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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:
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March 31, 1997 33-27139
FEDERAL TRUST CORPORATION
(Exact name of registrant as specified in its charter)
Florida 59-2935028
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(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification No.)
1211 Orange Avenue
Winter Park, Florida 32789
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(Address of principal executive offices)
Registrant's telephone number: (407) 645-1201
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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
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(class) Outstanding at March 31,1997
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FEDERAL TRUST CORPORATION AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Page
Consolidated Condensed Balance Sheets
March 31, 1997 and December 31, 1996 (unaudited)............... 3
Consolidated Condensed Statements of Operations for the
Three months ended March 31, 1997 and 1996 (unaudited).......... 4
Consolidated Condensed Statements of Cash Flows for the
Three months ended March 31, 1997 and 1996 (unaudited).......... 5
Notes to Consolidated Condensed Financial Statements (unaudited)..6 - 13
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................14 - 22
PART II. OTHER INFORMATION
Signatures.............................................................. 23
2
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FEDERAL TRUST CORPORATION AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Balance Sheets
(Unaudited)
March 31, 1997 December 31, 1996
-------------- -----------------
<S> <C> <C>
Assets
Cash $ 373,297 628,648
Interest bearing deposits 2,762,055 4,837,114
Investment securities available for sale 8,773,703 8,763,641
Investment securities held to maturity 6,307,745 6,290,610
Loans receivable, net (net of allowance for loan losses of
$1,192,734 in 1997 and $1,533,003 in 1996) 113,214,544 112,547,266
Accrued interest receivable - Loans 829,431 833,458
Accrued interest receivable - Securities 105,460 196,171
Notes Receivable 305,354 305,354
Federal Home Loan Bank of Atlanta stock, at cost 1,427,500 1,253,200
Real Estate owned, net 3,612,392 1,508,166
Property and equipment, net 887,140 917,572
Prepaid expenses and other assets 313,905 371,161
Deferred income taxes 1,082,724 1,129,696
------------- -------------
Total $ 139,995,250 139,582,057
============= =============
Liabilities and Stockholders' Equity
Deposit accounts $ 103,726,147 106,119,006
Official Checks 508,329 646,235
Federal Home Loan Bank advances 27,250,000 24,800,000
Advance payments for taxes and insurance 680,621 347,774
Accrued expenses and other liabilities 503,231 504,414
------------- -------------
Total Liabilities $ 132,668,328 132,417,429
------------- -------------
Stockholders' equity
Commonstock, $.01 par value, 5,000,000 shares authorized;
2,256,505 shares issued and outstanding at March 31,
1997 and December 31, 1996 22,565 22,565
Additional paid-in capital 11,143,659 11,143,659
Accumulated deficit (3,125,315) (3,226,204)
Treasury stock (16,577 shares of common stock, at cost at
March 31, 1997 and December 31, 1996) (76,525) (76,525)
Unrealized loss on investments securities, net (203,936) (210,224)
Unrealized loss on investment securities transferred from
available for sale to held to maturity, net (433,526) (488,643)
------------- -------------
Total Stockholders' Equity $ 7,326,922 7,164,628
------------- -------------
Total Liabilities and Stockholders' Equity $ 139,995,250 139,582,057
============= =============
See accompanying Notes to Consolidated Condensed Financial Statements.
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3
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FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Consolidated Condensed Statements of Operations
For Three Months Ended March 31, 1997 and 1996
(Unaudited)
Three Months
Ended March 31, 1997
1997 1996
---- ----
<S> <C> <C>
Interest income:
Loans $ 2,335,042 2,353,343
Securities 167,450 152,424
Interest-bearing deposits and other 47,567 52,055
----------- -----------
Total interest income 2,550,059 2,557,822
----------- -----------
Interest expense:
Deposit accounts 1,384,785 1,519,970
Federal Home Loan Bank advances & other borrowings 338,741 296,904
----------- -----------
Total interest expense 1,723,526 1,816,874
----------- -----------
Net interest income 826,533 740,948
Provision for loan losses (3,000) (18,356)
----------- -----------
Net interest income after provision 829,533 759,304
----------- -----------
Other income:
Fees and service charges 25,835 26,301
Rents 13,673 5,544
Gain on sale of assets 49,819 136,396
Other miscellaneous 15,541 20,846
----------- -----------
Total other income 104,868 189,087
----------- -----------
Other expenses:
Employee compensation & benefits 325,867 344,225
Occupancy and equipment 131,813 169,471
Data procession expense 20,831 23,294
Professional fees 79,664 136,825
FDIC Insurance 61,952 80,390
Other miscellaneous 137,085 188,760
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Total other expense 757,212 942,965
----------- -----------
Net income before income tax 177,189 5,426
Income tax 76,300 1,953
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Net income $ 100,889 3,473
=========== ===========
Per share amounts:
Earnings per share .045 0.002
Cash dividends per share 0.00 0.00
Weighted average number of shares outstanding 2,239,928 2,239,928
----------- -----------
See accompanying Notes to Consolidated Financial Statements.
