Examinations to prior years resulted in the Bank entering into a
supervisory agreement in 1993 and the OTS issuing a Supervisory Order to
Cease and Desist (the "Order") to both the Bank and the Holding Company in
1994. In a letter dated March 18, 1998, the OTS removed the growth
restrictions placed on the Bank pursuant to Regulatory Bulletin 3b,
permitting future growth of the Bank consistent with the Bank's strategic
and operating plans, and safe and sound banking practices. The Order to
Cease and Desist was lifted as of June 1, 1998.
(18) Credit Commitments
The Bank has outstanding at any time a significant number of commitments to
extend credit. These arrangements are subject to strict credit control
assessments and each customer's credit worthiness is evaluated on a
case-by-case basis. A summary of commitments to extend credit and standby
letters of credit written at December 31, 1998 and 1997 are as follows:
1998 1997
----------- -----------
Available lines of credit $ 681,054 306,516
=========== =========
Standby letters of credit $ -- 500,000
=========== =========
Outstanding mortgage loan commitments,
exclusive of loans in process:
Fixed rates $ 4,655,140 577,846
Variable rates 8,854,982 3,736,823
=========== =========
$13,510,122 4,314,669
=========== =========
Because many commitments expire without being funded in whole or part, the
contract amounts are not estimates of future cash flows.
<PAGE>
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
Loan commitments written have off-balance-sheet credit risk because only
original fees are recognized in the balance sheet until the commitments are
fulfilled or expire. Credit risk represents the accounting loss that would
be recognized at the reporting date if counterparties failed completely to
perform as contracted. The credit risk amounts are equal to the contractual
amounts, assuming that the amounts are fully advanced, and that collateral
or other security is of no value.
The Bank's policy is to require customers to provide collateral prior to
the disbursement of approved loans. The amount of collateral obtained, if
it is deemed necessary by the Bank upon extension of credit, is based on
management's credit evaluation of the counterparty. Collateral held varies
but may include accounts receivable, inventory, real estate and income
producing commercial properties.
Standby letters of credit are contractual commitments issued by the Bank to
guarantee the performance of a customer to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that
involved in extending loan facilities to customers.
(19) Concentration of Credit Risk
The Bank originates real estate, consumer and commercial loans primarily in
its Central Florida market area. Although the Bank has a diversified loan
portfolio, a substantial portion of its borrowers' ability to honor their
contracts is dependent upon the economy of Central Florida. The Bank does
not have a significant exposure to any individual customer or counterparty.
The Bank manages its credit risk by limiting the total amount of
arrangements outstanding with individual customers, by monitoring the size
and maturity structure of the loan portfolio, by obtaining collateral based
on management's credit assessment of the customers, and by applying a
uniform credit process for all credit exposures.
<PAGE>
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
OF THE REGISTRANT
MANAGEMENT
Management of Federal Trust
The Board of Directors of Federal Trust Corporation consists of 5 members all of
whom also presently serve as directors of the Bank. See "Management of the
Bank." The table below sets forth the name and positions of each director and
executive officer of Federal Trust.
<TABLE>
<CAPTION>
Age at Position with the Year First Term of
Director's Name January 1, 1999 Holding Company Elected Director Office Expires
--------------- --------------- --------------- ---------------- --------------
<S> <C> <C> <C>
James V. Suskiewich 51 President/Chairman/Director 1994 1999
Aubrey H. Wright, Jr. 52 Sr. V.P./CFO/Director 1995 1999
Samuel C. Certo 51 Director 1997 1999
George W. Foster 69 Director 1997 1999
Kenneth W. Hill 65 Director 1997 1999
</TABLE>
Directors are elected for a term of one year effective with the 1996 Annual
meeting.
Information with respect to the persons who are directors or executive officers
of Federal Trust, including an employment history covering the past five years
is detailed in the next section, "Management of the Bank". Except as otherwise
indicated, all persons named have been engaged in their principal occupations
for more than the past five years.
Management of the Bank
The direction and control of the Bank is vested in its Board of Directors, who
are elected by Federal Trust as the sole stockholder of the Bank. Directors are
elected for a term of three years, with one-third of the directors standing for
election each year.
Age at Position with Director Expiration
Name January 1, 1999 the Bank Since of Term
---- --------------- -------- -------- -------
James V. Suskiewich 51 President/ 1993 2000
Chairman
Director
George W. Foster 69 Director 1991 2000
Aubrey H. Wright, Jr. 52 SVP and CFO/ 1994 2001
Director
Samuel C. Certo 51 Director 1996 1999
Kenneth W. Hill 65 Director 1996 1999
Louis Laubscher 55 VP and CLO N/A N/A
Mr. Suskiewich joined the Bank as President in January 1993. He has served as
Chairman of the Board of Directors since May 1996. Prior to joining the Bank, he
was the President and a director of First Federal Savings Bank of the Glades,
Clewiston, Florida from March, 1988 to December 31, 1992.
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Mr. Foster served as President of the Bank from December, 1990 to January, 1993,
has served as President of Barnett Bank of Seminole County, President of
Seminole County Chamber of Commerce, National President of the American Safe
Deposit Association, as well as Director and President of numerous other civic
and professional organizations. Prior to joining the Bank, Mr. Foster served as
Assistant Vice President, Security Branch manager of First Federal Savings and
Loan Association of Seminole County from 1980 to 1990.
