SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Three Months Ended: Commission File Number:
- ----------------------------------- -------------------------
June 30, 1996 33-27139
FEDERAL TRUST CORPORATION
(Exact name of registrant as specified in its charter)
Florida 59-2935028
- ----------------------------------- -------------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification No.)
1211 Orange Avenue
Winter Park, Florida 32789
--------------------------
(Address of principal executive offices)
Registrant's telephone number: (407) 645-5550
---------------------------------------------
FEDTRUST CORPORATION
(Former name of registrant)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such quarterly reports), and (2) has been subject to such
filing requirements for the past 90 days:
YES X NO
----------- ----------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the last practicable date:
Common Stock, par value $.01 per share 2,239,928
- -------------------------------------- -----------------------------
(class) Outstanding at June 30, 1996
<PAGE>
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements Page
----
Consolidated Condensed Balance Sheets
June 30, 1996 (unaudited) and December 31, 1995....... 2
Consolidated Condensed Statements of Operations for the
Three months and Six months ended June 30, 1996
and 1995 (unaudited).................................. 3
Consolidated Condensed Statements of Cash Flows for the
Three months and Six months ended June 30, 1996
and 1995 (unaudited).................................. 4
Notes to Consolidated Condensed Financial Statements
(unaudited)........................................... 5 - 12
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 13 - 24
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders..... 25
Signatures....................................................... 25
Supplemental information to be furnished with reports
filed pursuant to Section 15(d) to the Act by
Registrants which have not registered securities
pursuant to Section 12 of the Act............................... 26
<PAGE>
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Balance Sheets
(Unaudited)
June 30, 1996 December 31, 1995
------------- -----------------
ASSETS
Cash $ 3,183,150 1,618,607
Interest bearing deposits -- 51,154
Investment securities available for sale 9,532,797 15,918,376
Investment securities held to maturity 6,256,457 19,093
Loans receivable, net (net of allowance
for loan losses of $1,092,024 in 1996 and
$2,060,568 in 1995) 113,115,996 112,905,740
Accrued interest receivable - Loans 736,415 824,330
Accrued interest receivable - Securities 171,255 179,874
Federal Home Loan Bank of Atlanta stock,
at cost 1,853,200 1,853,200
Loan Sale Proceeds receivable -- 37,765
Real Estate owned, net 1,757,042 3,293,108
Property and equipment, net 1,057,762 1,291,974
Prepaid expenses and other assets 543,796 358,465
Deferred income taxes 1,080,085 847,752
Income tax refund receivable 1,190,000 1,190,000
--------- ---------
Total $140,477,955 140,389,438
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposit accounts and accrued interest
on deposits $104,703,399 109,203,123
Official Checks 598,645 695,332
Federal Home Loan Bank advances 25,500,000 21,000,000
Debentures 250,000 420,000
Advance payments for taxes and insurance 864,662 330,504
Accrued expenses and other liabilities 748,209 680,353
------- -------
Total Liabilities $132,664,915 132,329,312
------------ -----------
Stockholders' equity
Common stock, $.01 par value,
5,000,000 shares authorized; 2,256,505
shares issued and outstanding at March 31,
1996 and December 31, 1995 $ 22,565 22,565
Additional paid-in capital 11,143,659 11,143,659
Retained earnings (accumulated deficit) (2,409,355) (2,249,701)
Treasury stock (16,577 shares of common
stock, at cost at March 31, 1996 and
December 31, 1995) (76,525) (76,525)
Unrealized loss on investment securities
available for sale, net (867,304) (779,872)
-------- --------
Total stockholders equity 7,813,040 8,060,126
--------- ---------
Total Liabilities and Stockholders' Equity $140,477,955 140,389,438
============ ===========
See accompanying Notes to Consolidated Condensed Financial Statements.
2
<PAGE>
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
For Three Months and Six Months Ended June 30, 1996 and 1995
(Unaudited)
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30, 1996
----------------------------------------------------------
1996 1995 1996 1995
---- ---- ---- ----
Interest income:
<S> <C> <C> <C> <C>
Loans $2,219,285 2,280,994 4,572,628 4,404,325
Securities 150,290 403,438 302,714 816,179
Interest-bearing deposits and other 62,131 80,422 114,186 192,641
------ ------ ------- -------
Total interest income 2,431,706 2,764,854 4,989,528 5,413,145
--------- --------- --------- ---------
Interest expense:
Deposit accounts 1,405,622 1,598,199 2,925,592 2,941,098
Federal Home Loan Bank advances
& other borrowings 294,786 432,081 591,689 953,291
------- ------- ------- -------
Total interest expense 1,700,408 2,030,280 3,517,281 3,894,389
--------- --------- --------- ---------
Net interest income 731,298 734,574 1,472,247 1,518,756
Provision for loan losses 131,862 730,000 113,506 732,323
------- ------- ------- -------
Net interest income after provision 599,436 4,574 1,358,741 786,433
------- ----- --------- -------
Other income:
Fees and service charges 27,367 39,407 53,668 77,520
Rents 2,163 56,389 7,707 96,119
Gain on sale of assets 16,925 15,969 153,321 142,434
Other miscellaneous 16,173 23,351 37,019 34,902
------ ------ ------ ------
Total other income 62,628 135,116 251,715 350,975
------ ------- ------- -------
Other expenses:
Employee compensation & benefits 345,479 389,357 689,704 806,775
Occupancy and equipment 315,603 180,938 485,074 344,364
Data procession expense 22,177 22,362 45,471 36,602
Professional fees 120,993 175,374 257,818 352,464
FDIC Insurance 79,560 72,966 159,950 145,931
Other miscellaneous 183,443 304,288 372,203 502,481
------- ------- ------- -------
Total other expense 1,067,255 1,145,285 2,010,220 2,188,617
--------- --------- --------- ---------
Net income before income tax (405,191) (1,005,595) (399,764) (1,051,209)
Income tax (242,065) (362,014) (240,111) (378,435)
-------- -------- -------- --------
Net income $ (163,126) (643,581) (159,653) (672,774)
=========== ======== ======== ========
Per share amounts:
Earnings per share (.07) (0.29) (.07) (0.30)
Cash dividends per share 0.00 0.00 0.00 0.00
Weighted average number
of shares outstanding 2,239,928 2,239,928 2,239,928 2,239,928
--------- --------- --------- ---------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
3
<PAGE>
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Consolidated Condensed Statements of Cash Flows
For the Six Months Ended June 30, 1996 and 1995
(Unaudited)
1996 1995
---- ----
Cash flows from operating activities: $
Net income (159,653) (672,774)
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Amort. of Valuation Adjustment on
Investment Securities -- 20,533
Depreciation & amortization of property & equipment 238,359 80,200
Amort. (net) of premiums, fees & disc. on
loans & securities 66,811 140,545
(Increase) Decrease in prepaid expenses
& other assets (428,881) (593,596)
Increase (Decrease) in accrued expenses &
other liabilities 65,322 69,223
Provision for allowance on real estate owned 26,101 122,812
Provision (charge-off) for loan losses 113,506 732,323
(Increase) Decrease in accrued interest receivable 96,534 (156,323)
(Increased) Decrease in loan sale proceeds
receivable 37,765 2,491,359
Increase (Decrease) in official checks (96,687) (48,829)
Increase (Decrease) in accrued interest on
deposit accounts 2,534 5,544
----- -----
Net cash provided by (used in) operating
activities (38,289) 2,191,017
======= ---------
Cash flows from investing activities:
Acquisition of office properties and equipment (4,147) 11,021
Sale (Purchase) of Federal Home Loan Bank
of Atlanta stock -- 121,800
Proceeds collected from loan sales 4,084,252 1,866,639
(Acquisition) of real estate owned 1,536,066 (547,181)
Sale of securities, available for sale -- --
Principal collected on securities held
to maturity 8,324 30,762
Principal collected on loans 12,880,206 13,623,713
Loans originated or purchased (17,317,457) (18,786,217)
----------- -----------
Net cash provided by (used in)
investing activities 1,187,244 (3,679,463)
========= ----------
Cash flows from financing activities:
Increase (Decrease) in deposits, net (4,499,724) 11,439,746
Increase (Decrease) in Federal Home Loan
Bank advances 4,500,000 (10,900,000)
Increase (Decrease) in other borrowings (170,000) --
Dividends -- --
Net increase in advance payments by borrowers
for taxes & insurance 534,158 505,802
------- -------
Net cash provided by (used in) financing
activities 364,434 1,045,548
======= ---------
Increase in cash and cash equivalents 1,513,389 (442,898)
Cash and cash equivalents at beginning of period 1,669,761 7,604,389
--------- ---------
Cash and cash equivalents at end of period $3,183,150 7,161,491
========== =========
See accompanying Notes to Consolidated Condensed Financial Statements.
4
<PAGE>
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (unaudited)
1. General
Federal Trust Corporation ("Company" or "Holding Company") was organized in
February 1989 for the purpose of becoming the unitary savings and loan holding
company of Federal Trust Bank ("Bank"), a federally chartered stock savings bank
then headquartered in Amelia Island, Florida. The Company's and the Bank's
headquarters are currently located in Winter Park, Florida. The Company is
currently conducting business as a unitary savings and loan holding company, and
its principal asset is all of the capital stock of the Bank. As a unitary
holding company, the Company has greater flexibility than the Bank to diversify
and expand its business activities, either through newly formed subsidiaries or
through acquisitions.
The Company's primary investment is the ownership of the Bank. The Bank is
chartered as a federal stock savings bank and is primarily engaged in the
business of obtaining funds in the form of deposits and Federal Home Loan Bank
("FHLB") advances and investing such funds in permanent loans on residential
and, to a lesser extent, commercial real estate primarily in Florida, in various
types of construction and other loans, and in investment securities. The Holding
Company has been operating two non-bank subsidiaries, Federal Trust Properties
Corp. ("FTPC"), a real estate holding and development company, organized
December 12, 1994, and 1270 Leasing, Co. ("1270 LC"), a real estate leasing
entity organized May 27, 1994, which leases the Holding Company's office located
in Winter Park, Florida. Prior to June 30, 1993, the Company operated three
other subsidiaries, First Coast Financial Corporation ("FCFC"), a residential
mortgage broker, FC Construction Services Corp. ("FCCSC"), a small commercial
construction and consulting company and FedTrust Building Corporation ("FTBC"),
the owner of the First Coast Plaza office complex. The stock of FCFC and the
assets of FCCSC and FTBC were sold in June and July, 1993 and the corporate
entity of FCCSC and FTBC were dissolved in December, 1993. On July 1, 1996, the
Company sold FTPC to an unaffiliated third party and is renting the office space
previously occupied by the Company to FTPC.
The balance sheet as of June 30, 1996 and December 31, 1995 and the statements
of operations for the three-month and six-month periods ended June 30, 1996 and
1995 and the statement of cash flows for the six-month period ended June 30,
1996 and 1995 include the accounts and operations of the Company and all
subsidiaries. All material intercompany accounts and transactions have been
eliminated.
In the opinion of management of the Company, the accompanying consolidated
condensed financial statements contain all adjustments (principally consisting
of normal recurring accruals) necessary to present fairly the financial position
as of June 30, 1996, the results of operations for the six-month period ended
June 30, 1996 and 1995 and cash flows for the six-month period ended June 30,
1996 and 1995. The results of operations for the six-month period ended June 30,
1996 are not necessarily indicative of the results to be expected for the full
year. These statements should be read in conjunction with the financial
statements included in the Company's Annual Report on Form 10 - K for the year
ended December 31, 1995.
2. Summary of Significant Accounting Policies
Per Share Amounts:
Earnings per share is computed using the weighted average number of common
shares outstanding during the period.
Real Estate:
Real estate acquired through foreclosure is recorded at the lower of cost
(unpaid loan balance plus foreclosure expenses) or net realizable value at the
time of acquisition. Net realizable value is based on current appraisals reduced
by an estimate of net holding costs, including interest and selling expenses,
for the period the property is expected to be held prior to sale.
5
<PAGE>
3. Loans
The Financial Accounting Standards Board (FASB) has issued Standard No. 114,
"Accounting by Creditors for Impairment of a Loan," which requires that all
creditors value all specifically reviewed loans for which it is probable that
the creditor will be unable to collect all amounts due according to the terms of
the loan agreement at the present value of expected cash flows, market price of
the loan, if available, or the fair value of the underlying collateral. Expected
cash flows are required to be discounted at the loan's effective interest rate.
FASB 114 does not apply to large groups of smaller balance homogeneous loans
that are collectively evaluated for impairment. Loans collectively reviewed by
the Bank for impairment include all residential, consumer, and non-residential
loans that are less than 90 days delinquent, excluding loans which are
individually reviewed based on specific information or events, such as the
condition of the collateral. The Standard is required for fiscal years beginning
after December 15, 1994.
The FASB also has issued Standard No. 118, "Accounting by Creditors for
Impairment of a Loan - Income Recognition and Disclosures," that amends FASB
Standard No. 114 to allow a creditor to use existing methods for recognizing
interest income on an impaired loan and by requiring additional disclosures
about how a creditor recognizes interest income related to impaired loans. This
Standard is to be implemented concurrently with Standard No. 114.
On January 1, 1995, the provisions of Standards No. 114 and 118 were adopted.
The adoption of the Standards required no increase to the allowance for loan
losses and had no impact on net income in the first six months of 1995 or 1996.
As a matter of policy, the Bank classifies all loans 90 days or more past due as
non-performing and does not accrue interest on these loans and reverses all
accrued and unpaid interest, however, a non-performing loan is not considered
impaired if all amounts due including contractual interest are expected to be
collected. When the ultimate collectibility of an impaired loan's principal is
in doubt, wholly or partially, all cash receipts are applied to principal. When
this doubt does not exist, cash receipts are applied under the contractual terms
of the loan agreement first to interest income and then to principal. Once the
recorded principal balance has been reduced to zero, future cash receipts are
applied to interest income, to the extent that any interest has been forgone.
