- --------------------------------------------------------------------------------
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, 1997 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
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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 2,256,505
- -------------------------------------- ----------------------------
(class) Outstanding at June 30, 1997
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FEDERAL TRUST CORPORATION AND SUBSIDIARIES
INDEX
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements Page
Consolidated Condensed Balance Sheets
June 30, 1997 and December 31, 1996 (unaudited)..................3
Consolidated Condensed Statements of Operations for the
Three and Six months ended June 30, 1997 and 1996 (unaudited).....4
Consolidated Condensed Statements of Cash Flows for the
Six months ended June 30, 1997 and 1996 (unaudited)...............5
Notes to Consolidated Condensed Financial Statements (unaudited).......6 - 12
ItemManagement's Discussion and Analysis of Financial Condition
and Results of Operations..............................................13 - 22
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders................23
Signatures.................................................................23
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..............................................24
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FEDERAL TRUST CORPORATION AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Balance Sheets
(Unaudited)
June 30, 1997 December 31, 1996
------------- -----------------
Assets
<S> <C> <C>
Cash $ 628,015 628,648
Interest bearing deposits 2,601,592 4,837,114
Investment securities available for sale 8,863,375 8,763,641
Investment securities held to maturity 6,322,864 6,290,610
Loans receivable, net (net of allowance for loan losses of
$1,190,875 in 1997 and $1,533,003 in 1996) 111,118,646 112,547,266
Loans held for sale (market value of $977,691) 954,404 --
Accrued interest receivable - Loans 812,850 833,458
Accrued interest receivable - Securities 188,566 196,171
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 3,429,185 1,508,166
Property and equipment, net 856,013 917,572
Prepaid expenses and other assets 1,508,603 371,161
Deferred income taxes 1,004,116 1,129,696
------------- -------------
Total $ 140,021,083 139,582,057
============= =============
Liabilities and Stockholders' Equity
Deposit accounts $ 106,894,483 106,119,006
Official Checks 685,228 646,235
Federal Home Loan Bank advances 23,500,000 24,800,000
Advance payments for taxes and insurance 1,050,149 347,774
Accrued expenses and other liabilities 473,669 504,414
------------- -------------
Total Liabilities $ 132,603,528 132,417,429
------------- -------------
Stockholders' equity
Commonstock, $.01 par value, 5,000,000 shares authorized;
2,256,505 shares issued and outstanding at
June 30, 1997 and December 31, 1996 22,565 22,565
Additional paid-in capital 11,143,659 11,143,659
Accumulated deficit (3,100,165) (3,226,204)
Treasury stock (16,577 shares of common stock, at cost at
June 30, 1997 and December 31, 1996) (76,525) (76,525)
Unrealized loss on investments securities, net (147,890) (210,224)
Unrealized loss on investment securities transferred from
available for sale to held to maturity, net (424,090) (488,643)
------------- -------------
Total Stockholders' Equity $ 7,417,554 7,164,628
------------- -------------
Total Liabilities and Stockholders' Equity $ 140,021,083 139,582,057
============= =============
</TABLE>
See accompanying Notes to Consolidated Condensed Financial Statements
3
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<TABLE>
<CAPTION>
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Consolidated Condensed Statements of Operations
For Three and Six Months Ended June 30, 1997 and 1996
(Unaudited)
Three Months Six Months
Ended June 30 Ended June 30
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Interest income:
Loans $2,280,989 2,219,285 $4,616,031 4,572,628
Securities 165,999 150,290 333,449 302,714
Interest-bearing deposits and other 47,759 62,131 95,326 114,186
---------- ---------- ---------- ----------
Total interest income 2,494,747 2,431,706 5,044,806 4,989,528
---------- ---------- ---------- ----------
Interest expense:
Deposit accounts 1,424,036 1,405,622 2,808,821 2,925,592
Federal Home Loan Bank advances & other
borrowings 376,422 294,786 715,163 591,689
---------- ---------- ---------- ----------
Total interest expense 1,800,458 1,700,408 3,523,984 3,517,281
---------- ---------- ---------- ----------
Net interest income 694,289 731,298 1,520,822 1,472,247
Provision for loan losses 40,748 131,862 37,748 113,506
---------- ---------- ---------- ----------
Net interest income after provision 653,541 599,436 1,483,074 1,358,741
---------- ---------- ---------- ----------
Other income:
Fees and service charges 25,095 27,367 50,930 53,668
Rents 56,160 2,163 69,833 7,707
Gain on sale of assets 18,365 16,925 68,184 153,321
Other miscellaneous 44,422 16,173 59,963 37,019
---------- ---------- ---------- ----------
Total other income 144,042 62,628 248,910 251,715
---------- ---------- ---------- ----------
Other expenses:
Employee compensation & benefits 334,384 345,479 660,251 689,704
Occupancy and equipment 131,215 315,603 263,028 485,074
Data processing expense 23,698 22,177 44,529 45,471
Professional fees 29,413 120,993 109,077 257,818
FDIC Insurance 62,354 79,560 124,306 159,950
Other miscellaneous 150,869 183,443 287,954 372,203
---------- ---------- ---------- ----------
Total other expense 731,933 1,067,255 1,489,145 2,010,220
---------- ---------- ---------- ----------
Net income before income tax 65,650 (405,191) 242,839 (399,764)
Income tax (benefit) 40,500 (242,065) 116,800 (240,111)
---------- ---------- ---------- ----------
Net income $ 25,150 (163,126) 126,039 (159,653)
========== ========== ========== ----------
Per share amounts:
Earnings per share .01 (0.07) .06 (.07)
Cash dividends per share 0.00 0.00 .00 .00
Weighted average number of shares outstanding 2,256,505 2,256,505 2,256,505 2,256,505
---------- ---------- ---------- ----------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
4
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<TABLE>
<CAPTION>
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Consolidated Condensed Statements of Cash Flows
For the Six Months Ended June 30, 1997 and 1996
(Unaudited)
1997 1996
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 126,039 (159,653)
Adjustments to reconcile net income to net cash flows from operations:
Depreciation & amortization of property & equipment 80,556 238,359
Amort. (net) of premiums, fees & disc. on loans & securities 127,351 66,811
Provision for allowance on real estate owned 72,252 26,101
Provision for loan losses 37,748 113,506
Gain on sale of assets (68,184) (153,321)
Deferred Income Taxes 115,599 (240,111)
Cash provided by (used for) changes in:
Accrued interest receivable 28,213 96,534
Loan sale proceeds receivable -- 37,765
Prepaid expenses & other assets (1,137,442) (125,094)
Official checks 38,993 (96,687)
Accrued expenses & other liabilities (30,745) 65,322
------------ ------------
Net cash used in operating activities (531,455) (40,823)
------------ ------------
Cash flows from investing activities:
Acquisition of office properties and equipment (18,997) (4,147)
Purchase of Federal Home Loan Bank of Atlanta stock (174,300) --
Proceeds collected from loan sales 705,564 4,084,252
Addition to real estate owned (22,695) (13,180)
Proceeds from sale of real estate owned 437,787 1,903,114
Principal collected on securities held to maturity 4,880 8,323
Principal collected on loans 8,854,986 12,615,984
Loans originated or purchased (11,591,612) (17,317,457)
------------ ------------
Net cash provided by (used in) investing activities (1,882,552) 1,187,244
------------ ------------
Cash flows from financing activities:
Increase (decrease) in deposits, net 775,477 (4,497,190)
(Increase) Decrease in Federal Home Loan Bank advances (1,300,000) 4,500,000
Decrease in other borrowings -- (170,000)
Net increase in advance payments by borrowers for taxes & insurance 702,375 534,158
Net cash provided by financing activities 177,852 366,968
------------ ------------
Decrease (increase) in cash and cash equivalents (2,236,155) 1,513,389
Cash and cash equivalents at beginning of period 5,465,762 1,669,761
------------ ------------
Cash and cash equivalents at end of period $ 3,229,607 3,183,150
============ ============
</TABLE>
See accompanying Notes to Consolidated Condensed Financial Statements
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 for First Coast Savings Bank, F.S.B. a federally-chartered stock savings
bank now known as Federal Trust Bank ("Bank"). The Bank is headquartered 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 Holding Company's primary investment is the ownership of the Bank. The Bank
is primarily engaged in the business of attracting deposits from the general
public and using these funds with Federal Home Loan Bank ("FHLB") advances to
fund bulk purchases of one-to-four family residential mortgage loans,
residential consumer loans, multi-family loans, and to a lesser extent,
commercial real estate related SBA loans and sonsumer loans.