Mr. Wright joined the Bank as Chief Financial Officer in June, 1993 and was
elected as Chief Financial Officer of the Company in April 1994. Prior to
joining the Bank, Mr. Wright was President, Chief Operating Officer and director
of Essex Saving Bank, F.S.B. in West Palm Beach, Florida from August, 1991 to
May, 1993.
Dr. Certo is the former dean and has been a professor of management in the
Crummer Graduate School of Business at Rollins College in Winter Park since
1986. In addition, Dr. Certo serves as a business consultant and has published
textbooks in the areas of management and strategic management, and has been
involved in executive education for the past 20 years.
Mr. Hill is retired from SunBank, N.A., where he served as Vice President and
Trust Officer from 1983 until 1995. Mr. Hill's banking career began in 1966 and
he has been a resident of central Florida since 1957.
Mr. Laubscher joined the Bank in February, 1995 and has been Chief Lending
Officer since January, 1996. Prior to joining the Bank, Mr. Laubscher was
Executive Vice President, Director and Chief Loan Officer for First Family Bank,
FSB from March, 1992 to January, 1995.
The following table sets forth information as of March 1, 1998 with respect to
the ownership of shares of the Common Stock by directors and officers of Federal
Trust, and all directors and officers as a group.
Percentage of
Shares of Common Stock Options to Percentage of
Common issued & Purchase Common Stock on a
Name Stock(1) outstanding Stock fully diluted basis
---- -------- ----------- -------- -------------------
James V. Suskiewich(2) 85,580 1.73 120,000 3.89
Aubrey H. Wright, Jr 30,100 .61 70,000 1.90
George W. Foster 11,343 .23 25,000 .69
Samuel C. Certo 25,000 .51 25,000 .95
Kenneth W. Hill 25,000 .51 25,000 .95
Louis Laubscher 37,000 .75 30,000 1.27
Officers & Directors
as a Group 228,609 4.63 340,000 10.77
(1) Except as indicated below, includes all shares of Common Stock owned by
each director's spouse, or as custodian or trustee for minor children,
over which shares such individuals effectively exercise sole voting and
investment power.
(2) Includes 45,483 shares held as trustee under Federal Trust's ESOP with
respect to which Mr. Suskiewich exercises sole voting and investment
power.
Management is not aware of any contractual arrangements or any pledge of voting
stock which may result in a change of control of Federal Trust.
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<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth, for the fiscal years ended December 31, 1998,
1997 and 1996, the total compensation paid or accrued for the Chief Executive
Officer and each of the other two most highly compensated executive officers of
the Company and its subsidiaries, whose aggregate salary and bonus exceeded
$100,000 per year.
<TABLE>
<CAPTION>
Annual Compensation (1)
Restricted
Name and Principal Directors' Other Annual Stock
Position Year Salary Bonus (2) Fees Compensation(3) Awards(4) Options(5)
- --------------------- ---- ------ --------- ---------- --------------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
James V. Suskiewich, 1998 $145,807 $31,000 $13,750 $39,080 $22,562 120,000
CEO of the 1997 $134,441 $41,000 $17,000 $21,446 - -
Company, CEO 1996 $137,409 $11,000 $13,750 $14,161 - -
of the Bank
Aubrey H. Wright, Jr., 1998 $ 93,254 $12,000 $11,000 $20,488 $14,321 70,000
CFO of the 1997 $ 84,808 $18,500 $ 9,500 $ 8,291 - -
Company, CFO 1996 $ 79,904 $ 6,000 $ 7,250 $ 5,936 - -
of the Bank
Louis Laubscher, 1998 $ 77,053 $46,505 - $ 4,049 30,000
VP of the Bank, 1997 $ 74,038 $29,966 - $ 3,908 - -
CLO of the Bank 1996 $ 69,807 $16,848 - $ 4,218 - -
</TABLE>
(1) Includes all compensation in the year earned whether received or
deferred at the election of the executive.
(2) Includes $45,505, $28,966, and $10,848, in incentive bonuses for Mr.
Laubscher based on resolutions of non-performing loans and REO, and
the origination of SBA loans in 1998, 1997, and 1996, respectively.
(3) Includes the estimated value of:
James V. Suskiewich 1998 1997 1996
------------------- ---- ---- ----
Health & Life insurance premiums $ 4,244 $ 4,126 $ 4,454
Use of Company automobile 5,829 5,924 6,928
Social/Country Club Dues 4,531 5,600 2,779
Supplemental Retirement Plan 24,476 5,796 --
------- ------- -------
Total: $39,080 $21,446 $14,161
Aubrey H. Wright Jr 1998 1997 1996
- -------------------------------- ------- ------- -------
Health & Life insurance premiums $ 4,974 $ 5,477 $ 5,936
Supplemental Retirement Plan 15,514 2,814 --
------- ------- -------
Total: $20,488 $ 8,291 $ 5,936
Louis Laubscher 1998 1997 1996
- -------------------------------- ------- ------- -------
Health & Life insurance premiums $ 4,049 $ 3,908 $ 4,218
(4) Includes value of fully vested participation in the Company's
Employee Stock Ownership Plan ("ESOP"). In 1990, the Company
adopted an ESOP which provides that the Company can make a
contribution to a trust fund for the purpose of purchasing shares
of the Company's common stock on behalf of the participants. The
Company pays the entire cost of the ESOP and all salaried
employees of the Company who have completed six months of service
are eligible to participate. The ESOP is qualified under Section
497(e)(7) of the Internal Revenue Code, under which subsidiaries
may act as participating employees. In addition, the ESOP meets
all applicable requirements of the Tax Replacement Act of 1986 and
is qualified under Section 401(c) of the Internal Revenue Code.
