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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report under Section 13 or 15(d) of the Securities Exchange
Act of 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2005
[ ] Transition report under Section 13 or 15(d) of the Exchange Act
For the transition period from _____________ to _____________
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 or Organization) Identification No.)
312 West 1st Street
Sanford, Florida 32771
----------------------------------------
(Address of Principal Executive Offices)
(407) 323-1833
---------------------------
(Issuer's Telephone Number)
N/A
---------------------------------------------------------------
(Former Name, Former Address and Former Fiscal Year, if Changed
Since Last Report)
Check whether the Registrant (1) filed all report required to be filed by
Section 13 or 15(d) of the Exchange Act during the past twelve months (or for
such shorter period that the Small business issuer was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days: Yes [X] No [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act): Yes [ ] No [X]
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date:
Common stock, par value $.01 per share 8,073,588 shares
-------------------------------------- --------------------------
(class) Outstanding at May 6, 2005
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FEDERAL TRUST CORPORATION AND SUBSIDIARY
INDEX
PAGE
-----
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets -
At March 31, 2005 (unaudited) and At December 31, 2004.................................... 2
Condensed Consolidated Statements of Earnings (unaudited)
Three Months ended March 31, 2005 and 2004................................................ 3
Condensed Consolidated Statements of Stockholders' Equity (unaudited)
Three Months ended March 31, 2005 and 2004................................................ 4
Condensed Consolidated Statements of Cash Flows (unaudited)
Three Months Ended March 31, 2005 and 2004................................................ 5-6
Notes to Condensed Consolidated Financial Statements (unaudited)........................... 7-12
Review by Independent Accountants.......................................................... 13
Independent Accountants' Report............................................................ 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................................................... 15-18
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ......................... 19
ITEM 4. CONTROLS AND PROCEDURES............................................................. 19
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS................................................................... 19
ITEM 6. EXHIBITS............................................................................ 20
SIGNATURES..................................................................................... 21
FEDERAL TRUST CORPORATION AND SUBSIDIARY
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
($ in thousands, except per share amounts)
AT
------------------------------
MARCH 31, DECEMBER 31,
2005 2004
------------- -------------
(Unaudited)
ASSETS
Cash and due from banks $ 5,562 $ 3,645
Interest-earning deposits 2,522 3,836
------------- -------------
Cash and cash equivalents 8,084 7,481
Securities available for sale 47,448 41,172
Loans, less allowance for loan losses of $4,006 in 2005
and $3,835 in 2004 547,522 521,331
Accrued interest receivable 3,291 3,254
Premises and equipment, net 13,162 12,499
Foreclosed assets 306 326
Federal Home Loan Bank stock 9,294 7,385
Mortgage servicing rights, net 873 868
Bank-owned life insurance 6,766 6,703
Deferred tax asset 991 1,119
Other assets 1,263 993
------------- -------------
Total assets $ 639,000 $ 603,131
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Non-interest-bearing demand deposits $ 13,613 $ 21,305
Interest-bearing demand deposits 47,399 48,792
Money-market deposits 77,302 76,236
Savings deposits 5,595 6,237
Time deposits 259,593 251,546
------------- -------------
Total deposits 403,502 404,116
Federal Home Loan Bank advances 179,950 143,700
Other borrowings 885 885
Junior subordinated debentures 5,155 5,155
Capital lease obligation 2,978 3,049
Accrued interest payable 986 811
Official checks 931 1,045
Other liabilities 4,524 4,983
------------- -------------
Total liabilities 598,911 563,744
------------- -------------
Stockholders' equity:
Common stock, $.01 par value, 15,000,000 shares authorized;
8,073,563 and 8,061,813 shares outstanding in 2005
and 2004, respectively 81 81
Additional paid-in capital 32,139 32,059
Retained earnings 9,062 8,089
Unallocated ESOP shares (117,114 shares in 2005 and
119,375 shares in 2004) (846) (862)
Accumulated other comprehensive income (loss) (347) 20
------------- -------------
Total stockholders' equity 40,089 39,387
------------- -------------
Total liabilities and stockholders' equity $ 639,000 $ 603,131
============= =============
See Accompanying Notes to Condensed Consolidated Financial Statements.
2
FEDERAL TRUST CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (Unaudited)
(In thousands, except per share amounts)
THREE MONTHS ENDED
MARCH 31,
------------------------------
2005 2004
------------- -------------
Interest income:
Loans $ 6,896 $ 5,453
Securities 447 292
Other 109 53
------------- -------------
Total interest income 7,452 5,798
------------- -------------
Interest expense:
Deposits 2,433 1,658
Other 1,229 735
------------- -------------
Total interest expense 3,662 2,393
------------- -------------
Net interest income 3,790 3,405
Provision for loan losses 180 550
------------- -------------
Net interest income after provision for loan losses 3,610 2,855
------------- -------------
Other income:
Service charges and fees 79 224
Gain on sale of loans held for sale 77 159
Net gain (loss) on sale of securities available for sale 135 (1)
Rental income 72 68
Increase in cash surrender value of life insurance policies 63 70
Other 203 158
------------- -------------
Total other income 629 678
------------- -------------
Other expenses:
Salary and employee benefits 1,167 1,166
Occupancy expense 409 382
Professional services 203 209
Data processing 160 155
Marketing and advertising 61 72
Other 354 362
------------- -------------
Total other expenses 2,354 2,346
------------- -------------
Earnings before income taxes 1,885 1,187
Income taxes 670 377
------------- -------------
Net earnings $ 1,215 $ 810
============= =============
Earnings per share:
Basic $ .15 $ .12
============= =============
Diluted $ .15 $ .12
============= =============
Weighted-average shares outstanding for (in thousands):
Basic 7,951 6,529
============= =============
Diluted 8,180 6,683
============= =============
Cash dividends per share $ .03 $ .02
============= =============
See Accompanying Notes to Condensed Consolidated Financial Statements.