Through the first six months of 1996, 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 LC.
The consolidated condensed balance sheets as of June 30, 1997 and December 31,
1996, and the consolidated condensed statements of operations for the three and
six month periods ended June 30, 1997 and 1996, and the cash flows for the six
month periods ended June 30, 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 June 30, 1997, the results of operations for the three and six month
periods ended June 30, 1997 and 1996, and cash flows for the three and six month
periods ended June 30, 1997 and 1996. The results of operations for the
six-month period ended June 30, 1997 are not necessarily indicative of the
results to be expected for the full year. These statements should be read in
conjunction with the consolidated 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 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
The Bank's policy is to classify all loans 90 days or more past due as
non-performing and 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 June 30, 1997, impaired loans amounted to $1.786 million as compared to
$4.625 million at June 30, 1996. Included in the allowance for loan losses is
$439 thousand related to the impaired loans as compared to $601 thousand at June
30, 1996. 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 six months of 1997, the average recorded investment in impaired
loans was $2.708 million and $15.4 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
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<CAPTION>
Allowance for Loan Losses: The following is an analysis of the activity in the
allowance for loan losses for the periods presented:
Three Months Six Months
Ended June 30, Ended June 30,
-------------- --------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Balance at beginning of period $ 1,192,734 1,929,814 1,533,003 2,060,568
Provision for loan losses 40,748 131,862 37,748 113,506
Less Charge-offs (47,354) (972,854) (387,689) (1,088,535)
Plus recoveries 4,747 3,202 7,813 6,485
Balance at end of period $ 1,190,875 1,092,024 1,190,875 1,092,024
========= ========= ========= =========
Loans Outstanding $ 112,073,050 113,115,996 112,073,050 113,115,996
Ratio of charge-offs to Loans Outstanding .04% .86% .35% .96%
Ratio of allowance to Loans Outstanding 1.06% .97% 1.06% .97%
</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, 1997, management made a provision of $40,748 based on
its evaluation of the loan portfolio, as compared to the provision of $131,862
made in the quarter ended June 30, 1996. The decrease in the provision was
primarily the result of the improving quality in the loan portfolio.
(continued)
7
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FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (unaudited)
5. Supplemental Disclosure of Cash Flow and Non-Cash Investing and Financing
Activities
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<CAPTION>
Six Months Ended June 30,
1997 1996
---- ----
Cash paid during the period for:
<S> <C> <C>
Interest expense $ 1,718,697 1,751,136
Income taxes $ 10,000 --
Supplemental disclosure of non-cash transactions:
Real Estate Acquired in Settlement of Loans $ 2,350,000 327,753
Market Value adjustment - investment securities
available for sale:
Market value adjustment - investments $ (236,625) (567,203)
Deferred income tax asset $ (88,735) (194,950)
----------- -----------
Unrealized loss on investment securities
available for sale, net $ (147,890) (372,253)
Unrealized loss on investment securities transferred
from available for sale to held to maturity $ (678,523) (754,312)
Deferred income tax asset $ (254,433) (259,261)
----------- -----------
Unrealized loss on investment securities transferred
from available for sale to held to maturity $ (424,090) (495,051)
=========== ===========
</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:
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
---------- --- --------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Balance at beginning of period $ 3,612,392 2,018,920 1,508,166 3,293,108
Acquired through foreclosure -- 92,284 2,350,000 327,753
Add: Capitalized costs 32,158 -- 22,695 13,180
Less: Sale of real estate (176,113) (346,481) (379,424) (1,850,898)
Less: Chargeoffs (39,252) (7,745) (72,252) (26,101)
Less: Allowance for losses -- -- -- --
---------- ---------- ---------- ----------
Balance at end of period $ 3,429,185 1,757,042 3,429,185 1,757,042
========== ========== ========== ==========
7. Investment Securities
At June 30, 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 6,321,477 6,234,375
--------- ---------
Total 6,322,864 6,235,762
========= =========
</TABLE>
(continued)
8
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FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (unaudited)
Available for sale:
FHLB Floating Rate Note, 3.334% due 6/17/98 971,875 971,875
FHLB Floating Rate Note, 3.771% due 6/25/98 1,712,266 1,712,266
FHLB Floating Rate Note, 3.556% due 7/15/98 1,460,156 1,460,156
FHLB Floating Rate Note, 3.556% due 7/15/98 1,460,156 1,460,156
FHLB Floating Rate Note, 3.748% due 7/28/98 3,258,922 3,258,922
---------- ----------
Total $8,863,375 8,863,375
========== ==========
The Bank's investment in obligations of U.S. government agencies consists of
dual indexed bonds issued by the Federal Home Loan Bank. At June 30, 1997, the
bonds had a market value of $14,959,137 and gross unrealized pretax losses of
$1,140,863. 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 June 30, 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 June 30, 1997:
Maturity Date Rate Amount Type
- ------------- ---- ------ ----
09/16/97 6.01% $ 5,000,000 Fixed rate
10/16/97 5.86% 5,000,000 Fixed rate
12/31/97 6.48% 1,000,000 Variable rate
06/30/98 6.00% 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
---------- -------------
Total 6.02% $23,500,000
===== ===========
Variable rate advances reprice daily and may be repaid at any time without
penalty. Fixed rate advances incur a prepayment penalty if repaid prior to
maturity, and the interest rate is fixed for the term of the advance.
Amounts Outstanding at:
Month-end Rate Amount
--------- ---- ------
4/30/97 5.99% $ 27,250,000
5/31/97 6.00% 23,250,000
6/30/97 6.02% 23,500,000
The maximum amount of borrowings outstanding at any month end during the three
and six months periods ended Juen 30, 1997 were $27,250,000 and $27,300,000
respectively. During the three and six month periods ended June 30, 1997,
average advances outstanding totaled $24.9 and $23.9 million, at average rates
of 6.04% and 5.99%, respectively.
Advances from the FHLB are collateralized by loans and securities that totaled
approximately $35.8 million and $7.0 million, respectively.
(continued)
9
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FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (unaudited)
9. Acquisitions
On April 3, 1992, the Bank acquired approximately $78.0 million in assets and
$120.2 million in liabilities of First Federal Savings and Loan Association of
Seminole County, F.A. from the RTC. 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 $1,663,025 of the premium as of June 30,
1997 as an adjustment to interest income. The acquisition was accounted for as a
purchase.
10. Supervision
The Holding Company is 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. 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 deposit insurance funds 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
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.
In the April, 1994 examination, 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 Federal Trust. 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
pursuant to procedures that 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 control systems and
operating procedures of financial institutions, including compliance with
10
<PAGE>
internal policies and procedures to ensure that the Bank was in compliance with
its Order.
The most recent OTS examinations of the Holding Company and the Bank were
completed 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 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 violations of the Bank's Order,
law or regulation. The Boards of Directors of the Holding Company and the Bank
authorized management to file written appeals regarding the respective
supervisory ratings and to request that the Bank's Order be lifted in whole or
in part.
On December 20, 1996, the OTS Regional Director advised Federal Trust that the
OTS had decided to upgrade the Company's supervisory rating. As for the Bank,
the OTS Regional Director noted 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. As a result the OTS, reduced
the number of provisions in the Bank's Order from 27 to 23.
