SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549-1004
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999 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
- --------------------- --------
(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
Check if disclosure of delinquent filers pursuant to Item 405 of Regulation S-B
is not contained in this form, and will not be contained, to the best of
Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [X]
Revenues for the fiscal year ended December 31, 1999: $15,492,152
The aggregate market value of the common stock of the Registrant held by
nonaffiliates of the Registrant (4,509,803 shares) on March 22, 2000 was
approximately $11,556,370. As of such date, no organized trading market existed
for the common stock of the Registrant. The aggregate market value was computed
by reference to recent trading activity of the common stock of the Registrant at
$2.5625 per share. For the purposes of this response, directors, officers and
holders of 5% or more of the Registrant's common stock are considered the
affiliates of the Registrant at that date.
The number of shares outstanding of the Registrant's common stock, as of March
23, 2000: 4,947,911 shares of $0.01 par value common stock.
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
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DOCUMENTS INCORPORATED BY REFERENCE:
1. Portions of the Proxy Statement for the 2000 Annual Meeting of
Shareholders filed electronically with the Securities and Exchange
Commission on March 30, 2000. (Part III)
<PAGE>
TABLE OF CONTENTS
Consolidated-Federal Trust Corporation and Subsidiaries ("Registrant").
Page Number
PART I
Item 1 Business......................................................... 3
Item 2 Properties.......................................................21
Item 3 Legal Proceedings................................................21
Item 4 Submission of Matters to a Vote of Security Holders..............22
PART II
Item 5 Market for Common Equity and Related Stockholder Matters.........22
Item 6 Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................22
Item 7 Financial Statements and Supplementary Data......................28
Item 8 Changes in and disagreements with Accountants on
Accounting and Financial Disclosure..............................63
PART III
Item 9 Directors and Executive Officers of the Registrant:..............63 (1)
Item 10 Executive Compensation...........................................63 (1)
Item 11 Security Ownership of Certain Beneficial Owners and Management...63 (1)
Item 12 Certain Relationships and Related Transactions...................63
PART IV
Item 13 Exhibits, Financial Statement Schedules, and Reports on Form 8-K.64
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(1) The material required by Items 9 through 11 is hereby incorporated by
reference from Registrant's definitive Proxy Statement, pursuant to
Instruction E 3 of Form 10-KSB.
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PART I
ITEM 1. BUSINESS
General
Federal Trust Corporation ("Federal Trust") 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. Federal
Trust, the Bank and its subsidiaries are collectively referred to herein as the
"Company". The Company's headquarters are currently located in Winter Park,
Florida. Federal Trust conducts business as a savings and loan holding company,
and its principal asset is the capital stock of the Bank. As a savings and loan
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.
Subsidiary
Federal Trust is a legal entity separate from the Bank. Federal Trust's
executive offices are located at 1211 Orange Avenue, Winter Park, Florida 32789,
and its telephone number is (407) 645-1201. 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."
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 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."
Forward Looking Statements
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. Actual results may differ
materially, depending upon a variety of important factors, including
competition, inflation, general economic conditions, changes in interest rates
and changes in the value of collateral securing loans we have made, among other
things.
Strategy
Our 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 us manage our 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
such as economic, environmental, competitive and liquidity needs will have an
effect on the cost of deposits. Our principal sources of earnings are currently
interest on real estate mortgage loans, investments, and overnight deposits,
fees on checking accounts and sales of loans. Our principal expenses are
interest paid on deposits, FHLB advances and operating expenses.
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Market Area and Competition
The Company is headquartered 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, we opened a new branch in downtown
Sanford, Florida. Sanford is located approximately 12 miles northeast of our
main office in Winter Park, and is the second largest city in Seminole County
with a population estimated at 36,000. We are currently looking at a new branch
facility in New Smyrna, Florida.
Our primary market area is northeast Orange County and Seminole County, although
our 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 Company experiences substantial competition in attracting and retaining
deposits and in lending funds. The primary factor in competing for deposits is
interest rates. Direct competition for deposits comes from other thrift
institutions, commercial banks and nontraditional financial service providers,
including insurance companies, consumer finance companies, brokerage houses and
credit unions. 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.
Competition for origination of real estate loans normally comes from other
thrift institutions, commercial banks, mortgage bankers, insurance companies and
real estate investment trusts.
Consolidation within the banking industry, and in particular within Florida, has
been dramatic. As of September 30, 1999, the four largest banking institutions
in the state controlled approximately 54% 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.
Lending Activities
General. Our primary lending activity 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 our
loans are made to homeowners on the security of single-family dwellings. To a
lesser extent, we have also made commercial real estate, U.S. Small Business
Administration ("SBA") guaranteed business loans, home equity, and other
consumer loans.
Credit Risk. The Bank's primary business is the origination and acquisition of
loans to families and businesses. That activity entails potential credit losses,
the magnitude of which depends on a variety of economic factors affecting
borrowers which are beyond the control of the Bank. While the Bank has
instituted guidelines and credit review procedures to protect it from 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
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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.
Loan Portfolio Composition. Our 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 $186.7 million at
December 31, 1999, representing 88% of total assets at such date. At December
31, 1998, our total loan portfolio net was $152.1 million.
Residential mortgage loans comprise the largest group of loans in our loan
portfolio, amounting to $172.7 million or 92% of the total loan portfolio at
December 31, 1999, of which approximately 99.5% are first mortgage loans and
includes $31.5 million in loans for the construction of one-to-four-family homes
and $3.51 million which are either insured by the FHA or partially guaranteed by
the VA. The percentage of our loan portfolio consisting of one-to-four-family
residential real estate loans has increased during the past few years. We offer
fixed rate and ARM loans for up to 30 years. As of December 31, 1999,
approximately $129.3 million, or 74.8% of these loans were ARM loans and $43.4
million, or 25.2% of these loans were fixed-rate. Fixed-rate loans are generally
sold in the secondary market.
Commercial real estate loans, including land loans, amounted to $20.9 million or
11.2% of the total loan portfolio, net at December 31, 1999. Commercial real
estate loans consist of $18.3 million of loans secured by other non-residential
property and $2.6 million of loans secured by undeveloped land as of December
31, 1999. At December 31, 1999, consumer and other loans, consisting of
installment loans and savings account loans, amounted to $1.2 million or 0.7% 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,
- ----------------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
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>
Mortgage loans:
Permanent 162,118 82.6% $ 141,518 88.8% $ 117,279 94.7% $ 109,012 94.8% $ 110,725 96.0%
Construction 31,518 16.1% 15,332 9.6% 4,715 3.8% 3,795 3.3% 1,667 1.4%
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total mortgage loans 193,636 98.6% 156,850 98.4% 121,994 98.5% 112,807 98.1% 112,392 97.9%
Consumer & other loans 1,242 0.6% 999 0.6% 746 0.6% 154 0.1% 180 0.2%
Commercial loans -- 0.0% 354 0.2% 490 0.4% 1,350 1.2% 1,443 1.3%
Lines of credit 1,434 0.7% 1,243 0.8% 570 0.5% 686 0.6% 1,259 1.1%
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total loans 196,312 100.0% 159,446 100.0% 123,800 100.0% 114,997 100.0 112,372 100.0%
Premium on loans purchased 1,676 1,375 1,370 1,155 987
Less:
Loans in process 9,967 7,590 2,138 1,902 1,190
Unearned discounts & loan
origination fees (77) 27 13 170 104
Loans held for sale -- -- -- -- --
Allowance for loan losses 1,438 1,136 1,110 1,533 2,061
-------- -------- -------- -------- --------
Net loans $186,660 $152,068 $121,909 $112,547 $112,906
======== ======== ======== ======== ========
</TABLE>
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 Company the right
to declare a conventional loan immediately due and payable in the event, among
other things, that the borrower sells the real property subject to the mortgage
and the loan is not repaid. The average life of mortgage loans tends to
increase, however, when current mortgage loan rates are substantially higher
than rates on existing mortgage loans and, conversely, decrease when rates on
existing mortgages are substantially higher than current mortgage loan rates. As
of December 31, 1999, the Company had $31.5 million in construction loans, all
of which mature in one year or less.
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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. Our real estate mortgage loan origination activities will be
affected by changes in the real estate development and construction industries.
Since 1991, our residential real estate loan volume has been primarily
purchased. We generally purchase loan packages of $2.0 million to $10.0 million
of single family residential mortgages, which are primarily seasoned one-year
ARM loans. Approximately 77.2% of the single family residential mortgages in our
loan portfolio are secured by properties located in Florida. While we prefer to
purchase loan packages comprised of Florida real estate, because of pricing and
the limited number of Florida loan packages that are available, we also purchase
packages of seasoned loans outside of Florida. The loan packages undergo an
individual loan underwriting review prior to purchase.
Loans that we originate are generally on real estate located in our primary
lending area of central Florida. Sources for residential mortgage loan
originations include direct solicitation by employed loan originators,
depositors, other existing customers, advertising and referrals from real estate
brokers, mortgage brokers and developers. Our 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 Company has engaged
in the sale of whole loans.
Consumer loan originations are attributable largely to depositors and walk-in
customers and referrals, while 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 following table sets forth for the Bank total loans originated, purchased,
sold and repaid during the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Originations:
Real Estate Loans:
Loans on existing property 29,804 $ 19,238 $ 10,405 $ 4,955 $ 3,354
Construction loans 22,670 10,168 2,758 621 186
Commercial loans 9,311 3,223 2,308 663 100
Lines of credit 191 704 409 -- 74
Consumer & other loans 917 683 285 515 47
-------- -------- -------- -------- --------
Total loans originated 62,893 34,016 16,165 6,754 3,761
Purchases: 55,177 51,266 23,675 25,082 36,913
-------- -------- -------- -------- --------
Total loans originated & purchased 118,070 85,282 39,840 31,836 32,766
Sales and principal reductions
Loans sold (30,431) (9,250) (2,241) (7,761) (2,561)
Principal on loan reductions (50,773) (40,386) (28,796) (24,351) (27,296)
-------- -------- -------- -------- --------
Total loans sold & principal reductions (81,204) $(49,636) $(31,037) $(32,112) $(29,587)
======== ======== ======== ========
Increase (decrease) in loans receivable (before net items) 36,866 $ 35,646 $ 8,803 $ (276) $ 2,909
======== ======== ======== ======== ========
</TABLE>
Loan Underwriting. Lending activities are subject to strict 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. Our lending policy for real estate loans generally requires that
collateral be appraised by an independent, outside appraiser approved by the
Board of Directors.
Loans are approved at various management levels up to and including the Board of
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Directors. 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.
To ensure that underwriting standards and loan policies are being followed, an
internal and an external loan review process has been put in place.
General lending policies. Our policy 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.
We are 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, federal
regulations require that private mortgage insurance be obtained on that portion
of the principal amount of the loan that exceeds 80% of the appraised value of
the property. We 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 or combination
construction/permanent financing, we will lend up to 95% of the appraised value
of the property on an "as completed"basis. The loan-to-value ratio on
multi-family residential and commercial real estate loans is generally limited
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 that could have been loaned to one borrower and the
borrower's related entities at December 31, 1999, was approximately $1.99
million. We have no loans in our portfolio that exceed our loans to one borrower
limit.
Federal regulations also permit us to invest, in the aggregate, up to four times
our regulatory capital in loans secured by non-residential or commercial real
estate. At December 31, 1999, this limit allowed us to invest in non-residential
or commercial real estate loans in an aggregate amount up to $53.1 million. At
such date, we had $21.0 million in loans secured by non-residential or
commercial real estate.
Income from Lending Activities/Loan Servicing. 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. We also receive fees for servicing loans sold to
others. At December 31, 1999, we were servicing $158.8 million in loans for
other institutions, which produced $252,035 in servicing income. Income from
these activities varies from period to period with the volume and type of loans
originated, sold and purchased, which in turn is dependent upon prevailing
mortgage interest rates and their effect on the demand for loans in the
Company's market area.
Loan fees typically are charged at the time of loan origination and may be a
flat fee or a percentage of the amount of the loan. Under current accounting
standards such fees cannot typically be recognized as income and are deferred
and taken into income over the contractual life of the loan, using a level yield
method. If a loan is prepaid or refinanced, all remaining deferred fees with
respect to such loan are taken into income at that time.
Non-performing Loans and Real Estate Owned. When a borrower fails to make a
required payment on a loan, the Company attempts to collect the payment by
contacting the borrower. If a payment on a loan has not been received by the end
of a grace period (usually 15 days from the payment due 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 normal collection procedures, more formal measures are instituted
to remedy the default, including the commencement of foreclosure proceedings.
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If foreclosure is effected, the property is sold at a public auction in which we
may participate as a bidder. If we are the successful bidder, the acquired real
estate property is then included in the Company's "real estate owned"account
until it is sold. Under federal regulations, we are permitted 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 our underwriting
guidelines. At December 31, 1999, 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. Our policy is to
not accrue interest on loans past due 90 days or more.
Real estate acquired as a result of foreclosure or by deed-in-lieu of
foreclosure is classified as real estate owned until it is sold. When property
is acquired, it is recorded at the lower of cost or fair 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 certain information regarding our 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.
There were no troubled debt restructuring or accruing loans more than 90 days
delinquent at any of the dates presented.
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Non-accrual loans:
Residential:
Construction and land loans $ -- $ -- $ -- $ 548 $2,035
Permanent loans (1-4 units) 2,027 1,359 1,283 322 807
All other mortgage loans 629 -- -- -- 416
Commercial loans -- -- -- 47 --
Consumer and other loans -- 1 -- 73 69
In-substance foreclosures -- -- -- -- --
-------- -------- ------- ------ ------
Total non-accrual loans $ 2,656 $ 1,360 $ 1,283 $ 991 $3,327
======== ======= ====== ======
Total non-accrual loans to total loans 1.4% 0.9% 1.0% 0.9% 2.9%
======== ======== ======= ====== ======
Total non-accrual loans to total assets 1.3% 0.8% 0.9% 0.7% 2.4%
======== ======== ======= ====== ======
Total allowance for loss to total non-accrual loans 54.1% 83.5% 86.5% 154.7% 61.9%
======== ======== ======= ====== ======
Real estate owned:
Real estate acquired by foreclosure $ 295 $ 1,107 $ 1,390 $1,508 $3,293
Total real estate owned $ 295 $ 1,107 $ 1,390 $1,508 $3,293
======== ======== ======= ====== ======
Total non-accrual loans and real estate owned to total assets 1.4% 1.4% 1.9% 1.8% 4.7%
======== ======== ======= ====== ======
</TABLE>
If the non-accrual loans at December 31, 1999, 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, 1999, would have been increased $164,582.
The $2.7 million of non-accruing single-family residential permanent loans at
December 31, 1999, consists of 31 loans. Such loans have an average loan balance
of approximately $85,674 and no loan exceeded $408,165.
At December 31, 1999, there were no non-accruing land acquisition and
development loans. As for the $295,319 in real estate owned, 7 were single
family properties with an average balance of $38,331, and one acquisition and
development project with a balance of $27,001.
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 $320,000 to its provision for loan losses during 1999.
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The Bank's net loans increased by $34.6 million during 1999. Although management
believes that its present allowance for loan losses is adequate as of December
31, 1999, 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 1999 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, 1999 was $1,437,913 or 54.1% of
non-performing loans and .77% of net loans receivable compared to $1,136,056 or
83.5% of non-performing loans and .75% of net loans at December 31, 1998. The
allowance at December 31, 1999 consisted of reserves for the performing loans in
the portfolio and reserves against certain loans based on management's
evaluation of these loans. During 1999, 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 higher level of reserves at December 31, 1999, reflects
the increase in total loans outstanding during 1999.
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 December 31, 1999 and has not concluded as of
March 31, 2000. See "Supervision".
During 1999, the Bank's total non-accrual loans increased by approximately
$1,295,900.
Allowance for Losses on Loans
When establishing our allowance for loan losses, a number of factors are
considered. For loan loss purposes, the loan portfolio is segregated into the
following broad segments: commercial real estate; residential real estate;
commercial business; and consumer loan. A general allowance for losses is then
provided for each of the aforementioned 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.
Although we believe that we use 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 our allowance for loan losses. Such agencies may
require us 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 the 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.
9
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Average loans outstanding, net $176,152 $135,617 $113,472 $112,288 $115,608
Allowance at beginning of year, 1,136 1,111 1,533 2,061 1,975
Charge offs:
Conventional loans 36 163 -- 794 267
Construction loans -- -- -- --
Commercial real estate loans 479 390 440
Consumer loans -- -- 50 39 --
-------- -------- -------- -------- --------
Total loans charged off 39 163 529 1,233 707
-------- -------- -------- -------- --------
Recoveries 21 23 14 267 14
Net charge-offs 18 140 515 956 694
Provision for loan losses charged to operating expenses 320 165 93 280 779
Transfer from allowance for real estate owned -- -- -- 149 --
-------- -------- -------- -------- --------
Allowance at end of year 1,438 $ 1,136 $ 1,111 $ 1,533 $ 2,061
======== ======== ======== ======== ========
Ratio of net charge-offs to average loans outstanding 0.01% 0.10% 0.45% 0.85% 0.61%
======== ======== ======== ======== ========
Ratio of allowance to period-end total loans, net 0.77% 0.75% 0.91% 1.36% 1.83%
======== ======== ======== ======== ========
Period-end total loans, net 186,660 $152,068 $121,909 $112,547 $112,906
======== ======== ======== ======== ========
</TABLE>
The following table represents information regarding the Company's total
allowance for losses, as well as the allocation of such amounts to the various
categories of loans.
<TABLE>
<CAPTION>
As of Ended December 31,
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- -------
Percent of Percent of Percent of Percent of Percent of
Loans to Loans to Loans to Loans to Loans to
Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans
------ ----------- ------ ----------- ------ ----------- ------ ----------- ------ -----------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Residential real estate loans 713 87.9% $ 502 87.7% $ 413 86.5% $ 283 88.3% $ 415 86.1%
Commercial real estate loans
(Including multi-family & land l 550 10.7% 431 11.4% 434 12.0% 946 9.8% 1,073 11.4%
Non-mortgage loans 175 1.4% 203 0.9% 263 1.5% 304 1.9% 573 2.5%
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Total Allowance for loan losses $1,438 100.0% $1,136 100.0% $1,110 100.0% $1,533 100.0% $ 2,061 100.0%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
</TABLE>
Mortgage-Backed Securities
In September of 1999, the Company purchased two FNMA mortgage-backed securities,
which are guaranteed as to principal and interest by FNMA, an agency of the
Federal government. The securities are permissible investments for a thrift
institution and were acquired primarily for their liquidity, yield, and credit
characteristics. Such securities may be used as collateral for borrowing. The
mortgage securities acquired by the Company are backed by adjustable rate
mortgage loans. At December 31, 1999, these securities totaled.$1,921,226.
Investment Activities
Our investment portfolio currently consists of $7,000,000 in bonds issued by the
FHLB. We purchase securities to meet our 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,
1999, meet the liquidity requirements of our primary regulator, the Office of
Thrift Supervision ("OTS").
The Company's investment in obligations of U.S. government agencies consist of
dual indexed bonds issued by the FHLB. At December 31, 1999, the bonds had a
market value of $6,500,900 and gross unrealized losses of $70,411.
10
<PAGE>
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 bonds were purchased 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, our 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, our 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 our 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 1998 and
1999 were 3.76% and 3.87%, respectively. Market values for all securities were
calculated using published prices at December 31, 1999.
Based on OTS Thrift Bulletin 65 - Structured Notes, and other OTS releases, the
OTS would prefer that the institutions that they regulate not hold structured
notes. It is not our intent to purchase any additional structured notes.
At December 31, 1999 and 1998, the Company did not have any investments
securities pledged to the FHLB as collateral under its short-term credit
agreement. During 1998, the Company sold $3,350,000 par value of the FHLB bonds
that matured in 1998, at a gross loss of $9,945.
The following table sets forth the carrying value of the Company's total
investments and liquidity as of the dates indicated.
December 31,
---------------------------------
1999 1998 1997
---------- ---------- -------
(Dollars in thousands)
Short-term investments:
Interest-bearing deposits $ 4,470 $ 5,048 $ 3,556
Debt securities:
FHLB Notes 6,571 6,468 9,670
Mortgage-backed securities 1,921 - -
Equity securities:
FHLB stock 1,960 1,725 1,428
------- -------- -------
Total investment portfolio $14,922 $13,241 $14,654
====== ====== ======
Impact of Interest Rates on the Investment Portfolio
During the first half of 1999 interest rates continued to decline, however,
during the latter half of the year rates began to increase as the Federal
Reserve began to increase interest rates. As a result of the higher interest
rates at the end of 1999, the Bank's portfolio of investments consisting
primarily of Federal Home Loan Bank ("FHLB") Bonds, was adversely affected as to
their market value. In addition to the Federal Home Loan Bank Bonds the Bank
owns two FNMA Mortgage-backed securities that it purchased in October 1999. At
December 31,1998 the unrealized losses were $319,375 and at December 31, 1999
the unrealized losses had increased to $491,922.