3
FEDERAL TRUST CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004
($ in thousands)
COMMON STOCK ADDITIONAL UNALLOCATED
----------------------- PAID-IN RETAINED ESOP
SHARES AMOUNT CAPITAL EARNINGS SHARES
---------- ---------- ---------- ---------- -----------
Balance at December 31, 2003 6,661,807 $ 67 $ 22,069 $ 5,629 $ (979)
Comprehensive income:
Net earnings (unaudited) - - - 810 -
Change in unrealized loss on
securities available for sale,
net of income taxes of $173
(unaudited) - - - - -
Comprehensive income (unaudited)
Issuance of common stock, stock
options exercised (unaudited) 6 - - - -
ESOP shares allocated (4,453 shares)
(unaudited) - - - - 32
Dividends paid (unaudited) - - - (133) -
---------- ---------- ---------- ---------- -----------
Balance at March 31, 2004
(unaudited) 6,661,813 $ 67 $ 22,069 $ 6,306 $ (947)
========== ========== ========== ========== ===========
Balance at December 31, 2004 8,061,813 $ 81 $ 32,059 $ 8,089 $ (862)
Comprehensive income:
Net earnings (unaudited) - - - 1,215 -
Change in unrealized loss on
securities available for sale,
net of income taxes of $222
(unaudited) - - - - -
Comprehensive income (unaudited)
Tax benefit related to
exercise of stock options (unaudited) - - 26 - -
Issuance of common stock, stock
options exercised (unaudited) 11,750 - 47 - -
ESOP shares allocated (2,261 shares)
(unaudited) - - 7 - 16
Dividends paid (unaudited) - - - (242) -
---------- ---------- ---------- ---------- -----------
Balance at March 31, 2005
(unaudited) 8,073,563 $ 81 $ 32,139 $ 9,062 $ (846)
========== ========== ========== ========== ===========
ACCUMULATED
OTHER
COMPREHENSIVE TOTAL
INCOME STOCKHOLDERS'
(LOSS) EQUITY
------------- -------------
Balance at December 31, 2003 $ (329) $ 26,457
-------------
Comprehensive income:
Net earnings (unaudited) - 810
Change in unrealized loss on
securities available for sale,
net of income taxes of $173
(unaudited) 312 312
-------------
1,122
Comprehensive income (unaudited)
Issuance of common stock, stock
options exercised (unaudited) - -
ESOP shares allocated (4,453 shares)
(unaudited) - 32
Dividends paid (unaudited) - (133)
------------- -------------
Balance at March 31, 2004
(unaudited) $ (17) $ 27,478
============= =============
Balance at December 31, 2004 $ 20 $ 39,387
-------------
Comprehensive income:
Net earnings (unaudited) - 1,215
Change in unrealized loss on
securities available for sale,
net of income taxes of $222
(unaudited) (367) (367)
-------------
Comprehensive income (unaudited) 848
Tax benefit related to
exercise of stock options (unaudited) - 26
Issuance of common stock, stock
options exercised (unaudited) - 47
ESOP shares allocated (2,261 shares)
(unaudited) - 23
Dividends paid (unaudited) - (242)
------------- -------------
Balance at March 31, 2005
(unaudited) $ (347) $ 40,089
============= =============
See Accompanying Notes to Condensed Consolidated Financial Statements.
