- --------------------------------------------------------------------------------
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:
- --------------------------------------------------------------------------------
September 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 September 30,1999
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Page
Consolidated Condensed Balance Sheets (unaudited)
September 30, 1999 and December 31, 1998............................................................... 3
Consolidated Condensed Statements of Operations for the
Three and Nine months ended September 30, 1999 and 1998 (unaudited).................................... 4
Consolidated Condensed Statements of Cash Flows for the
Nine months ended September 30, 1999 and 1998 (unaudited).............................................. 5
Notes to Consolidated Condensed Financial Statements (unaudited)............................................ 6 - 13
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................................................................14 - 24
PART II. OTHER INFORMATION
Signatures...................................................................................................... 25
2
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Balance Sheets
September 30, 1999 December 31, 1998
------------------ -----------------
Assets (unaudited)
Cash $ 3,052,854 2,117,564
Interest bearing deposits 2,301,027 5,047,869
Investment securities held to maturity 6,544,512 6,468,411
Loans receivable, net (net of allowance for loan losses of
$1,333,798 in 1999 and $1,136,056 in 1998) 186,710,122 151,764,284
Loans held for sale -- 303,950
Accrued interest receivable - Loans 1,447,457 949,185
Accrued interest receivable - Securities 75,946 138,654
Notes receivable 50,000 50,000
Federal Home Loan Bank of Atlanta stock, at cost 1,685,000 1,725,000
Real estate owned, net 226,575 1,107,295
Property and equipment, net 932,191 990,330
Prepaid expenses and other assets 1,416,685 806,318
Executive supplemental income plan-cash surrender
value life insurance policies 2,574,869 2,490,319
Deferred income taxes 168,328 506,144
---------- ----------
Total $207,185,566 174,465,323
=========== ===========
Liabilities and Stockholders' Equity
Deposit accounts $150,187,224 129,292,337
Official checks 2,884,624 2,103,387
Federal Home Loan Bank advances 33,700,000 28,500,000
Other borrowings -- --
Advance payments for taxes and insurance 2,279,932 607,144
Accrued expenses and other liabilities 4,199,134 841,079
---------- -------
Total Liabilities $193,250,914 161,343,947
----------- -----------
Stockholders' equity
Commonstock, $.01 par value, 5,000,000 shares authorized; 4,947,911 shares
issued and outstanding at September 30,1999
and 4,941,547 at December 31, 1998 49,479 49,416
Additional paid-in capital 15,933,302 15,883,053
Accumulated deficit (1,764,041) (2,479,541)
Accumulated other comprehensive loss (284,088) (331,552)
--------- ---------
Total Stockholders' Equity $ 13,934,652 13,121,376
---------- ----------
Total Liabilities and Stockholders' Equity $207,185,566 174,465,323
=========== ===========
See accompanying Notes to Consolidated Condensed Financial Statements.
3
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Consolidated Condensed Statements of Operations
For Three and Nine Months Ended September 30, 1999 and 1998
(Unaudited)
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
1999 1998 1999 1998
---- ---- ---- ----
Interest income:
Loans $3,535,310 2,728,065 9,714,950 7,597,990
Securities 69,109 66,362 199,531 237,803
Interest-bearing deposits and other 66,327 69,150 210,355 210,803
---------- ---------- ---------- ----------
Total interest income 3,670,746 2,863,577 10,124,836 8,046,596
---------- ---------- ---------- ----------
Interest expense:
Deposit accounts 1,818,254 1,559,854 5,100,158 4,459,684
Federal Home Loan Bank advances & other
borrowings 544,044 389,264 1,303,059 1,097,160
---------- ---------- ---------- ----------
Total interest expense 2,362,298 1,949,118 6,403,217 5,556,844
---------- ---------- ---------- ----------
Net interest income 1,308,448 914,459 3,721,619 2,489,752
Provision for loan losses 60,000 45,000 210,000 95,648
---------- ---------- ---------- ----------
Net interest income after provision 1,248,448 869,459 3,511,619 2,394,104
---------- ---------- ---------- ----------
Other income:
Fees and service charges 164,785 41,379 232,860 114,302
Rents -- 18,773 -- 24,471
Gain on sale of assets 77,913 44,665 340,945 214,295
