================================================================================
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:
================================================================================
March 31, 1999
Commission File Number:
================================================================================
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 4,941,547
-------------------------------------- ----------------------------
(class) Outstanding at March 31,1999
================================================================================
<PAGE>
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Page
Consolidated Condensed Balance Sheets (unaudited)
March 31, 1999 and December 31, 1998.......................... 3
Consolidated Condensed Statements of Operations for the
Three months ended March 31, 1999 and 1998 (unaudited)........ 4
Consolidated Condensed Statements of Cash Flows for the
Three months ended March 31, 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.........13-21
PART II. OTHER INFORMATION
Signatures............................................................. 22
2
<PAGE>
<TABLE>
<CAPTION>
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Balance Sheets
March 31, 1999 December 31, 1998
Assets (unaudited)
<S> <C> <C>
Cash $ 1,974,172 2,117,564
Interest bearing deposits 3,115,847 5,047,869
Investment securities held to maturity 6,493,863 6,468,411
Loans receivable, net (net of allowance for loan losses of
$1,191,075 in 1999 and $1,136,056 in 1998) 159,945,697 151,764,284
Loans held for sale (market value at March 31, 1999 of $757,545) 757,545 303,950
Accrued interest receivable - Loans 910,031 949,185
Accrued interest receivable - Securities 73,242 138,654
Notes Receivable 50,000 50,000
Federal Home Loan Bank of Atlanta stock, at cost 1,725,000 1,725,000
Real Estate owned, net 947,375 1,107,295
Property and equipment, net 917,039 990,330
Prepaid expenses and other assets 78,572 806,318
Executive supplemental income plan-cash surrender
value life insurance policies 2,514,588 2,490,319
Deferred income taxes 341,039 506,144
------------- -----------
Total $ 179,844,010 174,465,323
============= ===========
Liabilities and Stockholders' Equity
Deposit accounts $ 140,262,766 129,292,337
Official Checks 1,326,690 2,103,387
Federal Home Loan Bank advances 23,500,000 28,500,000
Advance payments for taxes and insurance 863,415 607,144
Accrued expenses and other liabilities 564,703 841,079
------------- -----------
Total Liabilities $ 166,517,574 161,343,947
------------- -----------
Stockholders' equity
Commonstock, $.01 par value, 5,000,000 shares
authorize 4,941,547 shares
issued and outstanding at March 31,1999
and December 31, 1998 49,416 49,416
Additional paid-in capital 15,893,990 15,883,053
Accumulated deficit (2,301,291) (2,479,541)
Accumulated other comprehensive loss (315,679) (331,552)
------------- -----------
Total Stockholders' Equity $ 13,326,436 13,121,376
------------- -----------
Total Liabilities and Stockholders' Equity $ 179,844,010 174,465,323
============= ===========
See accompanying Notes to Consolidated Condensed Financial Statements
</TABLE>
3
<PAGE>
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Consolidated Condensed Statements of Operations
For Three Months Ended March 31, 1999 and 1998
(Unaudited)
Three Months
Ended March 31,
1999 1998
---- ----
Interest income:
Loans $2,967,828 2,401,931
Securities 65,147 81,699
Interest-bearing deposits and other 75,638 71,254
---------- ----------
Total interest income 3,108,613 2,554,884
---------- ----------
Interest expense:
Deposit accounts 1,635,863 1,426,197
Federal Home Loan Bank advances & other
borrowings 352,947 337,768
---------- ----------
Total interest expense 1,988,810 1,763,965
---------- ----------
Net interest income 1,119,803 790,919
Provision for loan losses 60,000 30,000
---------- ----------
Net interest income after provision 1,059,803 760,919
---------- ----------
Other income:
Fees and service charges 35,335 33,536
Gain on sale of assets 140,445 10,260
Other miscellaneous 105,067 80,571
---------- ----------
Total other income 280,847 124,367
---------- ----------
Other expenses:
Employee compensation & benefits 588,482 347,896
Occupancy and equipment 208,703 137,970
Data processing expense 37,760 23,025
Professional fees 47,345 40,491
FDIC Insurance 27,540 80,624
Other miscellaneous 167,400 109,252
---------- ----------
Total other expense 1,077,230 739,258
---------- ----------
Net income before income tax 263,420 146,028
Income tax expense 85,171 54,465
---------- ----------
Net income $ 178,249 91,563
========== ==========
Per share amounts:
Earnings per share .04 .02
Cash dividends per share 0.00 0.00
Weighted average number of shares outstanding 4,941,547 4,941,547
See accompanying Notes to Consolidated Financial Statements.