84
<PAGE>
(5) On January 30, 1998, the Board of Directors of Federal Trust
adopted the 1998 Key Employee Stock Compensation Program
("Program") for the benefit of officers and other key employees of
the Company. The Program is comprised of four parts: an Incentive
Stock Option Plan, a Compensatory Stock Option Plan, a Stock
Appreciation Rights Plan, and a Performance Plan. The Program
provides for a maximum of 325,000 shares of authorized common
stock to be reserved for future issuance pursuant to stock options
granted under one of the four enumerated parts of the Program. The
Program was subject to approval by the shareholders, which was
obtained at the 1998 Annual Meeting of Shareholders. The exercise
price of each option is $4.00 per share, the fair market value of
the common stock on January 30, 1998 (the date of grant), based
upon the "bid price" on that date. The December 31, 1998 closing
price for the common stock was $2.31 per share. The stock options
vest at the rate of 20% per year and a stock option may be
exercised at any time on or after six months after the date of
grant until ten years after the date of grant. Unless terminated,
this Program shall remain in effect for a period of ten years
ending on the tenth anniversary of the effective date of the
Program.
All full-time salaried employees of the Company and its subsidiaries are
participants in the ESOP. Executive officers of the Company are eligible to
participate in the ESOP, but directors are not eligible unless they are also
full-time salaried employees. A participant's interest in the ESOP is vested
after five years of service and there is no vesting prior to that period of
time. As of December 31, 1998, ten employees had vested interest in the ESOP.
Mr. Suskiewich and Mr. Wright are now vested in the ESOP, however, Mr. Laubscher
is not.
The ESOP contributions by the Company are determined annually by the Board of
Directors of the Company, taking into consideration prevailing financial
conditions, the Company's fiscal requirements and other factors deemed relevant
by the Board. Generally, the Company may make contributions to the ESOP of up to
15% of total compensation paid to employees during the year. Each participant's
contribution equals the proportion that each such participant's compensation for
the year bears to the total compensation of all participants for such year. In
1997 and 1996, the Company contributed cash of $50,782, and $38,000,
respectively to the ESOP; at December 31, 1998 the Company had accrued $7,200
which was contributed as cash to the ESOP in February 1999.
Options and Long-term Compensation
1993 Stock Option Plan for Directors. On May 5, 1993, the Board of Directors of
the Company approved a Stock Option Plan for Directors (the "1993 Plan"). The
Plan provided that a maximum of 176,968 shares of common stock (the "Option
Shares") were to be made available to directors and former directors of the
Company. Options for all the Option Shares were issued on May 6, 1993. The
options were for a term of ten 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. Options held by an active
director were canceled immediately if such director was removed for "cause" as
defined in the 1993 Plan.
The Company issued no stock options or stock appreciation rights as compensation
during the fiscal year ended December 31, 1996. On March 7, 1997, the Board of
Directors of the Company rescinded the Stock Option Plan for Directors. The
Company issued no stock options or stock appreciation rights as compensation
during the period January 1, 1997 through March 7, 1997.
1998 Directors' Option Plan. On January 30, 1998, the Board of Directors adopted
a 1998 Directors' Stock Option Plan (the "1998 Plan"). The shareholders of
Federal Trust approved the 1998 Plan on May 22, 1998. The 1998 Plan authorizes
the granting of non-statutory stock options (options which do not qualify as
incentive stock options).
Each non-employee Director was granted an option to purchase 25,000 shares of
common stock on the Effective Date (as defined in the 1998 Plan). New Directors
elected or appointed to the Board of Directors of the Company or any
wholly-owned subsidiary of the Company may be granted options to purchase shares
of common stock, as determined by the Board of Directors in its sole discretion.
The per share exercise price at which the shares of common stock may be
purchased upon exercise of a granted option will be equal to the fair market
value of a share of common stock as of the date of grant. For the purposes of
the 1998 Plan, the fair market value of a share of common stock shall be the
closing sale price of a share of common stock on the date in question (or, if
such day is not a trading day on the U.S. markets, on the nearest preceding
trading day), as reported with respect to the principal market (or the composite
85
<PAGE>
of the markets, if more than one), or national quotation system in which such
shares are then traded, or if no such closing prices are reported, the mean
between the closing high bid and low asked prices of a share of common stock on
the principal market or national quotation system then in use, or if no such
quotations are available, the price furnished by a professional securities
dealer making a market in such shares selected by the Board.
An option may be exercised at any time on or after six months after the date of
grant until ten years after the date of grant. Unless terminated, the 1998 Plan
shall remain in effect for a period of ten years ending on the tenth anniversary
of the Effective Date.
<TABLE>
<CAPTION>
Stock Options
Number of % of Total
Securities Options Exercise Grant
Underlying Granted to or Base Date
Options Employees Price Expiration Present
Name Granted in Fiscal Year(1) ($/Share)(2) Date(3) Value
- ---- ------- ----------------- ------------ --------- -----
<S> <C> <C> <C> <C> <C>
James V. Suskiewich 120,000 43.6% $4.00 10/22/08 $1.00
Aubrey H. Wright, Jr. 70,000 25.5% $4.00 10/22/08 $1.00
Louis Laubscher 30,000 10.9% $4.00 10/22/08 $1.00
</TABLE>
(1) A total of 275,000 options for shares were issued to employees
and an additional 75,000 options were granted to non-employee
directors.
