Final Prospectus
Table of Contents
PROSPECTUS   

Filed Pursuant to Rule 424(b)(3)

Registration No. 333-116613       

 

1,200,000 Shares

 

LOGO

 

Common Stock

 

Federal Trust Corporation is offering 1,200,000 shares of its common stock. We have engaged Kendrick Pierce Securities, Inc. to act on a best efforts basis as our Sales Agent in connection with the offering. Our common stock is listed on the American Stock Exchange under the symbol “FDT.” On July 2, 2004, the closing sale price of our common stock was $7.60 per share.

 

Because the offering is being conducted on a best efforts basis, the Sales Agent is not required to sell any minimum number or dollar amount of shares and is not obligated to purchase the shares if they are not sold to the public. There is no minimum number of shares that must be sold in order to close the offering. Investors are required to purchase a minimum of 1,000 shares of stock, except for our employees, who may purchase a minimum of 100 shares.

 

The offering is scheduled to end on August 6, 2004 or earlier at the discretion of Federal Trust. We have, the right, however, to extend the offering for up to an additional 60 days without notice to subscribers.

 

Investing in our common stock involves risks, which are described in the “ Risk Factors” section beginning on page 5 of this prospectus.

 

     Per Share

   Total

Public offering price

   $ 7.50    $ 9,000,000

Sales Agent Commission

   $ 0.26    $ 315,000

Proceeds to us, before expenses

   $ 7.24    $ 8,685,000

 

We will pay our Sales Agent, Kendrick Pierce Securities, Inc., a sales commission equal to 3.5% of the offering price of the shares it sells in the offering.

 

These securities are not deposits or savings accounts and are not insured by the FDIC or any other governmental agency.

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

 

An escrow account at Federal Trust Bank has been established to allow for staggered closings in the offering. We expect to deliver the shares to purchasers on or about July 7 2004, upon receipt of the purchase price of the shares and subject to customary closing conditions.

 

KENDRICK PIERCE SECURITIES, INC.

 

The date of this prospectus is July 7, 2004.


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LOGO


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PROSPECTUS SUMMARY

 

This section summarizes selected information contained in the prospectus and in documents incorporated by reference. This summary does not contain all the information you may wish to consider before purchasing shares. We urge you to read the entire prospectus carefully.

 
The Company

 

Federal Trust Corporation (“Federal Trust”) is the holding company for Federal Trust Bank (the “Bank”). We conduct our primary business through the Bank, which was founded in 1987. We provide a full range of banking products to consumers and small businesses in the Central Florida area from six full-service locations.

 

As of March 31, 2004, we had total assets of $483 million, loans of $414 million, deposits of $336 million and stockholders’ equity of $27.5 million. In 2003, we had net income of $2.8 million, an increase of 119% over 2001. Since December 31, 2001, our loans have grown approximately 57%, our deposits have grown approximately 49%, and our branch network has grown by three locations.

 

In 2001, we initiated a strategy to emphasize a community banking business model by increasing low-cost deposits and the origination of residential and commercial loans in our market areas. Since initiating this strategy, we have achieved the following results:

 

          •  

Increased our low-cost deposits, consisting of demand, money-market, and savings, by 173% to $111 million. These low-costs deposits represented 33.2% of our total deposits at March 31, 2004, compared to 18.1% of total deposits at December 31, 2001.

 

          •  

Increased commercial loans by 391% to $103 million. Commercial loans represented approximately 25% of our total loans at March 31, 2004, compared to 11% of total loans at December 31, 2001.

 

          •  

Opened three additional offices, for a total of six offices. We have also identified three additional sites for branch offices expected to open in the next 18 months.

 

          •  

Hired four senior bank executives, two of whom previously served as commercial bank presidents.

 

          •  

Established a centralized credit department managed by a senior credit officer with 28 years of credit administration experience.

 

          •  

Maintained disciplined underwriting standards, resulting in low net charge-offs and non-performing assets.

 

          •   Installed residential loan originators in each of our branch offices.
 

Our current operating strategy is to build a community bank branch network serving Central Florida, continue the origination and purchase of residential mortgage loans, and the expansion of a commercial loan portfolio. We plan to capitalize on the opportunities created by the significant consolidation of the banking industry in Florida in recent years.

 

Our market area consists of Orange, Seminole and Volusia Counties, which are located in Central Florida. These counties had combined total deposits of $24.1 billion as of June 30, 2003. Our total market area population has grown to approximately 1.8 million people and is expected to grow an additional 12.6% by 2008.

 

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Our executive offices are located at 312 West First Street, Sanford, Florida, our telephone number is (407) 323-1121 and our website is www.federaltrust.com. Information on our website is not a part of this prospectus and is not incorporated herein by reference.

   
The Offering     
   
Securities Offered for Sale:    1,200,000 shares of common stock.
   
Price per Share:    $7.50 per share.
   
Common Stock Issued:    Before offering - 6,661,813 shares.
     After offering - Up to 7,861,813 shares,
   
American Stock Exchange Symbol:    “FDT”
   
Use of Proceeds:    Assuming we receive $8,685,000 of net proceeds, we intend to provide up to $2.5 million of additional capital to the Bank to maintain its “well capitalized” regulatory classification, reduce approximately $4 million in outstanding debt owed by Federal Trust and take advantage of other revenue-enhancing opportunities.
   
Minimum Purchase:    The minimum number of Federal Trust shares that must be purchased by an investor is 1,000 shares; however, the minimum for our employees is 100 shares.
   
Offering Period:    The offering expires August 6, 2004, at 5:00 p.m., Eastern Time, unless we extend the offering period for up to an additional 60 days.
   
Distribution of Proceeds:    At the discretion of Kendrick Pierce Securities, Inc. (“Kendrick Pierce”) and Federal Trust, we expect to have the first closing and issue shares to purchasers whose subscriptions have been accepted on July 28, 2004, depending upon the volume of sales in the offering. If needed, additional closings will be held approximately every 15 days thereafter, or sooner.
   
Information About the Offering:    Kendrick Pierce Securities, Inc.
     324 South Hyde Park Avenue
     Tampa, Florida 33606
     Telephone: (813) 244-4602
   
     Federal Trust Corporation
     Attention: James V. Suskiewich or Gregory E. Smith
     312 West First Street, Suite 400
     Sanford, Florida 32771
    

Telephone: (407) 323-1833

 

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Best Efforts Offering:    Our executive officers and directors, and Kendrick Pierce will offer the shares on a best efforts basis. This means there is no guarantee that we will be able to sell all or any of the shares offered. Kendrick Pierce will be paid a 3.5% sales commission on sales to investors, with no commission on sales to our directors and employees.
   
Acceptance of Subscriptions:    We reserve the right to accept or reject any subscription, in whole or in part.
   
Subscriptions are Irrevocable:    Subscriptions are not revocable. You should not subscribe unless you are certain you wish to acquire shares of our common stock.

 

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SUMMARY FINANCIAL DATA

 

The following selected consolidated financial and other data are derived from and should be read with our Consolidated Financial Statements and Notes thereto, beginning on page F-1, and Management’s Discussion and Analysis of Financial Condition and Results of Operations on page 14. Information for interim periods is not necessarily indicative of results that may be achieved for full years.

 

     At or for the period ending
March 31,


   

At or for the year ended

December 31,


 
     2004

    2003

    2003

    2002

    2001

 
     All dollars in thousands, except per share data  

Income Statement Data

                                        

Total interest income

   $ 5,798     $ 5,493     $ 20,921     $ 19,452     $ 19,950  

Total interest expense

     2,393       2,772       9,750       10,971       13,272  

Net interest income

     3,405       2,721       11,171       8,481       6,678  

Provision for loan losses

     550       220       650       445       540  

Total other income

     678       607       2,358       2,400       2,383  

Total other expense

     2,346       2,138       8,826       7,339       6,538  

Earnings before income taxes

     1,187       970       4,053       3,097       1,983  

Income taxes

     377       316       1,276       1,038       716  

Net earnings

     810       654       2,777       2,059       1,267  

Balance Sheet Data

                                        

Total assets

   $ 482,739     $ 428,536     $ 468,198     $ 368,054     $ 306,481  

Securities

     34,082       37,299       33,615       21,520       13,948  

Loans, net

     413,868       357,604       398,401       308,598       264,187  

Allowance for loan losses

     3,283       2,332       2,779       2,110       1,765  

Total deposits

     335,570       294,299       314,630       278,531       225,400  

Total equity

     27,478       25,852       26,457       25,039       18,531  

Common shares outstanding (in thousands)

     6,531       6,591       6,526       6,591       5,409  

Performance Ratios

                                        

Return on average assets

     0.67 %     0.64 %     0.64 %     0.63 %     0.47 %

Return on average equity

     12.02 %     10.28 %     10.79 %     9.45 %     7.40 %

Efficiency ratio

     57.5 %     64.2 %     65.2 %     60.7 %     72.2 %

Net interest margin

     3.01 %     2.78 %     2.73 %     2.71 %     2.58 %

Asset Quality Ratios

                                        

Nonperforming assets to total assets

     0.93 %     1.41 %     1.58 %     1.75 %     1.40 %

Allowance for loan losses to total loans (net of LIP)

     0.79 %     0.66 %     0.70 %     0.69 %     0.67 %

Net charge-offs (recoveries) to average loans

     0.01 %     —         (0.01 )%     0.04 %     0.17 %

Capital Ratios

                                        

Total equity to assets (Federal Trust)

     5.69 %     6.03 %     5.65 %     6.80 %     6.05 %

Total equity to risk-based assets (Bank)

     11.6 %     11.5 %     11.6 %     11.7 %     11.4 %

Per Common Share

                                        

Net earnings per share – basic

   $ 0.12     $ 0.10     $ 0.42     $ 0.34     $ 0.25  

Net earnings per share - diluted

   $ 0.12     $ 0.10     $ 0.42     $ 0.34     $ 0.25  

Book value at period-end

   $ 4.21     $ 3.92     $ 4.05     $ 3.80     $ 3.43  

Average common shares outstanding (in thousands):

                                        

Basic

     6,529       6,591       6,549       5,991       5,060  

Diluted

     6,683       6,681       6,662       6,003       5,060  

 

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RISK FACTORS

 

An investment in our common stock involves risks. Before making an investment decision, you should carefully consider all of the risks described in this prospectus. If any of the events contemplated by the risk factors discussed in this prospectus actually impact us, our business, financial condition and results of operations could be materially adversely affected. If this were to occur, the trading price of our common stock could decline significantly and you could lose part or all of your investment.

 

We May Need to Raise Additional Capital, Which Could Dilute Your Ownership.

 

We may need to raise additional capital in the future to support our business, expand our operations, or maintain minimum capital levels required by our regulatory agencies. If we do sell additional shares of common stock to raise capital, the sale may dilute your ownership interest and such dilution could be substantial. At the present time, we do not expect to sell additional shares of common stock for the next 12 months.

 

Our Business Focus in the Central Florida Area Makes Us Vulnerable to Adverse Economic Conditions in the Area.

 

Our operations are materially affected by and sensitive to the economy of our market areas in Central Florida, and are particularly impacted by the economic conditions in Orange, Seminole and Volusia Counties. Because our business is focused in the market area of Orlando to Daytona Beach and suburbs adjacent to Interstate 4, we could be more adversely affected by a weakening of the area economy than banking institutions with operations in more diverse geographical areas.

 

A Slowdown in the Economy Could Diminish the Quality of Our Loan Portfolio and Our Financial Performance.

 

Recent economic indicators have shown improvement in U.S. economic activities. Possible future adverse economic developments, however, can impact the collectibility of loans and may negatively affect our earnings and financial condition. In addition, the banking industry in general is affected by the level of interest rates, general economic conditions such as inflation, recession, unemployment, and other factors beyond our control. A prolonged economic recession or other economic dislocation could cause increases in nonperforming assets and impair the values of real estate collateral, thereby causing operating losses, decreasing liquidity, and eroding capital. We cannot assure you that future declines in the economy, particularly in our market areas, will not have a material adverse effect on our financial condition, results of operations, or cash flows.

 

A Decline in the Real Estate Market May Result in Losses or Decreased Profitability.

 

Declines in real estate values could have a material adverse impact on our results of operations because of the composition of our loan portfolio. Our loan portfolio included $305.6 million of loans secured by residential real estate and $89.6 million of commercial real estate and $7.1 million of construction loans at March 31, 2004. The real estate collateralizing our commercial

 

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real estate and construction loans is concentrated primarily in our local market area of Central Florida and throughout the State. Approximately 40% of the real estate securing the wholesale residential loans that we purchase is generally located outside of Florida. These loans are subject to additional risks associated with the economy where the collateral is located, as well as collection risks.

 

We Are Subject to Government Regulation and Monetary Policy That Could Constrain Our Growth and Profitability.

 

We are subject to extensive federal government supervision and regulations that impose substantial limitations with respect to lending activities, purchases of investment securities, the payment of dividends, and many other aspects of the banking business. Many of these regulations are intended to protect depositors, the public, and the FDIC, but not shareholders. Future legislation or government policy could adversely affect the banking industry and our operations. Federal economic and monetary policy may affect our ability to attract deposits, make loans, and achieve our planned operating results.

 

We Could Be Negatively Impacted by Changes in Interest Rates and Economic Conditions.

 

Our results of operations may be materially adversely affected by changes in prevailing economic conditions, including declines in real estate market values, rapid changes in interest rates, and the monetary and fiscal policies of the federal government. Our profitability is driven by the spread between the interest rates earned on investments and loans and those paid on deposits and other borrowings.

 

As with most banking institutions, our net interest spread is affected by general economic conditions and other factors that influence market interest rates and our ability to respond to changes in such rates. At any given time, our assets and liabilities may be affected differently by a given change in interest rates. As a result, an increase or decrease in rates could have a material adverse effect on our net income, capital and liquidity. While we take measures to reduce interest rate risk, these measures may not adequately minimize exposure to interest rate risk.

 

An Inadequate Allowance for Loan Losses Would Result in Reduced Earnings.