Other miscellaneous 60,745 113,231 318,847 266,787
---------- ---------- ---------- ----------
Total other income 303,443 218,048 892,652 619,855
---------- ---------- ---------- ----------
Other expenses:
Employee compensation & benefits 573,491 455,151 1,785,315 1,205,335
Occupancy and equipment 208,405 145,092 646,854 426,088
Data processing expense 55,842 23,388 136,896 70,882
Professional fees 79,809 62,077 197,823 155,834
FDIC Insurance 31,125 24,878 87,980 186,146
Loss on sale of investment securities -- -- -- 9,945
Other miscellaneous 212,272 122,235 591,725 372,491
---------- ---------- ---------- ----------
Total other expense 1,160,944 832,821 3,446,593 2,426,721
---------- ---------- ---------- ----------
Net income before income tax 390,947 254,686 957,678 587,238
Income tax expense 87,096 93,183 242,178 222,460
---------- ---------- ---------- ----------
Net income $ 303,851 161,503 715,500 364,778
========== ========== ========== ==========
Per share amounts:
Basic and Diluted Earnings per share .06 .03 .14 .07
Weighted average number of shares outstanding 4,947,911 4,941,547 4,944,391 4,941,547
See accompanying Notes to Consolidated Financial Statements.
4
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Consolidated Condensed Statements of Cash Flows4
For the Nine Months Ended September 30, 1999 and 1998
(Unaudited)
1999 1998
---- ----
Cash flows from operating activities:
Net income $ 715,500 364,778
Adjustments to reconcile net income to net cash flows from operations:
Depreciation & amortization of property & equipment 288,867 103,870
Amort. (net) of premiums, fees & disc. on loans & securities 284,821 295,285
Provision for loan losses 210,000 105,000
Gain on sale of assets (340,945) (204,350)
Accretion of stock option expense 32,812 14,584
Deferred income taxes 337,816 271,012
Executive supplemental income plan (84,550) (1,383,506)
Loans originated or purchased, held for sale (6,164,671) (3,935,950)
Cash provided by (used for) changes in:
Accrued interest receivable (435,564) (36,467)
Prepaid expenses & other assets (610,367) 48,731
Official checks 781,237 46,299
Accrued expenses & other liabilities 3,358,055 54,387
------------ ------------
Net cash used by operating activities (1,626,989) (4,256,327)
------------ ------------
Cash flows from investing activities:
Acquisition of office properties and equipment (230,728) (187,239)
Sale (purchase) of Federal Home Loan Bank of Atlanta stock 40,000 (297,500)
Proceeds collected from loan sales 23,353,596 4,455,406
Reimbursement of real estate owned costs 145,179 86,021
Addition to real estate owned 195,231 719,377
Proceeds from sale of real estate owned 910,827 942,107
Proceeds from securities available for sale -- 3,340,055
Principal collected on loans 31,279,462 28,973,230
Loans originated or purchased (83,663,305) (60,006,115)
------------ ------------
Net cash (used in) investing activities (27,969,738) (21,974,658)
------------ ------------
Cash flows from financing activities:
Increase in deposits, net 20,894,887 13,471,267
Increase in Federal Home Loan Bank advances 5,200,000 11,500,000
Issuance of capital stock, net of stock issuance costs 17,500 --
Net increase in advance payments by borrowers for taxes & insurance 1,672,788 1,322,659
------------ ------------
Net cash provided by financing activities 27,785,175 26,293,926
------------ ------------
Decrease (increase) in cash and cash equivalents (1,811,552) 62,941
Cash and cash equivalents at beginning of period 7,165,433 4,002,050
------------ ------------
Cash and cash equivalents at end of period $ 5,353,881 4,064,991
============ ============
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 September 30, 1999 and December
31, 1998, and the consolidated condensed statements of operations for the three
and nine month periods ended September 30, 1999 and 1998, and the cash flows for
the nine month periods ended September 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 September 30, 1999, the results of operations for the three and nine month
periods ended September 30, 1999 and 1998, and cash flows for the nine month
periods ended September 30, 1999 and 1998. The results of operations for the
nine month period ended September 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 of 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 nine month periods ended September 30,
1999 was $319,146 and $762,964, respectively, as compared to the three and nine
month periods ended September 30, 1998 of $177,398 and $441,341, 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.