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4
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FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Consolidated Condensed Statements of Cash Flows
For the Three Months Ended March 31, 1997 and 1996
(Unaudited)
1997 1996
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 100,889 3,473
Adjustments to reconcile net income to net cash flows from operations:
Depreciation & amortization of property & equipment 39,878 50,271
Amort. (net) of premiums, fees & disc. on loans & securities 51,803 3,529
Provision for allowance on real estate owned 33,000 18,356
Provision (charge-off) for loan losses (3,000) (18,356)
Deferred Income Taxes 76,300 1,953
Cash provided by (used for) changes in:
Accrued interest receivable 94,738 39,188
Loan sale proceeds receivable -- 37,765
Prepaid expenses & other assets 57,257 (18,195)
Official checks (137,906) 52,489
Accrued expenses & other liabilities (1,183) 85,279
----------- -----------
Net cash provided by operating activities 311,776 255,752
----------- -----------
Cash flows from investing activities:
Acquisition of office properties and equipment (9,446) (4,147)
Purchase of Federal Home Loan Bank of Atlanta stock (174,300) --
Proceeds collected from loan sales 699,248 4,084,252
Proceeds from sale of real estate owned 212,774 1,255,832
Principal collected on securities held to maturity 4,880 8,324
Principal collected on loans 4,398,391 6,423,873
Loans originated or purchased (8,163,721) (9,327,715)
----------- -----------
Net cash provided by (used in) investing activities (3,032,174) 2,440,419
----------- -----------
Cash flows from financing activities:
Decrease in deposits, net (2,392,859) (1,500,133)
Increase in Federal Home Loan Bank advances 2,450,000 1,300,000
Decrease in other borrowings -- (170,000)
Net increase in advance payments by borrowers for taxes & insurance 332,847 234,451
----------- -----------
Net cash provided by (used in) financing activities 389,988 (135,682)
----------- -----------
Decrease in cash and cash equivalents (2,330,410) 2,560,489
Cash and cash equivalents at beginning of period 5,465,762 1,669,761
----------- -----------
Cash and cash equivalents at end of period $ 3,135,352 4,230,250
=========== ===========
See accompanying Notes to Consolidated Condensed Financial Statements.
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5
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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 had 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 leased the Holding Company's former office
located in Winter Park, Florida. On July 1, 1996, the Company sold FTPC to an
unaffiliated third party and is renting the office space previously occupied by
the Company to FTPC. On September 26, 1996, the Company dissolved 1270 Leasing
Co.
The consolidated condensed balance sheets as of March 31, 1997 and December 31,
1996, and the consolidated condensed statements of operations and cash flows for
the three-month periods ended March 31, 1997 and 1996, include the accounts and
operations of the Company and all subsidiaries. All material intercompany
accounts and transactions have been eliminated.
In the opinion of management of the Company, the accompanying consolidated
condensed financial statements contain all adjustments (principally consisting
of normal recurring accruals) necessary to present fairly the financial position
as of March 31, 1997, and the results of operations and cash flows for the
three-month periods ended March 31, 1997 and 1996. The results of operations for
the three-month period ended March 31, 1997 are not necessarily indicative of
the results to be expected for the full year. These statements should be read in
conjunction with the consolodated financial statements included in the Company's
Annual Report on Form 10 - K for the year ended December 31, 1996.
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 estimated fair value at the
time of acquisition. Subsequently, such real estate is carried at the lower of
cost or fair market value less estimated costs to sell. Fair market value is
based on current appraisals reduced by estimated costs to sell.
(continued)
6
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FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (unaudited)
3. Loans
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.
At March 31, 1997, impaired loans amounted to $1.37 million. Included in the
allowance for loan losses is $477 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.
In the first three months of 1997, the average recorded investment in impaired
loans was $3.38 million and $.46 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.
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:
Three Months
Ended March 31,
---------------
1997 1996
---- ----
Balance at beginning of period 1,533,003 2,060,568
Provision for loan losses (3,000) (18,356)
Less Charge-offs (340,335) (115,681)
Plus recoveries 3,066 3,283
------------ ------------
Balance at end of period 1,192,734 1,929,814
============ ============
Loans Outstanding 113,214,544 111,788,901
Ratio of charge-offs to Loans Outstanding .30% .10%
Ratio of allowance to Loans Outstanding 1.05% 1.73%
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 quarters ended March 31, 1997 and 1996, management did not make a provision
based on its evaluation of the loan portfolio.