(2) The market price on the date the option plan was approved by the
Board of Directors subject to stockholder approval. The plan was
approved by the stockholders on May 22, 1998.
(3) The options vest at the rate of 20% per year commencing May 22,
1998.
Director Compensation
Beginning on July 1, 1998, each director of the Company receives a quarterly fee
of $750 for his service. Directors receive no per-meeting fees for either Board
meetings or any meetings of committees for which they serve as members.
Report of Board of Directors
The compensation of the Company's executive officers is determined by the
Company's entire Board of Directors excluding any Director who is also an
executive officer. Current directors who are not executive officers are George
W. Foster, Samuel C. Certo and Kenneth W. Hill. The Chief Executive Officer (the
"CEO") determines the salary range recommendations for all employees, including
executives other than himself. The CEO presents these to the Board and the
Board, in turn, reviews and analyzes all information submitted to it.
Thereafter, the Board determines compensation of all executive officers of the
Company including the compensation of the CEO.
Executive Compensation Policies and Program. The Company's executive
compensation program is designed to:
o Attract and retain qualified management of the Company;
o Enhance short-term financial goals of the Company; and
o Enhance long-term shareholder value of the Company.
The Company strives to pay each executive officer the base salary that would be
paid on the open market for a fully qualified officer of that position. The
Board of Directors determines the level of base salary and any incentive bonus
plan for the CEO and certain senior executive officers of the Company and a
range for other executive officers based upon competitive norms, derived from
annual surveys published by several independent banking institutes or private
companies specializing in financial analysis of financial institutions. Such
surveys provide information regarding compensation of financial institution
officers and employees based on size and geographic location of the financial
institution and serve as a bench mark for determining executive salaries. Actual
salary changes are based upon an evaluation of each individual's performance
86
<PAGE>
based upon Holding Company objectives and specific job description objectives,
as well as the overall performance of the Holding Company. Bonus awards are made
based upon the attainment of the Holding Company's net income targets, the
officer's responsibilities and individual performance standards with each
officer given the opportunity to earn an annual performance bonus, generally in
the range of approximately 10-40% of his or her base salary.
Compensation of the Chief Executive Officer. The CEO of the Company does not
receive compensation from the Company, but is compensated in his position as CEO
of the Bank. The Company reimburses the Bank for the time that the CEO spends on
Company matters.
The employment contract of the former CEO of the Company was assigned to Federal
Trust Properties Corporation ("FTPC") in June 1996, and FTPC was sold to an
unaffiliated third party on July 1, 1996.
Compensation Committee Interlocks and Insider Participation in Compensation
Decisions
James V. Suskiewich, President and Chief Executive Officer of the Company and
President and Chief Executive Officer of the Bank, is a member of the Company's
Board of Directors and participated in deliberations of the Board of Directors
regarding executive compensation. Mr. Suskiewich, however, did not participate
in any deliberation regarding his own compensation or transactions.
Employment Contracts
Federal Trust and the Bank have jointly entered into employment agreements with
two of their executive officers, James V. Suskiewich, President and Chief
Executive Officer and Aubrey H. Wright, Chief Financial Officer. The Bank has
also entered into an employment agreement with Louis Laubscher, its Vice
President and Chief Loan Officer.
James V. Suskiewich. Mr. Suskiewich's agreement was significantly amended and
re-executed on December 18, 1998. Pursuant to its terms, Mr. Suskiewich is to
receive a base salary, plus reimbursement of reasonable business expenses. In
addition, for any quarter in which the Bank's after-tax earnings are at least
0.50% of its average quarterly assets on an annualized basis, Mr. Suskiewich is
to receive a bonus equal to 3% of the Bank's quarterly net, pre-tax income; Mr.
Suskiewich is also entitled to discretionary performance bonuses to be paid
annually for the duration of the agreement. For the year ended December 31,
1998, Mr. Suskiewich received a bonus of $31,000. In addition, he is entitled to
participate in any bonus and incentive programs adopted by the Bank or the
Company commensurate with his position.
The original term of Mr. Suskiewich's employment agreement was three years.
Every day during the term of the agreement, the agreement automatically renews
for one additional day. Therefore, at all times, Mr. Suskiewich's agreement has
a three year term. Any party to the agreement may cease the automatic renewals
by notifying the other party of their intent to not renew. In addition, any
party may terminate the agreement by delivering to the other parties a notice of
termination. The date of termination is either 60 or 90 days (depending on the
reason for termination) after delivery of the notice.
Mr. Suskiewich's employment agreement provides for termination by the Bank or
Company for reasons other than for "cause" and by Mr. Suskiewich for "good
reason," as those terms are defined in the agreement. In the event the
employment agreement is terminated by the Bank or Company for reasons other than
"cause" or by Mr. Suskiewich for "good reason," he shall be entitled to
severance payments. The severance payment would be in a lump sum equal to the
total annual compensation for the remainder of the term of the employment
agreement, the performance bonus due for the quarter of termination, an
annualized portion of any long term incentives to later come due, and the amount
of Mr. Suskiewich's annual club dues for the year of termination multiplied by
the amount of time remaining on the term of his employment agreement.