(continued)
6
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (unaudited)
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.
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 September 30, 1999, impaired loans amounted to $1.9 million as compared to
$2.0 million at September 30, 1998. Included in the allowance for loan losses is
$256 thousand related to the impaired loans as compared to $235 thousand at
September 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 nine months of 1999, the average recorded investment in impaired
loans was $1.7 million and $47,060 of interest income was recognized on loans
while they were impaired. All of this income was recognized using a cash basis
method of accounting.
A summary of loans receivable at September 30, 1999 and December 31, 1998 is as
follows:
September 30, 1999 December 31, 1998
------------------ -----------------
Mortgage Loans:
Permanent conventional:
Commercial 13,084,327 14,883,511
Residential 154,096,997 130,448,017
Residential Construction 30,600,763 11,518,308
----------- -----------
Total Mortgage Loans 197,782,087 156,849,836
Commerical loans 368,899 354,686
Consumer loans 1,193,008 998,826
Lines of credit 1,368,938 1,242,968
----------- -----------
Total loans receivable 200,712,932 159,446,316
(continued)
7
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (unaudited)
Net premium on mortgage loans purchased 1,817,143 1,374,559
Deduct:
Unearned loan origination fees, net of direct loan
origination costs 9,431 27,171
Undisbursed portion of loans in process 14,476,724 7,589,414
Allowance for loan losses 1,333,798 1,136,056
----------- -----------
Loans receivable, net 186,710,122 152,068,234
=========== ===========
5. Allowance for Losses
The following is an analysis of the activity in the allowance for loan losses
for the periods presented:
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
1999 1998 1999 1998
---- ---- ---- ----
Balance at beginning of period $ 1,272,435 1,130,200 1,136,056 1,110,521
Provision for loan losses 60,000 45,000 210,000 95,648
Less Charge-offs (2,678) -- (24,598) (39,458)
Plus recoveries 4,041 3,066 12,340 11,555
------------- ------------- ------------- -------------
Balance at end of period $ 1,333,798 1,178,266 1,333,798 1,178,266
============= ============= ============= =============
Loans Outstanding $ 186,710,122 150,760,657 186,710,122 150,760,657
Ratio of charge-offs to Loans Outstanding .001% .000% .01% .03%
Ratio of allowance to Loans Outstanding .71% .78% .71% .78%
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 September 30, 1999, management made a provision of $60,000
based on its evaluation of the loan portfolio, as compared to the provision of
$45,000 made in the quarter ended September 30, 1998. 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 over the previous year. 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
Nine Months Ended September 30,
1999 1998
---- ----
Cash paid during the period for:
Interest expense $ 2,557,966 2,574,278
Income taxes $ -- --
(continued)
8
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (unaudited)
Supplemental disclosure of non-cash transactions:
Real estate acquired in settlement of loans $ 195,231 719,377
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 $(455,488) (557,287)
Deferred income tax asset $(171,400) (209,706)
--------- ---------
Unrealized loss on investment securities transferred
from available for sale to held to maturity $(284,088) (347,581)
========= =========
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 Nine Months
Ended September 30, Ended September 30,
1999 1998 1999 1998
---- ---- ---- ----
Balance at beginning of period $ 389,532 $ 1,066,089 1,107,295 1,389,900
Acquired through foreclosure -- 508,154 195,231 719,377
Add: Capitalized costs (net of
insurance recoveries) (32,049) -- (145,179) (86,021)
Less: Sale of real estate (128,230) (502,446) (910,827) (942,107)
Less: Chargeoffs (2,678) -- (19,945) (9,352)
----------- ----------- ----------- -----------
Balance at end of period $ 226,575 $ 1,071,797 226,575 1,071,797
=========== =========== =========== ===========
8. Investment Securities
At September 30, 1999
---------------------
Book Value Market Value
---------- ------------
Held to maturity:
FHLB Floating Rate Note, 4.076% due 7/30/03 $6,544,512 6,501,250
========== ==========
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 September 30,
1999, the bond had a market value of $6,501,250 and gross unrealized pretax
losses of $498,750. 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 September 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
September 30, 1999, the Bank did not purchase or sell any bonds.