Further cash receipts are recorded as recoveries of any amounts previously
charged off.
A loan is also considered impaired if its terms are modified in a troubled debt
restructuring after January 1, 1995. For these accruing impaired loans, cash
receipts are typically applied to principal and interest receivable in
accordance with the terms of the restructured loan agreement. Interest income is
recognized on these loans using the accrual method of accounting. As of June 30,
1996, there were no accruing impaired loans of this type.
At June 30, 1996, impaired loans amounted to $4.625 million. Included in the
allowance for loan losses is $601 thousand related to the impaired loans. The
Bank measures impairment on collateralized loans using the fair value of the
collateral, and on unsecured loans using the present value of expected future
cash flows discounted at the loan's effective interest rate. At June 30, 1996
all impaired loans were evaluated on the fair value method.
In the first six months of 1996, the average recorded investment in impaired
loans was $5.65 million and $63.6 thousand of interest income was recognized on
loans while they were impaired. All of this income was recognized using a cash
basis method of accounting.
6
<PAGE>
4. Allowance for Losses
Allowance for Loan Losses: The following is an analysis of the activity in the
allowance for loan losses for the periods presented:
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30, 1996
----------------------------------------------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Balance at beginning of period 1,929,814 1,854,582 2,060,568 1,974,950
Provision for loan losses 131,862 730,000 113,506 732,323
Less Charge-offs (972,854) (161,761) (1,088,535) (283,774)
Plus recoveries 3,202 (43,983) 6,485 (44,661)
----- ------- ----- -------
Balance at end of period 1,092,024 2,378,838 1,092,024 2,378,838
========= ========= ========= =========
Loans Outstanding 113,115,996 113,483,078 113,115,996 113,483,078
Ratio of charge-offs to Loans
Outstanding .86% .04% .96% .04%
Ratio of allowance to Loans
Outstanding .97% 2.10% .97% 2.10%
</TABLE>
A provision for loan losses is generally charged to operations based upon
management's evaluation of the potential losses in its loan portfolio. During
the quarter ended June 30, 1996, management made a provision for $131,862 based
on its evaluation of the loan portfolio, as compared to the provision of
$730,000 made in the quarter ended June 30, 1995. The increase was primarily the
result of the decision to charge-off two loans in which the bank had a junior
lien position and had determined, based on current information, that there was
insufficient value in the collateral to provide recovery of the amounts due the
Bank after satisfaction of the superior liens.
5. Supplemental Disclosure of Cash Flow and Non-Cash Investing and Financing
Activities
Six Months Ended June 30,
-------------------------
1996 1995
---- ----
Cash paid during the period for:
Interest expense $1, 751,136 2,678,302
Income taxes $ -- 15,053
6. Real Estate Acquired through Foreclosure, Other Repossessed Assets and
Allowance for Real Estate Losses
Real Estate Acquired through Foreclosure, Other Repossessed Assets: The
following is an analysis of the activity in real estate acquired through
foreclosure and other repossessed assets for the periods presented:
7
<PAGE>
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30, 1996
----------------------------------------------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Balance at beginning of period $ 2,018,920 3,502,409 3,293,108 3,322,529
Acquired through foreclosure 92,284 1,243,539 327,753 2,193,718
Add: Capitalized costs -- 14,156 13,180 14,156
Less: Sale of real estate 346,417 (1,286,560) (1,850,898) (1,510,966)
Less: Chargeoffs (7,745) (34,760) (26,101) (580,653)
Less: Allowance for losses -- (123) -- (123)
---------- ---- --------- ----
Balance at end of period $ 1,757,042 3,438,661 1,757,042 3,438,661
=========== ========= ========= =========
Allowance for Real Estate Losses: The following is an analysis of the activity
in allowance for real estate losses for the periods presented:
Three Months Six Months
Ended June 30, Ended June 30, 1996
----------------------------------------------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Balance at beginning of period $ -- 113,957 -- 216,050
Provision for REO losses 7,745 -- 26,101 --
Transfer from Mortgage Loans -- 161,761 -- 283,774
Add: Recoveries -- 123 246
Less: Chargeoffs, $ (7,745) (275,718) (26,101) (499,947)
-------- -------- ------- --------
Balance at end of period - 0 - 123 - 0 - 123
= === = ===
</TABLE>
7. Investment Securities
At June 30, 1996
----------------
Book Value Market Value
---------- ------------
Held to maturity:
Orange County, Florida Tax Certificates 10,769 10,769
FHLB Floating Rate Note, 4.3075% due 7/30/03 6,245,688 6,245,688
--------- ---------
Total 6,256,457 6,256,457
========= =========
8
<PAGE>
At June 30, 1996
----------------
Available for sale:
FHLB Floating Rate Note, 5.020% due 3/10/97 $ 497,188 497,188
FHLB Floating Rate Note, 4.250% due 3/16/98 486,094 486,094
FHLB Floating Rate Note, 3.572% due 6/17/98 935,000 935,000
FHLB Floating Rate Note, 4.132% due 6/25/98 1,656,484 1,656,484
FHLB Floating Rate Note, 3.515% due 7/15/98 1,407,656 1,407,656
FHLB Floating Rate Note, 3.515% due 7/15/98 1,407,656 1,407,656
FHLB Floating Rate Note, 3.782% due 7/28/98 3,142,719 3,142,719
--------- ---------
Total $9,532,797 9,532,797
========== =========
The Bank's investment in obligations of U.S. government agencies consist of dual
indexed bonds issued by the Federal Home Loan Bank. At June 30, 1996, the bonds
had a market value of $15,554,985 and gross unrealized pre-tax losses of
$1,545,015. The bonds have a par value of $17,100,000 and pay interest based on
the difference between two indices. The majority of the bonds, approximately
$14,795,000 at June 30, 1996, pay interest at the 10 year constant maturity
treasury ("CMT") rate less the 3 month or 6 month LIBOR rate plus a contractual
amount ranging from 2.3% to 4.0%. During the quarter ended June 30, 1996 the
bank transferred $7,000,000 par value of the bonds maturing July 30, 2003 from
the Available For Sale category to the Held To Maturity category.
8. Debentures
The balance in "Debentures" at June 30, 1996 and December 31, 1995 was $250,000
and $420,000, respectively. These debentures have a 5 year maturity and an
interest rate of 10% per annum. They are callable at any time and interest is
payable annually. $170,000 of the debentures were called on January 10, 1996.
The remainder of the Debentures mature in September, October, and November 1996.
9. Advances from Federal Home Loan Bank
The following is an analysis of the advances from the Federal Home Loan Bank:
Amounts Outstanding at June 30, 1996:
---------------------------------------------------------
Maturity Date Rate Amount Type
------------- ---- ------ ----
07/01/96 5.47% $5,000,000 Fixed rate
07/31/96 5.60% 5,500,000 Variable rate
09/15/96 5.83% 5,000,000 Fixed rate
06/28/97 6.01% 5,000,000 Fixed rate
09/15/98 6.12% 5,000,000 Fixed rate
---- ---------
Total 5.80% 25,500,000
==== ==========
Variable rate advances reprice daily and may be repaid at any time without
penalty. Fixed rate advances incur a prepayment penalty if repaid prior to
maturity, and the interest rate is fixed for the term of the advance.
9
<PAGE>
Amounts Outstanding at:
------------------------------------------------
Month-end Rate Amount
--------- ---- ------
4/30/96 5.77% 23,300,000
5/31/96 5.74% 24,700,000
6/30/96 5.80% 25,500,000
During the three-month and six-month periods ended June 30, 1996, average
advances outstanding totaled $23.9 and $22.4 million, at average rates of 5.77%
and 5.84%, respectively.
Advances from the FHLB are collateralized by loans and securities that totaled
approximately $33.4 million and $7.0 million, respectively.
10. Acquisitions
On April 3, 1992, the Bank acquired certain assets and liabilities of First
Federal Savings and Loan Association of Seminole County, F.A. from the RTC. The
Bank acquired approximately $77,988,000 of loans and assumed $120,227,000 in
deposits and other liabilities. In addition, the Bank paid a net premium of
approximately $2,056,269 to the RTC and First Guaranty Mortgage Corporation in
connection with the acquisition. The Bank has amortized $1,618,820 of the
premium as of June 30, 1996 as an adjustment to interest income. The acquisition
was accounted for as a purchase.
11. Supervision
The Holding Company and the Bank are subject to extensive regulation,
supervision and examination by the OTS, the primary federal regulator, by the
FDIC with regard to the insurance of deposit accounts and, to a lesser extent,
the Federal Reserve. Such regulation and supervision establishes a comprehensive
framework of activities in which a savings and loan holding company and its
financial institution subsidiaries may engage and is intended primarily for the
protection of the SAIF administered by the FDIC and depositors.
The first significant supervisory concerns regarding the Bank's operation and
underwriting policy were cited by the OTS in the Bank's December 1992
examination. In response to the supervisory concerns, in January 1993, the Bank
hired a new Chief Executive Officer/President who was given the responsibility
of evaluating existing personnel, policies and procedures, and the development
of new operating strategies for the Bank.
In May 1993, the OTS and the Bank entered into a Supervisory Agreement which was
mainly directed at correcting loan underwriting deficiencies; limiting certain
affiliated party transactions, including taking measures to avoid the appearance
of conflicts of interest in transactions with affiliated persons; amending the
Bank's main office lease with an affiliate to more accurately reflect market
rates; developing plans for the disposition of classified assets; and better
monitoring and documenting of loans to borrowers to ensure compliance with the
Bank's loan to one borrower limits. To ensure compliance with the terms of the
Supervisory Agreement, the Bank hired its outside independent auditors, KPMG
Peat Marwick LLP, to report to management on a quarterly basis their assessment
of the Bank's performance. The independent auditors reviewed the operations of
the Bank in connection with the Supervisory Agreement and certified to
management that the Bank was in compliance with the Supervisory Agreement.
10
<PAGE>
In the following examinations of the Holding Company and the Bank, which were
completed in April, 1994, the OTS cited the Holding Company and the Bank with
certain deficiencies, many of which were the subject of the individual cease and
desist orders that were entered into on October 3, 1994 (collectively, the
"Orders"). The Bank's Order superseded the 1993 Supervisory Agreement with the
OTS. Management of the Holding Company and the Bank consented to the issuance of
the respective Orders, without admitting or denying that grounds for such Orders
existed.
The OTS examination directives which were not included in the Holding Company's
Order, require management of the Holding Company to amend the Holding Company's
office lease with an affiliated party to better reflect market terms and
conditions; discount certain notes receivable to better reflect market rates;
require officers to submit detailed expense reports to the Board of Directors;
discontinue use of the Bank's credit cards for Holding Company expenditures; and
obtain written approval from the Board of Directors for all Holding Company
expenses. The Board and management of the Holding Company believe that the
Holding Company has complied and is in compliance with each of these directives.
The OTS examination directives that were not included in the Bank's Order,
required management of the Bank to ensure adequate documentation of accounting
information, modify loan relationships to comply with loans to one borrower;
obtain appraisals for certain collateral property; obtain Board of Directors
approval for changes to policies and procedures of the Bank; increase the amount
of the general valuation allowance to $1.85 million and effectuate changes in
the management of the lending department, establishing guidelines and individual
responsibility for monitoring loan maturities, collection and foreclosures. The
Board and management believe the Bank has complied and is in compliance with
each of these directives.
Under the Holding Company's Order, the Company: (i) cannot request dividends
from the Bank without written permission from the OTS; (ii) must reimburse the
Bank for the Holding Company's expenses; (iii) develop a Management Services
Agreement with the Bank which provides for the reimbursement for employees who
work for both the Bank and the Holding Company; (iv) must appoint a Compliance
Committee to report to the Board of Directors as to the Company's compliance
with the Order; and (v) the Board must report to the OTS on a quarterly basis
the Company's compliance with the Order.
The Bank's Order provides for the Board of Directors to: (i) develop, adopt and
adhere to policies and procedures to strengthen the Bank's underwriting,
administration, collection and foreclosure efforts; (ii) review and revise
underwriting policies and procedures to comply with regulatory requirements;
(iii) record minutes of the loan committee and grant loans only on procedures to
comply with regulatory requirements; (iv) record minutes of the loan committee
and grant loans only on terms approved by the loan committee; (v) develop and
implement a written plan to collect, strengthen and reduce the risk of loss for
all real estate owned and for certain loans at risk and secured by real estate;
(vi) comply with policies and procedures requiring written inspection of
development and construction loans; (vii) pay no more than market rate,
determined by a rent study approved by the OTS for lease of the Bank's offices;
(viii) make no payment of taxes owned by a person affiliated with the Bank; (ix)
seek a Management Services Agreement for work performed for the Holding Company
by Bank employees; (x) develop and submit for approval a three year business
plan; (xi) comply with loans to one borrower policy; (xii) make no capital
distribution to the Holding Company without the consent of the OTS; (xiii)
appoint a compliance committee; and (xiv) refrain from purchasing additional
dual indexed bonds.
The Orders require the Holding Company and the Bank to establish separate
Compliance Committees. The Compliance Committees meet monthly to review, in
detail, the terms of the Orders to ensure that the respective companies are in
compliance with their Orders. The Bank also contracted with a company
specializing in the review of the system of internal controls and operating
procedures of financial institutions, including compliance with internal
policies and procedures.
