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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Three Months Ended: Commission File Number:
- --------------------------- -----------------------
June 30, 1998 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 4,941,547
- -------------------------------------- ---------------------------
(class) Outstanding at June 30,1998
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FEDERAL TRUST CORPORATION AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Page
Consolidated Condensed Balance Sheets (unaudited)
June 30, 1998 and December 31, 1997........................... 3
Consolidated Condensed Statements of Operations for the
Three and Six months ended June 30, 1998 and 1997 (unaudited). 4
Consolidated Condensed Statements of Cash Flows for the
Six months ended June 30, 1998 and 1997 (unaudited)........... 5
Notes to Consolidated Condensed Financial Statements (unaudited)...6-12
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................ 13-20
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders..... 21
Signatures........................................................... 22
2
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Balance Sheets
(Unaudited)
June 30, 1998 December 31, 1997
------------- -----------------
Assets
Cash $ 556,212 $ 446,134
Interest bearing deposits 3,716,351 3,555,916
Investment securities available for sale -- 3,301,844
Investment securities held to maturity 6,417,227 6,368,111
Loans receivable, net (net of allowance for loan losses of
$1,130,200 in 1998 and $1,190,875 in 1997) 133,212,033 121,908,816
Loans held for sale (Market Value $217,800) 217,800 --
Accrued interest receivable - Loans 901,989 846,396
Accrued interest receivable - Securities 112,447 157,155
Notes receivable 75,000 75,000
Federal Home Loan Bank of Atlanta stock, at cost 1,427,500 1,427,500
Real estate owned, net 1,066,089 1,389,900
Property and equipment, net 808,977 814,325
Prepaid expenses and other assets 310,149 417,015
Executive supplemental income plan-cash surrender
value life insurance policies 2,440,224 1,071,443
Deferred income taxes 671,676 803,977
------------- -------------
Total $ 151,933,674 $ 142,583,532
============= =============
Liabilities and Stockholders' Equity
Deposit accounts $ 110,068,924 $ 104,890,163
Official checks 1,170,182 1,208,607
Federal Home Loan Bank advances 26,050,000 23,000,000
Advance payments for taxes and insurance 1,198,574 336,406
Accrued expenses and other liabilities 607,743 577,694
------------- -------------
Total Liabilities $ 139,095,423 $ 130,012,870
------------- -------------
Stockholders' equity
Common stock, $.01 par value, 15,000,000 shares
authorized 4,941,547 shares
issued and outstanding at June 30,1998
and December 31, 1997 49,416 49,416
Additional paid-in capital 15,861,178 15,857,532
Accumulated deficit (2,708,867) (2,912,142)
Accumulated other comprehensive income (363,476) (424,144)
------------- -------------
Total Stockholders' Equity $ 12,838,251 $ 12,570,662
------------- -------------
Total Liabilities and Stockholders' Equity $ 151,933,674 $ 142,583,532
============= =============
See accompanying Notes to Consolidated Condensed Financial Statements
3
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Consolidated Condensed Statements of Operations
For Three and Six Months Ended June 30, 1998 and 1997
(Unaudited)
Three Months Six Months
Ended June 30, Ended June 30,
-------------- --------------
1998 1997 1998 1997
---- ---- ---- ----
Interest income:
Loans $2,467,994 $2,280,989 $4,869,925 $4,616,031
Securities 89,742 165,999 171,441 333,449
Interest-bearing deposits and other 70,399 47,759 141,653 95,326
---------- ---------- ---------- ----------
Total interest income 2,628,135 2,494,747 5,183,019 5,044,806
---------- ---------- ---------- ----------
Interest expense:
Deposit accounts 1,473,633 1,424,036 2,899,830 2,808,821
Federal Home Loan Bank advances & other
borrowings 370,128 376,422 707,896 715,163
---------- ---------- ---------- ----------
Total interest expense 1,843,761 1,800,458 3,607,726 3,523,984
---------- ---------- ---------- ----------
Net interest income 784,374 694,289 1,575,293 1,520,822
Provision for loan losses 20,648 40,748 50,648 37,748
---------- ---------- ---------- ----------
Net interest income after provision 763,726 653,541 1,524,645 1,483,074
---------- ---------- ---------- ----------
Other income:
Fees and service charges 39,387 25,095 72,923 50,930
Rents 5,698 56,160 5,698 69,833
Gain on sale of assets 159,370 18,365 169,630 68,184
Other miscellaneous 72,985 44,422 153,556 59,963
---------- ---------- ---------- ----------
Total other income 277,440 144,042 401,807 248,910
---------- ---------- ---------- ----------
Other expenses:
Employee compensation & benefits 402,288 334,384 750,184 660,251
Occupancy and equipment 143,026 131,215 280,996 263,028
Data processing expense 24,469 23,698 47,494 44,529
Professional fees 53,266 29,413 93,757 109,077
FDIC Insurance 80,644 62,354 161,268 124,306
Loss on sale of investment securities 9,945 -- 9,945 --
Other miscellaneous 141,004 150,869 250,256 287,954
---------- ---------- ---------- ----------
Total other expense 854,642 731,933 1,593,900 1,489,145
---------- ---------- ---------- ----------
Net income before income tax 186,524 65,650 332,552 242,839
Income tax (benefit) 74,812 40,500 129,277 116,800
---------- ---------- ---------- ----------
Net income $ 111,712 $ 25,150 $ 203,275 $ 126,039
========== ========== ========== ----------
Per share amounts:
Earnings per share $ 0.02 $ 0.01 $ 0.04 $ 0.06
Diluted earnings per share $ 0.02 $ 0.01 $ 0.04 $ 0.06
Weighted average number of shares outstanding 4,941,547 2,256,505 4,941,547 2,256,505
4
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Consolidated Condensed Statements of Cash Flows
For the Six Months Ended June 30, 1998 and 1997
(Unaudited)
1998 1997
---- ----
Cash flows from operating activities:
Net income (loss) $ 203,275 $ 126,039
Adjustments to reconcile net income to
net cash flows from operations:
Depreciation & amortization of property & equipment 66,906 80,556
Amort. (net) of premiums, fees & disc. on loans & securities 247,653 127,351
Provision for allowance on real estate owned 9,352 72,252
Provision for loan losses 50,648 37,748