 

As a lender, we are exposed to the risk that our customers will be unable to repay their loans according to their terms and that any collateral securing the payment of their loans will not be sufficient to assure full repayment. We evaluate the collectibility of our loan portfolio and provide an allowance for loan losses that we believe is adequate. If our evaluation is incorrect and defaults cause losses exceeding our allowance for loan losses, our earnings could be significantly and adversely affected. Commercial real estate, commercial business and construction lending generally involve higher credit risk than single-family residential lending. Such loans involve larger loan balances to a single borrower or groups of related borrowers. At March 31, 2004, we had balances of $89.6 million in commercial real estate loans, $7.1 million in construction loans and $13.4 million in commercial business loans.

 

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We Face Competition from a Variety of Competitors.

 

We face competition for deposits, loans and other financial services from other community banks, national and regional banks, credit unions and other financial institutions. We also compete with other entities which provide financial services, including consumer finance companies, securities brokerage firms, mortgage brokers, insurance companies, and mutual funds, for loans and alternative investment products. Some of these financial institutions and financial services organizations are not subject to the same degree of regulation as we are. We have faced increased competition due to the Gramm-Leach-Bliley Act, which allows insurance firms, securities firms, and other non-traditional financial companies to provide traditional banking services. Due to the growth of the Central Florida area, it can be expected that significant competition will continue from existing financial services providers, as well as new entrants to the market.

 

A Concentration of Our Residential Loans is to Foreign Nationals on Properties Located Throughout Florida

 

As part of our lending practice, we have made loans to foreign nationals on residential properties mainly around the Central Florida theme parks and waterfront properties in Central and Southern Florida. An adverse effect on the European and South American economies could affect the borrowers’ ability to repay their loans, which would have a negative impact on our earnings.

 

Our Ability to Service our Debt and Pay Dividends to our Shareholders Depends on Capital Distributions from the Bank, which are Subject to Regulatory Limits

 

We are a holding company and depend upon dividends from the Bank for a significant portion of our revenues. We use dividends from the Bank to service our debt obligations and to pay dividends on our capital stock. Our ability to service our debt and pay dividends to our shareholders is further subject to restrictions under our indentures and loan covenants. The Bank’s ability to pay dividends or make other capital distributions to us is subject to the regulatory authority of the Office of Thrift Supervision (“OTS”) and the Federal Deposit Insurance Corporation (“FDIC”).

 

This Is a Best Efforts Offering, and We May Not Be Able to Raise All the Capital We Need to Continue to Grow Our Operations.

 

This is a best efforts offering which means there is no guarantee that we will be able to sell all or any of the securities offered. There is no minimum number of shares that we must sell to complete the offering, and we are unable to guarantee that we will be able to sell any shares, although we have received non-binding indications of interest from our directors and executive officers. In the event we are unable to raise sufficient capital from this offering, it is likely that we will be unable to continue to grow as planned, which may adversely affect future earnings. Regardless of the number of shares that we sell in this offering, we may need to obtain additional capital in the future so that we can successfully execute our business strategy.

 

The Offering Price Is Not Necessarily an Indication of the Value of Our Shares.

 

The offering price does not necessarily bear any relationship to the book value of our assets, past operations, cash flows, losses, financial condition or any other established criteria for value. Our

 

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Board of Directors determined the offering price after consulting with our Sales Agent, Kendrick Pierce, and considering our historic and expected growth, the prior public sale of our shares and general market conditions, among other factors. Nevertheless, the offering price bears no relationship to the amount of our assets, book value, shareholders’ equity or other typical criteria of value, and may exceed the fair market value of our shares and the price at which shares may be sold after the offering. Consequently, you may lose a portion of your investment simply as a result of an inaccurately determined offering price.

 

We Have Broad Discretion as to the Use of Proceeds from the Offering. Our Failure to Effectively Apply Such Proceeds Could Affect Our Profits.

 

We have not allocated the proceeds of the offering to any specific purpose, and we will have significant flexibility in determining the amounts of net proceeds we will apply to different uses and the timing of such applications. We may utilize the proceeds in a manner that we believe is in our best interest but with which you may not agree and over which you will have no control.

 

FORWARD-LOOKING STATEMENTS

 

This prospectus contains certain forward-looking statements related to our future results, including certain projections and business trends. Assumptions relating to forward-looking statements involve judgments with respect to, among other things, future economic, competitive, and market conditions, and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond our control. When used in this prospectus, the words “estimate,” “project,” “intend,” “believe,” and “expect,” and similar expressions are intended to identify forward-looking statements. Although we believe that assumptions underlying the forward-looking statements are reasonable, any of the assumptions could prove inaccurate, and we may not realize the results contemplated by these statements. Management decisions are subjective in many respects and susceptible to interpretations and periodic revisions based on actual experience and business developments, the impact of which may cause us to alter our business strategy or capital expenditure plans and may, in turn, affect our results of operations. In light of the significant uncertainties inherent in the forward-looking information included in this prospectus, you should not regard the inclusion of such information as our representation that we will achieve any specific strategy, objective, or other plans.

 

The forward-looking statements contained in this prospectus speak only as of the date of this prospectus, and we have no obligation to publicly update or revise any of these forward-looking statements. These and other statements, which are not historical facts, are based largely on our current expectations and assumptions and are subject to a number of risks and uncertainties that could cause actual results to differ materially from those contemplated by such forward-looking statements. These risks and uncertainties include, among others, the risks and uncertainties described in Risk Factors, beginning on page 5.

 

USE OF PROCEEDS

 

Assuming that we receive $8,685,000 of net proceeds from this offering, we will use up to $2.5 million to provide additional working capital to the Bank to maintain the institution’s “well-capitalized” status. Approximately $4 million will be used to reduce outstanding debt. The remaining proceeds will be retained by Federal Trust to potentially be provided to the Bank as capital or otherwise invested by the Company.

 

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THE OFFERING

 

General

 

Securities Offered. We are offering to sell 1,200,000 shares of our common stock. The offering is scheduled to close on August 6, 2004. We have the right, however, to extend the offering for up to 60 days.

 

The purchase price for each share is $7.50. Individuals wanting to purchase shares in this offering must purchase a minimum of 1,000 shares, except for our employees who may purchase a minimum of 100 shares.

 

Best Efforts. We and Kendrick Pierce are offering the shares on a best efforts basis, and we are not required to issue any minimum number of shares in the offering. We will consummate the offering if any valid subscriptions are received, unless our Board of Directors terminates the offering entirely. The Board has engaged Kendrick Pierce to serve as the Sales Agent in this offering.

 

Procedure for Subscribing for Shares

 

If you wish to participate in the offering and invest in the shares, you may do so by completing and signing the stock order form included with this prospectus, and delivering it to us before the expiration date, together with payment in full of the subscription price for all the shares for which you have subscribed. Payment must be payable to “Federal Trust Bank as escrow agent for Federal Trust Corporation” and made by:

 

  check or bank draft drawn on a U.S. bank;

 

  cashier’s check or money order; or

 

  funds transferred via wire transfer.

 

 

The subscription price will be deemed to have been received only upon:

 

  clearance of any uncertified check;

 

  receipt of any certified check or bank draft drawn upon a U.S. bank, any cashier’s check, money order, or wire transfer; or

 

  Receipt of a completed stock order form.

 

If you wish to pay by uncertified personal check, please note that the funds may take at least five business days to clear. Accordingly, any such payment of the subscription price should be sent in time to ensure that payment is received and clears by the expiration date of the offering.

 

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The address to which the stock order form and payment of the offering price should be delivered is:

 

By Mail:    By Personal or Overnight Delivery:
Federal Trust Bank    Federal Trust Bank
P.O. Box 1867    312 West First Street, Suite 110
Sanford, Florida 32771-1867    Sanford, Florida 32771
Attn: Gregory E. Smith    Attn: Gregory E. Smith

 

If the amount you send with your stock order form is not the exact amount required to purchase the number of shares that you indicate are being subscribed for, or if you do not specify the number of shares to be purchased, then you will be deemed to have subscribed to purchase shares to the full extent of the payment tendered (subject to reduction to the extent necessary to comply with any regulatory limitation or conditions we impose in connection with the offering).

 

Failure to include the full subscription price with your subscription may cause us to reject your subscription. The method of delivery of the stock order form and payment of the subscription price will be at your election and risk. If you send your subscription by mail, we recommend that you use registered or express mail, return receipt requested.

 

We will decide all questions concerning the timeliness, validity, form and eligibility of stock order forms, and our decisions will be final and binding. In our sole discretion, we may waive any defect or irregularity in any subscription, may permit any defect or irregularity to be corrected within such time as we may allow, or may reject any purported subscription. Stock order forms will not be deemed to have been received or accepted until all irregularities have been waived or cured within the allotted time. No person has any duty to give a subscriber notice of any defect or irregularity in a stock order form submitted, and no one will incur any liability for failure to give such notice.

 

Sales Agent

 

We have entered into a Sales Agent Agreement with Kendrick Pierce to assist us in connection with the sale of our common stock in this offering on a best efforts basis. Kendrick Pierce is a broker-dealer registered with the Securities and Exchange Commission, and is a member of the National Association of Securities Dealers, Inc.

 

Under the terms of the Sales Agent Agreement, Kendrick Pierce will not receive any compensation in connection with the sales of common stock to our directors or employees. Kendrick Pierce is entitled to a fee of 2.5% of the dollar amount received for sales of our common stock to other investors in the offering. Selected dealers selling in the offering will be entitled to a fee not to exceed 3%. Pursuant to the terms of the Sales Agent Agreement, we will pay for Kendrick Pierce’s out-of-pocket expenses up to a total of $40,000.

 

Kendrick Pierce has the right to terminate the Sales Agent Agreement under defined circumstances. It could terminate the Sales Agent Agreement for example, if, in its judgment, there is a material adverse change in our financial condition or operations, or market conditions brought about by an outbreak or escalation of hostilities, adverse economic conditions or other circumstances which render the sale of our common stock impracticable or inadvisable.

 

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We and our executive officers and directors have agreed not to sell publicly, contract to sell publicly, or otherwise publicly dispose of, any shares of common stock for a period of 180 days from the date of this prospectus, without the written consent of Kendrick Pierce.

 

We have agreed to indemnify Kendrick Pierce against certain liabilities including liabilities under the Securities Act of 1933, or to contribute to payments that Kendrick Pierce may be required to make in respect thereof.

 

The foregoing is a summary of the principal terms of the Sales Agent Agreement and does not purport to be complete. Reference is made to a copy of the Sales Agent Agreement which is on file as an exhibit to the Registration Statement.

 

We estimate that the total expenses of this offering, including Sales Agent expenses and commissions, will be approximately $375,000.

 

Regulatory Limitations

 

If you would own 10% or more of our common stock after the offering (5% in some circumstances), you will be required to provide certain information to, or seek the prior approval of the OTS at your own expense. We will not be required to issue shares of common stock in the offering to any person who, in our opinion, would be required to obtain prior clearance or approval from the OTS to own or control such shares if, at the expiration date, such clearance or approval has not been obtained or any required waiting period has not expired. We reserve the right to reduce or reject, in whole or in part, any subscription which would require prior regulatory application or approval if such has not been obtained before the applicable offering expiration date.

 

Subscriptions for Shares May Not Be Revoked by Subscribers but May Be Rejected by Us.

 

A subscriber may not revoke a subscription once it has been received. Stock order forms are not binding on us until we have accepted such subscriptions. The Board of Directors has reserved the right to reject any subscription, in whole or in part. If we reject a subscription, we will refund subscription funds as soon as practicable.

 

Intentions of Directors and Executive Officers

 

Our directors and executive officers have indicated that they intend to subscribe for approximately 55,000 shares in the offering. These intentions are not commitments and could change based upon individual circumstances at the time of the offering. Any shares purchased by directors and executive officers are intended to be held for investment.

 

Issuance of Common Stock

 

Certificates representing the shares of common stock purchased in the offering will be delivered to purchasers or their brokers as soon as practicable after subscriptions for such shares have been accepted by us.

 

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Right to Terminate the Offering

 

We expressly reserve the right, at any time before or after the delivery of common stock, to terminate the offering for any reason, including, but not limited to, the offering being prohibited by law or regulation or our Board of Directors and Kendrick Pierce concluding that it is not in their best interests to complete the offering under the circumstances.

 

Requests for Additional Information

 

If you have questions or require additional information concerning the offering, please contact Kendrick Pierce Securities, Inc. at (813) 254-4602, extension 204 or James V. Suskiewich, President & Chief Executive Officer of Federal Trust Corporation or Gregory E. Smith, Executive Vice President & Chief Financial Officer, at (407) 323-1833 or (800) 226-2829.

 

Determination of Offering Price

 

The offering price of the shares was determined by the Board of Directors based upon a number of factors, including the general market conditions, the current market price of our common stock, and discussions with Kendrick Pierce. On July 2, 2004, the closing price of our common stock on the American Stock Exchange was $7.60.

 

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CAPITALIZATION

 

The following table sets forth our capitalization at March 31, 2004, on an actual basis and on an as adjusted basis to reflect the sale of 1,000,000 or 1,200,000 shares of common stock to be sold in this offering at a price of $7.50 per share (after deducting estimated offering expenses), and the application of the estimated net proceeds from the offering as described in the section of this prospectus entitled “Use of Proceeds.” You should read the information in the following table in conjunction with our consolidated financial statements and related notes thereto in this prospectus.