11
<PAGE>
In the most recent examinations of the Holding Company and the Bank, which were
concluded in June, 1995, the OTS found the companies to be in compliance with
their Orders. With regard to the Bank, improvement was noted in a number of
areas, including underwriting procedures, documentation, disposition of problem
assets, reduction in the dependency on wholesale funds and a reduction in
operating expenses. In August, 1995 the OTS informed the Holding Company that it
was conducting an expanded examination of the Holding Company with regard to
certain transactions that were entered into by prior Bank management in 1990 and
1991. As of the date of this filing, the examination had not been concluded.
Since the issuance of the 1993 Supervisory Agreement, the Board of Directors of
the Bank has strengthened the overall management of the Bank with the hiring of
a Chief Executive Officer/President in January 1993, the addition of a new Chief
Financial Officer in June 1993, the reorganization of the Loan Department and
the establishment of a new credit culture, coupled with the addition of a new
Chief Lending Officer/Senior Problem Asset Officer in March, 1995. The Board and
management of the Holding Company and the Bank believe that the Bank's
management is taking the necessary corrective measures to ensure that the Bank
is being operated properly and that the level of classified assets are being
carefully monitored and managed in order to provide for the steady reduction of
classified assets. The respective management's are committed to taking the
appropriate steps to have the Orders lifted as soon as possible.
Management expects that the interest income of the Bank will continue to be
limited, so long as the Bank's Order and current growth limitations remain in
place. Under the growth limitations, the Bank cannot increase its total assets
during any quarter in excess of an amount equal to net interest credited on
deposit liabilities during the quarter. Management of the Holding Company and
the Bank, however, do not believe that the respective Orders, or the current
growth limitations on the Bank, will have a material impact on the financial
condition of the Holding Company or the Bank. Changes in banking regulation by
the U.S. Congress, or changes in the banking regulations by the OTS or the FDIC
could, however, have a significant impact on the Holding Company and the Bank
and their operations.
12. Stock Options
On May 5, 1993, the Board of Directors of the Company approved a Stock Option
Plan for Directors. The Plan provides that a maximum of 176,968 shares of common
stock (the "Option Shares") will be made available to directors and former
directors of the Company. Options for all the Option Shares were issued on May
6, 1993 to 13 present and former directors. The options are for a term of ten
(10) years from the date of grant. The Options were issued at an exercise price
of $6.40 per share determined at the time of issuance to be the fair market
value of the underlying Common Stock subject to the Option on the date the
Option was granted. No options have been exercised under the Plan at June 30,
1996.
In addition, the Company has issued stock options to certain sales
representatives for their commitment in selling Federal Trust Corporation stock.
These options have a strike price of $10.00 per share and will expire on October
26, 1999. At June 30, 1996 and 1995, options for 58,453 shares had been granted
to various sales representatives.
12
<PAGE>
Overview
The Bank's net earnings were adversely affected by the rise in interest rates
that occurred during 1994 and 1995, due to its negative GAP position, as its
liabilities repriced sooner than, and in greater amounts than, its assets. As a
result, the Bank's cost of funds increased faster than the yields earned on its
assets, resulting in a decrease in its interest rate spread and lower earnings.
The Bank has continued to concentrate on increasing its portfolio of adjustable
rate loans and, as interest rates began to decline in 1995 and continued
declining into 1996, is increasing its efforts to lengthen the maturities of its
liabilities in order to reduce its negative GAP position and the impact of
higher interest rates in the future. Should interest rates begin to rise before
the Bank is able to further reduce its negative GAP, the Bank's earnings would
be adversely affected.
In addition, the bank had to increase its loss reserves in 1994 and 1995 as a
result of a higher level of non-performing loans. Although management believes
that the level of non-performing assets should continue to decrease in future
periods, unforeseen economic conditions and other circumstances beyond the
Bank's control could result in material additions to the loss reserves in future
periods if the level of non-performing assets increases. The Bank does
anticipate additions to the loss reserves in future periods as part of the
normal course of business, as the Bank's assets, consisting primarily of loans,
are continually evaluated and the loss allowances are adjusted to reflect the
potential losses in the portfolio on an ongoing basis. During the quarter ended
June 30, 1996, the bank made an addition to its loan loss reserves based on its
evaluation of the loan portfolio.
The Company has projected an operating profit for the full year of 1996, as a
result of the improved interest rate spread, and the decrease in non-performing
assets at the Bank, however, should interest rates rise during 1996 or
non-performing assets increase due to unforeseen circumstances, the Company
earnings could be adversely affected. In addition, during 1995, Congress
considered various proposals for a one-time special assessment to be charged on
all SAIF deposits to fully capitalize the SAIF at 1.25 percent of insured
deposits. The proposed amount of the special assessment has been as high as
$0.85 per $100 of SAIF deposits. Assuming that a special assessment was applied
at the $0.85 rate based upon SAIF insured deposits at December 31, 1995, the
Bank would incur additional deposit insurance premium expense of approximately
$930 thousand which would be charged against current period income. The timing
and amount of such an assessment cannot be accurately predicted at this time.
General
Federal Trust Corporation ("Company" or "Holding Company"), formerly FedTrust
Corporation, was incorporated as a unitary savings and loan holding company in
August 1988. The Company was capitalized on February 28, 1989 and acquired all
outstanding common stock of Federal Trust Bank, a federally chartered savings
bank (the "Bank"), formerly First Coast Savings Bank, F.S.B., in exchange for
all the outstanding shares of the Company. Five shares of the Company's common
stock were exchanged for each four shares of the Bank's common stock on that
date. The acquisition of the Bank was accounted for as a pooling of interests.
The Bank is currently the primary operating subsidiary of the Company and began
operations on May 3, 1988.
The Company has been operating two non-bank subsidiaries, Federal Trust
Properties Corp. ("FTPC"), a real estate holding and development company,
organized December 12, 1994, and 1270 Leasing Co. ("1270 LC"), a real estate
entity organized May 27, 1994, which leases the Holding Company's office located
in Winter Park, Florida. Three former subsidiaries, First Coast Financial
Corporation ("FCFC"), a mortgage broker, FC Construction Services Corp.
("FCCSC"), a commercial construction company and FedTrust Building Corporation
("FTBC"), which operated office buildings in Amelia Island, Florida were all
disposed of during fiscal year 1993. The assets of FCCSC and FTBC were sold on
July 31, 1993 and the companies were dissolved in December 1993. The stock of
FCFC was sold on June 30, 1993. Operations of these subsidiaries were not
significant to the consolidated entity.
13
<PAGE>
The Company acquired FCFC on February 17, 1989. The acquisition of FCFC was
accounted for as a purchase and goodwill of $193,585 resulted. The Company sold
the stock of FCFC on June 30, 1993 for $200,000 comprised of $1,000 in cash and
a $199,000 note secured by FCFC stock payable over ten (10) years. No loss was
reported on the sale. Subsequent to the sale, the operations of the Company and
its profitability declined and the purchaser was unable to make the required
payments on the note held by the Company. In December 1994, the purchaser
defaulted on the note and the Company's subsidiary, FTPC, acquired the personal
property consisting of furniture and equipment valued at $12,410. FTPC chose not
to acquire the stock of FCFC, as it had determined that the operations of the
company had essentially ceased and could not be restarted without an investment
of significant resources, if at all. The Company recognized a loss on the note
in the amount of $187,028.
The Company also formed FCCSC, a commercial construction company, during 1989.
FCCSC actively marketed its services during 1989 by building and selling an
office building, and during 1990 by buying and selling an office building site,
developing and licensing plans for residential townhouse units, and providing
technical and consulting services to a real estate contractor/developer, and in
1991 by continuing to provide significant technical and consulting services to
real estate contractors and developers. During 1992, FCCSC continued to license
plans for residential townhouse units, but no significant marketing of services
of FCCSC occurred in 1992 or during 1993. In July 1993, the Company sold
substantially all of the assets held by FCCSC to two unrelated third parties and
ceased operations of FCCSC and the company was dissolved. During 1994, the
purchaser of a portion of FCCSC's assets defaulted on its note which had been
assigned to the Company and, in December 1994, FTPC, to whom the Company had
assigned the note, acquired Georgia property through a deed in lieu of
foreclosure and a Note through a voluntary assignment. In January 1996 FTPC sold
the Georgia property with a book value of $17,350 for a purchase price of
$15,703, resulting in a loss of $1,646. The property was sold to an unaffiliated
party for cash.
The Company previously operated FTBC, whose primary business was the ownership
of commercial rental property comprising the office complex where the Amelia
Island offices of the Company were located. In December 1992, the building which
housed the Bank was conveyed to the Bank, which sold the property to another
bank as part of the sale of its Amelia Island deposits and branch office. In
July 1993, the remaining property was sold by FTBC to an unrelated third party
and the Company ceased operations and dissolved FTBC. During 1994, the purchaser
of the remaining property defaulted on its notes, which had been assigned to the
Company, and, in December 1994, FTPC, to whom the Company had assigned the
notes, acquired the property through a deed in lieu of foreclosure and the
deferred gain was offset against the secured promissory note. In December, 1995,
FTPC sold the personal property, the office buildings and all of the common area
located in, Amelia Island, Florida with a book value of $677,605 for a purchase
price of $583,334, resulting in a loss on the sale of $94,271. The properties
were sold to an unaffiliated party for cash.
14
<PAGE>
During the past year FTPC has been in the initial stages of a HUD insured
apartment development project, which during the quarter ended June 30, 1996, had
advanced to the stage of applying for a mortgage insurance commitment. Based on
the anticipated cash needs and continuing overhead for such a project, the
Company concluded that it would be in the best interest of the Company, and its
banking subsidiary, to sell FTPC, in order to focus the Company's efforts and
resources on the Bank. On July 1, 1996, the Company sold the stock of FTPC for
$425,354 consisting of $60,000 in cash, a note for $60,000 due August 8, 1996, a
note for $230,354 due upon the earlier of certain events, but in any event due
no later than July 31, 1997, and three notes for $25,000 each, due December 31,
1998, 1999 and 2000, respectively. In addition, the Company is renting the
quarters it previously occupied to FTPC on a month to month basis, and plans to
sub-lease the space to a long term tenant. The Company intends to dissolve 1270
LC during the third quarter of 1996, as it is no longer necessary to maintain
the entity for purposes of the lease on the office space previously occupied by
the Company.
As a result of the sale of FTPC and the impending dissolution of 1270 LC, the
only remaining subsidiary of the Company will be the Bank, and the Company's
expenses have been reduced to minimal levels, as there are no longer any
salaried employees in the Company and its offices have been sub-let. As a part
of this reorganization, Mr. James T. Bell resigned as Chairman, President and
Chief Executive Officer of the Company, although he remains on the Board of
Directors. The Board has named James V. Suskiewich, the Chairman, President and
Chief Executive Officer of the Bank, to the positions previously held by Mr.
Bell. As a part of this corporate reorganization, the Company has written off
the remaining balance of the leasehold improvements, totaling $114,646, in the
office space previously occupied by the Company.
On June 1, 1995, the Company assumed the lease from the Bank on the remote
drive-in facility that had been previously used by the Bank. The current annual
lease payment on this facility is $40,063. During the second quarter of 1996,
the Company entered into a contract to sell this facility under the purchase
option in the lease. This was done in order to terminate the remaining lease
obligation which has 16 years remaining. The sale is anticipated to close in the
third or fourth quarter of 1996 and the Company provided for the lease
termination fee of $30,000 and the estimated closing costs of $8,000, in the
second quarter of 1996. In addition, the Company wrote off the remaining balance
of the leasehold improvements at the facility, totaling $34,921, during the
second quarter of 1996.
Asset/Liability Management
The operating results of the Company depend primarily on the Bank's net interest
income, which is the difference between interest income on interest-earning
assets, primarily single-family residential loans, and interest expense on
interest-bearing liabilities, consisting of deposits, FHLB advances, debentures
and other borrowings. Net interest income is determined by (i) the difference
between yields earned on interest-earning assets and rates paid on
interest-bearing liabilities ("interest rate spread") and (ii) the relative
amounts of interest-earning assets and interest-bearing liabilities. The Bank's
interest rate spread is affected by regulatory, economic and competitive factors
that influence interest rates, loan demand and deposit flows. In addition, the
Company's net earnings are also affected by the level of non-performing loans
and real estate owned, as well as the level of its non-interest income,
including loan related fees, and its non-interest expenses, such as salaries and
employee benefits, occupancy and equipment costs and provisions for losses on
real estate owned and income taxes.
The Bank's one year GAP position at March 31, 1996, the most recent report
available, was -23%, as compared to -38% at March 31, 1995. The primary reason
for the decrease in the one year GAP has been the ability of the Bank to extend
the maturities of its liabilities and the sale of a portion of the dual-indexed
bonds from the Bank's investment portfolio during the fourth quarter of 1995. As
interest rates have declined in 1995 and 1996, the Bank's net interest spread
has improved. Should interest rates begin to rise, the Bank's net interest
income will be adversely affected as a result of its negative GAP, however,
should interest rates decline further the Bank's net interest income will
improve, as the rates paid on its liabilities will fall faster than the rates
earned on its assets. In the most recent OTS examination, the Board was directed
to develop and submit a plan to reduce the Bank's interest rate risk, as a
result of the Bank's sensitivity to rising interest rates and the continued
decline in its net interest spread.