(continued)
9
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (unaudited)
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 September 30, 1999:
Maturity Date Rate Amount Type
------------- ---- ------ ----
12/01/99 5.09% 5,000,000 Fixed rate
12/02/99 5.75% 13,700,000 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 5.47% $33,700,000
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
--------- ---- ------
7/31/99 5.29% $ 33,000,000
8/31/99 5.45% 31,000,000
9/30/99 5.47% 33,700,000
The maximum amount of advances outstanding at any month end during the three
month period ended September 30, 1999, was $33,700,000. During the three and
nine month periods ended September 30, 1999, average advances outstanding
totaled $32.1 and $30.2 million at average rates of 5.39% and 5.25%,
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, approximately 133% of the outstanding
advances, and a pledge of all FHLB stock owned by the Bank.
The maximum amount of other borrowings outstanding at any month end during the
three month period ended September 30, 1999, was $10,000,000. During the three
and nine month periods ended September 30, 1999, average other borrowings
outstanding totaled $4.4 and $1.5 million at average rates of 10.2% and 10.2%,
respectively.
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.
(continued)
10
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (unaudited)
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.
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
(continued)
11
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (unaudited)
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
September 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 September 30,
1999, the closing price for the common stock was $2.56 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
=======
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.
(continued)
12
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (unaudited)
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 September 30, 1999, the closing
price for the common stock was $2.56 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)
(continued)
13
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 increased during the third quarter of 1999 primarily
as a result of an increase in its net interest income which was attributable to
the growth in the loan portfolio. 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 third quarter of 1999. 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 this continued in
the third quarter. 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 September 30, 1999, the Company did make an
addition to its loan loss reserves based on its evaluation of the loan
portfolio.
The Company is expecting an operating profit for 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.
(continued)
14
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 June 30, 1999, the most recent report
available, was -58%, as compared to -48% at June 30, 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. In addition, during the third quarter of 1999 the
Company sold fixed rate loans from its portfolio and began increasing the amount
of deposits with terms of one year or longer in order to improve the Company's
interest rate risk profile. 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 three quarters of 1999 as compared to the first three
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.
(continued)
15
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operation
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.
The following table sets forth information about rates and yields:
Yields and Rates at
September 30, December 31, September 30,
1999 1998 1998
---- ---- ----
Yields on:
Loan portfolio 7.56% 7.70% 7.76%
Other interest-earning assets 4.97% 4.15% 4.49%
---- ---- ----
Interest-earning assets 7.40% 7.37% 7.46%
Cost of:
Deposits 4.88% 5.36% 5.42%
FHLB advances and other interest-bearing liabilities 5.48% 5.79% 5.90%
---- ---- ----
Interest-bearing liabilities 4.99% 5.44% 5.51%
Interest rate spread 2.41% 1.93% 1.95%
==== ==== ====
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, other borrowings, 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
(continued)
16
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operation
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 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 nine month period ended September 30, 1999, the Company used funds
primarily from principal collected on loans, $31,279,462; proceeds from loan
sales, $23,353,596; increases in net deposits, $20,894,887; an increase in FHLB
advances, $5,200,000; an increase in accrued expenses and other liabilities,
$3,358,055; an increase in advance payment by borrowers, $1,672,788; proceeds
from the sale of real estate owned, $910,827; and a decrease in cash,
$1,811,552, to fund the origination and purchase of loans, $89,827,976. As of
September 30, 1999, the Company had outstanding FHLB advances of $33,700,000.
Management believes that in the future funds will be obtained from the above
sources.
At September 30, 1999, loans-in-process, or closed loans scheduled to be funded
over a future period of time, totaled $14,476,724. Loans committed, including
loans to be purchased, but not closed, totaled $11,763,829 and available lines
of credit totaled $745,769. During the nine month period ended September 30,
1999, the Company acquired $52.4 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 September 30, 1999,
average liquidity was 6.00%.