Gain on sale of assets (159,685) (68,184)
Deferred income taxes 132,301 115,599
Executive supplemental income plan (1,368,781) (1,051,790)
Cash provided by (used for) changes in:
Accrued interest receivable (10,885) 28,213
Prepaid expenses & other assets 106,866 (85,652)
Official checks (38,425) 38,993
Accrued expenses & other liabilities 30,049 (30,745)
------------ ------------
Net cash provided by (used in) operating activities (730,726) (609,620)
------------ ------------
Cash flows from investing activities:
Acquisition of office properties and equipment (61,558) (18,997)
Purchase of Federal Home Loan Bank of Atlanta stock -- (174,300)
Proceeds collected from loan sales 3,112,210 705,564
Addition to real estate owned -- (22,695)
Reimbursement of real estate owned costs 16,668 --
Proceeds from sale of real estate owned 509,014 437,787
Proceeds from sale of securities available for sale 3,340,055 4,880
Principal collected on loans 18,552,719 8,854,986
Loans originated or purchased (33,562,444) (11,591,612)
------------ ------------
Net cash provided by (used in) investing activities (8,093,336) (1,804,387)
------------ ------------
Cash flows from financing activities:
Accretion of stock option expense 3,646 --
Increase (decrease) in deposits, net 5,178,761 775,477
Increase (decrease) in Federal Home Loan Bank advances 3,050,000 (1,300,000)
Net increase in advance payments by borrowers for taxes & insurance 862,168 702,375
------------ ------------
Net cash provided by financing activities 9,094,575 177,852
------------ ------------
(Decrease) increase in cash and cash equivalents 270,513 (2,236,155)
Cash and cash equivalents at beginning of period 4,002,050 5,465,762
------------ ------------
Cash and cash equivalents at end of period $ 4,272,563 $ 3,229,607
============ ============
See accompanying Notes to Consolidated Condensed Financial Statements.
5
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (unaudited)
1. General
Federal Trust Corporation ("Federal Trust" or "Holding Company") is a unitary
savings and loan holding company for Federal Trust Bank ("Bank") a
federally-chartered stock savings bank. Federal Trust and the Bank are
collectively referred to as the "Company". The Company is headquartered in
Winter Park, Florida. Federal Trust 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 Federal Trust 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 advances from the Federal Home Loan Bank of
Atlanta ("FHLB") to originate 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 consumer loans, and also fund bulk
purchases of one-to-four family residential mortgage loans
The consolidated condensed balance sheets as of June 30, 1998 and December 31,
1997, and the consolidated condensed statements of operations for the three and
six month periods ended June 30, 1998 and 1997, and the cash flows for the six
month periods ended June 30, 1998 and 1997, include the accounts and operations
of the Federal Trust 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, 1998, the results of operations for the three and six month
periods ended June 30, 1998 and 1997, and cash flows for the six month periods
ended June 30, 1998 and 1997. The results of operations for the three and six
month periods ended June 30, 1998 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, 1997.
2. Summary of Significant Accounting Policies
Comprehensive Income:
In June 1997, the Financial Accounting Standards Board established Statement of
Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income."
This Statement establishes standards for reporting and display of comprehensive
income and its components in a full set of financial statements. This Statement
requires that an enterprise classify items or other comprehensive income by
nature in a financial statement, and display the accumulated balance of other
comprehensive income separately from retained earnings and additional paid-in
capital in the equity section of a balance sheet. The Company adopted this
Statement effective January 1, 1998. The Company's other comprehensive income is
the unrealized gain/(loss) on investment securities available for sale. Total
comprehensive income for the three and six months periods ended June 30, 1998
was $143,863 and $264,943, respectively, as compared to the three and six month
periods ended June 30, 1997 of $90,632 and $252,926, respectively.
3. Loans
The Company's policy is to classify all loans 90 days or more past due as
non-performing and not accrue interest on these loans and reverse 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.
(continued)
6
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (unaudited)
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, 1998, impaired loans amounted to $2.1 million as compared to $2.3
million at June 30, 1997. Included in the allowance for loan losses is $312
thousand related to the impaired loans as compared to $454 thousand at June 30,
1997. The Company 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 1998, the average recorded investment in impaired
loans was $2.1 million and $8,300 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
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,
-------------- --------------
1998 1997 1998 1997
---- ---- ---- ----
Balance at beginning of period $ 1,146,160 1,192,734 1,110,521 1,533,003
Provision for loan losses 20,648 40,748 50,648 37,748
Less Charge-offs (39,458) (47,354) (39,458) (387,689)
Plus recoveries 2,850 4,747 8,489 7,813
------------- ------------- ------------- -------------
Balance at end of period $ 1,130,200 1,190,875 1,130,200 1,190,875
============= ============= ============= =============
Loans Outstanding $ 133,429,833 112,073,050 133,429,833 112,073,050
Ratio of charge-offs to Loans Outstanding .03% .04% .03% .35%
Ratio of allowance to Loans Outstanding .85% 1.06% .85% 1.06%
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, 1998, management made a provision of $20,648 based on
its evaluation of the loan portfolio, as compared to the provision of $40,748
made in the quarter ended June 30, 1997. The overall provision for loans and
real estate owned was $30,000 in the second quarter of 1998 and $60,000 for the
six months ended June 30, 1998, with $9,352 allocated to real estate owned.