 

   

At March 31, 2004

(historical)


   

Adjusted for

the sale of 1,000,000
shares


   

Adjusted for

the sale of 1,200,000
shares


 
    (In thousands)  

Deposits

  $ 335,570     $ 335,570     $ 335,570  

Federal Home Loan Bank advances

    100,400       100,400       100,400  

Other borrowings

    5,217       1,217 (1)     1,217 (1)

Junior subordinated debentures

    5,155       5,155       5,155  

Capital lease obligation

    3,262       3,262       3,262  

Common stock, $0.01 par value

    67       77       79  

Additional paid-in capital

    22,069       29,237       30,682  

Retained Earnings

    6,306       6,306       6,306  

Unallocated ESOP shares (131,139 shares)

    (947 )     (947 )     (947 )

Accumulated other comprehensive income (loss)

    (17 )     (17 )     (17 )
   


 


 


Total capitalization

  $ 477,082     $ 480,260     $ 481,707  
   


 


 



(1) Assumes $4.0 million of proceeds will be used to repay other borrowings.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

 

CONSOLIDATED FINANCIAL HIGHLIGHTS

(Dollars in thousands, except per share amounts)

 

     March 31,

    December 31,

 
     2004

    2003

    2003

    2002

    2001

 

AT PERIOD END:

                                        

Total assets

   $ 482,739     $ 428,536     $ 468,198     $ 368,054     $ 306,481  

Loans, net

     413,868       357,604       398,401       308,598       264,187  

Securities

     34,082       37,299       33,615       21,520       13,948  

Deposits

     335,570       294,299       314,630       278,531       225,400  

Equity

     27,478       25,852       26,457       25,039       18,531  

Book value per share

     4.21       3.92       4.05       3.80       3.43  

Shares outstanding (in thousands)

     6,531       6,591       6,526       6,591       5,409  

Equity-to-assets ratio

     5.69 %     6.03 %     5.65 %     6.80 %     6.05 %

FOR THE PERIOD:

                                        

Interest income

   $ 5,798     $ 5,493     $ 20,921     $ 19,452     $ 19,950  

Interest expense

     2,393       2,772       9,750       10,971       13,272  

Provision for loan losses

     550       220       650       445       540  

Net interest income after provision for loan losses

     2,855       2,501       10,521       8,036       6,138  

Other income

     678       607       2,358       2,400       2,383  

Other expense

     2,346       2,138       8,826       7,339       6,538  

Net earnings

     810       654       2,777       2,059       1,267  

Basic earnings per share

     .12       .10       .42       .34       .25  

Diluted earnings per share

     .12       .10       .42       .34       .25  

Return on average assets

     .67 %     .64 %     .64 %     .63 %     .47 %

Return on average equity

     12.02 %     10.28 %     10.79 %     9.45 %     7.40 %

Average equity to average assets ratio

     5.62 %     6.19 %     5.95 %     6.68 %     6.30 %

Dividend payout ratio

     16.42 %     9.94 %     11.81 %     —         —    

 

Overview

 

For the year ended December 31, 2003, our net earnings were $2.8 million, or $0.42 per basic and fully diluted share, which represented a 35% increase in net earnings and a 24% increase in earnings per share from the previous year. For the first three months of 2004, net earnings were $810,000, or $0.12 per basic and fully diluted share, compared to $654,000, or $0.10 per basic and fully diluted share for the same period in 2003.

 

Our return on assets increased slightly in 2003 to 0.64% from 0.63% for 2002. Similarly, for the first three months of 2004, the annualized return on assets increased to 0.67% from 0.64% for the same period in 2003. Our return on equity for the years 2003 and 2002 were 10.79% and 9.45%, respectively. For the first three months of 2004, our annualized return on equity improved to 12.02% from 10.28% for the same period in 2003.

 

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The continuing improvement in our earnings over the past few years is a result of our strategy to build a strong, profitable community bank in the Central Florida market area. Total assets grew $100 million, or 27% in 2003 to $468 million. Our assets continued to grow in the first quarter of 2004 and reached $483 million by March 31, 2004. In spite of the significant level of residential loan refinancing activity in 2003, our total loans grew by 29% during the year. The loan growth was a major factor in our improved earnings for the year. Within the loan portfolio, our commercial real estate loans grew $33.4 million, or 75% to $78 million by December 31, 2003. The remainder of the loan growth in 2003 was primarily in loans secured by single-family homes.

 

During 2003 and 2004, we have been working to improve the credit quality in our portfolio and resolve delinquent accounts. Our progress in that regard is evident by the fact that during the first quarter of 2004, non-performing loans decreased $2.6 million, or 41% from $6.4 million at December 31, 2003, to $3.8 million at March 31, 2004. Additionally, we had $31,000 in charge-offs during 2003, but received $50,000 in recoveries from previously charged-off loans. The resolution of these problem loans helped us continue our earnings improvement in early 2004.

 

Our total deposits grew $36 million or 13% during 2003, to $315 million at December 31, 2003. The other major funding sources for our growth in 2003 were advances from the Federal Home Loan Bank, which grew $54 million to $108 million at the end of 2003. We continued our strategy of building our Central Florida footprint with the opening of three new banking branches from December 2002 to October 2003. One branch was located in Casselberry, Seminole County, and the other two were in Western Volusia County, in the towns of Deltona and Orange City. We are very pleased with the initial growth we have seen in those new markets and expect them to contribute to our continued growth in 2004.

 

Besides the overall growth in our assets, another significant factor impacting our earnings are market interest rates, which affect all aspects of our core business. As rates fell in 2002 and 2003, our deposit rates decreased, which reduced our interest expense despite the increase in the balances. At the same time, however, we also witnessed the significant increase in refinance activity in our residential loan portfolio and the new loans we generated and purchased were generally at lower rates than the loans which were paid off. The result of these changes was that our interest expense during 2003 decreased 11% to $9.8 million. At the same time, our interest income increased 8% during 2003 to $20.9 million, which was primarily attributed to the increased balances of loans. With the reduction in interest expense and increase in interest income our net interest income, the primary driver of our earnings grew by $2.7 million, or 32% in 2003 to $11.2 million.

 

General

 

Federal Trust was organized in February 1989 for the purpose of becoming the unitary savings and loan holding company of the Bank. During 2003, Federal Trust’s corporate headquarters were located in Sanford, Florida, 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.

 

Average Balance Sheet

 

The following table sets forth, for the periods indicated, information regarding: (i) the total dollar amount of interest income 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.

 

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     For The Three Months Ended March 31,

 
     2004

    2003

 
     Average
Balance


   Interest

   Average
Yield/
Cost


    Average
Balance


   Interest

   Average
Yield/
Cost


 
     (Dollars in thousands)  

Interest-earning assets:

                                        

Loans (1)

   $ 412,119    $ 5,453    5.29 %   $ 356,086    $ 5,129    5.76 %

Securities

     33,408      292    3.50       26,259      300    4.57  

Other interest-earning assets (2)

     6,716      53    3.16       9,504      64    2.69  
    

  

        

  

      

Total interest-earning assets

     452,243      5,798    5.13       391,849      5,493    5.61  
           

               

      

Non-interest earning assets

     27,840                   18,922              
    

               

             

Total assets

   $ 480,083                 $ 410,771              
    

               

             

Interest-bearing liabilities:

                                        

Non-interest bearing demand deposits

     7,622      —      —         7,760      —      —    

Interest-bearing demand and money-market deposits

     93,994      408    1.74       85,285      476    2.23  

Savings deposits

     8,537      31    1.45       9,707      50    2.06  

Time deposits

     214,230      1,219    2.28       193,088      1,507    3.12  
    

  

        

  

      

Total deposit accounts

     324,383      1,658    2.04       295,840      2,033    2.75  

Borrowings (3)

     123,278      735    2.38       84,274      739    3.51  
    

  

        

  

      

Total interest-bearing liabilities

     447,661      2,393    2.14       380,114      2,772    2.92  
           

               

      

Non-interest bearing liabilities

     5,459                   5,212              

Stockholders’ equity

            26,963                   25,445       
           

               

      

Total liabilities and stockholders’ equity

   $ 480,083                 $ 410,771              
    

               

             

Net interest/dividend income

          $ 3,405                 $ 2,721       
           

               

      

Interest rate spread (4)

                 2.99 %                 2.69 %
                  

               

Net interest margin (5)

                 3.01 %                 2.78 %
                  

               

Ratio of average interest-earning assets to average interest-bearing liabilities

                 1.01                   1.03  
                  

               


(1) Includes non-accrual loans.
(2) Includes interest-earning deposits and FHLB stock.
(3) Includes FHLB advances, other borrowings, junior subordinated debentures and capital lease obligation.
(4) Interest rate spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities.
(5) Net interest margin is net interest income divided by average interest-earning assets.

 

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    For The Year Ended December 31,

 
    2003

    2002

    2001

 
    Average
Balance


  Interest

  Average
Yield/
Cost


    Average
Balance


  Interest

  Average
Yield/
Cost


    Average
Balance


  Interest

  Average
Yield/
Cost


 
    (Dollars in thousands)  

Interest-earning assets:

                                                     

Loans (1)

  $ 366,488   $ 19,591   5.35 %   $ 279,934   $ 18,349   6.55 %   $ 245,069   $ 19,235   7.85 %

Securities

    34,755     1,112   3.20       16,695     735   4.40       6,997     363   5.19  

Other interest-earning assets(2)

    7,626     218   2.86       15,871     368   2.32       6,939     352   5.07  
   

 

       

 

       

 

     

Total interest-earning assets

    408,869     20,921   5.12       312,500     19,452   6.22       259,005     19,950   7.70  
         

             

             

     

Non-interest earning assets

    23,942                 13,756                 12,762            
   

             

             

           

Total assets

  $ 432,811               $ 326,256               $ 271,767            
   

             

             

           

Interest-bearing liabilities:

                                                     

Non-interest bearing demand deposits

  $ 7,102   $ —     —   %   $ 5,837   $ —     —   %   $ 5,230   $ —     —   %

Interest-bearing demand and money-market deposits

    92,525     1,764   1.91       56,066     1,607   2.87       22,880     824   3.60  

Savings deposits

    9,446     163   1.73       7,621     139   1.82       1,269     55   4.33  

Time deposits

    188,975     5,156   2.73       176,721     6,774   3.83       166,453     9,595   5.76  
   

 

       

 

       

 

     

Total deposit accounts

    298,048     7,083   2.38       246,245     8,520   3.46       195,832     10,474   5.35  

Borrowings (3)

    103,074     2,667   2.59       49,902     2,451   4.91       50,346     2,798   5.56  
   

 

       

 

       

 

     

Total interest-bearing liabilities

    401,122     9,750   2.43       296,147     10,971   3.70       246,178     13,272   5.39  
         

             

             

     

Non-interest bearing liabilities

    5,941                 8,324                 8,469            

Stockholders’ equity

    25,748                 21,785                 17,120            
   

             

             

           

Total liabilities and stockholders’ equity

  $ 432,811               $ 326,256               $ 271,767            
   

             

             

           

Net interest/dividend income

          11,171                 8,481                 6,678      
         

             

             

     

Interest rate spread (4)

              2.69 %               2.52 %               2.31 %
               

             

             

Net interest margin (5)

              2.73 %               2.71 %               2.58 %
               

             

             

Ratio of average interest-earning assets to average interest-bearing liabilities

              1.02 %               1.06 %               1.05 %
               

             

             


(1) Includes non-accrual loans.
(2) Includes interest-earning deposits and FHLB stock.
(3) Includes FHLB advances, other borrowings, junior subordinated debentures and capital lease obligation.
(4) Interest rate spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities.
(5) Net interest margin is net interest income divided by average interest-earning assets.

 

Rate/Volume Analysis

 

The following table sets forth certain information regarding changes in interest income and interest expense for the periods indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to: (i) changes in rate (change in rate multiplied by prior volume); (ii) changes in volume (changes in volume multiplied by prior rate); and (iii) changes in rate-volume (change in rate multiplied by change in volume).

 

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Three Months Ended March 31,

2004 vs. 2003


 
     Increase (Decrease) Due to Changes in

 
     (Dollars In thousands)  
     Rate

    Volume

    Rate/
Volume


    Total

 

Interest-earning assets:

                                

Loans

   $ (417 )   $ 807     $ (66 )   $ 324  

Securities

     (71 )     82       (19 )     (8 )

Other interest-earning assets

     11       (19 )     (3 )     (11 )
    


 


 


 


Total

     (477 )     870       (88 )     305  
    


 


 


 


Interest-bearing liabilities:

                                

Deposit accounts

     (529 )     208       (54 )     (375 )

FHLB advances and other borrowings

     (237 )     342       (109 )     (4 )
    


 


 


 


Total

     (766 )     550       (163 )     (379 )
    


 


 


 


Net change in net interest income before provision for loan losses

   $ 289     $ 320     $ 75     $ 684  
    


 


 


 


 

    

Year Ended December 31,

2003 vs. 2002


 
     Increase (Decrease) Due to Changes in

 
     (Dollars In thousands)  
     Rate

    Volume

    Rate/
Volume


    Total

 

Interest-earning assets:

                                

Loans

   $ (3,385 )   $ 5,673     $ (1,046 )   $ 1,242  

Securities

     (201 )     795       (217 )     377  

Other interest-earning assets

     86       (191 )     (45 )     (150 )
    


 


 


 


Total

     (3,500 )     6,277       (1,308 )     1,469  
    


 


 


 


Interest-bearing liabilities:

                                

Deposit accounts

     (2,498 )     1,548       (487 )     (1,437 )

FHLB advances and other borrowings

     (1,160 )     2,612       (1,236 )     216  
    


 


 


 


Total

     (3,658 )     4,160       (1,723 )     (1,221 )
    


 


 


 


Net change in net interest income before provision for loan losses

   $ 158     $ 2,117     $ 415     $ 2,690  
    


 


 


 


 

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Table of Contents
    

Year Ended December 31,

2002 vs. 2001


 
     Increase (Decrease) Due to Changes in

 
     (Dollars In thousands)  
     Rate

    Volume

    Rate/
Volume


    Total

 

Interest-earning assets:

                                

Loans

   $ (3,171 )   $ 2,736     $ (451 )   $ (886 )

Securities

     (55 )     503       (76 )     372  

Other interest-earning assets

     (191 )     453       (246 )     16  
    


 


 


 


Total

     (3,417 )     3,692       (773 )     (498 )
    


 


 


 


Interest-bearing liabilities:

                                

Deposit accounts

     (3,415 )     2,062       (601 )     (1,954 )

FHLB advances and other borrowings

     (325 )     (25 )     3       (347 )
    


 


 


 


Total

     (3,740 )     2,037       (598 )     (2,301 )
    


 


 


 


Net change in net interest income before provision for loan losses

   $ 323     $ 1,655     $ (175 )   $ 1,803  
    


 


 


 


 

Liquidity and Capital Resources at March 31, 2004 and December 31, 2003

 

General. Like all financial institutions, we must ensure that sufficient funds are available to meet deposit withdrawals, loan commitments, investment needs and expenses. Control of our cash flow requires the anticipation of deposit flows and loan payments. Our primary sources of funds are deposit accounts, FHLB advances and principal and interest payments on loans.

 

We require funds in the short term to finance ongoing operating expenses, pay liquidating deposits, purchase temporary investments in securities and invest in loans. We funds short-term requirements through advances from the FHLB, the sale of investments, deposit growth and loan principal payments. We require 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. We fund our long-term requirements with proceeds from maturing loans, the sale of loans and the sale of securities. We have no plans to significantly change long-term funding requirements.

