--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
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, 2001 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.)
655 West Morse Boulevard
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 5,409,449
-------------------------------------- -------------------------------
(class) Outstanding at November 9, 2001
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FEDERAL TRUST CORPORATION AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements Page
----
Consolidated Condensed Balance Sheets (unaudited)
September 30, 2001 and December 31, 2000........................................................................... 3
Consolidated Condensed Statements of Operations for the
Three and nine months ended September 30, 2001 and 2000 (unaudited)................................................ 4
Consolidated Condensed Statements of Cash Flows for the
Nine months ended September 30, 2001 and 2000 (unaudited).......................................................... 5
Notes to Consolidated Condensed Financial Statements (unaudited)..................................................... 6-11
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations....................................................................................... 12-15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings .............................................................................................. 16
Item 2. Changes in Securities and Use of Proceeds ...................................................................... 16
Item 3. Defaults upon Senior Securities ................................................................................ 16
Item 4. Submission of Matters to a Vote of Shareholders ................................................................ 16
Item 5. Other Information .............................................................................................. 16
Item 6. Exhibits and Reports on Form 8-K ............................................................................... 16
Signatures ............................................................................................................. 16
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Balance Sheet
(unaudited)
September 30, 2001 December 31, 2000
------------------ -----------------
Assets
Cash $ 1,873,029 2,048,179
Interest bearing deposits 2,531,674 2,911,000
Investment securities available for sale 2,513,145 1,388,825
Investment securities held to maturity 6,774,542 6,686,660
Loans receivable, net (net of allowance for loan losses of
$1,690,341 and $1,634,259 at September 30, 2001 and
and December 31, 2000, respectively) 241,214,074 222,365,037
Loans held for sale 1,065,051 530,017
Accrued interest receivable - Loans 1,899,570 1,625,576
Accrued interest receivable - Securities 127,448 150,887
Federal Home Loan Bank of Atlanta stock, at cost 3,075,000 2,525,000
Mortgage servicing rights, net 1,659,551 1,552,735
Real Estate owned, net 648,609 431,311
Property and equipment, net 2,897,024 1,940,430
Prepaid expenses and other assets 2,429,341 1,683,643
Executive supplemental income plan-cash surrender
value of life insurance policies 2,814,823 2,719,176
Deferred income taxes 400,852 379,852
------------- -------------
Total $ 271,923,733 248,938,328
============= =============
Liabilities and Stockholders' Equity
Deposit accounts $ 204,597,951 181,869,219
Official Checks 3,822,703 2,819,397
Federal Home Loan Bank advances 37,500,000 41,500,000
Other Borrowings 3,514,546 2,014,546
Advance payments for taxes and insurance 2,739,071 1,252,608
Accrued expenses and other liabilities 3,174,640 3,775,948
------------- -------------
Total Liabilities $ 255,348,911 233,231,718
------------- -------------
Stockholders' equity:
Common stock, $.01 par value, 15,000,000 shares authorized;
4,947,911 shares issued and outstanding 49,479 49,479
Additional paid-in capital 16,020,802 15,987,989
Retained Earnings (accumulated deficit) 604,979 (145,963)
Accumulated other comprehensive loss (100,438) (184,895)
------------- -------------
Total Stockholders' Equity $ 16,574,822 15,706,610
------------- -------------
Total Liabilities and Stockholders' Equity $ 271,923,733 248,938,328
============= =============
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, 2001 and 2000
(Unaudited)
Three Months Nine Months
Ended Sept. 30, Ended Sept.30,
--------------- --------------
2001 2000 2001 2000
---- ---- ---- ----
Interest income:
Loans $4,708,747 4,612,895 14,439,778 12,884,221
Securities 115,115 66,720 270,446 222,929
Interest-bearing deposits and other 84,952 111,051 269,093 311,563
---------- ---------- ---------- ----------