Although the amount of loans outstanding increased, the level of the allowance
for losses decreased slightly, primarily as a result of the improving quality of
the loans in the portfolio and the change in the composition of the portfolio to
a higher percentage of residential single family home loans.
(continued)
7
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
Six Months Ended June 30,
1998 1997
---- ----
Cash paid during the period for:
Interest expense $ 1,718,731 1,718,697
Income taxes $ -- 10,000
Supplemental disclosure of non-cash transactions:
Real estate acquired in settlement of loans $ 211,223 2,350,000
Market Value adjustment - investment securities available for sale:
Market value adjustment - investments $ -- (236,625)
Deferred income tax asset $ -- (88,735)
----------- -----------
Unrealized loss on investment securities
available for sale, net $ -- (147,890)
Unrealized loss on investment securities transferred
from available for sale to held to maturity $ (582,773) (678,523)
Deferred income tax asset $ (219,297) (254,433)
----------- -----------
Unrealized loss on investment securities transferred
from available for sale to held to maturity $ (363,476) (424,090)
=========== ===========
6. Real Estate Owned, Net
The following is an analysis of the activity in real estate acquired through
foreclosure for the periods ended:
Three Months Six Months
Ended June 30, Ended June 30,
---------- --- --------------
1998 1997 1998 1997
---- ---- ---- ----
Balance at beginning of period $ 1,532,741 $ 3,612,392 $ 1,389,900 $ 1,508,166
Acquired through foreclosure 51,714 -- 211,223 2,350,000
Add: Capitalized costs (69,353) 32,158 (86,021) 22,695
Less: Sale of real estate (439,661) (176,113) (439,661) (379,424)
Less: Chargeoffs (9,352) (39,252) (9,352) (72,252)
----------- ----------- ----------- -----------
Balance at end of period $ 1,066,089 $ 3,429,185 $ 1,066,089 $ 3,429,185
=========== =========== =========== ===========
7. Investment Securities
At June 30, 1998
----------------
Book Value Market Value
---------- ------------
Held to maturity:
FHLB Floating Rate Note, 2.575% due 7/30/03 $6,417,227 6,520,938
========== ==========
Available for sale:
None -- --
========== ----------
(continued)
8
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (unaudited)
The Company's investment in obligations of U.S. government agencies consists of
dual indexed bonds issued by the Federal Home Loan Bank. At June 30, 1998, the
bond had a market value of $6,520,938 and gross unrealized pretax losses of
$479,062. The bond has a par value of $7,000,000 and pays interest based on the
difference between two indices. The one bond held at June 30, 1998, pays
interest at the 10-year constant maturity treasury ("CMT") rate less six month
LIBOR rate plus a contractual amount of 4.0%. During the quarter ended June 30,
1998, the Bank sold its only remaining available for sale bond with a par value
of $3,350,000 for a pre-tax loss of $9,945.
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, 1998:
Maturity Date Rate Amount Type
- ------------- ---- ------ ----
09/15/98 6.12% $ 5,000,000 Fixed rate
10/16/98 5.88% 5,000,000 Fixed rate
12/02/98 6.35% 11,050,000 Variable rate
03/05/01 5.96% 5,000,000 Fixed rate
----------- -------------
Total 6.14% $26,050,000
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
--------- ---- ------
4/30/98 5.93% $ 25,550,000
5/31/98 5.96% 24,550,000
6/30/98 6.14% 26,050,000
The maximum amount of borrowings outstanding at any month end during the three
period ended June 30, 1998, was $26,050,000. During the three and six month
period ended June 30, 1998, average advances outstanding totaled $24.8 and $23.8
million at an average rates of 5.99% and 5.99%, respectively.
Advances from the FHLB are collateralized by a blanket pledge of eligible assets
in an amount required to be maintained so that the estimated value of such
eligible assets exceeds at all times, approximately133% of the outstanding
advances, and a pledge of all FHLB stock owned by the Bank.
9. Supervision
Federal Trust and the Bank are subject to extensive regulation, supervision and
examination by the OTS, their primary federal regulator, by the FDIC with regard
to the insurance of deposit accounts and, to a lesser extent, the Federal
Reserve. Such regulation and supervision establishes a comprehensive framework
of activities in which a savings and loan holding company and its financial
(continued)
9
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (unaudited)
institution subsidiary may engage and is intended primarily for the protection
of the Savings Association Insurance Fund administered by the FDIC and
depositors.
On October 3, 1994, Federal Trust and the Bank voluntarily entered into
individual Cease and Desist Orders (collectively, the "Orders") with the OTS.
The Bank Order superseded a prior Supervisory Agreement with the Bank. Under the
Holding Company's Order, Federal Trust (i) could not request dividends from the
Bank without written permission from the OTS; (ii) was required to reimburse the
Bank for the Holding Company's expenses; (iii) had to develop a Management
Services Agreement with the Bank which provides for the reimbursement for
employees who work for both the Bank and the Holding Company; (iv) had to
appoint a Compliance Committee to report to the Board of Directors as to the
Holding Company's compliance with the Order; and (v) was required to report to
the OTS on a quarterly basis the Holding Company's compliance with the Order.