4
<PAGE>
<TABLE>
<CAPTION>
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Consolidated Condensed Statements of Cash Flows
For the Three Months Ended March 31, 1999 and 1998
(Unaudited)
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 178,249 91,563
Adjustments to reconcile net income to net cash flows from operations:
Depreciation & amortization of property & equipment 96,269 33,361
Amort. (net) of premiums, fees & disc. on loans & securities 91,986 104,530
Provision for loan losses 60,000 30,000
Gain on sale of assets (140,445) (10,260)
Accretion of stock option expense 10,937 --
Deferred Income Taxes 165,105 55,500
Executive supplemental income plan (24,269) (130,203)
Cash provided by (used for) changes in:
Accrued interest receivable 104,566 51,094
Prepaid expenses & other assets 727,746 95,746
Official checks (776,697) (70,635)
Accrued expenses & other liabilities (276,376) (50,257)
------------ ------------
Net cash provided by operating activities 217,071 200,439
------------ ------------
Cash flows from investing activities:
Acquisition of office properties and equipment (22,978) (17,790)
Proceeds collected from loan sales 7,903,003 1,125,328
Reimbursement of real estate owned costs 57,392 16,668
Addition to real estate owned 91,580 159,509
Proceeds from sale of real estate owned 184,869 --
Principal collected on loans 10,280,721 7,498,144
Loans originated or purchased (27,013,772) (15,272,552)
------------ ------------
Net cash (used in) investing activities (8,519,185) (6,490,693)
------------ ------------
Cash flows from financing activities:
Increase in deposits, net 10,970,429 2,341,101
Increase (decrease) in Federal Home Loan Bank advances (5,000,000) 2,550,000
Net increase in advance payments by borrowers for taxes & insurance 256,271 341,507
------------ ------------
Net cash provided by financing activities 6,226,700 5,232,608
------------ ------------
(Decrease) in cash and cash equivalents (2,075,414) (1,057,646)
Cash and cash equivalents at beginning of period 7,165,433 4,002,050
------------ ------------
Cash and cash equivalents at end of period $ 5,090,019 2,944,404
============ ============
</TABLE>
See accompanying Notes to Consolidated Condensed Financial Statements.
5
<PAGE>
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 March 31, 1999 and December 31,
1998, and the consolidated condensed statements of operations for the three
month periods ended March 31, 1999 and 1998, and the cash flows for the three
month periods ended March 31, 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 March 31, 1999, the results of operations for the three month periods
ended March 31, 1999 and 1998, and cash flows for the three month periods ended
March 31, 1999 and 1998. The results of operations for the three month period
ended March 31, 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 month period ended March 31, 1999 was
$194,122 as compared to the three period ended March 31, 1998 of $120,080 .
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
(continued)
6
<PAGE>
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (unaudited)
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 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 March 31, 1999, impaired loans amounted to $2.0 million as compared to $2.2
million at March 31, 1998. Included in the allowance for loan losses is $248
thousand related to the impaired loans as compared to $311 thousand at March 31,
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 three months of 1999, the average recorded investment in impaired
loans was $2.0 million and $15,062 of interest income was recognized on loans
while they were impaired. All of this income was recognized using a cash basis
method of accounting.