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.
(continued)
17
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operation
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.
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
September 30, 1999:
At September 30, 1999
---------------------
Tier I Risk-Based
------ ----------
(Dollars in Thousands)
Percent Percent
Amount of Assets Amount of Assets
------ --------- ------ ---------
Regulatory Capital $13,011 6.27% $14,296 12.14%
Requirement 8,301 4.00% 9,424 8.00%
------- ----- ----- -----
Excess $ 4,710 2.27% $4,872 4.14%
===== ===== ===== =====
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
(continued)
18
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operation
results in terms of historical dollars, without considering changes in the
relative purchasing power of money over time due to inflation. Unlike most
industrial companies, substantially all of the assets and liabilities of the
Company are monetary in nature. As a result, interest rates have a more
significant impact on the Company's performance than the effects of general
levels of inflation. Interest rates do not necessarily move in the same
direction or in the same magnitude as the prices of goods and services, since
such prices are affected by inflation to a larger extent than interest rates.
Impact of Accounting Requirements
In June 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
(continued)
19
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operation
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.
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.
(continued)
20
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operation
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.
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 was 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.
Results of Operations
Comparison of the Three-Month Periods Ended September 30, 1999 and 1998
General. The Company had a net profit for the three-month period ended September
30, 1999 of $303,851 or $.06 per share, compared to a net profit of $161,503 or
$.03 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 $807,169 to $3,670,746
for the three-month period ended September 30, 1999 from $2,863,577 for the same
period in 1998. Interest income on loans increased to $3,535,310 in 1999 from
$2,728,065 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
increased by $2,747 for the three-month period ended September 30, 1999 over the
same period in 1998, as a result of an increase in the yield on securities
owned. Other interest and dividends decreased $2,823 during the same three-month
period in 1999 from 1998, as a result of a decrease in the
(continued)
21
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operation
average volume of other interest-bearing assets. Management expects the rates
earned on the portfolio to fluctuate with general market conditions.
Interest expense increased $413,180 during the three-month period ended
September 30, 1999 to $2,362,298 from the same period in 1998 due to an increase
in the amount of deposits and borrowings. Interest on deposits increased to
$1,818,254 in 1999 from $1,559,854 in 1998, as a result of an increase in the
amount of deposits, and interest on FHLB advances and Other Borrowings increased
to $544,044 in 1999 from $389,264 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 September 30, 1999, management made a
provision for loan losses of $60,000 based on its evaluation of the loan
portfolio, which was an increase of $15,000 from the same period in 1998. The
primary reason for the increased provision was the increased size of the loan
portfolio from the prior year. There were recoveries of $4,041 during the
three-month period ended September 30, 1999, as compared to net recoveries of
$3,066 during the three-month period ended September 30, 1998. Total
non-performing loans at September 30, 1999, were $1,635,686 compared to
$1,598,525 at September 30, 1998. The allowance for loan losses at September 30,
1999 was $1,333,798 or 82% of non-performing loans and .71% of net loans
outstanding, versus $1,178,266 at September 30, 1998, or 74% of non-performing
loans and .78% of net loans outstanding.
Total Other Income. Other income increased from $218,048 for the three-month
period ended September 30, 1998, to $303,443 for the same period in 1999. The
increase in other income was due to an increase of $123,406 in fees and service
charges, an increase of $33,248 in gains on the sale of assets, offset by a
decrease of $52,486 in other miscellaneous income, and a decrease of $18,773 in
rents. The increase in fees and service charges was primarily the result of an
increase in servicing fees on loans and increased fees on deposit accounts.
During the third quarter the Company began servicing approximately 2,800 loans
that are owned by other companies. The increase in gains on assets sold was the
result of an increase in the amount of loans sold during the period. The
decrease in other miscellaneous income was attributable primarily to decreased
other loan income, resulting from a decrease in the amount of loans originated.
Rent income decreased as a result of the sale of the rental property.
Total Other Expense. Other expense increased to $1,160,944 for the three-month
period ended September 30, 1999, from $832,821 for the same period in 1998.