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
CEO/President in January 1993, the addition of a new CFO, Aubrey H. Wright, Jr.,
in June 1993, the reorganization of the Loan Department and the establishment of
new underwriting systems, coupled with the addition of Louis E. Laubscher as the
new CLO/Senior Problem Asset Officer in March, 1995. This transition carried
over to Federal Trust in June of 1996, when James Suskiewich was named President
and CEO of Federal Trust. The Board of Directors and management of the Holding
Company believe that the necessary corrective measures are being taken to ensure
that the Company is being operated prudently 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 Company is committed to taking the appropriate steps to have
the respective Orders lifted as soon as possible and to assist the management in
its efforts to making the Bank a more traditional financial institution with
consistent core earnings.
Under the growth limitations that accompany the Orders, 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 expects that the
interest income of the Bank will continue to be limited, so long as the current
growth limitations remain in place. Management does not believe that the Orders
or the current growth limitations, will have a material impact on the financial
condition of the Company or the Bank.
11. Stock Options
Stock Option Plan for Directors. On May 5, 1993, the Board of Directors of the
Company approved a Stock Option Plan for Directors ("Stock Plan"). The Stock
Plan provided that a maximum of 176,968 shares of common stock (the "Stock
Shares") would be made available to directors and former directors of the
Company. Stock Options were issued on May 6, 1993 to 13 individuals who were at
that time directors or were former directors of the Company. The Stock Options
were for a term of ten (10) years from the date of grant. The Stock 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 on the date
11
<PAGE>
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (unaudited)
the Stock Option was granted. The options held by an active director are
canceled immediately if such director is removed for "cause", as defined in the
Stock Plan.
On March 7, 1997, the Board of Directors of the Holding Company rescinded the
Stock Plan and the underlying Stock Options were canceled. At the time the Stock
Plan was rescinded, none of the Stock Options had been exercised. The Company
issued no Stock Options or stock appreciation rights as compensation during the
period January 1, 1996 through June 30, 1997.
Stock Options for Stock Sales. In connection with the 1993 Private Placement
Offering and the 1990 Public Offering, the Holding Company issued stock options
to certain sales representatives for their commitment to sell common stock in
the respective offerings. The options have a strike price of $10.00 per share
and will expire on October 26, 1999. At June 30, 1997 none of the stock options
for 58,453 shares had been exercised. The stock options have an anti-dilutive
provision which adjusts the strike price in the event of a stock split or a
stock sale, wherein the purchase price is less than the strike price.
12. Subsequent Events
On July 3, 1997, the Company filed a Form S-1 Registration Statement with the
Securities and Exchange Commission ("SEC") to offer up to 2,701,619 shares of
its common stock, par value $1.00 per share ("Common Stock"), on a priority
basis, first to holders of record of its Common Stock ("Shareholder") at the
close of business on March 26, 1997 (the "Record Date"). Each Shareholder will
receive a nontransferable right to subscribe for and purchase one additional
share of Common Stock for each whole share of Common Stock owned on the Record
Date (the "Rights Offering"). Immediately following the Rights offering, shares
not subscribed for in the Rights Offering will be offered to the general public
(the "Community Offering").Keefe, Bruyette & Woods, Inc., ("KBW"), a registered
broker-dealer, has been engaged to consult with and advise the Company in the
Offering. KBW has agreed to use its best efforts to solicit subscriptions and
purchase orders for shares in the Offering. The price for the shares of common
stock has not been finalized, but it will be at a discount from the current book
value. The per share price will be the same in the Rights Offering and the
Community Offering.
In August, 1995, management was advised by the Office of Thrift Supervision
("OTS") that the Agency was proceeding with an expanded examination of the
Company. On August 1, 1997 management was advised by the OTS that it had issued
a resolution authorizing a "Formal Examination Proceeding to be Conducted on
Federal Trust Bank and its Affiliates" ("Formal Examination Proceedings"). Based
upon management's independent review of the circumstances surrounding the Formal
Examination Proceeding, management has no reason to believe that the Bank or
current management will be subject to any additional enforcement action stemming
from the Formal Examination Proceeding. Management does not know when the Formal
Examination Proceeding will be concluded.
(THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK)
12
<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 had an 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 amount of non-earning assets, which has
resulted in an increase in the yield on earning 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 June 30, 1997, the bank did make an addition to
its loan loss reserves based on its evaluation of the loan portfolio and 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 down payment. Of the $122,007 in interest income taken into
income on this loan during the quarter ended March 31, 1997, $85,463 was
attributable to the year 1996 and $36,544 was attributable to the quarter ended
March 31, 1997.
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, which was subsequently
written down, in the quarter ended June 30, 1997, to its fair value of
$2,340,000. The property consists of 44 unsold condominium units, which have
been, and currently are being rented. After evaluating the units, the Bank began
marketing the units in the second quarter of 1997. As of August 1, 1997, two
units have been sold and an additional 6 units are under contract for sale. The
Bank will continue to rent the majority of the remaining units, with one or two
held vacant for refurbishing, in order to generate income from the property.
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
loans 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.
(continued)
13
<PAGE>
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operation
General
Federal Trust Corporation ("Company" or "Holding Company"), formerly FedTrust
Corporation, was incorporated in August 1988 for the purpose of becoming a
unitary savings and loan holding company for First Coast Savings Bank, F.S.B., a
federally-chartered savings bank now known as Federal Trust Bank, ("Bank"). The
Holding company acquired all outstanding common stock of The Bank, on February
28, 1989 pursuant to an agreement and plan of reorganization whereby five shares
of the Company's common stock were exchanged for each four shares of the Bank's
common stock on that date. The Bank is currently the only subsidiary of the
Company and began operations on May 3, 1988.
During the first six months of 1996, the Holding company operated 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.
FTPC was involved with the development of a HUD insured apartment 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. The Company was notified in late July that the
closing on the HUD loan had been postponed until mid-August which would delay
payment on the note due July 31, 1997. On August 1, 1997, the Company notified
FTPC that it had until August 31, 1997, to pay the note in the amount of
$230,354. In addition, the Company is currently renting the quarters it
previously occupied to FTPC on a month to month basis, and plans to sublease 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. 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 sublet. Employees of the Bank perform all
necessary functions needed by the Company, and the Company reimburses the Bank
for the time spent 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 annual lease
payment on this facility was $40,063. During the second quarter of 1996, the
Company entered into a contract to sell this facility under the purchase option
in the lease. This was done in order to terminate the remaining lease obligation
which had 16 years remaining. The sale closed in September, 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
(continued)
14
<PAGE>
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operation
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, 1997, the most recent report
available, was -14%, as compared to -23% at March 31, 1996. 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 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, and as interest rates rose slightly in first half of
1997 the Bank's net interest spread did not decrease as a result of the
increased amount of adjustable rate loans in the portfolio and the decrease in
non-performing loans. Interest rates have declined slightly since the end of
the second quarter of 1997, which should improve the Bank's net interest spread,
as the rates paid on its liabilities will fall faster than the rates earned on
its assets, however, should interest rates begin to rise the Bank's net interest
income could be adversely affected as a result of its negative GAP.
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
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.
(continued)
15
<PAGE>
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operation
<TABLE>
<CAPTION>
The following table sets forth information about rates and yields:
Yields and Rates at
June 30, December 31, June 30,
1997 1996 1996
---- ---- ----
Yields on:
<S> <C> <C> <C>
Loan portfolio 8.15% 8.05% 7.83%
Other interest-earning assets 4.56% 4.12% 4.23%
---- ---- ----
Interest-earning assets 7.64% 7.41% 7.25%
Cost of:
Deposits 5.37% 5.41% 5.39%
FHLB advances and other interest-bearing liabilities 6.00% 5.43% 5.85%
---- ---- ----
Interest-bearing liabilities 5.49% 5.42% 5.47%
Interest rate spread 2.15% 1.99% 1.78%
==== ==== ====
</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 available for sale, 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 six-month period ended June 30, 1997, the Company used funds
primarily from principal collected on loans, $8,854,986; proceeds from the sale
of real estate owned, $437,787; proceeds from loan sales, $705,564; advance
payments by borrowers, $702,375; an increase in net deposits, $775,477; and a
decrease in cash, $2,236,155; to fund the origination and purchase of loans,
$11,591,612; a decrease in FHLB advances, $1,300,000; net cash used in operating
activities, $531,455; and the purchase of Federal Home Loan Bank Stock $174,300.