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 FHLB Bonds as Held-to-maturity
securities, and, as a result, the Bonds are reported at amortized cost. The FNMA
Mortgage-backed securities are classified as Available-for-Sale and are reported
at market value. During 1998 the Bank sold $3,350,000 par value of the FHLB
bonds at a gross loss of $9,945.
11
<PAGE>
The one remaining FHLB 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 in 2003. The
two FNMA securities which are guaranteed as to principal and interest by FNMA,
an agency of the Federal government and mature in 2028, are backed by adjustable
rate mortgages and the interest rate on the bonds will adjust in accordance with
the adjustment of interest rates on the underlying collateral.
Sources of Funds
General. Deposits are our primary source of funds for use in lending and for
other general business purposes. In addition to deposits, funds are obtained
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, 1999, the Company had $30.2 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,
we have increasingly emphasized deregulated fixed-rate certificate accounts and
other types of deposits. We have a number of different programs that are
designed to attract both short-term and long-term deposits. These programs
include statement savings accounts, NOW accounts, MMDAs and certificates of
deposit currently ranging in terms from 91 days to 120 months.
Deposits have generally been obtained from residents in our primary market area
and, to a much lesser extent, nationwide, via a computer network. The principal
methods used to attract "in market"deposit accounts have included offering a
wide variety of services and accounts, competitive interest rates and a
convenient office location, including access to automated teller machines
("ATMs"). We currently do not operate any ATM's. Instead, we issue cards which
have access to the Star(R) (previously Honor) 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 us to display its rates on certificates to individual
investors nationwide. Our personnel then deal directly with investors who
telephone or write for information concerning certificates of deposit. We are
looking to expand our ability to generate deposits through our new internet
banking site, which is expected to go on-line in the second quarter of 2000.
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,
--------------------------------------------------------------------
1999 1998 1997
--------------------------------------------------------------------
Percent Percent Percent
of of of
Amount Deposits Amount Deposits Amount Deposits
------ -------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Non-interest bearing commercial
checking accounts $ 2,266 1.5% $ 1,261 1.0% $ 126 .1%
Regular savings accounts 977 0.6% 872 .7 1,035 1.0
MMDA's 15,159 9.9% 11,235 8.7 7,246 6.9
NOW accounts 2,709 1.8% 1,439 1.1 890 .9
----- ---- ----- ---- ------ --
Subtotal 21,111 13.8% 14,807 11.5 9,297 8.9
------ ---- ----- ---
Certificate of Deposit:
1.00% to 3.99% -- -- 338 .3 443 .4
4.00% to 4.99% 33,432 21.8% 26,807 20.7 1,150 1.1
5.00% to 5.99% 81,548 53.1% 82,135 63.5 79,490 75.8
6.00% to 7.99% 17,421 11.3% 5,201 4.0 14,504 13.8
------ ------ ---- --- ------ ----
Total Certificates of Deposit 132,401 86.2% 114,481 88.5 95,587 91.1
------- ----- ------- ----
Total Deposits $153,512 100.0% $129,288 100.0% $104,884 100.0%
======= ===== ======= ===== ======= =====
</TABLE>
12
<PAGE>
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,
-----------------------------------------------------------------
1999 1998 1997
-----------------------------------------------------------------
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
------- ---- ------- ---- ------- ----
<S> <C> <C> <C> <C> <C> <C>
MMDA's, NOW and non-interest
bearing commercial checking
accounts $ 19,884 3.18% $ 12,057 3.27% $ 8,174 3.69%
Regular savings 947 2.53% 924 2.60% 1,286 2.57%
Certificates of Deposit 122,689 5.18% 101,015 5.63% 95,652 5.67%
------- ----- ------- ----- ------ -----
Total Deposits $143,520 4.89% $113,996 5.36% $105,112 5.48%
======== ==== ======== ==== ======== ====
</TABLE>
The variety of deposit accounts that we offer has increased our 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. Our
ability to attract and retain deposits and our cost of funds have been, and will
continue to be, significantly affected by market conditions.
We periodically review the rates offered by other federal institutions in our
market area and make adjustments to the rates we offer to be competitive with
such institutions. Our deposits increased to $153.5 million and for the year
ended December 31, 1999, from $129.3 million for the same period in 1998.
The following table sets forth jumbo certificates of $100,000 and over, maturing
as follows:
As of December 31, 1999
-----------------------
Due three months or less $ 4,224,174
Due over three months to six months $ 5,941,324
Due over six months to one year $ 20,215,107
Due over one year $ 3,242,060
-----------
$ 33,622,665
============
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 that we
own and certain of our 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 our regulatory capital, our liability for shares and deposits, or
on the FHLB's assessment of our 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,
1999, we had $35.2 million in borrowings outstanding.
The following is an analysis of the advances from the FHLB:
Amounts outstanding at December 31, 1999:
-------------------------------------------------------------
Maturity Date Rate Amount Type
------------- ---- ------ ----
12/04/00 4.55% 10,200,000 Variable
01/31/00 5.98% 5,000,000 Fixed Rate
06/05/00 6.12% 5,000,000 Fixed Rate
12/01/00 5.09% 5,000,000 Fixed Rate
12/04/00 6.29% 5,000,000 Fixed Rate
03/05/01 5.96% 5,000,000 Fixed Rate
----- ---------
Total 5.50 % $ 35,200,000
====== ==========
13
<PAGE>
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
====== ==========
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:
---------------------------------------------------------------------
1999 1998
------------------------------ -----------------------------------
Monthend Rate Amount Monthend Rate Amount
-------- ---- ------ -------- ---- -------
01/31/99 5.14% 34,000,000 01/31/98 5.94% 23,000,000
02/28/99 5.23% 24,500,000 02/28/98 5.97% 21,500,000
03/31/99 5.28% 23,500,000 03/31/98 6.04% 25,550,000
04/30/99 5.22% 33,500,000 04/30/98 5.93% 27,250,000
05/31/99 5.19% 32,000,000 05/31/98 5.96% 24,550,000
06/30/99 5.24% 37,500,000 06/30/98 6.14% 26,050,000
07/31/99 5.29% 33,000,000 07/31/98 5.89% 27,000,000
08/31/99 5.45% 31,000,000 08/31/98 5.95% 27,500,000
09/30/99 5.47% 33,700,000 09/30/98 5.93% 34,500,000
10/31/99 5.44% 38,200,000 10/31/98 5.50% 32,000,000
11/30/99 5.56% 35,700,000 11/30/98 5.56% 31,000,000
12/31/99 5.80% 35,200,000 12/31/98 5.24% 28,500,000
During the twelve-month periods ended December 31, 1999 and December 31, 1998,
average advances outstanding totaled $31.8 million and $26.2 million at an
average rate of 5.36% and 5.79%, respectively.
Advances from the FHLB are collateralized under a blanket floating lien by loans
and FHLB stock that totaled approximately $118.0 million and $2.0 million,
respectively at December 31, 1999.
Expansion Plans
In December 1999, we began offering loan products on the internet through our
web site, federaltrust.com. Deposit products are expected to be on line by the
second quarter of 2000.
In an effort to reduce overhead, we have expanded our lease space by 3,974
square feet at the Sanford, Florida facility to accommodate our loan servicing
and branch operations. The lease for our corporate headquarters expires on
December 31, 2000. We intend to maintain a strong presence in Winter Park and
will be relocating our branch facility to a new 13,202 square foot, two story
building, currently under construction. We will be leasing approximately 8,193
square feet. The building is scheduled to be completed by November 2000. The new
Winter Park branch facility will be located at Morse Boulevard, on a prominent
entrance street to Winter Park.
In addition, we intend to open a new full-service branch facility in New Smyrna,
Florida. We have negotiated a lease for a 1,600 square foot location, subject to
OTS approval of the branch application, which was formerly a branch office for
Harbor Federal Savings Bank. The New Smyrna Beach Branch will provide an
additional market from which we should be able to generate lower dost deposits
and expand our lending market throughout the Central Florida region.
14
<PAGE>
Employees
At December 31, 1999, Federal Trust had no full-time employees, while the Bank
and its subsidiaries had a total of 58 full-time employees. Management considers
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, an
employee stock ownership plan ("ESOP") and a 401K Plan. These 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, 1999, the Company had no subsidiaries other than the Bank. The
total equity investment at December 31, 1999 was $13,011,939.
Bank Subsidiaries
Current OTS regulations permit a thrift to invest up to 3% of its assets in
service corporations, provided any investment in excess of 2% must serve
primarily community, inner city or community development purposes. In addition,
a thrift can invest up to 20% of its net worth in conforming loans to service
corporations if net worth is equal to the minimum net worth requirement of the
thrift and scheduled items do not exceed 2.5% of specified assets. At December
31, 1999, the Bank had two operating subsidiaries, FTB Financial Services, Inc.
("FTBFS") and Vantage Mortgage Services Center, Inc. ("Vantage Mortgage").
FTBFS, which commenced operations in 1996, engages in the business of selling
insurance annuities, stocks and bond products. FTBFS had minimal operations in
1999. Vantage Mortgage commenced operations on June 1, 1999. Vantage Mortgage
originates residential mortgages (FHA and VA) in the Gainesville, Florida
market. The President of Vantage Mortgage, Rick T. Marson, owned a local
mortgage company in Gainesville, from which Vantage Mortgage acquired certain
assets. The Bank's investment in FTBFS and Vantage Mortgage is $15,683 and
$115,778, respectively.
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.
Monetary Policies
The results of our operations are affected by credit policies of monetary
authorities, particularly the Federal Reserve Board. The instruments of monetary
policy employed by the Federal Reserve Board include open market operations in
U.S. government securities, changes in the discount rate on member bank
borrowings, changes n reserve requirements against member bank deposits and
limitations on interest rates, which members banks may pay on time, and savings
deposits. In view of changing conditions in the national economy and in the
money market, as well as the effect of action by monetary and fiscal
authorities, including the Federal Reserve Board, no prediction can be made as
to our possible future changes in interest rates, deposit levels, loan demand or
our business and earnings.
Removal of Regulatory and Supervisory Actions
In October of 1994, Federal Trust and the Bank entered into individual Voluntary
Orders to Cease and Desist (collectively "Orders") with the OTS. Federal Trust
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, Federal Trust infused $3.7 million in capital to the Bank.
Federal Trust and the Bank requested that their respective Orders be rescinded,
along with the growth restrictions. The growth restrictions were lifted on March
13, 1998, and the individual Orders were rescinded on June 1, 1998.
15
<PAGE>
REGULATION AND SUPERVISION
General
Federal Trust, is a registered savings and loan holding company within the
meaning of the Home Owners' Loan Act ("HOLA"). Federal Trust and the Bank
operate in a highly regulated environment. Our business activities, which are
governed by statute, regulation and administrative policies, are supervised by a
number of federal regulatory agencies, including the OTS, the Federal Deposit
Insurance Corporation ("FDIC") and, to a limited extent, the Federal Reserve
Board.
The banking industry is highly regulated, with numerous federal and state laws
and regulations governing its activities. The following is a brief summary of
the more recent legislation which affects Federal Trust and our subsidiaries:
In November 1999, the financial services regulations were significantly reformed
with the adoption of the Gramm- Leach-Bliley act ("GLA"). The GLA provides for
the streamlining of the regulatory oversight functions of the various federal
banking agencies. Of significance, while the GLA permits bank holding companies
that are well managed, well capitalized and that have at least a satisfactory
Community Reinvestment Act rating to operate as Financial Holding Companies
("FHC"), it essentially eliminated the unlimited investment authority of a
"unitary savings and loan holding company". Savings and loan holding companies
are, for the most part, limited to activities permitted by a bank holding
company, a multiple savings and loan holding company, or an FHC.
The GLA also requires financial institutions to permit, with few exceptions,
their customers to "opt out" of having their personal financial information
shared with nonaffiliated third parties. The GLA bars financial institutions
from disclosing customer account numbers to direct marketers and mandates that
institutions provide annual disclosure to their customers regarding the
institution's privacy policies and procedures.
Regulation of the Holding Company
Restrictions on the Acquisition of Savings Institutions. 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.
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
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.
16
<PAGE>
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 1999.
Earnings are currently being reinvested to support the Bank's current growth.
34 Act Reporting
As a publicly traded company with its shares of common stock registered under
the Securities Act of 1933, Federal Trust is required to file periodic public
disclosure reports with the Securities and Exchange Commission, pursuant to the
Securities and Exchange Act of 1934, and the regulations promulgated thereunder.
A Form 10-KSB is a required annual report that must contain a complete overview
of Federal Trust's business, financial, management, regulatory, legal, ownership
and organizational status. Federal Trust must file Form 10-KSB by March 31 of
each year.
Similarly, Form 10-QSB must contain information concerning Federal Trust on a
quarterly basis. Although Form 10- KSB requires the inclusion of audited
financial statements, unaudited statements are sufficient for inclusion on Form
10-QSB. Additionally, any significant non-recurring events that occur during the
subject quarter, as well as changes in securities, any defaults and the
submissions of any matters to a vote of security holders, must also be reported
on Form 10-QSB.
Recently, the National Association of Securities Dealers adopted a rule
requiring the audit committees of Boards of Directors of reporting corporations,
such as Federal Trust, to undertake certain organizational and operational
steps.
17
<PAGE>
The Securities and Exchange Commission has adopted a similar rule. These
standard will require our audit committee to be comprised solely of independent,
non-employee directors who are financially literate. Furthermore, the audit
committee will need to adopt a formal charter defining the scope for its
operations. The Securities and Exchange Commission's proposed rule will also
require our auditors to review the financial statements contained in our Form
10- QSBs, in addition to our Form 10-KSBs.
Regulation of the Bank
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, the OTS
amended its capital regulation, raising the required leverage (core capital)
ratio from 3% to 4%. The Bank's leverage ratio at December 31, 1999, was 6.28%.
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 two
subsidiaries: (i) FTB Financial Services, Inc., which is in the business of
selling non- FDIC insured annuities; and (ii) Vantage Mortgage Service Center,
Inc., which is in the business of originating residential mortgage loans.
The OTS risk-based capital standard for savings institutions requires that total
capital (comprised of core capital and supplementary capital) be at least 8% of
risk-weighted assets. In determining risk-weighted assets, all assets, including
certain off-balance sheet assets, are multiplied by a risk-weight of 0% to 100%,
as assigned by the OTS capital regulation based on the risks OTS believes are
inherent in the type of asset. Generally, zero weight is assigned to risk- free
assets, such as cash and unconditionally guaranteed United States government
securities. A weight of 20% is assigned to, among other things, certain
obligations of United States government-sponsored agencies (such as the 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 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
18
<PAGE>
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, 1999, the Bank's interest rate-risk exposure, according to
OTS calculations, would not have been above the threshold requiring an
additional capital component.
The OTS (and other federal banking agencies) are required by law to revise the
risk-based capital standards with appropriate transition rules to take into
account concentration of credit risks and risks of nontraditional activities.
The regulations explicitly identify concentration of credit risk and other risks
from nontraditional activities, as well as an institution's ability to manage
these risks, as important factors in assessing an institution's overall capital
adequacy. These regulations do not contain any specific mathematical formulas or
capital requirements.
At December 31, 1999, the Bank met each of its capital requirements. The
following table sets forth the regulatory capital calculations of the Bank at
December 31, 1999:
Tier I Risk-Based
--------------------- --------------------
(Dollars in thousands)
Percent Percent
of of
Amount Assets Amount Assets
Regulatory Capital $ 13,225 6.29% $ 14,558 11.36%
Requirement $ 8,428 4.00% $ 10,253 8.00%
-------- ----- -------- -------
Excess $ 4,797 2.29% $ 4,305 3.36%
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 requires 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
19
<PAGE>
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, 1999, was 3 basis points on deposits.
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.
As of December 31, 1999, the Bank exceeded the 65.0% QTL test, maintaining 93.1%
of its portfolio assets in qualified thrift investments.
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
$56,592 in OTS assessments for the year-ended December 31, 1999.
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
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, 1999, dividends paid by the
FHLB-Atlanta to the Bank amounted $129,597 of the Bank's pre-tax income. Should
dividends be reduced, or interest on FHLB advances increased, the consolidated
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<PAGE>
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 reservable balances (subject to adjustments by the Federal Reserve)
are exempted from the reserve requirements. The Bank is in compliance with the
foregoing requirements. The balances maintained to meet the reserve requirements
imposed by the Federal Reserve may be used to satisfy liquidity requirements
imposed by the OTS. Because required reserves must be maintained in the form of
either vault cash, a non-interest-bearing account at a Federal Reserve or a
pass-through account as defined by the Federal Reserve, the effect of this
reserve requirement is to reduce the 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
The Company has an operating lease with its former chairman for its main
facility, which 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. This decision increased
occupancy and equipment expense and decreased net income in 1999 by
approximately $167,445 and $104,456, respectively.
The offices leased by, and formerly occupied by, Federal Trust are rented on a
month to month basis by Federal Trust Properties Corporation, a former
subsidiary, for the same amount as Federal Trust is required to pay.
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, 1999.
Net carrying value of real property
-----------------------------------
Lease
Owned Leased Expiration
----- ------ ----------
Federal Trust Building - 0 - $ 247,340 12/31/00
1211 Orange Avenue
Winter Park, Florida 32789
Federal Trust Bank Sanford Office - 0 - $ 401,502 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.
21
<PAGE>
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.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCK HOLDER MATTERS
On June 17, 1998, Federal Trust's stock began trading on the NASDAQ Small Cap
Market under the symbol FDTR. As of March 17, 2000, there were 455 holders of
common stock of the Company, some of which are street name holders. The Company
did not pay dividends during 1999 or 1998.
On March 17, 2000, the closing sales price of Federal Trust's common stock was
$2.50. From December 31, 1998 through December 31, 1999, the range of sale
prices was $2.31 to $3.00. At December 31, 1999, the closing sales price of
Federal Trust's stock was $2.50.
Calendar Year 1999
------------------
Low $ High $
----- ------
First Quarter $2.31 $2.75
Second Quarter 2.31 3.00
Third Quarter 2.38 2.88
Fourth Quarter 2.25 2.63
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS & FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Overview
The Company has continued to concentrate on increasing its portfolio of
adjustable rate loans and as interest rates declined in 1998 the Company
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 Company 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 Company. These premiums were paid when the Company
purchased loans from third parties. In addition, the Company 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 Company's interest rate spread increased in dollars during 1998
due primarily to growth, but decreased in percentage terms as the interest rate
spread narrowed. During the first half of 1999 interest rates on the Company's
liabilities continued to decrease, but this trend reversed in the second half of
the year as the Federal Reserve began to increase interest rates, which has
resulted in the Company's cost of funds increasing. This increase in interest
rates has substantially reduced the number of fixed rate loans being originated
and increased the amount of adjustable rate loans being made. The Company has
also seen a large decline in the prepayment of loans during the latter part of
1999 resulting in a decrease in the amount of premium writeoff during 1999.
Should interest rates continue to increase the Company's earnings will be
negatively affected due to its negative GAP position in which its liabilities
reprice sooner than its assets.
During 1999 the Company increased the amount of its addition to its loss
reserves. The level of non-performing assets increased in 1999 and the Company's
loan portfolio grew by $34.6 million, necessitating increased loan loss
reserves. Although management believes that the level of non-performing assets
will decrease somewhat in future periods, unforeseen economic conditions and
other circumstances beyond the Company's control could result in material
additions to the loss reserves in future periods if the level of non-performing
assets increases. In addition, the Company has been increasing the amount of
commercial loans in its portfolio consisting primarily of loans insured by the
22
<PAGE>
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 Company 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. As interest rates began to increase in 1999 the Company reduced the size
of the residential loan production department in response to a decrease in the
amount of loans being originated as a result of the higher rates. The Company
does anticipate additions to the loss reserves in future periods as part of the
normal course of business, as the Company'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 1999 the Company increased its profit by over 156% from 1998, 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.
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.