4
FEDERAL TRUST CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(in thousands)
THREE MONTHS ENDED
MARCH 31
----------------------
2005 2004
--------- ---------
Cash flows from operating activities:
Net earnings $ 1,215 $ 810
Adjustments to reconcile net earnings to net cash (used in) provided
by operating activities:
Depreciation and amortization 179 176
Provision for loan losses 180 550
Provision for deferred taxes 65 -
Net amortization of premiums and discounts on securities 23 330
Net amortization of loan origination fees, costs, premiums and discounts 249 88
Amortization of mortgage servicing rights 80 95
Valuation allowance on mortgage servicing rights - 30
Earnings on bank-owned life insurance (63) (70)
Proceeds from sales of loans held for sale 5,173 8,811
Loans originated for resale (7,260) (1,951)
Gain on sale of loans held for sale (77) (159)
Net (gain) loss on sales of securities available for sale (135) 1
Tax benefit from exercise of stock options 26 -
Cash provided by (used in) resulting from changes in:
Accrued interest receivable (37) (3)
Other assets 15 (23)
Accrued interest payable 175 107
Official checks (114) (942)
Other liabilities (685) 456
--------- ---------
Net cash (used in) provided by operating activities (991) 8,306
--------- ---------
Cash flows from investing activities:
Purchase of securities available for sale (9,638) (4,000)
Proceeds from principal repayments and sales of securities available for sale 5,423 3,929
Loan principal repayments, net of originations 3,994 7,695
Purchase of loans (31,197) (31,160)
Purchase of premises and equipment (842) (256)
Net (purchase) redemption of Federal Home Loan Bank stock (1,909) 290
Net proceeds from sale of foreclosed assets 144 722
--------- ---------
Net cash used in investing activities (34,025) (22,780)
--------- ---------
Cash flows from financing activities:
Net (decrease) increase in deposits (614) 20,940
Net increase (decrease) in Federal Home Loan Bank advances 36,250 (7,300)
Principal repayments under capital lease obligation (71) (72)
Net increase in advance payments from borrowers for taxes and insurance 249 363
Dividends paid (242) (133)
Net proceeds from the sale of common stock 47 -
--------- ---------
Net cash provided by financing activities 35,619 13,798
--------- ---------
Net increase (decrease) in cash and cash equivalents 603 (676)
Cash and cash equivalents at beginning of period 7,481 5,733
--------- ---------
Cash and cash equivalents at end of period $ 8,084 $ 5,057
========= =========
(continued)
5
FEDERAL TRUST CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited), continued
(in thousands)
THREE MONTHS ENDED
MARCH 31
-------------------
2005 2004
-------- --------
Supplemental disclosure of cash flow information-
Cash paid during the period for:
Interest $ 3,487 $ 2,286
======== ========
Income taxes $ 125 $ 160
======== ========
Noncash transactions:
Foreclosed assets acquired in settlement of loans $ 124 $ 409
======== ========
Accumulated other comprehensive income (loss), net change in unrealized
gain (loss) on securities available for sale, net of tax $ (367) $ 312
======== ========
Transfer of loans in portfolio to loans held for sale $ - $ 6,609
======== ========
Mortgage servicing rights recognized upon sale of loans held for sale $ 85 $ 8
======== ========
ESOP shares allocated $ 23 $ 32
======== ========
Securitization of loans held for sale $ 2,538 $ -
======== ========
See Accompanying Notes to Condensed Consolidated Financial Statements.
6
FEDERAL TRUST CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(1) DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Organization. Federal Trust Corporation ("Federal Trust") is the sole
shareholder of Federal Trust Bank (the "Bank"). Federal Trust operates as a
unitary savings and loan holding company. Federal Trust's business
activities primary include the operation of the Bank. The Bank is
federally-chartered as a stock savings bank. The Bank's deposits are insured
up to the applicable limits by the Federal Deposit Insurance Corporation.
The Bank provides a wide range of banking services to individual and
corporate customers through its six offices located in Orange, Seminole and
Volusia Counties, Florida.
The condensed consolidated financial statements include the accounts of
Federal Trust and the Bank (collectively, the "Company"). All significant
intercompany accounts and transactions have been eliminated in
consolidation.
In the opinion of management, the accompanying condensed consolidated
financial statements contain all adjustments (principally consisting of
normal recurring accruals) necessary to present fairly the financial
position as of March 31, 2005, and the results of operations and cash flows
for the three-month periods ended March 31, 2005 and 2004. The results of
operations for the three-month period ended March 31, 2005, are not
necessarily indicative of the results to be expected for the entire year
ended December 31, 2005. 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, 2004.
(2) LOANS
The components of loans are summarized as follows (in thousands):
AT MARCH 31, AT DECEMBER 31,
2005 2004
------------- ---------------
Residential Lending:
Mortgages (1) $ 380,650 $ 374,581
Lot loans 43,774 41,369
Construction 10,957 5,405
------------- ---------------
Total Residential lending 435,381 421,355
------------- ---------------
Commercial Lending:
Real Estate Secured 64,110 56,267
Land, Development and Construction 42,454 38,091
Commercial loans 12,540 13,257
------------- ---------------
Total Commercial lending 119,104 107,615
Consumer loans 499 657
------------- ---------------
Total loans 554,984 529,627
Add (deduct):
Allowance for loan losses (4,006) (3,835)
Net premiums, discounts, deferred fees and costs 3,809 3,524
Undisbursed portion of loans in process (7,265) (7,985)
------------- ---------------
Loans, net $ 547,522 $ 521,331
============= ===============
(1) Includes approximately $1,169,000 and $1,628,000 of loans held for sale
at March 31, 2005 and December 31, 2004, respectively.