5. Allowance for Losses
The following is an analysis of the activity in the allowance for loan losses
for the periods presented:
Three Months
Ended March 31,
---------------
1999 1998
---- ----
Balance at beginning of period $ 1,136,056 1,110,521
Provision for loan losses 60,000 30,000
Less Charge-offs 9,239 --
Plus recoveries 4,258 5,639
------------ ------------
Balance at end of period $ 1,191,075 1,146,160
============ ============
Loans Outstanding $160,703,242 128,097,403
Ratio of charge-offs to Loans Outstanding .006% - 0 -%
Ratio of allowance to Loans Outstanding .74% .89%
(continued)
7
<PAGE>
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 March 31, 1999, management made a provision of $60,000 based
on its evaluation of the loan portfolio, as compared to the provision of $30,000
made in the quarter ended March 31, 1998. Although the amount of loans
outstanding increased, the level of the allowance for losses decreased as a
percentage of loans outstanding, however the dollar amount of the allowance
increased during the quarter. 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.
<TABLE>
<CAPTION>
6. Supplemental Disclosure of Cash Flow and
Non-Cash Investing and Financing Activities
Three Months Ended March 31,
1999 1998
<S> <C> <C>
Cash paid during the period for:
Interest expense $ 769,832 822,541
Income taxes $ -- --
Supplemental disclosure of non-cash transactions:
Real estate acquired in settlement of loans $ 91,580 159,509
Market Value adjustment - investment securities available for sale:
Market value adjustment - investments $ -- (27,219)
Deferred income tax asset $ -- (10,243)
--------- --------
Unrealized loss on investment securities
available for sale, net $ -- (16,976)
Unrealized loss on investment securities transferred
from available for sale to held to maturity $(506,138) (607,105)
Deferred income tax asset $(190,459) (228,454)
--------- --------
Unrealized loss on investment securities transferred
from available for sale to held to maturity $(315,679) (378,651)
========= ========
</TABLE>
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
Ended March 31,
1999 1998
Balance at beginning of period $ 1,107,295 $ 1,389,900
Acquired through foreclosure 91,580 159,509
Add: Capitalized costs (57,392) (16,668)
Less: Sale of real estate 184,869 --
Less: Chargeoffs 9,239 --
----------- -----------
Balance at end of period $ 947,375 $ 1,532,741
=========== ===========
(continued)
8
<PAGE>
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (unaudited)
8. Investment Securities
At March 31, 1999
-----------------
Book Value Market Value
---------- ------------
Held to maturity:
FHLB Floating Rate Note, 3.71% due 7/30/03 $6,493,863 6,538,438
========== ==========
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 March 31, 1999,
the bond had a market value of $6,538,438 and gross unrealized pretax losses of
$461,562. 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 March 31, 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 March 31,
1999, the Bank did not purchase or sell any bonds.
9. Advances from Federal Home Loan Bank
The following is an analysis of the advances from the Federal Home Loan Bank:
Amounts Outstanding at March 31, 1999:
Maturity Date Rate Amount Type
- ------------- ---- ------ ----
12/01/99 5.09% 5,000,000 Fixed rate
12/02/99 5.30% 3,500,000 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 5.28% $23,500,000
==== ===========
Variable rate advances reprice daily and may be repaid at any time without
penalty. Fixed rate advances incur a prepayment penalty if repaid prior to
maturity, and the interest rate is fixed for the term of the advance.
Amounts Outstanding at:
Month-end Rate Amount
--------- ---- ------
1/31/99 5.14% $ 34,000,000
2/28/99 5.23% 24,500,000
3/31/99 5.28% 23,500,000
The maximum amount of borrowings outstanding at any month end during the three
period ended March 31, 1999, was $34,000,000. During the three month period
ended March 31, 1999, average advances outstanding totaled $27.4 million at an
average rate of 5.15%.
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.
(continued)
9
<PAGE>
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (unaudited)
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 the Holding
Company Order and the Bank's Order. The OTS officially rescinded the growth
restrictions on March 13, 1998, and the respective Orders were rescinded on June
1, 1998.
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.
(continued)
10
<PAGE>
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (unaudited)
12. 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, 1998, 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 of the Company. The Program comprises four parts: an Incentive Stock
Option Plan, a Compensatory Stock Option Plan, a Stock Appreciation Rights Plan,
and a Performance Plan. The Program provides for a maximum of 325,000 shares of
authorized common stock to be reserved for future issuance pursuant to stock
options granted under one of the four enumerated parts of the Program.