In the event of a change in control of Federal Trust or the Bank, Mr. Suskiewich
will be entitled to a special incentive bonus equal to three times his annual
salary multiplied by the price/book value ratio at which Federal Trust or the
Bank is acquired. Furthermore, the agreement includes a "gross up" payment
clause. In the event severance payments received by Mr. Suskiewich are subject
to federal excise taxes under Section 4999 of the Internal Revenue Code of 1986,
the Bank or the Company shall increase Mr. Suskiewich's severance payment so
that the net proceeds from such payments will equal the amount of severance
payments due to Mr. Suskiewich under the terms of the agreement.
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<PAGE>
The employment agreement also permits Mr. Suskiewich to terminate his employment
voluntarily. In the event of voluntary termination, except as previously
described herein, all rights and benefits under the contract shall immediately
terminate upon the effective date of such termination.
Aubrey H. Wright. Mr. Wright's employment agreement became effective on
September 1, 1995 and had an original term of three years. By September 15 of
each subsequent year, the Bank and Federal Trust are to review Mr. Wright's
performance to determine whether the term of the agreement should be extended
for an additional year. Under the agreement, Mr. Wright is entitled to receive a
base salary, plus reimbursement of reasonable business expenses. In addition,
for any quarter in which the Bank meets the "Well Capitalized" definition under
federal banking regulations and its quarterly after-tax earnings are at least
0.50% of its average quarterly assets on an annualized basis, Mr. Wright is to
receive a bonus equal to 1% of the Bank's quarterly net, pre-tax income; Mr.
Wright is also entitled to discretionary performance bonuses payable annually
for the duration of the agreement. For the year ended December 31, 1998, Mr.
Wright received a bonus of $12,000. Additionally, Mr. Wright is also entitled to
participate in any bonus and incentive programs adopted by the Bank or the
Company and commensurate with his position.
In the event Mr. Wright's employment is terminated for reasons other than for
"just cause" or he terminates his employment for "good reason," as those terms
are defined in his employment agreement, he shall receive as a severance payment
the total annual compensation due for the remainder of the term of his
employment agreement. In the event of a change in control of Federal Trust or
the Bank, Mr. Wright will be entitled to a special incentive bonus equal to his
annual salary then in effect, multiplied by the price/book value ratio at which
the Bank or Federal Trust is acquired. However, if he accepts employment with
the acquiror, Mr. Wright shall instead receive a bonus of 50% of his salary then
in effect, multiplied by the price/book value ratio at which the Bank or Federal
Trust is acquired.
The employment agreement permits Mr. Wright to terminate his employment
voluntarily. In the event of voluntary termination, except as previously
described herein, all rights and benefits under the contract shall immediately
terminate upon the effective date of such termination.
Louis Laubscher. Mr. Laubscher's employment agreement became effective on
February 1, 1999. The agreement replaces a previous Employee Severance Agreement
between Mr. Laubscher and the Bank. Under the terms of the employment agreement,
Mr. Laubscher is entitled to receive a base salary, plus reimbursement of
reasonable business expenses. He is also entitled to discretionary performance
bonuses payable annually for the duration of the agreement and to participate in
any bonus and incentive programs adopted by the bank and commensurate with his
position. For the year ended December 31, 1998, Mr. Laubscher received a
performance bonus of $46,505.
The original term of Mr. Laubscher's employment agreement was one year. Every
day during its term, the agreement automatically renews for one additional day.
Therefore, at all times during its term, Mr. Laubscher's agreement has a one
year term. Either party to the agreement may cease the automatic renewals by
notifying the other party of their intent to not renew. In addition, either
party may terminate the agreement by delivering the other party a notice of
termination. A termination is effective 30 days after delivery of the notice.
Mr. Laubscher's employment agreement provides for termination by the Bank for
reasons other than for "just cause," as well as by Mr. Laubscher for "good
reason," as those terms are defined in the employment agreement. In the event
Mr. Laubscher's employment agreement is terminated by the Bank for reasons other
than for "just cause" or by Mr.
Laubscher for "good reason," he would be entitled to severance payments.
In the event severance payments are due, Mr. Laubscher will be entitled to a sum
equal to two times his annual base salary and any bonus he would have been
entitled to under the agreement. In the event of termination due to a change in
control, he will be entitled to a sum equal to his annual base salary and any
bonus he would have been entitled to under the agreement. Mr. Laubscher will
receive these sums in semi-monthly instalments. Furthermore, for the longer of
one year or the remaining term of the agreement, the Bank is to maintain in full
force and effect any benefit plans or programs Mr. Laubscher was entitled to
participate in at the time of his termination.
In addition, the agreement permits Mr. Laubscher to terminate his employment
voluntarily. In the event of voluntary termination, except as previously
described herein, all rights and benefits under the contract shall immediately
terminate upon the effective date of such termination.
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<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The Company is not aware of any person who, on March 1, 1998, was the beneficial
owners of 5% or more of the Company's outstanding Common Stock, except for
William R. Hough & Co. Information concerning such ownership is set forth in the
following table together with information concerning beneficial ownership by
directors and officers as a group.
Amount and Nature of Percent of
Beneficial Owner Beneficial Ownership Class
---------------- -------------------- -----
William R. Hough & Co. 492,241(1) 9.96
100 Second Avenue South, Suite 800
St. Petersburg, Florida 33701
Directors and Executive Officers as a Group 228,609 4.63
(6 persons)
- -----------------------
(1) Includes 247,641 shares owned by WRH Mortgage, Inc. and 244,600 shares
owned by William R. Hough & Co.
Security Ownership of Management
The table set forth in "Item 10. Directors and Executive Officers of the
Registrant" contains certain information concerning shares of the Company's
Common Stock beneficially owned by directors and all directors and officers as a
group. There are no shares of the Company's Preferred Stock issued and
outstanding.