The Bank's initial Order required the Board of Directors to: (i) develop, adopt
and adhere to policies and procedures to strengthen the Bank's underwriting,
administration, collection and foreclosure efforts with regard to loans; (ii)
review and revise underwriting policies and procedures to comply with regulatory
requirements; (iii) record minutes of the loan committee and grant loans only on
procedures which comply with regulatory requirements; (iv) record minutes of the
loan committee and grant loans only on terms approved by the loan committee; (v)
develop and implement a written plan to collect, strengthen and reduce the risk
of loss for all real estate owned and for certain loans at risk and secured by
real estate; (vi) comply with policies and procedures requiring written
inspection of development and construction loans; (vii) pay no more than market
rate, determined by a rent study approved by the OTS for lease of the Bank's
offices; (viii) make no payment of taxes owned by a person affiliated with the
Bank; (ix) seek reimbursement for work performed for the Holding Company by Bank
employees; (x) develop and submit for approval a three year business plan; (xi)
comply with loans to one borrower policy; (xii) make no capital distribution to
the Holding Company without the consent of the OTS; (xiii) appoint a compliance
committee; and (xiv) refrain from purchasing additional dual indexed bonds.
The respective Compliance Committees met monthly to review, in detail, the terms
of the Orders to ensure that the Holding Company and the Bank are in compliance
with their Orders.
Following the completion of the Rights and Community Offering in December 1997,
the Company formally requested that the OTS remove the growth restrictions which
it had been operating under since the entry of the Bank's Order. In January
1998, management followed up with a request that the OTS rescind the Holding
Company Order and the Bank's Order. The OTS officially rescinded the growth
restrictions on March 13, 1998, and the respective Orders were rescinded on June
1, 1998.
10. Branching
On June 23, 1998, the Bank filed an application with the OTS for permission to
open a branch office in Sanford, Florida. Sanford is located in Seminole County.
The proposed branch office is approximately 15 miles northeast of the Bank's
main office in Winter Park, Florida. On August 7, 1998, the Bank received
approval from OTS to open the branch and it is anticipated that the branch will
open in the fourth quarter of this year.
11. Stock Options
Stock Options for Stock Sales. In connection with the 1993 Private Placement
Offering and the 1990 Public Offering, the Holding Company issued stock options
10
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (unaudited)
to acquire 58,453 shares of common stock to certain sales representatives for
their commitment to sell common stock in the respective offerings. The options
have a strike price of $5.63 per share and will expire on October 26, 1999. At
September 30, 1997, none of the stock options 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.
1998 Key Employee Incentive Stock Compensation Program. On July 30, 1998, the
Board of Directors of Federal Trust adopted the 1998 Key Employee Stock
Compensation Program ("Program") for the benefit of officer sand other key
employees of the Company. The Program comprises four parts: an Incentive Stock
Option Plan, a Compensatory Stock Option Plan, a Stock Appreciation Rights Plan,
and a Performance Plan. The Program provides for a maximum of 325,000 shares of
authorized common stock to be reserved for future issuance pursuant to stock
options granted under one of the four enumerated parts of the Program.
The Program was subject to approval by the shareholders, which was obtained at
the 1998 Annual Meeting of Shareholders. The exercise price of each option is
$4.00 per share, the fair market value of the common stock on January 30, 1998
(the date of grant), based upon the "bid price" on that date. The stock options
granted to the following officers and key employees are "Incentive Stock
Options." For financial reporting purposes, there will be no change to the
income of the Company in connection with the grant or exercise of the stock
option.
Number of Shares
Subject to
Name Title Options Granted
---- ----- ---------------
James V. Suskiewich President/CEO 120,000
Aubrey H. Wright Senior Vice President/CFO 70,000
Louis E. Laubscher Vice President/CLO 30,000
Jennifer B. Brodnax Vice President/Operations 15,000
Kevin L. Kranz Vice President/Loan Servicing 15,000
Thomas J. Punzak Treasurer 15,000
------
Total 265,000
=======
The terms of the Program may be amended by the Program Administrators (non
employee directors) except that no amendment may increase the maximum number of
shares included in the Program, change the exercise price of incentive stock
options, increase the maximum term established for any stock option, stock
appreciation right or share award, or permit any grant to a person who is not a
full-time employee of the Company.
1998 Directors Stock Option Plan. At the 1998 Annual Meeting of Shareholders,
the shareholders approved the 1998 Directors Stock Option Plan ("Directors'
Plan"). Only non-employee directors are eligible to participate in the
Directors' Plan. Each member of the Board of current Directors was granted a
single non-statutory option to purchase 25,000 shares of common stock at $4.00,
the fair market price on the effective date of the Directors' Plan (January 30,
1998, the date the stock options were granted, subject to shareholder approval).
New Directors elected or appointed by the Board of Directors of the Company or
any wholly-owned subsidiary of the Company may be granted stock options to
purchase shares of common stock, as determined by the Board of Directors in its
sole discretion.
The per share exercise price at which the shares of common stock may be
purchased upon exercise of a granted stock option will be equal to the fair
market value of a share of common stock as of the date of grant.
11
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (unaudited)
For purposes of this Plan, the "fair market value" of a share of common stock
shall be the closing price of a share of common stock on the date in question
(or, if such day is not a trading day on the U.S. markets, on the nearest
preceding trading day), as reported with respect to the principal market (or the
composite of the markets, if more than one), or national quotation system in
which such shares are then traded, or if no such closing prices are reported,
the mean between the closing high bid and low asked prices of a share of common
stock on the principal market or national quotation system then in use, or if no
such quotations are available, the price furnished by a professional securities
dealer making a market in such shares selected by the Board.