The Program was subject to approval by the shareholders, which was obtained at
the 1998 Annual Meeting of Shareholders. The exercise price of each option is
$4.00 per share, the fair market value of the common stock on January 30, 1998
(the date of grant), based upon the "bid price" on that date. At March 31, 1999,
the closing price for the common stock was $2.69 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
change to the income of the Company in connection with the grant or exercise of
the stock option.
Number of Shares
Subject to
Name Title Options Granted
---- ----- ---------------
James V. Suskiewich President/CEO 120,000
Aubrey H. Wright Senior Vice President/CFO 70,000
Louis E. Laubscher Vice President/CLO 30,000
Jennifer B. Brodnax Vice President/Operations 15,000
Kevin L. Kranz Vice President/Loan Servicing 15,000
Thomas J. Punzak Treasurer 15,000
------
Total 265,000
=======
The terms of the Program may be amended by the Program Administrators (non
employee directors) except that no amendment may increase the maximum number of
shares included in the Program, change the exercise price of incentive stock
options, increase the maximum term established for any stock option, stock
appreciation right or share award, or permit any grant to a person who is not a
full-time employee of the Company.
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'
11
<PAGE>
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (unaudited)
Plan"). Only non-employee directors are eligible to participate in the
Directors' Plan. Each member of the Board of current Directors was granted a
single non-statutory option to purchase 25,000 shares of common stock at $4.00,
the fair market price on the effective date of the Directors' Plan (January 30,
1998, the date the stock options were granted, subject to shareholder approval).
At March 31, 1999, the closing price for the common stock was $2.69 per share.
New Directors elected or appointed by the Board of Directors of the Company or
any wholly-owned subsidiary of the Company may be granted stock options to
purchase shares of common stock, as determined by the Board of Directors in its
sole discretion. The per share exercise price at which the shares of common
stock may be purchased upon exercise of a granted stock option will be equal to
the fair market value of a share of common stock as of the date of grant. 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)
12
<PAGE>
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 first 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.
Earnings have been negatively affected somewhat by the increase in loan payoffs
the Company has experienced, as customers refinance their mortgages at lower
rates.
Total interest income increased in the first 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 first quarter of 1999 the write-off of premiums abated
somewhat and was $12,500 less than the write-off in first quarter of 1998. As
long as refinancings continue there is the possibility that earnings could be
adversely affected to some degree by the premium write-offs.
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 decease somewhat in future periods, unforeseen economic conditions and
other circumstances beyond the Company's control could result in material
additions to the loss reserves in future periods if the level of non-performing
assets increases. The Company does anticipate additions to the loss reserves in
future periods as part of the normal course of business, since the Company's
assets, consisting primarily of loans, are continually evaluated and the loss
allowances are adjusted to reflect the losses in the portfolio on an ongoing
basis. During the quarter ended March 31, 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 projecting 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.
General
(continued)
13
<PAGE>
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operation
Federal Trust Corporation ("Federal Trust" or "Holding Company"), is a unitary
savings and loan holding company for Federal Trust Bank ("Bank"). Federal Trust
and the Bank are collectively referred to as the "Company" The Holding Company
acquired all outstanding common stock of the Bank on February 28, 1989, pursuant
to an agreement and plan of reorganization whereby five shares of the Company's
common stock were exchanged for each four shares of the Bank's common stock on
that date. The Bank is currently the only subsidiary of the Company.
In connection with the management restructuring that was completed in May of
1997, the 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 and provisions for losses on real estate owned and
income taxes.
The Company's one year GAP position at December 31, 1998, the most recent report
available, was -45%, as compared to -1% at December 31, 1997. 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 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 has continued in
1999, although the Company experienced a reduction in the write-off of premiums
in the first quarter of 1999 as compared to the first quarter of 1998. In the
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
(continued)
14
<PAGE>
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operation
(+100, +200, +300, +400 and -100, -200, -300, -400 basis points); (iii) an
Asset/Liability Management Committee ("ALCO"); and (iv) quarterly reporting to
the Board of Directors. The ALCO monitors the Company's interest rate risk
position and manages the asset and liability mix in order to better match the
maturities and repricing terms of the interest-earning assets and
interest-bearing liabilities. Since the latter half of 1993, the ALCO has
focused primarily on (i) emphasizing the origination and purchase of
single-family residential adjustable-rate mortgage loans ("ARMs"); and (ii)
extending the term of the Bank's deposits and borrowings; and (iii) maintaining
an adequate amount of liquid assets (cash and interest-earning assets). As a
result, the Company has continued to originate and purchase ARM loans throughout
this period and has extended deposits and borrowings to longer terms whenever
possible through its pricing practices.