Average Balance Sheet
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,
1999 1998 1997
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) 176,152 13,324 7.56% 135,617 10,438 7.70% 113,472 9,303 8.20%
Investment securities 6,515 271 4.16% 8,055 303 3.76% 14,454 619 4.28%
Other interest-earning assets(2) 5,658 288 5.09% 5,869 275 4.69% 3,780 237 6.27%
------- ----- ---- ------- ----- ---- ------- ----- ----
Total interest-earning assets 188,325 13,883 7.37% 149,541 11,016 7.37% 131,706 10,159 7.71%
Non-interest-earning assets 7,731 6,520 6,525
--------- --------- ---------
Total assets 196,056 156,061 138,231
======= ======= =======
Interest-bearing liabilities:
Non-interest bearing demand deposits 2,106 - 0.00% 886 - 0.00% 271 - 0.00%
Interest bearing demand deposits 17,778 633 3.56% 11,171 394 3.53% 7,903 303 3.82%
Savings deposits 947 24 2.53% 924 24 2.60% 1,286 33 2.57%
Time deposits 122,689 6,358 5.18 % 101,015 5,687 5.63% 95,652 5,439 5.69%
------- ----- ---- ------- ----- ---- ------- ----- ----
Total Deposit accounts 143,520 7,015 4.89% 113,996 6,105 5.36% 105,112 5,775 5.49%
FHLB advances & other borrowings 32,895 1,805 5.49% 26,150 1,513 5.79% 23,209 1,401 6.04%
------- ----- ---- ------- ----- ---- ------- ----- ----
Total interest-bearing liabilities 176,415 8,820 5.00% 140,146 7,618 5.44% 128,321 7,176 5.59%
Non-interest-bearing liabilities 6,996 4,551 3,084
Retained earnings and stockholder's equity 12,645 11,364 6,826
------ ------ -----
Total liabilities & stockholders 196,056 156,061 139,231
======= ======= =======
Net interest/dividend income 5,063 3,398 2,983
===== ===== =====
Interest rate spread(3) 2.37% 1.93% 2.12%
==== ==== ====
Net interest margin(4) 2.69% 2.27% 2.28%
==== ==== ====
Ratio of average interest-earning assets to444
average interest-bearing liabilities 1.07% 1.07% 1.03%
==== ==== ====
</TABLE>
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<PAGE>
(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 dividied by average interest-
earning assets.
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 (changes in volume
multiplied by prior rate) and (3) changes in rate-volume (change in rate
multiplied by change in volume).
<TABLE>
Year Ended December 31, 1999 Year Ended December 31, 1998 Year Ended December 31, 1997
vs. 1998 vs. 1997 vs. 1996
Increase (Decrease) Due to Increase (Decrease) Due to 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 (180) 3,120 (54) 2,886 (569) 1,816 (112) 1,135 166 95 2 263
Investment securities 32 (58) (6) (32) (75) (274) 33 (316) (1) (55) -- (56)
Other interest-earning assets 24 (10) (1) 13 (60) 131 (33) 38 157 (83) (59) 15
---- ------ ---- ------ ----- ------ ------ ------ ----- ------ ------ -----
Total (124) 3,052 (61) 2,867 (704) 1,673 (112) 857 322 (43) (57) 222
Interest-bearing liabilities:
Deposit accounts (533) 1,581 (137) 911 (146) 488 (12) 330 86 (70) (2) 14
FHLB Advances &
other borrowings (78) 390 (20) 292 (58) 178 (8) 112 143 (17) (2) 124
---- ------ ---- ------ ----- ------ ------ ------ ----- ----- ------ ------
Total (611) 1,971 (157) 1,203 (204) 666 (20) 442 229 (87) (4) 138
Net change in net interest
income before provision
for loan losses 487 1,081 96 1,664 (500) 1,007 (92) 415 93 44 (53) 84
==== ====== ==== ====== ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
Liquidity
The Company 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
Company's management seeks to maintain its liquid assets at comfortable levels
above the minimum requirements imposed by its regulators. In December 1999, the
Company's average liquidity was 6.44%.
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 Company meets regularly and, in part, reviews
liquidity levels to ensure that funds are available as needed.
Impact of Inflation and Changing Prices
The financial statements and related data presented herein have been prepared in
accordance with Generally Accepted Accounting Principles ("GAAP"), which require
the measurement of financial position and operating results in terms of
historical dollars, without considering changes in the relative purchasing power
of money over time due to inflation. Unlike most industrial companies,
substantially all of the assets and liabilities of 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 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
24
<PAGE>
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 June 1999, the FASB issued Statement of
Financial Accounting Standards No. 137 which amended the implementation date of
SFAS to be effective for all fiscal quarters of all fiscal years beginning after
June 15, 2000.
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
The Company formulated a Year 2000 Action Plan that was approved by the Board of
Directors in order to identify and correct all the systems that could be
affected by the rollover to the year 2000. As of March 31, 2000, the Company has
not experienced any problems related to the rollover to 2000. While the Company
believes that it has taken all the necessary steps to achieve Year 2000
compliance, there can be no assurance that every contingency has been foreseen
and corrected. The Company has a contingency plan in place that it believes
addresses any problems that might occur as a result of the Year 2000 changeover.
Results of Operations
Comparison of the Years Ended December 31, 1999 and 1998
General. The Company had a net profit for 1999 of $1,108,766 or $.22 per share
compared to a net profit of $432,601 or $.09 per share for 1998. The improvement
in the net profit in 1999 was due to an increase in net interest income,
increased other income and a decrease in FDIC premiums.
Interest Income and Expense. Interest income was $13,882,708 in 1999 compared to
$11,015,899 in 1998. Interest income on loans increased to $13,324,230 in 1999
from $10,437,822 in 1998. The increase in interest income on loans in 1999 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 income on loans was partly the result
of loans held by the Company that were prepaid as borrowers refinanced their
mortgages to take advantage of the lower interest rates available on mortgages
during 1998 and 1999, resulting in an increase in the premium write-off by the
Company. These premiums were paid when the Company purchased loans from third
parties. Interest income on investment securities decreased to $270,862 in 1999
from $302,728 in 1998 as a result of a decrease in the average balance of
investment securities held by the Company offset partially by an increase in the
interest rates earned on the securities. Other interest and dividends increased
from $275,349 in 1998 to $287,616 during 1999 due to an increase in the rates
earned, offset partially by a decrease in average amount of interest bearing
deposits outstanding. Management expects the rates earned on the portfolios to
fluctuate with general market conditions.
Interest expense increased during 1999 to $8,820,120 compared to $7,617,728 in
1999 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 on deposits increased by $910,799 in 1999 as a result of
an increase in the average amount of deposits, offset partially by a decrease in
the rates paid on deposits. 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 $1,804,593 in 1999 from $1,513,000 in
1998 due to an increase in the amount of advances and other borrowings
outstanding, offset partially by a decrease in the average rates paid on the
advances and borrowings. Management expects to continue to use FHLB advances and
other borrowings 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 Company's provision for loan losses for 1999 was $320,000
compared to $165,000 in 1998, primarily as a result of the increase in the
amount of loans held by the Company. The Company's gross loan portfolio grew by
$36.9 million in 1999. Of this amount, $36.8 million were mortgage loans, of
which $30.7 million were residential mortgage loans. As of December 31, 1999,
25
<PAGE>
88% of the Company'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.
Gross charge-offs totaled $39 thousand in 1999 compared to $163 thousand for
1998. Total non-performing loans at December 31, 1999 were $2,655,885 compared
to $1,360,008 at December 31, 1998. The allowance for loan losses at December
31, 1999 was $1,437,913 or 54.1% of non-performing loans and .77% of net loans
receivable compared to $1,136,056 or 83.5% of non-performing loans and .75% of
net loans receivable at December 31, 1998. 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 $873,762 in 1998 to $1,609,444
for the year ended December 31, 1999. The increase in 1999 was the result of
increased fees and service charges, increased gains on the sale of mortgage
loans, and increased other income, offset partially by a decrease in gains on
the sale of other real estate owned. Fees and service charges increased by
$239,398 as a result of more deposit accounts at the Company during the year.
Gains on the sale of loans increased by $154,355 as a result of the increase in
the number of fixed rate mortgage loans originated by the Company which were
then sold, as the Company adds adjustable rate mortgage loans to its portfolio
and sells fixed rate loans in order to reduce the Company's interest rate risk.
Gains on the sale of other real estate owned decreased by $30,471 as a result of
the decrease in the amount of foreclosed real estate owned by the Company. Other
income increased by $372,400 primarily as a result of increases in loan
servicing fees as the Company added approximately 2,800 loans to its portfolio
of loans serviced for others. These loans are sub-serviced for other entities
that own the servicing rights to the loans.
Total Other Expense. Other expense increased to $5,204,195 in 1999 from
$3,410,748 in 1998. The increase was the result of increased salary and employee
benefits expense, increased office occupancy, increased general and
administrative expenses, increased other expense and increased legal and
professional expense, offset partially by decreased deposit insurance premiums
and decreased losses on the sale of investment securities. The increase in
salary and employee benefits of $1,193,709 was the result of additions to staff
in late 1998 and also during 1999. Staff was added in September 1998 for the new
branch in Sanford that opened in October 1998 and additional staff was added in
the Operations department and the main office due to the growth of the Company
during the year. In addition, staff was added in the Loan Servicing department
as a result of the large increase in loans sub-serviced for others. Office
occupancy expense increased by $146,127 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 the additional space leased in Sanford due to the growth of
the Company. General and administrative expenses increased by $154,056 as a
result of increased personnel and the growth and expansion of the Company. Other
expense increased by $218,834 as a result of the increase in loans originated
during the first half of the year, and the growth and expansion of the Company.
Deposit insurance premiums decreased by $91,041 as a result of the reduction in
the premium charged by the FDIC from 24 basis points to 3 basis points effective
for the full year, due to the improvement in the Company's regulatory rating.
Legal and professional expense increased by $126,815 due to increased legal
fees, increased accounting fees and increased audit fees all resulting from the
growth of the Company . The loss on sale of investment securities decreased by
$9,945 as a result of no securities being sold in 1999.
Liquidity and Capital Resources at December 31, 1999
General. Like other financial institutions, the Company must ensure that
sufficient funds are available to meet deposit withdrawals, loan commitments,
investment needs and expenses. Control of the Company's cash flow requires the
anticipation of deposit flows and loan payments. The Company's primary sources
of funds are deposit accounts, FHLB advances and principal and interest payments
on loans.
The Company requires funds in the short term to finance ongoing operating
expenses, pay liquidating deposits, purchase temporary investments in securities
and invest in loans. The Company 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 Company requires funds in the long-term to invest in
loans for its portfolio, purchase fixed assets and provide for the liquidation
of deposits maturing in the future. The Company 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.
26
<PAGE>
During the year ended December 31, 1999, the Company used funds primarily from
sale of loans of $24,155,907; proceeds from the sales of real estate owned of
$1,079,921; proceeds from the increase in certificate accounts and deposits of
$24,223,630; the proceeds from FHLB advances of $6,700,000; and the cash
provided from operations of $5,715,814; to fund $59,531,705 in loan originations
and purchases, net; the purchase of $1,961,667 of investment securities; the
purchase of premises and equipment for $485,001; and the purchase of FHLB stock
for $235,000. 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, 1999 was 5.18% compared to 5.26% at December 31,
1998.
At December 31, 1999, loans-in-process, or closed loans scheduled to be funded
over a future period of time, totaled $12,506,329. Loans committed, but not
closed, totaled $7,269,030 and available lines of credit totaled $788,404.
Funding for these amounts is expected to be provided by the sources described
above. As of December 31, 1999, the Company had outstanding FHLB advances of
$35,200,000 compared to $28,500,000 in 1998.
OTS regulations require the Company 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
Company'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, 1999, liquidity averaged 6.44%.
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 Company 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, 1998 and 1999. Although the Company was profitable during 1999 and
projects a profit for 2000, the Board of Directors does not anticipate the
payment of dividends in 2000, 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, 1999, the Holding Company's liquidity consisted of $568 thousand
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:
<TABLE>
At December 31, 1999
Tier I Risk-Based
------- ----------
Stockholders' equity as shown in the accompanying
financial statements 13,011 13,011
Other:
<S> <C> <C>
Unrealized loss on investments 268 268
General valuation allowances - 1,438
Less: Excess mortgage servicing rights and
Excess net deferred tax assets (55) (55)
Less: Assets required to be deducted - (49)
------ -------
Regulatory capital 13,224 14,613
====== =======
</TABLE>
At December 31, 1999, the Company met each of its capital requirements.
27
<PAGE>
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Consolidated Financial Statements
December 31, 1999 and 1998
(With Independent Auditors' Report Thereon)
28
<PAGE>
Independent Auditors' Report
Board of Directors
Federal Trust Corporation and Subsidiaries:
We have audited the consolidated balance sheet of Federal Trust Corporation and
subsidiaries as of December 31, 1999, and the related consolidated statements of
operations, stockholders' equity and comprehensive income and cash flows for
each of the years in the two-year period ended December 31, 1999. 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, 1999 and the results of their
operations and their cash flows for each of the years in the two-year period
ended December 31, 1999 in conformity with generally accepted accounting
principles.
/s/KPMG LLP
Orlando, Florida
February 28, 2000
<PAGE>
<TABLE>
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheet
December 31, 1999
Assets
<S> <C>
Cash $ 2,597,953
Interest-bearing deposits 4,469,656
Investment securities available for sale 1,921,226
Investment securities held to maturity (market value of $6,500,900) 6,571,311
Loans, less allowance for loan losses of $1,437,913 186,659,820
Accrued interest receivable on loans 1,232,432
Accrued interest receivable on investment securities 163,506
Office facilities and equipment, net 1,094,293
Real estate owned 295,319
Federal Home Loan Bank stock, at cost 1,960,000
Prepaid expenses and other assets 1,249,143
Executive supplemental income plan - cash surrender value life insurance
policies 2,602,473
Deferred income taxes 460,375
---------------
$ 211,277,507
===============
Liabilities and Stockholders' Equity
Liabilities:
Deposits and accrued interest on deposits $ 153,523,609
Official checks 2,979,009
Federal Home Loan Bank advances 35,200,000
Advance payments by borrowers for taxes and insurance 807,793
Accrued expenses and other liabilities 4,411,958
---------------
Total liabilities 196,922,369
===============
Stockholders' equity:
Common stock, $.01 par value, 15,000,000 shares authorized; 4,947,911
shares issued and outstanding 49,479
Additional paid-in capital 15,944,240
Accumulated deficit (1,370,775)
Accumulated other comprehensive loss (267,806)
---------------
Total stockholders' equity 14,355,138
Commitments and contingencies (notes 13 and 18)
---------------
Total liabilities and stockholders' equity $ 211,277,507
===============
See accompanying notes to consolidated financial statements.
</TABLE>
30
<PAGE>
<TABLE>
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
For each of the years in the two-year period ended December 31, 1999
1999 1998
----------- ----------
Interest income:
<S> <C> <C>
Loans $ 13,324,230 10,437,822
Investment securities 270,862 302,728
Interest-bearing deposits and other 287,616 275,349
----------- ----------
Total interest income 13,882,708 11,015,899
----------- ----------
Interest expense:
Deposit accounts 7,015,527 6,104,728
FHLB advances and other borrowings 1,804,593 1,513,000
----------- ----------
Total interest expense 8,820,120 7,617,728
----------- ----------
Net interest income 5,062,588 3,398,171
Provision for loan losses 320,000 165,000
----------- ----------
Net interest income after provision for loan losses 4,742,588 3,233,171
----------- ----------
Other income:
Fees and service charges 378,373 138,975
Gain on sale of loans 302,576 148,221
Gain on sale of other real estate, net 125,396 155,867
Mortgage origination fees 168,381 --
Other 634,718 430,699
----------- ----------
Total other income 1,609,444 873,762
----------- ----------
Other expenses:
Salary and employee benefits 2,851,486 1,657,777
Deposit insurance premiums 119,900 210,941
Occupancy and equipment 897,363 751,236
Legal and professional 315,497 188,682
Real estate owned expenses 79,719 24,827
General and administrative expenses 354,933 200,877
Loss on sale of investment securities available for sale -- 9,945
Other 585,297 366,463
----------- ----------
Total other expenses 5,204,195 3,410,748
----------- ----------
Income before income taxes 1,147,837 696,185
Income tax expense 39,071 263,584
----------- ----------
Net income $ 1,108,766 432,601
=========== ==========
Basic and diluted earnings per share $ 0.22 0.09
=========== ==========
Weighted average shares outstanding 4,945,278 4,941,547
=========== ==========
See accompanying notes to consolidated financial statements.
</TABLE>
31
<PAGE>
<TABLE>
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity and Comprehensive Income
For each of the years in the two-year period ended December 31, 1999
Unrealized
gain- Additional
Comprehensive reclassification Common paid-in-
income amount stock capital
-------------- ---------------- ---------- ----------
Balances at December 31, 1997 $ 49,416 15,857,532
Accretion of stock options for stock compensation programs -- 25,521
Comprehensive income:
<S> <C> <C>
Net income $ 432,601 -- --
Other comprehensive income, net of tax:
Amortization of transferred 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 $ 525,193
======== ------- ----------
Balances at December 31, 1998 49,416 15,883,053
Accretion of stock options for stock compensation programs -- 43,750
Issuance of 6,364 shares of common stock 63 17,437
Comprehensive income:
Net income $ 1,108,766 -- --
Other comprehensive income, net of tax:
Amortization of transferred unrealized loss on securities
held to maturity 64,179 -- --
Gross unrealized loss on securities (433)
Add: reclassified adjustment for gains or losses included --
in net income --------
Net unrealized loss on securities (433) -- --
---------
Comprehensive income $ 1,172,512
========= ------ ----------
Balances at December 31, 1999 $ 49,479 15,944,240
====== ==========
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity and Comprehensive Income
For each of the years in the two-year period ended December 31, 1999
(Continued)
Accumulated
other Total
Accumulated comprehensive stockholders'
deficit loss equity
----------- ------------ -----------
(2,912,142) (424,144) 12,570,662
-- -- 25,521
432,601 -- 432,601
-- 62,557 62,557
-- 30,035 30,035
--------- ------- ----------
(2,479,541) (331,552) 13,121,376
-- -- 43,750
-- -- 17,500
1,108,766 -- 1,108,766
-- 64,179 64,179
-- (433) (433)
- -------------- -------------- -------------
(1,370,775) (267,806) 14,355,138
============== ============== =============
32
<PAGE>
<TABLE>
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For each of the years in the two-year period ended December 31, 1999
1999 1998
----------- ----------
Cash flows provided by (used in) operating activities:
<S> <C> <C>
Net income $ 1,108,766 432,601
Adjustments to reconcile net income to net cash flows
from operations:
Loss on sale of investment securities available for sale -- 9,945
Provision for losses on loans 320,000 165,000
Amortization of premium on purchased loans 545,690 535,275
Deferred income taxes 7,310 241,969
Depreciation of office facilities and equipment 398,538 326,752
Amortization of premium on investment securities
available for sale 118 --
Gain on sale of loans (302,576) (148,221)
Net amortization of fees and discounts on loans (101,138) (88,774)
Net gain on the sale of real estate owned (125,396) (155,867)
Write-down on other real estate owned 34,507 123,329
Proceeds from recovery of private mortgage
insurance claims on other real estate owned 145,180 67,750
Executive supplemental income plan (112,154) (88,876)
Accretion of stock option expense 43,750 25,521
Cash provided by (used) resulting from changes in:
Accrued interest receivable on loans (283,247) (102,789)
Accrued interest receivable on investment securities (24,852) 18,501
Prepaid expenses and other assets (392,825) (364,303)
Accrued interest on deposit accounts 7,642 (1,501)
Official checks 875,622 894,780
Accrued expenses and other liabilities 3,570,879 263,385
--------- ---------
Net cash provided by operating activities 5,715,814 2,154,477
--------- ---------
</TABLE>
33 (Continued)
<PAGE>
<TABLE>
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For each of the years in the two-year period ended December 31, 1999
1999 1998
------------ -----------
Cash flows provided by (used in) investing activities:
<S> <C> <C>
Loans originated, net of principal repayments (5,742,818) 11,441,862
Purchase of loans (53,788,887) (52,104,730)
Proceeds from sale of investment securities, available for sale -- 3,340,055
Purchase of mortgage-backed securities available for sale (1,961,667) --
Proceeds from pay downs of investment securities
available for sale 39,628 --
Purchase of cash surrender value life insurance
policies to fund executive supplemental income -- (1,330,000)
Proceeds from the sale of other real estate owned 1,079,921 1,192,567
Proceeds from loans sold 24,155,907 9,094,996
Purchase of Federal Home Loan Bank stock (235,000) (297,500)
Purchase of premises and equipment (485,001) (502,757)
----------- ----------
Net cash used in investing activities (36,937,917) (29,165,507)
----------- ----------
Cash flows provided by financing activities:
Deposit accounts:
Net increase in certificate accounts 17,919,320 18,894,160
Net increase in other deposits 6,304,310 5,509,515
Proceeds from FHLB advances 6,700,000 5,500,000
Net increase in advance payments by borrowers for taxes
and insurance 200,649 270,738
----------- ----------
Net cash provided by financing activities 31,124,279 30,174,413
----------- ----------
Net (decrease) increase in cash and cash
equivalents (97,824) 3,163,383
Cash and cash equivalents at beginning of period 7,165,433 4,002,050
----------- ----------
Cash and cash equivalents at end of period $ 7,067,609 7,165,433
=========== ==========
</TABLE>
34 (Continued)
<PAGE>
<TABLE>
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For each of the years in the two-year period ended December 31, 1999
1999 1998
---------- --------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
<S> <C> <C>
Interest $ 8,649,733 7,619,229
=========== ===========
Income taxes $ 289,146 --
=========== ===========
Supplemental disclosures of non-cash transactions:
Real estate acquired in settlement of loans $ 322,236 945,174
=========== ===========
Issuance of common stock for the assets of
Vantage Mortgage Associates $ 17,500 --
=========== ===========
Market value adjustment - investment securities
available for sale:
Market value adjustment - investments $ (695) --
Deferred income tax asset (262) --
----------- -----------
Unrealized loss on investment securities
available for sale, net $ (433) --
=========== ===========
Unrealized loss on investment securities
transferred from available for sale to held
to maturity $ (428,689) (531,589)
Deferred income tax asset (161,316) (200,037)
----------- -----------
Unrealized loss on investment securities
transferred from available for sale to
held to maturity $ (267,373) (331,552)
=========== ===========
See accompanying notes to consolidated financial statements.