 

During the three months ended March 31, 2004, our primary source of funds consisted of a net increase in deposits of $20.9 million and net principal repayments and sales of loans of $16.5 million and securities available for sale of $3.9 million. We used our capital resources principally to purchase loans of $31.2 million, repay $7.3 million in FHLB advances and to purchase securities available for sale of $4.0 million.

 

During the year ended December 31, 2003, we obtained funds primarily from the sale of loans of $40.2 million; net principal repayment of loans of $64.0 million; proceeds from the increase in deposits of $36.1 million; proceeds from the sale and repayments of securities of $24.0 million and proceeds from increased FHLB advances of $53.5 million. We used cash to fund $176.8 million in loan purchases; $20.3 million in loans originated for sale; the purchase of securities for $36.6 million; the purchase of bank-owned life insurance of $3.4 million; the purchase of FHLB stock of $2.8 million; and the purchase of premises and equipment of $2.6 million. We believe that in the future, we will be able to continue to obtain funds from the above sources.

 

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At March 31, 2004 and December 31, 2003, loans-in-process, or closed loans scheduled to be funded over a future period of time, totaled $3.3 million and $2.8 million, respectively. Loans committed, but not closed, totaled $5.6 million and $4.7 million, respectively, available lines of credit totaled $3.0 million and $5.3 million, respectively, and standby letters of credit totaled $494,000. Funding for these amounts is expected to be provided by the sources described above.

 

In March 2004, and December 2003, the Bank’s average liquidity was 8.1% and 9.6%, respectively. We expect that our six Central Florida offices, along with other wholesale sources of funds, will be able to generate sufficient funds to provide liquidity for expected loan purchases and originations and other investments. The Asset/Liability Management Committee meets regularly and reviews liquidity levels to ensure that funds are available as needed.

 

During the first three months of 2004, we paid $0.02 per common share in dividends. During 2003, we paid $0.05 per share in dividends, our first dividend payments since 1994. Although we were profitable during 2002, our Board of Directors did not authorize dividends, as the earnings were being retained and used by the Bank for its growth. The payment of future dividends will depend on general economic conditions, as well as our overall performance and capital needs.

 

At March 31, 2004 and December 31, 2003, Federal Trust had $207,000 and $396,000, respectively, in cash in its account, which will be used primarily for interest on debt, cash dividend payments and other operating expenses.

 

The following table is a reconciliation of the Bank’s stockholders’ equity calculated in accordance with accounting principles generally accepted in the United States of America (GAAP) to regulatory capital (Dollars in thousands):

 

     Tier 1

    Total
Risk-Based


 

At March 31, 2004:

                

Bank’s stockholders’ equity in accordance with GAAP

   $ 32,061     $ 32,061  

Add (deduct):

                

Unrealized losses on investments

     77       77  

Excess mortgage servicing rights and Excess net deferred tax assets

     (87 )     (87 )

General valuation allowances

     —         3,247  
    


 


Regulatory capital

   $ 32,051     $ 35,298  
    


 


At December 31, 2003:

                

Bank’s stockholders’ equity in accordance with GAAP

     30,860       30,860  

Add (deduct):

                

Unrealized losses on investments

     380       380  

Excess mortgage servicing rights and Excess net deferred tax assets

     (91 )     (91 )

General valuation allowances

     —         2,728  
    


 


Regulatory capital

   $ 31,149     $ 33,877  
    


 


 

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At March 31, 2004, and December 31, 2003, we exceeded all of our minimum capital requirements.

 

Results of Operations

 

Comparison of the Three-Month Periods Ended March 31, 2004 and 2003

 

General. Net earnings for the three-month period ended March 31, 2004, were $810,000 or $0.12 per basic and diluted share, compared to $654,000 or $0.10 per basic and diluted share for the same period in 2003. The increase in net earning was primarily due to an increase in net interest income, partially offset by increases in the provision for loan losses and other expenses.

 

Interest Income. Interest income increased by $305,000, or 5.6% to $5.8 million for the three-month period ended March 31, 2004, from $5.5 million for the same period in 2003. Interest income on loans increased $324,000 or 6.3% to $5.5 million in 2004 from $5.1 million in 2003, primarily as a result of an increase in the average amount of loans outstanding from $356.1 million in 2003 to $412.1 million in 2004, partially offset by a decrease in the average yield earned on loans from 5.76% for the three-month period ended March 31, 2003, to 5.29% for the comparable period in 2004. Interest income on securities decreased by $8,000 for the three-month period ended March 31, 2004, compared to the same period in 2003, primarily as a result of a decrease in the average yield, which was partially offset by an increase in the average balance of securities owned. We expect the rates earned on the portfolio will fluctuate with general market interest rates and economic conditions.

 

Interest Expense. Interest expense decreased by $379,000 or 13.7% to $2.4 million during the three-month period ended March 31, 2004, compared to $2.8 million for the same period in 2003. Interest on deposits decreased $375,000 or 18.4% to $1.7 million in 2004 from $2.0 million in 2003, as a result of a decrease in the average cost of deposits from 2.75% for the three-month period ended March 31, 2003, to 2.04% for the comparable period in 2004, partially offset by an increase in average deposits outstanding from $295.8 million in 2003, to $324.4 million in 2004. Interest on other borrowings decreased to $735,000 in 2004 from $739,000 in 2003, primarily as a result of a decrease in the average rate paid from 3.51% in 2003 to 2.38% in 2004, partially offset by an increase in the average balance of other borrowings from $84.3 million during 2003, to $123.3 million in 2004. We plan to continue to use FHLB advances and other borrowings to provide liquidity and as a liability management tool.

 

Provision for Loan Losses. A provision for loan losses is charged to earnings based upon management’s evaluation of the losses in its loan portfolio. During the quarter ended March 31, 2004, management recorded a provision for loan losses of $550,000 based on its evaluation of the loan portfolio, which was an increase of $330,000 from the same period in 2003, primarily as a result of the increase in total loans outstanding as well as an increase in the percentage of commercial loans in our portfolio. The allowance for loan losses at March 31, 2004, was $3.3 million or 0.79% of total loans outstanding, versus $2.8 million at December 31, 2003, or 0.69% of total loans outstanding. We believe the allowance for loan losses at March 31, 2004 is adequate.

 

Other Income. Other income increased $71,000 or 11.7% from $607,000 for the three-month period ended March 31, 2003, to $678,000 for the same period in 2004. The increase in other income was primarily due to increases of $52,000, $170,000 and $81,000 in gain on sale of loans held for sale, service charges and fees and other income, respectively, partially offset by a decrease of $196,000 in gain on sale of securities available for sale. The increase in gain on sale of loans held for sale is due to our selling more loans during 2004, as compared to 2003. The increase in service charges and fees primarily resulted from an increase in prepayment fees earned during 2004. The increase in other income resulted from an increase in earnings on bank-owned life insurance.

 

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Other Expense. Other expense increased $208,000 or 9.7%, to $2.3 million for the three-month period ended March 31, 2004, from $2.1 million for the same period in 2003. Salary and employee benefits increased $73,000, occupancy expense increased $74,000 and professional services increased $107,000 due to an increase in commercial lending personnel and the overall growth of the Company.

 

Income Taxes. Income taxes for the three months ended March 31, 2004, was $377,000 (an effective rate of 31.8%), compared to $316,000 (an effective rate of 32.6%) for the same period in 2003.

 

Comparison of the Years Ended December 31, 2003 and 2002

 

General. Net earnings for 2003 were $2.8 million or $0.42 per basic and diluted share, compared to net earnings of $2.1 million or $0.34 per basic and diluted share for 2002. The improvement in the net earnings in 2003 was due to an increase in net interest income, partially offset by an increase in other expenses.

 

Interest Income. Interest income was $20.9 million in 2003, compared to $19.5 million in 2002. Interest income on loans increased to $19.6 million in 2003, from $18.3 million in 2002. The increase in interest income on loans in 2003, was primarily attributable to an increase in the average amount of loans outstanding during the year offset partially by a decrease in yield earned on loans. Interest income on securities increased to $1.1 million in 2003, from $735,000 in 2002, as a result of an increase in the average balance of securities held by the Company partially offset by a decrease in yield earned on the securities. Other interest income decreased from $368,000 in 2002, to $218,000 during 2003.

 

Interest Expense. Interest expense decreased during 2003, to $9.8 million compared to $11.0 million in 2002 primarily due to a decrease in the average cost paid partially offset by an increase in the average amount of deposit accounts and borrowings outstanding. Interest expense on deposits decreased by $1.4 million in 2003 as a result of a decrease in average cost paid on deposits partially offset by an increase in the average amount of deposits. Interest expense on these accounts will increase or decrease according to the general level of interest rates. Interest on borrowings increased to $2.7 million in 2003, from $2.5 million in 2002 due to an increase in the amount of borrowings outstanding, partially offset by a decrease in the average cost paid for borrowings.

 

Provisions for Loan Losses. A provision for loan losses is charged to earnings based upon management’s evaluation of the inherent losses in its loan portfolio. Our provision for loan losses for 2003 was $650,000, compared to $445,000 in 2002. Our net loan portfolio grew by $89.8 million, or 29% in 2003. Of this amount, $55.8 million were residential mortgage loans. As of December 31, 2003, 75.4% of our 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.

 

Total charge-offs were $31,000 in 2003, compared to recoveries of $50,000 on loans previously charged-off. For 2002, total charge-offs and recoveries were $258,000 and $158,000, respectively. At December 31, 2003, the allowance for loan losses was $2.8 million, or 0.70%, of year-end loans compared to $2.1 million, or 0.69%, of loans at December 31, 2002. Total nonaccrual loans at December 31, 2003 were $6.4 million compared to $5.6 million at December 31, 2002. The amount needed in the allowance for loan losses for nonaccrual 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.

 

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Other Income. Other income decreased slightly to $2.4 million for the year ended December 31, 2003. Increased gains on sales of loans held for sale and securities were offset by decreased other income. Other income declined in 2003, due to a decrease in loan servicing income related to the significant residential loan refinancing activity during 2003 together with our decision to have a third party service our residential mortgage loan portfolio.

 

Other Expense. Other expense increased to $8.8 million in 2003, from $7.3 million in 2002. The increase was the result of increased salary and employee benefits expense, occupancy expenses, professional services and data processing expense. The increase in salary and employee benefits of $583,000 was the result of additions to staff in 2003, due to our growth and the opening of three new branches in December 2002, June 2003 and October 2003, which also caused occupancy expense to increase. In addition, staff was added in the commercial loan department as part of our strategy to increase non-residential real estate lending. Data processing expense increased as a result of an increase in the number of accounts and the opening of the new branches.

 

Income Taxes. Income taxes increased from $1.0 million (an effective tax rate of 33.5%) in 2002, to $1.3 million (an effective tax rate of 31.5%) in 2003. The effective tax rate decreased in 2003 due to an increase in tax-exempt income in 2003.

 

Comparison of the Years Ended December 31, 2002 and 2001

 

General. Net earnings for 2002 were $2.1 million or $0.34 per basic and diluted share, compared to net earnings of $1.3 million, or $0.25 per basic and diluted share for 2001. The improvement in the net earnings in 2002 was due to an increase in net interest income, partially offset by an increase in other expenses.

 

Interest Income. Interest income was $19.5 million in 2002 compared to $20.0 million in 2001. Interest income on loans decreased to $18.3 million in 2002 from $19.2 million in 2001. The decrease in interest income on loans in 2002, was primarily attributable to a decrease in the yield earned on loans offset partially by an increase in the average amount of loans outstanding during the year. Interest income on securities increased to $735,000 in 2002 from $363,000 in 2001, as a result of an increase in the average balance of securities held by the Company partially offset by a decrease in the yield earned on the securities. Other interest income increased from $352,000 in 2001 to $368,000 during 2002.

 

Interest Expense. Interest expense decreased during 2002 to $11.0 million, compared to $13.3 million in 2001 primarily due to a decrease in the average cost paid partially offset by an increase in the average amount of deposit accounts and FHLB advances outstanding. Interest expense on deposits decreased by $2.0 million in 2002, as a result of a decrease in average cost paid on deposits partially offset by an increase in the average amount of 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 decreased to $2.5 million in 2002, from $2.8 million in 2001 due to decreases in both the average cost paid on the advances and borrowings and in the amount of advances and other borrowings outstanding.

 

Provisions for Loan Losses. A provision for loan losses is generally charged to earnings based upon management’s evaluation of the inherent losses in its loan portfolio. The Company’s provision for loan losses for 2002 was $445,000 compared to $540,000, in 2001. The Company’s gross loan portfolio grew by $36.6 million in 2002. Residential mortgage loans grew $42.5 million, while construction loans declined by $20.0 million and commercial real estate loans increased $12.5 million. As of December 31, 2002, 79.2% of our 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.

 

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Gross charge-offs totaled $258,000 in 2002, compared to $425,000 for 2001. Loan recoveries for 2002 and 2001 were $158,000 and $16,000, respectively. At December 31, 2002, the allowance for loan losses was $2.1 million, or 0.69% of loans. Total nonaccrual loans at December 31, 2002 were $5.6 million, compared to $3.6 million at December 31, 2001. The amount needed in the allowance for loan losses for nonaccrual 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.

 

Other Income. Other income increased slightly to $2.4 million for the year ended December 31, 2002. The increase in 2002 was the result of increased rental income and gains on sales of securities available for sale offset partially by decreased gains on sales of loans held for sale. Rental income increased due to a full year of recognized sub-lease income on agreements entered into during 2001.

 

Other Expense. Other expense increased to $7.3 million in 2002, from $6.5 million in 2001. The increase was the result of increased salary and employee benefits expense, occupancy expense and data processing expense, offset partially by decreased professional services expense. The increase in salary and employee benefits of $637,000 was the result of additions to staff in 2002, due to our growth and the opening of a new branch, which also caused occupancy expense to increase. In addition, staff was added in the commercial loan department as part of our strategy to increase non-real estate commercial lending. Data processing expense increased as a result of an increase in the number of accounts and the opening of the new branch.