15
<PAGE>
In order to minimize the potential for adverse effects of material and prolonged
increases in interest rates on the Company's results of operations, the Bank has
an Interest Rate Risk Management Policy, which is reviewed and approved by the
Board of Directors on an annual basis. The policy provides (i) for management to
manage the assets and liabilities of the Bank to protect earnings over the
interest rate cycle; (ii) the maximum allowable percentage changes in net
interest income and net portfolio value over eight interest rate scenarios
(+100, +200, +300, +400 and -100, -200, -300, -400 basis points); (iii) for the
Asset/Liability Management Committee ("ALCO"); and (iv) for quarterly reporting
to the Board of Directors. The ALCO monitors the Bank's interest rate risk
position and manages the asset and liability mix in order to better match the
maturities and repricing terms of the Bank's interest-earning assets and
interest-bearing liabilities. Since the latter half of 1993 the ALCO has focused
primarily on (i) emphasizing the origination and purchase of single-family
residential adjustable-rate mortgage loans ("ARMs"); (ii) extending the term of
the Bank's deposits and borrowings; and (iii) maintaining an adequate amount of
liquid assets (cash and interest-earning assets). As a result, the Bank has
continued to originate and purchase ARM loans throughout this period and has
extended deposits to longer terms whenever possible through its pricing
practices. While the Bank has had success in these efforts, it has not been able
to achieve a level of success great enough to completely insulate its net
interest rate spread during periods of rising interest rates. Until such time as
the Bank is able to further reduce its negative GAP position, it will be subject
to a declining net interest spread when interest rates are rising. As interest
rates began to decline in 1995, the Bank increased its efforts to lengthen
liabilities and shall continue to do so.
The following table sets forth information about rates and yields:
Yields and Rates at
--------------------------------------
June 30, December 31, June 30,
1996 1995 1995
---- ---- ----
Yields on:
Loan portfolio 7.83% 7.78% 7.98%
Other interest-earning assets 4.23% 5.42% 6.47%
---- ---- ----
Interest-earning assets 7.25% 7.29% 7.68%
Cost of:
Deposits 5.39% 5.64% 5.78%
FHLB advances and other interest-
bearing liabilities 5.85% 5.94% 6.43%
---- ----
Interest-bearing liabilities 5.47% 5.71% 5.89%
----
Interest rate spread 1.78% 1.58% 1.79%
Liquidity and Capital Resources
General
Like other financial institutions, the Bank must ensure that sufficient funds
are available to meet deposit withdrawals, loan commitments, investment needs
and expenses. Control of the Bank's cash flow requires the anticipation of
deposit flows and loan payments. The Bank's primary sources of funds are deposit
accounts, FHLB advances and principal and interest payments on loans.
16
<PAGE>
The Bank requires funds in the short-term to finance ongoing operating expenses,
pay liquidating deposits, purchase temporary investments in securities and
invest in loans. The Bank funds short-term requirements through short-term
advances from the FHLB, the sale of temporary investments, deposit growth and
loan principal payments. The Bank requires funds in the long-term to invest in
loans for its portfolio, purchase fixed assets and provide for the liquidation
of deposits maturing in the future. The Bank funds its long-term requirements
with proceeds from maturing loans, the sale of loans, the sale of investments in
securities, deposits, long-term advances from the FHLB and the sale of real
estate. In addition, management has no plans to significantly change long-term
funding requirements.
During the six-month period ended June 30, 1996, the Company used funds
primarily from principal collected on loans, $12,880,206; proceeds from FHLB
advances, $4,500,000; proceeds from loan sale receivable, $37,765; proceeds from
the sale of real estate owned, $1,536,066; proceeds from loan sales, $4,084,252;
and funds collected from advance payments of borrowers, $534,158; to fund the
origination and purchase of loans, $17,317,457; decreases in net deposits,
$4,499,724; decreases in other borrowings, $170,000; and an increase in cash,
$1,513,389. As of June 30, 1996, the Bank had outstanding FHLB advances of
$25,500,000. Management believes that in the future funds will be obtained from
the above sources.
At June 30, 1996, loans-in-process, or closed loans scheduled to be funded over
a future period of time, totaled $915,777. Loans committed, but not closed,
totaled $2,297,218 and available lines of credit totaled $186,430. During the
six-month period ended June 30, 1996, the Bank acquired $14.96 million in
primarily domestic residential mortgage loans. The Company anticipates that
other loan acquisitions will occur in the future. Funding for these amounts is
expected to be provided by the sources described above.
The Company last declared a dividend to its stockholders on September 30, 1994,
which was paid on November 14, 1994. As a result of the net losses that have
been incurred by the Company since the fourth quarter of 1994, no additional
dividends have been declared and the Board of Directors decided to suspend the
payment of dividends for calendar year 1995, and does not anticipate the payment
of dividends during 1996. In addition, although the Company does not require OTS
approval for the granting of dividends, the Bank is prohibited from granting
dividends without OTS approval and Bank does not anticipate the payment of
dividends to the Company for calendar year 1996. The payment of dividends in
subsequent years will depend on general economic conditions, the overall
performance of the Company, and the capital needs of the Company.
Acquisitions
On April 3, 1992, the Bank acquired certain assets and liabilities of First
Federal Savings and Loan Association of Seminole County, F.A. from the RTC. The
Bank acquired approximately $77,988,000 of loans and assumed $120,227,000 in
deposits and other liabilities. In addition, the Bank paid a net premium of
approximately $2,056,269 to the RTC and First Guaranty Mortgage Corporation in
connection with the acquisition. The Bank has amortized $1,618,820 of the
premium as of June 30, 1996 as an adjustment to interest income. The acquisition
was accounted for as a purchase.
Liquidity
As a member of the Federal Home Loan Bank system, the Bank is required to
maintain a daily average balance of liquid assets equal to a specified
percentage (currently 5%) of net withdrawable deposit accounts and borrowings
payable in one year or less. Federal regulations also require that each member
institution maintain short-term liquid assets of at least 1% of its net
withdrawable deposit accounts and borrowings payable in one year or less.
Generally, the Bank's management seeks to maintain its liquid assets at
comfortable levels above the minimum requirements imposed by its regulators. At
June 30, 1996, average liquidity was 10.65%.
17
<PAGE>
The Asset/Liability Management Committee of the Bank meets regularly and, in
part, reviews liquidity levels to ensure that funds are available as needed.
Credit Risk
The Bank's primary business is the origination and acquisition of loans to
families and businesses. This activity entails potential credit losses, the
magnitude of which depends on a variety of economic factors affecting borrowers
which are beyond the control of the Bank. While the Bank has instituted
guidelines and credit review procedures to protect it from avoidable credit
losses, some losses may inevitably occur.
Short-term balloon mortgage loans are sometimes used to allow borrowers the
option of waiting until interest rates are more favorable for a long term fixed
rate loan. If interest rates rise, these loans may require renewals if borrowers
fail to qualify for a long term fixed rate loan at maturity and there is no
assurance that a borrower's income will be sufficient to service the renewal.
Management recognizes the risks associated with this type of lending and
believes that the policies and procedures it applies to such loans lowers the
general risk.
Supervision
The Company and the Bank are subject to extensive regulation, supervision and
examination by the OTS, the primary federal regulator, by the FDIC with regard
to the insurance of deposit accounts and, to a lesser extent, the Federal
Reserve. Such regulation and supervision establishes a comprehensive framework
of activities in which a savings and loan holding company and its financial
institution subsidiaries may engage and is intended primarily for the protection
of the SAIF administered by the FDIC and depositors.
The first significant supervisory concerns regarding the Bank's operation and
underwriting policy were cited by the OTS in the Bank's December 1992
examination. In response to the supervisory concerns, in January 1993, the Bank
hired a new Chief Executive Officer/President who was given the responsibility
of evaluating existing personnel, policies and procedures, and the development
of new operating strategies for the Bank.
In May 1993, the OTS and the Bank entered into a Supervisory Agreement which was
mainly directed at correcting loan underwriting deficiencies; limiting certain
affiliated party transactions, including taking measures to avoid the appearance
of conflicts of interest in transactions with affiliated persons; amending the
Bank's main office lease with an affiliate to more accurately reflect market
rates; developing plans for the disposition of classified assets; and better
monitoring and documenting of loans to borrowers to ensure compliance with the
Bank's loan to one borrower limits. To ensure compliance with the terms of the
Supervisory Agreement, the Bank hired its outside independent auditors, KPMG
Peat Marwick LLP, to report to management on a quarterly basis their assessment
of the Bank's performance. The independent auditors reviewed the operations of
the Bank in connection with the Supervisory Agreement and certified to
management that the Bank was in compliance with the Supervisory Agreement.
In the following examinations of the Holding Company and the Bank, which were
completed in April, 1994, the OTS cited the Company and the Bank with certain
deficiencies, many of which were the subject of the individual cease and desist
orders that were entered into on October 3, 1994 (collectively, the "Orders").
The Bank's Order superseded the 1993 Supervisory Agreement with the OTS.
Management of the Company and the Bank consented to the issuance of the
respective Orders, without admitting or denying that grounds for such Orders
existed.
18
<PAGE>
The OTS examination directives which were not included in the Company's Order,
require management of the Company to amend the Company's office lease with an
affiliated party to better reflect market terms and conditions; discount certain
notes receivable to better reflect market rates; require officers to submit
detailed expense reports to the Board of Directors; discontinue use of the
Bank's credit cards for Company expenditures; and obtain written approval from
the Board of Directors for all Company expenses. The Board and management of the
Company believe that the Company has complied and is in compliance with each of
these directives.
The OTS examination directives that were not included in the Bank's Order,
required management of the Bank to ensure adequate documentation of accounting
information, modify loan relationships to comply with loans to one borrower;
obtain appraisals for certain collateral property; obtain Board of Directors
approval for changes to policies and procedures of the Bank; increase the amount
of the general valuation allowance to $1.85 million and effectuate changes in
the management of the lending department, establishing guidelines and individual
responsibility for monitoring loan maturities, collection and foreclosures. The
Board and management believe the Bank has complied and is in compliance with
each of these directives.
Under the Company's Order, the Company: (i) cannot request dividends from the
Bank without written permission from the OTS; (ii) must reimburse the Bank for
the Company's expenses; (iii) develop a Management Services Agreement with the
Bank which provides for the reimbursement for employees who work for both the
Bank and the Company; (iv) must appoint a Compliance Committee to report to the
Board of Directors as to the Company's compliance with the Order; and (v) the
Board must report to the OTS on a quarterly basis the Company's compliance with
the Order.
The Bank's Order provides for the Board of Directors to: (i) develop, adopt and
adhere to policies and procedures to strengthen the Bank's underwriting,
administration, collection and foreclosure efforts; (ii) review and revise
underwriting policies and procedures to comply with regulatory requirements;
(iii) record minutes of the loan committee and grant loans only on procedures to
comply with regulatory requirements; (iv) record minutes of the loan committee
and grant loans only on terms approved by the loan committee; (v) develop and
implement a written plan to collect, strengthen and reduce the risk of loss for
all real estate owned and for certain loans at risk and secured by real estate;
(vi) comply with policies and procedures requiring written inspection of
development and construction loans; (vii) pay no more than market rate,
determined by a rent study approved by the OTS for lease of the Bank's offices;
(viii) make no payment of taxes owned by a person affiliated with the Bank; (ix)
seek a Management Services Agreement for work performed for the Company by Bank
employees; (x) develop and submit for approval a three year business plan; (xi)
comply with loans to one borrower policy; (xii) make no capital distribution to
the Company without the consent of the OTS; (xiii) appoint a compliance
committee; and (xiv) refrain from purchasing additional dual indexed bonds.
The Orders require the Company and the Bank to establish separate Compliance
Committees. The Compliance Committees meet monthly to review, in detail, the
terms of the Orders to ensure that the respective companies are in compliance
with their Orders. The Bank also contracted with a company specializing in the
review of the system of internal controls and operating procedures of financial
institutions, including compliance with internal policies and procedures.
19
<PAGE>
In the most recent examinations of the Company and the Bank, which were
concluded in June, 1995, the OTS found the companies to be in compliance with
their Orders. With regard to the Bank, improvement was noted in a number of
areas, including underwriting procedures, documentation, disposition of problem
assets, reduction in the dependency on wholesale funds and a reduction in
operating expenses. In August, 1995 the OTS informed the Company that it was
conducting an expanded examination of the Company with regard to certain
transactions that were entered into by prior Bank management in 1990 and 1991.
As of the date of this filing, the examination had not been concluded.
Since the issuance of the 1993 Supervisory Agreement, the Board of Directors of
the Bank has strengthened the overall management of the Bank with the hiring of
a Chief Executive Officer/President in January 1993, the addition of a new Chief
Financial Officer in June 1993, the reorganization of the Loan Department and
the establishment of a new credit culture, coupled with the addition of a new
Chief Lending Officer/Senior Problem Asset Officer in March, 1995. The Board and
management of the Company and the Bank believe that the Bank's management is
taking the necessary corrective measures to ensure that the Bank is being
operated properly and that the level of classified assets are being carefully
monitored and managed in order to provide for the steady reduction of classified
assets. The respective management's are committed to taking the appropriate
steps to have the Orders lifted as soon as possible.
Management expects that the interest income of the Bank will continue to be
limited, so long as the Bank's Order and current growth limitations remain in
place. Under the growth limitations, the Bank cannot increase its total assets
during any quarter in excess of an amount equal to net interest credited on
deposit liabilities during the quarter. Management of the Company and the Bank,
however, do not believe that the respective Orders, or the current growth
limitations on the Bank, will have a material impact on the financial condition
of the Company or the Bank. Changes in banking regulation by the U.S. Congress,
or changes in the banking regulations by the OTS or the FDIC could, however,
have a significant impact on the Company and the Bank and their operations.
Capital Requirements
The Bank is required to meet certain minimum regulatory capital requirements.