The following table sets forth information about rates and yields:
<TABLE>
<CAPTION>
Yields and Rates at
March 31, December 31, March 31,
1999 1998 1998
---- ---- ----
Yields on:
<S> <C> <C> <C>
Loan portfolio 7.52% 7.70% 7.82%
Other interest-earning assets 4.97% 4.15% 4.09%
---- ---- ----
Interest-earning assets 7.35% 7.37% 7.42%
Cost of:
Deposits 4.94% 5.36% 5.42%
FHLB advances and other interest-bearing liabilities 5.15% 5.79% 5.91%
---- ---- ----
Interest-bearing liabilities 4.97% 5.44% 5.50%
Interest rate spread 2.38% 1.93% 1.92%
==== ==== ====
</TABLE>
Liquidity and Capital Resources
General
Like other financial institutions, the Company must ensure that sufficient funds
are available to meet deposit withdrawals, loan commitments, investment needs
and expenses. Control of the Company's cash flow requires the anticipation of
deposit flows and loan payments. The Company's primary sources of funds are
deposit accounts, FHLB advances, and principal and interest payments on loans.
The Company requires funds in the short-term to finance ongoing operating
expenses, pay liquidating deposits, purchase temporary investments in securities
and invest in loans. Short-term requirements are funded through short-term
advances from the FHLB, the sale of temporary investments, deposit growth and
loan principal payments. The Company requires funds in the long-term to invest
in loans for its portfolio, purchase fixed assets and provide for the
liquidation of deposits maturing in the future. The Bank funds its long-term
requirements with proceeds from maturing loans, the sale of loans, the sale of
investments securities available for sale, deposits, long-term advances from the
FHLB and the sale of real estate. Management has no plans to significantly
change long-term funding requirements.
(continued)
15
<PAGE>
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operation
In June, the Company, in response to its request, was advised by the FHLB that
its maximum amount of allowable borrowings had been increased from 20% to 25% of
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 three month period ended March 31, 1999, the Company used funds
primarily from principal collected on loans, $10,280,721; proceeds from loan
sales, $7,903,003; increases in net deposits, $10,970,429; and a decrease in
cash, $2,075,414, to fund the origination and purchase of loans, $27,013,772;
and a decrease in FHLB advances, $5,000,000. As of March 31, 1999, the Company
had outstanding FHLB advances of $23,500,000. Management believes that in the
future funds will be obtained from the above sources.
At March 31, 1999, loans-in-process, or closed loans scheduled to be funded over
a future period of time, totaled $8,433,344. Loans committed including loans to
be purchased, but not closed, totaled $7,450,860 and available lines of credit
totaled $571,163. During the three month period ended March 31, 1999, the
Company acquired $18.0 million in primarily domestic residential mortgage loans.
The Company anticipates that other loan acquisitions will occur in the future.
Funding for these amounts is expected to be provided by the sources described
above.
The last dividend paid to stockholders was on November 14, 1994. Due to the net
losses that were incurred by the Company in 1995 and 1996, no additional
dividends have been declared. The Board of Directors suspended the payment of
dividends for calendar years 1995 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 March 31, 1999, average
liquidity was 7.53%.
The Asset/Liability Management Committee of the Bank meets regularly and, in
part, reviews liquidity levels to ensure that funds are available as needed.
Credit Risk
The Company's primary business is the origination and acquisition of loans to
families and small businesses. This activity entails potential credit losses,
the magnitude of which depends on a variety of economic factors affecting
borrowers which are beyond the control of the Bank. While the Bank has
instituted guidelines and credit review procedures to protect it from avoidable
credit losses, some losses may inevitably occur.