As of June 30, 1997, the Bank had outstanding FHLB advances of $23,500,000.
Management believes that in the future funds will be obtained from the above
sources.
At June 30, 1997, loans-in-process, or closed loans scheduled to be funded over
a future period of time, totaled $771,447. Loans committed, but not closed,
totaled $2,758,452 and available lines of credit totaled $283,061. During the
six-month period ended June 30, 1997, the Bank acquired $7.0 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.
(continued)
16
<PAGE>
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operation
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. 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 and the Bank.
Acquisitions
On April 3, 1992, the Bank acquired approximately $78.0 million in assets and
$120.2 million in liabilities of First Federal Savings and Loan Association of
Seminole County, F.A. from the RTC. 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 $1,663,025 of the premium as of June 30,
1997 as an adjustment to interest income. The acquisition was accounted for as a
purchase.
Liquidity
OTS regulations require 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 the OTS. At June 30, 1997, average liquidity was 8.94%.
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 small 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.
(continued)
17
<PAGE>
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operation
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 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 note 10 - Supervision and
note 12 Subsequent Events.")
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, 1997:
<TABLE>
<CAPTION>
At June 30, 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 $ 6,844 4.91% $ 6,844 4.91% $ 7,779 10.15%
Requirement 2,091 1.50% 4,182 3.00% 6,130 8.00%
----- ---- ----- ----- ------- -----
Excess $ 4,753 3.41% $ 2,662 1.91% $ 1,649 2.15%
===== ==== ===== ===== ======= =====
</TABLE>
(continued)
18
<PAGE>
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operation
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 Financial Accounting Standards Board ("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. There was
no impact on its operations or financial position from the implementation of
SFAS 125, as amended.
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 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 had not adopted the disclosure requirements of this standard in its
December 31, 1996 consolidated 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. However, had the company
adopted the provisions of SFAS 128, there would have been no impact on the
earnings per share information presented.
In June 1997 the FASB issued Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income." This statement establishes standards for
reporting and display of comprehensive income and its components (revenues,
expenses, gains, and losses) in a full set of general-purpose financial
statements. This statement requires that all items that are required to be
recognized under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence as
other financial statements. The statement also requires that an enterprise (a)
classify items of other comprehensive income by their nature in a financial
statement and (b) display the accumulated balance of other income separately
from retained earnings and additional paid-in capital in the equity section of a
statement of financial position. The statement is required for fiscal years
beginning after December 15, 1997. The adoption of this standard will require
the Company to disclose as a component of comprehensive income the activity in
its unrealized gain or loss on investment securities available for sale.
(continued)
19
<PAGE>
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operation
In June 1997 the FASB issued Statement of Financial Accounting Standards No.
131, "Disclosures about Segments of an Enterprise and Related Information." This
statement establishes standards for the way that public business enterprises
report information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports issued to shareholders. The statement is
required for fiscal years beginning after December 15, 1997. The Company does
not anticipate adoption of this standard will have a significant impact on its
consolidated financial statements upon adoption.
Results of Operations
Comparison of the Three-Month Periods Ended June 30, 1997 and 1996
General. The Company had a net profit for the three-month period ended June 30,
1997 of $25,150 or $.01 per share, compared to a net loss of $163,126 or $.07
per share for the same period in 1996. The increase in the net profit was due
primarily to the reduction in loan loss reserves, increased other income, and
the reduction of other expenses offset partially by decreased net interest
income.
Interest Income and Expense. Interest income increased by $63,041 to $2,494,747
for the three-month period ended June 30, 1997 from $2,431,706 for the same
period in 1996. Interest income on loans increased to $2,280,989 in 1997 from
$2,219,285 in 1996, primarily as a result of an increase in the average yield on
loans and a decrease in the amount of non-earning loans outstanding. Interest
income on the securities portfolio increased by $15,709 for the three-month
period ended June 30, 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 $14,372 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 increased to $1,800,458 during the three-month period ended
June 30, 1997 from $1,700,408 for the same period in 1996 due to an increase in
the amount of such deposits and FHLB advances. Interest on deposits increased to
$1,424,036 in 1997 from $1,405,622 in 1996 as a result of increased deposits,
and interest on FHLB Advances increased to $376,422 in 1997 from $294,786 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 as a liability management tool.
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 made a provision for loan losses
of $40,748 based on its evaluation of the loan portfolio, which was a decrease
of $91,114 from the same period in 1996, when the Bank made a provision for loan
losses $131,862, There were net charge-offs of $47,354 during the three-month
period ended June 30, 1997 as compared to net charge offs of $972,854 during the
three-month period ended June 30, 1996. Total non-performing loans at June 30,
1997 were $1,751,724 compared to $3,470,920 at June 30, 1996. The allowance for
loan losses at June 30, 1997 was $1,190,875 or 68% of non-performing loans and
1.06% of net loans outstanding, versus $1,092,024 at June 30, 1996 or 31% of
non-performing loans and .97% of net loans outstanding.
Total Other Income. Other income increased from $62,628 for the three-month
period ended June 30, 1996 to $144,042 for the same period in 1997. The increase
in other income was due to an increase of $1,440 in gains on the sale of assets,
an increase of $53,997 in rental income, an increase of $28,249 in other
miscellaneous income, offset partially by a decrease in fees and service charges
of $2,272. Rental income increased as a result of an increase in the amount of
income producing repossessed properties at the Bank and
(continued)
20
<PAGE>
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operation
a previously foreclosed property beginning to generate rental income. Other
miscellaneous income increased for the three-month period ended June 30, 1997
due primarily to increased other loan income, and gains on the sale of assets
increased as a result of gains on the sale of REO by the Bank. Fees and service
charges decreased primarily because of a decrease in the fees and charges earned
by the Bank on deposit accounts.
Total Other Expense. Other expense decreased to $731,933 for the three-month
period ended June 30, 1997 from $1,067,255 for the same period in 1996. The
decrease in 1997 was primarily the result of the elimination of the staff and
offices of the Holding 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 $334,384 in 1997 from $345,479 in 1996 as a result of reductions in
staff. Professional fees decreased by $91,580 primarily as a result of decreased
legal costs associated with non-performing loans. Other miscellaneous expense
decreased by $32,574 due to reduced costs associated with repossessed assets.
Occupancy and equipment expense decreased by $184,388 in 1997 to $131,215 due to
the one time charges, totaling $149,567, taken in 1996 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. The remainder of the decrease in occupancy and equipment expense was
the result of reduced rental expense, resulting from the sale of the drive-in
facility which was previously rented, and the subletting of the Company's former
office. FDIC Insurance expense decreased by $17,206 as a result of the reduction
in the premium rate charged by the FDIC. Data Processing expense increased by
$1,521 due to an increase in the number of accounts at the Bank. 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, 1997 and 1996
General. The Company had a net profit for the six-month period ended June 30,
1997 of $126,039 or $.06 per share, compared to net loss of $159,653 or $.07 per
share for the same period in 1996. The decrease in the net loss was due
primarily to the increase in net interest income, a decrease in provision for
loan losses and decreased other expense offset partially by decreased other
income.
Interest Income and Expense. Interest income increased to $5,044,806 for the
six-month period ended June 30, 1997 from $4,989,528 for the same period in
1996. Interest income on loans increased to $4,616,031 in 1997 from $4,572,628
in 1996, primarily as a result of an increase in the yield on loans outstanding,
which was attributable to interest income received on a loan originated in 1996
which was deferred in accordance with accounting standards which required the
income to be deferred until such time as the loan balance was reduced to 85% of
the original loan amount since the borrower did not make a cash downpayment.