A stock option may be exercised at any time on or after six months after the
date of grant until ten years after the date of grant. Unless terminated, this
Plan shall remain in effect for a period of ten years ending on the tenth
anniversary of the effective date.
12. Year 2000 Considerations
As in the case for all businesses that rely on computers for their business and
record keeping, the concern is whether the Company's software and hardware
systems will be able to "read" the Year 2000. The Company has formulated a Year
2000 Action Plan ("Year 2000 Plan") which has been approved by the Board of
Directors. Management believes that all affected systems have been identified
and steps are being taken to ensure that all necessary changes are accomplished
by July 31, 1999 An OTS off-site examination was performed on the Year 2000 Plan
in September 1997 requiring certain changes to be made to the Plan. The Board of
Directors receives quarterly reports regarding the progress made on the
implementation of the Year 2000 Plan. Management has concluded that the
additional costs for Year 2000 compliance will be approximately $50,000, in
addition to already budgeted purchases of new equipment and software.
(The remainder of this page left intentionally blank)
12
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operation
Overview
When used in this document, or in the documents incorporated by reference
herein, the words "anticipate", "believe", "estimate", "may", "intend" and
"expect" and similar expressions identify forward-looking statements. Actual
results, performance or achievements could differ materially from those
contemplated, expressed or implied by the forward-looking statements contained
herein. It should be recognized that the factors that could cause future results
to vary materially from current expectations include, but are not limited to,
changes in interest rates, competition by other financial institutions,
legislation and regulatory changes, and changes in the economy generally and in
business conditions in the market in which the Bank operates.
The Company's net earnings were positively affected by the increase in its net
interest income during the second quarter of 1998. As a result of the intense
competition in the Orlando market the Company has had to pay higher rates on
deposits to keep its existing customers and attract new money in its effort to
increase assets. As a result, the increase in the Company's net interest income
has been negatively affected. The Company's GAP position has improved during
1998, which will cushion the impact on earnings if interest rates rise in the
future. Should interest rates increase ,earnings would be adversely affected in
the short run since the adjustments on the ARM loans lag the movement in
interest rates by approximately two months.
Total interest income increased in the second quarter, although the increase was
offset partially by an increase in the writeoff of premiums on purchased loans.
The decline in long term interest rates during 1998 has resulted in a lower
level of mortgage loan rates which has resulted in an increase in the number of
loans prepaying as individuals refinance to take advantage of the lower rates.
This has increased the write-off of the premiums that the Company has paid in
the past when purchasing loans, which results in a lower yield on the loan
portfolio. As long as this continues earnings will be adversely affected to some
degree.
The Company has been able to decrease its additions to the loss reserves in 1997
and 1998 due to a lower level of non-performing loans. Although management
believes that the level of non-performing assets should decease somewhat in
future periods, unforeseen economic conditions and other circumstances beyond
the Company's control could result in material additions to the loss reserves in
future periods if the level of non-performing assets increases. The Company does
anticipate additions to the loss reserves in future periods as part of the
normal course of business, since the Company's assets, consisting primarily of
loans, are continually evaluated and the loss allowances are adjusted to reflect
the losses in the portfolio on an ongoing basis. During the quarter ended June
30, 1998, the Company did make an addition to its loan loss reserves based on
its evaluation of the loan portfolio.
During the quarter ended March 31, 1997, the Company 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 Statement of Accounting Standards ("SFAS")
No.66, which requires 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.
The Company is projecting an operating profit for the fiscal year 1998, due to
the decrease in non-performing loans and the additional capital raised during
the fourth quarter of 1997, which will provide the Company the capital resources
it needs to grow now that the regulatory growth restriction has been removed.
(continued)
13
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operation
However, should interest rates rise during the remainder of the year or
non-performing assets increase due to unforeseen circumstances, the Company
earnings could be adversely affected.
General
Federal Trust Corporation ("Federal Trust" or "Holding Company"), is a unitary
savings and loan holding company for Federal Trust Bank ("Bank"). Federal Trust
and the Bank are collectively referred to as the "Company" 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.
In connection with the management restructuring that was completed in May of
1997, the Company's expenses have been reduced to minimal levels. 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.
Asset/Liability Management
The operating results of the Company depend primarily on its 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 Company's interest
rate spread is affected by regulatory, economic and competitive factors that
influence interest rates, loan demand and deposit flows. In addition, 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 Company's one year GAP position at March 31, 1998, the most recent report
available, was less than 1%, as compared to -14% at March 31, 1997. The primary
reason for the decrease in the one year GAP has been the ability of the Company
to extend the maturities of its liabilities and the sale of a portion of the
dual- indexed bonds in 1997. In addition, the Company sold fixed rate loans
during 1997 which it replaced with adjustable rate loans as part of its efforts
to continue improving its GAP position. As interest rates rose slightly in 1997,
the Company's net interest spread decreased only slightly as a result of the
increased amount of adjustable rate loans in the portfolio and the decrease in
non-performing loans. As a general rule, the Company sells the fixed rate
mortgages it originates in order to remove the interest rate risk inherent in
these loans should interest rates increase. The Company's net interest spread,
however, has been adversely affected in the first six months of 1998 as a result
of the increase in prepayments on mortgage loans resulting from lower mortgage
rates which has increased the amount of the write-off of the premiums paid for
the loans, which results in a lower yield on the loan portfolio
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 Company
has an Interest Rate Risk Management Policy, which is reviewed and approved
annually by the Board of Directors. The policy provides for: (i) 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
(continued)
14
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operation
(+100, +200, +300, +400 and -100, -200, -300, -400 basis points); (iii) an
Asset/Liability Management Committee ("ALCO"); and (iv) quarterly reporting to
the Board of Directors. The ALCO monitors the Company's interest rate risk
position and manages the asset and liability mix in order to better match the
maturities and repricing terms of the 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"); and (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 Company 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.