Total interest income 4,908,814 4,790,666 14,979,317 13,418,713
---------- ---------- ---------- ----------
Interest expense:
Deposit accounts 2,608,928 2,531,894 8,181,362 6,815,244
Federal Home Loan Bank advances & other
borrowings 653,205 800,491 2,186,050 2,183,677
---------- ---------- ---------- ----------
Total interest expense 3,262,133 3,332,385 10,367,412 8,998,921
---------- ---------- ---------- ----------
Net interest income 1,646,681 1,458,281 4,611,905 4,419,792
Provision for loan losses 130,000 60,000 420,000 180,000
---------- ---------- ---------- ----------
Net interest income after provision 1,516,681 1,398,281 4,191,905 4,239,792
---------- ---------- ---------- ----------
Other income:
Fees and service charges 122,500 129,469 448,458 454,000
Gain on sale of assets 288,477 96,688 635,189 153,756
Rental Income 3,376 0 3,376 0
Other 57,631 299,414 496,666 815,774
---------- ---------- ---------- ----------
Total other income 471,984 525,571 1,583,689 1,423,530
---------- ---------- ---------- ----------
Other expenses:
Employee compensation & benefits 536,239 820,876 2,243,985 2,388,152
Occupancy and equipment 264,983 255,316 789,764 770,003
Data processing expense 78,086 75,139 235,169 195,259
Professional fees 136,635 72,009 271,503 195,244
FDIC Insurance 23,207 20,933 67,989 61,328
Other 332,532 274,534 956,464 748,026
---------- ---------- ---------- ----------
Total other expense 1,371,682 1,518,807 4,564,874 4,358,012
---------- ---------- ---------- ----------
Income before income tax 616,983 405,045 1,210,720 1,305,310
Income tax expense 249,762 116,110 459,779 388,665
---------- ---------- ---------- ----------
Net income $ 367,221 288,935 750,941 916,645
========== ========== ========== ==========
Per share amounts:
Earnings per share (basic and diluted) .07 .06 .15 .19
Cash dividends per share 0.00 0.00 0.00 0.00
Weighted average number of shares outstanding 4,947,911 4,947,911 4,947,911 4,947,911
See accompanying Notes to Consolidated Condensed Financial Statements.
4
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Consolidated Condensed Statements of Cash Flows
For the Nine Months Ended September 30, 2001 and 2000
(Unaudited)
2001 2000
---- ----
Cash flows from operating activities:
Net income $ 750,941 916,645
Adjustments to reconcile net income to net cash flows from operations:
Depreciation & amortization of property & equipment 297,125 332,428
Amort. (net) of premiums, fees & disc. on loans & securities 319,887 144,272
Provision for loan losses 420,000 180,000
Gain on sale of assets (635,189) (153,756)
Accretion of stock option expense 32,813 32,812
Deferred Income Taxes 26,189 161,324
Executive supplemental income plan (95,647) (87,533)
Loans originated or purchased for resale (9,635,489) (2,046,077)
Proceeds collected from loan sales 28,456,040 17,464,524
Cash provided by (used for) changes in:
Accrued interest receivable (250,555) (158,924)
Prepaid expenses & other assets (899,703) (2,955,109)
Official checks 1,003,305 (839,616)
Accrued expenses & other liabilities (601,308) (154,287)
------------- -------------
Net cash provided by operating activities 19,188,409 12,836,703
------------- -------------
Cash flows from investing activities:
Acquisition of office properties and equipment (1,253,719) (454,414)
Purchase of Federal Home Loan Bank stock (550,000) (540,000)
Purchase of securities available for sale (2,501,742) -
Reimbursement of real estate owned costs - 79,890
Proceeds from sale of real estate owned 1,269,472 136,714
Proceeds from securities available for sale 4,663,960 339,636
Principal collected on loans 91,281,917 63,946,789
Loans originated or purchased (134,367,969) (106,292,162)
------------- -------------
Net cash used in investing activities (41,458,081) (42,783,547)
------------- -------------
Cash flows from financing activities:
Increase in deposits, net 22,728,732 17,391,526
Increase in Federal Home Loan Bank advances (4,000,000) 7,300,000
Increase in other borrowings 1,500,000 2,000,000
Net increase in advance payments by borrowers for taxes & insurance 1,486,464 2,081,681
------------- -------------
Net cash provided by financing activities 21,715,196 28,773,207
------------- -------------
Decrease in cash and cash equivalents (554,476) (1,173,637)
Cash and cash equivalents at beginning of period 4,959,179 7,067,609
------------- -------------
Cash and cash equivalents at end of period $ 4,404,703 5,893,972
============= =============
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") 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.
Federal Trust'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, commercial loans, and consumer loans and also fund
bulk purchases of one-to-four family residential mortgage loans.