(continued)
7
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FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (unaudited)
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5. Supplemental Disclosure of Cash Flow and Non-Cash Investing and Financing Activities
Three Months Ended March 31,
1997 1996
---- ----
<S> <C> <C>
Cash paid during the period for:
Interest expense $ 803,481 921,320
Income taxes $ -- --
Supplemental disclosure of non-cash transactions:
Real Estate Acquired in Settlement of Loans $ 2,350,000 306,143
Market Value adjustment - investment securities
available for sale:
Market value adjustment - investments $ (326,297) (1,311,609)
Deferred income tax asset $ (122,361) (450,496)
----------- -----------
Unrealized loss on investment securities
available for sale, net $ (203,936) (861,113)
Unrealized loss on investment securities transferred
from available for sale to held to maturity $ (693,642) --
Deferred income tax asset $ (260,116) --
----------- -----------
Unrealized loss on investment securities transferred
from available for sale to held to maturity $ (433,526) --
=========== ===========
</TABLE>
6. Real Estate Owned, Net
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:
Three Months
Ended March 31,
----------------
1997 1996
---- ----
Balance at beginning of period $ 1,508,166 3,293,108
Acquired through foreclosure 2,350,000 235,469
Add: Capitalized costs (9,463) 13,180
Less: Sale of real estate (203,311) (1,498,481)
Less: Chargeoffs (33,000) (24,356)
(continued)
8
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FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (unaudited)
Less: Allowance for losses -- --
---------- ----------
Balance at end of period $3,612,392 2,018,920
========== ==========
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7. Investment Securities
At March 31, 1997
Book Value Market Value
---------- ------------
<S> <C> <C>
Held to maturity:
Orange County, Florida Tax Certificates 1,387 1,387
FHLB Floating Rate Note, 4.873% due 7/30/03 6,306,358 6,094,375
---------- ----------
Total 6,307,745 6,095,762
========== ==========
Available for sale:
FHLB Floating Rate Note, 3.334% due 6/17/98 961,563 961,563
FHLB Floating Rate Note, 3.771% due 6/25/98 1,696,406 1,696,406
FHLB Floating Rate Note, 3.556% due 7/15/98 1,445,156 1,445,156
FHLB Floating Rate Note, 3.556% due 7/15/98 1,445,156 1,445,156
FHLB Floating Rate Note, 3.748% due 7/28/98 3,225,422 3,225,422
---------- ----------
Total $8,773,703 8,773,703
========== ==========
</TABLE>
The Bank's investment in obligations of U.S. government agencies consists of
dual indexed bonds issued by the Federal Home Loan Bank. At March 31, 1997, the
bonds had a market value of $14,868,078 and gross unrealized pre-tax losses of
$1,231,922. The bonds have a par value of $16,100,000 and pay interest based on
the difference between two indices. All of the bonds at March 31, 1997, 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%.
8. Advances from Federal Home Loan Bank
The following is an analysis of the advances from the Federal Home Loan Bank:
Amounts Outstanding at March 31, 1997:
Maturity Date Rate Amount Type
------------- ---- ------ ----
12/31/97 6.85% $4,750,000 Variable rate
06/28/97 6.01% 5,000,000 Fixed rate
09/16/97 6.01% 5,000,000 Fixed rate
10/16/97 5.86% 5,000,000 Fixed rate
03/04/98 6.02% 2,500,000 Fixed rate
09/15/98 6.12% 5,000,000 Fixed rate
----- ---------
(continued)
9
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FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (unaudited)
Total 6.15% 27,250,000
==== ==========
Variable rate advances reprice daily and may be repaid at any time without
penalty. Fixed rate advances incur a prepayment penalty if repaid prior to
maturity, and the interest rate is fixed for the term of the advance.
Amounts Outstanding at:
Month-end Rate Amount
--------- ---- ------
1/31/97 5.93% 24,800,000
2/28/97 5.90% 27,300,000
3/31/97 6.15% 27,250,000
During the three-month period ended March 31, 1997, average advances outstanding
totaled $22.8 million, at an average rate 6.03%.
Advances from the FHLB are collateralized by loans and securities that totaled
approximately $40.1 million and $7.0 million, respectively.
9. 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 $1,644,097 of the
premium as of March 31, 1997 as an adjustment to interest income. The
acquisition was accounted for as a purchase.
10. 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 operations and
underwriting policy were cited by the OTS in the Bank's December 1992 safety and
soundness examination. 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.
(continued)
10
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FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (unaudited)
In the safety and soundness 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 stemmed from transactions and
loans which occurred or were made prior to 1993. Management of the Holding
Company and the Bank consented to the issuance of individual Cease and Desist
Orders, without admitting or denying that grounds for such Orders existed. The
Bank's Order superseded the 1993 Supervisory Agreement with the OTS.
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; and (iv) 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, among other items: (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 owed 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; and (xiii) 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 to ensure that the Bank is in compliance with it.
In August, 1995, the OTS informed the Holding Company that it was conducting an
expanded examination with regard to certain transactions that were entered in
1990 and 1991 by prior Bank management. As of the date of this filing, the OTS
has not advised the Holding Company whether the expanded examination has been
concluded.
