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, 1999 33-27139
FEDERAL TRUST CORPORATION
(Exact name of registrant as specified in its charter)
Florida 59-2935028
--------------------------- -----------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification No.)
1211 Orange Avenue
Winter Park, Florida 32789
--------------------------
(Address of principal executive offices)
Registrant's telephone number: (407) 645-1201
---------------------------------------------
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 4,947,911
-------------------------------------- ---------------------------
(class) Outstanding at June 30,1999
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements Page
----
Consolidated Condensed Balance Sheets (unaudited)
June 30, 1999 and December 31, 1998............................. 3
Consolidated Condensed Statements of Operations for the
Three and Six months ended June 30, 1999 and 1998 (unaudited).. 4
Consolidated Condensed Statements of Cash Flows for the Six
months ended June 30, 1999 and 1998 (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 - 23
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.......... 24
Signatures........................................................... 25
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Balance Sheets
June 30, 1999 December 31, 1998
------------- -----------------
Assets (unaudited)
Cash $ 1,986,043 2,117,564
Interest bearing deposits 1,565,046 5,047,869
Investment securities held to maturity 6,519,989 6,468,411
Loans receivable, net (net of allowance for loan losses of
$1,272,435 in 1999 and $1,136,056 in 1998) 181,052,964 151,764,284
Loans held for sale (market value at June 30, 1999 of $6,670,601) 6,670,601 303,950
Accrued interest receivable - Loans 1,139,653 949,185
Accrued interest receivable - Securities 137,648 138,654
Notes receivable 50,000 50,000
Federal Home Loan Bank of Atlanta stock, at cost 1,875,000 1,725,000
Real estate owned, net 389,532 1,107,295
Property and equipment, net 870,449 990,330
Prepaid expenses and other assets 808,379 806,318
Executive supplemental income plan-cash surrender
value life insurance policies 2,541,180 2,490,319
Deferred income taxes 259,100 506,144
------------- -----------
Total $ 205,865,584 174,465,323
============= ===========
Liabilities and Stockholders' Equity
Deposit accounts $ 140,971,750 129,292,337
Official checks 1,777,337 2,103,387
Federal Home Loan Bank advances 37,500,000 28,500,000
Other borrowings 10,000,000 --
Advance payments for taxes and insurance 1,275,600 607,144
Accrued expenses and other liabilities 736,328 841,079
------------- -----------
Total Liabilities $ 192,261,015 161,343,947
------------- -----------
Stockholders' equity
Common stock, $.01 par value, 5,000,000 shares authorized;
4,947,911 shares issued and outstanding at June 30,1999
and 4,941,547 at December 31, 1998 49,479 49,416
Additional paid-in capital 15,922,365 15,883,053
Accumulated deficit (2,067,892) (2,479,541)
Accumulated other comprehensive loss (299,383) (331,552)
------------- -----------
Total Stockholders' Equity $ 13,604,569 13,121,376
------------- -----------
Total Liabilities and Stockholders' Equity $ 205,865,584 174,465,323
============= ===========
See accompanying Notes to Consolidated Condensed Financial Statements.
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Consolidated Condensed Statements of Operations
For Three and Six Months Ended June 30, 1999 and 1998
(Unaudited)
Three Months Six Months
Ended June 30, Ended June 30, 1999
-------------- -------------------
1999 1998 1999 1998
---- ---- ---- ----
Interest income:
Loans $3,211,812 2,467,994 6,179,640 4,869,925
Securities 65,275 89,742 130,422 171,441
Interest-bearing deposits and other 68,390 70,399 144,028 141,653
---------- --------- --------- ---------
Total interest income 3,345,477 2,628,135 6,454,090 5,183,019
---------- --------- --------- ---------
Interest expense:
Deposit accounts 1,646,041 1,473,633 3,281,904 2,899,830
Federal Home Loan Bank advances & other
borrowings 406,068 370,128 759,015 707,896
---------- --------- --------- ---------
Total interest expense 2,052,109 1,843,761 4,040,919 3,607,726
---------- --------- --------- ---------
Net interest income 1,293,368 784,374 2,413,171 1,575,293
Provision for loan losses 90,000 20,648 150,000 50,648
---------- --------- --------- ---------
Net interest income after provision 1,203,368 763,726 2,263,171 1,524,645
---------- --------- --------- ---------
Other income:
Fees and service charges 32,740 39,387 68,075 72,923
Rents -- 5,698 -- 5,698
Gain on sale of assets 120,587 159,370 263,032 169,630
Other miscellaneous 153,035 72,985 258,102 153,556
---------- --------- --------- ---------
Total other income 308,362 277,440 589,209 401,807
---------- --------- --------- ---------
Other expenses:
Employee compensation & benefits 623,342 402,288 1,211,824 750,184
Occupancy and equipment 229,746 143,026 438,449 280,996
Data processing expense 43,294 24,469 81,054 47,494
Professional fees 70,069 53,266 118,014 93,757
FDIC Insurance 29,315 80,644 56,855 161,268
Loss on sale of investment securities -- 9,945 -- 9,945
Other miscellaneous 212,053 141,004 379,453 250,256
---------- --------- --------- ---------
Total other expense 1,208,419 854,642 2,285,649 1,593,900
---------- --------- --------- ---------
Net income before income tax 303,311 186,524 566,731 332,552
Income tax expense 69,911 74,812 155,082 129,277
---------- --------- --------- ---------
Net income $ 233,400 111,712 411,649 203,275
========== ========= ========= =========
Per share amounts:
Basic and diluted Earnings per share .05 .02 .08 .04
Weighted average number of shares outstanding 4,943,645 4,941,547 4,942,602 4,941,547
See accompanying Notes to Consolidated Financial Statements.