Changes in Control
The Registrant does not know of any arrangement, including any pledge by any
person of the securities of the Registrant or any of its subsidiaries, the
operation of which may at a subsequent date result in a change in control of the
Registrant.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
TRANSACTIONS WITH MANAGEMENT
Indebtedness of Management
In 1994 the Board of Directors of the Company and the Bank amended their loan
policies with regard to loans to directors, officers and employees. The current
policy is generally not to make loans to directors and officers. Any loans that
are made, however, will require approval of a majority of the disinterested
directors of the company making the loan. The Bank is also subject to the
provisions of Section 22(h) of the Federal Reserve Act. Any credit extended by
the Bank to directors, executive officers and, to the extent otherwise
permitted, principal shareholders, or any affiliates thereof must be: (i) on
substantially the same terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions by the Bank with
non-affiliated parties and (ii) not involve more than the normal risk of
repayment or present other unfavorable features.
As of December 31, 1998, neither the Company nor the Bank had any loans
outstanding to directors or executive officers. The Bank, however, did have
$737,472 in commercial loans to Morrone, Smoker and Grill, Inc., whose President
Jack L. Morrone is the brother-in-law of the Company's former Chairman and Chief
Executive Officer. Mr. Morrone is considered to be an "affiliate", as that term
is defined by SEC regulations. This largest outstanding balance during 1998 was
$324,585. As of February 28, 1999 the balance was $318,395.
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<PAGE>
Transactions With Certain Related Persons
Effective January 1, 1990, John Martin Bell, a former director and former major
shareholder of the Company and the wife of the former Chairman of the Board of
the Company, as lessor, and the Company, as lessee, entered into a triple net
lease (the "Lease"), pursuant to which the Company leased from Mrs. Bell 3,953
square feet of office space located at 1211 Orange Avenue, Winter Park, Florida
(the "Premises"). The term of the Lease was two (2) years. Effective January 1,
1991, the Lease was amended to increase the term from December 31, 1991 to
December 31, 2000. The square footage leased by the Company increased to 11,393
square feet. On November 11, 1991, the Company and Ms. Bell terminated the Lease
and executed a new triple net lease (the "New Lease"), pursuant to which the
Company has leased 13,305 square feet in the Premises. The term of the New Lease
runs until December 31, 2000. The New Lease will automatically be extended for
two (2) consecutive periods of ten (10) years each unless the Company elects to
terminate the New Lease pursuant to the notice provisions in the New Lease prior
to the expiration of the ten year lease period. Effective July 15, 1992, the New
Lease was modified to reduce the amount of space leased to 12,392 square feet
and to decrease the annual rental by $49,510 to $240,686. Effective June 6,
1994, the New Lease was modified to decrease the annual rent for the years 1993
and 1994 to $216,984 and $223,552, respectively. Effective June 1, 1995, the New
Lease was modified to increase the amount of space leased to 13,305 square feet.
The rent for 1996 through the end of the New Lease term will be the preceding
year's rent increased by the Consumer Price Index Escalation, provided however,
that in no event shall the rent increase be less than 3% or more than 6%. The
Company believes that the terms of this transaction are no less favorable to the
Company than transactions obtainable from unaffiliated parties. When a
transaction involves the Company and an officer, director, principal shareholder
or affiliate, the policy of the Company is that the transaction will be on terms
no less favorable to the Company than could be obtained from an unaffiliated
party. Any such transactions must be approved in advance by a majority of
independent and the disinterested directors.
During the year 1995, the Company reimbursed John Martin Bell for her cost of
furniture, fixtures and leasehold improvements for the Company's office space
located at 1270 Orange Avenue, Winter Park, Florida in the amount of $1,417. No
fees or profit was paid to the Bells in connection with this reimbursement. The
Company believes that the terms of this reimbursement are no less favorable to
the Company than what could be obtained from unaffiliated parties.
All future transactions with officers, directors, principal shareholders or
affiliates of the Company and its subsidiaries will be on terms no less
favorable than could be obtained from unaffiliated parties, and shall be
approved by the Board of Directors, including a majority of the independent
disinterested directors of the Company.
[THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK.]
90
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON
FORM 8-K
(a) List of Documents filed by Registrant as part of this report:
Financial Statements. Financial statements of Registrant included herein for the
year ended December 31, 1998.
o Independent Auditors' Report
o Consolidated Balance Sheets at December 31, 1998 and 1997
o Consolidated Statements of Operations for each of the years in the three
year period ended December 31, 1998
o Consolidated Statements of Cash Flows for each of the three years in the
three year period ended December 31, 1998
o Consolidated Statement of Stockholders' Equity and Comprehensive Income
for each of the three years in the three year period ended December 31,
1998
o Notes to Consolidated Financial Statements
(b) The following exhibits are filed as part of this report:
Exhibit Number Description Page
3(a) Restated Articles of Incorporation dated July 22, 1994. ****
3(g) Bylaws dated August 3, 1988, as amended March 23, 1990 and
July 20, 1990. ****
10(a) Stock Exchange Agreement by and between the Company and
The John Martin Bell Corporation dated March 8, 1990. *
10(b) Employment Agreement by and between the Company and James
T. Bell dated January 26, 1990. *
10(C) Amendment to the Employment Agreement by and between the
Company and James T. Bell dated June 29, 1990. **
10(d) Second Amendment to the Employment Agreement by and
between the Company and James T. Bell dated April 5, 1991. ***
10(e) Employee Stock Ownership Plan dated January 1, 1990. **
10(f) Lease for Federal Trust Building dated November 11, 1991,
as amended July 29, 1992 and March 1, 1994. ****
10(g) Amended and Restated Lease for Federal Trust Drive-In
Facility dated December 31, 1992. ****
10(h) Lease for Federal Trust Corporation offices dated April 7,
1992, as amended and assumed on June 1, 1994. ****
91
<PAGE>
10(i) Third Amendment to the Employment Agreement by and between
the Company and James T. Bell dated January 5, 1994 ****
10(j) Employment Agreement by and between the Company and James
V. Suskiewich dated September 1, 1995. *****
21 Subsidiaries. 93 99 Statement Regarding Issuance of
Debentures. ***
(c) Financial Statement Schedules
All supplemental schedules are omitted as inapplicable or because the
required information is included in the financial statements or notes
thereto.