The OTS completed is most recent safety and soundness examinations of the
Holding Company and the Bank in September, 1996. The examination of the Bank
included a review and evaluation of capital, asset quality, management,
earnings, and liquidity-asset/liability management. While the examination
concluded that there had been modest improvement in the overall condition of the
Bank, and that the Bank met the FDICIA definition of a well-capitalized
institution, the Holding Company and the Bank needed to establish a plan for
raising additional capital due to the level of classified assets. The OTS noted
that while classified assets had declined 37.0% from the prior examination,
classified assets still represented 6.3% of total assets and continued to have
an adverse effect on earnings and capital. The examination did not disclose any
(continued)
11
<PAGE>
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (unaudited)
violations of the Bank's Order, law or regulation. The Bank's Board authorized
management to file a written appeal to the Bank's supervisory rating and to
request that the Bank's Order be lifted in whole or in part.
The examination of the Holding Company focused on the interaction between the
Holding Company and the Bank, and the effect of the interaction of the
operations of the Bank. The OTS cited two instances which it characterized as
having an appearance of a conflict of interest involving the Holding Company's
former President. The Holding Company's Board of Directors disagreed with the
conclusions and findings in the examination report and filed a written appeal to
the OTS Regional Director for the Southeast Region. The first instance cited
involved the sale of Federal Trust Properties Corporation "(FTPC"). The sale of
FTPC to an unrelated third-party in an arms-length transaction, was, in the
Board's opinion, necessary and in the best interest of the Holding Company's
shareholders. The decision to sell FTPC was part of the Company's strategy to
downsize the Company's activities with the sole focus being the operations of
the Bank, while at the same time recouping the Company's investments in FTPC.
The OTS contended that this transaction raised certain issues, including the
Board's failure to operate the Company in a safe and sound manner by failing to
prevent the appearance of conflicts of interest in violation of the Holding
Company's Order.
The second instance cited by the OTS as an appearance of a conflict of interest,
was the manner in which the Board explored opportunities to raise new capital.
The Board engaged the services of an experienced investment banking firm to
determine the marketability of the Holding Company and the Bank. No acceptable
definitive sale opportunities were presented to the Board by the investment
banker. The Board ultimately determined that it was not in the best interest of
the stockholders to sell the Holding Company or Bank.
On December 20, 1996, the OTS Regional Director responded to the Holding
Company's written appeal, advising that the OTS had decided to upgrade the
Company's supervisory rating. As to the written appeal filed by the Bank, while
the OTS Regional Director recognized that there was an overall improvement in
the Bank's operations including underwriting procedures, documentation,
disposition of problem assets, significant reduction in the dependency on
wholesale funds and a continued reduction in operating expenses, the OTS was not
willing to lift the Bank's order due to the level of classified assets to
capital. The OTS did, however, reduce the number of provisions in the Bank's
Order from 27 to 23 and indicated that it would consider lifting the Order when
the ratio of classified assets to capital is reduced below 100%.
Since the issuance of the 1993 Supervisory Agreement, the overall management of
the Bank has been strengthened with the hiring of James V. Suskiewich as the
Chief Executive Officer/President in January 1993, the addition of a new Chief
Financial Officer, Aubrey H. Wright, Jr., in June 1993, the reorganization of
the Loan Department and the establishment of a new credit culture, coupled with
the addition of Louis E. Laubscher as the new Chief Lending Officer/Senior
Problem Asset Officer in March, 1995. This transition carried over to the
Holding Company in June of 1996, when the new senior management team was given
control over the day to day management of the Holding Company. 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 and non-performing assets. The Boards of Directors of the Holding
Company and Bank are committed to taking the appropriate steps to have the
respective Orders lifted as soon as possible and to assist the management of the
Bank in its efforts to making the Bank a more traditional financial institution
with consistent core earnings.
(continued)
12
<PAGE>
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (unaudited)
Management expects that the interest income of the Bank will continue to be
limited, so long as the 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, however, does not believe that the Holding
Company's Order and the Bank's Order, 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 Congress, or changes in
the banking regulations by the OTS or the FDIC could, however, have a
significant impact on the operations of the Holding Company and the Bank.
11. Stock Options
On May 5, 1993, the Board of Directors of the Company approved a Stock Option
Plan for Directors. The Plan provided that a maximum of 176,968 shares of common
stock (the "Option Shares") would 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 were 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 Stock Option Plan was rescinded by the Board of
Directors on March 7, 1997. No options had been exercised under the Plan.
In addition, the Company has issued stock options to certain sales
representatives for their commitment in selling Federal Trust Corporation stock.
These options have a strike price of $10.00 per share and will expire on October
26, 1999. At March 31, 1997 and 1996, options for 58,453 shares had been granted
to various sales representatives, none of which have been exercised.