</TABLE>
35
<PAGE>
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Consolidated Financial Statements
December 31, 1999 and 1998
(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 and prevailing practices
within the banking industry. The following summarizes the more
significant of these policies and practices.
(c) 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.
(d) Federal Home Loan Bank ("FHLB") Stock
This asset is owned due to regulatory requirements and is carried
at cost.
(e) 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.
36 (Continued)
<PAGE>
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Consolidated Financial Statements
December 31, 1999 and 1998
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.
(f) 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.
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.
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, are 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.
37 (Continued)
<PAGE>
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Consolidated Financial Statements
December 31, 1999 and 1998
(g) 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 and concentrations of
credit.
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.
Regulatory examiners may require the Company to recognize
additions to the allowance based upon their judgments about the
information available to them at the time of their examination.
Management believes that the allowance for loan losses is
adequate.
(h) Mortgage Servicing Rights
The Bank generates mortgage servicing rights by selling originated
loans and retaining the servicing rights. The carrying value of
mortgage servicing rights is included in prepaid expenses 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.
38 (Continued)
<PAGE>
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Consolidated Financial Statements
December 31, 1999 and 1998
(i) 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.
(j) 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 lives or the respective lease
terms.
(k) Comprehensive Income
The Company's other comprehensive income consists of changes in
unrealized gain/(loss), net of related taxes, of investment
securities available for sale and investment securities
transferred from available for sale to held to maturity in 1996.
(l) Net Income Per Share
The Company adopted Statement of Financial Accounting Standards
No. 128 (Statement 128), "Earnings Per Share", in the year ended
December 31, 1998. Under Statement 128, the Company presents two
earnings per share amounts. Basic EPS is calculated based on net
earnings available to common shareholders and the weighted-average
number of shares outstanding during the year. Diluted EPS includes
additional dilution from potential common stock, such as stock
issuable pursuant to the exercise of stock options outstanding.
(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.
39 (Continued)
<PAGE>
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Consolidated Financial Statements
December 31, 1999 and 1998
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
includes 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 the dual index
bond 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 and
that real estate owned is stated at the lower of cost or fair
value. Actual results could differ from these estimates.
(p) Effect of New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (the
"FASB") issued Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedge Activities"
("Statement 133"). This Statement, which is effective for all
fiscal quarters of 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.
In June 1999, the FASB issued Statement of Financial Accounting
Standards No. 137 which amended the implementation date of
Statement 133 to be effective for all fiscal quarters of all
fiscal years beginning after June 15, 2000. The Company does not
expect Statement 133 to have any impact on its consolidated
financial statements upon adoption.
40 (Continued)
<PAGE>
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Consolidated Financial Statements
December 31, 1999 and 1998
(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, 1999 are as
follows:
Investment securities held to maturity:
<TABLE>
Gross Gross Estimated
Amortized unrealized unrealized market value
cost gains losses value
-------------- -------------- -------------- ---------------
1999:
Obligation of U.S. government
<S> <C> <C> <C>
agencies $ 6,571,311 -- 70,411 6,500,900
============== ============== ============== ===============
</TABLE>
Investment securities available for sale:
<TABLE>
Gross Gross Estimated
Amortized unrealized unrealized market value
cost gains losses
-------------- -------------- -------------- ---------------
1999:
<S> <C> <C> <C> <C>
Mortgage backed securities $ 1,921,921 3,215 3,910 1,921,226
============== ============== ============== ===============
</TABLE>
The amortized cost and estimated market value of investment securities
held to maturity and available for sale at December 31, 1999, 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.
Amortized Estimated market
cost value
---------------- ----------------
Investment securities held to maturity:
Due after one year through five years $ 6,571,311 6,500,900
================ ================
Investment securities available for sale:
Due after one year through five years $ 1,921,921 1,921,226
================ ================
Market values for all securities were calculated using published prices
at December 31, 1999.
41 (Continued)
<PAGE>
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Consolidated Financial Statements
December 31, 1999 and 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, 1999, 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
bond to partially offset its risk related to its portfolio of adjustable
rate mortgages and as such subjects the Company to a certain degree of
market risk as the indices change with prevailing market interest rates.
Proceeds from sales of investment securities available for sale were $-0-
and $3,340,055 in 1999 and 1998, respectively. Gross realized losses on
sales of investment securities available for sale during 1999 and 1998
were $-0- and $9,945, respectively.
In March 1996, the Company transferred a security 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 investment.
(3) Loans Receivable, Net
A summary of loans receivable at December 31, 1999 is as follows:
Mortgage loans:
Permanent conventional:
Commercial $ 20,980,519
Residential 141,137,035
Residential construction 31,518,265
-----------------
Total mortgage loans 193,635,819
Consumer loans - secured 1,005,590
Consumer loans - unsecured 236,306
Lines of credit 1,434,301
-----------------
Total loans receivable 196,312,016
Add (deduct):
Net premium on mortgage loans purchased 1,676,358
Unearned loan origination fees, net of direct loan
origination costs 76,938
Undisbursed portion of loans in process (9,967,579)
Allowance for loan losses (1,437,913)
-----------------
Loans receivable, net $ 186,659,820
=================
42 (Continued)
<PAGE>
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Consolidated Financial Statements
December 31, 1999 and 1998
The following is a summary of information regarding nonaccrual and
impaired loans as of December 31:
<TABLE>
1999 1998
--------------- ---------------
<S> <C> <C>
Nonaccrual loans $ 2,655,885 1,360,008
=============== ===============
Total recorded investment in impaired loans $ 2,877,975 1,710,827
=============== ===============
Recorded investment in impaired loans for which there is a
related allowance for loan losses $ 2,242,043 1,710,827
=============== ===============
Recorded investment in impaired loans for which there is no
related allowance for loan losses $ 635,932 --
=============== ===============
Allowance for loan losses related to impaired loans $ 310,545 240,189
=============== ===============
Interest
income not Interest income Average
recognized on recognized on recorded
nonaccrual impaired investment in
loans loans impaired loans
---------------- ----------------- -----------------
For the years ended December 31:
1999 $ 164,582 57,040 1,936,763
================ ================= =================
1998 $ 161,510 56,108 1,809,013
================ ================= =================
</TABLE>
The activity in the allowance for loan losses for the years ended
December 31, 1999 and 1998 is as follows:
1999 1998
--------------- ----------------
Balance at beginning of period $ 1,136,056 1,110,521
Charge-offs (39,160) (162,788)
Provision for loan losses 320,000 165,000
Recoveries 21,017 23,323
--------------- ----------------
Balance at end of period $ 1,437,913 1,136,056
=============== ================
43 (Continued)
<PAGE>
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Consolidated Financial Statements
December 31, 1999 and 1998
There were no outstanding loans to executive officers, directors and
affiliates at December 31, 1999.
(4) Loan Servicing
Mortgage loans serviced for others are not included in the accompanying
consolidated balance sheets. The unpaid principal balances of these loans
was $158,829,215 and $17,390,004 at December 31, 1999 and 1998,
respectively. Servicing fees earned were $252,035 and $10,426 for the
years ended December 31, 1999 and 1998, respectively.
(5) Mortgage Servicing Rights
An analysis of the activity for originated mortgage servicing rights for
the years ended December 31, 1999 and 1998 is as follows:
Balance, December 31, 1997 $ 87,669
Originations 155,059
Amortization (31,888)
----------------
Balance, December 31, 1998 210,840
Originations 418,340
Amortization (63,564)
----------------
Balance, December 31, 1999 $ 565,616
================
Mortgage servicing rights are included in prepaid expenses and other
assets in the consolidated balance sheet.
(6) Office Facilities and Equipment
Office facilities and equipment and their related accumulated
depreciation and amortization at December 31, 1999 is summarized as
follows:
<TABLE>
Estimated useful
lives
------------------
<S> <C> <C>
Leasehold improvements $ 1,439,615 3-25 years
Furniture and fixtures 1,169,143 3-7 years
----------------
Total 2,608,758
Less accumulated depreciation and amortization (1,514,465)
----------------
Office facilities and equipment, net $ 1,094,293
================
</TABLE>
44 (Continued)
<PAGE>
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Consolidated Financial Statements
December 31, 1999 and 1998
(7) Deposits
A summary of deposits at December 31, 1999 is as follows:
<TABLE>
Weighted
average
interest rate
----------------
<S> <C>
Commercial checking accounts - noninterest - bearing $ 2,265,696 --%
NOW accounts 2,709,306 2.00%
Money market deposit accounts 15,159,382 4.10%
Statement savings accounts 976,593 3.25%
---------------- ----------------
21,110,977 3.30%
---------------- ----------------
Certificate accounts by interest rates:
4.00% - 4.99% 33,431,771
5.00% - 5.99% 81,547,600
6.00% - 6.99% 17,421,334
----------------
Total certificate accounts 132,400,705 5.38%
---------------- ----------------
Accrued interest 11,927
----------------
Total deposits $ 153,523,609 4.99%
================ ================
</TABLE>
The following table presents, by various interest rate categories, the
amount of certificate accounts maturing during the periods reflected
below:
<TABLE>
Interest rate 2000 2001 2002 2003 2004 Total
------------------- -------------- ------------- ------------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
4.00% - 4.99% $ 30,722,760 2,709,011 -- -- -- 33,431,771
5.00% - 5.99% 74,903,355 3,510,330 1,705,032 440,430 988,453 81,547,600
6.00% - 6.99% 11,867,138 4,628,203 627,439 -- 298,554 17,421,334
-------------- ------------- ------------- ------------- ------------ -------------
$ 117,493,253 10,847,544 2,332,471 440,430 1,287,007 132,400,705
============== ============= ============= ============= ============ =============
</TABLE>
45 (Continued)
<PAGE>
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Consolidated Financial Statements
December 31, 1999 and 1998
Certificates of deposit issued have remaining maturities at December 31,
1999 as follows:
One year $ 117,493,253
Two year 10,847,544
Three year 2,332,471
Four year 440,430
Five year 1,287,007
--------------------
$ 132,400,705
====================
At December 31, 1999, certificates of deposit exceeding $100,000 were
$18,322,665.
Interest expense on deposits for the years ended December 31, 1999 and
1998 is as follows:
<TABLE>
1999 1998
--------------- ---------------
<S> <C> <C>
Interest on NOW and Super NOW accounts $ 39,339 19,598
Interest on money market accounts 593,690 374,678
Interest on savings accounts 24,347 23,676
Interest on certificate accounts, net of penalties 6,358,151 5,686,776
--------------- ---------------
$ 7,015,527 6,104,728
=============== ===============
</TABLE>
The Company has deposits from directors, officers and employees and their
related interests of $433,565 at December 31, 1999.
(8) Federal Home Loan Bank Advances
A summary of advances from the Federal Home Loan Bank of Atlanta at
December 31, 1999 are as follows:
<TABLE>
Maturing during the year Fixed interest rate
ending December 31, (variable rate)
--------------------------- ----------------------
<S> <C> <C> <C>
2000 5.09 $ 5,000,000
2000 5.98 5,000,000
2000 6.12 5,000,000
2000 6.29 5,000,000
2000 (4.55) 10,200,000
2001 5.96 5,000,000
------------------
$ 35,200,000
==================
</TABLE>
46 (Continued)
<PAGE>
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Consolidated Financial Statements
December 31, 1999 and 1998
Pursuant to collateral agreements with the Federal Home Loan Bank
("FHLB"), advances are secured by the following at December 31, 1999:
FHLB stock $ 1,960,000
Qualifying mortgage loans 117,981,905
=================
As of December 31, 1999, the FHLB has a blanket lien on all qualifying
mortgage loans as noted above.
(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 Fannie Mae ("FNMA") mortgage backed securities. The
fair value of the FNMA mortgage backed securities was based on quoted
market prices. The Bank's investments held to maturity represent
investments in Federal Home Loan Bank ("FHLB") bonds. The fair value
of the FHLB bond 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 residential, commercial real estate,
commercial and consumer loans other than variable rate loans are
estimated using discounted 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,
1999 (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.
47 (Continued)
<PAGE>
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Consolidated Financial Statements
December 31, 1999 and 1998
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.
The estimated fair values of the Company's financial instruments at
December 31, 1999 are as follows:
<TABLE>
Carrying amount Fair value
------------------ ----------------
Financial assets:
<S> <C> <C>
Cash and cash equivalents $ 7,067,609 7,067,609
Investment securities held to maturity 6,571,311 6,500,900
Investment securities available for sale 1,921,226 1,921,226
Loans (carrying amount less allowance
For loan loss of $1,437,913) 186,659,820 183,201,569
Federal Home Loan Bank stock 1,960,000 1,960,000
Financial liabilities:
Deposits:
Without stated maturities $ 21,110,977 21,110,977
With stated maturities 132,400,705 132,131,619
Federal Home Loan Bank advances 35,200,000 35,200,000
</TABLE>
The carrying amounts shown in the table are included in the consolidated
balance sheet under the indicated captions.
48 (Continued)
<PAGE>
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Consolidated Financial Statements
December 31, 1999 and 1998
(10) Income Taxes
Income tax expense for the years ended December 31, 1999 and 1998
consists of:
Current Deferred Total
-------------- --------------- --------------
1999:
Federal $ 31,761 6,242 38,003
State -- 1,068 1,068
-------------- --------------- --------------
Total $ 31,761 7,310 39,071
============== =============== ==============
1998:
Federal $ 19,402 211,972 231,374
State 2,213 29,997 32,210
-------------- --------------- --------------
Total $ 21,615 241,969 263,584
============== =============== ==============
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 as of
December 31, 1999 are as follows:
Deferred tax assets:
Allowance for loan losses $ 197,805
Unrealized loss on investment securities 161,578
AMT credit carryforward 73,868
Depreciation 44,020
Deferred compensation 33,987
Net operating loss carryforward 286,473
Other reserves 18,815
----------------
Gross deferred tax assets 816,546
Less valuation allowance (147,896)
----------------
Net deferred tax assets 668,650
----------------
Deferred tax liabilities:
FHLB stock dividend (18,845)
Mortgage servicing rights (165,890)
Deferred loan fees and costs, net (23,540)
----------------
Total deferred tax liabilities (208,275)
----------------
Net deferred tax assets $ 460,375
================
49 (Continued)
<PAGE>
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Consolidated Financial Statements
December 31, 1999 and 1998
At December 31, 1999, the Company has net operating loss carryovers
(NOL's) of approximately $501,890 for federal and $3,190,915 for state
tax purposes, which expire between 2009 and 2011. In addition, the
Company has approximately $73,868 in alternative minimum tax (AMT) credit
carryforwards. A valuation allowance has been established relating to the
NOL that management believes are not more likely than not to be utilized
prior to their expiration through future profitable operations.
The Company's effective tax rate on pretax income for 1999 and 1998
differs from the statutory Federal income tax rate as follows:
<TABLE>
1999 % 1998 %
-------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Tax (benefit) provision at statutory rate $ 390,265 34.00% $ 236,702 34.00%
Increase (decrease) in tax
Decrease in valuation allowance (284,630) (24.80) -- --
State income taxes net of federal
Income Tax Benefit 705 .06 23,365 3.36
Officers' life insurance, travel and
Other (38,070) (3.32) 3,517 .40
-------------- ------------- ------------- -------------
$ 39,071 3.40% $ 263,584 37.76%
============== ============= ============= =============
</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. Management believes, as of December
31, 1999, that the Bank meets all capital adequacy requirements to which
it is subject.
50 (Continued)
<PAGE>
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Consolidated Financial Statements
December 31, 1999 and 1998
As of December 31, 1999, the most recent notification from the Office of
Thrift Supervision categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as
well capitalized, the Bank must maintain total risk-based, Tier I
risk-based and Tier I leverage ratios as set forth in the table. There
are no conditions or events since that notification that management
believes have changed the institution's category. 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>
To be well capitalized
under prompt corrective
For capital adequacy action
Actual purposes provisions
-------------------------- --------------------------- --------------------------
Amount Ratio Amount Ratio Amount Ratio
-------------- ----------- -------------- ------------ -------------- -----------
As of December 31, 1999:
Total capital (to risk
<S> <C> <C> <C> <C> <C> <C>
weighted assets) $ 14,558,000 11.39% $ 10,252,880 >8.0% $ 12,816,100 >10.0%
- -
Tier I capital (to risk
weighted assets) 13,225,076 10.32% 5,126,440 >4.0% 7,689,660 >6.0%
- -
Tier I capital (to
adjusted assets) 13,225,076 6.29% 8,428,195 >4.0% 10,535,243 >5.0%
- -
</TABLE>
(12) Stock Option Plans
The Company issued stock options to certain sales representatives for
their commitment in selling Federal Trust Corporation stock. These
options had a strike price of $5.63 per share, as amended as a result of
the 1997 stock offering, and expired on October 26, 1999. During 1999,
58,453 options were forfeited due to expiration.
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, 1999 and 1998 was $43,750 and
$25,521, respectively. At December 31, 1999 the number of options vested
and exercisable was 68,000.
51 (Continued)
<PAGE>
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Consolidated Financial Statements
December 31, 1999 and 1998
The Company applies Accounting Principles Board 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:
1999 1998
---------------- --------------
Net income:
As reported $ 1,108,766 $ 432,601
Pro forma $ 1,089,156 $ 412,991
Diluted earnings per share:
As reported $ .22 $ .09
Pro forma $ .22 $ .08
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 rate
of 4.73% and expected lives of 7 years for the plan options.
A summary of the status of the Company's stock option plan as of December
31, 1999 and 1998 and changes during the year ended on that date is
presented below:
Fixed options 1999 1998
----------------------------------------- ---------------- ------------
Outstanding at beginning of year: 398,453 58,453
Granted -- 350,000
Exercised -- --
Forfeited 58,453 10,000
------------- ------------
Outstanding at end of year 340,000 398,453
------------- ------------
Options exercisable at year-end 68,000 --
============= ============
Weighted-average fair value of options
granted during the year per share $ -- 1.00
============= ============
52 (Continued)
<PAGE>
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Consolidated Financial Statements
December 31, 1999 and 1998
<TABLE>
Number Weighted Weighted Number Weighted average
outstanding at remaining average exercisable at exercise price at
Exercise price December 31, 1999 contractual life exercise price December 31, 1999 December 31, 1999
- -------------- ----------------- ---------------- -------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
$4.00 340,000 9 years $4.00 68,000 $4.00
</TABLE>
(13) Commitments and Related Party Transactions
Future minimum lease payments under noncancelable leases, at December 31,
1999 are as follows:
Year ending December 31,
-----------------------------------
2000 $ 431,305
2001 355,087
2002 355,087
2003 355,087
2004 355,087
Thereafter 2,015,256
--------------
Total minimum lease payments $ 3,866,909
==============
Rent expense amounted to $340,457 and $298,193 for the years ended
December 31, 1999 and 1998, respectively.
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 $316,504
and $308,233 were made during the years ended December 31, 1999 and 1998,
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 was to increase
occupancy and equipment expense and decrease net income by approximately
$167,000 and $104,000 in 1999 and $178,000 and $111,000 in 1998
respectively.