4
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Consolidated Condensed Statements of Cash Flows
For the Six Months Ended June 30, 1999 and 1998
(Unaudited)
1999 1998
---- ----
Cash flows from operating activities:
Net income $ 411,649 203,275
Adjustments to reconcile net income to net cash flows from operations:
Depreciation & amortization of property & equipment 194,163 66,906
Amort. (net) of premiums, fees & disc. on loans & securities 220,764 247,653
Provision for loan losses 150,000 60,000
Gain on sale of assets (263,032) (159,685)
Accretion of stock option expense 39,375 3,646
Deferred income taxes 247,044 132,301
Executive supplemental income plan (50,861) (1,368,781)
Cash provided by (used for) changes in:
Accrued interest receivable (189,462) (10,885)
Prepaid expenses & other assets (2,061) 106,866
Official checks (326,050) (38,425)
Accrued expenses & other liabilities (104,751) 30,049
----------- -----------
Net cash provided by operating activities 326,778 (727,080)
----------- -----------
Cash flows from investing activities:
Acquisition of office properties and equipment (74,282) (61,558)
Purchase of Federal Home Loan Bank of Atlanta stock (150,000) --
Proceeds collected from loan sales 9,557,010 3,112,210
Reimbursement of real estate owned costs 113,130 16,668
Addition to real estate owned 195,231 --
Proceeds from sale of real estate owned 782,597 509,014
Proceeds from securities available for sale -- 3,340,055
Principal collected on loans 20,928,253 18,552,719
Loans originated or purchased (66,640,930) (33,562,444)
----------- -----------
Net cash (used in) investing activities (35,288,991) (8,093,336)
----------- -----------
Cash flows from financing activities:
Increase in deposits, net 11,679,413 5,178,761
Increase in Federal Home Loan Bank advances 9,000,000 3,050,000
Increase in other borrowings 10,000,000 --
Net increase in advance payments by borrowers for taxes & insurance 668,456 862,168
----------- -----------
Net cash provided by financing activities 31,347,869 9,090,929
----------- -----------
Increase in cash and cash equivalents (3,614,344) 270,513
Cash and cash equivalents at beginning of period 7,165,433 4,002,050
----------- -----------
Cash and cash equivalents at end of period $ 3,551,089 4,272,563
============ =========
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, 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, 1999 and December 31,
1998, and the consolidated condensed statements of operations for the three and
six month periods ended June 30, 1999 and 1998, and the cash flows for the six
month periods ended June 30, 1999 and 1998, include the accounts and operations
of 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, 1999, the results of operations for the three and six month
periods ended June 30, 1999 and 1998, and cash flows for the six month periods
ended June 30, 1999 and 1998. The results of operations for the six month period
ended June 30, 1999 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, 1998.
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 loss is
the unrealized loss on investment securities available for sale. Total
comprehensive income for the three and six month periods ended June 30, 1999 was
$249,696 and $443,818, respectively, as compared to the three and six month
periods ended June 30, 1998 of $143,863 and $263,943, respectively.
3. New Accounting Pronouncements
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 standard, 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. In June 1999, the Financial Accounting Standards
Board issued FASB 137, "Accounting for Derivative Instruments and Hedge
Activities - Deferral of The Effective Date of FASB 133", which is a one year
deferral of the application of FASB 133. FASB 133 shall be effective for all
fiscal quarters of all fiscal years beginning after June 15, 2000.
6
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (unaudited)
In October 1998, the FASB issued Financial Accounting Standards No. 134,
"Accounting for Mortgage-Backed Securities Retained after the Securitization of
Mortgage Loans Held for Sale by a Mortgage Banking Enterprise." This statement
requires that, after the securitization of a mortgage loan held for sale, an
entity engaged in mortgage banking activities classify the resulting mortgage
backed security as a trading security. The statement is effective for the first
fiscal quarter beginning after December 15, 1998. The Company does not expect
the adoption of this standard to have any impact on its consolidated statements.
4. 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.
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, 1999, impaired loans amounted to $1.5 million as compared to $2.1
million at June 30, 1998. Included in the allowance for loan losses is $208
thousand related to the impaired loans as compared to $312 thousand at June 30,
1998. 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 1999, the average recorded investment in impaired
loans was $1.7 million and $19,403 of interest income was recognized on loans
while they were impaired. All of this income was recognized using a cash basis
method of accounting.