The following table sets forth information about rates and yields:
Yields and Rates at
June 30, December 31, June 30,
1998 1997 1997
---- ---- ----
Yields on:
Loan portfolio 7.73% 8.20% 8.15%
Other interest-earning assets 4.30% 4.69% 4.56%
---- ---- ----
Interest-earning assets 7.38% 7.71% 7.64%
Cost of:
Deposits 5.41% 5.49% 5.37%
FHLB advances and other interest-bearing liabilities 5.94% 6.04% 6.00%
---- ---- ----
Interest-bearing liabilities 5.50% 5.59% 5.49%
Interest rate spread 1.88% 2.12% 2.15%
==== ==== ====
Liquidity and Capital Resources
General
Like other financial institutions, the Company must ensure that sufficient funds
are available to meet deposit withdrawals, loan commitments, investment needs
and expenses. Control of the Company's cash flow requires the anticipation of
deposit flows and loan payments. The Company's primary sources of funds are
deposit accounts, FHLB advances, and principal and interest payments on loans.
The Company requires funds in the short-term to finance ongoing operating
expenses, pay liquidating deposits, purchase temporary investments in securities
and invest in loans. Short-term requirements are funded through short-term
advances from the FHLB, the sale of temporary investments, deposit growth and
loan principal payments. The Company requires funds in the long-term to invest
in loans for its portfolio, purchase fixed assets and provide for the
liquidation of deposits maturing in the future. The 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.
In June, the Company, in response to its request, was advised by the FHLB that
its maximum amount of allowable borrowings had been increased from 20% to 25% of
(continued)
15
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operation
assets and it would no longer be required to pledge specific collateral to the
FHLB, but would instead be permitted to use the blanket floating lien on
eligible assets.
During the six month period ended June 30, 1998, the Company used funds
primarily from principal collected on loans, $18,552,719; proceeds from loan
sales, $3,112,210; proceeds from the sale of available for sale securities,
$3,340,055; increases in net deposits, $5,178,761; an increase in FHLB advances,
$3,050,000; and advance payments by borrowers, $862,168; to fund the origination
and purchase of loans, $33,562,444. As of June 30, 1998, the Company had
outstanding FHLB advances of $26,050,000. Management believes that in the future
funds will be obtained from the above sources.
At June 30, 1998, loans-in-process, or closed loans scheduled to be funded over
a future period of time, totaled $4,164,554. Loans committed including loans to
be purchased, but not closed, totaled $11,050,697 and available lines of credit
totaled $515,570. During the six month period ended June 30, 1998, the Company
acquired $23.0 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.
The last dividend paid to stockholders was on November 14, 1994. Due to the net
losses that were incurred by the Company in 1995 and 1996, no additional
dividends have been declared. The Board of Directors suspended the payment of
dividends for calendar years 1995, 1996 and 1997. The Company does not
anticipate the payment of dividends during 1998. Instead, earnings are being
reinvested to provide for additional growth of the Bank. 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.
Liquidity
OTS regulations require the Bank to maintain a daily average balance of liquid
assets equal to a specified percentage (currently 4%) of net withdrawable
deposit accounts and borrowings payable in one year or less. Generally, the
Bank's management seeks to maintain its liquid assets at comfortable levels
above the minimum requirements imposed by the OTS. At June 30, 1998, average
liquidity was 7.10%.
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 Company'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)
16
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operation
Regulatory Enforcement Action
Since October of 1994, Federal Trust and the Bank have been operating under
individual cease and desist orders (collectively, the "Orders") which were
voluntarily entered into, with the OTS. The Bank Order superseded a prior
Supervisory Agreement with the Bank. See Item 9 of Notes to Consolidated
Condensed Financial Statements for a full discussion of the Orders. In addition
to the Orders, the Bank was placed under growth restrictions which has had a
negative impact on the Company's earnings.
On December 4, 1997, Federal Trust successfully completed its Rights and
Community Offering. The Holding Company, in turn, infused $3.7 million in
capital to the Bank which is again considered to be "well capitalized" under
regulations of the Federal Deposit Insurance Corporation.
In December 1997, the Bank formally requested that the OTS remove the growth
restrictions. In January 1998, management followed up with a request that the
OTS rescind the Orders against the Holding Company and the Bank. On March 13,
1998, the OTS officially rescinded the growth restrictions against the Bank and
on June 1, 1998, the Orders against Federal Trust and the Bank were rescinded.
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, 1998:
At June 30, 1998
----------------
Tangible Core Risk-Based
-------- ---- ----------
(Dollars in Thousands)
Percent Percent Percent
Amount of Assets Amount of Assets Amount of Assets
---------------- ------ --------- ------ ---------
Regulatory Capital $11,441 7.53% $11,441 7.53% $12,535 14.33%
Requirement 2,280 1.50% 6,080 4.00% 6,999 8.00%
------- ---- ------- ---- ------- -----
Excess $ 9,161 6.03% $ 5,361 3.53% $ 5,536 6.33%
======= ==== ======= ==== ======= =====
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.