53 (Continued)
<PAGE>
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Consolidated Financial Statements
December 31, 1999 and 1998
(14) Parent Company Financial Information
The parent company financial information is as follows at December 31,
1999:
<TABLE>
Condensed Balance Sheet
Assets:
<S> <C>
Cash, deposited with subsidiary $ 568,495
Prepaid expenses and other assets 626,298
Property, plant and equipment, net 109,477
Note receivable 50,000
Investment in subsidiaries 13,011,939
-----------------
$ 14,366,209
=================
Liabilities and stockholders' equity:
Accounts payable and accrued expenses $ 11,071
-----------------
Stockholders' equity:
Common stock 49,479
Additional paid-in capital 15,944,240
Accumulated deficit (1,370,775)
Accumulated other comprehensive loss (433)
Accumulated other comprehensive loss-investment securities
transferred from available for sale to held to maturity (267,373)
-----------------
Total stockholders' equity 14,355,138
-----------------
$ 14,366,209
=================
</TABLE>
54 (Continued)
<PAGE>
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Consolidated Financial Statements
December 31, 1999 and 1998
<TABLE>
Condensed Statements of Operations
1999 1998
---------------- ----------------
Revenues:
<S> <C> <C>
Interest and dividend income $ 43,102 52,900
Other income 327,891 356,271
---------------- ----------------
Total income 370,993 409,171
---------------- ----------------
Expenses:
Compensation 59,091 34,284
Occupancy 439,752 420,357
Other expense 79,695 88,927
---------------- ----------------
Total expenses 578,538 543,568
---------------- ----------------
Loss before income from subsidiaries (207,545) (133,851)
Income from subsidiaries 1,018,718 515,591
---------------- ----------------
Income before income taxes 811,173 381,740
Income tax benefit (297,593) (50,861)
---------------- ----------------
Net income $ 1,108,766 432,601
================ ================
</TABLE>
55 (Continued)
<PAGE>
<TABLE>
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Consolidated Financial Statements
December 31, 1999 and 1998
Condensed Statements of Cash Flows
1999 1998
-------------- ---------------
Cash flows provided by (used in) operating activities:
<S> <C> <C>
Net income $ 1,108,766 432,601
Adjustments to reconcile net income to net cash provided by
Depreciation 111,416 111,397
Accretion of stock option expense 43,750 25,521
Equity in undistributed earnings
of subsidiaries (1,018,718) (515,591)
Cash provided by (used) resulting from changes in:
Prepaid expenses and other assets (537,466) (47,832)
Accounts payable and accrued expenses 8,331 (69,501)
-------------- ---------------
Net cash used in operating activities (283,921) (63,405)
-------------- ---------------
Cash flows (used in) provided by investing activities:
Capital infusion in the subsidiary (500,000) --
Notes receivable originated, net of repayments -- 25,000
-------------- ---------------
Net cash (used in) provided by investing activities (500,000) 25,000
-------------- ---------------
Net decrease in cash and cash equivalents (783,921) (38,405)
Cash and cash equivalents at beginning of year 1,352,416 1,390,821
-------------- ---------------
Cash and cash equivalents at end of year $ 568,495 1,352,416
============== ===============
</TABLE>
56 (Continued)
<PAGE>
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Consolidated Financial Statements
December 31, 1999 and 1998
<TABLE>
Condensed Statements of Cash Flows, Continued
1999 1998
-------------- ---------------
Supplemental disclosures of non-cash transactions:
Issuance of common stock for the assets of
<S> <C>
Vantage Mortgage Associates $ 17,500 --
============== ===============
Market value adjustment -investment securities available for sale:
Market value adjustments - investments $ (695) --
Deferred income tax asset (262) --
-------------- ---------------
Unrealized loss on investment securities
available for sale, net $ (433) --
============== ===============
Unrealized loss on investment securities transferred from
available for sale to held to maturity (428,689) (531,589)
Deferred income tax asset (161,316) (200,037)
-------------- ---------------
Unrealized loss on investment securities transferred
from available for sale to held to maturity $ (267,373) (331,552)
============== ===============
</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.
(15) Selected Quarterly Financial Data (Unaudited)
Summarized quarterly financial data follows (in thousands, except for per
share amounts):
<TABLE>
Fourth quarter
-----------------------------
1999 1998
------------ ------------
<S> <C> <C>
Interest income $ 3,758 2,969
Net interest income 1,341 908
Provision for loan losses 110 69
Income before income taxes 191 109
Net income 394 67
============ ============
Basic and diluted earnings per share $ .07 .02
============ ============
</TABLE>
57 (Continued)
<PAGE>
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Consolidated Financial Statements
December 31, 1999 and 1998
<TABLE>
Third quarter
-----------------------------
1999 1998
------------ ------------
<S> <C> <C>
Interest income $ 3,671 2,864
Net interest income 1,308 914
Provision for loan losses 60 45
Income before income taxes 391 255
Net income 304 162
============ ============
Basic and diluted earnings per share $ .06 .03
============ ============
Second quarter
-----------------------------
1999 1998
------------ ------------
Interest income $ 3,345 2,628
Net interest income 1,293 784
Provision for loan losses 90 21
Income before income taxes 303 186
Net income 233 112
============ ============
Basic and diluted earnings per share $ .05 .02
============ ============
First quarter
-----------------------------
1999 1998
------------ ------------
Interest income $ 3,109 2,555
Net interest income 1,120 791
Provision for loan losses 60 30
Income before income taxes 263 146
Net income 178 92
============ ============
Basic and diluted earnings per share $ .04 .02
============ ============
</TABLE>
58 (Continued)
<PAGE>
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Consolidated Financial Statements
December 31, 1999 and 1998
(16) Employee Plans
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(k) 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, 1999 and 1998, the Company
incurred compensation costs of $100,000 and $7,300, respectively.
In addition, the Company sponsors an employee savings plan, which
qualifies as a 401(k) plan under the Internal Revenue Code. Under the
employee savings plan, employees may contribute up to 10% of their
pre-tax compensation. The Company makes contributions on a discretionary
basis as approved by the Board of Directors. Participants vest
immediately in their own contributions and after four years of service in
contributions made by the Company. Employee savings plan expense for the
years ended December 31, 1999 and 1998 was $28,207 and $25,782,
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 Federal Deposit Insurance Corporation ("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
Savings Association Insurance Fund ("SAIF") administered by the FDIC and
depositors. As a thrift holding company, the Holding Company also is
subject to extensive regulation, supervision and examination by the OTS
and, to a lesser extent, the FDIC.
The 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.
59 (Continued)
<PAGE>
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Consolidated Financial Statements
December 31, 1999 and 1998
The Bank and the Holding Company are subject to periodic examinations by
the OTS. Examinations in 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 Orders to
Cease and Desist were lifted as of June 1, 1998.
(18) Executive Supplemental Income Plan
The Company implemented an executive supplemental income plan (the
"Plan") during 1997 to provide supplemental income for two of its current
executives after their retirement. The funding of the Plan involved the
purchase of five cash surrender value life insurance policies, which
totaled $3,180,000. The Plan is structured such that each participant is
scheduled to receive specified levels of income after the retirement age
of 65 for seventeen years. In the event a participant leaves the
employment of the Bank before retirement, only the benefits vested
through that date would be paid to the employee. The Plan also provides
for 100% vesting in the event of a change in Bank ownership. The
accounting for the Plan is as follows: Monthly, the Company records the
mortality cost as a reduction of the asset. Interest for the policies is
recorded to the asset and salary continuation expenses are accrued.
The Company has approximately $103,704 and $48,600 in deferred
compensation accrued at December 31, 1999 and 1998, respectively, which
is included in accounts payable and other liabilities in the accompanying
consolidated balance sheets. The Company incurred charges of $85,854 and
$69,112 in connection with the Plan during 1999 and 1998, respectively.
60 (Continued)
<PAGE>
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Consolidated Financial Statements
December 31, 1999 and 1998
(19) Credit Commitments
The Bank has outstanding at any time a significant number of commitments
to extend credit. These arrangements are subject to strict credit control
assessments and each customer's credit worthiness is evaluated on a
case-by-case basis. A summary of commitments to extend credit and standby
letters of credit written at December 31, 1999 is as follows:
<TABLE>
<S> <C>
Available lines of credit $ 788,404
================
Standby letters of credit $ 95,936
================
Outstanding mortgage loan commitments, exclusive of loans in
Fixed rates $ 6,829,231
Variable rates 13,734,533
----------------
$ 20,563,764
================
</TABLE>
Because many commitments expire without being funded in whole or part,
the contract amounts are not estimates of future cash flows.
Loan commitments written have off-balance-sheet credit risk because only
original fees are recognized in the balance sheet until the commitments
are fulfilled or expire. Credit risk represents the accounting loss that
would be recognized at the reporting date if counterparties failed
completely to perform as contracted. The credit risk amounts are equal to
the contractual amounts, assuming that the amounts are fully advanced,
and that collateral or other security is of no value.
The Bank's policy is to require customers to provide collateral prior to
the disbursement of approved loans. The amount of collateral obtained, if
it is deemed necessary by the Bank upon extension of credit, is based on
management's credit evaluation of the counterparty. Collateral held
varies but may include accounts receivable, inventory, real estate and
income producing commercial properties.
Standby letters of credit are contractual commitments issued by the Bank
to guarantee the performance of a customer to a third party. The credit
risk involved in issuing letters of credit is essentially the same as
that involved in extending loan facilities to customers.
61 (Continued)
<PAGE>
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Consolidated Financial Statements
December 31, 1999 and 1998
(20) Concentration of Credit Risk
The Bank originates real estate, consumer and commercial loans primarily
in its Central Florida market area. Although the Bank has a diversified
loan portfolio, a substantial portion of its borrowers' ability to honor
their contracts is dependent upon the economy of Central Florida. The
Bank does not have a significant exposure to any individual customer or
counterparty.
The Bank manages its credit risk by limiting the total amount of
arrangements outstanding with individual customers, by monitoring the
size and maturity structure of the loan portfolio, by obtaining
collateral based on management's credit assessment of the customers, and
by applying a uniform credit process for all credit exposures.
(21) Basic and Diluted Earnings Per Share
Basic and diluted earnings per share are calculated as follows:
<TABLE>
Income Shares Per share
(numerator) (denominator) amount
----------------- ------------------- -------------
1999:
Basic earnings per share:
<S> <C> <C> <C>
Net income $ 1,108,766 4,945,278 $ .22
=============
Effect of Dilutive Securities:
Stock options -- --
----------------- -------------------
Diluted earnings per share:
Income and assumed conversions $ 1,108,766 4,945,278 $ .22
================= =================== =============
1998:
Basic earnings per share:
Net income $ 432,601 4,941,547 $ .09
=============
Effect of Dilutive Securities:
Stock options -- --
----------------- -------------------
Diluted earnings per share:
Income and assumed conversions $ 432,601 4,941,547 $ .09
================= =================== =============
</TABLE>
62 (Continued)
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE MATTERS.
None.
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS
Registrant hereby incorporates by reference the sections entitled "Election of
One Class I Director" and "Board of Directors Meeting" contained at pages 3
through 5 of the Proxy Statement filed electronically with the Securities and
Exchange Commission on March 30, 2000.
ITEM 10. EXECUTIVE COMPENSATION
Registrant hereby incorporates by reference the section entitled "Executive
Compensation" contained at pages 5 through 13 of the Proxy Statement.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
(d) Security Ownership of Certain Beneficial Owners
Registrant hereby incorporates by reference the section titled "Certain
Shareholders" on page 3 of the Proxy Statement.
(e) Security Ownership of Management
Registrant hereby incorporates by reference the section entitled "Information
Concerning Directors" and "1998 Key Employee Incentive stock compensation
Program" contained at page 3 and page 10 of the Proxy Statement.
(f) Changes in Control
Registrant is not aware of any arrangements, including any pledge by any person
of securities of Federal Trust, the operation of which may, at a subsequent
date, result in a change in control of Federal Trust.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During 1999, neither Federal Trust nor its subsidiaries have engaged in any
reportable transactions, including loans, to Federal Trust's or its
subsidiaries' directors, executive officers, their associates and members of the
immediate families of such directors and executive officers.
63
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. The following exhibits are filed with or incorporated by
reference into this report. The exhibits which are marked by a single
asterisk (*) were previously filed as a part of, and are hereby
incorporated by reference from Registrant's Registration Statement on form
SB-1, as effective with the Securities and Exchange Commission ("SEC") on
October 17, 1997, Registration No. 333-30883. The exhibits which are marked
by a double asterisk (**) were previously filed with the SEC, and are
hereby incorporated by reference from Registrant's 1998 Definitive Proxy
Statement. The exhibits which are marked with a triple asterisk (***) were
previously filed with the SEC, and are hereby incorporated by reference
from Registrant's 1999 Definitive Proxy Statement. The exhibit numbers
correspond to the exhibit numbers in the referenced documents.
Exhibit No. Description of Exhibit
* 3.1 1996 Amended Articles of Incorporation and the 1995 Amended and
Restated Articles of Incorporation of Federal Trust
* 3.2 1995 Amended and Restated Bylaws of Federal Trust
** 3.3 1998 Articles of Amendment to Articles of Incorporation of
Federal Trust
*** 3.4 1999 Articles of Amendment to Articles of Incorporation of
Federal Trust
* 4.0 Specimen of Common Stock Certificate
10.1 Amended Employment Agreement By and Among Federal Trust, the
Bank and James V. Suskiewich
10.2 First Amendment to the Amended Employment Agreement By and Among
Federal Trust, the Bank and James V. Suskiewich
10.3 Amended Employment Agreement By and Among Federal Trust, the
Bank and Aubrey W. Wright, Jr.
21.0 Subsidiaries
22.1 Proxy Statement for 2000 Annual Meeting of Shareholders
27.1 Financial Data Schedule
(b) Reports on form 8-KSB. Registrant did not file any reports on Form 8-KSB
during the last quarter of 1999.
64
<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, 2000 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, 2000
- ------------------------ President
James V. Suskiewich
/s/ Aubrey H. Wright, Jr Director March 30, 2000
- ------------------------
Aubrey H. Wright, Jr.
/s/ Samuel C. Certo Director March 30, 2000
- ------------------------
Samuel C. Certo
/s/ Kenneth W. Hill Director March 30, 2000
- ------------------------
Kenneth Hill
/s/ George W. Foster Director March 30, 2000
- ------------------------
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.
Registrant intends to mail the 1999 Annual Report and proxy materials to its
shareholders on or about April 7, 2000.
65
EXHIBIT 10.1
AMENDED
EMPLOYMENT AGREEMENT
BY AND AMONG
FEDERAL TRUST CORPORATION,
FEDERAL TRUST BANK,
AND
JAMES V. SUSKIEWICH
THIS EMPLOYMENT AGREEMENT is made, entered into, and is effective as of
this 18th day of December, 1998 ("Effective Date"), by and between Federal Trust
Corporation, a Florida corporation ("Company"), Federal Trust Bank, a federally
chartered stock savings bank which has its principal office in Winter Park,
Florida ("Bank") and James V. Suskiewich ("Executive").
WHEREAS, Executive is presently employed by the Company and the Bank in
the capacity of President and Chief Executive Officer of these entities and
possesses considerable experience and an intimate knowledge of the business and
affairs of the Company and the Bank, their policies, methods, personnel, and
operations; and
WHEREAS, the Company's primary subsidiary is the Bank; and
WHEREAS, the Company and the Bank recognize that Executive's
contributions have been substantial and meritorious and, as such, Executive has
demonstrated unique qualifications to act in an executive capacity for the
Company and the Bank; and
WHEREAS, the Company and the Bank are desirous of assuring the
continued employment of Executive in the above stated capacities, and Executive
is desirous of having such assurance;
NOW, THEREFORE, in consideration of the foregoing and of the mutual
covenants and agreements of the parties set forth in this Agreement, and of
other good and valuable consideration the receipt and sufficiency of which are
hereby acknowledged, the parties hereto, intending to be legally bound, agree as
follows:
ARTICLE 1. TERM OF EMPLOYMENT
The Company and the Bank hereby agree to employ Executive and Executive
hereby agrees to continue to serve the Company and the Bank, in accordance with
the terms and conditions set forth herein, for an initial period of three years,
commencing as of the Effective Date of this Agreement, as indicated above. Upon
each new day of the three year period of employment from the Effective Date
until the Executive's 65th birthday, the term of this Agreement automatically
shall be extended for one additional day, to be added to the end of the
then-existing three year term. Accordingly, at all times prior to (i) the
Executive's attaining age 65 and (ii) a notice of employment termination (or an
actual termination), the term of this Agreement shall be three full years.
However, either party may terminate this Agreement by giving the other party
written notice of intent not to renew. Additionally, the automatic extensions of
the term of this Agreement shall immediately be suspended upon termination of
Executive by reason of death, Disability (see Section 6.2), or Retirement (see
Section 6.1), or an employment termination made voluntarily by Executive (other
than for Good Reason pursuant to Section 6.7), or involuntarily for Cause
(pursuant to Section 6.5), or for any of the reasons set out in Section 6.6. The
provisions applicable to such suspensions of the term of this Agreement are set
forth in those Sections pertaining to each of such types of employment
termination.
In the event Executive gives notice of employment termination, the term
of this Agreement shall expire upon the ninetieth (90th) day following the
delivery to the Company and the Bank of such notice of employment termination.
Except as otherwise provided in the following paragraph with respect to a
voluntary termination for Good Reason (see Section 6.7), a voluntary employment
termination by Executive shall result in the termination of the rights and
66
<PAGE>
obligations of the parties under this Agreement; provided, however, that the
terms and provisions of Article 9 shall continue to apply.
In the event the Company and the Bank desire to involuntarily terminate
the employment of Executive (for purposes of this Agreement, a voluntary
employment termination by Executive for Good Reason shall be treated as an
involuntary termination of the Executive's employment without Cause), the
Company and the Bank shall each deliver to Executive a notice of employment
termination, and the following provisions shall apply:
(a) In the event the involuntary termination is for Cause (see
Section 6.5 herein), the term of this Agreement shall
terminate on the 90th day following delivery to Executive of
such notice of termination. Such a termination for Cause shall
result in the termination of all rights and obligations of the
parties under this Agreement; provided, however, that the
terms and provisions of Article 9 shall continue to apply, and
Section 6.5 shall apply until payments required thereunder
have been made.
(b) In the event the involuntary termination is without Cause,
Executive shall be entitled to receive the severance benefits
set forth in Section 6.4 herein; provided, however, that the
terms and provisions of Article 9 shall continue to apply and
Section 6.4 shall apply until payments required thereunder
have been made.
ARTICLE 2. POSITION AND RESPONSIBILITIES
During the term of this Agreement, Executive agrees to serve as
President and Chief Executive Officer of the Company and of the Bank, and as a
member of the Company's and the Bank's Board of Directors if so elected. In his
capacity as President and Chief Executive Officer of the Company and of the
Bank, Executive shall report directly to the Board of Directors of the Company
(with respects to his functions as an Executive of the Company) and to the Board
of Directors of the Bank (with respects to his functions as an Executive of the
Bank). Executive shall serve as the first in command and have management
responsibility over the operations of the Company and of the Bank. Executive
shall also perform such executive services for the Bank as may be consistent
with his titles or be assigned to him by the Board of Directors of either the
Company, the Bank, or both. Executive shall have the same status, privileges,
and responsibilities normally inherent in such capacities in financial
institutions of similar size and characteristics.
The services of Executive shall be rendered principally in Winter Park,
Florida, but it is understood that he shall do such traveling on behalf of the
Company and/or the Bank as may be reasonably required.
ARTICLE 3. STANDARD OF CARE
During the term of this Agreement, Executive agrees to devote
substantially his full working time, attention, and energies to the Company's
and the Bank's business and shall not be engaged in any other business activity,
whether or not such business activity is pursued for gain, profit, or other
pecuniary advantage. However, Executive may serve as a director of other
companies so long as such service is not injurious to the Company or the Bank,
and provided that such service is approved by both the Board of the Company and
of the Bank as may be required under their respective Bylaws.
Executive covenants, warrants, and represents that he shall:
(a) Devote his full and best efforts to the fulfillment of his
employment obligations; and
(b) Exercise the highest degree of loyalty and the highest
standards of conduct in the performance of his
duties.
This Article 3 shall not be construed as preventing Executive from
investing assets in such form or manner as
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will not require his services in the daily operations of the affairs of the
companies in which such investments are made.
ARTICLE 4. COMPENSATION
The Bank shall be primarily responsible for providing to Executive his
salary, bonus, and other benefits and perquisites available to him pursuant to
this Agreement (except for the benefit outlined in Section 4.3, for which the
Company is primarily liable). The Company shall proportionally reimburse the
Bank, on an annual basis, for the time that Executive spends performing duties
for the Company. For example, if Executive spends, in a particular year, 20% of
his time working for the Company, the Company shall then reimburse the Bank 20%
of the annual cost to the Bank of complying with this Agreement. As remuneration
for all services to be rendered by Executive during the term of this Agreement,
and as consideration for complying with the covenants herein, the Bank shall pay
and provide to Executive the following:
4.1 BASE SALARY. The Bank shall pay Executive a Base Salary in an
amount which shall be established from time to time by the Board of Directors of
the Bank or the Board's designee; provided, however, that such Base Salary shall
not be less than one hundred and forty thousand dollars ($140,000.00) per year
and if subsequently increased shall not be less than such increased amount
("Base Salary"). This Base Salary shall be paid to Executive in equal
semimonthly installments throughout the year, consistent with the normal payroll
practices of the Bank.