7
A summary of loans receivable at June 30, 1999
and Decmeber 31, 1998 is as follows:
June 30, 1999 December 31, 1998
------------- -----------------
Mortgage Loans:
Permanent conventional:
Commercial 13,522,338 14,883,511
Residential 160,501,845 130,448,017
Residential Construction 22,633,483 11,518,308
----------- -----------
Total Mortgage Loans 197,575,813 156,849,836
Commercial loans -- 354,686
Consumer loans 1,166,005 998,826
Lines of credit 1,168,449 1,242,968
----------- -----------
Total loans receivable 198,992,120 159,446,316
Net premium on mortgage loans purchased 1,729,558 1,374,559
Deduct:
Unearned loan orgination fees, net of direct loan
origination costs 9,587 27,171
Undisbursed portion of loans in process 11,716,091 7,589,414
Allowance for loan losses 1,272,435 1,136,056
----------- -----------
Loans receivable, net 187,723,565 152,068,234
=========== ===========
5. 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,
-------------- --------------
1999 1998 1999 1998
---- ---- ---- ----
Balance at beginning of period $ 1,191,075 1,146,160 1,136,056 1,110,521
Provision for loan losses 90,000 20,648 150,000 50,648
Less Charge-offs (12,681) (39,458) (21,920) (39,458)
Plus recoveries 4,041 2,850 8,299 8,489
------------- --------- --------- ---------
Balance at end of period $ 1,272,435 1,130,200 1,272,435 1,130,200
============= ========= ========= =========
Loans Outstanding $ 187,723,565 133,429,833 187,723,565 133,429,833
Ratio of charge-offs to Loans Outstanding .002% .002% .004% .006%
Ratio of allowance to Loans Outstanding .68% .85% .68% .85%
9
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (unaudited)
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, 1999, management made a provision of $90,000 based on
its evaluation of the loan portfolio, as compared to the provision of $20,648
made in the quarter ended June 30, 1998. Although the dollar amount of the
allowance increased during the quarter, the level of the allowance for losses
decreased as a percentage of loans outstanding. The increase in the provision
for the quarter was the result of the increase in the amount of loans
outstanding during the quarter. Management believes that the allowance is
adequate, 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.
6. Supplemental Disclosure of Cash Flow and Non-Cash Investing and Financing
Activities
Six Months Ended June 30,
1999 1998
---- ----
Cash paid during the period for:
Interest expense $ 1,573,541 1,718,731
Income taxes $ -- --
Supplemental disclosure of non-cash transactions:
Real estate acquired in settlement of loans $ 195,231 211,223
Market Value adjustment - investment securities available for sale:
Market value adjustment - investments $ -- --
Deferred income tax asset $ -- --
----------- ---------
Unrealized loss on investment securities
available for sale, net $ -- --
Unrealized loss on investment securities transferred
from available for sale to held to maturity $ (480,011) (582,773)
Deferred income tax asset $ (180,628) (219,297)
----------- ---------
Unrealized loss on investment securities transferred
from available for sale to held to maturity $ (299,383) (363,476)
=========== =========
7. 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,
-------------- --------------
1999 1998 1999 1998
---- ---- ---- ----
Balance at beginning of period $ 947,375 $ 1,532,741 1,107,295 1,389,900
Acquired through foreclosure 103,651 51,714 195,231 211,223
Add: Capitalized costs (55,738) (69,353) (113,130) (86,021)
Less: Sale of real estate (597,728) (439,661) (782,597) (439,661)
Less: Chargeoffs (8,028) (9,352) (17,267) (9,352)
----------- ----------- ------- ---------
Balance at end of period $ 389,532 $ 1,066,089 389,532 1,066,089
=========== =========== ======= =========
10
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (unaudited)
8. Investment Securities
At June 30, 1999
----------------
Book Value Market Value
---------- ------------
Held to maturity:
FHLB Floating Rate Note, 3.71% due 7/30/03 $6,519,989 6,621,563
========== =========
Available for sale:
None -- --
========== =========
The Company's investment in obligations of U.S. government agencies consists of
one dual indexed bond issued by the Federal Home Loan Bank. At June 30, 1999,
the bond had a market value of $6,621,563 and gross unrealized pretax losses of
$378,437. 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, 1999, 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,
1999, the Bank did not purchase or sell any bonds.
9. Advances from Federal Home Loan Bank and Other Borrowings
The following is an analysis of the advances from the Federal Home Loan Bank:
Amounts Outstanding at June 30, 1999:
Maturity Date Rate Amount Type
- ------------- ---- ------ ----
12/01/99 5.09% 5,000,000 Fixed rate
12/02/99 5.20% 17,500,000 Variable rate
12/10/99 4.98% 5,000,000 Fixed rate
12/01/00 5.09% 5,000,000 Fixed rate
03/05/01 5.96% 5,000,000 Fixed rate
---- -----------
Total 5.24% $37,500,000
==== ===========
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
--------- ---- ------
4/30/99 5.22% $ 33,500,000
5/31/99 5.19% 32,000,000
6/30/99 5.24% 37,500,000
The maximum amount of borrowings outstanding at any month end during the three
month period ended June 30, 1999, was $37,500,000. During the three and six
month periods ended June 30, 1999, average advances outstanding totaled $21.1
and $19.2 million at average rates of 5.23% and 5.19%, respectively.