Short-term balloon mortgage loans are sometimes used to allow borrowers the
option of waiting until interest rates are more favorable for a long term fixed
(continued)
16
<PAGE>
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operation
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
Since October of 1994, Federal Trust and the Bank have been operating under
individual cease and desist orders (collectively, the "Orders") which were
voluntarily entered into, with the OTS. The Bank Order superseded a prior
Supervisory Agreement with the OTS. See Item 9 of Notes to Consolidated
Condensed Financial Statements for a full discussion of the Orders. In addition
to the Orders, the Bank was placed under growth restrictions which has had a
negative impact on the Company's earnings.
On December 4, 1997, Federal Trust successfully completed its Rights and
Community Offering. Federal Trust, in turn, infused $3.7 million in capital to
the Bank which is again considered to be "well capitalized" under regulations of
the Federal Deposit Insurance Corporation.
In December 1997, the Bank formally requested that the OTS remove the growth
restrictions. In January 1998, management followed up with a request that the
OTS rescind the Orders against the Holding Company and the Bank. On March 13,
1998, the OTS officially rescinded the growth restrictions against the Bank and
on June 1, 1998, the Orders against Federal Trust and the Bank were rescinded.
Capital Requirements
The Bank is required to meet certain minimum regulatory capital requirements.
The following table presents a summary of the capital requirements for
adequately capitalized banks, the Bank's capital and the amounts in excess as of
March 31, 1999:
At March 31, 1999
-----------------
Tier I Risk-Based
------ ----------
(Dollars in Thousands)
Percent Percent
Amount of Assets Amount of Assets
------ --------- ------ ---------
Regulatory Capital $11,908 6.62% $13,050 12.99%
Requirement 7,196 4.00% 8,035 8.00%
------- ---- ------- -----
Excess $ 4,712 2.62% $ 5,015 5.21%
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,
(continued)
17
<PAGE>
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operation
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 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 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 did not require any further
changes to the plan. The Board of Directors receives quarterly reports regarding
the progress made on the implementation of the Year 2000 Plan. Management has
concluded that the additional costs for Year 2000 compliance will be
approximately $50,000, in addition to already budgeted purchases of new
equipment and software.
The 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
(continued)
18
<PAGE>
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operation
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
on all its systems and has completed the renovation phase on ten of its eleven
systems. The testing phase and implementation phase has been completed on eight
systems, and all systems are scheduled to be finished with the testing and
implementation phases by June 30, 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.
(continued)
19
<PAGE>
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. In
addition, the plan provides for utilizing the services of the Federal Reserve
and the FHLB by telephone.
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
to function properly or at all when the Year 2000 arrives. The failure of the
service bureau 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 March 31, 1999 and 1998
General. The Company had a net profit for the three-month period ended March 31,
1999 of $178,249 or $.04 per share, compared to a net profit of $91,563 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 $553,729 to $3,108,613
for the three-month period ended March 31, 1999 from $2,554,884 for the same
period in 1998. Interest income on loans increased to $2,967,828 in 1999 from
$2,401,931 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 and higher prepayments on mortgage loans
resulting in the expensing of premiums that were paid on many of the loans when
purchased. Interest income on the securities portfolio decreased by $16,552 for
the three-month period ended March 31, 1999 over the same period in 1998, as a
result of a decrease in the amount of securities owned. Other interest and
dividends increased $4,384 during the same three-month period in 1999 from 1998,
as a result of an increase in the average volume of other interest-bearing
assets. Management expects the rates earned on the portfolio to fluctuate with
general market conditions.
Interest expense increased to $224,845 during the three-month period ended March
31, 1999 from $1,763,965 for the same period in 1998 due to an increase in the
amount of deposits offset partially by a decrease in the rates paid. Interest on
deposits increased to $1,635,863 in 1999 from $1,426,197 in 1998, primarily as a
result of an increase in the amount of deposits, and interest on FHLB advances
increased to $352,947 in 1999 from $337,768 in 1998, primarily as a result of an
increase in the average amount of advances outstanding. Management expects to
continue to use FHLB advances as a liability management tool.