(continued)
17
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operation
Impact of Accounting Requirements
In June 1998 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedge Activities" (FASB 133). This statement, which is effective for all
fiscal quarters and all fiscal years beginning after June 15, 1999, requires all
derivatives be measured at fair value and be recognized as assets and
liabilities in the statement of financial position. FASB 133 sets forth the
accounting for changes in fair value of a derivative depending on the intended
use and designation of the derivative. Implementation of FASB 133 is not
expected to have a significant impact on the financial position or results of
operations of the Company.
Results of Operations
Comparison of the Three-Month Periods Ended June 30, 1998 and 1997
General. The Company had a net profit for the three-month period ended June 30,
1998 of $111,712 or $.02 per share, compared to a net profit of $25,150 or $.01
per share for the same period in 1997. The increase in the net profit was due
primarily to an increase in net interest income, and a decrease in the provision
for loan losses, an increase in other income, offset partially by increased
other expense.
Interest Income and Expense. Interest income increased by $133,388 to $2,628,135
for the three-month period ended June 30, 1998 from $2,494,747 for the same
period in 1997. Interest income on loans increased to $2,467,994 in 1998 from
$2,280,989 in 1997, primarily as a result of an increase in the average amount
of loans outstanding, offset partially by a decrease in the average yield earned
on loans. The decrease in the average yield earned on loans is the result of
higher prepayments on mortgage loans resulting in the expensing of premiums that
were paid on many of the loans when purchased. Interest income on the securities
portfolio decreased by $76,257 for the three-month period ended June 30, 1998
over the same period in 1997, as a result of a decrease in the amount of
securities owned. Other interest and dividends increased $22,640 during the same
three-month period in 1998 from 1997, as a result of an increase 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 $1,843,761 during the three-month period ended
June 30, 1998 from $1,800,458 for the same period in 1997 due to an increase in
the amount of deposits and an increase in the rates paid. Interest on deposits
increased to $1,473,633 in 1998 from $1,424,036 in 1997 as a result of an
increase in the amount of deposits and in the rates paid on deposits, and
interest on FHLB advances decreased to $370,128 in 1998 from $376,7422 in 1997
as a result of a decrease in the rates paid on advances and a decrease in the
average amount of advances outstanding. 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 losses in its loan
portfolio. During the second quarter, management made a provision for loan
losses of $20,648 based on its evaluation of the loan portfolio, which was a
decrease of $20,100 from the same period in 1997, however, in addition a
provision of $9,352 was made to the provision for real estate owned. There were
net recoveries of $2,850 during the three-month period ended June 30, 1998, as
compared to net recoveries of $4,747 during the three-month period ended June
30, 1997. Total non-performing loans at June 30, 1998, were $1,666,332 compared
to $1,751,724 at June 30, 1997. The allowance for loan losses at June 30, 1998
(continued)
18
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operation
was $1,130,200 or 68% of non-performing loans and .85% of net loans outstanding,
versus $1,190,875 at June 30, 1997, or 68% of non-performing loans and 1.06% of
net loans outstanding.
Total Other Income. Other income increased from $144,042 for the three-month
period ended June 30, 1997, to $277,440 for the same period in 1998. The
increase in other income was due to an increase of $14,292 in fees and service
charges, an increase of $28,563 in other miscellaneous income, an increase of
$141,005 in gains on the sale of assets, offset partially by a decrease of
$50,462 in rental income which was primarily derived from rental income on 44
condominium units that were acquired through a deed-in-lieu of foreclosure and
were being held as real estate owned. All of the units have been sold and the
Company recovered all of its principal investment. Fees and service charges
increased primarily because of an increase in late charges earned by the Bank on
past due loans, and servicing fees on loans. Other miscellaneous income
increased for the three-month period ended June 30, 1998 due primarily to
increased other loan income, resulting from increased originations of loans.
Gains on the sale of assets increased as a result of an increase in the amount
of loans sold and gains on the sale of real estate owned. During the quarter the
Company sold a commercial piece of real estate owned, resulting in a gain on
sale of $128,806. Rental income decreased as a result of the sale of the other
real estate owned that was generating rental income.
Total Other Expense. Other expense increased to $854,642 for the three-month
period ended June 30, 1998, from $731,933 for the same period in 1997.
Compensation and benefits increased to $402,288 in 1998, from $334,384 in 1997
due to an increase in staff, primarily in the loan department. The Company's
business plan calls for an increase in loan originations now that the Bank is no
longer subject to the regulatory growth restriction. Occupancy and equipment
expense increased by $11,811 in 1998, to $143,026 due to increases in office
building rent and maintenance expenses. Data Processing expense increased by
$771 due to an increase in the number of accounts. Professional fees increased
by $23,853, primarily as a result of costs associated with the removal of the
regulatory restrictions. FDIC Insurance expense increased by $18,290, as a
result of the increase in the amount of deposits. As a result of the Bank's
improved examination rating there will be a significant reduction in the Bank's
FDIC insurance premium beginning in the third quarter of 1998. Other
miscellaneous expense decreased by $9,865 due primarily to decreases in REO
expenses.
Comparison of the Six-Month Period Ended June 30, 1998 and 1997
General. The Company had a net profit for the six-month period ended June 30,
1998, of $203,275 or $.04 per share, compared to a net profit of $126,039 or
$.06 per share for the same period in 1997. The increase in the net profit was
due primarily to increased net interest income, increased other income, offset
partially by an increase in the provision for loan losses and increased other
expense.