11
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (unaudited)
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.
At June 30, 1999, the Company had other borrowings of $10,000,000 outstanding at
an interest rate of 8.77%, collateralized by $15,360,107 in mortgage loans. This
borrowing was outstanding for 30 days and was paid off on July 30, 1999.
10. 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
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 OTS. 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 Federal Trust's
and the Bank's Orders. The OTS officially rescinded the growth restrictions on
March 13, 1998, and the respective Orders were rescinded on June 1, 1998.
12
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (unaudited)
11. 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
and 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 on October 30, 1998 the branch opened
for business with four employees.
12. Subsidiaries
On May 19, 1999, Federal Trust Bank incorporated a new subsidiary, Vantage
Mortgage Service Center, Inc. (VMSC). On June 1, 1999, Federal Trust Corporation
acquired the fixed assets, consisting of furniture, fixtures and equipment, of
Vantage Mortgage Associates, Inc., a non-affiliated company, located in
Gainesville, Florida for 6,364 shares of Federal Trust Corporation common stock.
The fixed assets were contributed by Federal Trust Corporation to Federal Trust
Bank, who in turn contributed the fixed assets to VMSC. VMSC is engaged
primarily in the origination and sale of residential mortgage loans and all of
the officers and employees of Vantage Mortgage Associates, Inc. accepted
employment with VMSC.
13. 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
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
June 30, 1999, 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 January 30, 1998, the
Board of Directors of Federal Trust adopted the 1998 Key Employee Stock
Compensation Program ("Program") for the benefit of officers and other key
employees. 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. At June 30, 1999,
the closing price for the common stock was $2.81 per share.
The stock options granted to the following officers and key employees are
"Incentive Stock Options." For financial reporting purposes, there will be no
charge 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
=======
13
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operation
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.
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.
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. Outside directors, Dr. Samuel C. Certo, Kenneth W. Hill and
George W. Foster, were each 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). At June 30, 1999, the closing price
for the common stock was $2.81 per share.
New Directors elected or appointed by the Board of Directors of Federal Trust 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. 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.
(The remainder of this page left intentionally blank)
14
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 1999. 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 to an extent. 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.
The increase in loan payoffs that the Company had experienced during 1998 and
the first quarter of 1999, as customers refinanced their mortgages at lower
rates, declined to normal levels during the second quarter of 1999 as the
interest rates on mortgage loans increased, which had a positive effect on
earnings.
Total interest income increased in the second quarter. The decline in long term
interest rates that occurred 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. During
1998, this 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. During the second quarter of 1999, the write-off of premiums returned
to more normal levels, as mortgage loan rates increased, and was $14,300 less
than the write-off in second quarter of 1998. Should the interest rates on
mortgage loans decline again in the future, earnings could be adversely affected
to some degree by increased premium write-offs should the mortgage loans held by
the Company experience higher prepayments.
The Company has increased its additions to the loss reserves in 1999 due to a
higher level of loans outstanding, resulting from the growth the Company has
experienced since the removal of the regulatory growth restriction in March
1998. Although management believes that the level of non-performing assets
should decrease 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, 1999, the Company did make an addition
to its loan loss reserves based on its evaluation of the loan portfolio and the
increase in size of the loan portfolio.
The Company is expecting an operating profit for the fiscal year 1999, due to
the decrease in non-performing loans and the additional capital raised during
the fourth quarter of 1997, which has provided the Company the capital resources
it needs to grow now that the regulatory growth restriction has been removed.
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.
15
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operation
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 active subsidiary of the Company.
In connection with the management restructuring that was completed in May of
1997, the Holding Company's expenses have been reduced to minimal levels. There
are no longer any salaried employees in the Holding Company and its offices have
been sublet. Employees of the Bank perform all necessary functions needed by the
Holding Company, and the Holding Company reimburses the Bank for the time spent
on Holding 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, provisions for losses on real estate owned, and
income taxes.
The Company's one year GAP position at March 31, 1999, the most recent report
available, was -47%, as compared to -0% at March 31, 1998. The primary reason
for the increase in the one year GAP has been the growth experienced by the
Company during the year. The increases in assets and liabilities have not had
the same maturities or adjustment dates which has resulted in an increase in the
Company's negative GAP position. In addition, the Company's bond portfolio which
had shorter adjustment periods has decreased through maturities and sales. The
Company continues to sell fixed rate loans as they are originated but has
increased its holdings of fixed rate loans overall during 1998 and 1999 as a
result of loans purchased. As interest rates declined in 1998 the Company's net
interest spread in percentage terms decreased primarily 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 and this trend
continued in 1999, although the Company experienced a reduction in the write-off
of premiums in the first and second quarters of 1999 as compared to the first
and second quarters of 1998. In terms of dollars, the Company's net interest
income has increased as a result of the growth in the loan portfolio and the
decrease in non-performing loans.