 

Income Taxes. Income taxes increased from $716,000 (an effective tax rate of 36.1%) in 2001 to $1.0 million (an effective tax rate of 33.5%) in 2002. The effective tax rate decreased in 2002 due to an increase in tax-exempt income being recognized during the year.

 

Asset /Liability Management

 

Our profitability, like that of most holding companies and financial institutions, is dependent to a large extent upon its net interest income, which is the difference between its interest income on interest-earning assets, such as loans, mortgage-backed securities and other investment securities, and its interest expense on interest-bearing liabilities, such as deposits and other borrowings. Financial institutions are affected by changes in levels of market interest rates and other economic factors beyond their control. At December 31, 2003, our one-year interest sensitivity gap (the difference between the amount of interest-earning assets anticipated by the Company to mature or reprice within one year and the amount of interest-bearing liabilities anticipated by the Company to mature or reprice within one year) as a percentage of total assets was a negative 36.6%. Generally, an institution with a negative gap would experience a decrease in net interest income in a period of rising interest rates or an increase in net interest income in a period of declining interest rates since there will be more liabilities than assets that will either mature or be subject to repricing within the one-year period. However, certain shortcomings are inherent in this rate sensitivity analysis. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different manners to changes in market interest rates. Therefore, no assurance can be given that we will be able to maintain our net interest-rate spread as market interest rates fluctuate.

 

We monitor our interest-rate risk through the Bank’s Asset/Liability Committee, which meets bi-weekly. An interest-rate risk report is presented to the Bank’s Board quarterly. Our policy is to seek to maintain a balance between interest-earning assets and interest-bearing liabilities so that our cumulative

 

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one-year gap is within a range established by the Board of Directors and which management believes is conducive to maintaining profitability without incurring undue risk. We have increased its investment in adjustable-rate and shorter average-life loans and mortgage-related securities in order to position itself for changing interest rates.

 

The following table sets forth the amounts of interest-earning assets and interest-bearing liabilities outstanding at December 31, 2003 that are expected to reprice, based upon certain assumptions and contractual maturities, in each of the future periods shown. Adjustable-rate mortgage-backed securities are scheduled according to their next adjustment date and fixed-rate mortgage-backed securities are scheduled according to their maturity date.

 

   

Three
Months

or Less


   

More

than

Three
Months

to Six
Months


   

More

than

Six

Months

to 12
Months


   

More

than

One

Year

to 3

Years


   

More

than
Three
Years

to 5

Years


   

More

than

Five

Years

to 10
Years


   

More

than

Ten

Years


    Total

    (Dollars in thousands)

At December 31, 2003:

                                                             

Rate-sensitive assets:

                                                             

Mortgage loans, net of LIP

  $ 16,371     $ 16,115     $ 34,223     $ 52,554     $ 129,582     $ 5,501     $ 44,947     $ 299,293

Commercial and consumer loans

    29,468       2,126       4,516       24,542       33,973       1,226       2,690       98,541

Mortgage-backed securities

    3,422       2,976       1,658       3,451       —         —         4,248       15,755

Debt securities

    —         —         1,963       —         —         —         5,988       7,951

Corporate equity securities

    9,909       —         —         —         —         —         —         9,909

Interest-earning deposits

    666       —         —         —         —         —         —         666

FHLB stock

    5,660       —         —         —         —         —         —         5,660
   


 


 


 


 


 


 


 

Total interest-earning assets

    65,496       21,217       42,360       80,547       163,555       6,727       57,873       437,775
   


 


 


 


 


 


 


 

Rate-sensitive liabilities:

                                                             

Deposits:

                                                             

Demand, money-market and savings accounts

    100,327       —         —         —         —         —         —         100,327

Time deposits

    40,600       37,119       81,594       44,338       4,292       8       —         207,951

FHLB advances

    30,500       —         —         30,000       22,200       25,000       —         107,700

Other borrowings

    10,372       —         —         —         —         —         —         10,372
   


 


 


 


 


 


 


 

Total interest-bearing liabilities

    181,799       37,119       81,594       74,338       26,492       25,008       —         426,350
   


 


 


 


 


 


 


 

Interest-sensitivity gap

  $ (116,303 )   $ (15,902 )   $ (39,234 )   $ 6,209     $ 137,063     $ (18,281 )   $ 57,873     $ 11,425
   


 


 


 


 


 


 


 

Cumulative interest-sensitivity gap

  $ (116,303 )   $ (132,205 )   $ (171,439 )   $ (165,230 )   $ (28,167 )   $ (46,448 )   $ 11,425        
   


 


 


 


 


 


 


     

Cumulative interest-earning assets

  $ 65,496     $ 86,713     $ 129,073     $ 209,620     $ 373,175     $ 379,902     $ 437,775        
   


 


 


 


 


 


 


     

Cumulative interest-bearing liabilities

  $ 181,799     $ 218,918     $ 300,512     $ 374,850     $ 401,342     $ 426,350     $ 426,350        
   


 


 


 


 


 


 


     

Cumulative interest-sensitivity gap as a percentage of total assets

    (24.8 )%     (28.2 )%     (36.6 )%     (35.3 )%     (6.0 )%     (9.9 )%     2.4 %      
   


 


 


 


 


 


 


     

Cumulative interest-earning assets as a percentage of cumulative interest-bearing liabilities

    36.0 %     39.6 %     43.0 %     55.9 %     93.0 %     89.1 %     102.7 %      
   


 


 


 


 


 


 


     

 

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Recent Pronouncements

 

In November 2002, the Financial Accounting Standards Board (“the FASB”) issued Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others” (“FIN 45”), which expands previously issued accounting guidance and disclosure requirements for certain guarantees. FIN 45 requires us to recognize an initial liability for the fair value of an obligation assumed by issuing a guarantee. The provision for initial recognition and measurement of the liability is applied on a prospective basis to guarantees issued or modified after December 31, 2002. The adoption of FIN 45 did not have a material affect on our consolidated financial statements.

 

In June 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities, to provide guidance on the recognition and measurement of liabilities for costs associated with exit or disposal activities. SFAS No. 146 is effective for exit and disposal activities that are initiated after December 31, 2002. The adoption of this Statement had no effect on our consolidated financial statements.

 

In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” This Statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under FASB Statement No. 133, “Accounting for Derivative Instruments and Hedging Activities. This Statement is effective for contracts entered into or modified after June 30, 2003. The adoption of this Statement had no effect on our consolidated financial statements.

 

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” This Statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. This Statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of this Statement had no effect on our consolidated financial statements.

 

Impact of Inflation and Changing Prices

 

The financial statements and related data presented herein have been prepared in accordance with accounting principles generally accepted in the United States of America (“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 our assets and liabilities are monetary in nature. As a result, interest rates have a more significant impact on our 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.

 

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MANAGEMENT

 

Executive Officers and Directors of Federal Trust and the Bank

 

The following table sets forth information with respect to Federal Trust’s and the Bank’s executive officers and directors.

 

Name


 

Position with Federal Trust


 

Position with the Bank


Jennifer B. Brodnax

 

Assistant Corporate Secretary

 

SVP of Branch Administration

Dr. Samuel C. Certo

 

Director

 

Director

George W. Foster

 

Director

 

Director

Stephen C. Green

 

None

 

EVP & Chief Operating Officer

A. Stewart Hall, Jr.

 

None

 

Director

Dennis J. Harward

 

None

 

Director

Kenneth W. Hill

 

Director

 

Director

A. George Igler

 

Vice Chairman

 

None

Thomas J. Punzak

 

None

 

VP & Treasurer

Daniel C. Roberts

 

None

 

SVP & Chief Credit Officer

Gregory E. Smith

 

EVP & Chief Financial Officer

 

EVP & Chief Financial Officer

James V. Suskiewich

 

President, Chief Executive Officer & Chairman of the Board

 

President, Chief Executive Officer & Chairman of the Board

 

Information regarding the experience and expertise of these executive officers and directors is set forth below.

 

Jennifer B. Brodnax started her banking career in June 1987 with the Bank, while it was still in organization. She has served in various management capacities including the oversight of the accounting functions and operations. She presently serves as Senior Vice President of Branch Administration, responsible for all branch operations. Ms. Brodnax resides in Winter Park, Florida.

 

Dr. Samuel C. Certo has been a director of Federal Trust since 1997 and a director of the Bank since 1996. He is the former Dean and a Professor of Management in the Crummer Graduate School of Business at Rollins College in Winter Park. Since 1986, Dr. Certo has served as a business consultant and has published textbooks in the areas of management and strategic management. Dr. Certo resides in Longwood, Florida.

 

George W. Foster is a retired banker and has been a director of Federal Trust since 1997 and a director of the Bank since 1990. From 1990 through 1993, he served as President and Chief Executive Officer of Federal Trust Bank. Mr. Foster resides in Longwood, Florida.

 

Stephen C. Green has been in banking since 1973, principally involved in corporate and commercial lending. He has served in various management capacities including Senior Lending Officer, Chief Credit Officer, and Region President with large regional banks. Mr. Green has served in his current capacity with the Bank as Executive Vice President and Chief Operating Officer since November 2000. Mr. Green resides in Longwood, Florida.

 

A. Stuart Hall, Jr. has been a director of the Bank since September 2003. He has been Chairman of Ashcorp, Inc. since 2001. He was also President and Chief Operating Officer of Hughes Supply, Inc. from 1973 to 2001. Mr. Hall resides in Orlando, Florida.

 

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Table of Contents

Dennis J. Harward has been a director of the Bank since May 1999. He is the President and Chief Executive Officer of Innoprise Software, Inc., which provides software programs to the public sector and utility companies. Mr. Harward resides in Orlando, Florida.

 

Kenneth W. Hill has been a director of Federal Trust since 1997 and a director of the Bank since 1995. Mr. Hill was the Vice President and Trust Officer of SunBank, N.A., Orlando, Florida from 1983 through 1995. Mr. Hill resides in Orlando, Florida.

 

A. George Igler was elected to the Board in October 2001. Since 1992, he has been a principal in the law firm of Igler & Dougherty, P.A., which specializes in banking, corporate and securities law. Igler & Dougherty, P.A., which has offices in Tallahassee and Tampa, Florida, has served as the Federal Trust’s corporate counsel since 1993. Mr. Igler resides in Tallahassee, Florida.

 

Thomas J. Punzak is Vice President/Treasurer for Federal Trust Bank and began his career with the Bank in June 1992. He has 18 years of experience in the banking and mortgage banking industries, including in the accounting, loan servicing and operations areas. He is a licensed CPA in Florida with auditing experience dealing primarily with banking clients while employed with a large CPA firm. Mr. Punzak resides in Winter Springs, Florida.

 

Daniel C. Roberts has been in banking since 1974, principally as a regulator, and in various aspects of credit review, credit administration, underwriting and approval. He has served in various management capacities including Chief Credit Officer, and in the loan review, underwriting and approval functions with large regional banks. He has served in his current capacity as Senior Vice President and Chief Executive Officer since March 2001. Mr. Roberts resides in Lake Mary, Florida.

 

Gregory E. Smith joined Federal Trust and the Bank in April 2003, as its Executive Vice President and Chief Financial Officer. He has worked in both large and small commercial banks and savings associations in Florida since 1979. His prior banking experience includes being President, Chief Operating Officer, Chief Financial Officer and director. Mr. Smith is a CPA and he started his career with a large CPA firm in New York, where he was a bank specialist. Mr. Smith resides in Winter Springs, Florida.

 

James V. Suskiewich has been a director of Federal Trust since 1994 and is currently Chairman of the Board. He has served as President and Chief Executive Officer of Federal Trust since July 1996. Since January 1993, he has been President, Chief Executive Officer and a director of the Bank. Mr. Suskiewich resides in Lake Mary, Florida.

 

DESCRIPTION OF BUSINESS

 

General

 

Federal Trust was organized in February 1989 for the purpose of becoming the unitary savings and loan holding company of the Bank, a federally-chartered stock savings bank. Our executive office is located at 312 West First Street, Sanford, Florida 32771 and our telephone number is (407) 323-1833.The principal source of our revenues on an unconsolidated basis is earnings of the Bank. Various regulatory restrictions and tax considerations limit, directly or indirectly, the amount of dividends the Bank can pay to us. In addition, federal law restricts the Bank in the making of investments in or loans to us or our affiliates. See “Regulation and Supervision.”

 

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Subsidiary

 

Federal Trust 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 FHLB advances and investing such funds in permanent loans on residential and commercial real estate, in various types of commercial, construction and consumer loans and in investment securities.

 

The 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 OTS and the FDIC, which is intended primarily for the benefit of depositors. See “Regulation and Supervision.”

 

Other Entity

 

In September 2003, Federal Trust Statutory Trust I (the “Statutory Trust I”) was formed for the sole purpose of issuing $5,000,000 of trust preferred securities. In accordance with Financial Accounting Standards Interpretation No. 46 “Consolidation of Variable Interest Entities” (as revised December 2003), Federal Trust accounts for the Statutory Trust I under the equity method of accounting.

 

Critical Accounting Policies

 

Our financial condition and results of operations are sensitive to accounting measurements and estimates of matters that are inherently uncertain. When applying accounting policies in areas that are subjective in nature, we use our best judgment to arrive at the carrying value of certain assets. The most critical accounting policy we applied is related to the valuation of the loan portfolio.

 

A variety of factors impact the carrying value of the loan portfolio including the calculation of the allowance for loan losses, the valuation of underlying collateral, the timing of loan charge-offs and the amount and amortization of loan fees and deferred origination costs.

 

We believe that the determination of the allowance for loan losses represents a critical accounting policy. The allowance for loan losses is maintained at a level management considers to be adequate to absorb probable loan losses inherent in the portfolio, based on evaluations of the collectibility and historical loss experience of loans. Credit losses are charged and recoveries are credited to the allowance. Provisions for loan losses are based on our review of the historical loan loss experience and such factors which, in management’s judgment, deserve consideration under existing economic conditions in estimating probable credit losses. The allowance is based on ongoing assessments of the probable estimated losses inherent in the loan portfolio. Our methodology for assessing the appropriate allowance level consists of several key elements described below.