The following table presents a summary of the capital requirements for
adequately capitalized banks, the Bank's capital and the amounts in excess as of
June 30, 1996:
At June 30, 1996
---------------------------------------------------------
Tangible Core Risk- Based
----------------- ---------------- ------------------
(Dollars in Thousands)
Percent Percent Percent
Amount of Assets Amount of Assets Amount of Assets
------ --------- ------ --------- ------ ---------
Regulatory Capital 7,629 5.45% 7,629 5.45% 8,398 11.14%
Requirement 2,099 1.50% 4,198 3.00% 6,033 8.00%
----- ---- ----- ---- ----- ----
Excess 5,530 3.95% 3,431 2.45% 2,365 3.14%
===== ==== ===== ==== ===== ====
20
<PAGE>
Impact of Inflation and Changing Prices
The financial statements and related data presented herein have been prepared in
accordance with Generally Accepted Accounting Principles ("GAAP"), which require
the measurement of financial position and operating results in terms of
historical dollars, without considering changes in the relative purchasing power
of money over time due to inflation. Unlike most industrial companies,
substantially all of the assets and liabilities of the Company are monetary in
nature. As a result, interest rates have a more significant impact on the
Company's performance than the effects of general levels of inflation. Interest
rates do not necessarily move in the same direction or in the same magnitude as
the prices of goods and services, since such prices are affected by inflation to
a larger extent than interest rates.
Impact of Accounting Requirements
On March 31, 1995, the Financial Accounting Standards Board issued Statement of
Accounting Standards No. 121, "Accounting for the Impairment of long-lived
Assets and for long-lived assets to be disposed of." This Statement establishes
accounting standards for the impairment of long-lived assets, assets to be held
and used for long-lived assets and certain identifiable intangibles to be
disposed of. It requires that long-lived assets and certain identifiable
intangibles to be held and used by an entity be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. It also prescribes the value of these assets to be
disposed be reported at the lower of carrying amount or fair value less cost to
sell. Statement 121 is effective for financial statements issued for fiscal
years beginning after December 15, 1995; therefore, it is required to be
implemented in the first quarter of 1996 for calendar year companies as is the
Company.
On May 31, 1995, the Financial Accounting Standards Board issued Statement of
Accounting Standards No. 122, "Accounting for Mortgage Servicing Rights." This
Statement amends FASB Statement No. 65, "Accounting for Certain Mortgage Banking
Activities." This Statement requires that a mortgage banking enterprise assess
its capitalized mortgage servicing rights for impairment based on the fair value
of those rights. Statement 122 is effective prospectively for financial
statements issued for fiscal years beginning after December 15, 1995; therefore,
it is required to be implemented in the first quarter of 1996 for calendar year
companies as is the Company.
In October 1995, the Financial Accounting Standards Board issued SFAS No. 123,
"Accounting for Stock Based Compensation." This Statement establishes financial
accounting and reporting standards for stock-based employee compensation plans.
Those plans include all arrangements by which employees receive shares of stock
or other equity instruments of the employer or the employer incurs liabilities
to employees in amounts based on the price of the employer's stock. Examples are
stock purchase plans, stock options, restricted stock and stock appreciation
rights. This Statement also applies to transactions in which an entity issues
its equity instruments to acquire goods or services from nonemployees. Those
transactions must be accounted for based on the fair value of the consideration
received or the fair value of the equity instruments issued, whichever is more
reliably measurable. This Statement is effective for transactions entered into
in fiscal years that begin after December 15, 1995.
In June 1996, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 125 Accounting for Transfers and Servicing of
Financial Assets and Extinguishment of Liabilities. This Statement provides
accounting and reporting standards for transfers and servicing of financial
assets and extinguishment of liabilities. Those standards are based on
consistent application of a financial-components approach that focuses on
control. Under that approach, after a transfer of financial assets, an entity
recognizes the financial and servicing assets it controls and the liabilities it
has incurred, derecognizes financial assets when control has been surrendered,
and derecognizes liabilities when extinguished. This Statement provides
consistent standards for distinguishing transfers of financial assets that are
sales from transfers that are secured borrowings. This Statement is effective
for transfers and servicing of financial assets and extinguishment of
liabilities occurring after December 31, 1996, and is to be applied
prospectively. Earlier or retroactive application is not permitted.
21
<PAGE>
The Securities and Exchange Commission has requested that the FASB develop new
accounting standards that could require financial institutions to carry all
financial instruments at their fair market value. Implementation of the standard
would more than likely produce significant volatility in the measurement of
periodic net earnings and capital.
Results of Operations
Comparison of the Three-Month Period Ended June 30, 1996 and 1995
General. The Company had a net loss for the three-month period ended June 30,
1996 of $163,126 or $.07 per share, compared to net loss of $643,581 or $.29
per share for the same period in 1995. The decrease in the net loss was due
primarily to the decrease in provision for loan losses.
Interest Income and Expense. Interest income decreased to $2,431,706 for the
three-month period ended June 30, 1996 from $2,764,854 for the same period in
1995. Interest income on loans decreased to $2,219,285 in 1996 from $2,280,994
in 1995, primarily as a result of a decrease in the average yield on the loan
portfolio. Interest income on the securities portfolio decreased by $253,148 for
the three-month period ended June 30, 1996 over the same period in 1995, as a
result of a decrease in the amount of securities owned and a decrease in the
average yield on securities held. Other interest and dividends decreased $18,291
during the same three-month period in 1996 from 1995 as a result of a decrease
in the average volume of other interest-bearing assets. Management expects the
rates earned on the portfolio to fluctuate with general market conditions.
Interest expense decreased to $1,700,408 during the three-month period ended
June 30,1996 from $2,030,280 for the same period in 1995 due to a decrease in
the amount of, and the average rate paid on, such deposits and FHLB advances.
Interest on deposits increased to $1,405,622 in 1996 from $1,598,199 in 1995 as
a result of decreased deposits and a decrease in the average rate paid, and
interest on FHLB Advances decreased to $294,786 in 1996 from $432,081 in 1995 as
a result of the decrease in the amount of advances outstanding and a decrease in
the rates paid on advances. Management expects to continue to use FHLB advances
when the proceeds can be invested wisely.
Provisions for Loan Losses. A provision for loan losses is generally charged to
operations based upon management's evaluation of the potential losses in its
loan portfolio. During the quarter, management did make a provision for loan
losses of $131,862 based on its evaluation of the loan portfolio. The Bank's
total provision for loan losses was $730,000 during the same period in 1995. Net
charge-offs on loans totaled $972,854 during the three-month period ended June
30, 1996 and $161,761 during the three-month period ended June 30,1995. Total
non-performing loans at June 30,1996 were $3,470,920 compared to $3,491,328 at
June 30, 1995. The allowance for loan losses at June 30, 1996 was $1,092,024 or
31% of non-performing loans and .97% of net loans outstanding.
Total Other Income. Other income decreased from $135,116 for the three-month
period ended June 30, 1995 to $62,628 for the same period in 1996. The decrease
in other income was due to a decrease in rental income of $54,226 on the
commercial rental property repossessed by the Company, a decrease of $12,040 in
fees and services charges, and a decrease of $7,178 in other miscellaneous
income, partially offset by an increase in gains on the sale of assets. Rental
income decreased as a result of a reduction in the amount of rental property
owned by the Company, and fees and service charges decreased primarily because
of a decrease in the fees and charges earned by the Bank on deposit accounts.
Other miscellaneous income decreased for the three-month period ended June 30,
1996 due primarily to decreased other loan income, and gains on the sale of
assets increased by $956 for the three month period.
22
<PAGE>
Total Other Expense. Other expense decreased to $1,067,255 the three-month
period ended June 30, 1996 from $1,145,285 for the same period in 1995. The
decrease in 1996 was the result of decreased employee compensation expense,
decreased data processing expense, decreased professional fees, and decreased
miscellaneous expense, partially offset by increased occupancy and equipment
expense and FDIC insurance expense. Compensation decreased to $345,479 in 1996
from $389,357 in 1995 as a result of reductions in staff. Data processing
expense decreased by $185 as a result of a decrease in the number of customer
accounts at the bank. Professional fees decreased by $54,381 primarily as a
result of decreased legal costs associated with non-performing loans. Other
miscellaneous expense decreased by $120,845 due to reduced costs associated with
repossessed assets. Occupancy and equipment expense increased by $134,665 in
1996 to $315,603 in 1996 due to the one time charges to writeoff the leasehold
improvements at the Company's office in the amount of $114,646 and to writeoff
the leasehold improvements at the closed drive-in facility in the amount of
$34,921. These one time charges totaling $149,567 were partially offset by
decreases in other occupancy and equipment expenses. FDIC Insurance expense
increased by $6,594 as a result of increased deposits in the bank at the time of
the assessments. Management expects professional fees and other miscellaneous
expenses to decrease further as non-performing loans are resolved and
repossessed assets are disposed of.
Comparison of the Six-Month Period Ended June 30, 1996 and 1995
General. The Company had a net loss for the six-month period ended June 30, 1996
of $159,653 or $.07 per share, compared to net loss of $672,774 or $.30 per
share for the same period in 1995. The decrease in the net loss was due
primarily to the decrease in provision for loan losses and decreased other
expense offset partially by decreased net interest income and decreased other
income.
Interest Income and Expense. Interest income decreased to $4,989,528 for the
six-month period ended June 30, 1996 from $5,413,145 for the same period in
1995. Interest income on loans increased to $4,572,628 in 1996 from $4,404,325
in 1995, primarily as a result of an increase in the amount of loans
outstanding. Interest income on the securities portfolio decreased by $513,465
for the six-month period ended June 30, 1996 over the same period in 1995, as a
result of a decrease in the amount of securities owned and a decrease in the
average yield on the securities. Other interest and dividends decreased $78,455
during the same six-month period in 1996 from 1995 as a result of a decrease in
the average volume of other interest-bearing assets. Management expects the
rates earned on the portfolio to fluctuate with general market conditions.
Interest expense decreased by $377,108 from $3,517,281 during the six-month
period ended June 30, 1996 from $3,894,389 for the same period in 1995 due to a
decrease in the amount of, and the average rate paid on, such deposits and FHLB
advances. Interest on deposits decreased to $2,925,592 in 1996 from $2,941,098
in 1995 as a result of decreased deposits and a decrease in the average rate
paid, and interest on FHLB Advances decreased to $591,689 in 1996 from $953,291
in 1995 as a result of the decrease in the amount of advances outstanding and a
decrease in the rates paid on advances. Management expects to continue to use
FHLB advances when the proceeds can be invested wisely.
23
<PAGE>
Provisions for Loan Losses. A provision for loan losses is generally charged to
operations based upon management's evaluation of the potential losses in its
loan portfolio. During the first six months of 1996 management did make a
provision for loan losses of $113,506 based on its evaluation of the loan
portfolio. The Bank's total provision for loan losses was $732,323 during the
same period in 1995. Net charge-offs on loans totaled $1,088,535 during the six-
month period ended June 30, 1996 and $283,774 during the six-month period ended
June 30,1995. Total non-performing loans at June 30,1996 were $3,470,920
compared to $3,491,328 at June 30, 1995. The allowance for loan losses at June
30, 1996 was $1,092,024 or 31% of non-performing loans and .97% of net loans
outstanding.
Total Other Income. Other income decreased from $350,975 for the six-month
period ended June 30, 1995 to $251,715 for the same period in 1996. The decrease
in other income was due to a decrease in rental income of $88,412 on the
commercial rental property repossessed by the Company, a decrease of $23,852 in
fees and services charges, offset partially by an increase of $10,887 in gains
on the sale of assets and an increase in other miscellaneous income of $2,117.
Rental income decreased as a result of a reduction in the amount of rental
property owned by the Company, and fees and service charges decreased primarily
because of a decrease in the fees and charges earned by the Bank on deposit
accounts. Gains on the sale of assets increased by $10,887 for the three month
period. Other miscellaneous income increased for the six-month period ended June
30, 1996 due primarily to increased other loan income.
Total Other Expense. Other expense decreased to $2,010,220 the six-month period
ended June 30, 1996 from $2,188,617 for the same period in 1995. The decrease in
1996 was the result of decreased employee compensation expense, decreased
professional fees, and decreased miscellaneous expense, partially offset by
increased occupancy and equipment expense, increased data processing expense,
and increased FDIC insurance expense. Compensation decreased to $689,704 in 1996
from $806,775 in 1995 as a result of reductions in staff. Professional fees
decreased by $94,646 primarily as a result of decreased legal costs associated
with non-performing loans. Other miscellaneous expense decreased by $130,278 due
to reduced costs associated with repossessed assets. Occupancy and equipment
expense increased by $140,710 in 1996 to $485,074 in 1996 due to the one time
charges to writeoff the leasehold improvements at the Company's office in the
amount of $114,646 and to writeoff the leasehold improvements at the closed
drive-in facility in the amount of $34,921. These one time charges totaling
$149,567 were partially offset by decreases in other occupancy and equipment
expenses. Data processing expense increased by $8,869 as a result of an increase
in the charges from the service bureau that process customer accounts at the
bank. FDIC Insurance expense increased by $14,019 as a result of increased
deposits in the bank at the time of the assessments. Management expects
professional fees and other miscellaneous expenses to decrease further as
non-performing loans are resolved and repossessed assets are disposed of.
24
<PAGE>
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
On June 5, 1996, the Registrant held its annual meeting of shareholders at which
the following matters were voted upon at the meeting:
1. Amendment of Restated Votes For Votes Against Votes Abstained
Articles of Incorporation to
eliminate staggered terms and
multiple classes of directors
and provide for election of
directors for one year terms: 1,254,493 5,664 17,296
2. Election of Directors:
One Year Terms:
Edwin J. Feiler, Jr. 1,276,086
Aubrey H. Wright, Jr. 1,274,328
Directors whose terms are continuing are as follows:
One Year Terms:
James T. Bell
James V. Suskiewich
Two Year Terms:
Anne T. Coonrod
Francis T. West
3. Selection of KPMG Peat
Marwich as independent
auditor: 1,265,285 3,418 8,750
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused the report to be signed on its behalf by the
undersigned thereunto duly authorized.