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
(+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.
16
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operation
The following table sets forth information about rates and yields:
Yields and Rates at
June 30, December 31, June 30,
1999 1998 1998
---- ---- ----
Yields on:
Loan portfolio 7.61% 7.70% 7.73%
Other interest-earning assets 4.97% 4.15% 4.30%
---- ---- ----
Interest-earning assets 7.44% 7.37% 7.38%
Cost of:
Deposits 4.87% 5.36% 5.41%
FHLB advances and other interest-bearing liabilities 5.18% 5.79% 5.94%
---- ---- ----
Interest-bearing liabilities 4.93% 5.44% 5.50%
Interest rate spread 2.51% 1.93% 1.88%
==== ==== ====
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 other borrowings, 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.
17
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operation
In June 1998, 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 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, 1999, the Company used funds
primarily from principal collected on loans, $20,928,253; proceeds from loan
sales, $9,557,010; increases in net deposits, $11,679,413; an increase in FHLB
advances, $9,000,000; an increase in other borrowings, $10,000,000; and a
decrease in cash, $3,614,344, to fund the origination and purchase of loans,
$66,640,930. As of June 30, 1999, the Company had outstanding FHLB advances of
$37,500,000, and other borrowings of $10,000,000. Management believes that in
the future funds will be obtained from the above sources.
At June 30, 1999, loans-in-process, or closed loans scheduled to be funded over
a future period of time, totaled $11,716,091. Loans committed, including loans
to be purchased, but not closed, totaled $8,053,383 and available lines of
credit totaled $652,448. During the six month period ended June 30, 1999, the
Company acquired $43.4 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 through 1998. The Company does not anticipate
the payment of dividends during 1999. 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, 1999, average
liquidity was 6.74%.
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.
18
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operation
Short-term balloon mortgage loans are sometimes used to allow borrowers the
option of waiting until interest rates are more favorable for a long term fixed
rate loan. If interest rates rise, these loans may require renewals if borrowers
fail to qualify for a long term fixed rate loan at maturity and there is no
assurance that a borrower's income will be sufficient to service the renewal.
Management recognizes the risks associated with this type of lending and
believes that the policies and procedures it applies to such loans lowers the
general risk.
Regulatory Enforcement Action
From October 3, 1994, to June 1, 1998, Federal Trust and the Bank operated under
individual cease and desist orders (collectively, the "Orders") which were
voluntarily entered into with the OTS. In addition to the Orders, the Bank was
placed under growth restrictions which has had a negative impact on the
Company's earnings.
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.
See Item 10 of Notes to Consolidated Condensed Financial Statements for a full
discussion of the Orders.
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, 1999:
At June 30, 1999
----------------
Tier I Risk-Based
------ ----------
(Dollars in Thousands)
Percent Percent
Amount of Assets Amount of Assets
------ --------- ------ ---------
Regulatory Capital $12,689 6.16% $13,912 11.67%
Requirement 8,242 4.00% 9,540 8.00%
------- ---- ------- ----
Excess $ 4,447 2.16% $ 4,372 3.67%
======= ==== ======= ====
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.
19
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 ("FASB") issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedge Activities" (FASB 133). This standard, 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. In June 1999 FASB adopted FASB 137, "Accounting for
Derivative Instruments and Hedge Activities - Deferral of The Effective Date of
FASB 133", which is a deferral of FASB 133. FASB 133 shall be effective for all
fiscal quarters of all fiscal years beginning after June 15, 2000.
In October 1998, the FASB issued Financial Accounting Standards No. 134,
"Accounting for Mortgage-Backed Securities Retained after the Securitization of
Mortgage Loans Held for Sale by a Mortgage Banking Enterprise." This statement
requires that, after the securitization of a mortgage loan held for sale, an
entity engaged in mortgage banking activities classify the resulting mortgage
backed security as a trading security. The statement is effective for the first
fiscal quarter beginning after December 15, 1998. The Company does not expect
the adoption of this standard to have any impact on its consolidated statements.
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 and required certain changes be made to the Plan. The OTS
conducted an on-site examination in January 1999 and again in June 1999, and did
not require any further changes to the plan. The Board of Directors receives
monthly 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 Year 2000 Action Plan consists of five phases which are awareness,
assessment, renovation, validation, and implementation. The awareness phase
consists of defining the Year 2000 problem and committing the necessary
resources to perform the required compliance work. The assessment phase consists
of determining the size and complexity of the problem, as well as the magnitude
of the effort necessary to address the Year 2000 issues. The renovation phase
includes software enhancements, hardware and software upgrades or replacements,
and other changes necessary to achieve Year 2000 readiness. The validation phase
involves testing the renovated or replaced hardware and software components for
Year 2000 compliance. The implementation phase consists of certifying the system
as Year 2000 compliant and beginning the use of the renovated system. There is
one additional item that should be included in a Year 2000 Action Plan which is
a contingency plan. Even when the systems involved have completed each of the
five phases, a contingency plan is necessary inasmuch as there is always the
chance that a system may still fail when the Year 2000 arrives as a result of
unforeseen problems.