 

Larger commercial loans that exhibit probable or observed credit weaknesses are subject to individual review. Where appropriate, reserves are allocated to individual loans based on our estimate of the borrower’s ability to repay the loan given the availability of collateral, other sources of cash flows, and available legal options. Included in the review of individual loans are those that are impaired as provided in Statement of Financial Accounting Standards No. 114, “Accounting by Creditors for Impairment of a Loan” as amended. Any specific reserves for impaired loans are measured based on the fair market value of the underlying collateral. We evaluate the collectibility of both principal and interest when assessing the need for a special reserve. Historical loss rates are applied to other commercial loans not subject to specific reserve allocations.

 

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Homogenous loans, such as residential mortgage loans, are not individually reviewed by management. Reserves are established for each pool of loans based on the delinquency trends and expected net charge-offs. Loss rates are based on the average net charge-off history by loan category.

 

Historical loss rates for commercial and consumer loans may be adjusted for significant factors that, in management’s judgment, reflect the impact of any current conditions or loss recognition. Factors which management considers in the analysis include the effects of the local economy, trends in the nature and volume of loans (delinquencies, charge-offs, nonaccrual and problem loans), changes in the internal lending policies and credit standards, collection practices, and examination results from bank regulatory agencies and our internal credit review function. An unallocated reserve is maintained to recognize the imprecision in estimating and measuring loss when evaluating reserves for individual loans or pools of loans. Specific reserves on individual loans and historical loss rates are reviewed throughout the year and adjusted as necessary based on changing borrower and collateral conditions and actual collection and charge-off experience.

 

Based on the procedures discussed above, we believe that our allowance for loan losses was adequate to absorb estimated loan losses associated with the loan portfolio at March 31, 2004 and December 31, 2003. Actual results could differ from these estimates. However, since the allowance is affected by our judgment and uncertainties, there is the likelihood that materially different amounts would be reported under different conditions or assumptions. To the extent that the economy, collateral values, reserve factors, or the nature and volume of problem loans change, we may need to adjust the provision for loan losses. Material additions to our provision for loan losses would result in a decrease in net earnings and capital.

 

The allowance for loan losses is also discussed as part of “Results of Operations” and in Note 3 to the consolidated financial statements. The significant accounting policies are discussed in Note 1 to the consolidated financial statements.

 

Operating Strategy

 

Our current operating strategy is to build a community bank branch network serving Central Florida through the origination and bulk purchase of residential mortgage loans, and expansion of a commercial loan portfolio. Residential loans are typically secured by a first mortgage on a dwelling and commercial loans are secured by real estate and, where appropriate, the working assets of the borrower (such as accounts receivable, inventory, and equipment). To a lesser extent, we provide loans to consumers secured by the equity in their homes.

 

Our lending activities are funded through core deposit generation fostered by branch expansion, borrowings form the Federal Home Loan Bank, and in the secondary market when rates are favorable. To the extent possible, we attempt 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 interest on loans, securities, and overnight deposits, fees on checking and loan accounts and sales of loans and investments held for sale. Our principal expenses are interest paid on deposits and other borrowings and operating expenses.

 

Market Area and Competition

 

We have six full-service branch offices located in: Sanford, Winter Park, New Smyrna Beach, Casselberry, Deltona and Orange City, Florida. Sanford, which is located approximately 20

 

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miles northeast of downtown Orlando, is the second largest city in Seminole County and is the County seat. The City of Winter Park is located 13 miles southeast of Sanford and approximately 7 miles northeast of downtown Orlando, 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 1.6 million, with the majority in Orange and Seminole Counties. Casselberry is located in Seminole County between our Sanford and Winter Park Offices. New Smyrna Beach is located in Volusia County on the Atlantic Ocean approximately 33 miles northeast of our Sanford office and 15 miles south of Daytona Beach, Florida. Deltona and Orange City are both located in the western part of Volusia County along the Interstate 4 corridor between Orlando and Daytona Beach. Our administrative and operations offices are located in Sanford.

 

Our primary market area is Orange, Seminole and Volusia Counties. Although best known as a tourist destination, with over 20 million visitors a year, the Central Florida 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 greater Orlando area as a base for corporate, regional, and divisional headquarters. The area is also home to the University of Central Florida, the second largest state university in Florida, with an enrollment of 36,000, 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 85,000. Winter Park is home to Rollins College, the oldest college in Florida founded in 1885. In addition, Stetson University, Florida’s first private university, is located in Volusia County.

 

We experience substantial competition in attracting and retaining deposits and in lending funds. The primary factors in competing for deposits are customer service, branch locations and interest rates. Direct competition for deposits comes from other savings 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 loan structure, interest rates and loan origination points. Competition for origination of real estate loans normally comes from other savings 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 over the past eight years. As of June 30, 2003, the four largest banking institutions in the state controlled approximately 50% of the bank deposits. In 1994, the four largest controlled less than 29% of the deposits.

 

Geographic deregulation also has had a material impact on the banking industry. Legislation in Florida and on the national level has removed 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 residential lending includes the origination and purchase of mortgage loans for purchasing or constructing residential real property, primarily secured by first liens on such property. These loans are typically conventional loans which are not insured by the Federal Housing Agency (FHA) or partially secured by the Veterans Administration (VA). Loans with fixed rates beyond five years are generally sold into the secondary market. Loans with fixed rates

 

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of five years or less are considered for portfolio. Interest rates for construction loans are tied to the prime rate and float daily during the construction period and are fixed upon completion. To a lesser extent, we also make home equity loans which generally float daily with the prime rate. Other consumer related loans are savings loans secured by certificates of deposit at an interest rate above the rate paid on the certificate.

 

As part of our strategy, we have emphasized commercial lending during the past three years. Commercial loans are comprised of loans to small businesses secured by real estate used in the enterprise and, where appropriate, the working assets of the business. We also make commercial real estate loans for the acquisition and development of undeveloped land, and income producing properties. Commercial loans are priced on a floating prime rate basis or fixed at repricing intervals not to exceed five years. As a matter of policy, commercial loans are guaranteed by the borrowers’ principals.

 

Credit Risk. Since our primary business is the origination and acquisition of loans, 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 guidelines have been instituted and credit review procedures have been put in place to protect us 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. There is no assurance, however, that a borrower’s income will be sufficient to service the renewal. In making short-term balloon loans, we require lower loan to value ratios or additional collateral to cover the general risk with this type of loan.

 

We conduct business as a savings and loan holding company, and our principal asset is the capital stock of the Bank. As a savings and loan holding company, we have greater flexibility than the Bank to diversify and expand its business activities, either through newly formed subsidiaries or through acquisitions.

 

The principal source of our revenues on an unconsolidated basis is earnings of the Bank. Various regulatory restrictions and tax considerations limit, directly or indirectly, the amount of dividends the Bank can pay to us. In addition, federal law restricts the Bank in the making of investments in or loans to us or our affiliates. See “Regulation and Supervision.”

 

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Loan Portfolio Composition. Our net loan portfolio, which is total loans plus premiums paid for loans purchased less loans in process, deferred loan origination fees and costs and allowance for loan losses, totaled $413.9 million at March 31, 2004, representing 86% of total assets at such date, and $398.4 million at December 31, 2003, representing 85% of total assets at such date. At December 31, 2002, our net loan portfolio was $308.6 million or 84% of total assets.

 

Residential mortgage loans, not including construction loans, comprise the largest group of loans in our loan portfolio, amounting to $305.6 million or 73.4% and $302.1 million or 75.4% of the total loan portfolio at March 31, 2004, and December 31, 2003, respectively. We offer fixed-rate and ARM loans with maturities up to 30 years. As of March 31, 2004, and December 31, 2003, approximately 89% and 86%, respectively, of these loans were ARM loans and 11% and 14%, respectively, of these loans were fixed-rate. Fixed-rate loans are generally underwritten to secondary market standards to ensure liquidity and interest rate risk protection.

 

Commercial real estate loans, including land loans, amounted to $89.6 million or 21.5% and $78.2 million or 19.5% of the total loan portfolio at March 31, 2004 and December 31, 2003, respectively. Commercial real estate loans consist of $47.4 million of loans secured by other non-residential property and $30.8 million of loans secured by land which is developed or being developed as of December 31, 2003.

 

Construction loans amounted to $7.1 million or slightly less than 2% of total loans at both March 31, 2004 and December 31, 2003. We make residential and commercial real estate construction loans usually on property throughout Central Florida.

 

At March 31, 2004 and December 31, 2003, consumer loans, consisting of installment loans and savings account loans, amounted to $930,000 and $864,000 or 0.2%, respectively, of the total loan portfolio.

 

Commercial loans at March 31, 2004 and December 31, 2003, amounted to $13.4 million or 3.2% and $12.4 million or 3.1%, respectively, of total loans. Commercial loans are generally secured by the assets of the borrower including accounts receivable, inventory, fixed assets and company owned real estate, and are also usually guaranteed by the owners.

 

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The following table sets forth information on our loan portfolio by type.

 

     At March 31,

   

At December 31,


 
     2004

    2003

    2002

    2001

    2000

    1999

 
     Amount

    % of
Total


    Amount

    % of
Total


    Amount

    % of
Total


    Amount

     % of
Total


    Amount

     % of
Total


    Amount

     % of
Total


 
                 (Dollars in thousands)  

Mortgage loans:

                                                                                       

Residential

   $ 305,625     73.4 %   $ 302,083     75.4 %   $ 246,234     79.2 %   $ 203,729      74.3 %   $ 164,387      70.4 %   $ 141,137      71.9 %

Commercial

     89,644     21.5       78,209     19.5       44,766     14.4       32,315      11.8       28,343      12.1       20,981      10.7  

Construction

     7,125     1.7       7,079     1.8       12,258     3.9       32,212      11.7       35,014      15.0       31,518      16.1  
    


 

 


 

 


 

 


  

 


  

 


  

Total mortgage loans

     402,394     96.6       387,371     96.7       303,258     97.5       268,256      97.8       227,744      97.5       193,636      98.7  

Consumer loans

     930     .2       864     .2       969     .3       3,111      1.1       4,436      1.9       2,676      1.3  

Commercial Loans

     13,419     3.2       12,389     3.1       6,768     2.2       3,078      1.1       1,505      0.6       —        —    
    


 

 


 

 


 

 


  

 


  

 


  

Total loans

     416,743     100.0 %     400,624     100.0 %     310,995     100.0 %     274,445      100.0 %     233,685      100.0 %     196,312      100.0 %
            

         

         

          

          

          

Add (deduct):

                                                                                       

Loans in process

     (3,272 )           (2,790 )           (3,189 )           (10,813 )            (10,885 )            (9,967 )       

Net premiums, discounts, deferred fees and costs

     3,680             3,346             2,902             2,320              1,729              1,753         

Allowance for loan losses

     (3,283 )           (2,779 )           (2,110 )           (1,765 )            (1,634 )            (1,438 )       
    


       


       


       


        


        


      

Net loans

   $ 413,868           $ 398,401           $ 308,598           $ 264,187            $ 222,895            $ 186,660         
    


       


       


       


        


        


      

 

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 us 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 both March 31, 2004 and December 31, 2003, we had $7.1 million in construction loans, the majority of which mature in one year or less.

 

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The following table shows the contractual maturities of the Bank’s loan portfolio. Loans that have adjustable rates are shown as amortizing to final maturity rather than when the interest rates are next subject to change. The table does not include prepayments or scheduled principal repayments.

 

     Mortgage Loans

  

Consumer
Loans


  

Commercial
Loans


  

Total
Loans
Receivable


     Residential

   Other

        
     (In thousands)

At March 31, 2004:

                                  

Amounts due:

                                  

Within 1 year

   $ 7,508    $ 14,327    $ 249    $ 8,800    $ 30,884
    

  

  

  

  

1 to 3 years

     6,762      22,400      101      1,975      31,238

3 to 5 years

     19,843      39,822      497      2,498      62,660

5 to 10 years

     5,717      5,824      83      146      11,770

10 to 20 years

     14,412      7,759      —        —        22,171

Over 20 years

     251,383      6,637      —        —        258,020
    

  

  

  

  

Total due after 1 year

     298,117      82,442      681      4,619      385,859
    

  

  

  

  

Total amounts due

   $ 305,625    $ 96,769    $ 930    $ 13,419    $ 416,743
    

  

  

  

  

At December 31, 2003:

                                  

Amounts due:

                                  

Within 1 year

   $ 5,364    $ 5,872    $ 244    $ 8,062    $ 19,542
    

  

  

  

  

1 to 3 years

     223      20,557      32      975      21,787

3 to 5 years

     763      35,045      511      3,352      39,671

5 to 10 years

     29,024      10,562      77      —        39,663

10 to 20 years

     14,949      4,478      —        —        19,427

Over 20 years

     251,760      8,774      —        —        260,534
    

  

  

  

  

Total due after 1 year

     296,719      79,416      620      4,327      381,082
    

  

  

  

  

Total amounts due

   $ 302,083    $ 85,288    $ 864    $ 12,389    $ 400,624
    

  

  

  

  

 

Loans Due After March 31, 2005 and December 31, 2004. The following table sets forth the dollar amount of all loans due after March 31, 2005 and December 31, 2004, respectively, classified according to whether such loans have fixed or adjustable interest rates.

 

(Table to follow this page)

 

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Table of Contents
     Due after March 31, 2005

     Fixed

   Adjustable

   Total

     (In thousands)

At March 31, 2004:

                    

Mortgage loans:

                    

Residential

   $ 31,710    $ 266,407    $ 298,117

Other

     21,551      60,891      82,442

Consumer loans

     351      330      681

Commercial loans

     4,619      —        4,619
    

  

  

Total

   $ 58,231    $ 327,628    $ 385,859
    

  

  

     Due after December 31, 2004

     Fixed

   Adjustable

   Total

     (In thousands)

At December 31, 2003:

                    

Mortgage loans:

                    

Residential

   $ 49,126    $ 247,593    $ 296,719

Other

     34,109      45,307      79,416

Consumer loans

     362      258      620

Commercial loans

     4,327      —        4,327
    

  

  

Total

   $ 87,924    $ 293,158    $ 381,082
    

  

  

 

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 volume could be affected by changes in interest rates and in the real estate development and construction industries.

 

Our loan portfolio consists of purchased and originated loans. When loans are acquired in the secondary market, we generally purchase loan packages of $5 million to $25 million of single-family residential mortgages, comprised of new and seasoned adjustable rate mortgage (“ARM”) loans. 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 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. In addition, if the size of a particular loan request exceeds our legal or internal lending limit, we may seek to sell a participation in that loan to a correspondent bank. From time to time, we also purchase participations from our correspondents.