(continued)
7
FEDERAL TRUST CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), CONTINUED
(2) LOANS, CONTINUED
The following is a summary of information regarding nonaccrual and impaired
loans (in thousands):
AT
-----------------------------
MARCH 31, DECEMBER 31,
2005 2004
------------- -------------
Nonaccrual loans $ 2,227 $ 2,600
============= =============
Accruing loans past due ninety days or more $ - $ -
============= =============
Recorded investment in impaired loans for which
there is a related allowance for loan losses $ 2,272 $ 2,648
============= =============
Recorded investment in impaired loans for which
there is no related allowance for loan losses $ - $ -
============= =============
Allowance for loan losses related to impaired loans $ 334 $ 290
============= =============
THREE MONTHS ENDED
MARCH 31,
-----------------------------
2005 2004
------------- -------------
Interest income recognized and
received on impaired loans $ 29 $ 43
============= =============
Average net recorded investment
in impaired loans $ 2,148 $ 5,684
============= =============
The activity in the allowance for loan losses is as follows (in thousands):
THREE MONTHS ENDED
MARCH 31,
-----------------------------
2005 2004
------------- -------------
Balance at beginning of period $ 3,835 $ 2,779
Provision for loan losses 180 550
Charge-offs (10) (48)
Recoveries 1 2
------------- -------------
Balance at end of period $ 4,006 $ 3,283
============= =============
A provision for loan losses is charged to earnings based upon management's
evaluation of the potential losses in its loan portfolio. During the three
months ended March 31, 2005, management made a provision of $180,000 based
on its evaluation of the loan portfolio, compared to a provision of $550,000
made in the comparable period in 2004. At March 31, 2005, 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.
(continued)
8
FEDERAL TRUST CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), CONTINUED
(3) REGULATORY CAPITAL
The Bank is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the Bank's and the Company's financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Bank must meet specific capital guidelines that
involve quantitative measures of the Bank's assets, liabilities and certain
off-balance sheet items as calculated under regulatory accounting practices.
The Bank's capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings
and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and percentages (set forth in
the table below) of total and Tier I capital (as defined in the regulations)
to risk-weighted assets and Tier I capital to average adjusted assets (as
defined in the regulations). Management believes that, as of March 31, 2005,
the Bank exceeds the minimum capital adequacy requirements to which it is
subject.
In addition, as of March 31, 2005, the Bank met the requirements to be
categorized as "well" capitalized under the regulatory framework for prompt
corrective action. To be categorized as well capitalized, the Bank must
maintain total risk-based, Tier I risk-based and Tier I leverage percentages
as set forth in the table below. There are no conditions or events since
March 31, 2005 that management believes would change the institution's
categorization as well capitalized. The following table summarizes the
capital thresholds for each prompt corrective action capital category. An
institution's capital category is based on whether it meets the threshold
for all three capital ratios within the category. The Bank's actual capital
amounts and percentages are also presented in the table ($ in thousands).
TO BE WELL CAPITALIZED
UNDER PROMPT
FOR CAPITAL ADEQUACY CORRECTIVE ACTION
ACTUAL PURPOSES PROVISIONS
----------------------- ----------------------- -----------------------
AMOUNT % AMOUNT % AMOUNT %
---------- ---------- ---------- ---------- ---------- ----------
At March 31, 2005:
Total capital (to risk-
weighted assets) $ 47,033 11.0% $ 34,209 8.0% $ 42,761 10.0%
Tier I capital (to risk
weighted assets) 43,027 10.1 17,104 4.0 25,656 6.0
Tier I capital (to average
adjusted assets) 43,027 6.8 25,363 4.0 31,704 5.0
(continued)
9
FEDERAL TRUST CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), CONTINUED
(4) EARNINGS PER SHARE OF COMMON STOCK
The Company follows the provisions of Financial Accounting Standards No.
128, "Earnings Per Share" ("SFAS No. 128"). SFAS No. 128 provides accounting
and reporting standards for calculating earnings per share. Basic earnings
per share of common stock has been computed by dividing the net earnings for
the period by the weighted-average number of shares outstanding. Shares of
common stock purchased by the Company's Employee Stock Ownership Plan
("ESOP") are considered outstanding when the shares are allocated to
participants. Diluted earnings per share is computed by dividing net
earnings by the weighted-average number of shares outstanding including the
dilutive effect of stock options computed using the treasury stock method.
The following table presents the calculation of basic and diluted earnings
per share of common stock (in thousands, except per share amounts):
THREE MONTHS ENDED
MARCH 31,
--------------------
2005 2004
-------- --------
Weighted-average shares outstanding before
adjustment for unallocated ESOP shares 8,068 6,662
Adjustment to reflect the effect of unallocated
ESOP shares (117) (133)
-------- --------
Weighted-average shares outstanding
for basic earnings per share 7,951 6,529
======== ========
Basic earnings per share $ .15 $ .12
======== ========
Total weighted-average shares outstanding
for basic earnings per share computation 7,951 6,529
Additional dilutive shares using the average
market value for the period utilizing the
treasury stock method regarding stock options 229 154
-------- --------
Weighted-average shares and equivalents
outstanding for diluted earnings per share 8,180 6,683
======== ========
Diluted earnings per share $ .15 $ .12
======== ========
(continued)
10
FEDERAL TRUST CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), CONTINUED
(5) STOCK COMPENSATION PLANS
The Company has two stock options plans. The Key Employee Stock Compensation
Program (the "Employee Plan") is authorized to issue up to 10% of the issued
shares up to a maximum of 1,000,000 shares through the exercise of incentive
stock options, compensatory stock options, stock appreciation rights or
performance shares. All awards granted under the Employee Plan have been
incentive stock options. These options have ten year terms and vest ratably
over various terms up to five years. At March 31, 2005, the Company had
332,479 options available for future grants under the Employee Plan.