Compensation and benefits increased to $573,491 in 1999, from $455,151 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 $63,313 in 1999, to $208,405 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
$32,454 due to an increase in the number of loans serviced, an increase in the
number of deposit accounts, and the opening of the Sanford Branch. Professional
fees increased by $17,732, as a result of increased professional and regulatory
fees, resulting primarily from the growth of the Company. FDIC Insurance expense
increased by $6,247, as a result of an increase in the amount of deposits in the
Bank. Other miscellaneous expense increased by $90,037 due primarily to
increases in loan expenses related to the increased number of loans originated
by the Company and increases in general and administrative expenses resulting
from the growth
22
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operation
of the Company during the year.
Comparison of the Nine-Month Periods Ended September 30, 1999 and 1998
General. The Company had a net profit for the nine month period ended September
30, 1999, of $715,500 or $.14 per share, compared to a net profit of $364,778 or
$.07 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 $10,124,836 for the
nine month period ended September 30, 1999, from $8,046,596 for the same period
in 1998. Interest income on loans increased to $9,714,950 in 1999 from
$7,597,990 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 $38,272 for the nine month period ended September 30,1999 over the
same period in 1998, as a result of a decrease in the amount of securities
owned, offset partially by an increase in the yield on the securities. Other
interest and dividends decreased $448 during the same nine 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 $846,373 to $6,403,217 during the nine month
period ended September 30,1999, from $5,556,844 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 $5,100,158 in 1999,
from $4,459,684 in 1998 as a result of increased deposits offset partially by a
decrease in the rates paid on deposits. Interest on FHLB advances and other
borrowings increased to $1,303,059 in 1999 from $1,097,160 in 1998 as a result
of an increase in the average amount of advances and other borrowings
outstanding which was partially offset by a decrease in the rates paid.
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 nine months of 1999 management did make a provision
for loan losses of $210,000 based on its evaluation of the loan portfolio. The
primary reason for the increased provision was the growth in the loan portfolio
during the year. The total provision for loan losses was $95,648 during the same
period in 1998. Net charge-offs on loans totaled $24,598 during the nine month
period ended September 30, 1999 compared to $39,458 during the nine month period
ended September 30,1998. Total non-performing loans at September 30, 1999, were
$1,635,686 compared to $1,598,525 at September 30, 1998. The allowance for loan
losses at September 30, 1999 was $1,333,798 or 82% of non-performing loans and
.71% of net loans outstanding, versus $1,178,266 at September 30, 1998, or 74%
of non-performing loans and .78% of net loans outstanding.
Total Other Income. Other income increased from $619,855 for the nine month
period ended September 30, 1998, to $892,652 for the same period in 1999. The
increase in other income was due to an increase of $126,650 in gain on the sale
of assets, an increase of $118,558 in fees and service charges, an increase of
$52,060 in other miscellaneous income, offset partially by a $24,471 decrease in
rental income. Fees and service charges increased primarily because of an
increase in servicing fees on loans and increased fees on deposit accounts.
Gains on the sale of assets increased as a result of an increase in the amount
of loans and
23
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operation
real owned sold during the year. Other miscellaneous income increased for the
nine month period ended September 30, 1999 due primarily to increased other loan
income resulting from an increase in the amount of loans originated. 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 $3,446,593 in the nine month
period ended September 30, 1999, from $2,426,721 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 $1,785,315 in 1999 from
$1,205,335 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 $220,766 in 1999 to $646,854 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 $66,014 as a
result of an increase in the number loans serviced, an increase in the number of
accounts at the Bank, and the opening of the Sanford Branch. Professional fees
increased by $41,989, as a result of increased professional and regulatory fees,
resulting primarily from the growth of the Company. Other miscellaneous expense
increased by $219,234 due primarily to increases in loan expenses related to the
increased number of loans originated by the Company and increases in general and
administrative expenses resulting 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 nine month period ended September 30, 1999. FDIC Insurance
expense decreased by $98,166 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)
24
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: November 12, 1999 By: /s/ Aubrey H. Wright, Jr.
Aubrey H. Wright, Jr.
Chief Financial Officer
and duly authorized
Officer of the Registrant
25