Interest income on the securities portfolio increased by $30,735 for the
six-month period ended June 30, 1997 over the same period in 1996, as a result
of an increase in the yield on securities owned. Other interest and dividends
decreased $18,860 during the same six-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 increased by $6,703 to $3,523,984 during the six-month period
ended June 30,1997 from $3,517,281 for the same period in 1996 due to an
increase in the total average amount of FHLB advances outstanding, offset
partially by a decrease in interest bearing deposits. Interest on deposits
decreased to $2,808,821 in 1997 from $2,925,592 in 1996 as a result of decreased
deposits and a decrease in the average rate paid, and interest on FHLB Advances
increased to $715,163 in 1997 from $591,689 in 1996 as a result of an increase
in the rates paid on advances.
21
<PAGE>
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operation
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 1997 management did make a
provision for loan losses of $37,748 based on its evaluation of the loan
portfolio. The Bank's total provision for loan losses was $113,506 during the
same period in 1996. Net charge-offs on loans totaled $387,689 during the
six-month period ended June 30, 1997 and $1,088,535 during the six-month period
ended June 30,1996. Total non-performing loans at June 30, 1997 were $1,751,724
compared to $3,470,920 at June 30, 1996. The allowance for loan losses at June
30, 1997 was $1,190,875 or 68% of non-performing loans and 1.06% of net loans
outstanding.
Total Other Income. Other income decreased from $251,715 for the six-month
period ended June 30, 1996 to $248,910 for the same period in 1997. The decrease
in other income was due to an $85,137 decrease in gains on the sale of assets, a
decrease of $2,738 in fees and services charges, offset partially by an increase
in rental income of $62,126 and an increase in other miscellaneous income of
$22,944. Gains on the sale of assets decreased as a result of fewer asset sales,
and fees and service charges decreased primarily because of a decrease in the
fees and charges earned by the Bank on deposit accounts. Rental income increased
as a result of an increase in the amount of income producing repossessed
properties at the Bank and a previously foreclosed property beginning to
generate rental income. Other miscellaneous income increased for the six-month
period ended June 30, 1997 due primarily to increased loan servicing fees and
increased other loan income.
Total Other Expense. Other expense decreased to $1,489,145 the six-month period
ended June 30, 1997 from $2,010,220 for the same period in 1996. The decrease in
1997 was the result of decreased employee compensation expense, decreased
occupancy and equipment expense, decreased data processing expense, decreased
professional fees, decreased FDIC insurance expense and decreased miscellaneous
expense. Compensation decreased to $660,251 in 1997 from $689,704 in 1996 as a
result of reductions in staff. Occupancy and equipment expense decreased by
$222,046 in 1997 to $263,028 due to the one time charge, totaling $149,567,
taken in 1996 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. The remainder of the decrease in
occupancy and equipment expense was the result of reduced rental expense,
resulting from the sale of the drive-in facility which was previously rented,
and the subletting of the Company's former office. Data processing expense
decreased by $942 as a result of a decrease in the charges from the service
bureau that process customer accounts at the bank. Professional fees decreased
by $148,741primarily as a result of decreased legal costs associated with
non-performing loans. FDIC Insurance expense decreased by $35,644 as a result of
a reduction in the premium rate charged by FDIC. Other miscellaneous expense
decreased by $84,249 primarily due to reduced costs associated with repossessed
assets.
22
<PAGE>
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
On May 22, 1996, the Registrant held its annual meeting of shareholders at which
the following matters were voted upon at the meeting:
1. Election of Directors: Votes For Votes Withheld
One Year Terms:
James V. Suskiewich 1,378,129 66,367
Aubrey H. Wright, Jr. 1,378,129 66,367
George W. Foster 1,372,317 72,179
Dr. Samuel C. Certo 1,371,732 72,764
Kenneth W. Hill 1,375,395 69,101
2. Selection of KPMG Peat Votes For Votes Against Votes Abstained
Marwick as independent
auditor for the year ending
December 31, 1997: 1,413,972 13,339 13,046
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, 1997 By: /s/ Aubrey H. Wright, Jr.
------------------- ---------------------------
Aubrey H. Wright, Jr.
Chief Financial Officer and duly
authorized Officer of the Registrant
23
<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 May 22, 1997
(2) Proxy Statement for the Annual Meeting of Shareholders to be held May 22,
1997
24
<PAGE>
FEDERAL TRUST CORPORATION
------------------------
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD MAY 22, 1997
-------------------------
TO THE HOLDERS OF COMMON STOCK:
NOTICE IS HEREBY GIVEN that the 1997 Annual Meeting of Shareholders
("Annual Meeting") of Federal Trust Corporation ("Company") will be held at 1:00
p.m. on Thursday, May 22, 1997, at the Company's Corporate Office, 1211 Orange
Avenue, Winter Park, Florida 32789, to consider and vote upon the following
matters:
(1) Election of five directors of the Company, James V.
Suskiewich, Aubrey H. Wright, George Foster, Dr. Samuel C.
Certo and Kenneth W. Hill, each for a one-year term;
(2) Ratify the selection of KPMG Peat Marwick as independent
auditors of the Company for the fiscal year ending December
31, 1997;
(3) Approve the adjournment of the Annual Meeting to solicit
additional proxies in the event that there are not sufficient
votes to approve any one or more of the proposals; and
(4) Such other business as properly may come before the meeting
and any adjournments thereof. The Board of Directors is not
aware of any other business to come before the annual meeting.
Information relating to the above matters is set forth in the attached
Proxy Statement. All shareholders of record at the close of business on March
22, 1997, are entitled to receive notice of and to vote at the Annual Meeting or
any adjournments thereof.
Each shareholder, whether he or she plans to attend the Annual Meeting,
is requested to sign, date and return the enclosed Proxy Card without delay in
the enclosed postage-paid envelope. Any proxy given by the shareholder may be
revoked at any time before it is exercised. A proxy may be revoked by filing
with the Corporate Secretary of the Company a written revocation or a duly
executed proxy bearing a later date. Any shareholder present at the Annual
Meeting may revoke his or her proxy and vote personally on each matter brought
before the Annual Meeting.
By Order of the Board of Directors
/s/ James V. Suskiewich
JAMES V. SUSKIEWICH
Chairman of the Board
Winter Park, Florida
April 18, 1997
25
<PAGE>
FEDERAL TRUST CORPORATION
1270 Orange Avenue
Winter Park, Florida 32789
-----------------------------------
PROXY STATEMENT
-----------------------------------
This Proxy Statement and accompanying Proxy Card are being furnished in
connection with the solicitation by the Board of Directors of Federal Trust
Corporation ("Federal Trust" or "Company") of proxies to be voted at the 1997
Annual Meeting of Shareholders and at any adjournments thereof ("Annual
Meeting"). The Annual Meeting will be held on Thursday, May 22, 1997, at 1:00
p.m. at the Company's corporate office 1211 Orange Avenue, Winter Park, Florida.
The date on which this Proxy Statement and the enclosed Proxy Card are first
being sent or given to shareholders is April 18, 1997.
General
The securities that can be voted at the Annual Meeting consist of
common stock of the Company, $0.01 par value per share, 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
March 24, 1997, (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.
Regardless of the number of shares of common stock that you own, it is
important that shareholders be represented by proxy or in person at this Annual
Meeting. Shareholders are urged to indicate the way they wish to vote in the
spaces provided on the Proxy Card and return the Proxy Card signed and dated in
the enclosed prepaid envelope. Proxies solicited by the Board of Directors of
the Company will be voted in accordance with the directions given. If no space
is marked, the proxy will be voted "FOR" the director nominees, "FOR" the
ratification of KPMG Peat Marwick LLP as the Company's auditors for the fiscal
year ending December 31, 1997, and if necessary, "FOR" the adjournment of the
Annual Meeting to solicit additional proxies in the event that there are not
sufficient votes to approve any one or more of the foregoing proposals.