The Directors' Stock Option Plan (the "Director Plan") is authorized to
issue up to 140,000 shares. All options granted under the Director Plan have
ten year terms, vest immediately and are not exercisable for a period of six
months after the grant date. At March 31, 2005, all of the allocated options
in the Director Plan had been granted.
A summary of stock option transactions for the three-month periods ended
March 31, 2005 and 2004 follows ($ in thousands, except per share data):
NUMBER RANGE OF AGGREGATE
OF PER SHARE OPTION
OPTIONS OPTION PRICE PRICE
---------- ------------ ----------
OPTIONS GRANTED UNDER THE EMPLOYEE PLAN:
Outstanding at December 31, 2003 377,418 $ 4.00-7.62 $ 1,933
Options granted 3,000 7.62 23
Options exercised (6) 4.00 -
Options forfeited (36) 4.00 -
---------- ----------
Outstanding at March 31, 2004 380,376 $ 4.00-7.62 $ 1,956
========== ============ ==========
Outstanding at December 31, 2004 380,376 $ 4.00-7.62 $ 1,956
Options granted 24,072 10.25 247
Options forfeited (46) 4.00 -
---------- ----------
Outstanding at March 31, 2005 404,402 $ 4.00-10.25 $ 2,203
========== ============ ==========
OPTIONS GRANTED UNDER THE DIRECTOR PLAN:
Outstanding at December 31, 2003 and 2004 140,000 $ 4.00-7.62 $ 694
Options Exercised (11,750) 4.00 (47)
---------- ----------
Outstanding at March 31, 2005 128,250 $ 4.00-7.62 $ 647
========== ============ ==========
(continued)
11
FEDERAL TRUST CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited), CONTINUED
(5) STOCK COMPENSATION PLANS, CONTINUED
Statement of Financial Accounting Standards No. 123, Accounting for Stock
Based Compensation, as amended by SFAS No. 148 Accounting for Stock Based
Compensation transition and disclosure, ("SFAS No. 123") requires pro forma
fair value disclosures if the intrinsic value method is being utilized to
calculate the fair value of options. For purposes of pro forma disclosures,
the estimated fair value is included in expense in the period vesting
occurs. The proforma information has been determined using the Black-Scholes
model as if the Company had accounted for its stock options under the fair
value method of SFAS No. 123. The Company accounts for its stock option
plans under the recognition and measurement principles of Accounting
Principles Board Opinion No. 25. No stock-based employee compensation cost
is reflected in net earnings, as all stock options granted under the plans
had an exercise price equal to the market value of the underlying common
stock on the date of grant. The following table illustrates assumptions used
in calculating the grant-date fair value and the effect on net earnings and
basic and diluted earnings per share as if the Company had applied the fair
value recognition provisions of SFAS No. 123 to stock-based employee
compensation ($ in thousands, except per share amounts):
THREE MONTHS ENDED
MARCH 31,
-------------------------
2005 2004
---------- ----------
Assumptions for grants made during the period:
Weighted-average risk-free rate of return 4.34% 4.68%
Annualized dividend yield 1.17% 1.05%
Expected life of options granted 7 years 10 years
Expected stock volatility 20.0% 20.0%
Number of options granted during the period 24,072 3,000
========== ==========
Grant-date fair value of options issued
during the period $ 68 $ 8
========== ==========
Grant-date fair value per share of options
issued during the period $ 2.84 $ 2.68
========== ==========
Net earnings, as reported $ 1,215 $ 810
Deduct: Total stock-based employee
compensation determined under the fair
value based method for all awards, net of
related tax benefit (61) (45)
---------- ----------
Proforma net earnings $ 1,154 $ 765
========== ==========
Basic earnings per share:
As reported $ .15 $ .12
========== ==========
Proforma $ .15 $ .12
========== ==========
Diluted earnings per share:
As reported $ .15 $ .12
========== ==========
Proforma $ .14 $ .11
========== ==========
12
FEDERAL TRUST CORPORATION AND SUBSIDIARY
REVIEW BY INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Hacker, Johnson & Smith PA, the Company's independent registered public
accounting firm, have made a limited review of the financial data as of March
31, 2005, and for the three-month periods ended March 31, 2005 and 2004
presented in this document, in accordance with standards established by the
Public Company Accounting Oversight Board (United States).
Their report furnished pursuant to Article 10 of Regulation S-X is included
herein.
13
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Federal Trust Corporation
Sanford, Florida:
We have reviewed the accompanying condensed consolidated balance sheet
of Federal Trust Corporation and Subsidiary (the "Company") as of March 31,
2005, and the related condensed consolidated statements of earnings,
stockholders' equity and cash flows for the three-month periods ended March 31,
2005 and 2004. These interim financial statements are the responsibility of the
Company's management.
We conducted our reviews in accordance with the standards of the Public
Company Accounting Oversight Board (United States). A review of interim
financial information consists principally of applying analytical procedures and
making inquiries of persons responsible for financial and accounting matters. It
is substantially less in scope than an audit conducted in accordance with the
standards of the Public Company Accounting Oversight Board (United States), the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications
that should be made to the accompanying interim financial statements for them to
be in conformity with U.S. generally accepted accounting principles.