FEDERAL TRUST CORPORATION
(Registrant)
Date: August 7, 1996 By: /s/ Aubrey H. Wright, Jr.
---------------- -------------------------
Aubrey H. Wright, Jr.
Chief Financial Officer and duly authorized
Officer of the Registrant
25
<PAGE>
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILE PURSUANT TO SECTION
15(D) TO THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO
SECTION 12 OF THE ACT.
(1) Notice of Annual Meeting of Shareholders to be held June 5, 1996
(2) Proxy Statement for the Annual Meeting of Shareholders to be held June 5,
1996
26
<PAGE>
FEDERAL TRUST CORPORATION
1270 Orange Avenue
Winter Park, Florida 32789
--------------------------
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD JUNE 5, 1996
--------------------------
To the Shareholders of Federal Trust Corporation:
NOTICE IS HEREBY GIVEN that the 1996 Annual Meeting of Shareholders of Federal
Trust Corporation (the "Company") will be held at the offices of Lowndes
Drosdick Doster Kantor & Reed, P.A., 215 North Eola Drive, Orlando, Florida
32802-2809, on Wednesday, June 5, 1996 at 4:30 p.m. local time, for the purpose
of considering and voting upon:
(1) A proposal to amend the Restated Articles of Incorporation of the Company
to eliminate staggered terms and multiple classes of directors and to
provide for the election of directors for one year rather than three year
terms.
(2) A proposal to elect two (2) nominees of Class III to the Board of Directors
of the Company to serve until either the annual meeting of shareholders in
1997 or 1999 depending on whether the proposal to amend the Restated
Articles of Incorporation is approved.
(3) A proposal to ratify selection of KPMG Peat Marwick as independent auditors
of the Company for the fiscal year ending December 31, 1996.
(4) Such other business as properly may come before the meeting and any
adjournments thereof.
Information relating to the above matters is set forth in the attached Proxy
Statement. All shareholders of record at the close of business on May 8, 1996
are entitled to receive notice of and to vote at the Annual Meeting or any
adjournments thereof.
By Order of the Board of Directors
/s/ James T. Bell
JAMES T. BELL
Chairman of the Board
Winter Park, Florida
May 14, 1996
PLEASE READ THE ATTACHED PROXY STATEMENT AND THEN COMPLETE, SIGN, DATE AND
RETURN THE ENCLOSED PROXY IN THE ACCOMPANYING POSTAGE-PAID ENVELOPE AS EARLY AS
POSSIBLE. IF YOU ATTEND THE ANNUAL MEETING, YOU MAY REVOKE THE PROXY AND VOTE IN
PERSON IF YOU SO DESIRE.
<PAGE>
FEDERAL TRUST CORPORATION
1270 Orange Avenue
Winter Park, Florida 32789
--------------------------
PROXY STATEMENT
FOR THE ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD JUNE 5, 1996
This Proxy Statement is furnished to the shareholders of Federal Trust
Corporation (the "Company") in connection with the solicitation of proxies by
the Board of Directors of the Company to be voted at the 1996 Annual Meeting of
Shareholders and at any adjournments thereof (the "Annual Meeting"). The Annual
Meeting will be held on Wednesday, June 5, 1996 at 4:30 p.m., local time, at the
offices of Lowndes Drosdick Doster Kantor & Reed, P.A., 215 North Eola Drive,
Orlando, Florida 32802- 2809. The approximate date on which this Proxy Statement
and the enclosed form of proxy are first being sent or given to shareholders is
May 14, 1996.
VOTING STOCK OUTSTANDING AND VOTE REQUIRED FOR APPROVAL
General
The securities that can be voted at the Annual Meeting consist of Common Stock
of the Company, $0.01 par value per share (the "Common Stock"), with the holders
of the Common Stock being entitled to one vote for each share on each matter
submitted to the shareholders. Only shareholders of record as of the close of
business on May 8, 1996 (the "Record Date") will be entitled to receive notice
of, and to vote at, the Annual Meeting. On the Record Date, there were 2,239,928
shares of Common Stock outstanding, and no other classes of capital stock
outstanding.
Vote Required
Each share of Common Stock outstanding on the Record Date is entitled to one
vote. An affirmative vote of the majority of the outstanding shares of Common
Stock as of the Record Date for the Annual Meeting is required for the approval
of Proposal No. 1 which would amend the Restated Articles of Incorporation to
eliminate staggered terms and multiple classes of directors and provide for the
election of directors for one year rather than three year terms. An affirmative
vote of a majority of the shares present and eligible to vote at the meeting is
required for approval of Proposals Nos. 2 and 3 regarding the election of
directors and the ratification of the Company's independent auditors being
submitted to the shareholders for their consideration. Abstentions and broker
non-votes will not be included in the total number of votes cast and therefore
will have no effect on the outcome of the vote for Proposals No. 2 and 3 and
will effectively count as a vote against Proposal No. 1.
VOTING AND REVOCATION OF PROXIES
Holders of Common Stock
Forms of proxies are being transmitted with this Proxy Statement to all
shareholders of the Company. When such a proxy is properly executed and
returned, the shares that it represents will be voted at the Annual Meeting in
accordance with the instructions noted thereon. In the absence of such
instructions, the shares represented will be voted FOR each proposal listed on
the proxy and described herein. Any shareholder who executes and delivers a
proxy may revoke it at any time before its exercise by filing with the Secretary
of the Company a written instrument of revocation at 1270 Orange Avenue, Suite
C, Winter Park, Florida 32789, or by executing and delivering to the Secretary a
duly executed proxy bearing a later date, or by appearing at the meeting and
voting in person. The mere presence of a shareholder at the meeting will not
automatically revoke such shareholder's proxy. The Board of Directors of the
Company does not know of any other business to be brought before the Annual
Meeting, but it is intended that, as to any such other business, a vote will be
cast pursuant to the proxy in accordance with the judgment of the persons named
as proxies.
<PAGE>
Costs of Solicitation
The Company will bear the entire cost of preparing, assembling, printing and
mailing this Proxy Statement, the accompanying proxy and any additional material
which may be furnished to shareholders. Copies of solicitation material will be
furnished to brokerage houses, fiduciaries, nominees and custodians to forward
to beneficial owners of stock held in their names and the Company will reimburse
such brokerage houses and others for their reasonable expenses incurred in
connection therewith. In addition to the use of the mails, proxies may be
solicited by direct communication with certain shareholders or their
representatives, including without limitation, telephone, telegraph or personal
contact, by directors, officers and employees of the Company who will receive no
additional compensation therefor.
COMMON STOCK OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The Company is not aware of any person who, on May 8, 1996, was the beneficial
owner of 5% or more of the Company's outstanding Common Stock, except for James
T. Bell and John M. Bell. Information concerning such ownership is set forth in
the following table together with information concerning beneficial ownership by
directors and officers as a group.
Amount and Nature of
Beneficial Ownership Percent of
---------
Beneficial Owner Common Stock
---------------- ------------
James T. and John M. Bell 642,860(1) 28.7
675 Osceola Avenue
Winter Park, Florida 32789
Directors and Executive Officers
as a Group (6 persons) 733,720(1) 32.8
- ----------
(1) Includes 7,643 shares held by Mr. Bell in his name, 12,500 shares held as
trustee and 25,391 shares held as trustee under the Company's ESOP, with
respect to which Mr. Bell exercises sole voting and investment power,
212,405 shares held by Mrs. Bell in her name, with respect to which Mrs.
Bell exercises sole voting and investment power, 384,921 shares held by Mr.
and Mrs. Bell as joint tenants, with respect to which Mr. and Mrs. Bell
share voting and investment power.
PROPOSAL NO. 1 - AMEND ARTICLES OF INCORPORATION
To amend the Articles of Incorporation to eliminate staggered terms and multiple
classes of directors and to provide for the election of directors for one year
rather than three year terms.
APPROVAL OF AMENDMENT TO
THE RESTATED ARTICLES OF INCORPORATION
General
On May 7, 1996 the Board of Directors unanimously proposed to amend the Restated
Articles of Incorporation of the Company in the form attached hereto as Appendix
"A" (the "First Amendment") and recommended that the Company's shareholders
consider and adopt the First Amendment at the Annual Meeting of Shareholders. If
approved by the affirmative vote of the holders of a majority of the outstanding
Common Stock of the Company, the First Amendment will become effective upon
filing with the Secretary of State of Florida. If Proposal No. 1 is approved,
the filing will be made electronically immediately after the vote on Proposal
No. 1 and prior to the vote on any other proposals. This will allow the vote for
the nominees for directors to be conducted under the terms of the First
Amendment.
2
<PAGE>
Background
The Company was incorporated and its Articles of Incorporation filed with the
Florida Secretary of State on August 5, 1988. Its Articles of Incorporation were
subsequently amended by amendments filed with the Florida Secretary of State on
September 23, 1988, November 4, 1988 and March 26, 1990. Articles of Restatement
were filed with the Florida Secretary of State on August 2, 1990 and were
subsequently amended by an amendment filed with the Florida Secretary of State
on May 21, 1991. Restated Articles were filed with the Florida Secretary of
State on October 5, 1994.
The changes proposed in the First Amendment will give the shareholders more
input into and control over the Company. Staggered terms and multiple classes of
directors will be eliminated. Directors will be elected for one year rather than
three year terms, making it easier to bring in additional directors, and
resulting in a Board of Directors which is more responsive to shareholder
concerns.
Proposed Amendments to the Articles of Incorporation.
ARTICLE VI, DIRECTORS, SECTION 1 NUMBER AND TERM. This provision has been
amended to phase out the staggered terms and multiple classes of directors. Each
director shall be elected for a term of approximately one year, expiring at the
annual meeting following his or her election.
ARTICLE VI, DIRECTORS, SECTION 2, DIRECTORSHIPS AND VACANCIES. This provision
has been amended to reflect that staggered terms and multiple classes of
directors are being phased out.
Pursuant to the proposed First Amendment, existing directors whose terms expire
at an annual meeting will be elected for a term which expires at the next annual
meeting. Existing directors whose terms do not expire at the 1996 annual meeting
will continue to serve until their current term expires. Upon such expiration
that directors position will be filled in accordance with the First Amendment
which provided for a term which expires at the next annual meeting. Furthermore,
any directors elected by the remaining directors to fill a vacancy on the Board
of Directors will serve the remainder of the full term for which the director
who held the vacant seat was originally elected.
Adoption of the First Amendment
The First Amendment must be approved by the favorable vote of the holders of a
majority of the shares of Common Stock outstanding as of the Record Date for the
Annual Meeting. The Board of Directors has unanimously proposed the First
Amendment and recommended its adoption by the shareholders. If approved by the
shareholders, the Company shall file, with the Florida Secretary of State, the
First Amendment, which shall become effective at the time and date of filing.
The filing will be made prior to the vote on any other proposals. Proxies
solicited by the Board of Directors will be voted in favor of adoption of the
First Amendment, unless the shareholders specify in their proxies a contrary
choice.
The Board of Directors unanimously recommends a vote FOR the adoption of the
First Amendment.
3
<PAGE>
PROPOSAL NO. 2 - ELECTION OF DIRECTORS
The Board of Directors of the Company is currently divided into three classes,
with the terms of office of each Class ending in successive years. The term of
the director in Class III expires with this Annual Meeting. The directors of
Class I and Class II will continue in office until the 1997 and 1998, annual
meetings, respectively. At the present time, there are two directors in Class I,
two directors in Class II and one director in Class III. The By-laws of the
Company currently provide that the number of directors shall be fixed from time
to time exclusively by the Board of Directors pursuant to a resolution adopted
by a majority of the full Board. The Board has fixed the current number of
directors at six by resolution dated May 7, 1996.
All proxies received by the Company will be voted in accordance with the
instructions appearing on such proxies. In the absence of contrary instructions,
the proxy will be voted for the election of the nominees whose names appear
below. In the event that Proposal No. 1 has been approved by the favorable vote
of a majority of the shares of Common Stock outstanding as of the Record Date
for the Annual Meeting, then the proxy will be voted for terms for such nominees
which expire at the 1997 Annual Meeting of Shareholders. If Proposal No. 1 is
not approved, the proxy will be voted for terms for such nominees which expire
at the 1999 Annual Meeting of Shareholders. In the event that any nominee is
unable to serve (which is not anticipated), the persons designated as proxies
will cast votes for the remaining nominees and for such other person as they may
select. The election of the directors listed below requires the affirmative vote
of a plurality of the votes cast by the holders of shares of the Company's
Common Stock present in person or represented by proxy at the Annual Meeting,
provided that a quorum is present.
The following table sets forth the name of the two nominees and each director
continuing in office; a description of his positions and offices with the
Company, if any; a brief description of his principal occupation and business
experience during at least the last five years; directorships presently held by
him in companies with registered securities, other than the Company; and certain
other information including his age and number of shares of Company Common Stock
beneficially owned as of May 8, 1996. If any nominee should become unavailable
to serve for any reason (which is not anticipated), the persons named as proxies
will vote all valid proxies for the election of the remaining nominees and for
such other person or persons as may be designated by the Board of Directors, or
to allow the vacancy created thereby to remain open until filled by the Board,
or to reduce the authorized number of directors, as the Board of Directors
recommends.
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4
<PAGE>
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE "FOR" THE
PROPOSAL TO ELECT AS DIRECTORS THE NOMINEES NAMED BELOW.