The Board of Directors knows of no other matters that will be presented
for consideration at this Annual Meeting. Execution of a proxy, however, confers
on the designated proxy holders discretionary authority to vote the shares in
accordance with their best judgment on other business, if any, that may properly
come before the Annual Meeting, or any adjournments thereof.
Voting Procedures
The Bylaws for Federal Trust provide that a majority of shares entitled
to vote and represented in person or by proxy at a meeting of the shareholders
constitutes a quorum. Under the Florida Business Corporation Act ("Act"),
directors are elected by a plurality of the votes cast by the shares entitled to
vote in the election at a meeting at which a quorum is present. Other matters
are approved if affirmative votes cast by the holders of the shares represented
at a meeting at which a quorum is present and entitled to vote on the subject
matter exceed votes opposing the action unless a greater number of affirmative
votes or voting by classes is required by the Act or the Company's Amended and
Restated Articles of Incorporation. Therefore, abstentions and broker non-votes
have no effect under Florida law. A broker non-vote generally occurs when a
broker who holds shares in street name for a customer does not have authority to
vote on certain non-routine matters under the rules of the New York Stock
Exchange because its customer has not provided any voting instructions on the
matter.
26
<PAGE>
Revocation of Proxy
The presence of a shareholder at this Annual Meeting will not
automatically revoke such shareholder's proxy. Shareholders may, however, revoke
a proxy at any time prior to its exercise by simply filing with the Corporate
Secretary of the Company a written notice of revocation, by delivering to
Federal Trust a duly executed proxy bearing a later date, or by attending this
Annual Meeting and voting in person.
Costs of Solicitation
Federal Trust will bear the entire cost of preparing, assembling,
printing and mailing this Proxy Statement, the accompanying Proxy Card 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
Federal Trust is not aware of any person who, on March 24, 1997, was
the beneficial owner of 5 percent 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.
Amount and Nature of Percent of
Beneficial Owner Beneficial Ownership Common Stock
- ---------------- -------------------- ------------
James T. Bell and John M. Bell 522,369(1) 23.3%
675 Osceola Avenue
Winter Park, Florida 32789
- ---------------
(1)Includes 115,558 shares held by Mr. Bell in his name, 12,500 shares held as
trustee 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, 181,906 shares held by
Mr. Bell and Mrs. Bell as joint tenants, with respect to which Mr. Bell and
Mrs. Bell share voting and investment power.
PROPOSAL 1
ELECTION OF DIRECTORS
The Board of Directors, in a Resolution dated March 7, 1997, determined
that the management and supervision of the Company should be placed in a single
group of directors who will serve as the Board of Directors for both the Company
and its wholly-owned subsidiary, Federal Trust Bank ("Bank"). Having determined
that the direction of the Company should be primarily focused on the Bank's
operations and recognizing that the additional costs associated with having two
separate Boards of Directors could be eliminated, the Board of Directors of the
Company have nominated the Bank's current Board of Directors, comprised of James
V. Suskiewich, Aubrey H. Wright, Jr., George W. Foster, Dr. Samuel C. Certo, and
Kenneth W. Hill, to stand for election at the Annual Meeting. These directors,
upon the affirmative vote of the shareholders, will serve as the Board of
Directors of the Company for a one-year term, or until such time their
successors are duly elected. In order to pass this Resolution, Directors Anne T.
Coonrod and Frances T. West, whose terms expire in 1998, have agreed to step
down from their positions as directors for the remainder of their respective
terms.
27
<PAGE>
The following table sets forth the names of the nominees and a
description of their positions and offices with the Company, if any; a brief
description of their principal occupation and business experience during the
last five years; directorships presently held by them in companies with
registered securities, other than the Company; and certain other information
including their age and number of shares of Company common stock beneficially
owned as of the Record Date. 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.
<TABLE>
<CAPTION>
THE BOARD OF DIRECTORS RECOMMENDS
THAT SHAREHOLDERS VOTE "FOR" THE ELECTION
OF EACH OF THE NOMINEES NAMED BELOW
Information Concerning Nominees
Number of Shares of
Year First
Common Stock Percent
Director's Principal Occupation and Elected a Owned Beneficially at of
Name, Age (1) Other Information (1) Director March 31, 1997 (2) Class
- ------------- ----------------------------- ------------ ----------------------- -------
<S> <C> <C> <C>
James V. Suskiewich/49 Chairman of the Board, 1994 33,844.(3) 1.51
President and CEO of the
Company since July 1996;
President and CEO of the
Bank from January 1993 to
present; and 1988 to 1993,
President, CEO and a
director of First Federal
Savings Bank of the Glades
in Clewiston, Florida.
Resides in Apopka, Florida.
Aubrey H. Wright, Jr./50 Chief Financial Officer of 1995 100 .004
the Company since April 1994
and Chief Financial Officer
of 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; and from 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 Resides in Winter
Park, Florida.(4)
George W. Foster/67 President and CEO of N/A 1,343 .06%
Retired. the Bank from 1990 through
1993; and director of the
Bank since 1980. Resides in
Longwood, Florida.
Dr. Samuel C. Certo/49 Director of the Bank since 1996; N/A -0- --
former Dean and Professor of
Management in the Crummer
Graduate School of Business
at Rollins College in Winter
Park since 1986; serves as a
business consultant and has
published text-books in the
area of management and
strategic management and has
been involved in executive
education for the past 20
years. Resides in Longwood,
Florida.
Kenneth W. Hill/63 Director of the Bank since 1995; N/A -0- --
Retired - Vice President and
Trust Officer of SunBank,
N.A. from 1983 through 1995.
Resides in Orlando, Florida.
28
<PAGE>
Class 2 Directors
Terms Expiring 1998
Number of Shares of
Year First
Common Stock Percent
Director's Principal Occupation and Elected a Owned Beneficially at of
Name, Age (1) Other Information (1)(5) Director March 31, 1997 (3) Class
- ------------- -------------------------------- ------------ ----------------------- -------
Anne T. Coonrod / 52(5)(6) Director of the Company; Vice 1988 22,045(6) .98%
President of the Company
since 1990; former Vice
Presi- dent, Federal Trust
Building Corp- oration and
the Bank; and owner, Front
and Center Gift Shops; owner
of Atlantic Seafood from
1973 to present. Resides in
Amelia Island, Florida.
Francis T. West / 77(5) Director of the Company; former 1989 44,981 2.01%
director of Crestar Bank;
Past Mayor of Martinsville,
Virginia; President,
Franklin Finance Company;
former Chairman & Owner,
WestWindow Corporation; and
Chairman & Director,
Multitrade Group, Inc.
Resides in Martinsville,
Virginia.
All Nominees, Current
Directors and Executive 671,392(7)(8) 29.97%
Officers as a Group
</TABLE>
Board of Directors for 1996:
- ----------------------------
James T. Bell Anne T. Coonrod James V. Suskiewich
Edwin J. Feiler, Jr Francis T. West Aubrey H. Wright, Jr.
- --------------------------
(1) The terms for Directors Edwin J. Feiler, Jr. and James T. Bell expire at
this Annual Meeting and they have not been nominated for re-election.
(2) Except as indicated below, includes all shares of common stock owned by each
director's spouse, or as custodian or trustee for minor children, over which
shares such individuals effectively exercise sole voting and investment
power.
(3) Includes 25,391 shares held as trustee under Federal Trust's ESOP with
respect to which Mr. Suskiewich exercises sole voting and investment power.
(4) Coral Savings and Loan Association was placed under conservatorship by the
Resolution Trust Corporation in January 1991.
(5) The term of directorship was to expire in 1998, but has chosen to step down
as a director effective as of the date of the Annual Meeting.