We have previously audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the consolidated
balance sheet as of December 31, 2004, and the related consolidated statements
of earnings, stockholders' equity and cash flows for the year then ended (not
presented herein); and in our report dated March 15, 2005 we expressed an
unqualified opinion on those consolidated financial statements. In our opinion,
the information set forth in the accompanying condensed consolidated balance
sheet as of December 31, 2004, is fairly stated, in all material respects, in
relation to the consolidated balance sheet from which it has been derived.
/s/ Hacker, Johnson & Smith PA
HACKER, JOHNSON & SMITH PA
Orlando, Florida
May 9, 2005
14
FEDERAL TRUST CORPORATION AND SUBSIDIARY
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
COMPARISON OF MARCH 31, 2005 AND DECEMBER 31, 2004
GENERAL
Federal Trust Corporation ("Federal Trust") is the sole shareholder of
Federal Trust Bank (the "Bank"). Federal Trust operates as a unitary
savings and loan holding company. Federal Trust's business activities
primarily include the operation of the Bank. The Bank is
federally-chartered as a stock savings bank and the Bank's deposits are
insured up to the applicable limits by the Federal Deposit Insurance
Corporation. The Bank provides a wide range of banking services to
individual and corporate customers through its six offices located in
Seminole, Orange and Volusia Counties, Florida.
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.
CAPITAL RESOURCES
During the three months ended March 31, 2005, the Company's primary
source of funds consisted of a net increase in Federal Home Loan Bank
Advances of $36.3 million. The Company used its capital resources
principally to purchase loans of $31.2 million, and to purchase
securities available for sale of $9.6 million.
OFF-BALANCE SHEET ARRANGEMENTS AND AGGREGATE CONTRACTUAL OBLIGATIONS
The Company is a party to financial instruments with off-balance sheet
risk in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend
credit, unused lines of credit, standby letters of credit and loans in
process. These instruments involve, to varying degrees, elements of
credit and interest-rate risk in excess of the amounts recognized in the
condensed consolidated balance sheet. The contract amounts of those
instruments reflect the extent of the Company's involvement in
particular classes of financial instruments.
15
FEDERAL TRUST CORPORATION AND SUBSIDIARY
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED
The Company's exposure to credit loss in the event of nonperformance by
the other party to the financial instrument for commitments to extend
credit, unused lines of credit and loans in process is represented by
the contractual amount of those instruments. The Company uses the same
credit policies in making commitments as it does for on-balance sheet
instruments.
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Since many of the
commitments are expected to expire without being drawn upon, the total
committed amounts do not necessarily represent future cash requirements.
The Company evaluates each customer's credit worthiness on a
case-by-case basis. The amount of collateral obtained, if it is deemed
necessary by the Company upon extension of credit, is based on
management's credit evaluation of the counter party.
Standby letters of credit are conditional commitments issued by the
Company to guarantee the performance of a customer to a third party. The
credit risk involved in issuing letters of credit is essentially the
same as that involved in extending loans to customers.
A summary of the amounts of the Company's financial instruments, with
off-balance sheet risk at March 31, 2005, follows (in thousands):
Contract
Amount
--------
Commitments to extend credit $ 7,288
Unused lines of credit $ 4,294
Standby letters of credit $ 2,872
Loans in process $ 23,478
Management believes the Company has adequate resources to fund all its
commitments. At March 31, 2005, the Company had approximately $202
million in time deposits maturing in one year or less. Management also
believes that, if so desired, it can adjust the rates on time deposits
to retain or obtain new deposits in a changing interest rate
environment.
Management believes the Bank was in compliance with all minimum capital
requirements which it was subject to at March 31, 2005. See note 3 to
the condensed consolidated financial statements.
Management is not aware of any trends, demands, commitments or
uncertainties which are expected to have a material impact on future
operating results, liquidity or capital resources.
16
FEDERAL TRUST CORPORATION AND SUBSIDIARY
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, information
regarding: (i) the total dollar amount of interest income of the Company from
interest-earning assets and the resultant average yields; (ii) the total dollar
amount of interest expense on interest-bearing liabilities and the resultant
average costs; (iii) net interest/dividend income; (iv) interest-rate spread;
and (v) net interest margin (in thousands).