Information Concerning Nominees
NOMINEES FOR DIRECTOR
FOR CLASS III
<TABLE>
<CAPTION>
Number of Shares of
Year First Common Stock Owned
Nominee's Principal Occupation and Other Elected a Beneficially at
Name, Age Information(2) Director March 31, 1996(3)
- --------- -------------- -------- -----------------
<S> <C> <C> <C>
Edwin J. Feiler, Jr.(1), 61 Vice Chairman of the Board of Directors of the 1989 15,381
Company; President, Metro Developers, Inc.,
residential construction and property management
company; general partner of American Housing
Associates, a multi-family construction
supervision and management partnership in
Savannah, GA and Arlington, VA; resides
in Savannah, Georgia (4)
Aubrey H. Wright, Jr., 49 Chief Financial Officer of the Company since N/A -0-
April 1994 and Chief Financial Officer of
Federal Trust Bank (the "Bank") since June 1993;
from 1991 to 1993 President, Chief Operating
Officer and Director of Essex Savings Bank,
F.S.B. Palm Beach, Florida; 1989 to 1991
President and Chief Financial Officer of Coral
Savings and Loan Association, Coral Springs,
Florida, and Senior Vice President of Ambassador
Federal Savings, Tamarac, Florida(8)(9)
CLASS I DIRECTORS
TERM EXPIRING ANNUAL MEETING 1997
James T. Bell, 54 Chairman of the Board and President of the 1988 642,860
Company; President of the Bank in 1990;
resides in Orlando, Florida(4)(6)(7)
5
<PAGE>
Number of Shares of
Year First Common Stock Owned
Nominee's Principal Occupation and Other Elected a Beneficially at
Name, Age Information(2) Director March 31, 1996(3)
- --------- -------------- -------- -----------------
James V. Suskiewich, 48 President & CEO of the Bank; from 1988 to 1993 1994 8,453
President, CEO and a director of First Federal
Savings Bank of the Glades in Clewiston,
Florida; resides in Orlando, Florida(5)
CLASS II DIRECTORS
TERM EXPIRING ANNUAL MEETING 1998
Anne T. Coonrod, 51 Vice President of the Company since 1990; 1988 22,045
Former Vice President, FedTrust Building
Corporation and the Bank; Owner, Front and
Center Gift Shops; Owner of Atlantic Seafood
from 1973 to present; resides in Amelia
Island, Florida(5)
Francis T. West, 76 Former Director of Crestar Bank; Past Mayor of 1989 44,981
Martinsville, Virginia; President, Franklin
Finance Company; Former Chairman & Owner, West
Window Corporation; Chairman & Director,
Multitrade Group, Inc.; resides in Martinsville,
Virginia(4)
------
All Nominees,
Directors and Executive
Officers as a Group 733,720
</TABLE>
(1) If Proposal No. 1 above is approved, and the First Amendment is filed, the
proposed term of the nominees for director shall expire as of the date of
the 1997 Annual Meeting of Shareholders. If Proposal No. 1 is not approved,
the proposed term of the nominees for director shall expire as of the date
of the 1999 Annual Meeting of Shareholders.
(2) Except as otherwise indicated, all nominees and directors have been engaged
in their principal occupations for more than the past five years. Age is
determined as of March 31, 1996.
(3) Except for James T. Bell/John M. Bell and Francis T. West, who beneficially
own 642,860 and 44,981 of the outstanding Common Stock of the Company,
respectively, as of May 8, 1996, no other nominee or director owned
beneficially 1% or more of the outstanding Common Stock of the Company or
any shares of any class of Preferred Stock of the Company. This number
includes all shares of Common Stock owned by each director's spouse or as
custodian or trustee for minor children, over which shares such
individuals, unless otherwise noted, effectively exercise voting and
investment power.
6
<PAGE>
(4) Director of the Company only.
(5) Director of the Company and the Bank.
(6) Based on their percentage of ownership, Mr. Bell and Mrs. Bell may be
considered "controlling" persons of the Company.
(7) Mr. Bell and Mrs. Bell are married.
(8) Director of the Bank only.
(9) Coral Savings and Loan Association was placed under conservatorship by the
Resolution Trust Corporation in January, 1991.
Meetings, Committees and Compensation of Directors
The Board of Directors conducts its business through meetings of the full Board,
the Compliance Committee and the Nominating Committee. During the fiscal year
ended December 31, 1995, the Board of Directors met 6 times, the Compliance
Committee met 11 times and the Nominating Committee met one time. Each director
attended 75% or more of the aggregate of all meetings of the Board of Directors
and the Committees on which he or she may have served during such fiscal year
held during the period for which each of them was a director.
The Compliance Committee is composed of Messrs West and Feiler and Ms. Coonrod.
The purpose of the Compliance Committee is to monitor the Company's compliance
with certain regulatory issues and requirements imposed on Federal Trust Bank
(the "Bank") by the OTS and report to the Board its recommendations for
continued or improved compliance with these issues.
The Nominating Committee is composed of Messrs. Bell and Suskiewich and Ms.
Coonrod. The purpose of the Nominating Committee is to identify and recommend
(i) nominees for executive officer positions of the Company and its subsidiaries
to the Board of Directors and (ii) nominees for election to the Board of
Directors of the Company and its subsidiaries. The Nominating Committee will
consider nominees recommended by shareholders but has not established any formal
procedures for doing so.
EXECUTIVE COMPENSATION
Summary Compensation Table
COMPENSATION. The following table sets forth, for the fiscal years ended
December 31, 1995, 1994 and 1993, the total compensation paid or accrued for the
Chief Executive Officer and each of the four most highly compensated executive
officers of the Company and its subsidiaries, whose aggregate salary and bonus
exceeded $100,000 per year.
<TABLE>
<CAPTION>
Annual Compensation(1)
- ----------------------------------------------------------------------------------------------------------
Name and Principal Other Annual Restricted Stock
Position(2) Year Salary Bonus Compensation(3) Awards(4) Options(5)
----------- ---- ------ ----- --------------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
James T. Bell, CEO 1995 $151,508 -- $27,279 -- --
1994 $182,327 $ 5,563 $21,870 -- --
1993 $173,645 $ 5,995 $24,632 -- 107,674
James V. Suskiewich, 1995 $118,223 $16,000 $13,169 -- --
CEO of the Bank 1994 $105,729 $ 5,000 $13,822 -- --
1993 $ 87,885 -- $11,495 -- --
</TABLE>
(1) Includes all compensation in the year earned whether received or deferred
at the election of the executive.
(2) Includes CEO. There were no other executives whose salary and bonus exceed
$100,000 per year.
7
<PAGE>
(3) Includes the estimated value of:
James T. Bell 1995 1994 1993
------------- ---- ---- ----
Health insurance premiums $5,044 $5,152 $5,550
Life insurance premiums 5,556 36 5,340
Disability 7,714 7,227 6,763
Use of Company automobile 4,000 4,000 4,000
Social/Country Club Dues 4,965 5,455 2,979
----- ----- -----
Total: $27,279 $21,870 $24,632
James V. Suskiewich 1995 1994 1993
------------------- ---- ---- ----
Health & Life insurance premiums $3,933 $3,926 $4,077
Use of Company automobile 6,564 7,263 5,443
Social/Country Club Dues 2,671 2,633 1,975
----- ----- -----
Total: $13,169 $13,822 $11,495
(4) Includes value of fully vested participation in the Company's Employee
Stock Ownership Plan ("ESOP"). In 1990, the Company adopted an ESOP which
provides that the Company can make a contribution to a trust fund for the
purpose of purchasing shares of the Company's common stock on behalf of the
participants. The Company pays the entire cost of the ESOP and all salaried
employees of the Company who have completed six months of service are
eligible to participate. The ESOP is qualified under Section 497(e)(7) of
the Internal Revenue Code, under which subsidiaries may act as
participating employees. In addition, the ESOP meets all applicable
requirements of the Tax Replacement Act of 1986 and is qualified under
Section 401 of the Internal Revenue Code.
(5) Represents options held jointly with Mrs. Bell.
All full-time salaried employees of the Company, and its subsidiaries are
participants in the ESOP. Executive officers of the Company are eligible to
participate in the ESOP, but directors are not eligible unless they are also
full-time salaried employees. A participant's interest in the ESOP is vested
after five years of service and there is no vesting prior to that period of
time. Mr. Bell and 3 other employees had vested interest in the ESOP as of
December 31, 1995. Mr. Bell's vested interest equals approximately 26% of the
total ESOP contributions made by the Company. Mr. Suskiewich is not vested in
the ESOP.
The ESOP contributions by the Company are determined annually by the Board of
Directors of the Company, taking into consideration the prevailing financial
conditions, the Company's fiscal requirements and other factors deemed relevant
by the Board. The Company, generally, may make contributions to the ESOP of up
to 15% of total compensation paid to employees during the year. Each
participant's contribution equals the proportion that each such participant's
compensation for the year bears to the total compensation of all participants
for such year. In 1995, 1994 and 1993, the Company contributed cash of $10,000,
$25,000 and $16,500, respectively to the ESOP.
8
<PAGE>
Options and Long-term Compensation
Stock Option Plan for Directors: On May 5, 1993, the Board of Directors of the
Company approved a Stock Option Plan for Directors. The Plan provides that a
maximum of 176,968 shares of common stock (the "Option Shares") will be made
available to directors and former directors of the Company. Options for all the
Option Shares were issued on May 6, 1993 to 13 present and former directors. The
options are for a term of ten (10) years from the date of grant. The Options
were issued at an exercise price of $6.40 per share determined at the time of
issuance to be the fair market value of the underlying Common Stock subject to
the Option on the date the Option was granted. The options held by an active
director are canceled immediately if such director is removed for "cause" as
defined in the Plan.
The Company issued no stock options or stock appreciation rights as compensation
during the fiscal year ended December 31, 1995.
Director Compensation
Each non-management director of the Company receives a fee of $500 for each
meeting of the Board which he or she attends plus $750 per quarter, $250 for
each Compliance Committee meeting and no fee for any other standing committee of
which he or she is a member which he or she attends. Directors are reimbursed
for expenses incurred in connection with attendance at meetings of the Board of
Directors and all standing committees.
Report of Board of Directors
The compensation of the Company's executive officers is determined by the
Company's entire Board of Directors excluding any Director who is also an
executive officer. The Chief Executive Officer (the "CEO") determines the salary
range recommendations for all employees, including executives other than
himself. The CEO presents these to the Board and the Board, in turn, reviews and
analyzes all information submitted to it. Thereafter, the Board determines
compensation of all executive officers of the Company including the compensation
of the CEO.
Executive Compensation Policies and Program. The Company's executive
compensation program is designed to:
*Attract and retain qualified management of the Company;
*Enhance short-term financial goals of the Company; and
*Enhance long-term shareholder value of the Company.
The Company strives to pay each executive officer the base salary that would be
paid on the open market for a fully qualified officer of that position. The
Board of Directors determines the level of base salary and any incentive bonus
plan for the CEO and certain senior executive officers of the Company and a
range for other executive officers based upon competitive norms, derived from
annual surveys published by several independent banking institutes or private
companies specializing in financial analysis of financial institutions. Such
surveys provide information regarding compensation of financial institution
officers and employees based on size and geographic location of the financial
institution and serve as a bench mark for determining executive salaries. Actual
salary changes are based upon an evaluation of each individual's performance
based upon Holding Company objectives and specific job description objectives,
as well as the overall performance of the Holding Company. Executive officers's
salaries were reduced in fiscal year 1995 as compared to 1994, consistent with
the Holding Company's efforts to reduce budgeted expenses and overhead. Bonus
awards are made based upon the attainment of the Holding Company's net income
targets, the officer's responsibilities and individual performance standards
with each officer given the opportunity to earn an annual performance bonus,
generally in the range of approximately 10-40% of his or her base salary. In
fiscal year 1995, however, no bonuses were awarded primarily because the Holding
Company failed to attain its performance goals.
9
<PAGE>
Compensation of the Chief Executive Officer. The Board of Directors entered into
an employment contract (the "Contract") with the CEO in January, 1990. The
Contract is for a period of one year, automatically renewable at the discretion
of both parties. The Contract was amended in June, 1990, April, 1991 and
January, 1994 to reflect an increase in the rate of annual compensation and the
inclusion of other benefits. The Committee, in recommending changes in the
Contract to the Board, reviews the salaries of top executives of comparable
financial institutions, using the process previously described. In determining
the level of incentive compensation, the Board has established a general policy
of linking incentives to the Company's financial performance. In 1990, the Board
determined that a prudent basis for establishing CEO compensation was a base
salary plus a bonus linked to 10% of pre-tax earnings in excess of $1.1 million.
On September 1, 1995, the CEO voluntarily reduced his salary to $60,000 per
year, but the contract was not amended.
BOARD OF DIRECTORS
James T. Bell Anne T. Coonrod James V. Suskiewich
Edwin J. Feiler, Jr. Francis T. West
Compensation Committee Interlocks and Insider Participation in Compensation
Decisions
James T. Bell, President and Chief Executive Officer of the Company, James V.
Suskiewich, President and Chief Executive Officer of Federal Trust Bank, (the
"Bank") and Anne T. Coonrod, Vice President of the Company are members of the
Company's Board of Directors and participated in deliberations of the Board of
Directors regarding executive compensation. Mr. Bell, Mr. Suskiewich and Ms.
Coonrod, however, did not participate in any deliberation regarding their own
compensation or transactions.
Employment Contracts
The Company has entered into an employment agreement ("Company CEO Agreement")
with James T. Bell which commenced January 1, 1990. Mr. Bell's salary for the
fiscal year ending December 31, 1995 was $151,508. The CEO Agreement provides
for an annual bonus equal to ten percent (10%) of the difference of the
Company's pre-tax profit calculated in accordance with generally accepted
accounting principles less $1,100,000. No bonus was paid for the year ended
December 31, 1995. The Company CEO Agreement provides that Mr. Bell may direct
the Company to pay a portion of the bonus to other employees. No bonuses were
paid to Company employees during 1995, since the Company did not meet the
Board's profit objectives. In addition to the annual compensation and bonus, the
Company will provide Mr. Bell with a Company automobile and memberships in a
business and a social/country club in the city where the Company is located. The
term of the Company CEO Agreement is one year. Either party may terminate the
CEO Agreement with at least one hundred eighty (180) days notice. The CEO
Agreement is automatically extended on a year-to-year basis if not otherwise
terminated or otherwise amended in writing. On September 1, 1995, the CEO
voluntarily reduced his salary to $60,000 per year, but the contract was not
amended.