13
<PAGE>
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operation
Overview
The Bank's net earnings were favorably affected by the small decline in interest
rates that occurred during the first half of 1996, due to its negative GAP
position, as its liabilities repriced sooner than, and in greater amounts than,
its assets. As a result, the Bank's cost of funds decreased faster than the
yields earned on its assets, resulting in an increase in its interest rate
spread and higher earnings. During the latter half of 1996 and into the first
quarter of 1997 rates began to rise which will have a adverse effect due to the
Bank's negative GAP position, however, the Bank has been able to decrease the
amount of its negative GAP during the past year, which should lessen the adverse
impact of higher rates. The Bank has continued to concentrate on increasing its
portfolio of adjustable rate loans and 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. The Bank's net interest income has improved
in 1997 as a result of a decrease in the cost of funds and a decrease in the
amount of nonearning assets. Should interest rates increase before the Bank is
able to further reduce its negative GAP, the Bank's earnings would be adversely
affected.
The Bank has been able to decrease its additions to the loss reserves in 1996
and 1997 as a result of a lower level of non-performing loans. Although
management believes that the level of non-performing assets should continue to
decease in future periods, unforeseen economic conditions and other
circumstances beyond the Bank's control could result in material additions to
the loss reserves in future periods if the level of non-performing assets
increases. The Bank does anticipate additions to the loss reserves in future
periods as part of the normal course of business, as the Bank's assets,
consisting primarily of loans, are continually evaluated and the loss allowances
are adjusted to reflect the potential losses in the portfolio on an ongoing
basis. During the quarter ended March 31, 1997, the bank did not make an
addition to its loan loss reserves based on its evaluation of the loan
portfolio, but did make an addition to the loss reserves on repossessed real
estate owned.
During the quarter ended March 31, 1997, the Bank sold a participation interest
in a loan originated in March, 1996 in conjunction with the sale of a previously
foreclosed property, which resulted in the realization of $122,007 in interest
income and $30,993 in profit that had been deferred since the loan was
originated in 1996 in accordance with the accounting standards which require the
income on the loan and profit on the sale be deferred until such time as the
loan balance is reduced to a certain level, in this case 85%, when the buyer
does not make a cash downpayment.
On March 31, 1997, the Bank reached agreement with a borrower to accept a
deed-in-lieu of foreclosure, which resulted in the property being transferred to
Real Estate Owned at its net book value of $2,350,000. The property consists of
44 unsold condominium units, which have been, and currently are being rented.
The Bank is in the process of evaluating the units, which are part of a 60 unit
condominium complex in northeast Florida, and will begin marketing the units in
the second quarter of 1997. Until such time as the units are sold the Bank will
continue to rent the majority of the units, with one or two held vacant for
refurbishing, in order to generate income from the property.
(continued)
14
<PAGE>
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operation
The Company has projected an operating profit for the full year of 1997, as a
result of its improved interest rate spread, the decrease in non-performing
assets at the Bank, and the reduction in expenses, resulting from the corporate
reorganization of the Company in the second quarter of 1996. However, should
interest rates rise during the remainder of the year or non-performing assets
increase due to unforeseen circumstances, the Company earnings could be
adversely affected.
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 only subsidiary of the Company and began operations on
May 3, 1988.
The Company had 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 leased the Holding Company's former office
located in Winter Park, Florida.
During 1995 and the first half of 1996 FTPC had been in the initial stages of a
HUD insured apartment development project, which during the quarter ended June
30, 1996, had advanced to the stage of applying for a mortgage insurance
commitment. Based on the anticipated cash needs and continuing overhead for such
a project, the Company concluded that it would be in the best interest of the
Company, and its banking subsidiary, to sell FTPC, in order to focus the
Company's efforts and resources on the Bank. On July 1, 1996, the Company sold
the stock of FTPC for $425,354 consisting of $60,000 in cash, a note for $60,000
which was due and paid on 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 dissolved 1270 LC on September 26, 1996, as it
was no longer necessary to maintain the entity for purposes of the lease on the
office space previously occupied by the Company.
As a result of the sale of FTPC and the dissolution of 1270 LC, the only
remaining subsidiary of the Company is the Bank, and the Company's expenses have
been reduced to minimal levels, as there are no longer any salaried employees in
the Company and its offices have been sub-let. Employees of the Bank perform all
necessary functions needed by the Company, and the Company reimburses the Bank
for the time they spend on Company business.
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 was $40,063. During the second quarter of 1996,
the Company entered into a contract to sell this facility under the purchase
option in the lease.
(continued)
15
<PAGE>
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operation
This was done in order to terminate the remaining lease obligation which had 16
years remaining. The sale closed in September, 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, 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 December 31, 1996, the most recent report
available, was -13%, as compared to -23% at December 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
quarters of 1995 and 1996. In addition, the Bank sold fixed rate loans in the
first quarter of 1997 which it replaced with adjustable rate loans as part of
its efforts to continue improving its GAP position. As interest rates declined
slightly in 1996, the Bank's net interest spread improved, but as interest rates
have risen in 1997 the Bank's net interest spread has decreased. Should interest
rates continue to rise, as they have in the first quarter of 1997, the Bank's
net interest income could be adversely affected as a result of its negative GAP,
however, should interest rates begin to decline 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 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 and borrowings 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
(continued)
16
<PAGE>
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operation
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 the first half of 1996, the Bank increased
its efforts to lengthen liabilities and shall continue to do so whenever
prudent.