The consolidated condensed balance sheet as of September 30, 2001, and the
consolidated condensed statements of operations for the three and nine month
periods ended September 30, 2001 and 2000, and the cash flows for the nine month
periods ended September 30, 2001 and 2000, 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, 2001, the results of operations for the three and nine month
periods ended September 30, 2001 and 2000, and cash flows for the nine month
periods ended September 30, 2001 and 2000. The results of operations for the
three and nine month periods ended September 30, 2001, 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 - KSB for the year ended
December 31, 2000.
2. Comprehensive Income:
The Company's accumulated 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, 2001 was $410,605 and $835,398,
as compared to the three and nine month periods ended September 30, 2000, of
$310,798 and $762,964.
3. New Accounting Pronouncements
In June 2001, the Financial Accounting Standard Board ("FASB) issued Financial
Accounting Standards ("SFAS") No. 141, "Business Combinations." This Statement
addresses financial accounting and reporting for business combinations and
supersedes Accounting Principles Board ("APB") Opinion No. 16, Business
Combinations, and FASB Statement No. 38, Accounting for Preacquisition
Contingencies of Purchased Enterprises. All business combinations in the scope
of this Statement are to be accounted for using one method, the purchase method.
The provisions of this Statement apply to all business combinations initiated
after June 30, 2001. This Statement also applies to all business combinations
accounted for using the purchase method for which the date of acquisition is
July 1, 2001, or later. Adoption of this Statement is not expected to have a
significant impact on the financial position or results of operations of the
Company.
(continued)
6
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (unaudited)
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets." This Statement addresses financial accounting and reporting for
acquired goodwill and other intangible assets and supersedes APB Opinion No. 17,
Intangible Assets. It addresses how intangible assets that are acquired
individually or with a group of other assets (but not those acquired in a
business combination) should be accounted for in financial statements upon their
acquisition. This Statement also addresses how goodwill and other intangible
assets should be accounted for after they have been initially recognized in the
financial statements. ___ Adoption of this Statement is not expected to have a
significant impact on the financial position or results of operations of the
Company.
In July 2001, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 102, "Selected Loan Loss Allowance Methodology and Documentation
Issues" ("SAB 102") which expresses certain of the staff's views on the
development, documentation and application of a systematic methodology for
determining allowances for loan and lease losses in accordance with generally
accepted accounting principles. In particular, the guidance focuses on the
documentation the staff normally would expect registrants to prepare and
maintain in support of their allowances for loan losses. Management believes
that the Company complies with the views included in SAB 102.
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. 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, 2001, impaired loans amounted to $3.5 million as compared to
$3.5 million at September 30, 2000. Included in the allowance for loan losses is
$508 thousand related to the impaired loans as compared to $396 thousand at
September 30, 2000. 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 2001, the average recorded investment in impaired
loans was $3.7 million and $70 thousand of interest income was recognized on
loans while they were impaired. All of this income was recognized using a cash
basis method of accounting.
A summary of loans receivable at September 30, 2001, is as follows:
September 30, 2001 December 31, 2000
------------------ -----------------
Mortgage Loans:
Permanent conventional:
Commercial $ 27,227,626 28,343,075
Residential 183,856,691 164,386,510
Residential Construction 38,746,537 35,014,342
------------ ------------
Total Mortgage Loans 249,830,854 227,743,927
Commercial loans 3,351,471 1,505,000
Consumer loans 1,598,354 1,750,828
Lines of credit 1,779,634 2,685,543
------------ ------------
Total loans receivable 256,560,313 233,685,298
(continued)
7
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (unaudited)
Add (deduct):
Net premium on mortgage loans purchased 1,358,142 1,462,559
Unearned loan origination fees, net of direct loan
origination costs 488,330 266,725
Undisbursed portion of loans in process (14,437,319) (10,885,269)
Allowance for loan losses (1,690,341) (1,634,259)
------------- -------------
Loans receivable, net $ 242,279,125 222,895,054
============= =============
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,
------------------- -------------------
2001 2000 2001 2000
---- ---- ---- ----
Balance at beginning of period $ 1,808,681 1,416,114 1,634,259 1,437,913
Provision for loan losses 130,000 60,000 420,000 180,000
Less Charge-offs 251,034 -- 376,040 149,881
Plus recoveries 2,694 4,041 12,122 12,123
------------ ------------ ------------ ------------
Balance at end of period $ 1,690,341 1,480,155 1,690,341 1,480,155
============ ============ ============ ============
Loans Outstanding $242,279,125 213,410,680 242,279,125 213,410,680
Ratio of charge-offs to Loans Outstanding .10% .00% .16% .07%
Ratio of allowance to Loans Outstanding .70% .69% .70% .69%
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, 2001, management made a provision of $130,000
based on its evaluation of the loan portfolio, as compared to the provision of
$60,000 made in the quarter ended September 30, 2000. The increase in the
provision for the quarter was primarily the result of the increase in the amount
of loans outstanding as compared to September 30, 2000, an increase in the
number of commercial loans, and an increase in the reserve ratio on a segment of
the loan portfolio. Management believes that the allowance is adequate,
primarily as a result of the overall quality, and the high percentage of
residential single family home loans, in the portfolio.