(6) Includes 18,150 shares held by Ms. Coonrod individually and 3,895 shares
held of record by Century Federal Bank, Trustee for Anne T. Coonrod.
(7) Includes 115,558 shares held by Mr. James Bell in his name, with respect to
which Mr. Bell exercises sole voting and investment power; 212,405 shares
held by Mrs. John Bell in her name, with respect to which Mrs. Bell
exercises sole voting and investment power; and 181,906 shares held by Mr.
Bell and Mrs. Bell as joint tenants, with respect to which Mr. Bell and Mrs.
Bell share voting and investment power. Also includes 12,500 shares held as
trustee under Crummer Graduate School of Business of Rollins College with
respect to which Mr. Bell exercises sole voting and investment power. Based
on their percentage of ownership, Mr. Bell and Mrs. Bell may be considered
"controlling persons" of Federal Trust.
(8) Includes 8,545 shares held be Mr. Feiler individually; 2,441 shares held by
Aleen W. Feiler and Edwin J. Feiler, Jr., Trustee for Stanley W. Feiler
under the will of Edwin J. Feiler; 5,000 held by Edwin J. Feiler, Jr.,
Guardian for Stanley W. Feiler; 4,395 shares held by Feiler Enterprises;
5,000 held by the Feiler Company; and 11,329 held by Metro Developers.
Meetings, Committees and Compensation of Directors
The Board of Directors of the Company conducts its business through meetings
of the full Board, the Compliance Committee, and the Nominating Committee.
During the fiscal year ended December 31, 1996, the Board of Directors met nine
times, the Compliance Committee met twelve times, and the Nominating Committee
met one time. Each director attended 75 percent 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, 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 the
Company by the Office of Thrift Supervision and report to the Board of Directors
its recommendations for continued or improved compliance with these issues.
The Nominating Committee is composed of the Board of Directors. The purpose
of the Nominating Committee is to identify and recommend (1) nominees for
29
<PAGE>
executive officer positions of the Company and its subsidiaries to the Board of
Directors; and (2) 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. At the March 7, 1997, meeting of the Company's Board of Directors, all
but one director determined that it was in the Company's best interest to
nominate the current Board of Directors of the Bank as the Company's directors
slate for the 1997 Annual Meeting.
EXECUTIVE COMPENSATION
Summary Compensation Table
Compensation. The following table sets forth, for the fiscal years ended
December 31, 1996, 1995, and 1994, the total compensation paid to or accrued by
the Chief Executive Officer and each of the four most highly compensated
executive officers of the Company and its subsidiaries, whose aggregate salaries
and bonuses exceeded $100,000 per year.
<TABLE>
<CAPTION>
Annual Compensation(1)
- --------------------------------------------------------------------------------
Name and Principal Bonus Other Annual Restricted Stock;
Position Year Salary(3)(4) Options Compensation(2)(5) Awards(6) Options
- -------- ---- ------------ ------- ------------------ --------- -------
<S> <C> <C> <C> <C>
James T. Bell,(2) 1996 $ 33,033 $ (2) $ 25,290(2) -- --
CEO and President 1995 $151,508 -- $ 27,279 -- --
1994 $182,327 $ 5,563 $ 21,870 -- --
James V. Suskiewich, 1996 $137,409 $ 11,000 $ 14,161 -- --
CEO and President 1995 $118,223 $ 16,000 $ 13,169 -- --
of the Bank 1994 $105,729 $ 5,000 $ 13,822 -- --
</TABLE>
(1) Includes all compensation in the year earned whether received or deferred at
the election of the executive.
(2) Mr. Bell resigned his position as Chairman of the Board, President and Chief
Executive Officer on June 12, 1996. Mr. Bell did not receive a bonus in 1996
and his Annual Compensation for fiscal years ended December 31, 1996, 1995
and 1994, were paid by Federal Trust. Mr. Bell was granted stock options to
acquire 107,674 shares of common stock at $6.40 per share pursuant to the
1993 Stock Option Plan for Directors ("Stock Plan"). The Stock Option's were
canceled when the Board rescinded the Stock Plan on March 7, 1997.
(3) Includes CEO. There were no other executives whose salary and bonus exceeded
$ 100,000 per year.
(4) Mr. Suskiewich was appointed Chairman of the Board, President and Chief
Executive Officer of Federal Trust on July 26, 1996. Mr. Suskiewich's Annual
Compensation is paid by the Bank.
(5) Includes the estimated value of:
<TABLE>
<CAPTION>
James T. Bell 1996 1995 1994
------------- -------- --------- ---------
<S> <C> <C> <C>
Health & Life insurance premiums $ 3,775 $ 5,044 $ 5,152
Life insurance premiums 10,680 5,556 36
Disability 3,214 7,714 7,227
Use of Company automobile 2,000 4,000 4,000
Social/Country Club Dues 5,621 4,965 5,455
--------- ---------- ----------
Total: $25,290 $ 27,279 $ 21,870
======= ======== ========
James V. Suskiewich 1996 1995 1994
------------------- ---------- ---------- --------
Health & Life insurance premiums $ 4,454 $ 3,933 $ 3,926
Use of Company automobile 6,928 6,564 7,263
Social/Country Club Dues 2,779 2,671 2,633
---------- ---------- ----------
Total: $ 14,161 $ 13,169 $ 13,822
======== ======== ========
</TABLE>
(6) 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.
All full-time salaried employees of Federal Trust 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
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after five years of service and there is no vesting prior to that period of
time. Two current employees had vested interest in the ESOP as of December 31,
1996. Mr. Suskiewich is not vested in the ESOP.
The ESOP contributions 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 percent 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 1996, the Company contributed $38,000 to the ESOP.
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 ("Stock Plan"). The
Stock Plan provided that a maximum of 176,968 shares of common stock (the "Stock
Options") would be made available to directors and former directors of the
Company. Stock options were issued on May 6, 1993, to 13 present and former
directors. The Stock Options were for a term of ten years from the date of
grant. The Stock 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 on the date the Stock Option was granted. The options held by an
active director are canceled immediately if such director is removed for
"cause," as defined in the Stock Plan.
On March 7, 1997, the Board of Directors of Federal Trust rescinded the
Stock Plan and the underlying Stock Options were canceled. At the time the Stock
Plan was rescinded, none of the Stock Options had been exercised. The Company
issued no Stock Options or stock appreciation rights as compensation during the
period January 1, 1996, through March 7, 1997.
Director Compensation
Effective July 1, 1996, the Company temporarily suspended the payment
on all Board and Committee fees. Prior to that time, each director of the
Company received a fee of $500 for each meeting of the Board which he or she
attended, 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 or which
he or she attended. 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
Compensation for executive officers is determined by the Board of
Directors of Federal Trust, excluding any director who is also an executive
officer. Compensation for executive officers of the Bank is determined by the
Bank's Board of Directors. The Chief Executive Officer determines the salary
range recommendations for all employees, including executives other than
himself. The Chief Executive Officer presents these to the Board of Directors
and the Board, in turn, reviews and analyzes all information submitted to it.
Thereafter, the respective Boards determine compensation of all executive
officers, including the compensation of the Chief Executive Officer.
Executive Compensation Policies and Program. The Company's executive
compensation program is designed to:
o Attract and retain qualified management for Federal Trust and the Bank;
o Enhance short-term financial goals of Federal Trust and the Bank; and o
Enhance long-term shareholder value.
The Federal Trust and the Bank strive 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 respective Boards of Directors determine the level of base
salary and any incentive bonus plan for the Chief Executive Officer and certain
senior executive officers and a range for other executive officers based upon
competitive norms, derived from annual surveys published by several independent
31
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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 Federal Trust's and the Bank's objectives
and specific job description objectives, as well as the overall performance of
the respective companies. The executive officer's salary for Federal Trust was
reduced in fiscal year 1996 as compared to 1995 and 1994, consistent with
efforts to reduce budgeted expenses and overhead.