<TABLE>
<CAPTION>
The following table sets forth information about rates and yields:
Yields and Rates at
March 31, December 31, March 31,
1997 1996 1996
---- ---- ----
<S> <C> <C> <C>
Yields on:
Loan portfolio 8.24% 8.05% 8.76%
Other interest-earning assets 4.65% 4.12% 3.90%
---- ---- ----
Interest-earning assets 7.74% 7.41% 7.99%
Cost of:
Deposits 5.30% 5.41% 5.58%
FHLB advances and other interest-bearing liabilities 5.94% 5.43% 5.77%
---- ---- ----
Interest-bearing liabilities 5.42% 5.42% 5.61%
Interest rate spread 2.32% 1.99% 2.38%
==== ==== ====
</TABLE>
Liquidity and Capital Resources
General
Like other financial institutions, the Bank must ensure that sufficient funds
are available to meet deposit withdrawals, loan commitments, investment needs
and expenses. Control of the Bank's cash flow requires the anticipation of
deposit flows and loan payments. The Bank's primary sources of funds are deposit
accounts, FHLB advances, and principal and interest payments on loans.
The Bank requires funds in the short-term to finance ongoing operating expenses,
pay liquidating deposits, purchase temporary investments in securities and
invest in loans. The Bank funds short-term requirements through short-term
advances from the FHLB, the sale of temporary investments, deposit growth and
loan principal payments. The Bank requires funds in the long-term to invest in
loans for its portfolio, purchase fixed assets and provide for the liquidation
of deposits maturing in the future. The Bank funds its long-term requirements
with proceeds from maturing loans, the sale of loans, the sale of investments
securities, deposits, long-term advances from the FHLB and the sale of real
estate. Management has no plans to significantly change long-term funding
requirements.
During the three-month period ended March 31, 1997, the Company used funds
primarily from principal collected on loans, $4,398,391; proceeds from FHLB
advances, $2,450,000; proceeds from the sale of real estate owned, $212,714;
proceeds from loan sales, $699,248; advance payments by borrowers, $332,847; and
cash from operating activities, $311,776; to fund the origination and purchase
of loans, $8,163,721; decreases in net deposits, $2,392,859; and the purchase of
Federal Home Loan Bank Stock $174,300. As of March 31, 1997, the Bank had
outstanding FHLB advances of $27,250,000. Management believes that in the future
funds will be obtained from the above sources.
(continued)
17
<PAGE>
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operation
At March 31, 1997, loans-in-process, or closed loans scheduled to be funded over
a future period of time, totaled $1,407,473. Loans committed, but not closed,
totaled $4,253,667 and available lines of credit totaled $172,453. During the
three-month period ended March 31, 1997, the Bank acquired $6.6 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 were
incurred by the Company in 1995 and 1996, no additional dividends have been
declared and the Board of Directors decided to suspend the payment of dividends
for calendar years 1995 and 1996, and does not anticipate the payment of
dividends during 1997. 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 1997. 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 $1,644,097 of the
premium as of March 31, 1997 as an adjustment to interest income. The
acquisition was accounted for as a purchase.
Liquidity
As a member of the Federal Home Loan Bank system, the Bank is required to
maintain a daily average balance of liquid assets equal to a specified
percentage (currently 5%) of net withdrawable deposit accounts and borrowings
payable in one year or less. Federal regulations also require that each member
institution maintain short-term liquid assets of at least 1% of its net
withdrawable deposit accounts and borrowings payable in one year or less.
Generally, the Bank's management seeks to maintain its liquid assets at
comfortable levels above the minimum requirements imposed by its regulators. At
March 31, 1997, average liquidity was 9.50%.
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.
(continued)
18
<PAGE>
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operation
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
On October 3, 1994, the Holding Company and the Bank each entered into a
voluntary Cease and Desist Order (collectively the "Orders") with the OTS. The
decision by management and the Board of Directors of both companies to enter
into the Orders was reached after several months of discussions with the OTS
following the 1994 safety and soundness examinations. Although management and
the Board of Directors of the Holding Company and the Bank believed that
significant action had been taken to correct operational deficiencies cited in
the Bank's 1992 safety and soundness examination (which resulted in a
Supervisory Agreement between the Bank and the OTS) and the deficiencies cited
in the 1994 examinations, it was determined that it was in the best interest of
the Holding Company and the Bank to agree to the Orders due to the increase in
the Bank's classified assets and the resulting increase to the Bank's loan loss
reserves. Another factor that was considered in this decision was the fact that
most of the items included in the Bank's Order were repetitive of the directives
contained in the Supervisory Agreement, which the Bank was either in compliance
with or had corrected. The Holding Company's Order, on the other hand, was
viewed to be administrative in nature and similarity could be easily monitored.