20
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operation
The Company has identified what it believes are the information technology
systems which are "mission critical" to the operation of the Company's business.
The Company's primary information technology system is the Fiserv service bureau
which process the Company's deposit accounts, loan accounts, and general ledger
accounts. The Company interfaces with Fiserv through a local area network
consisting of two network servers which in turn are connected to the personal
computers (PC's) at the Company's two locations. In addition to Fiserv, the
Company has identified the Federal Reserve Bank (FRB) FedWire system, and the
Federal Home Loan Bank (FHLB) DIAL system as "mission critical". The Company
interfaces with the FRB and FHLB systems with PC's at its main office.
In addition to the "mission critical" systems, the Company identified and
assessed various other systems that could potentially be affected by the Year
2000. These systems included the Company's telephone systems, security systems,
cooling and heating systems, fax machines, and postage meter. The Company
currently does not own or use any Automated Teller Machines or elevators, since,
if it did, these systems could also be potentially affected by the Year 2000. In
the assessment phase it has been determined that these other systems should not
be affected by the Year 2000 date issue, since these systems, with the exception
of the fax machines and the postage meter, do not use a date. The fax machines
and the postage meter will show the date in the Year 2000 as "00", which the
Company believes is acceptable.
In late 1997, the Company began the replacement of all of its personal computers
which was completed in the fourth quarter of 1998. This replacement of PC's was
a part of the Company's plan to convert from the Tampa service bureau of Fiserv
to the Orlando service bureau of Fiserv. This conversion required the Company to
have a local area network at its offices and the PC's owned by the Company prior
to conversion did not meet the requirements of the new service bureau. The
conversion to the Orlando service bureau was completed in September 1998. The
new PC's and the network servers that were purchased in 1997 and 1998 were
tested at purchase to verify that they were Year 2000 compliant. In addition,
the purchase of the new PC's necessitated the purchase of new operating system
software, new word processing software, and new spreadsheet software. Each of
the manufacturers of the various software packages had stated that the software
was Year 2000 compliant and the Company has tested each of the software packages
with the new PC's, and the tests have indicated that the hardware and software
are able to process data in the Year 2000.
The Fiserv Orlando service bureau has been expending significant resources in
addressing the Year 2000 issue since 1997. It has completed the evaluation phase
and the renovation phase on all its systems. The testing phase has been
completed on nine systems, and the implementation phase has been completed on
ten systems, and all systems are scheduled to be finished with the testing and
implementation phases by August 31, 1999. On November 8, 1998, the Company
participated in the test of the primary Fiserv system and has received a report
that states that the testing was successful and the remediated software has been
implemented.
The FRB Fedwire has renovated its system for Year 2000 compliance and the
Company participated in several tests of the system in the first quarter of
1999, but as yet has not received the results of the tests. The FHLB DIAL system
has issued a new software package in conjunction with its Year 2000 compliance
program which the Company received and implemented in the first quarter of 1999.
The upgrade of the FHLB DIAL system necessitated the purchase of a new PC.
21
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operation
While the testing and implementation phases continue on the affected systems,
the Company developed its contingency plans in the fourth quarter of 1998 which
the OTS reviewed as part of their Year 2000 examination in January 1999. The
Company tested the plan during the first quarter of 1999 and the results were
satisfactory. The contingency plan provides for the manual capture of data and
the manual updating of the deposit, loan, and general ledger accounts. The
Company has signed an agreement with Fiserv which will permit the use of their
facilities for the input of the manually captured data should the need arise.
Fiserv Orlando's facilities are located approximately 10 miles from the
Company's two offices. In addition, the plan provides for utilizing the services
of the Federal Reserve and the FHLB by telephone.
During the second quarter of 1999, the Company completed the development of its
Cash/Liquidity Plan for Year 2000. The Plan, which will be implemented in the
third quarter, was reviewed by the OTS as part of their Year 2000 examination in
June 1999.
While the Company believes that it is taking the necessary steps to achieve Year
2000 compliance, there can be no assurance that every contingency can be
foreseen or corrected prior to the arrival of the Year 2000. The Company is of
the opinion that the greatest risk it faces is the failure of its service bureau
or the electric and/or telephone utilities to function properly or at all when
the Year 2000 arrives. The failure of the service bureau or the utilities would
cause a severe hardship on the Company in being able to serve its customers
fully and could have a very significant negative impact on the Company's
earnings. The Company's contingency plan addresses this possible worst case
scenario and provides for continuing the operations of the Company should this
occur.
Results of Operations
Comparison of the Three-Month Periods Ended June 30, 1999 and 1998
General. The Company had a net profit for the three-month period ended June 30,
1999 of $233,400 or $.05 per share, compared to a net profit of $111,712 or $.02
per share for the same period in 1998. The increase in the net profit was due
primarily to an increase in net interest income, an increase in other income,
offset partially by an increase in other expense.