 

Consumer loan originations are attributable largely to depositors and walk-in customers and referrals, while commercial and commercial real estate loan originations are primarily attributable to

 

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our loan officers and referrals. All loan applications are evaluated by staff at the administrative and operations office in Sanford to ensure compliance with our underwriting standards. See “Lending Activities - Loan Portfolio Composition - Loan Underwriting Policies.”

 

The following table sets forth the amount of loans originated, purchased, sold and repaid during the periods indicated (in thousands).

 

     Three Months Ended
March 31,


    For the Year Ended December 31,

 
     2004

    2003

    2003

    2002

    2001

    2000

    1999

 

Originations:

                                                        

Mortgage loans:

                                                        

Loans on existing property

   $ 18,311     $ 12,127     $ 55,310     $ 79,373     $ 70,969     $ 56,575     $ 29,804  

Construction loans

     2,328       1,472       9,787       27,674       64,437       41,513       22,670  
    


 


 


 


 


 


 


Total mortgage loans

     20,639       13,599       65,097       107,047       135,406       98,088       52,474  

Commercial loans

     4,400       2,217       12,373       33,077       5,751       14,834       9,311  

Consumer loans

     186       305       701       529       2,469       2,161       1,108  
    


 


 


 


 


 


 


Total loans originated

     25,225       16,121       78,171       140,653       143,626       115,083       62,893  

Purchases

     31,160       61,471       176,828       97,897       53,933       29,802       55,177  
    


 


 


 


 


 


 


Total loans originated and purchased

   $ 56,385     $ 77,592     $ 254,999     $ 238,550     $ 197,559     $ 144,885     $ 118,070  
    


 


 


 


 


 


 


Sales and principal repayments:

                                                        

Loans sold

     (8,652 )     (7,142 )     (39,560 )     (28,072 )     (33,764 )     (24,598 )     (30,431 )

Principal repayments

     (31,614 )     (21,998 )     (125,810 )     (173,928 )     (123,035 )     (82,914 )     (50,773 )
    


 


 


 


 


 


 


Total loans sold and principal repayments

   $ (40,266 )   $ (29,140 )   $ (165,370 )   $ (202,000 )   $ (156,799 )   $ (107,512 )   $ (81,204 )
    


 


 


 


 


 


 


Increase in total loans (before net items)

   $ 16,119     $ 48,452     $ 89,629     $ 36,550     $ 40,760     $ 37,373     $ 36,866  
    


 


 


 


 


 


 


 

Loan Underwriting. Lending activities are subject to underwriting standards and loan origination procedures prescribed by our Board of Directors and management. Loan applications are obtained to determine the borrowers’ 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 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 Loan Committee of the Board of Directors. Loan approvals are made in accordance with a “Chart of Delegated Authority” approved by our Board of Directors. Generally, loans less than $300,000 are approved jointly by authorized officers and underwriters. Loans in excess of $300,000 to $2,000,000 require the concurrence of three or more authorized officers. Loans greater than $2,000,000 require approval of the Board of Directors’ Loan Committee. For loan approvals, the aggregate loans to the borrower and their related interest are used for determination of the appropriate lending authority required for any new loans or renewals.

 

To ensure that underwriting standards and loan policies are being followed, an internal loan review process has been put in place. Additionally, our external auditor and the OTS perform independent testing of the Bank’s underwriting and credit quality.

 

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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 ensures 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, are 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 by the Bank to one borrower and the borrower’s related entities at March 31, 2004, was approximately $4.8 million. We have no loans in our portfolio that exceed our loans to one borrower limit.

 

Federal savings and loan association regulations permit the Bank to invest in loans secured by non-residential or commercial real estate in the aggregate, up to four times our regulatory capital. At March 31, 2004, this limit allowed us to invest in non-residential or commercial real estate loans in an aggregate amount up to $128.2 million. At such date, we had $89.6 million in loans secured by non-residential or commercial real estate.

 

The risk of non-payment of loans is inherent in all loans. However, we carefully evaluate all loan applicants and attempt to minimize our credit risk exposure by use of thorough loan application and approval procedures that we have established for each category of loan. In determining whether to make a loan, we consider the borrower’s credit history, analyze the borrower’s income and ability to service the loan, and evaluate the need for collateral to secure recovery in the event of default. An allowance for loan losses is maintained based upon assumptions and judgments regarding the ultimate collectibility of loans in our portfolio and a percentage of the outstanding balances of specific loans when their ultimate collectibility is considered questionable.

 

Residential Real Estate Loans. We make adjustable or fixed interest rate residential real estate loans to qualified individuals for the purchase of existing single-family residences in our principal markets. We also purchase loan packages in the secondary market. We make these loans in accordance with our underwriting policy which is focused on debt-to-income and loan-to-value ratios, and the borrower’s credit score. We believe our underwriting standards are sufficient to insulate us from fluctuations in real estate market values and will minimize losses that could result from a downturn in the residential real estate market. We sell mortgage loans that do not meet our portfolio criteria in the secondary markets. The risk of these loans depends on our ability to sell the loans to national investors and on the frequency of interest rate changes.

 

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We limit interest rate risk and credit risk on these loans by locking in the interest rate for fixed rate loans with a secondary market investor and receiving the investor’s underwriting approval before originating the loan. Adjustable rate loans are retained for our portfolio when rates and other loan terms are favorable to retain the loans. The loan underwriting standards and policies are generally the same for both loans sold in the secondary market and those retained in our portfolio.

 

Commercial Real Estate Loans. Commercial real estate loans are offered to developers of both commercial and residential properties, as well as to small businesses. Interest rates may be fixed or adjustable. We manage credit risk associated with these loans by actively monitoring such measures as advance rate, cash flow, collateral value and other appropriate credit factors. Risks associated with commercial real estate loans include the general risk of the failure of the commercial borrower, which are different for each type of business and commercial entity. We evaluate each business on an individual basis. We attempt to reduce credit risks in the commercial real estate loan portfolio by emphasizing loans on owner-occupied office and retail buildings where the loan-to-value ratio, established by independent appraisals, does not exceed 80%. In addition, we typically require personal guaranties of the principal owners.

 

Construction and Development Loans. Construction and development loans are made on both a pre-sold and speculative basis, and are generally at a floating interest rate. If the borrower has entered into an arrangement to sell the property prior to beginning construction, we consider the loan to be on a pre-sold basis. If the borrower has not entered into an agreement to sell the property prior to beginning construction, we consider the loan to be on a speculative basis. We make residential and commercial construction loans to builders and developers, as well as to consumers who have contracted with an approved builder. We generally limit the term of most construction and development loans to 18 months, although we may structure the payments based on a longer amortization basis. We base speculative loans on the borrower’s financial strength, cash flow position and market dynamics, such as absorption rates. Loan proceeds are disbursed based on the percentage of completion and only after an approved inspector certifies that the work is completed. These loans generally command higher rates and fees commensurate with the risks warranted in the construction loan field. The risk in construction lending depends upon the performance of the builder in building the project to the plans and specifications of the borrower and our ability to administer and control all phases of the construction disbursements. Upon completion of the construction, we typically convert construction loans to permanent loans.

 

Commercial Loans. This category includes loans made to business entities for a variety of business purposes. We place particular emphasis on loans to small to medium-sized professional firms, retail and wholesale businesses, and light industry and manufacturing concerns operating in our principal markets. We consider “small business” to include commercial, professional and retail businesses with annual gross sales of less than $15 million or annual operating profits of less than $5 million. Our commercial loans include term loans and lines of credit with fixed and variable interest rates secured by equipment, inventory, receivables and other assets. We evaluate general business conditions of the local economy and the borrowers’ ability to sell its products and services in order to generate sufficient business profits to repay their loans under the agreed upon terms and conditions. Personal guarantees are obtained from the principals of business borrowers to support further the borrower’s ability to service the debt and reduce the risk of non-payment.

 

Consumer and Installment Loans. Consumer loans include lines of credit and term loans secured by second mortgages on the residences of borrowers for a variety of purposes, including home improvements, education and other personal expenditures. Consumer loans also include installment loans to individuals for personal, family and household purposes, including automobile and boat loans and pre-approved lines of credit. Consumer loans generally involve more risk than

 

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mortgage loans because the collateral for a defaulted loan may not provide an adequate source of repayment of the principal. This risk is due to the potential for damage to the collateral or other loss of value, and the fact that any remaining deficiency often does not warrant further collection efforts. In addition, consumer loan performance depends on the borrower’s continued financial stability and is, therefore, more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy.

 

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 loans. We also receive fees for servicing loans owned by others. At March 31, 2004, we were servicing $86.6 million in loans for other institutions, which produces servicing income, net of amortization of mortgage servicing rights. 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 our market area. During 2003, we made a strategic decision to have a third party begin servicing our residential mortgage loans who charges us standard servicing and administration fees for these services.

 

Loan fees and direct costs 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 Foreclosed Assets. When a borrower fails to make a required payment on a loan, our collection efforts begin with contacting the borrower. If a payment on a loan has not been received by the end of a grace period, 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.

 

If foreclosure is effected, the property is sold at a public auction in which we typically participate as a bidder. If we are the successful bidder, the acquired real estate property is then included in our “foreclosed assets” account until it is sold. Under federal regulations, we are permitted to finance sales of foreclosed assets by “loans to facilitate,” which may involve more favorable interest rates and terms than generally would be granted under our underwriting guidelines. At March 31, 2004, and December 31, 2003, we 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.

 

Assets acquired as a result of foreclosure or by deed-in-lieu of foreclosure are classified as foreclosed assets until they are sold. When assets are acquired, they are recorded at the lower of cost or fair value less estimated selling costs 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 foreclosed assets, the ratio of such loans and foreclosed assets to total assets as of the date indicated, and certain other related information.

 

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     At March 31,

    At December 31,

 
     2004

    2003

    2002

    2001

    2000

    1999

 
           (Dollars in thousands)  

Non-accrual loans

                                                

Mortgage loans:

                                                

Construction

   $ 229     $ 229     $ 293     $ 418     $ 248     $ —    

Residential

     3,565       6,167       5,221       2,629       1,999       2,027  

Commercial

     —         —         —         481       773       629  
    


 


 


 


 


 


Total mortgage loans

     3,794       6,396       5,514       3,528       3,020       2,656  

Commercial loans

     —         —         —         39       —         —    

Consumer loans

     —         —         65       22       23       —    
    


 


 


 


 


 


Total non-accrual loans

   $ 3,794     $ 6,396     $ 5,579     $ 3,589     $ 3,043     $ 2,656  
    


 


 


 


 


 


Total non-accrual loans to total loans

     0.9 %     1.6 %     1.8 %     1.3 %     1.4 %     1.4 %
    


 


 


 


 


 


Total non-accrual loans to total assets

     0.8 %     1.4 %     1.5 %     1.2 %     1.2 %     1.3 %
    


 


 


 


 


 


Total allowance for loss to total non-accrual loans

     86.5 %     43.4 %     37.8 %     49.2 %     53.7 %     54.1 %
    


 


 


 


 


 


Foreclosed assets:

                                                

Assets acquired by foreclosure

   $ 694     $ 1,007     $ 858     $ 714     $ 431     $ 295  
    


 


 


 


 


 


Total foreclosed assets

   $ 694     $ 1,007     $ 858     $ 714     $ 431     $ 295  
    


 


 


 


 


 


Total non-accrual loans and foreclosed assets to total assets

     0.9 %     1.6 %     1.7 %     1.4 %     1.4 %     1.4 %
    


 


 


 


 


 


 

At March 31, 2004, we had no accruing loans which were contractually past due 90 days or more as to principal and interest and no troubled debt restructurings as defined by Statement of Financial Accounting Standards No. 15. Nonaccrual loans for which interest has been reduced totaled approximately $3.8 million, $6.4 million, $5.6 million and $3.6 million at March 31, 2004, December 31, 2003, 2002 and 2001, respectively. Interest income that would have been recorded under the original terms of nonaccrual loans and interest income actually recognized is summarized below (in thousands):

 

    

Three Months Ended

March 31,


    Year Ended
December 31,


 
     2004

    2003

    2003

 

Interest income that would have been recorded

   $ 83     $ 109     $ 468  

Interest income recognized

     (43 )     (7 )     (111 )
    


 


 


Interest income foregone

   $ 40     $ 102     $ 357  
    


 


 


 

Classified Assets – Potential Problem Loans. Federal regulations and the Bank’s policies require the classification of loans and other assets, such as debt and equity securities, considered to be of lesser quality as “substandard,” “doubtful” or “loss” assets. An asset is considered “substandard” if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. “Substandard” assets include those characterized by the “distinct possibility” that the

 

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institution will sustain “some loss” if the deficiencies are not corrected. Assets classified as “doubtful” have all of the weaknesses inherent in those classified “substandard,” with the added characteristic that the weaknesses present make “collection or liquidation in full,” on the basis of currently existing facts, conditions, and values, “highly questionable and improbable.” Assets classified as “loss” are those considered “uncollectible” and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted. In addition, the Bank’s policies require that assets which do not currently expose the insured institution to sufficient risk to warrant classification as substandard but possess other weaknesses be designated “special mention” by management.

 

If an asset is classified, the estimated fair value of the asset is determined and if that value is less than the then carrying value of the asset, the difference is established as a specific reserve. If an asset is classified as loss, the amount of the asset classified as loss is reserved. General reserves or general valuation allowances represent loss allowances which have been established to recognize the inherent risk associated with lending activities but, unlike specific reserves, are not allocated to particular assets.

 

No assets were classified “doubtful” or “loss” at March 31, 2004, or December 31, 2003. The following table sets forth information concerning the number and dollar amount of assets classified as “special mention” or “substandard:”

 

     Special Mention

   Substandard

     Number

   Amount

   Number

   Amount

     (Dollars in thousands)

At March 31, 2004:

                       

Loans

   6    $ 1,202    57    $ 4,975
    
  

  
  

At December 31, 2003:

                       

Loans

   8    $ 1,128    78    $ 8,249
    
  

  
  

 

Provisions for Loan Losses

 

A provision for loan losses is generally charged to earnings based upon management’s evaluation of the inherent losses in our loan portfolio. During the three months ended March 31, 2004, we made a provision of $550,000 based on its evaluation of the loan portfolio, compared to a provision of $220,000 made in the comparable period in 2003. The increase is primarily a result of an increase in total loans outstanding as well as an increase in the percentage of commercial loans in our portfolio. During 2003, our gross loans increased by $89.8 million and we charged $650,000 to our provision for loan losses. Also during 2003, we recognized $31,000 in charge-offs against our allowance, but collected $50,000, in recoveries from prior charge-offs.