In August, 1995 the OTS informed the Holding Company that it was conducting an
expanded examination with regard to certain transactions that were entered into
1990 and 1991 by prior Bank management. As of the date of this filing, the
Holding Company has had no further contact with the OTS concerning this
examination.
In the 1996 safety and soundness examinations of the Holding Company and the
Bank, OTS found both companies to be in compliance with their respective Orders.
Subsequently, the Holding Company's supervisory rating was upgraded. With regard
to the Bank, further improvement was noted in a number of areas, including
underwriting procedures, documentation, disposition of problem assets,
significant reduction in the dependency on wholesale funds, and a continued
reduction in operating expenses. In light of the improvement of the Bank's
operations, the OTS reduced the number of provisions in the Bank's Order from 27
to 23. Management has been advised that the OTS will consider lifting the Bank's
Order when the ratio of classified assets to capital is reduced below 100%. (See
"Notes to Consolidated Condensed Financial Statements - Supervision".)
Capital Requirements
The Bank is required to meet certain minimum regulatory capital requirements.
The following table presents a summary of the capital requirements for
adequately capitalized banks, the Bank's capital and the amounts in excess as of
March 31, 1997:
(continued)
19
<PAGE>
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operation
<TABLE>
<CAPTION>
At March 31, 1997
-----------------
Tangible Core Risk-Based
-------- ---- ----------
(Dollars in Thousands)
Percent Percent Percent
Amount of Assets Amount of Assets Amount of Assets
------ --------- ------ --------- ------ ---------
<S> <C> <C> <C> <C> <C> <C>
Regulatory Capital 6,740 4.84% 6,740 4.84% 7.553 10.09%
Requirement 2,091 1.50% 4,182 3.00% 5,991 8.00%
----- ----- ----- ----- ----- -----
Excess 4,649 3.34% 2,558 1.84% 1,562 2.09%
===== ===== ===== ===== ===== =====
</TABLE>
Impact of Inflation and Changing Prices
The financial statements and related data presented herein have been prepared in
accordance with Generally Accepted Accounting Principles ("GAAP"), which require
the measurement of financial position and operating results in terms of
historical dollars, without considering changes in the relative purchasing power
of money over time due to inflation. Unlike most industrial companies,
substantially all of the assets and liabilities of the Company are monetary in
nature. As a result, interest rates have a more significant impact on the
Company's performance than the effects of general levels of inflation. Interest
rates do not necessarily move in the same direction or in the same magnitude as
the prices of goods and services, since such prices are affected by inflation to
a larger extent than interest rates.
Impact of Accounting Requirements
In June 1996, the FASB issued Statement of Financial Accounting Standards No.
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities". SFAS 125 provides accounting and reporting
standards for transfers and servicing of financial assets and extinguishments 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. SFAS 125 is effective for transfers and servicing of
financial assets and extinguishments of liabilities occurring after December 31,
1996, and is to be applied prospectively. The Company does not anticipate a
material impact on its operations or financial position from the implementation
of SFAS 125.
In February 1997, the FASB issued Statement of Accounting Standards No. 128,
"Earnings Per Share". SFAS 128 establishes new standards for computing and
presenting earnings per share (EPS) and applies to entities with publicly held
common stock. In effect, this statement simplifies the standards for computing
EPS previously addressed in APB Opinion No. 15, "Earnings Per Share", by making
them comparable to international EPS standards. SFAS 128 replaces the
presentation of primary EPS with a presentation of basic
(continued)
20
<PAGE>
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operation
EPS and it also requires dual presentation of basic and diluted EPS on the face
of the income statement for all public entities with complex capital structures.
In addition, the statement requires a reconciliation of the numerator and
denominator used to compute basic EPS. SFAS 128 supersedes APB Opinion No. 15
and the AICPA Interpretations thereon and is effective for financial statements
issued for periods ending after December 15, 1997. The standard also requires
the restatement of all prior-period EPS data presented in the financial
statements. The Company has not adopted the disclosure requirements of this
standard in its December 31, 1996 financial statements and does not anticipate a
material impact on its operations or financial position from its implementation
during the fiscal year ending December 31, 1997.
Results of Operations
Comparison of the Three-Month Periods Ended March 31, 1997 and 1996
General. The Company had a net profit for the three-month period ended March 31,
1997 of $100,889 or $.045 per share, compared to net profit of $3,473 or $.002
per share for the same period in 1996. The increase in the net profit was due
primarily to the increase in net interest income and the reduction of other
expenses offset partially by decreased other income.