The Base Salary shall be reviewed at least annually following the
Effective Date of this Agreement, while this Agreement is in force, to ascertain
whether, in the judgment of the Board of the Bank or the Board's designee, such
Base Salary should be increased, based primarily on Executive's performance
during the year. If so increased, the Base Salary as stated above shall,
likewise, be increased for all purposes of this Agreement.
4.2 PERFORMANCE BONUS. Executive shall be entitled to a Performance
Bonus based upon the profitability of the Bank. The Performance Bonus is
triggered when the Bank's after tax earnings equal or exceed 0.50 percent of the
average quarterly assets on an annualized basis. The Bank shall pay Executive a
bonus equal to three percent (3%) of the Bank's quarterly net income before
taxes (excluding extraordinary gains or losses. The Performance Bonus amounts
shall be determined as of the close of each fiscal quarter and shall be paid to
Executive within 45 days of each quarter-end. Aggregate quarterly bonuses in any
one fiscal year shall not exceed the amount of Employee's Base Salary for such
fiscal year.
4.3 LONG-TERM INCENTIVES. During the term of this Agreement, Executive
shall be entitled to participate in any and all long-term incentive programs at
a level that is commensurate with his position with the Company.
4.4 RETIREMENT BENEFITS. The Bank shall provide Executive all the
benefits to which he is entitled under the Salary Continuation Plan (and any
subsequent amendments thereto), which was adopted by the Bank in January of 1997
and approved by the OTS on April 4, 1997. The obligations of the Bank and
pursuant to this Section 4.4 shall survive the termination of this Agreement.
4.5 EXECUTIVE BENEFITS. The Bank shall provide Executive all benefits
to which other executives and Executives of the Bank are entitled to receive, as
commensurate with Executive's position, subject to the eligibility requirements
and other provisions of such plans or arrangements. Such benefits shall include,
but not be limited to, group term life insurance, comprehensive health and major
medical insurance for Executive and his wife, dental and life insurance, and
short-term and long-term disability insurance.
The Executive shall be entitled to five weeks of paid vacation. The
Bank shall pay to Executive, at the end of each fiscal year, double his regular
daily rate of compensation (pursuant to the Base Salary) for each day of
vacation he did not take and, instead, worked for either the Company or the
Bank.
4.6 PERQUISITES. The Bank shall provide to Executive, at the Bank's
cost, all perquisites to which other similarly situated executives of the Bank
are entitled to receive and such other perquisites which are suitable to the
character of Executive's position with the Bank and adequate for the performance
of his duties hereunder.
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The Bank shall provide Executive with a vehicle of like make and model
as would be suitable to the character of Executive's position with the Company
(the "Executive's Company Car"). The Bank shall reimburse Executive for the
costs of maintaining the Executive Company Car, including repairs completed at
any time while this Agreement is in effect.
4.7 RIGHT TO CHANGE PLANS. The Bank shall not be obligated to
institute, maintain, or refrain from changing, amending, or discontinuing any
benefit plan, program, or perquisite, so long as such changes are similarly
applicable to executive officers (Vice President or above) generally.
4.8 MINIMUM CAPITAL STOCK INVESTMENT AND REPURCHASE OF STOCK. Executive
agrees to maintain his minimum capital stock investment in the Company (1993
stock purchase of 8,453 shares, ["Shares"]) for as long as this Agreement
remains in effect. Upon voluntary termination for Good Reason as defined in
Section 6.7, involuntary termination (other than for Cause as provided in
Section 6.5) the Company agrees to repurchase from Executive at book value or
the fair market value, whichever is greater, all or any portion of the Shares
which he wishes to sell to the Company. In the event the Company is dissolved,
liquidated, or reorganized where the Bank is the surviving entity, and Executive
voluntarily terminates his employment for Good Reason or is involuntarily
terminated (other than for Cause), the Bank agrees to repurchase from Executive
at book value or at fair market value, whichever is greater, any capital stock
which he may then own in the Bank and which he wishes to sell to the Company;
provided, however, that such repurchase shall not be required to the extent that
the purchase would cause the Bank to fail to meet its minimum capital
requirements.
ARTICLE 5. EXPENSES
The Bank shall pay or reimburse Executive for all ordinary and
necessary expenses, in a reasonable amount, which Executive incurs in performing
his duties under this Agreement including, but not limited to, travel,
entertainment, professional dues and subscriptions, and all dues, fees, and
expenses associated with membership in various social clubs or professional,
business, and civic associations and societies in which Executive's
participation is in the best interest of the Company and/or the Bank.
ARTICLE 6. EMPLOYMENT TERMINATIONS
6.1 TERMINATION DUE TO RETIREMENT OR DEATH. In the event Executive's
employment is terminated while this Agreement is in force by reason of early or
normal retirement (as provided under the then established rules of the Bank's
tax-qualified retirement plan, "Retirement"), or death, Executive's benefits
shall be determined in accordance with the Bank's retirement, survivors'
benefits, insurance, and other applicable programs of the Bank then in effect.
Upon the effective date of such termination, the Bank's obligation under this
Agreement to pay and provide to Executive the elements of pay described in
Sections 4.1, 4.2, and 4.3 shall immediately expire. However, Executive shall
receive all other rights and benefits that he is vested in, pursuant to other
plans and programs of the Bank. In addition, subject to any conflicting terms of
any short-term incentive program which would provide for greater benefits
following such termination, the Bank shall pay to Executive (or Executive's
beneficiaries or estate, as applicable) a pro rata share any accrued bonus for
such fiscal year. This pro rata Bonus amount shall be determined at the sole
discretion of the Bank's Board of Directors, as a function of the number of days
in such fiscal year prior to the date of employment termination in relation to
the total number of days in such fiscal year. The pro rata Bonus shall be paid
within 45 days of the Effective Date of employment termination. Also, all
unvested stock awards (including, but not limited to, any stock options and
restricted stock) will vest in full on the date of termination.
6.2 TERMINATION DUE TO DISABILITY. If Executive becomes disabled or
incapacitated to the extent that he is unable to perform his duties as President
and Chief Executive Officer of the Company and the Bank, he shall nevertheless
continue to receive the following percentages of his compensation, exclusive of
any benefits which may be in effect for Executives of the Company and/or the
Bank, for the following periods of disability: 100% for the first six months and
75% thereafter for the remaining term of this Agreement. Upon returning to
active duties, Executive's full compensation as set forth in this Agreement
shall be reinstated. In the event that Executive returns to active
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employment on other than a full-time basis, then his compensation shall be
reduced in proportion to the time spent in said employment.
There shall be deducted from the amounts paid to Executive hereunder
during any period of disability any amounts actually paid to the Executive
pursuant to any disability insurance or other such similar program which the
Company and/or the Bank have instituted or may institute on behalf of their
Executives for the purpose of compensating Executives in the event of
disability.
For the purpose of this Agreement, Executive shall be deemed disabled
or incapacitated if Executive, due to physical or mental illness, shall have
been absent from his duties with the Bank, on a full-time basis for 90 days;
provided that, if Executive shall not agree with a determination to terminate
him because of disability or incapacity, the question of Executive's ability
shall be submitted to an impartial and reputable physician selected by the
parties hereto and such physician's determination on the question of disability
or incapacity shall be binding.
6.3 VOLUNTARY TERMINATION BY THE EXECUTIVE. Executive may terminate
this Agreement at any time by giving the Board of Directors of the Company and
of the Bank written notice of intent to terminate, delivered at least 60
calendar days prior to the effective date of such termination. This Section 6.3
shall not apply if Executive terminates employment because of Retirement. The
Bank shall pay Executive his full Base Salary, at the rate then in effect as
provided in Section 4.1 herein, through the effective date of termination, plus
all other benefits to which the Executive has a vested right at that time (for
this purpose, Executive shall not be paid any bonus with respect to the fiscal
quarter in which voluntary termination under this Section 6.3 occurs). In the
event that the voluntary termination is for Good Reason, the terms of Section
6.7 herein shall govern the parties' rights and obligations hereunder.
6.4 INVOLUNTARY TERMINATION BY THE COMPANY AND/OR THE BANK WITHOUT
CAUSE. At any time during the term of this Agreement, the Board of the Company
or of the Bank may terminate Executive's employment, as provided under this
Agreement, for reasons other than death, Disability, Retirement, or for Cause,
by notifying Executive in writing of the Bank's and/or the Company's intent to
terminate, at least 90 calendar days prior the effective date of such
termination.
Subject to the terms of Article 7 herein, following the expiration of
the 90-day notice period, the Bank shall pay to Executive a lump sum cash
payment equal to the present value of the sum of the following amounts:
(a) The Base Salary which would have been paid to Executive
throughout the remaining years of the term of this Agreement;
(b) The Performance Bonus amount for the fiscal quarter in which the
termination became effective;
(c) The annualized long-term incentive award for the year in which
termination occurs, at the higher of the targeted level of award
or anticipated actual, multiplied by the remaining years of the
term of this Agreement; and
(d) The amount of Executive's annual club dues in the year of
termination, multiplied by the remaining years of the term of
this Agreement.
For purposes of making the present value calculations described above,
the Bank's Board shall treat such payments as if they were made at the point in
time in the future when each such payment is scheduled to have been made. Such
present value calculations shall at the Federal Discount Rate plus 2.5%.
All unvested stock awards (including, but not limited to, any stock
options and restricted stock) will vest on the date of termination. Further, the
Bank shall continue Executive's health and welfare benefit coverage for the
entire three-year period following employment termination (including health
insurance for his wife), at the same cost, and on the same terms as existed
immediately prior to employment termination. The Bank shall also transfer to
Executive title to the Executive's Company Car, without cost to Executive, and
shall pay to Executive a lump sum cash payment in an amount necessary to fully
gross-up the income tax effect of said transfer.
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The Bank and Executive thereafter shall have no further obligations
under this Agreement. Notwithstanding the foregoing, in the event Executive
obtains comparable employment, the Bank's obligation to continue Executive's
health and welfare benefit coverage pursuant to this Section 6.4 shall
immediately cease. The payments described in this Section 6.4 shall be in part
to compensate Executive for being subject to the provisions of Article 9
hereafter, even though Executive's employment has been terminated without Cause
or for Good Reason as provided in Section 6.7.
6.5 TERMINATION FOR CAUSE. Nothing in this Agreement shall be construed to
prevent the Board of the Bank from terminating Executive's employment under this
Agreement for "Cause."
"Cause" shall be determined by the appropriate Board of Directors
(determined by where the conduct or action in question was taken) in the
exercise of good faith and reasonable judgment; and shall be defined as the
conviction of the Executive for the commission of an act of fraud, embezzlement,
theft, or other criminal act constituting a felony under U.S. laws involving
moral turpitude; or the gross neglect of the Executive in the performance of any
or all material covenants under this Agreement, for reasons other than
Executive's death, Disability, or Retirement. The Board, by majority vote, shall
make the determination of whether Cause exists, after providing the Executive
with notice of the reasons the Board believes Cause may exist, and after giving
Executive the opportunity to respond to the allegation that Cause exists. In the
event this Agreement is terminated by the Board for Cause, the Company shall pay
Executive his Base Salary through the effective date of the employment
termination and Executive shall immediately thereafter forfeit all rights and
benefits (other than vested benefits) he would otherwise have been entitled to
receive under this Agreement. The Bank and Executive, thereafter, shall have no
further obligations under this Agreement provided, however, that the provisions
of Article 9 shall continue to apply.
6.6 OTHER REASONS FOR SUSPENSION/TERMINATION. The following are additional
reasons for this Agreement to be suspended or terminated:
(a) If Executive is suspended from office and/or temporarily
prohibited from participating in the conduct of the Bank's
affairs pursuant to notice served under Section 8(e)(3) or
Section 8(g)(1) of the Federal Deposit Insurance Act
("FDIA") (12 U.S.C. Section 1818[e][3] and Section
1818[g][1]), Company's and the Bank's obligations under this
Agreement shall be suspended as of the date of service,
unless stayed by appropriate proceedings. If the charges in
the notice are dismissed, the Bank may, in its discretion:
(i) pay Executive all or part of the compensation withheld
while its obligations under this Agreement were suspended,
and (ii) reinstate (in whole or in part) any of its
obligations which were suspended.
(b) If Executive is removed from office and/or permanently
prohibited from participating in the conduct of the Bank's
affairs by an order issued under Section 8(e)(4) or Section
8(g)(1) of the FDIA (12 U.S.C. Sections 1818[e][4] and
[g][1]), all obligations of the Executive and the Company
under this Agreement shall terminate as of the effective date
of the order, but vested rights of the Executive and of the
Company and/or the Bank, as of the date of termination, shall
not be affected.
(c) All obligations under this Agreement may be terminated
pursuant to 12 C.F.R. Section 563.39(b)(5) (except to the
extent that it is determined that continuation of the
Agreement for the continued operation of Bank is necessary):
(i) by the Director of the Office of Thrift Supervision
("OTS"), or his/her designee, at the time the Federal
Deposit Insurance Corporation ("FDIC") enters into an
agreement to provide assistance to or on behalf of Bank
under the authority contained in Section 13(c) of the FDIA
(12 U.S.C. Section 1823[c]); or (ii) by the Director of the
OTS, or his/her designee, at the time the Director or
his/her designee approves a supervisory merger to resolve
problems related to operation of Bank or when Bank is
determined by the Director of the OTS in final agency action
to be in an unsafe or unsound condition, but vested rights
of the Executive and of the Bank, as of the date of
termination, shall not be affected.
(d) If Bank is in default, as defined in Section 3(x)(1) of the
FDIA (12 U.S.C. Section 1818[x][1]) to mean an adjudication
or other official determination by any court of competent
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jurisdication, the appropriate federal banking agency or
other public authority pursuant to this Agreement shall
terminate as of the date of default, but vested rights of
the Executive as of the date of termination, shall not be
affected.
6.7 TERMINATION FOR GOOD REASON. At any time during the term of this
Agreement, Executive may terminate this Agreement for Good Reason (as defined
below) by giving the Board of Directors of the Company and/or of the Bank 60
calendar days written notice of intent to terminate, which notice sets forth in
reasonable detail the facts and circumstances claimed to provide a basis for
such termination. Executive's ability to terminate for Good Reason is contingent
upon his agreement to allow the Company and/or the Bank to remedy, within such
60 day period, the events constituting Good Reason.
Upon the failure of the Company and/or the Bank to remedy the events
constituting Good Reason prior to the expiration of the 60 day notice period,
the Good Reason termination shall become effective, and the Bank shall pay and
provide Executive the benefits set forth in Section 6.4 herein (as if the
termination were an involuntary termination without Cause.)
Good Reason shall mean, without Executive's express prior written
consent, the occurrence of any one or more of the following:
(a) The assignment of Executive to duties materially inconsistent
with Executive's authorities, duties, responsibilities, and
status (including titles and reporting requirements) as an
officer of the Company or of the Bank, or a material reduction
or alteration in the nature or status of Executive's
authorities, duties, or responsibilities from those in effect
as of the Effective Date (or as subsequently increased), other
than an insubstantial and inadvertent act that is remedied by
the Company and/or the Bank promptly after receipt of notice
thereof by the Executive;
(b) The Bank's or the Company's requiring Executive to be based at
a location in excess of 35 miles from the location of
Executive's principal job location or office as of the
Effective Date, except for required travel on the Company's or
the Bank's business to an extent substantially consistent with
Executive's present business obligations;
(c) A reduction by the Bank of Executive's Base Salary as in
effect on the Effective Date, or as the same shall be increase
from time to time;
(d) An intentional material reduction by the Company or the
Bank of Executive's aggregate incentive opportunities under
the Company's or Bank's short- and long-term incentive
programs, as such opportunities exist on the Effective Date,
or as such opportunities may be increased after the
Effective Date. For this purpose, a reduction in Executive's
incentive opportunities shall be deemed to have occurred in
the event his targeted annualized award opportunities and/or
the degree of probability of attainment of such annualized
award opportunities, are materially diminished from the
levels and probability of attainment that existed as of the
Effective Date or as such opportunity and/or degree of
probability have been increased from time to time;
(e) The failure of the Company or the Bank to maintain Executive's
relative level of coverage under the Bank's Executive benefit
or retirement plans, policies, practices, or arrangements in
which Executive participates as of the Effective Date, both in
terms of the amount of benefits provided and the relative
level of the executive's participation. For this purpose, the
Company or the Bank may eliminate and/or modify existing
programs and coverage levels; provided, however, that the
Executive's level of coverage under all such programs must be
at least as great as is such coverage provided to executives
who have the same or lesser levels of reporting
responsibilities within the organization;
(f) The failure of the Company or the Bank to obtain a
satisfactory agreement from any successor to the Company
and/or the Bank to assume and agree to perform the Company's
and the Bank's obligations under this Agreement, as
contemplated in Article 11 herein; and
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(g) Any purported termination by the Company and/or the Bank of
Executive's employment that is not effected pursuant to a
notice of termination satisfying the requirements of Article 1
herein, and for purposes of this Agreement, no such purported
termination shall be effective.
Executive's right to terminate employment for Good Reason shall not be
affected by Executive's incapacity due to physical or mental illness.
Executive's continued employment shall not constitute a consent to, or a waiver
of rights with respect to, any circumstance constituting Good Reason herein.
Upon a termination of Executive's employment for Good Reason at any time during
the term of this Agreement, Executive shall be entitled to receive the same
payments and benefits as he is entitled to receive following an involuntary
termination of his employment by the Company and/or the Bank without Cause, as
specified in Section 6.4 herein.
6.8 CHANGE IN CONTROL. In the event of a change in control (with
respect to either the Company or the Bank), as defined in 12 C.F.R. Section
574.4(a) or (b) of the OTS regulations, the Company and/or the Bank shall pay
"delayed recognition bonus" equal to three times Executive's annual
compensation, times the price/book value ration at which the Company or the Bank
is acquired in recognition of Executive having agreed to defer payment of a
higher Base Salary during the first three years of employment in order that the
Company and Bank could reduce their employee compensation costs while the
Company underwent reorganization and the Company and the Bank addressed and
corrected regulators concerns.
ARTICLE 7. NO DUTY TO MITIGATE
Executive shall not be required to mitigate the amount of any payment
provided to him by the Bank as a result of Executive's termination.
ARTICLE 8. EXCISE TAX GROSS-UP
8.1 EQUALIZATION PAYMENT. In the event that Executive becomes entitled
to severance benefits under Sections 6.4, 6.7, or 6.8 herein ("Severance
Benefits"), if any of the Severance Benefits will be subject to the tax (the
"Excise Tax") imposed by Section 4999 of the Internal Revenue Code of 1986, as
amended (the "Code"), or any similar tax that may hereafter be imposed, the Bank
shall pay to Executive in cash an additional amount (the "Gross-Up Payment")
such that the net amount retained by Executive after deduction of (i) any Excise
Tax on the Severance Benefits and (ii) any Federal, state, and local income tax
and Excise Tax on the Gross-Up Payment provided for by this Section 8.1, shall
be equal to the Severance Benefits. Such payment shall be made by the Company or
the Bank to Executive as soon as practicable following the effective date of
termination, but in no event beyond 30 days from such date.
8.2 TAX COMPUTATION. For purposes of determining whether any of the
Severance Benefits will be subject to the Excise Tax and the amounts of such
Excise Tax:
(a) Any other payments or benefits received or to be received by
Executive in connection with a change in control of the Company
or the Bank or Executive's termination of employment (whether
pursuant to the terms of this Plan or any other plan,
arrangement, or agreement with the Company and/or the Bank, or
with any individual, entity, or group of individuals or entities
(individually and collectively referred to in this Section 8.2 as
"Persons" whose actions result in a change in control of the
Company and/or Bank or any Person affiliated with the Company,
the Bank, or such Persons) shall be treated as "parachute
payments" within the meaning of Section 280G(b)(2) of the
Internal Revenue Code, and all "excess parachute payments" within
the meaning of Code Section 280G(b)(1) of the Code shall be
treated as subject to the Excise Tax, unless in the opinion of
tax counsel selected by the Company's and Bank's independent
auditors and acceptable to Executive, such other payments or
benefits (in whole or in part) do not constitute parachute
payments, or unless such excess parachute payments (in whole or
in part) represent reasonable compensation for services actually
rendered
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within the meaning of Code Section 280G(b)(4) of the Code in
excess of the base amount within the meaning of Section
280G(b)(3) of the Code, or are otherwise not subject to the
excise tax;
(b) The amount of the Severance Benefits which shall be treated as
subject to the Excise Tax shall be equal to the lesser of: (i)
the total amount of the Severance Benefits; or (ii) the amount
of excess parachute payments within the meaning of Code
Section 280G(b)(1) of the Code (after applying clause (a)
above); and
(c) The value of any noncash benefits or any deferred payment or
benefit shall be determined by the Company's and the Bank's
independent auditors in accordance with the principles of
Sections 280G(d)(3) and (4) of the Code. The base amount shall
be determined by the Bank's independent auditors in accordance
with the principles of sections 280G(d)(3) of the Code.