 

Although we believe that our present allowance for loan losses is adequate as of March 31, 2004, the provisions are based on the current and 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. In addition, the overall composition and amount of the performing loans in the portfolio at the time of evaluation is considered to determine the adequacy of the allowance, and, as a result, will vary over time. Although more emphasis is being placed on originating new commercial real estate loans, the composition of our loan portfolio continues to be concentrated primarily on residential mortgage loans, which tend to have a lower risk of loss. Loan repayments are dependent on loan underwriting and also on economic, operating and other conditions that may be beyond our 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.

 

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In addition to the continuing internal assessment of the loan portfolio, our loan portfolio is subject to examination by the OTS, which will periodically review the loan portfolio and assess the adequacy of the allowance for loan losses.

 

During 2003, our total non-accrual loans increased by approximately $817,000, however nonaccrual loans decreased by $2.6 million, or 41%, in the first quarter of 2004.

 

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: residential real estate loans to United States citizens; residential real estate loans to foreign borrowers; commercial real estate loans; and commercial business and other loans. 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 losses is debited or credited in order to bring the allowance for loan losses to the required level as determined above.

 

The allowance for loan losses at December 31, 2003, was $2.8 million, or 43.4% of non-performing loans and 0.70% of total loans net of loans in process (“LIP”), compared to $2.1 million, or 37.8% of non-performing loans and 0.69% of total loans net of LIP at December 31, 2002. At March 31, 2004, the allowance was $3.3 million or 86.5% of non-performing loans and 0.79% of total loans net of LIP. The allowance at both dates consisted of reserves for the performing loans in the portfolio and reserves against certain loans based on management’s evaluation of these loans. As the size of the total loan portfolio and the amount of commercial real estate loans in the portfolio increases, the allowance will be adjusted accordingly.

 

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 our allowance for loan losses will be the result of periodic loan, property, and collateral reviews and thus cannot be predicted in advance. In addition, the OTS, as an integral part of its examination process, periodically reviews our allowance for loan losses. The OTS 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.

 

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The following table sets forth information with respect to our allowance for loan losses during the periods indicated. The allowances 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 (Dollars in thousands).

 

     At March 31,

    At December 31,

 
     2004

    2003

    2002

    2001

    2000

    1999

 

Average loans outstanding, net of LIP

   $ 412,119     $ 366,488     $ 279,934     $ 245,069     $ 214,755     $ 176,152  
    


 


 


 


 


 


Allowance at beginning of year

     2,779       2,110       1,765       1,634       1,438       1,136  
    


 


 


 


 


 


Charge-offs:

                                                

Residential real estate loans

     —         (30 )     (173 )     (211 )     (150 )     (36 )

Construction loans

     —         —         (10 )     (27 )     —         —    

Commercial real estate loans

     —         —         —         —         —         (3 )

Commercial loans

     (48 )     —         (39 )     (187 )     —         —    

Consumer loans

     —         (1 )     (36 )     —         —         —    
    


 


 


 


 


 


Total loans charged-off

     (48 )     (31 )     (258 )     (425 )     (150 )     (39 )

Recoveries

     2       50       158       16       17       21  
    


 


 


 


 


 


Net (charge-offs) recoveries

     (46 )     19       (100 )     (409 )     (133 )     (18 )

Provision for loan losses

     550       650       445       540       329       320  
    


 


 


 


 


 


Allowance at end of year

   $ 3,283     $ 2,779     $ 2,110     $ 1,765     $ 1,634     $ 1,438  
    


 


 


 


 


 


Ratio of net (recoveries) charge-offs to average loans outstanding

     .01 %     (.01 )%     .04 %     .17 %     .06 %     .01 %
    


 


 


 


 


 


Ratio of allowance to period-end total loans, net of LIP

     .79 %     .70 %     .69 %     .67 %     .73 %     .77 %
    


 


 


 


 


 


Period-end total loans, net of LIP

   $ 413,471     $ 397,834     $ 307,806     $ 263,632     $ 222,800     $ 186,345  
    


 


 


 


 


 


 

The following table represents information regarding our total allowance for losses, as well as the allocation of such amounts to the various categories of loans ($ in thousands).

 

     At March 31,

    At December 31,

 
     2004

    2003

    2002

    2001

    2000

    1999

 
          % of
Loans to
Total
         % of
Loans to
Total
         % of
Loans to
Total
         % of
Loans to
Total
         % of
Loans to
Total
         % of
Loans to
Total
 
     Amount

   Loans

    Amount

   Loans

    Amount

   Loans

    Amount

   Loans

    Amount

   Loans

    Amount

   Loans

 

Residential real estate loans

   $ 2,353    73.4 %   $ 1,886    75.4 %   $ 1,409    79.2 %   $ 1,097    74.3 %   $ 723    70.4 %   $ 713    71.9 %

Commercial and commercial real estate loans

     862    24.7       825    22.6       566    16.6       456    12.9       750    12.7       550    10.7  

Construction and consumer loans

     68    1.9       68    2.0       135    4.2       212    12.8       161    16.9       175    17.4  
    

  

 

  

 

  

 

  

 

  

 

  

Total allowance for loan losses

   $ 3,283    100.0 %   $ 2,779    100.0 %   $ 2,110    100.0 %   $ 1,765    100.0 %   $ 1,634    100.0 %   $ 1,438    100.0 %
    

  

 

  

 

  

 

  

 

  

 

  

 

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Investment Activities

 

Mortgage-Backed Securities. We purchase mortgage-backed securities and other collateralized mortgage obligations, which are guaranteed as to principal and interest by FNMA and FHLMC, agencies of the Federal government. We also purchased mortgage-backed securities issued by entities that are not Federal government agencies. The securities are permissible investments for a savings institution and were acquired primarily for their liquidity, yield, and credit characteristics. Such securities may be used as collateral for borrowings. The mortgage-backed securities are backed by either fixed-rate or adjustable-rate mortgage loans. At December 31, 2003, these securities totaled $15.8 million and had decreased to $14.9 at March 31, 2004.

 

Other Investments. We also purchases municipal bonds, corporate equity and debt securities and are required to invest in the FHLB common stock. At March 31, 2004, and December 31, 2003, we did not have any securities pledged to the FHLB as collateral under its short-term credit agreement.

 

The following table sets forth the carrying values of our total investments and liquidity as of the dates indicated (Dollars in thousands).

 

     At March 31,

   At December 31,

     2004

   2003

   2002

   2001

     (Unaudited)               

Short-term investments:

                           

Interest-earning deposits

   $ 756    $ 666    $ 14,515    $ 8,608

Debt securities:

                           

Government agency

     6,005      1,963      —        —  

Municipal bonds

     3,164      5,988      205      2,097

Corporate debt

     —        —        2,164      —  

Mortgage-backed securities

     14,893      15,755      11,725      7,496

Equity securities:

                           

FHLB stock

     5,370      5,660      2,860      3,075

Corporate equity

     10,020      9,909      7,426      4,355
    

  

  

  

Total investment portfolio

   $ 40,208    $ 39,941    $ 38,895    $ 25,631
    

  

  

  

 

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The following table sets forth the remaining maturity and weighted-average yields:

 

    

Less than

One Year


   

Five Through

Ten Years


   

More than

Ten Years


    Total

 
     Value

   Carrying
Yield


    Value

   Carrying
Yield


    Value

   Carrying
Yield


    Value

   Carrying
Yield


 
     ($ in thousands)  

At March 31, 2004:

                                                    

Interest-earning deposits

   $ 756    1.10 %   $ —      —   %   $ —      —   %   $ 756    1.10 %

FHLB stock

     5,370    3.50       —      —         —      —         5,370    3.50  

Government agency securities

     —      —         6,005    3.45       —      —         6,005    3.45  

Municipal bonds

     —      —         —      —         3,164    4.83       3,164    4.83  
    

        

        

                   

Mortgage-backed securities

                                            14,893    4.52  

Corporate equity securities

                                            10,020    4.83  
                                           

      
     $ 6,126    3.20 %   $ 6,005    3.45 %   $ 3,164    4.83 %   $ 40,208    4.26 %
    

  

 

  

 

  

 

  

At December 31, 2003:

                                                    

Interest-earning deposits

   $ 666    1.00 %   $ —      —   %   $ —      —   %   $ 666    1.00 %

FHLB stock

     5,660    3.50       —      —         —      —         5,660    3.50  

Government agency securities

     —      —         1,963    2.81       —      —         1,963    2.81  

Municipal bonds

     —      —         —      —         5,988    4.92       5,988    4.92  
    

        

        

                   

Mortgage-backed securities

                                            15,755    4.57  
                                                      

Corporate equity securities

                                            9,909    4.91  
                                           

      
     $ 6,326    3.24 %   $ 1,963    2.81 %   $ 5,988    4.92  %   $ 39,941    4.40 %
    

  

 

  

 

  

 

  

 

    

Less than

One Year


   

Five Through

Ten Years


   

More than

Ten Years


    Total

 
     Value

   Carrying
Yield


    Value

   Carrying
Yield


    Value

   Carrying
Yield


    Value

   Carrying
Yield


 
     (Dollars in thousands)  

At December 31, 2002:

                                                    

Interest-earning deposits

   $ 14,515    1.00 %   $ —      —   %   $ —      —   %   $ 14,515    1.00 %

FHLB stock

     2,860    5.00       —      —         —      —         2,860    5.00  

Corporate debt security

     —      —         2,164    9.33       —      —         2,164    9.33  

Municipal bonds

     —      —         205    4.63       —      —         205    4.63  
    

        

        

                   

Mortgage-backed securities

                                            11,725    4.90  

Corporate equity securities

                                            7,426    5.38  
                                           

      
     $ 17,375    1.57 %   $ 2,369    8.92 %   $ —      —   %   $ 38,895    5.51 %
    

  

 

  

 

  

 

  

 

Impact of Interest Rates on the Investment Portfolio. From 2001 through the first half of 2003, both long and short term interest rates moved steadily lower as a result of Federal Reserve action, the weak global economy, terrorist activities and the overseas military actions. As interest rates fell, all

 

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financial institutions experienced a dramatic increase in residential loan refinancing activity coupled with a general slowdown in commercial loan originations. During this period, we also experienced a similar increase in prepayments in our mortgage-backed securities portfolio. To replenish our investment portfolio, we purchased other mortgage-backed investments which generally had lower yields than the previous issues.

 

In the second half of 2003, long-term interest rates increased from the June 2003 lows, while the Federal Reserve kept short-term rates at historical lows. The increase in market rates in the second half of 2003 resulted in a decrease in the market value of our investment portfolio. At December 31, 2003, we had unrealized pretax losses of $511,000 in our investment portfolio, as compared to unrealized pretax gains of $24,000 at December 31, 2002. At March 31, 2004, we had unrealized pretax losses of $26,000 in the investment portfolio. Management does not consider the unrealized loss at March 31, 2004, to be a permanent impairment of value of the portfolio.

 

As a condition of our membership in the FHLB we are required to own FHLB stock. The amount of FHLB stock that we own is based in part on the level of our outstanding FHLB advances. At March 31, 2004 and December 31, 2003, our investment in FHLB stock was $5.4 million and $5.7 million, respectively. The other investments in the portfolio, with the exception of the corporate equity securities, are eligible for inclusion in our liquidity base when calculating our regulatory liquidity requirement.

 

Sources of Funds

 

General. Deposits are our primary source of funds for use in lending, investments 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. FHLB borrowings are used on a short-term basis to compensate for seasonal or other reductions in normal sources of funds. FHLB borrowings are also used on a longer term basis to support expanded lending or investment activities.

 

Borrowings by Federal Trust can also be used by the Bank as an additional source of capital. At March 31, 2004, there was approximately $4.0 million in debt in Federal Trust that is utilized as equity capital by the Bank.

 

Deposits. Our primary deposit products include fixed-rate certificate accounts, money-market deposit accounts and both noninterest and interest-bearing transaction accounts. We have a number of different programs that are designed to attract both short-term and long-term deposits.

 

Deposits have generally been obtained from residents in our primary market area and, to a lesser extent, through a network of deposit brokers. The principal methods used to attract “in market” deposit accounts have included offering a wide variety of services and accounts, competitive interest rates and convenient office locations, including access to automated teller machines (“ATMs”) and Internet Banking. We currently operate six ATMs and our customers also have access to the Star7 (previously Honor) and other shared ATM networks. We also offer customers Internet Banking which allows convenient access to their accounts, funds transfer, and bill paying.

 

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The following table shows the distribution of, and certain other information relating to, our deposits by type as of the dates indicated ($ in thousands).

 

    At March 31,

    At December 31,

 
    2004

    2003

    2002

    2001

 
    Amount

  Percent of
Deposits


    Amount

  Percent of
Deposits


    Amount

  Percent of
Deposits


    Amount

  Percent of
Deposits


 

Noninterest-bearing checking accounts

  $ 8,270   2.5 %   $ 6,352   2.0 %   $ 6,112   2.2 %   $ 5,135   2.3 %

Interest-bearing checking accounts

    18,895   5.6       15,566   4.9       12,094   4.3       1,348   0.6  

Money-market accounts

    76,137   22.7       76,047   24.2       68,893   24.7       32,368   14.4  

Savings accounts

    8,030   2.4       8,714   2.8       9,319   3.4       1,923   0.8  
   

 

 

 

 

 

 

 

Subtotal

    111,332   33.2       106,679   33.9       96,418   34.6       40,774   18.1  
   

 

 

 

 

 

 

 

Time deposits:

                                               

Less than 1.00%

    443   0.1       236   0.1       —     —         —     —    

1.00% to 1.99%

    105,118   31.3       95,193   30.3       25,963   9.3 %     —     —    

2.00% to 2.99%

    94,699   28.2       84,104   26.7       54,144   19.4       26,283   11.7  

3.00% to 3.99%

    12,828   3.8       14,58