* Incorporated by reference to such documents filed as
Exhibits 3, 10(a), 10(b), and 22 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 31,
1989
** Incorporated by reference to the document filed as
Exhibits 10(C) and 10(e) to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1990
*** Incorporated by reference to the document files as Exhibit
10(d) and Exhibit 99 to the Company's Annual Report on
Form 10-K from the fiscal year ended December 31, 1991.
**** Incorporated by reference to the document files as
Exhibits 3(a), 3(g), 10(f), 10(g), 10(h) and 10(i) to the
Company's Annual Report on Form 10-K from the fiscal year
ended December 31, 1994.
***** Incorporated by reference to the document files as
Exhibits 10(j) to the Company's Annual Report on Form 10-K
from the fiscal year ended December 31, 1995.
92
<PAGE>
SIGNATURES
Pursuant to the requirement of Section 13 of 15(d) of the Securities and
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
March 30, 1999 FEDERAL TRUST CORPORATION
By /s/ Aubrey H. Wright
-----------------------
Aubrey H. Wright
Chief Financial Officer
Pursuant to the requirements of the Securities and Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ James V. Suskiewich Chairman of the Board and March 30, 1999
- -----------------------
James V. Suskiewich President
/s/ Aubrey H. Wright, Jr Director March 30, 1999
- ------------------------
Aubrey H. Wright, Jr.
/s/ Samuel C. Certo Director March 30, 1999
- -------------------
Samuel C. Certo
/s/ Kenneth W. Hill Director March 30, 1999
- -------------------
Kenneth Hill
/s/ George W. Foster Director March 30, 1999
- ---------------------------
George Foster
Supplemental information to be furnished with Reports Filed Pursuant to Section
15(d) of the Act by Registrants Which Have Not Registered Securities Pursuant to
Section 12 of the Act.
No Annual Report or proxy material has been sent to security holders.
93
<PAGE>
EXHIBIT INDEX
Exhibit Number Description Page
- -------------- ----------- ----
3(a) Restated Articles of Incorporation dated July 22, 1994. ****
3(g) Bylaws dated August 3, 1988, as amended March 23, 1990 and
July 20, 1990. ****
10(a) Stock Exchange Agreement by and between the Company and
The John Martin Bell Corporation dated March 8, 1990. *
10(b) Employment Agreement by and between the Company and James
T. Bell dated January 26, 1990. *
10(C) Amendment to the Employment Agreement by and between the
Company and James T. Bell dated June 29, 1990. **
10(d) Second Amendment to the Employment Agreement by and
between the Company and James T. Bell dated April 5, 1991. ***
10(e) Employee Stock Ownership Plan dated January 1, 1990. **
10(f) Lease for Federal Trust Building dated November 11, 1991,
as amended July 29, 1992 and March 1, 1994. ****
10(g) Amended and Restated Lease for Federal Trust Drive-In
Facility dated December 31, 1992. ****
10(h) Lease for Federal Trust Corporation offices dated April 7,
1992, as amended and assumed on June 1, 1994. ****
10(i) Third Amendment to the Employment Agreement by and between
the Company and James T. Bell dated January 5, 1994 ****
10(j) Employment Agreement by and between the Company and James
V. Suskiewich dated September 1, 1995. *****
21 Subsidiaries. 93
99 Statement Regarding Issuance of Debentures. ***
(c) Financial Statement Schedules
All supplemental schedules are omitted as inapplicable or because the
required information is included in the financial statements or notes
thereto.
* Incorporated by reference to such documents filed as Exhibits 3,
10(a), 10(b), and 22 to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1989
** Incorporated by reference to the document filed as Exhibits 10(C)
and 10(e) to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1990
*** Incorporated by reference to the document files as Exhibit 10(d)
and Exhibit 99 to the Company's Annual Report on Form 10-K from
the fiscal year ended December 31, 1991.
**** Incorporated by reference to the document files as Exhibits 3(a),
3(g), 10(f), 10(g), 10(h) and 10(i) to the Company's Annual Report
on Form 10-K from the fiscal year ended December 31, 1994.
***** Incorporated by reference to the document files as Exhibits 10(j)
to the Company's Annual Report on Form 10-K from the fiscal year
ended December 31, 1995.