For purposes of determining the amount of the Gross-Up Payment,
Executive shall be deemed to pay Federal income taxes at the highest marginal
rate of Federal income taxation in the calendar year in which the Gross-Up
Payment is to be made, and state and local income taxes at the highest marginal
rate of taxation in the state and locality of Executive's residence on the
effective date of employment, net of the maximum reduction in Federal income
taxes which could be obtained from deduction of such state and local taxes.
8.3 SUBSEQUENT RECALCULATION. In the event the Internal Revenue Service
adjusts the computation of the Company under Section 8.1 herein, which
adjustment becomes binding on the Service, the Company, the Bank, and the
Executive, so that Executive did not receive the greatest net benefit, the Bank
shall reimburse Executive for the full amount necessary to make Executive whole,
plus a market rate of interest.
ARTICLE 9. NONCOMPETITION
9.1 PROHIBITION ON COMPETITION. Without the prior written consent of
the Company and the Bank, during the term of this Agreement, and for six months
following the expiration of this Agreement, Executive shall not serve as an
officer or engage directly, or indirectly, in any business or enterprise which
is "in competition" with the Company and/or the Bank or its successors or
assigns. For purposes of this Agreement, a business or enterprise will be deemed
to be "in competition" if it is a banking institution, the headquarter of which
is within 100 miles from the location of Executive's principal job location or
office at the time of termination of employment. However, Executive shall not
thereby be precluded or prohibited from owning passive investments, including
investments in the securities of other financial institutions, so long as such
ownership does not require him to devote substantial time to management or
control of the business or activities in which he has invested.
9.2 DISCLOSURE OF INFORMATION. Executive recognizes that he has access
to and knowledge of certain confidential and proprietary information of the
Company and of the Bank which is essential to the performance of his duties
under this Agreement. Executive will not, during the term of his employment by
the Company and/or the Bank, or within six months following expiration of this
Agreement, in whole or in part, disclose such information to any person, firm,
corporation, association, or other entity for any reason or purpose whatsoever,
nor shall he make use of any such information for his own purposes.
9.3 SPECIFIC PERFORMANCE. The parties recognize that the Company and
the Bank will have no adequate remedy at law for breach by Executive of the
requirements of this Article 9 and, in the event of such breach, the Company the
Bank, and Executive hereby agree that, in addition to the right to seek monetary
damages, the Bank and/or the Company will be entitled to a decree of specific
performance, mandamus, or other appropriate remedy to enforce performance of
such requirements.
ARTICLE 10. INDEMNIFICATION
The Company and the Bank hereby covenant and agree to indemnify and
hold harmless Executive in a manner consistent with the provisions of the
Company's and the Bank's Article of Incorporation.
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ARTICLE 11. ASSIGNMENT
11.1 ASSIGNMENT BY BANK OR COMPANY. This Agreement may and shall be
assigned or transferred to, and shall be binding upon and shall inure to the
benefit of, any successor of the Company or of the Bank, and any such successor
shall be deemed substituted for all purposes of the Company or the Bank under
the terms of this Agreement. As used in this Agreement, the term "successor"
shall mean any person, firm, corporation, or business entity which at any time,
whether by merger, purchase, or otherwise, acquires all or substantially all of
the assets or the business of the Company or of the Bank. Notwithstanding such
assignment, the Company and/or the Bank shall remain, with such successor,
jointly and severally liable for all its obligations hereunder.
Failure of the Company and/or the Bank to obtain the agreement of any
successor to be bound by the terms of this Agreement prior to the effectiveness
of any such succession shall be a breach of this Agreement, and shall
immediately entitle Executive to compensation from the Bank in the same amount
and on the same terms as the Executive would be entitled in the event of a
termination of employment, as provided in Section 6.4 herein.
Except as herein provided, this Agreement may not otherwise be assigned
by the Company and/or the Bank.
11.2 ASSIGNMENT BY EXECUTIVE. The services to be provided by Executive
to the Company and the Bank hereunder are personal to Executive, and his duties
may not be assigned by Executive; provided, however, that this Agreement shall
inure to the benefit of and be enforceable by Executive's personal or legal
representatives, executors, and administrators, successors, heirs, distributees,
devisees, and legatees. If Executive dies while any amounts payable to Executive
hereunder remain outstanding, all such amounts, unless otherwise provided
herein, shall be paid in accordance with the terms of this Agreement to
Executive's devisee, legatee, or other designee or, in the absence of such
designee, to Executive's estate.
ARTICLE 12. DISPUTE RESOLUTION AND NOTICE
12.1 DISPUTE RESOLUTION. Executive shall have the right and option to
elect to have any good faith dispute or controversy arising under or in
connection with this Agreement settled by litigation or by arbitration. The
venue for any litigation concerning the enforcement of this Agreement or a
breach of this Agreement shall be Orange County, Florida. If arbitration is
selected, such proceeding shall be conducted before a panel of three arbitrators
sitting in a location selected by the Executive, but within Orange County,
Florida, in accordance with the rules of the American Arbitration Association
then in effect. Judgment may be entered on the award of the arbitrators in any
court having competent jurisdiction.
All expenses of such litigation or arbitration, including the
reasonable fees and expenses of the legal representative for the Executive, and
necessary costs and disbursements incurred as a result of such dispute or legal
proceeding, and any prejudgment interest, shall be borne by the Bank and/or the
Company.
12.2 NOTICE. Any notices, requests, demands, or other communications
provided for by this Agreement shall be sufficient if in writing and if sent by
registered or certified mail to the Executive at the last address he has filed
in writing with the Company and the Bank or, in the case of the Bank or the
Company, to an executive officer of the Company and an executive officer of the
Bank, at the Company's and the Bank's principal offices.
ARTICLE 13. MISCELLANEOUS
13.1 ENTIRE AGREEMENT. This Agreement supersedes any prior agreements
or understandings, oral or written, between the parties hereto, or between the
Executive, the Bank, and the Company, with respect to the subject matter hereof,
and constitutes the entire agreement of the parties with respect thereto.
13.2 MODIFICATION. This Agreement shall not be varied, altered,
modified, canceled, changed, or in any way amended except by mutual agreement of
the parties in a written instrument executed by the parties hereto or
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their legal representatives.
13.3 SEVERABILITY. In the event that any provision or portion of this
Agreement shall be determined to be invalid or unenforceable for any reason, the
remaining provisions of this Agreement shall be unaffected thereby and shall
remain in full force and
13.4 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original, but all of which
together will constitute one and the same Agreement.
13.5 TAX WITHHOLDING. The Bank may withhold from any benefits payable
under this Agreement all federal, state, city, or other taxes as may be required
pursuant to any law or governmental regulation or ruling.
13.6 BENEFICIARIES. Executive may designate one or more persons or
entities as the primary and/or contingent beneficiaries of any amounts to be
received under this Agreement. Such designation must be in the form of a signed
writing acceptable to the Board or the Board's designee. Executive may make or
change such designation at any time.
ARTICLE 14. GOVERNING
To the extent not preempted by federal law, the provisions of this
Agreement shall be construed and enforced in accordance with the laws of the
State of Florida.
IN WITNESS WHEREOF, Executive has executed, the Company (pursuant to a
resolution adopted at a duly constituted meeting of the Company's Board of
Directors) has executed this Agreement, and the Bank (pursuant to a resolution
adopted at a duly constituted meeting of the Bank's Board of Directors) has
executed this Agreement as of December 18, 1998.
FEDERAL TRUST CORPORATION EXECUTIVE:
By:/s/George W. Foster /s/James V. Suskiewich
---------------------- ----------------------
George W. Foster James V. Suskiewich
On behalf of the
Board of Directors
Attest:/s/Lori MacTavish
------------------
FEDERAL TRUST BANK
By:/s/George W. Foster
----------------------
George W. Foster
On behalf of the
Board of Directors
76
EXHIBIT 10.2
FIRST AMENDMENT
TO THE AMENDED EMPLOYMENT AGREEMENT
BY AND AMONG FEDERAL TRUST CORPORATION,
FEDERAL TRUST BANK, AND
JAMES V. SUSKIEWICH
THIS AMENDMENT TO THE AMENDED EMPLOYMENT AGREEMENT is made and entered into
this 9th of February, 1999, by and between Federal Trust Corporation (the
"Company"), Federal Trust Bank (the "Bank"), and James V. Suskiewich (the
"Executive");
WHEREAS, the parties entered into that certain employment agreement, dated
December 18, 1998 (the "Agreement");
WHEREAS the parties mutually desire and deem it necessary to amend the
Agreement in certain respects;
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
1. Amendment to Article 1. The parties hereby agree to delete Article 1
of the Agreement and replace it with the following, the underlined portions of
which reflect the changes from the hereby deleted Article 1:
ARTICLE 1. TERM OF EMPLOYMENT
The Company and the Bank hereby agree to employ Executive and Executive
hereby agrees to continue to serve the Company and the Bank, in
accordance with the terms and conditions set forth herein, for an
initial period of three years, commencing as of the Effective Date of
this Agreement, as indicated above. Upon each new day of the three year
period of employment from the Effective Date until the Executive's 65th
birthday, the term of this Agreement automatically shall be extended
for one additional day, to be added to the end of the then-existing
three year term. Accordingly, at all times prior to (I) the Executive's
attaining age 65 and (ii) a notice of employment termination (or an
actual termination), the term of this Agreement shall be three full
years. However, either party may terminate this Agreement by giving the
other party written notice of intent not to renew. Additionally, the
Board of the Bank and of the Company shall, on an annual basis, review
this Agreement and document their justification and approval in their
respective board minutes. The automatic extensions of the term of this
Agreement shall immediately be suspended upon termination of Executive
by reason of death, Disability (see Section 6.2), or Retirement (see
Section 6.1), or an employment termination made voluntarily by
Executive (other than for Good Reason pursuant to Section 6.7), or
involuntarily for Cause (pursuant to Section 6.5), or for any of the
reasons set out in Section 6.6. The provisions applicable to such
suspensions of the term of this Agreement are set forth in those
Sections pertaining to each of such types of employment termination.
In the event Executive gives notice of employment termination, the term
of this Agreement shall expire upon the ninetieth (90th) day following
the delivery to the Company and the Bank of such notice of employment
termination. Except as otherwise provided in the following paragraph
with respect to a voluntary termination for Good Reason (see Section
6.7), a voluntary employment termination by Executive shall result in
the termination of the rights and obligations of the parties under this
Agreement; provided, however, that the terms and provisions of Article
9 shall continue to apply.
In the event the Company and the Bank desire to involuntarily terminate
the employment of Executive (for purposes of this Agreement, a
voluntary employment termination by Executive for Good Reason shall be
treated as an involuntary termination of the Executive's employment
without Cause), the Company and the Bank shall each deliver to
Executive a notice of employment termination, and the following
provisions shall apply:
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(a) In the event the involuntary termination is for Cause
(see Section 6.5 herein), the term of this Agreement
shall terminate on the 90th day following delivery to
Executive of such notice of termination. Such a
termination for Cause shall result in the termination
of all rights and obligations of the parties under
this Agreement; provided, however, that the terms and
provisions of Article 9 shall continue to apply, and
Section 6.5 shall apply until payments required
thereunder have been made.
(b) In the event the involuntary termination is without
Cause, Executive shall be entitled to receive the
severance benefits set forth in Section 6.4 herein;
provided, however, that the terms and provisions of
Article 9 shall continue to apply and Section 6.4
shall apply until payments required thereunder have
been made.
2. Amendment to Article 6, Subsection 5. The parties hereby agree to
delete Article 6, Subsection 5, of the Agreement and replace it with the
following, the underlined portions of which reflect the changes from the hereby
deleted Article 6, Subsection 5:
6.5 TERMINATION FOR CAUSE. Nothing in this Agreement shall be construed
to prevent the Board of the Bank from terminating Executive's employment under
this Agreement for "Cause."
"Cause" shall be determined by the appropriate Board of Directors
(determined pursuant to the law of the venue where the conduct or
action in question was taken) in the exercise of good faith and
reasonable judgment; and shall include termination because of the
Executive 's personal dishonesty, incompetence, willful misconduct,
breach of fiduciary duty involving personal profit, intentional failure
to perform stated duties, willful violation of any law, rule, or
regulation (other than traffic violations or similar offenses) or final
cease- and-desist order, or material breach of any provision of the
contract. The Board, by majority vote, shall make the determination of
whether Cause exists, after providing the Executive with notice of the
reasons the Board believes Cause may exist, and after giving Executive
the opportunity to respond to the allegation that Cause exists. In the
event this Agreement is terminated by the Board for Cause, the Company
shall pay Executive his Base Salary through the effective date of the
employment termination and Executive shall immediately thereafter
forfeit all rights and benefits (other than vested benefits) he would
otherwise have been entitled to receive under this Agreement. The Bank
and Executive, thereafter, shall have no further obligations under this
Agreement provided, however, that the provisions of Article 9 shall
continue to apply.
IN WITNESS WHEREOF, Executive has executed, the Company (pursuant to a
resolution adopted at a duly constituted meeting of the Company's Board of
Directors) has executed this Agreement, and the Bank (pursuant to a resolution
adopted at a duly constituted meeting of the Bank's Board of Directors) has
executed this Agreement as of February 9, 1999.
FEDERAL TRUST CORPORATION EXECUTIVE:
By: /s/ George W. Foster /s/ James V. Suskiewich
-------------------- -----------------------
George W. Foster, On Behalf of the James V. Suskiewich
Board of Directors
FEDERAL TRUST BANK
By:/s/George W. Foster
-------------------
George W. Foster, On Behalf of the
Board of Directors
78
EXHIBIT 10.3
AMENDED AND RESTATED
EMPLOYMENT AGREEMENT
BY AND AMONG
FEDERAL TRUST BANK,
FEDERAL TRUST CORPORATION
AND
AUBREY H. WRIGHT
THIS EMPLOYMENT AGREEMENT ("Agreement") is being entered into by and among
Federal Trust Bank, a federally-chartered stock savings bank which has its
principal office in Winter Park, Florida ("Bank"), Federal Trust Corporation, a
Florida corporation ("Corporation") and Aubrey H. Wright ("Employee").
WITNESSETH:
WHEREAS, the Employee is the Chief Financial Officer of the Bank and
the Corporation and has developed an intimate and thorough knowledge of the
business methods and operations of the Bank and the Corporation;
WHEREAS, the retention of the Employee's services for and on behalf of
the Bank and the Corporation is of material importance to the preservation and
enhancement of the value of the business of the Bank and the Corporation; and
WHEREAS, the Employee, the Bank, through its Board of Directors, and
the Corporation, through its Chief Executive Officer and President, have agreed
to this Agreement in order to update and clarify their relationship and to
comply with current government regulations;
NOW, THEREFORE, in consideration of the mutual covenants herein set
forth, the Bank, the Corporation and the Employee do hereby agree as follows:
I. TERM OF EMPLOYMENT
Section 1.1 The Bank shall employ the Employee as its Chief Financial
Officer, as hereinafter provided, and the Employee hereby accepts said
employment and agrees to render such services to the Bank on the terms and
conditions set forth in this Agreement commencing on the "Effective Date" as
defined in Section 8.5 herein, and terminating September 30, 1998, unless
further extended or terminated in accordance with the terms and conditions
hereinafter set forth. During the term of this Agreement, the Employee agrees to
perform such duties as are customarily performed by one holding the position of
Chief Financial Officer of a financial institution. The Board of Directors of
the Bank and the Corporation shall review this Agreement and the Employee's
performance on or before September 15, 1997, and annually thereafter, in order
to determine whether to extend this Agreement. The decision to extend the term
of this Agreement for an additional year is within the sole discretion of the
Board of Directors. References herein to the term of this Agreement shall refer
both to the initial term and successive terms.
Section 1.2 During the term of this Agreement, the Employee shall
perform such executive services for the Bank as may be consistent with his
titles and from time to time be assigned to him by the Bank's Board of
Directors. The Employee shall devote his best efforts, including such portion of
his time and effort to the affairs and business of the Bank and the Corporation
as is customarily provided by a Chief Financial Officer for such companies.
Section 1.3 The services of the Employee shall be rendered principally
in Winter Park, Florida, but he shall do such traveling on behalf of the Bank
and the Corporation as may be reasonably required.
II. COMPETITIVE ACTIVITIES
Section 2.1 Employee agrees that during the term of his employment
hereunder, except with the express consent of the Board of Directors of the Bank
or the Corporation, he will not, directly or indirectly, engage or participate
in, become a director of, or render advisory or other services for, or in
connection with, or become interested in, or make any financial investment in
any firm, corporation, or business enterprise competitive with or to any
business of the Bank; provided, however, that the Employee shall not thereby be
precluded or prohibited from owning passive investments, including investments
in the securities of other financial institutions, so long as such ownership
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does not require him to devote substantial time to management or control of the
business or activities in which he has invested.
Section 2.2 Employee agrees and acknowledges that by virtue of his
employment hereunder, he will maintain an intimate knowledge of the activities
and affairs of the Bank, including trade secrets and other confidential matters.
As a result, also because of the special, unique, and extraordinary services
that the Employee is capable of performing for the Bank or one of their
competitors, the Employee recognizes that the services to be rendered by him
hereunder are of a character giving them a peculiar value, the loss of which
cannot be adequately or reasonably compensated for by damages. Employee,
therefore, agrees that during the term of this Agreement, and for a period of
six (6) months after either a voluntary termination by the Employee (except for
a termination effected pursuant to the provisions of Section 7.10 herein) or due
to a termination resulting from termination of the Employee for cause, the
Employee shall not:
(a) divulge any matter pertaining to the activities and affairs of the
Bank, including without limitation, trade secrets and other confidential matters
except as may be required by law; and
(b) become employed, directly or indirectly, whether as an employee,
independent contractor, consultant, or otherwise, in the financial services
industry with any business enterprise or business entity competitive with or to
any business of the Bank, and either maintains offices or does business in
Orange County, Florida.
Employee agrees that breach of any of these covenants by the Employee
shall constitute irreparable harm to the Bank for which the Bank does not have
an adequate remedy at law, and that the Bank is, therefore, entitled to
immediate injunctive or other equitable relief to restrain the Employee from
violating the provisions of this Agreement. The right to such injunctive and
equitable relief shall survive the termination for cause of the Employee by the
Bank or the voluntary termination of this Agreement by the Employee except if
such termination is affected pursuant to the provisions of Section 7.10 herein.
Employee hereby agrees that the duration of the anticompetitive
covenant set forth herein is reasonable, and its geographic scope not unduly
restrictive.
III. COMPENSATION
Section 3.1 The Bank will compensate and pay the Employee for services
during the term of the Agreement at a minimum base salary of $75,000 per year
for the year ending December 31, 1995, with annual salary increases, if any,
thereafter in an amount determined by the Board of Directors.
Section 3.2 At such time as the Bank meets the "Well-Capitalized"
definition under federal banking regulations, and quarterly after-tax earnings
equal or exceed 0.50 percent of average quarterly assets on an annualized basis,
the Bank shall pay to the Employee a bonus ("Quarterly Bonus") equal to one (1%)
of the Bank's quarterly net income before taxes (excluding extraordinary gains
or losses). Quarterly Bonus amounts shall be determined as of the close of each
of the Bank's fiscal quarters and shall be paid to the Employee within 45 days
of each quartered-end. Aggregate Quarterly Bonuses in any one fiscal year shall
not exceed the amount of Employee's annual base salary for such fiscal year.
Section 3.3 Employee may be granted an annual performance bonus by the
Board of Directors of the Bank. The granting of a bonus shall be on a subjective
basis, considering the Employee's performance and the performance of the Bank.
Any bonuses awarded the Employee by the Bank shall not be considered as nor
constitute part of the Employee's base compensation for the purposes of this
Agreement.
IV. PARTICIPATING IN RETIREMENT AND MEDICAL PLANS,
LIFE INSURANCE AND DISABILITY
Section 4.1 Except as otherwise stated herein, the Employee shall be
entitled to participate in and receive the benefits of any plans of the Bank
relating to pension, profit-sharing, or other retirement benefits. This
includes, but shall not be limited to, participation in the Federal Trust
Corporation's ESOP program.
Except as otherwise stated herein, the Employee shall also be entitled
to participate in and receive the benefits of any plans of the Bank relating to
medical coverage or reimbursements that the Bank may adopt for the benefit of
their employees. The Bank shall also provide hospitalization coverage and
expenses for the Employee and his spouse.