Provisions for Loan Losses. A provision for loan losses is generally charged to
operations based upon management's evaluation of the losses in its loan
(continued)
20
<PAGE>
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operation
portfolio. During the first quarter, management made a provision for loan losses
of $60,000 based on its evaluation of the loan portfolio, which was an increase
of $30,000 from the same period in 1998. The primary reason for the increased
provision was the growth in loan portfolio during the first quarter. There were
recoveries of $4,258 during the three-month period ended March 31, 1999, as
compared to net recoveries of $5,639 during the three-month period ended March
31, 1998. Total non-performing loans at March 31, 1999, were $1,685,647 compared
to $1,767,936 at March 31, 1998. The allowance for loan losses at March 31, 1999
was $1,191,075 or 71% of non-performing loans and .74% of net loans outstanding,
versus $1,146,160 at March 31, 1998, or 65% of non-performing loans and .89% of
net loans outstanding.
Total Other Income. Other income increased from $124,367 for the three-month
period ended March 31, 1998, to $280,847 for the same period in 1999. The
increase in other income was due to an increase of $130,185 in gains on the sale
of assets, an increase of $24,496 in other miscellaneous income, and an increase
of $1,799 in fees and service charges. The increase in gains on assets sold was
the result of an increase in the amount of loans sold during the period. The
increase in other miscellaneous income was attributable primarily to increased
other loan income, resulting from increased originations of loans. Fees and
service charges increased primarily because of an increase in servicing fees on
loans, and increased fees on deposit accounts.
Total Other Expense. Other expense increased to $1,077,230 for the three-month
period ended March 31, 1999, from $739,258 for the same period in 1998.
Compensation and benefits increased to $588,482 in 1999, from $347,896 in 1998
due to an increase in staff, primarily in the loan department, but also from an
increase of employees in September to staff the new branch in Sanford. Occupancy
and equipment expense increased by $70,733 in 1999, to $208,703 due to increases
in office building rent and maintenance expenses, the opening of the new branch
in Sanford, and the opening of a loan production office in New Smyrna Beach.
Data Processing expense increased by $14,735 due to an increase in the number of
accounts and the opening of the Sanford Branch. Professional fees increased by
$6,854, as a result increased professional and regulatory fees, resulting
primarily from the growth of the Company. FDIC Insurance expense decreased by
$53,084, 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 $58,148 due
primarily to increases in loan expenses related to the increased number of loans
originated by the Company, and an increase in REO expenses.
21
<PAGE>
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
PART II. OTHER INFORMATION
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: May 13 , 1999 By: /s/ Aubrey H. Wright, Jr.
------------------ -------------------------
Aubrey H. Wright, Jr.
Chief Financial Officer and
duly authorized Officer of
the Registrant
22
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheets and consolidated statements of operations found on
pages and 3 of the company's form 10-Q for the year to date.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<EXCHANGE-RATE> 1
<CASH> 1,974
<INT-BEARING-DEPOSITS> 3,116
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 6,494
<INVESTMENTS-MARKET> 6,538
<LOANS> 160,703
<ALLOWANCE> 1,191
<TOTAL-ASSETS> 179,844
<DEPOSITS> 140,263
<SHORT-TERM> 13,500
<LIABILITIES-OTHER> 2,755
<LONG-TERM> 10,000
0
0
<COMMON> 49
<OTHER-SE> 13,277
<TOTAL-LIABILITIES-AND-EQUITY> 179,844
<INTEREST-LOAN> 2,968
<INTEREST-INVEST> 65
<INTEREST-OTHER> 76
<INTEREST-TOTAL> 3,109
<INTEREST-DEPOSIT> 1,636
<INTEREST-EXPENSE> 353
<INTEREST-INCOME-NET> 1,120
<LOAN-LOSSES> 60
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,077
<INCOME-PRETAX> 263
<INCOME-PRE-EXTRAORDINARY> 263
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 178
<EPS-PRIMARY> 0.04
<EPS-DILUTED> 0.04
<YIELD-ACTUAL> 7.35
<LOANS-NON> 1,686
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 3,767
<ALLOWANCE-OPEN> 1,136
<CHARGE-OFFS> 9
<RECOVERIES> 4
<ALLOWANCE-CLOSE> 1,191
<ALLOWANCE-DOMESTIC> 1,191
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