Bonus awards are made based upon the attainment of net income targets for
Federal Trust and the Bank, 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 percent of his
or her base salary. In fiscal year 1996, however, no bonuses were awarded by
Federal Trust, primarily because the Company failed to attain its performance
goals. Bonuses were paid, however, to executive officers of the Bank based upon
the Bank's overall improvement financially, from an operations standpoint and
regulatorily, and the performance of the executive officers.
Compensation of the Chief Executive Officer. Up until June 30, 1996, the Chief
Executive Officer and President of Federal Trust was compensated by Federal
Trust. On July 26, 1996, Mr. James V. Suskiewich was appointed President and
Chief Executive Officer of Federal Trust. Mr. Suskiewich's Annual Compensation
is paid by the Bank. Federal Trust reimburses the Bank for the time that Mr.
Suskiewich spends on Federal Trust matters.
The employment contract of Mr. James T. Bell, the former Chief Executive
Officer and President of Federal Trust, was assigned to Federal Trust Properties
Corporation ("FTPC") in June 1996, in connection with the sale of FTPC to an
unaffiliated third party on July 1, 1996.
Employment Contracts
Federal Trust and the Bank have jointly entered into employment
agreements with two of their executive officers, James V. Suskiewich, President
and Chief Executive Officer, and Aubrey H. Wright, Chief Financial Officer. The
employment agreements became effective September 1, 1995. The employment
agreements with Messrs. Suskiewich and Wright are substantially the same except
as noted herein.
Each of the individuals is entitled to receive a base salary, plus
reimbursement of reasonable business expenses. Mr. Suskiewich is entitled to a
discretionary performance bonus payable annually for the duration of the
Agreement. For the year ended December 31, 1996, Mr. Suskiewich received a
performance bonus of $20,000. Mr. Wright is also considered for any annual
performance bonus program developed by the Bank or the Corporation. For the year
ended December 31, 1996, Mr. Wright received a performance bonus of $7,500. The
base salary and any bonus is paid by the Bank. Messrs. Suskiewich and Wright may
participate in all employee benefits, stock option plans, pension plans,
insurance plans and other fringe benefits commensurate with his position. On or
before September 15 each, the Board of Directors shall review the employment
agreements and the employees' performance and vote whether to extend the term of
the employment agreements for an additional year. The decision to extend these
agreements is within the sole discretion of the Board of Directors.
The employment agreements provide for termination by the Bank for
"cause," as defined in the employment agreement. In the event the Bank chooses
to terminate Messrs. Suskiewich and Wright's employment for reasons other than
for cause, they (or in the event of death, their respective beneficiaries) would
be entitled to a severance payment equal to the total annual compensation for
the remainder of the term of the employment agreement. In the event of a change
of control of Federal Trust 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 Federal Trust or the Bank is acquired. If he
accepts employment with the acquirer, he will be entitled to 50 percent of the
special incentive bonus. The special incentive bonus is payable by either
Federal Trust or the Bank. In the event of a change of control of Federal Trust
or the Bank, Mr. Wright will be entitled to a special incentive bonus equal to
his annual salary then in effect, times the price/book value ratio at which the
32
<PAGE>
Bank or the Corporation is acquired. If he accepts employment with the acquirer
or the Bank, he shall receive a special incentive bonus equal to 50 percent of
his annual salary then in effect, times the price/book value ratio at which the
Bank or the Corporation is acquired.
The Agreement permits Messrs. Suskiewich and Wright to terminate their
employment voluntarily. In the event of voluntary termination, except as
previously described herein, all rights and benefits under the contracts shall
immediately terminate upon the effective dates of termination.
TRANSACTIONS WITH MANAGEMENT
Indebtedness of Management
In 1994 the Board of Directors of Federal Trust and the Bank amended
their respective 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. Any credit extended by the Bank to directors, executive officers and, to
the extent otherwise permitted, principal shareholders, or any affiliates
thereof must be: (i) on substantially the same terms, including interest rates
and collateral, as those prevailing at the time for comparable transactions by
the Bank with non-affiliated parties; and (ii) not involve more than the normal
risk of repayment or present other unfavorable features.
As of December 31, 1996, neither Federal Trust nor the Bank had any loans
outstanding to directors or executive officers. The Bank, however, did have
$737,472 in commercial loans to Morrone, Smoker and Grill, Inc., whose President
Jack L. Morrone is the brother-in-law of James T. Bell, the former Chairman,
President and Chief Executive Officer of Federal Trust. Mr. Morrone is
considered to be an "affiliate," as that term is defined by SEC regulations. The
largest outstanding balance during 1996 was $737,128. As of December 31, 1996,
the balance on the loan was $478,128.
Transactions With Certain Related Persons
Effective January 1, 1990, John Martin Bell, a major shareholder and then
director of Federal Trust, and the wife of James T. Bell, the then Chairman of
the Board of Federal Trust, as lessor, and Federal Trust, as lessee, entered
into a triple net lease ("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 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 Federal
Trust increased to 11,393 square feet. On November 11, 1991, Federal Trust and
Mrs. Bell terminated the Lease and executed a new triple net lease (the "New
Lease"), pursuant to which Federal Trust 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 consecutive periods of ten years each
unless Federal Trust 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 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 percent or more than 6 percent. Federal Trust believes that the
terms of this transaction are no less favorable to Federal Trust than
transactions obtainable from unaffiliated parties.
PROPOSAL 2
RATIFY SELECTION OF KPMG PEAT MARWICK
AS INDEPENDENT AUDITORS FOR THE
FISCAL YEAR ENDING DECEMBER 31, 1997.
The Board of Directors has appointed the KPMG Peat Marwick as Federal
Trust's independent accountants to audit the accounts of Federal Trust and the
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Bank for the 1997 fiscal year. KPMG Peat Marwick has served as Federal Trust's
auditors since the fiscal years ending December 31, 1990, and during this period
has been engaged by Federal Trust 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 shareholders' questions regarding the Company's
financial statements. The Board of Directors recommends that the shareholders
vote for approval of the appointment of KPMG Peat Marwick as the 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.
PROPOSAL 3
ADJOURNMENT OF ANNUAL MEETING.
Federal Trust seeks your approval to adjourn the Annual Meeting in the
event that the number of proxies sufficient to approve Proposals 1 and 2 are not
received by May 22, 1997. In order to permit proxies that have been received by
Federal Trust at the time of the Annual Meeting to be voted, if necessary, for
the adjournment, Federal Trust is submitting the question of adjournment to
permit further solicitation of proxies to approve Proposals 1 and 2 to the
shareholders as a separate matter for your consideration. If it is necessary to
adjourn the Annual Meeting and the adjournment is for a period of less than 30
days, no notice of the time and place of the adjourned meeting need be given the
shareholders, other than an announcement made at the Annual Meeting.
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 1996 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, 1996, which is being mailed to all shareholders along with this
Proxy Statement. The financial statements are incorporated herein by reference.
SHAREHOLDERS' PROPOSALS FOR 1998 ANNUAL MEETING
Proposals of shareholders intended to be presented at the 1998 Annual
Meeting should be submitted by certified mail, return receipt requested, and
must be received by Federal Trust at its corporate office located at 1211 Orange
Avenue, Winter Park, Florida 32789, on or before November 30, 1997, to be
eligible for inclusion in next year'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 1997
Annual Meeting, any shareholder who wishes to have a proposal included in the
Proxy Statement for that meeting must deliver a copy of the proposal to Federal
Trust a reasonable time before the proxy solicitation is made. Federal Trust
reserves the right to decline to include in the Proxy Statement any
shareholder's proposal which does not comply with the rules of the SEC for
inclusion therein.
FEDERAL TRUST CORPORATION
WINTER PARK, FLORIDA
April 18, 1997
34
<PAGE>
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
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PAGES 2 AND 3 OF THE COMPANY'S FORM 10-Q FOR THE YEAR TO DATE.
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