Interest Income and Expense. Interest income decreased by $7,763 to $2,550,059
for the three-month period ended March 31, 19
97 from $2,557,822 for the same
period in 1996. Interest income on loans decreased to $2,335,042 in 1997 from
$2,353,343 in 1996, primarily as a result of a decrease in the average amount of
loans outstanding and a decrease in the average yield on loans. Interest income
on the securities portfolio increased by $15,026 for the three-month period
ended March 31, 1997 over the same period in 1996, as a result of an increase in
the average yield on securities held. Other interest and dividends decreased
$4,488 during the same three-month period in 1997 from 1996 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 $1,723,526 during the three-month period ended
March 31, 1997 from $1,816,874 for the same period in 1996 due to a decrease in
the amount of, and the average rate paid on, such deposits and FHLB advances.
Interest on deposits decreased to $1,384,785 in 1997 from $1,519,970 in 1996 as
a result of decreased deposits and a decrease in the average rate paid, and
interest on FHLB Advances increased to $338,741 in 1997 from $296,904 in 1996 as
a result of the increase in the average amount of advances outstanding and an
increase 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 not make a provision for loan
losses based on its evaluation of the loan portfolio, however a provision for
$30,000 was made for losses on real estate owned, and $3,000 was transferred
(continued)
21
<PAGE>
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operation
from the provision for loan losses to the provision for losses on real estate
owned. The Bank did not make a provision for loan losses during the same period
in 1996, however $18,356 was transferred to the provision for losses on real
estate owned. There were net charge-offs of $337,269 during the three-month
period ended March 31, 1997 as compared to net charge offs of $112,398 during
the three-month period ended March 31, 1996. Total non-performing loans at March
31, 1997 were $1,323,551 compared to $3,215,300 at March 31, 1996. The allowance
for loan losses at March 31, 1997 was $1,192,734 or 90% of non-performing loans
and 1.05% of net loans outstanding.
Total Other Income. Other income decreased from $189,087 for the three-month
period ended March 31, 1996 to $104,868 for the same period in 1997. The
decrease in other income was due to a decrease of $86,577 in gains on the sale
of assets, a decrease of $466 in fees and services charges, and a decrease of
$5,305 in other miscellaneous income, offset partially by an increase in rental
income of $8,129 on the rental property repossessed by the Bank. Rental income
increased as a result of the Bank beginning to receive rental income on a
repossessed property. 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 March 31, 1997
due primarily to decreased other loan income and gains on the sale of assets
decreased as a result of fewer assets sales by the Bank.
Total Other Expense. Other expense decreased to $757,212 for the three-month
period ended March 31, 1997 from $942,965 for the same period in 1996. The
decrease in 1997 was primarily the result of the elimination of the staff and
offices of the Company at the end of the second quarter of 1996 and decreases in
the amount of non-performing loans at the Bank. Compensation decreased to
$325,867 in 1997 from $344,225 in 1996 as a result of reductions in staff.
Professional fees decreased by $57,161 primarily as a result of decreased legal
costs associated with non-performing loans. Other miscellaneous expense
decreased by $51,675 due to reduced costs associated with repossessed assets.
Occupancy and equipment expense decreased by $37,658 to $131,813 in 1997 due to
the subletting of the Company's offices and the termination of the lease on the
remote drive-in facility that had been previously used by the Bank. Data
Processing expense decreased by $2,463 due to the decreased number of accounts
at the Bank and FDIC Insurance expense decreased by $18,438 as a result of the
reduction in the premium rate charged by the FDIC. Management expects
professional fees and other miscellaneous expenses to decrease further as
non-performing loans are resolved and repossessed assets are disposed of.
22
<PAGE>
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
PART II. OTHER INFORMATION
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.
Date: May 14 , 1997 By: /s/ Aubrey H. Wright, Jr.
- ------------------------- ------------------------------
FEDERAL TRUST CORPORATION Aubrey H. Wright, Jr.
(Registrant) Chief Financial Officer and duly authorized
Officer of the Registrant
23
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALALNCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS FOUND ON
PAGES 3 AND 4 OF THE COMPANY'S FORM 10-Q FOR THE YEAR TO DATE.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<EXCHANGE-RATE> 1
<CASH> 373
<INT-BEARING-DEPOSITS> 2,762
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 8,774
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<DEPOSITS> 103,726
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<LONG-TERM> 5,000
0
0
<COMMON> 23
<OTHER-SE> 7,304
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<INTEREST-LOAN> 2,335
<INTEREST-INVEST> 167
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<INTEREST-TOTAL> 2,550
<INTEREST-DEPOSIT> 1,385
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<INTEREST-INCOME-NET> 827
<LOAN-LOSSES> (3)
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<INCOME-PRETAX> 177
<INCOME-PRE-EXTRAORDINARY> 177
<EXTRAORDINARY> 0
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<EPS-PRIMARY> 0.05
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<YIELD-ACTUAL> 7.74
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<ALLOWANCE-CLOSE> 1,192
<ALLOWANCE-DOMESTIC> 1,192
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