THREE MONTHS ENDED MARCH 31,
-----------------------------------------------------------------------------
2005 2004
------------------------------------ -------------------------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST
---------- ---------- ---------- ---------- ---------- ----------
Interest-earning assets:
Loans (1) $ 529,980 $ 6,896 5.20% $ 412,119 $ 5,453 5.29%
Securities 43,591 447 4.10 33,408 292 3.50
Other interest-earning assets (2) 10,111 109 4.31 6,716 53 3.16
---------- ---------- ---------- ---------- ---------- ----------
Total interest-earning assets 583,682 7,452 5.11 452,243 5,798 5.13
Noninterest-earning assets 31,063 27,840
---------- ----------
Total assets $ 614,745 $ 480,083
========== ==========
Interest-bearing liabilities:
Noninterest-bearing demand deposits $ 14,720 - - $ 7,622 - -
Interest-bearing demand and money-
market deposits 126,302 723 2.29 93,994 408 1.74
Savings deposits 5,790 20 1.38 8,537 31 1.45
Time deposits 256,521 1,690 2.64 214,230 1,219 2.28
---------- ---------- ---------- ---------- ---------- ----------
Total deposits 403,333 2,433 2.41 324,383 1,658 2.04
Borrowings (3) 166,276 1,229 2.96 123,278 735 2.38
---------- ---------- ---------- ---------- ---------- ----------
Total interest-bearing liabilities 569,609 3,662 2.57 447,661 2,393 2.14
Noninterest-bearing liabilities 5,398 5,459
Stockholders' equity 39,738 26,963
---------- ----------
Total liabilities and stockholders' equity $ 614,745 $ 480,083
========== ==========
Net interest income $ 3,790 $ 3,405
========== ==========
Interest-rate spread (4) 2.54% 2.99%
========== ==========
Net interest margin (5) 2.60% 3.01%
========== ==========
Ratio of average interest-earning assets to
average interest-bearing liabilities 1.02 1.01
========== ==========
(1) Includes non-accrual loans.
(2) Includes Federal Home Loan Bank stock and interest-earning deposits.
(3) Includes Federal Home Loan Bank advances, other borrowings, junior
subordinated debentures and capital lease obligation.
(4) Interest-rate spread represents the difference between the average yield
on interest-earning assets and the average cost of interest-bearing
liabilities.
(5) Net interest margin is annualized net interest income divided by average
interest-earning assets.
17
FEDERAL TRUST CORPORATION AND SUBSIDIARY
COMPARISON OF THE THREE-MONTH PERIODS ENDED MARCH 31, 2005 AND 2004
General. The Company had net earnings for the three-month period ended March 31,
2005, of $1.2 million or $.15 per basic and diluted share, compared to $810,000
or $.12 per basic and diluted share for the same period in 2004. The increase in
net earnings was primarily due to an increase in net interest income, while
other expenses were essentially unchanged.
Interest Income. Interest income increased by $1.7 million or 29% to $7.5
million for the three-months ended March 31, 2005, from $5.8 million for the
same period in 2004. Interest income on loans increased $1.4 million to $6.9
million in 2005, due to an increase in the average amount of loans outstanding
from $412.1 million in 2004 to $530.0 million in 2005, partially offset by a
decrease in the average yield earned on loans from 5.29% for the three-month
period ended March 31, 2004, to 5.20% for the comparable period in 2005.
Interest income on securities increased by $155,000 for the three-month period
ended March 31, 2005, over the same period in 2004. Management expects the rates
earned on the earning asset portfolio to fluctuate with general market rates.
Interest Expense. Interest expense increased by $1.3 million or 53% during the
three-month period ended March 31, 2005, compared to the same period in 2004.
Interest on deposits increased $775,000 or 47% to $2.4 million in 2005 from $1.7
million in 2004. The increase in interest on deposits was a result of an
increase in average deposits outstanding from $324.4 million in 2004 to $403.3
million in 2005, together with an increase in the average cost of deposits from
2.04% for the three-month period ended March 31, 2004, to 2.41% for the
comparable period in 2005. Interest on other borrowings increased to $1.2
million in 2005 from $735,000 in 2004, primarily as a result of an increase in
the average amount of other borrowings outstanding from $123.3 million in 2004
to $166.3 million in 2005 and an increase in the average cost from 2.38% to
2.95% from 2004 to 2005. Management expects to continue to use FHLB advances and
other borrowings as a liability management tool.
Provision for Loan Losses. A provision for loan losses is charged to earnings
based upon management's evaluation of the losses in its loan portfolio. During
the quarter ended March 31, 2005, management recorded a provision for loan
losses of $180,000 based on its evaluation of the loan portfolio, which was a
decrease of $370,000 from the same period in 2004. The allowance for loan losses
at March 31, 2005, was $4.0 million compared to $3.8 million at December 31,
2004. As a percent of total loans outstanding, the allowance for loan losses was
.72% at both March 31, 2005 and December 31, 2004. Management believes the
allowance for loan losses at March 31, 2005 is adequate.
Other Income. Other income decreased to $629,000 for the first quarter of 2005
from $678,000 for the three-month period ended March 31, 2004. The decrease in
other income resulted from a decline in service charges and fees, plus gains on
the sale of loans, partially offset by an increase in the net gain on sales of
securities available for sale.
Other Expenses. Other expenses were $2.4 million for the three-month period
ended March 31, 2005, and was virtually unchanged from the same period in 2004.
Salaries and employee benefits increased $1,000 and occupancy expense increased
$27,000 while marketing and advertising and other expenses decreased $19,000.
Income Taxes. Income taxes for the three months ended March 31, 2005, was
$670,000 (an effective rate of 35.5%), compared to $377,000 (an effective rate
of 31.8%) for the same period in 2004.
18
FEDERAL TRUST CORPORATION AND SUBSIDIARY
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss from adverse changes in market prices
and rates. The Company's market risk arises primarily from interest-rate
risk inherent in its lending, investment and deposit taking activities.