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Section 4.2 (a) If the Employee shall become disabled or incapacitated
to the extent that he is unable to perform his duties as Chief Financial Officer
of the Bank and the Corporation, he shall nevertheless continue to receive the
following percentages of his compensation, exclusive of any benefits which may
be in effect for employees of the Bank, under Section 4.1 herein, for the
following periods of his disability: 100% for the first six (6) months and 75%
hereafter for the remaining term of this Agreement. Upon returning to active
duties, the Employee's full compensation as set forth in this Agreement shall be
reinstated. In the event that the Employee returns to active employment on other
than a full-time basis, then his compensation (as set forth in Section 3.1
herein) shall be reduced in proportion to the time spent in said employment.
(b) There shall be deducted from the amounts paid to the Employee
hereunder during any period of disability, as described in Section 4.2(a)
herein, any amounts actually paid to the Employee pursuant to any disability
insurance or other similar such program which the Bank has instituted or may
institute on behalf of their employees for the purpose of compensating employees
in the event of disability.
(c) For the purpose of this Agreement, the Employee shall be deemed
disabled or incapacitated if the Employee, due to physical or mental illness,
shall have been absent from his duties with the Bank, on a full-time basis for
three (3) consecutive months; provided that, if the Employee shall not agree
with a determination to terminate him because of disability or incapacity, the
question of the Employee's ability shall be submitted to an impartial and
reputable physician selected by the parties hereto and such physician's
determination on the question of disability or incapacity shall be binding.
V. ADDITIONAL COMPENSATION AND BENEFITS
Section 5.1 During the term of this Agreement, the Employee will be
entitled to participate in and receive the benefits of any stock option, stock
ownership, profit-sharing, or other plans, benefits and privileges given to
employees and executives of the Bank which are currently in effect at the
execution of this Agreement or which may come into existence thereafter, to the
extent the Employee is otherwise eligible and qualifies to so participate in and
receive such benefits or privileges. The Bank and/or the Corporation shall not
make any changes in such plans, benefits or privileges which would adversely
affect the Employee's rights or benefits thereunder, unless such change occurs
pursuant to a program applicable to all executive officers (Vice President or
above) of the Bank or the Corporation, whichever the case might be, and does not
result in a proportionately greater adverse change in the rights of or benefits
to the Employee as compared with any other executive officer of the Bank or the
Corporation. Furthermore, the Bank shall not make any changes in plans, benefits
or privileges in effect at the execution of this Agreement which would adversely
affect the Employee's Rights or benefits thereunder, except by the mutual
agreement of the parties. Nothing paid to the Employee under any plan or
arrangement presently in effect or made available in the future shall be deemed
to be in lieu of the salary payable to the Employee pursuant to Section 3.1
herein.
Section 5.2 Employee shall be entitled to three weeks paid vacation.
VI. EXPENSES
Section 6.1 The Bank and/or the Corporation shall reimburse the
Employee or otherwise provide for or pay for all reasonable expenses incurred by
the Employee in furtherance or in connection with the business of the Bank or
the Corporation including, but not by way of limitation, automobile and
traveling expenses, along with reasonable entertainment expenses (whether
incurred at the Employee's residence, while traveling, or otherwise), subject to
such reasonable limitations as may be established by the respective Boards of
Directors.
VII. TERMINATION
Section 7.1 The Bank shall have the right, at any time upon prior
written notice of termination satisfying the requirements of Section 7.10(c)
herein, to terminate the Employee's employment hereunder, including termination
for just cause. For the purpose of this Agreement, termination for "just cause"
shall mean termination for personal dishonesty, incompetence, willful
misconduct, material breach of fiduciary duty, intentional failure to perform
the duties stated in this Agreement, willful violation of any law, rule or
regulation (other than traffic violations or similar offenses), willful
violation of a final cease-and-desist order, willful or intentional breach or
negligence or misconduct in the performance of such duties or material breach of
any provision of this Agreement as determined by a court of competent
jurisdiction or in final agency action by a federal or state regulatory agency
having jurisdiction over the Bank. For purposes of this Section, no act, or
failure to act, on the Employee's part shall be considered "willful" unless
done, or omitted to be done, by him not in good faith and without reasonable
belief that his action or omission was in the best
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interest of the Bank or the Corporation; provided that any act or omission to
act by the Employee in reasonable reliance upon an opinion of counsel to the
Bank or the Corporation shall not be deemed to be willful.
Section 7.2 In the event the Employee is terminated for just cause
pursuant to Section 7.1 herein, the Employee shall have no right to compensation
or other benefits for any period after such date of termination. If the Employee
is terminated by the Bank other than for just cause pursuant to Section 7.1
herein, and other than in connection with a change in control of the Bank, as
defined herein, the Employee's right to compensation and other benefits under
this Agreement shall be as set forth in Sections 7.10(e) and (f) herein. In the
event the Employee is terminated by the Bank other than for just cause pursuant
to Section 7.1 herein, but in connection with a change in control of the Bank as
defined herein, the Employee's right to compensation and other benefits under
this Agreement shall be as set forth in Sections 7.10(d)(e) and (f) herein.
Section 7.3 Employee shall have the right, upon prior written notice of
termination of not less than thirty (30) days satisfying the requirements of
Section 7.10(c) herein, to terminate his employment hereunder, but in such
event, the Employee shall have no right after the date of termination to
compensation or other benefits as provided in this Agreement, unless such
termination is for "good reason", as defined, pursuant to Section 7.10(a)
herein. If the Employee provides a notice of termination for good reason, the
date of termination shall be the date on which a notice of termination is given.
Section 7.4 If the Employee is suspended from office and/or temporarily
prohibited from participating in the conduct of the Bank's affairs pursuant to
notice served under Section 8(e)(3) or Section 8(g)(1) of the Federal Deposit
Insurance Act ("FDIA") (12 U.S.C. Section 1818[e][3] and Section 1818[g][1]),
the Bank's obligations under this Agreement shall be suspended as of the date of
service, unless stayed by appropriate proceedings. If the charges in the notice
are dismissed, the Bank may, in its discretion: (i) pay the Employee all or part
of the compensation withheld while its obligations under this Agreement were
suspended, and (ii) reinstate (in whole or in part) any of its obligations which
were suspended.
Section 7.5 If the Employee is removed from office and/or permanently
prohibited from participating in the conduct of the Bank's affairs by an order
issued under Section 8(e)(4) or Section 8(g)(1) of the FDIA (12 U.S.C. Sections
1818[e](4] and [g][1]), all obligations of the Bank under this Agreement shall
terminate as of the effective date of the order, but vested rights of the
Employee and the Bank as of the date of termination shall not be affected.
Section 7.6 All obligations under this Agreement may be terminated
pursuant to 12 C.F.R. Section 563.39(b)(5) (except to the extent that it is
determined that continuation of the Agreement for the continued operation of the
Bank is necessary): (i) by the Director of the Office of Thrift Supervision
("OTS"), or his/her designee, at the time the Federal Deposit Insurance
Corporation ("FDIC") or Resolution Trust Corporation enters into an agreement to
provide assistance to or on behalf of the Bank under the authority contained in
Section 13(c) of the FDIA (12 U.S.C. Section 1823[c]); or (ii) by the Director
of the OTS, or his/her designee, at the time the Director or his/her designee
approves a supervisory merger to resolve problems related to operation of the
Bank or when the Bank is determined by the Director of the OTS in final agency
action to be in an unsafe or unsound condition, but vested rights of the
Employee and the Bank as of the date of termination shall not be affected.
Section 7.7 If the Bank is in default, as defined in Section 3(x)(1) of
the FDIA (12 U.S.C. Section 1813[x][1]) to mean an adjudication or other
official determination by any court of competent jurisdiction, the appropriate
federal banking agency or other public authority pursuant to which a
conservator, receiver or other legal custodian is appointed for the Bank, all
obligations under this Agreement shall terminate as of the date of default, but
vested rights of the Employee and the Bank as of the date of termination shall
be not affected.
Section 7.8 In the event that the Employee is terminated in a manner
which violates any provisions of this Agreement, as determined by a court of
competent jurisdiction, the Employee shall be entitled to reimbursement for all
reasonable costs, including attorneys fees, in challenging such termination.
Further, because of economic disparity among the Bank, the Corporation and the
and the Employee, the Bank and/or the Corporation (jointly and severally)
agree(s) to pay for the Employee's reasonable attorneys' fees and costs up to
$20,000 to enforce the terms of this Agreement or recovered damages for breach
of this agreement as follows; up to $10,000 at the commencement of litigation
and up to an additional $10,000 during the course of litigation. In the event
the Employee is unsuccessful in his claim or defense, the Employee shall
reimburse the Bank for any attorney' fees, expenses and costs that have been
advanced by the Bank. If the Employee is successful, any attorneys' fee award
will be reduced by the amount of attorney's fees and costs that have been
advanced. Such reimbursement shall be in addition to all rights to which the
Employee is otherwise entitled under this Agreement.
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Section 7.9 This Agreement shall be terminated upon the death of the
Employee during the term of this Agreement; provided that, if the Employee has
heirs, the estate of the Employee shall be entitled to receive payment in an
amount equal to 75% of the Employee's total annual compensation, at the date of
death, as herein defined, for the remainder of the term of this Agreement or
twelve (12) months, whichever is longer. For purposes of this ARTICLE VII annual
compensation shall equal the Employee's base salary in effect at the time of
termination plus an amount equal to (i) the previous 4 Quarterly Bonus payments
made to the Employee, or (ii) 4 times the amount of the most recent Quarterly
Bonus payment, whichever is higher. Unless alternative arrangements are made by
the Bank and/or the Corporation and the legal representative of the Employee's
estate, such payment shall be made in one installment due and payable within
thirty (30) days of the Employee's death.
Section 7.10(a) Employee may terminate his employment hereunder for
good reason. For purposes of this Agreement, "good reason" shall mean (i) a
failure by the Bank or the Corporation to comply with any material provision of
this Agreement, which failure has not been cured within ten (10) days after a
notice of such noncompliance has been given by the Employee to the Bank or the
Corporation; or (ii) subsequent to a change in control as defined in Section
7.10(b) and without the Employee's express written consent, any of the following
shall occur: the assignment to the Employee of any duties inconsistent with the
Employee's positions, duties, responsibilities and status with the Bank or the
Corporation immediately prior to a change in control; a change in the Employee's
reporting responsibilities, titles or offices as in effect immediately prior to
a change in control of the Bank or the Corporation; any removal of the Employee
from, or any failure to re-elect the Employee to, any of such positions, except
in connection with a termination of employment for just cause, disability,
death, or removal pursuant to Sections 7.1 or 7.5 herein; a reduction by the
Bank or the Corporation in the Employee's annual salary as in effect immediately
prior to a change in control; the failure of the Bank or the Corporation to
continue in effect any bonus, benefit or compensation plan, life insurance plan,
health and accident plan or disability plan in which the Employee is
participating at the time of a change in control of the Bank or the Corporation,
or the taking of any action by the Bank or the Corporation which would adversely
affect the Employee's participation in or materially reduce the Employee's
benefits under any of such plans or the transfer of the Employee to any location
outside of Orange County, Florida, or the assignment of substantial duties to
the Employee to be completed outside Orange County, Florida, without the prior
consent of the Employee.
(b) For purposes of this Agreement, a "change in control" shall mean
a change in control with respect to either the Bank or the Corporation as
defined in 12 C.F.R. Sections 574.4 (a) or (b) of the OTS regulations.
(c) Any termination of the Employee's employment by the Bank or by
the Employee shall be communicated by written notice of termination to the other
party hereto. For purposes of this Agreement, a "notice of termination" shall
mean a dated notice which shall (i) indicate the specific termination provision
in the Agreement relied upon; (ii) set forth in reasonable detail the facts and
circumstances claimed to provide a basis for termination of the Employee's
employment under the provision so indicated; (iii) specify a date of
termination, which shall be not less than thirty (30) days nor more than
forty-five (45) days after such notice of termination is given, except in the
case of the Bank's termination of the Employee's employment for just cause
pursuant to Section 7.1 herein, in which case the notice of termination may
specify a date of termination as of the date of such notice of termination is
given; and (iv) be given in the manner specified in Section 8.3 herein.
(d). In the event of a change in control as provided in Section 7.10(b)
herein, the Corporation shall to pay the Employee a special incentive bonus
equal to two times the Employee's annual compensation then in effect, times the
price/book value ratio at which the Bank or the Corporation is acquired.
(e) If the Employee shall terminate his employment for good reason as
defined in Section 7.10(a)(i) herein, or if the Employee is terminated by the
Bank or the Corporation for other than just cause pursuant to Section 7.1
herein, then in lieu of any further salary payments to the Employee for periods
subsequent to the date of termination, the Employee shall be paid as severance
an amount which would equal the Employee's current annual salary for the
remainder of the term of the Agreement, plus any special incentive bonus which
the Employee would have been entitled to under Section 7.10(d) herein, should a
change in control of the Corporation or the Bank occur within twelve (12) months
of the Employees' voluntary termination for good reason. Such payments to be
made in substantially equal semi-monthly installments on the fifteenth and last
days of each month until paid in full.
(f) Unless the Employee is terminated for just cause pursuant to
Section 7.1 Sections 7.4 through 7.7 herein, or pursuant to a termination of
employment by the Employee for other than good reason, the Bank and the
Corporation shall maintain in full force and effect, for the continued benefit
of the Employee for twenty-four (24) months, all employee benefit plans and
programs in which the Employee was entitled to participate immediately prior to
the date of termination, provided that the Employee's continued participation is
possible under the general terms and
83
<PAGE>
provisions of such plans and programs. Further, the Bank and the Corporation
shall pay for the same or similar benefits if such benefits are available to the
employee on an individual or group basis as a result of contractual or statutory
provisions requiring or permitting such availability including, but not limited
to, health insurance covered under COBRA. At the Employee's option, in lieu of
continued benefits over future years as provided in this Section 7.10(f),
Employee shall be paid a lump sum payment equal to the present value of each
benefits, based upon a discount rate equal to the Federal Funds Rate as
published by the Wall Street Journal on the date of termination.
(g) Employee shall not be required to mitigate the amount of any
payment provided for in Sections 7.10(d) and (e) of this Agreement by seeking
other employment or otherwise.
(h) Notwithstanding the foregoing or anything contained herein to the
contrary, in no event shall the total amount of payments made under this
Agreement on account of termination under Subsection 8(a) (vi) above exceed the
aggregate present value of three times the "base amount" minus one dollar. "Base
amount" means the average annualized compensation income from the Company
includible in the Executive's gross income for Federal income tax purposes over
the five-year period preceding the year in which the Executive's employment is
terminated. This paragraph, and the language therein, shall be interpreted
consistently with Section 280G of the Internal Revenue Code of 1986, as amended,
and any regulations thereunder.
VIII. MISCELLANEOUS
Section 8.1 Notwithstanding anything to the contrary herein contained,
the payment or obligation to pay any monies, or granting of any rights or
privileges to the Employee as provided in this Agreement shall not be in lieu or
derogation of the rights and privileges that the Employee now has under any plan
or benefit presently outstanding.
Section 8.2 This Agreement may not be modified, changed, amended, or
altered except in writing signed by the Employee or by his duly authorized
representative, and by a duly authorized representative of the Bank and the
Corporation.
Section 8.3 All notices given or required to be given herein shall be
in writing, sent by United States first-class certified or registered mail,
postage prepaid, by way of overnight carrier or by hand delivery. If to the
Employee (or to the Employee's spouse or estate upon the Employee's death)
notice shall be sent to the Employee's last-known address, and if to the Bank
and/or the Corporation notice shall be sent to the corporate headquarters. All
such notices shall be effective when deposited in the mail if sent via
registered mail, or upon delivery if by hand delivery or sent via overnight
carrier. Either party, by notice in writing, may change or designate the place
for receipt of all such notices.
Section 8.4 No course of conduct by the Bank, the Corporation or the
Employee and no delay or omission of the Bank, the Corporation or the Employee
to exercise any right or power given under this Agreement shall: (i) impair the
subsequent exercise of any right or power, or (ii) be construed to be a waiver
of any default or any acquiescence in or consent to the curing of any default
while any other default shall continue to exist, or be construed to be a waiver
of such continuing default or of any other right or power that shall theretofore
have arisen. Any power and/or remedy granted by law and by this Agreement to any
party hereto may be exercised from time to time, and as often as may be deemed
expedient. All such rights and powers shall be cumulative to the fullest extent
permitted by law.
Section 8.5 The "Effective Date" of this Agreement shall be retroactive
to September 1, 1995.
Section 8.6 All references herein to particular sections of a statute,
rule or regulation or to a particular disclosure item or schedule shall also be
deemed to be a reference to any successor section, statute, rule, regulation,
disclosure item or schedule.
Section 8.7 The invalidity or unenforceability of any provision or
provisions of this Agreement shall not affect the validity or enforceability of
any other provision of this Agreement, which shall remain in full force and
effect.
Section 8.8 This Agreement supersedes and replaces all previous
employment agreements or amendments thereto among the Bank, the Corporation and
the Employee.
84
<PAGE>
IX. SUCCESSORS, ETC.
Section 9.1 This Agreement shall inure to the benefit of and be binding
upon the Employee, and to the extent applicable, his heirs, assigns, executors,
and personal representatives, and the Bank and the Corporation, their
successors, and assigns, including, without limitation, any person, partnership,
or corporation which may acquire all or substantially all of the Bank's or the
Corporation's assets and business, or with or into which the Bank or the
Corporation may be consolidated or merged, and this provision shall apply in the
event of any subsequent merger, consolidation, or transfer, unless such merger
or consolidation or subsequent merger or consolidation is a transaction of the
type which would result in termination under Sections 7.6 and 7.7 herein.
Section 9.2 This Agreement is personal to each of the parties and
neither party may assign or delegate any of their rights or obligations under
this Agreement without the prior written consent of the other party.
X. APPLICABLE LAW AND VENUE
Section 10.1 This Agreement shall be governed in all respects and be
interpreted by and under the laws of Florida, except to the extent that such law
may be preempted by applicable federal law, including regulations, opinions or
orders duly issued by the OTS or FDIC ("Federal Law"), in which event this
Agreement shall be governed and be interpreted by and under Federal Law.
Section 10.2 The venue for any litigation concerning the enforcement of
this Agreement or a breach of this Agreement shall be Orange County, Florida.
IN WITNESS WHEREOF, the parties hereto have duly executed this Amended
and Restated Agreement on this 8th day of September, 1997
FEDERAL TRUST BANK
/s/ Clair I. Ford By:/s/ James V. Suskiewich
- ----------------- -----------------------
Witness James V. Suskiewich
Chairman of the Board
FEDERAL TRUST CORPORATION
/s/ Clair I. Ford By:/s/James V. Suskiewich
- ----------------- -----------------------
Witness James V. Suskiewich
Chairman of the Board
/s/ Clair I. Ford /s/Aubrey H. Wright
- ----------------- -------------------
Witness Aubrey H. Wright
(Employee)
85
EXHIBIT 21
SUBSIDIARIES
Subsidiaries of the Registrant Jurisdiction of Incorporation
- ------------------------------ -----------------------------
Federal Trust Bank United States of America
Name under which business is conducted
- --------------------------------------
Federal Trust Bank
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> Dec-31-1999
<PERIOD-START> Jan-01-1999
<PERIOD-END> Dec-31-1999
<EXCHANGE-RATE> 1
<CASH> 2,598
<INT-BEARING-DEPOSITS> 4,470
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1,921
<INVESTMENTS-CARRYING> 6,571
<INVESTMENTS-MARKET> 6,501
<LOANS> 186,660
<ALLOWANCE> 1,438
<TOTAL-ASSETS> 211,278
<DEPOSITS> 153,524
<SHORT-TERM> 30,200
<LIABILITIES-OTHER> 8,199
<LONG-TERM> 5,000
0
0
<COMMON> 49
<OTHER-SE> 14,306
<TOTAL-LIABILITIES-AND-EQUITY> 211,278
<INTEREST-LOAN> 13,324
<INTEREST-INVEST> 271
<INTEREST-OTHER> 288
<INTEREST-TOTAL> 13,883
<INTEREST-DEPOSIT> 7,016
<INTEREST-EXPENSE> 1,805
<INTEREST-INCOME-NET> 5,063
<LOAN-LOSSES> 320
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 5,204
<INCOME-PRETAX> 1,148
<INCOME-PRE-EXTRAORDINARY> 1,148
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,109
<EPS-BASIC> 0.22
<EPS-DILUTED> 0.22
<YIELD-ACTUAL> 7.37
<LOANS-NON> 2,656
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 2,878
<ALLOWANCE-OPEN> 1,136
<CHARGE-OFFS> 39
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<ALLOWANCE-CLOSE> 1,438
<ALLOWANCE-DOMESTIC> 1,438
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