Interest Income and Expense. Interest income increased by $717,342 to $3,345,477
for the three-month period ended June 30, 1999 from $2,628,135 for the same
period in 1998. Interest income on loans increased to $3,211,812 in 1999 from
$2,467,994 in 1998, 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 the
overall decrease in loan rates. Interest income on the securities portfolio
decreased by $24,467 for the three-month period ended June 30, 1999 over the
same period in 1998, as a result of a decrease in the amount of securities
owned. Other interest and dividends decreased $2,009 during the same three-month
period in 1999 from 1998, 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.
22
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operation
Interest expense increased $208,348 during the three-month period ended June 30,
1999 to $2,052,109 from the same period in 1998 due to an increase in the amount
of deposits and borrowings. Interest on deposits increased to $1,646,041 in 1999
from $1,473,633 in 1998, as a result of an increase in the amount of deposits,
and interest on FHLB advances and Other Borrowings increased to $406,068 in 1999
from $370,128 in 1998, as a result of an increase in the average amount of
advances and other borrowings outstanding. Management expects to continue to use
FHLB advances and other borrowings 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 quarter ended June 30, 1999, management made a provision
for loan losses of $90,000 based on its evaluation of the loan portfolio, which
was an increase of $69,352 from the same period in 1998. The primary reason for
the increased provision was the growth in the loan portfolio during the second
quarter. There were recoveries of $4,041 during the three-month period ended
June 30, 1999, as compared to net recoveries of $2,850 during the three-month
period ended June 30, 1998. Total non-performing loans at June 30, 1999, were
$1,372,999 compared to $1,666,332 at June 30, 1998. The allowance for loan
losses at June 30, 1999 was $1,272,435 or 93% of non-performing loans and .68%
of net loans outstanding, versus $1,130,200 at June 30, 1998, or 68% of
non-performing loans and .85% of net loans outstanding.
Total Other Income. Other income increased from $277,440 for the three-month
period ended June 30, 1998, to $308,362 for the same period in 1999. The
increase in other income was due to an increase of $80,050 in other
miscellaneous income, offset partially by a decrease of $36,783 in gains on the
sale of assets, a decrease of $6,647 in fees and service charges, and a decrease
of $5,698 in rents. The increase in other miscellaneous income was attributable
primarily to increased other loan income, resulting from increased originations
of loans. The decrease in gains on assets sold was the result of a decrease in
the amount of loans sold during the period. The decrease in fees and service
charges was primarily the result of a decrease in servicing fees on loans and
decreased fees on deposit accounts. Rent income decreased as a result of the
sale of the rental property.
Total Other Expense. Other expense increased to $1,208,419 for the three-month
period ended June 30, 1999, from $854,642 for the same period in 1998.
Compensation and benefits increased to $623,342 in 1999, from $402,288 in 1998
due to an increase in staff, primarily in the loan department, but also from an
increase of employees in September 1998 to staff the new branch in Sanford.
Occupancy and equipment expense increased by $86,720 in 1999, to $229,746 due to
increases in office building rent and maintenance expenses, the opening of the
new branch in Sanford in October 1998, and the opening of a loan production
office in New Smyrna Beach in March 1999. Data Processing expense increased by
$18,825 due to an increase in the number of accounts and the opening of the
Sanford Branch. Professional fees increased by $17,403, as a result of increased
professional and regulatory fees, resulting primarily from the growth of the
Company. Loss on the sale of investment securities decreased by $9,945 as a
result of no sales of securities during the quarter. FDIC Insurance expense
decreased by $51,329, as a result of a decrease in the amount of premium paid on
deposits by the Bank to the FDIC, offset partially by the growth of deposits in
the Company. The decrease in the FDIC premium was the result of the Bank's
improved examination rating. Other miscellaneous expense increased by $71,049
due primarily to increases in loan expenses related to the increased number of
loans originated by the Company.
23
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operation
Comparison of the Six-Month Periods Ended June 30, 1999 and 1998
General. The Company had a net profit for the six month period ended June 30,
1999, of $411,649 or $.08 per share, compared to a net profit of $203,275 or
$.04 per share for the same period in 1998. The increase in the net profit was
due primarily to increased net interest income and increased other income,
offset partially by an increase in other expense.
Interest Income and Expense. Interest income increased to $6,454,090 for the six
month period ended June 30, 1999, from $5,183,019 for the same period in 1998.
Interest income on loans increased to $6,179,640 in 1999 from $4,869,925 in
1998, 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 the overall
decrease in loan rates. Interest income on the securities portfolio decreased by
$41,019 for the six month period ended June 30,1999 over the same period in
1998, as a result of a decrease in the amount of securities owned. Other
interest and dividends increased $2,375 during the same six month period in 1999
from 1998, 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.