6. Supplemental Disclosure of Cash Flow and Non-Cash Investing and Financing
Activities
Nine Months Ended September 30,
2001 2000
---- ----
Cash paid during the period for:
Interest expense $ 4,047,148 2,557,966
Income taxes $ 230,000 402,144
Supplemental disclosure of non-cash transactions:
Real estate acquired in settlement of loans $ 1,590,961 195,231
Market Value adjustment - investment securities available for sale:
Market value adjustment - investments $ 161,036 338,848
Deferred income tax asset $ 60,598 127,509
----------- -----------
Unrealized loss on investment securities
available for sale, net $ 100,438 211,339
Transfer of Loans from held to maturity to
available for sale $19,355,585 --
(continued)
8
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (unaudited)
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,
------------------- -------------------
2001 2000 2001 2000
---- ---- ---- ----
Balance at beginning of period $1,559,263 $ 88,215 431,311 295,319
Acquired through foreclosure 19,899 - 1,486,770 --
Add: Capitalized costs (net of
insurance recoveries) -- -- - (79,890)
Less: Sale of real estate 930,553 9,500 1,269,472 136,714
---------- ---------- ---------- ----------
Balance at end of period $ 648,609 78,715 648,609 78,715
========== ========== ========== ==========
8. Investment Securities
At September 30, 2001
Book Value Market Value
Held to maturity:
FHLB Floating Rate Note, 5.44%, due 7/30/03 $6,774,542 7,094,062
========== ==========
Available for sale:
Bear Stearns Preferred Stock 6.15%, 10,000 shares 451,777 457,500
FHLMC Series 2136 CMO, 6.00%, due 01/15/28 977,148 1,005,490
FHLMC Series 2248 CMO, 7.00%, due 07/15/24 $1,014,074 1,050,155
========== ==========
Total $2,442,999 2,513,145
========== ==========
The Company's investment in obligations of U.S. government agencies consists of
one dual indexed bond issued by the Federal Home Loan Bank and two bonds issued
by the Federal Home Loan Mortgage Corporation. At September 30, 2001, the FHLB
bond had a market value of $7,094,062. The bond has a par value of $7,000,000
and pays interest at the 10-year constant maturity treasury ("CMT") rate less
six month LIBOR rate plus a contractual amount of 4.0%. The FHLMC bonds, Series
2136 and 2248, are fixed rate planned amortization class (PAC) fixed rate bonds
with yields of 6.405% and 5.969%. In addition, the Company owns 10,000 shares of
$50 par value Bear Stearns Preferred Stock with a coupon of 6.15%.
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, 2001:
(continued)
9
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (unaudited)
Maturity Date Rate Amount Type
------------- ---- ------ ----
12/04/01 3.59% 7,500,000 Variable rate
12/14/01 3.94% 10,000,000 Fixed rate
01/22/02 5.45% 5,000,000 Fixed rate
12/05/02 6.39% 5,000,000 Fixed rate
12/27/02 5.95% 5,000,000 Fixed rate
12/05/03 6.39% 5,000,000 Fixed rate
----- ---------
Total 4.99% $37,500,000
===== ===========
Variable rate advances reprice daily and may be repaid at any time without
penalty. Fixed rate advances incur a prepayment penalty if repaid prior to
maturity, and the interest rate is fixed for the term of the advance.
Amounts Outstanding at:
Month-end Rate Amount
--------- ---- ------
7/31/01 4.34% $ 56,000,000
8/31/01 4.99% 47,500,000
9/30/01 4.99% 37,500,000
The maximum amount of advances outstanding at any month end during the three
month period ended September 30, 2001, was $56,000,000. During the three month
period ended September 30, 2001, average advances outstanding totaled $45.6
million at an average rate of 5.12%.