The Company has little or no risk related to trading accounts,
commodities or foreign exchange.
Management actively monitors and manages its interest rate risk
exposure. The primary objective in managing interest-rate risk is to
limit, within established guidelines, the adverse impact of changes in
interest rates on the Company's net interest income and capital, while
adjusting the Company's asset-liability structure to obtain the maximum
yield-cost spread on that structure. Management relies primarily on its
asset-liability structure to control interest rate risk. However, a
sudden and substantial increase in interest rates could adversely impact
the Company's earnings, to the extent that the interest rates borne by
assets and liabilities do not change at the same speed, to the same
extent, or on the same basis. There has been no significant change in
the Company's market risk exposure since December 31, 2004.
ITEM 4. CONTROLS AND PROCEDURES
a. Evaluation of Disclosure Controls and Procedures. The Company
maintains controls and procedures designed to ensure that
information required to be disclosed in the reports that the Company
files or submits under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported within the time periods
specified in the rules and forms of the Securities and Exchange
Commission. Based upon their evaluation of those controls and
procedures as of the end of the period covered by this report, the
Chief Executive and Chief Financial officers of the Company
concluded that the Company's disclosure controls and procedures were
adequate.
b. Changes in Internal Controls. The Company made no significant
changes in its internal controls or in other factors that could
significantly affect these controls subsequent to the date of the
evaluation of those controls by the Chief Executive and Chief
Financial Officers.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which Federal Trust
Corporation or its subsidiary is a party or to which any of their
property is subject.
19
FEDERAL TRUST CORPORATION AND SUBSIDIARY
PART II. OTHER INFORMATION, CONTINUED
Item 6. Exhibits
(a) Exhibits. The following exhibits are filed with or incorporated by
reference into this report. The exhibits which are marked by a (1) were
previously filed as a part of, and are hereby incorporated by reference
from Registrant's Registration Statement on form SB-1, as effective with
the Securities and Exchange Commission ("SEC") on October 7, 1997,
Registration No. 333-30883. The exhibits which are marked by a (2) were
previously filed with the SEC, and are hereby incorporated by reference
from Registrant's 1998 Definitive Proxy Statement. The exhibits which
are marked with a (3) were previously filed with the SEC, and are hereby
incorporated by reference from Registrant's 1999 Definitive Proxy
Statement. The exhibits which are marked with a (4) were previously
filed with the SEC, and are hereby incorporated by reference from
Registrant's 2001 Definitive Proxy Statement. The exhibits which are
marked with a (5) were previously filed with the SEC, and are hereby
incorporated by reference from Registrant's 1999 Form 10-KSB. The
exhibits which are marked with a (6) were previously filed with the SEC
and are hereby incorporated by reference from the Registrant's 2004 Form
10-KSB. The exhibit numbers correspond to the exhibit numbers in the
referenced documents. The exhibits which are marked with a (7) were
previously filed with the SEC, and are hereby incorporated by reference
from Registrant's 2005 Definitive Proxy Statement.
EXHIBIT NO. DESCRIPTION OF EXHIBIT
----------- -------------------------------------------------------
(1) 3.1 1996 Amended Articles of Incorporation and the 1995
Amended and Restated Articles of Incorporation of
Federal Trust
(1) 3.2 1995 Amended and Restated Bylaws of Federal Trust
(2) 3.3 1998 Articles of Amendment to Articles of
Incorporation of Federal Trust
(3) 3.4 1999 Articles of Amendment to Articles of
Incorporation of Federal Trust
(1) 4.0 Specimen of Common Stock Certificate
(4) 10.1 Amended Employment Agreement By and Among Federal
Trust, the Bank and James V. Suskiewich
(4) 10.2 First Amendment to the Amended Employment Agreement By
and Among Federal Trust, the Bank and James V.
Suskiewich
(6) 10.3 Employee Severance Agreement with Stephen C. Green
(5) 10.4 Amendment to Federal Trust 1998 Key Employee Stock
Compensation Program
(5) 10.5 Amendment to Federal Trust 1998 Directors' Stock Option
Plan
(6) 10.6 Employee Severance Agreement with Gregory E. Smith
(6) 10.7 Employee Severance Agreement with Daniel C. Roberts
(6) 10.8 Employee Severance Agreement with Jennifer B. Brodnax
(7) 10.9 2005 Directors' Stock Plan
(6) 14.1 Code of Ethical Conduct
31.1 Certification of Chief Executive Officer, pursuant to
Rule 13a - 14(a)
31.2 Certification of Chief Financial Officer, pursuant to
Rule 13a - 14(a)
32.1 Certification of Chief Executive Officer, pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Financial Officer, pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
20
FEDERAL TRUST CORPORATION AND SUBSIDIARY
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Small
business issuer has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FEDERAL TRUST CORPORATION
(Small business issuer)
Date: May 13, 2005 By: /s/ James V. Suskiewich
--------------------------------------
James V. Suskiewich
President and Chief Executive Officer
Date: May 13, 2005 By: /s/ Gregory E. Smith
--------------------------------------
Gregory E. Smith
Executive Vice President and
Chief Financial Officer
21