Interest expense increased by $433,193 to $4,040,919 during the six month period
ended June 30,1999, from $3,607,726 for the same period in 1998 due to an
increase in the average amount of interest bearing deposits and FHLB advances
outstanding, which was partially offset by a decrease in the rates paid on
deposits and advances. Interest on deposits increased to $3,281,904 in 1999,
from $2,899,830 in 1998 as a result of increased deposits offset partially by a
decrease in the rates paid on deposits. Interest on FHLB advances increased to
$759,015 in 1999 from $707,896 in 1998 as a result of an increase in the average
amount of advances outstanding which was partially offset by 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 1999 management did make a provision
for loan losses of $150,000 based on its evaluation of the loan portfolio. The
primary reason for the increased provision was the growth in the loan portfolio
during the second quarter. The total provision for loan losses was $50,648
during the same period in 1998. Net charge-offs on loans totaled $21,920 during
the six month period ended June 30, 1999 compared to $39,458 during the six
month period ended June 30,1998. Total non-performing loans at June 30, 1999,
were $1,372,999 compared to $1,666,332 at June 30, 1998. The allowance for loan
losses at June 30, 1999 was $1,272,435 or 93% of non-performing loans and .68%
of net loans outstanding, versus $1,130,200 at June 30, 1998, or 68% of
non-performing loans and .85% of net loans outstanding.
Total Other Income. Other income increased from $401,807 for the six month
period ended June 30, 1998, to $589,209 for the same period in 1999. The
increase in other income was due to an increase of $104,546 in other
miscellaneous income, an increase of $93,402 in gains on the sale of assets,
offset partially by a $5,698 decrease in rental income, and a decrease of $4,848
in fees and service charges. Other miscellaneous income increased for the six
month period ended June 30, 1999 due primarily to increased other loan income
resulting from an increase in the amount of loans originated. Gains on the sale
of assets increased as a result of an increase in the amount of loans and real
owned sold during the year. Rental income decreased as a result of the sale of
the other real estate owned that was generating rental income. Fees and service
charges decreased primarily because of a decrease in late charges earned on past
due loans and decreased fees on deposits accounts.
24
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operation
Total Other Expense. Other expense increased to $2,285,649 in the six month
period ended June 30, 1999, from $1,593,900 for the same period in 1998. The
increase in 1999 was the result of increased employee compensation expense,
increased occupancy and equipment expense, increased data processing expense,
increased professional fees, and increased miscellaneous expense, offset
partially by decreased FDIC insurance expense and decreased loss on the sale of
investment securities. Compensation increased to $1,211,824 in 1999 from
$750,184 in 1998 due primarily to an increase in the loan department staff, but
also from an increase of employees in September 1998 to staff the new branch in
Sanford, both as called for in the Company's business plan. Occupancy and
equipment expense increased by $157,453 in 1999 to $438,449 due to increased
rent and maintenance expenses at the main office, the opening of the new branch
in Sanford in October 1998, and the opening of a loan production office in New
Smyrna Beach in March 1999. Data processing expense increased by $33,560 as a
result of an increase in the number of accounts at the Bank and the opening of
the Sanford Branch. Professional fees increased by $24,257, as a result of
increased professional and regulatory fees, resulting primarily from the growth
of the Company. Other miscellaneous expense increased by $129,197 due primarily
to increases in loan expenses related to the increased number of loans
originated by the Company. Loss on the sale of investment securities decreased
by $9,945 as a result of no sales of securities during the six month period
ended June 30, 1999. FDIC Insurance expense decreased by $104,413 as a result of
a decrease in the insurance rate paid to the FDIC as a result of the improvement
in the Bank's examination rating, offset partially by an increase in the amount
of deposits in the Bank
(The remainder of this page left intentionally blank)
25
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
On May 28, 1999, Registrant held its Annual Meeting of Shareholders at which the
following matters were voted upon:
1. Election of Directors: Votes For Votes Withheld
One Year Terms:
James V. Suskiewich 4,049,600 66,853
Aubrey H. Wright, Jr. 4,047,100 69,353
George W. Foster 4,026,943 89,510
Dr. Samuel C. Certo 4,049,600 66,853
Kenneth W. Hill 4,049,600 66,853
2. Selection of KPMG Peat Marwick as independent auditor for the year ending
December 31, 1999:
Votes For Votes Against Votes Abstained
4,067,985 28,973 19,495
3. Amendment to the Amended and Restated Articles of Incorporation to require
a 66% vote of shareholders to amend certain articles:
Votes For Votes Against Votes Abstained
2,560,643 707,846 24,729
4. Amendment to the Amended and Restated Articles of Incorporation to provide
for a Classified Board with staggered terms and if approved to nullify item
1 and elect the five nominees in item 1 to the following classes and terms:
Class I: (One year term) Kenneth W. Hill
Class II: (Two year term) George W. Foster
Aubrey H. Wright, Jr.
Class III: (Three year term) James V. Suskiewich
Dr. Samuel C. Certo
Votes For Votes Against Votes Abstained
2,573,183 692,745 27,290
5. Amendment to the Amend and Restated Articles of Incorporation to require a
66% vote of shareholders to approve a Control Share Acquisition or a
Business Combination:
Votes For Votes Against Votes Abstained
2,520,706 733,599 31,158
26
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, 1999 By: /s/ Aubrey H. Wright, Jr.
------------------- -------------------------
Aubrey H. Wright, Jr.
Chief Financial Officer and duly authorized
Officer of the Registrant
27