The Company and Bank entered into an employment agreement with James V.
Suskiewich ("Agreement"). Mr. Suskiewich is a director of the Company and serves
as the Chief Executive Officer and President of the Bank. The Agreement which
became effective September 1, 1995 has a three-year term. The Agreement provides
for a minimum base salary of $120,000 per year. Mr. Suskiewich is entitled to a
discretionary performance bonus payable annually for the duration of the
Agreement. For the year ended December 31, 1995, Mr. Suskiewich received a
performance bonus of $10,000. The base salary and any bonus is paid by the Bank.
In addition to the base salary and bonus, the Agreement provides for
participation in all employee benefits, stock option plans, pension plans,
insurance plans and other fringe benefits including club memberships and
business related expenditures commensurate with his position. On each successive
anniversary of the employment contract, the Board of Directors is required to
vote on whether the Agreement should be extended an additional year so that the
remaining term shall be three years. The decision to extend the Agreement is
within the sole discretion of the Board of Directors.
The Agreement provides for termination by the Bank for "cause", as defined in
the Agreement. In the event the Bank chooses to terminate Mr. Suskiewich's
employment for reasons other than for cause, Mr. Suskiewich (or in the event of
death, Mr. Suskiewich's beneficiary) would be entitled to a severance payment
equal to his total annual compensation for the remainder of the term of the
Agreement. In the event of a change of control of the Company or the Bank, Mr.
Suskiewich will be entitled to a special incentive bonus equal to two times his
annual salary, times the price/book value ratio at which the Company or Bank is
acquired. If Mr. Suskiewich accepts employment with the acquirer, he will be
entitled to fifty percent (50%) of the special incentive bonus. The special
incentive bonus is payable by either the Company or the Bank.
10
<PAGE>
The Agreement permits Mr. Suskiewich to terminate his employment voluntarily. In
the event of voluntary termination, except as previously described herein, all
rights and benefits under the contract shall immediately terminate upon the
effective date of termination.
TRANSACTIONS WITH MANAGEMENT
Indebtedness of Management
In 1994 the Board of Directors of the Company and the Bank amended their loan
policies with regard to loans to directors, officers and employees. The current
policy is generally not to make loans to directors, officers and employees. Any
loans that are made, however, will require approval of a majority of the
disinterested directors of the company making the loan. The Bank is also subject
to the provisions of Section 22(h) of the Federal Reserve Act.
As of December 31, 1995, and as of May 8, 1996, neither the Company nor the Bank
had any loans outstanding to directors or executive officers. The Bank, however,
did make $737,472 in commercial loans to Morrone, Smoker and Grill, Inc., whose
President Jack L. Morrone is the brother-in-law of the Company's Chairman and
Chief Executive Officer. Mr. Morrone is considered to be an "affiliate", as that
term is defined by SEC regulations. This largest outstanding balance during 1995
was $741,786. As of March 31, 1996 the balance was $486,202.
Transactions With Certain Related Persons
Effective January 1, 1990, John Martin Bell, a director and major shareholder of
the Company and the wife of the Chairman of the Board of the Company, as lessor,
and the Company, as lessee, entered into a triple net lease (the "Lease"),
pursuant to which the Company leased from Mrs. Bell 3,953 square feet of office
space located at 1211 Orange Avenue, Winter Park, Florida (the "Premises"). The
term of the Lease was two (2) years. Effective January 1, 1991, the Lease was
amended to increase the term from December 31, 1991 to December 31, 2000. The
square footage leased by the Company increased to 11,393 square feet. On
November 11, 1991, the Company and Ms. Bell terminated the Lease and executed a
new triple net lease (the "New Lease"), pursuant to which the Company has leased
13,305 square feet in the Premises. The term of the New Lease runs until
December 31, 2000. The New Lease will automatically be extended for two (2)
consecutive periods of ten (10) years each unless the Company elects to
terminate the New Lease pursuant to the notice provisions in the New Lease prior
to the expiration of the ten year lease period. Effective July 15, 1992, the New
Lease was modified to reduce the amount of space leased to 12,392 square feet
and to decrease the annual rental by $49,510 to $240,686. Effective June 6,
1994, the New Lease was modified to decrease the annual rent for the years 1993
and 1994 to $216,984 and $223,552, respectively. Effective June 1, 1995, the New
Lease was modified to increase the amount of space leased to 13,305 square feet.
The rent for 1996 through the end of the New Lease term will be the preceding
year's rent increased by the Consumer Price Index Escalation, provided however,
that in no event shall the rent increase be less than 3% or more than 6%. The
Company believes that the terms of this transaction are no less favorable to the
Company than transactions obtainable from unaffiliated parties.
During the year 1995, the Company reimbursed John Martin Bell for her cost of
furniture, fixtures and leasehold improvements for the Company's office space
located at 1270 Orange Avenue, Winter Park, Florida in the amount of $1,417. No
fees or profit was paid to the Bells in connection with this reimbursement. The
Company believes that the terms of this reimbursement are no less favorable to
the Company than what could be obtained from unaffiliated parties.
All future transactions with officers, directors, principal shareholders or
affiliates of the Company and its subsidiaries will be on terms no less
favorable than could be obtained from unaffiliated parties, and shall be
approved by the Board of Directors, including a majority of the independent
disinterested directors of the Company.
11
<PAGE>
PROPOSAL NO. 3 - RATIFY SELECTION OF KPMG
PEAT MARWICK AS INDEPENDENT AUDITORS OF
THE COMPANY FOR THE FISCAL YEAR
ENDING DECEMBER 31, 1996.
The Board of Directors has appointed the KPMG Peat Marwick as the Company's
independent accountants to audit the accounts of the Company for the 1996 fiscal
year. KPMG Peat Marwick served as the Company's auditors for the fiscal years
ended December 31, 1995, 1994, 1993, 1992, 1991, 1990 and in connection with
those fiscal years they were also engaged by the Company to provide certain tax
and consultant services. KPMG Peat Marwick plans to have a representative
present at the annual meeting who will have the opportunity to make a statement
if he desires to do so and is expected to respond to appropriate questions which
the shareholders might have. The Board of Directors recommends that the
shareholders vote FOR approval of the appointment of KPMG Peat Marwick as the
Company's independent accountants for the succeeding year. If the appointment is
not approved, the Board will select other independent accountants. Approval of
the appointment requires the affirmative vote of a majority of the votes cast by
the holders of shares of the Company's Common Stock present in person or
represented by proxy at the Annual Meeting provided that a quorum is present.
----------
MATTERS NOT DETERMINED AT TIME OF SOLICITATION
The Board of Directors is not aware of any matters to come before the meeting
other than the proposals set forth therein. If any other matter should come
before the meeting, then the persons named in the enclosed form of proxy will
have discretionary authority to vote all proxies with respect thereto in
accordance with their judgment.
FINANCIAL STATEMENTS AND OTHER FINANCIAL INFORMATION
The Company's 1995 financial statements, selected consolidated financial data,
and management's discussion and analysis of financial condition and results of
operations appear in its Annual Report on Form 10-K for the fiscal year ended
December 31, 1995 which is being mailed to all shareholders along with this
Proxy Statement. Said financial statements and sections are incorporated herein
by reference.
SHAREHOLDERS' PROPOSALS FOR 1997 ANNUAL MEETING
Proposals of shareholders intended to be presented at the 1997 Annual Meeting
should be submitted by certified mail, return receipt requested, and must be
received by the Company at its office located at 1270 Orange Avenue, Winter
Park, Florida 32787 on or before November 30, 1996 to be eligible for inclusion
in the Company's Proxy Statement in form of proxy relating to that meeting.
However, if next year's annual meeting of shareholders is held on a date more
than 30 days before or after the corresponding date of the 1996 Annual Meeting,
any shareholder who wishes to have a proposal included in the Company's proxy
statement for that meeting must deliver a copy of the proposal to the Company a
reasonable time before the proxy solicitation is made. The Company reserves the
right to decline to include in the Company's proxy statement any shareholder's
proposal which does not comply with the rules of the SEC for inclusion therein.
12
<PAGE>
VOTE OF PROXIES
All shares represented by duly executed proxies will be voted for the election
of the nominees named above as directors unless authority to vote for the
proposed slate of directors or any individual director has been withheld. If for
any unforeseen reason any of said nominees should not be available as a
candidate for a director, the proxies will be voted in accordance with the
authority conferred in the proxy for such other candidate or candidates as maybe
nominated by the Board of Directors. Proxies received in response to the
proposal to amend the Restated Articles of Incorporation will be voted in favor
of such proposal unless the shareholder instructs otherwise with respect to such
proposal. With respect to the proposal to approve the appointment of KPMG Peat
Marwick as the Company's independent accountants, all such shares will be voted
for or against, or not voted, as specified on each proxy. If no choice is
indicated, a proxy will be voted for the proposal to approve KPMG Peat Marwick
as the Company's independent accountants.
BY THE ORDER OF THE BOARD OF DIRECTORS
By: /s/ James T. Bell
---------------------
James T. Bell, Chairman of the Board
WINTER PARK, FLORIDA
May 14, 1996.
13
<PAGE>
APPENDIX "A"
ARTICLES
OF AMENDMENT
TO THE RESTATED ARTICLES OF INCORPORATION
OF FEDERAL TRUST CORPORATION
Pursuant to the provisions of Sections 607.1003 and 607.1006 of the Florida
Statutes, FEDERAL TRUST CORPORATION adopts the following Articles of Amendment
to its Restated Articles of Incorporation:
1. The name of the corporation is FEDERAL TRUST CORPORATION.
2. The original Articles of Incorporation for the corporation were filed on
August 5, 1988 and assigned Charter No. M92930 . The Articles of Incorporation
were amended by amendments filed with the Secretary of State of the State of
Florida on September 23, 1988, November 4, 1988 and March 26, 1990. Articles of
Restatement of the Articles of Incorporation were filed on August 3, 1990 and
amended on May 21, 1991. Restated Articles of Incorporation were filed on
October 5, 1994.
3. At a regular meeting of the Board of Directors of the corporation held
on May 7, 1996 the Directors adopted and recommended to the corporation's
Stockholders for approval, and at the annual meeting of the Stockholders of the
corporation held on June 6, 1996 the Stockholders approved, an amendment to the
corporation s Restated Articles of Incorporation to delete in their entirety
Sections 1 and 2 of Article VI and to insert in lieu thereof new Sections 1 and
2 to read as follows:
SECTION 1. NUMBER AND TERM. The number of directors
shall be fixed from time to time exclusively by the
Board of Directors pursuant to a resolution adopted by
a majority of the Full Board. However, the maximum
number of directors shall be eleven and the minimum
number shall be three. At each annual meeting of
Stockholder, directors shall be elected to succeed
directors whose terms expire at such annual meeting for
a term expiring at the next annual meeting of
Stockholders.
SECTION 2. NEW DIRECTORSHIPS AND VACANCIES. Newly
created directorships resulting from any increase in
the authorized number of directors or any vacancies in
the Board of Directors resulting from death,
resignation, disqualification, removal from office or
other cause may be filled only by a majority vote of
the directors then in office, though less than a
quorum, and directors so chosen shall hold office for a
term expiring at the next annual meeting of
Stockholders. No decrease in the number of directors
constituting the Board of Directors shall shorten the
term of any incumbent director.
4. The amendment was approved by the corporation's single class of
Stockholders and the number of votes cast for approval was sufficient.
14
<PAGE>
IN WITNESS WHEREOF, the Chairman of the corporation has executed these
Articles of Amendment this 6th day of June, 1996 on behalf of the corporation.
FEDERAL TRUST CORPORATION
By: /s/ James T. Bell
---------------------
James T. Bell, Chairman
15
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Balance Sheets and Consolidated Statements of Operations found on
pages 2 and 3 of the company's Form 10-Q for the year to date.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> APR-01-1996
<PERIOD-END> JUN-30-1996
<EXCHANGE-RATE> 1
<CASH> 3,183
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 9,533
<INVESTMENTS-CARRYING> 6,256
<INVESTMENTS-MARKET> 6,256
<LOANS> 113,116
<ALLOWANCE> 1,092
<TOTAL-ASSETS> 140,478
<DEPOSITS> 104,704
<SHORT-TERM> 20,750
<LIABILITIES-OTHER> 2,212
<LONG-TERM> 5,000
0
0
<COMMON> 23
<OTHER-SE> 7,790
<TOTAL-LIABILITIES-AND-EQUITY> 140,478
<INTEREST-LOAN> 2,219
<INTEREST-INVEST> 150
<INTEREST-OTHER> 62
<INTEREST-TOTAL> 2,432
<INTEREST-DEPOSIT> 1,406
<INTEREST-EXPENSE> 1,700
<INTEREST-INCOME-NET> 731
<LOAN-LOSSES> 132
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,067
<INCOME-PRETAX> (405)
<INCOME-PRE-EXTRAORDINARY> (163)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (163)
<EPS-PRIMARY> (0.07)
<EPS-DILUTED> (0.07)
<YIELD-ACTUAL> 7.40
<LOANS-NON> 3,471
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 7,477
<ALLOWANCE-OPEN> 1,930
<CHARGE-OFFS> 973
<RECOVERIES> 3
<ALLOWANCE-CLOSE> 1,092
<ALLOWANCE-DOMESTIC> 1,092
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