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, 2001, was $3,514,546. During the three
month period ended September 30, 2001, average other borrowings outstanding
totaled $3.5 million at an average rate of 6.79%.
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.
Federal Trust's Order focused on operating expenses and its financial
relationship with the Bank. The Bank's Order required the Bank to control its
operating expenses and to institute and adhere to programs and policies designed
to strengthen its overall lending practices, primarily in regard to underwriting
procedures and credit risk. The Bank's Order also placed restrictions on the
Bank's asset growth and on the payment of dividends to Federal Trust.
(continued)
10
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements (unaudited)
Pursuant to the Orders, both Federal Trust and the Bank established Compliance
Committees that met monthly to review, in detail, the terms of the Orders to
ensure that the Holding Company and the Bank were in compliance with their
respective Orders. On March 12, 1998, the OTS rescinded the growth restrictions
and on June 1, 1998, the OTS rescinded the Orders.
At the present, neither Federal Trust nor the Bank are operating under any
extraordinary regulatory restrictions, agreements or orders. At September 30,
2001, the bank is categorized as well capitalized.
11. Branching
On March 27, 2001, the Bank filed an application with the OTS for permission to
open a branch office in New Smyrna Beach, Florida. New Smyrna Beach is located
in Volusia County and the proposed branch office is approximately 40 miles
northeast of the Bank's main office in Winter Park, Florida. On April 20, 2001,
the Bank received approval from OTS, and the branch opened on June 22, 2001. The
Bank also has a branch in Sanford, Florida which opened on October 30, 1998.
12. Subsidiaries
Up until March, 2001, the Bank had two operating subsidiaries, FTB Financial
Services, Inc. ("FTB Financial") and Vantage Mortgage Service Center, Inc.
("VMSC"). FTB Financial, which commenced operation in 1996, engages in the
business of selling insurance, annuities, stocks and bonds at the Bank's branch
offices.
VMSC was a mortgage subsidiary located in Gainesville, Florida. Since its
inception in June 1999, VMSC has not been able to generate the loan production
or profitability necessary to warrant its continued operation. The subsidiary
was closed on March 11, 2001.
(The remainder of this page left intentionally blank)
(continued)
11
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations
Forward Looking Statements
Readers should note, in particular, that this document contains forward-looking
statements within the meaning of Section 21E of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), that involve substantial risks and
uncertainties. 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 certain of such
forward-looking statements. Actual results, performance or achievements could
differ materially from those contemplated, expressed or implied by the
forward-looking statements contained herein. Actual results may differ
materially, depending upon a variety of important factors, including
competition, inflation, general economic conditions, changes in interest rates
and changes in the value of collateral securing loans we have made, among other
things.
Results of Operations
Comparison of the Three-Month Periods Ended September 30, 2001 and 2000
General. The Company had a net profit for the three-month period ended September
30, 2001, of $367,221 or $.07 per share, compared to a net profit of $288,935 or
$.06 per share for the same period in 2000. The increase in the net profit was
due primarily to an increase in net interest income, a decrease in other
expense, offset partially by an increase in the provision for loan losses and a
decrease in other income.
Interest Income and Expense. Interest income increased by $118,148 to $4,908,814
for the three-month period ended September 30, 2001, from $4,790,666 for the
same period in 2000. Interest income on loans increased to $4,708,747 in 2001
from $4,612,895 in 2000, primarily as a result of an increase in the average
amount of loans outstanding and 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 during 2001. Interest income on the
securities portfolio increased by $48,395 for the three-month period ended
September 30, 2001, over the same period in 2000, as a result of an increase in
the amount of securities owned and an increase in the yield earned on the
securities. Other interest and dividends decreased $26,099 during the same
three-month period in 2001 from 2000, as a result of a decrease in the average
volume of, and a decrease in the rates earned on other interest-bearing assets.
Management expects the rates earned on the portfolio to fluctuate with general
market conditions.