Interest Income and Expense. Interest income increased to $5,183,019 for the
six-month period ended June 30, 1998, from $5,044,806 for the same period in
1997. Interest income on loans increased to $4,869,925 in 1998 from $4,616,031
in 1997, primarily as a result of an increase in the amount of loans
outstanding, offset partially by a decrease in the yield earned on loans
outstanding. The decrease in the average yield earned on loans is the result of
higher prepayments on mortgage loans resulting in the expensing of premiums that
were paid on many of the loans when purchased. Interest income on the securities
portfolio decreased by $162,008 for the six-month period ended June 30, 1998
over the same period in 1997, as a result of a decrease in the amount of
securities owned. Other interest and dividends increased $46,327 during the same
six-month period in 1998 from 1997, due to the increase in the average volume of
other interest-bearing assets. Management expects the rates earned on the
portfolio to fluctuate with general market conditions.
19
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operation
Interest expense increased by $83,742 to $3,607,726 during the six-month period
ended June 30,1998, from $3,523,984 for the same period in 1997 due to an
increase in the average amount of interest bearing deposits and a slight
increase in the total average amount of FHLB advances outstanding, which was
partially offset by a decrease in the rates paid on advances. Interest on
deposits increased to $2,899,830 in 1998, from $2,808,821 in 1997 as a result of
increased deposits and an increase in the average rate paid, and interest on
FHLB advances decreased to $707,896 in 1998 from $715,163 in 1997 as a result of
a decrease in the rates paid on advances.
Provisions for Loan Losses. A provision for loan losses is generally charged to
operations based upon management's evaluation of the losses in its loan
portfolio. During the first six months of 1998 management did make a provision
for loan losses of $50,648 based on its evaluation of the loan portfolio. The
total provision for loan losses was $37,748 during the same period in 1997. Net
charge-offs on loans totaled $8,489 during the six-month period ended June 30,
1998 compared to $7,813 during the six-month period ended June 30,1997. Total
non-performing loans at June 30, 1998 were $1,666,332 compared to $1,751,724 at
June 30, 1997. The allowance for loan losses at June 30, 1998 was $1,130,200 or
68% of non-performing loans and .85% of net loans outstanding.
Total Other Income. Other income increased from $248,910 for the six-month
period ended June 30, 1997, to $401,807 for the same period in 1998. The
increase in other income was due to a $101,446 increase in gains on the sale of
assets, an increase of $93,593 in other income, an increase of $21,993 in fees
and service charges, offset partially by a decrease in rental income of $64,135.
Gains on the sale of assets increased as the Company continues to sell the
mortgage loans it originates into the secondary market, and disposes of real
estate owned. During the second quarter the Company sold a commercial piece of
real estate owned, resulting in a gain on sale of $128,806. Fees and service
charges increased primarily because of an increase in late charges earned on
past due loans, and servicing fees on loans. Rental income decreased as a result
of the sale of the other real estate owned that was generating rental income.
Other miscellaneous income increased for the six-month period ended June 30,
1998 due primarily to increased other loan income resulting from an increase in
the amount of loans originated.
Total Other Expense. Other expense increased to $1,593,900 in the six-month
period ended June 30, 1998, from $1,489,145 for the same period in 1997. The
increase in 1998 was the result of increased employee compensation expense,
increased occupancy and equipment expense, increased data processing expense,
increased FDIC insurance expense, offset partially by decreased professional
fees, and decreased miscellaneous expense. Compensation increased to $750,184 in
1998 from $660,251 in 1997 due primarily to an increase in the loan department
staff, as called for in the Company's business plan. Occupancy and equipment
expense increased by $17,968 in 1998 to $280,996 due to increased rent and
maintenance expenses. Data processing expense increased by $2,965 as a result of
an increase in the charges from the service bureau that processes the Company's
customer accounts. FDIC Insurance expense increased by $36,962 as a result of an
increase in the amount of deposits in the Bank. Professional fees decreased by
$15,320 primarily as a result of decreased legal costs associated with
non-performing loans and other miscellaneous expense decreased by $37,698
primarily due to reduced costs associated with repossessed assets.
20
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
On May 22, 1998, Registrant held its Annual Meeting of Shareholders at which the
following matters were voted upon:
1. Election of Directors:
One Year Terms: Votes For Votes Withheld
James V. Suskiewich 3,718,130 68,016
Aubrey H. Wright, Jr 3,721,912 64,234
George W. Foster 3,718,249 67,897
Dr. Samuel C. Certo 3,721,912 64,234
Kenneth W. Hill 3,721,912 64,234
2. Selection of KPMG Peat Marwick as independent auditor for the year ending
December 31, 1998:
Votes For Votes Against Votes Abstained
3,749,819 23,624 12,703
3. Amendment to the Amended and Restated Articles of Incorporation to
increase the amount of authorized common stock from 5,000,000 shares to
15,000,000 shares:
Votes For Votes Against Votes Abstained
3,580,132 165,851 40,163
4. Amendment to the Amend and Restated Articles of Incorporation to increase
the percentage of outstanding shares required to call a Special Meeting of
Shareholders from 10% to 20%:
Votes For Votes Against Votes Abstained
2,878,566 251,080 23,151
5. Approve the Key Employee Incentive Stock Option Plan:
Votes For Votes Against Votes Abstained
2,856,903 229,879 65,997
6. Approve the 1998 Directors' Stock Option Plan:
Votes For Votes Against Votes Abstained
2,788,007 296,345 68,445
21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, Registrant
has duly caused the report to be signed on its behalf by the undersigned
thereunto duly authorized.
FEDERAL TRUST CORPORATION
(Registrant)
Date: August 12 , 1998 By: /s/ Aubrey H. Wright, Jr.
---------------- -------------------------
Aubrey H. Wright, Jr.
Chief Financial Officer and
duly authorized
Officer of the Registrant
22