94
<PAGE>
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity and Comprehensive Income
For each of the years in the three year period ended December 31, 1998
<TABLE>
<CAPTION>
Unrealized
gain -
reclass- Additional Treasury
Comprehensive ification Common paid-in Accumulated stock,
income amount stock capital deficit at cost
------ ------ ----- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1995 22,565 11,143,659 (2,249,701) (76,525)
Comprehensive income:
Net loss (976,503) -- -- (976,503) --
Other comprehensive income, net of tax:
Unrealized loss associated with
investment securities
transferred from available for
sale to held to maturity (553,923) -- -- -- --
Amortization of unrealized loss on
securities held to maturity 65,280 -- -- -- --
Gross unrealized gain on securities 557,304
Add: reclassified adjustment for
losses in net income 12,344
------
Net unrealized gain on securities 569,648 -- -- -- --
-------
Comprehensive income $ (895,498)
==========
------ ---------- ---------- -------
Balances at December 31, 1996 22,565 11,143,659 (3,226,204) (76,525)
Proceeds from sale of 2,701,619 shares of
common stock 26,851 4,713,873 -- 76,525
Loss on treasury stock included in above
stock sale -- -- (43,370) --
Comprehensive income:
Net income 357,432 -- -- 357,432 --
Other comprehensive income, net of tax:
Amortizaiton of unrealized loss on
securities held to maturity 94,534 -- -- -- --
Gross unrealized gain on securities 54,564
Add: reclassified adjustment for losses
included in net income 125,625
-------
Net unrealized gain on securities 180,189 -- -- -- --
-------
Comprehensive income 632,155
=======
Balances at December 31, 1997 49,416 15,857,532 (2,912,142) --
------ ---------- ---------- -------
Accretion of stock options for stock compensation
program -- 25,521 -- --
Comprehensive income:
Net income 543,943 -- -- 543,934 --
Other comprehensive income, net of tax:
Amortization of unrealized loss on securities
held to maturity 62,557 -- -- -- --
Gross unrealized gain on securities 20,090
Add: reclassified adjustment for losses
included in net income 9,945
-----
Net unrealized gain on securities 30,035 -- -- -- --
------
Comprehensive income 636,526
=======
------ ---------- ---------- -------
Balances at December 31, 1998 49,416 15,883,053 (2,368,208) --
</TABLE>
<PAGE>
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity and Comprehensive Income
For each of the years in the three year period ended December 31, 1998
Accumulated
other Total
comprehensive stockholder's
income equity
------ ------
Balances at December 31, 1995 (779,872) 8,060,126
Comprehensive income:
Net loss -- (976,503)
Other comprehensive income, net of tax:
Unrealized loss associated with
investment securities
transferred from available for
sale to held to maturity (553,923) (55,923)
Amortization of unrealized loss on
securities held to maturity 65,280 65,280
Gross unrealized gain on securities
Add: reclassified adjustment for
losses in net income
Net unrealized gain on securities 569,648 569,648
Comprehensive income
------- ---------
Balances at December 31, 1996 (698,867) 7,164,628
Proceeds from sale of 2,701,619 shares of
common stock -- 4,817,249
Loss on treasury stock included in above
stock sale -- (43,370)
Comprehensive income:
Net income -- 357,432
Other comprehensive income, net of tax:
Amortizaiton of unrealized loss on
securities held to maturity 94,534 94,534
Gross unrealized gain on securities
Add: reclassified adjustment for losses
included in net income
Net unrealized gain on securities 180,189 180,189
Comprehensive income
Balances at December 31, 1997 (424,144) 12,570,662
-------- ---------
Accretion of stock options for stock compensation
program -- 25,521
Comprehensive income:
Net income -- 543,934
Other comprehensive income, net of tax:
Amortization of unrealized loss on securities
held to maturity 62,557 62,557
Gross unrealized gain on securities
Add: reclassified adjustment for losses
included in net income
Net unrealized gain on securities 30,035 30,035
Comprehensive income
-------- ---------
Balances at December 31, 1998 (331,552) 13,232,709
<PAGE>
<PAGE>
EXHIBIT 21
SUBSIDIARIES
Subsidiaries of Jurisdiction of Name under which
the Registrant Incorporation business is conducted
- -------------- ------------- ---------------------
Federal Trust Bank United States of America Federal Trust Bank
95
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 2,118
<INT-BEARING-DEPOSITS> 5,048
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 6,468
<INVESTMENTS-MARKET> 6,681
<LOANS> 152,068
<ALLOWANCE> 1,136
<TOTAL-ASSETS> 174,465
<DEPOSITS> 129,292
<SHORT-TERM> 18,500
<LIABILITIES-OTHER> 3,552
<LONG-TERM> 10,000
0
0
<COMMON> 49
<OTHER-SE> 13,072
<TOTAL-LIABILITIES-AND-EQUITY> 174,465
<INTEREST-LOAN> 10,438
<INTEREST-INVEST> 303
<INTEREST-OTHER> 275
<INTEREST-TOTAL> 11,016
<INTEREST-DEPOSIT> 6,105
<INTEREST-EXPENSE> 1,153
<INTEREST-INCOME-NET> 3,398
<LOAN-LOSSES> 165
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 3,411
<INCOME-PRETAX> 696
<INCOME-PRE-EXTRAORDINARY> 696
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 433
<EPS-PRIMARY> 0.09
<EPS-DILUTED> 0.09
<YIELD-ACTUAL> 7.37
<LOANS-NON> 1,360
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 3,672
<ALLOWANCE-OPEN> 1,111
<CHARGE-OFFS> 163
<RECOVERIES> 23
<ALLOWANCE-CLOSE> 1,136
<ALLOWANCE-DOMESTIC> 1,136
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