Interest expense decreased $70,252 during the three-month period ended September
30, 2001, to $3,262,133 from $3,332,385 for the same period in 2000, due to a
decrease in the rates paid on deposits and borrowings, offset partially by an
increase in deposits and borrowings. Interest on deposits increased to
$2,608,928 in 2001 from $2,531,894 in 2000, as a result of an increase in the
amount of deposits, offset partially by a decrease in rates paid on deposits,
and interest on FHLB advances and other borrowings decreased to $653,205 in 2001
from $800,491 in 2000, as a result of a decrease in the interest rates paid on
advances and other borrowings, offset partially by an increase in the amounts
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
(continued)
12
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations
portfolio. During the quarter ended September 30, 2001, management made a
provision for loan losses of $130,000 based on its evaluation of the loan
portfolio, which was an increase of $70,000 from the same period in 2000. The
increase in the provision was attributable to the growth of the loan portfolio
and the increase in commercial loans. There were recoveries of $2,694 during the
three-month period ended September 30, 2001, as compared to recoveries of $4,041
during the three-month period ended September 30, 2000. Total non-performing
loans at September 30, 2001, were $3,365,389 compared to $2,987,234 at September
30, 2000. The allowance for loan losses at September 30, 2001 was $1,690,341 or
50% of non-performing loans and .70% of net loans outstanding, versus $1,480,155
at September 30, 2000, or 50% of non-performing loans and .69% of net loans
outstanding.
Total Other Income. Other income decreased from $525,571 for the three-month
period ended September 30, 2000, to $471,984 for the same period in 2001. The
decrease in other income was due to an decrease of $6,969 in fees and service
charges and a decrease of $241,783 in other miscellaneous income, offset
partially by an increase of $191,789 in gains on the sale of assets and an
increase of $3,376 in rental income. The decrease in fees and service charges
was primarily the result of a decrease in servicing fees on loans. The increase
in gains on assets sold was the result of an increase in the amount of loans and
securities sold during the period. The increase in rental income was
attributable to the short term rental of real estate owned. The decrease in
other miscellaneous income was attributable primarily to decreased other loan
income.
Total Other Expense. Other expense decreased to $1,371,682 for the three-month
period ended September 30, 2001, from $1,518,807 for the same period in 2000.
Compensation and benefits decreased to $536,239 in 2001, from $820,876 in 2000
due to a decrease in staff as a result of the closure of Vantage Mortgage.
Occupancy and equipment expense increased by $9,667 in 2001, to $264,983 due to
an increase in overall square footage rented as a result of the growth of the
Company, however this increase was offset to a large extent by the relocation of
the Company's executive and administrative personnel from the Winter Park office
to new quarters in Sanford which have a lower rental cost. Data Processing
expense increased by $2,947 due to an increase in the number of accounts in the
Bank. Professional fees increased by $64,626, as a result of increased
professional and regulatory fees, resulting primarily from the growth of the
Company and consultants hired to manage the conversion of the Bank to a new data
servicer. FDIC Insurance expense increased by $2,274, as a result of the growth
in deposits in the Bank. Other miscellaneous expense increased by $57,998 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 during the year.
Provision for Income Taxes The income tax provision for the three months ended
September 30, 2001 was $249,762 (an effective rate of 40.5%), compared to
$116,110 (an effective rate of 28.7%) for the same period in 2000. The accrual
rate for taxes was adjusted in 2000 as a result of the recapture of a portion of
the deferred tax asset in 2000.
Comparison of the Nine-Month Periods Ended September 30, 2001 and 2000
General. The Company had a net profit for the nine-month period ended September
30, 2001, of $750,941 or $.15 per share, compared to a net profit of $916,645 or
$.19 per share for the same period in 2000. The decrease in the net profit was
due primarily to an increase in the provision for loan losses, and an increase
in other expense, offset partially by an increase in net interest income, and an
increase in other income.
(continued)
13
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations
Interest Income and Expense. Interest income increased by $1,560,604 to
$14,979,317 for the nine-month period ended September 30, 2001, from $13,418,713
for the same period in 2000. Interest income on loans increased to $14,439,778
in 2001 from $12,884,221 in 2000, 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 during 2001. Interest income
on the securities portfolio increased by $47,517 for the nine-month period ended
September 30, 2001, over the same period in 2000, as a result of an increase in
the amount of securities owned. Other interest and dividends decreased $42,470
during the same nine-month period in 2001 from 2000, as a result of a decrease
in the average volume of other interest-bearing assets and a decrease in the
rates earned. Management expects the rates earned on the portfolio to fluctuate
with general market conditions.
Interest expense increased $1,368,491 during the nine-month period ended
September 30, 2001, to $10,367,412 from the same period in 2000 due to an
increase in the amount of deposits and borrowings, offset partially by a
decrease in interest rates during 2001. Interest on deposits increased to
$8,181,362 in 2001 from $6,815,244 in 2000, as a result of an increase in the
amount of deposits, offset partially by a decrease in rates paid on deposits.
Interest on FHLB advances and Other Borrowings increased to $2,186,050 in 2001
from $2,183,677 in 2000, as a result of an increase in the average amount of
advances and other borrowings outstanding, offset partially by a decrease in the
interest rates paid. The rates on advances and other borrowings adjusted more
rapidly in the first nine months of 2001 than the rates on deposits, but the
rates on deposits have been declining since early 2001. 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 nine months ended September 30, 2001, management made a
provision for loan losses of $420,000 based on its evaluation of the loan
portfolio, which was an increase of $240,000 from the same period in 2000. The
increase in the provision was primarily the result of the increase in the size
of the loan portfolio and the increase in the number of commercial loans in the
portfolio. During the nine months ended September 30, 2001, charge-offs were
$376,040 as compared to charge-offs of $149,881 for the same period in 2000.
There were recoveries of $12,122 during the nine-month period ended September
30, 2001, as compared to net recoveries of $12,123 during the nine-month period
ended September 30, 2000. Total non-performing loans at September 30, 2001, were
$3,365,389 compared to $2,987,234 at September 30, 2000. The increase in
non-performing loans was attributable to the growth of the loan portfolio, as
the percentage of non-performing loans is unchanged at September 30, 2001 as
compared to September 30, 2000. The allowance for loan losses at September 30,
2001 was $1,690,341 or 50% of non- performing loans and .70% of net loans
outstanding, versus $1,480,155 at September 30, 2000, or 50% of non- performing
loans and .69% of net loans outstanding.
Total Other Income. Other income increased from $1,423,530 for the nine-month
period ended September 30, 2000, to $1,583,689 for the same period in 2001. The
increase in other income was due to an increase of $481,433 in gains on the sale
of assets, an increase of $3,376 in rental income, offset partially by a
decrease of $5,542 in fees and service charges and a decrease of $319,108 in
other miscellaneous income. The increase in gains on assets sold was the result
of an increase in the amount of loans and securities sold during the period. The
decrease in fees and service charges was primarily the result of a decrease in
servicing fees on loans. The increase in rental income was attributable to the
short term rental of real estate owned. The decrease in other miscellaneous
income was attributable primarily to decreased other loan income.
(continued)
14
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations
Total Other Expense. Other expense increased to $4,564,874 for the nine-month
period ended September 30, 2001, from $4,358,012 for the same period in 2000.
Compensation and benefits decreased to $2,243,985 in 2001, from $2,388,152 in
2000 due to a decrease in staff as a result of the closure of Vantage Mortgage.
Occupancy and equipment expense increased by $19,761 in 2001, to $789,764 due to
an increase in overall square footage rented as a result of the growth of the
Company, however this increase was offset to a large extent by the relocation of
the Company's executive and administrative personnel from the Winter Park office
to new quarters in Sanford which have a lower rental cost. Data Processing
expense increased by $39,910 due to an increase in the number of deposit
accounts. Professional fees increased by $76,259, as a result of increased
professional and regulatory fees, resulting primarily from the growth of the
Company and consultants hired to manage the conversion of the Bank to a new data
servicer.. FDIC Insurance expense increased by $6,661, as a result of the growth
in deposits in the Bank. Other miscellaneous expense increased by $208,438, 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 during the year.
Provision for Income Taxes The income tax provision for the nine months ended
September 30, 2001 was $459,779 (an effective rate of 38.0%), compared to
$388,665 (an effective rate of 29.8%) for the same period in 2000. The accrual
rate for taxes was adjusted in 2000 as a result of the recapture of a portion of
the deferred tax asset in 2000.
(The remainder of this page left intentionally blank)
(continued)
15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Shareholders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
Form 8-K - Changes in Registrant's Certifying Accountant - Filed
10-09-01
Form 8-K - Changes in Registrant's Certifying Accountant with Exhibit -
Filed 10-10-01
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 09, 2001 By: /s/ Aubrey H. Wright, Jr.
------------------------- ----------------------------
Aubrey H. Wright, Jr.
Chief Financial Officer and duly
authorized Officer of the Registrant
(continued)
16