--------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(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, 2003
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 Small Business Issuer 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)
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 6,591,338 shares
-------------------------------------- -----------------------------
(class) Outstanding at April 29, 2003
Transitional small business disclosure format (check one) Yes No X
------ -------
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FEDERAL TRUST CORPORATION AND SUBSIDIARY
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements Page
Condensed Consolidated Balance Sheets -
At March 31, 2003 (unaudited) and At December 31, 2002...................................................2
Condensed Consolidated Statements of Earnings (unaudited)
Three Months ended March 31, 2003 and 2002...............................................................3
Condensed Consolidated Statements of Stockholders' Equity (unaudited)
Three Months ended March 31, 2003 and 2002...............................................................4
Condensed Consolidated Statements of Cash Flows (unaudited)
Three Months Ended March 31, 2003 and 2002.............................................................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. Controls and Procedures............................................................................19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..................................................................................19
Item 6. Exhibits and Reports on Form 8-K...................................................................20
SIGNATURES.....................................................................................................21
CERTIFICATIONS..............................................................................................22-23
1
FEDERAL TRUST CORPORATION AND SUBSIDIARY
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
(Dollars in thousands, except per share amounts)
At
-----------
March 31, December 31,
--------- ------------
Assets 2003 2002
---- ----
(Unaudited)
Cash and due from banks $ 3,463 4,318
Interest-earning deposits 7,603 14,515
-------- --------
Cash and cash equivalents 11,066 18,833
Securities available for sale 37,299 21,520
Loans, less allowance for loan losses of $2,332 in 2003 and
$2,110 in 2002 357,604 308,598
Accrued interest receivable 2,601 2,186
Premises and equipment, net 9,177 8,357
Foreclosed assets 1,065 858
Federal Home Loan Bank stock, at cost 4,810 2,860
Mortgage servicing rights, net 1,252 1,325
Executive supplemental income plan - cash surrender value of
life insurance policies 3,005 2,974
Other assets 657 543
-------- --------
Total assets $428,536 368,054
======== ========
Liabilities and Stockholders' Equity
Liabilities:
Noninterest-bearing demand deposits 5,813 6,112
Interest-bearing demand deposits 15,359 12,094
Money-market deposits 74,224 68,893
Savings deposits 9,815 9,319
Time deposits 189,088 182,113
-------- --------
Total deposits 294,299 278,531
Federal Home Loan Bank advances 96,200 54,200
Line of credit 4,165 915
Capital lease obligation 2,058 2,139
Accrued interest payable 577 449
Official checks 1,172 1,778
Other liabilities 4,213 5,003
-------- --------
Total liabilities 402,684 343,015
-------- --------
Stockholders' equity:
Common stock 66 66
Additional paid-in capital 21,784 21,778
Retained earnings 3,769 3,180
Accumulated other comprehensive income 233 15
-------- --------
Total stockholders' equity 25,852 25,039
-------- --------
Total liabilities and stockholders' equity $428,536 368,054
======== ========
See Accompanying Notes to Condensed Consolidated Financial Statements.
2
FEDERAL TRUST CORPORATION AND SUBSIDIARY
Condensed Consolidated Statements of Earnings
(Unaudited)
(Dollars in thousands, except per share amounts)
Three Months Ended
March 31,
---------
2003 2002
---- ----
Interest income:
Loans $5,129 4,491
Securities 300 155
Other 64 94
------ ------
Total interest income 5,493 4,740
------ ------
Interest expense:
Deposits 2,033 2,178
Other 739 592
------ ------
Total interest expense 2,772 2,770
------ ------
Net interest income 2,721 1,970
Provision for loan losses 220 30
------ ------
Net interest income after provision for loan losses 2,501 1,940
------ ------
Other income:
Service charges and fees 54 93
Net loan servicing income 15 53
Gain on sale of loans held for sale 107 258
Gain on sale of securities available for sale 195 -
Rental income 104 91
Other 132 145
------ ------
Total other income 607 640
------ ------
Other expenses:
Salary and employee benefits 1,093 959
Occupancy expense 308 332
Data processing 129 94
Professional services 102 70
Other 506 425
------ ------
Total other expense 2,138 1,880
------ ------
Earnings before income taxes 970 700
Income taxes 316 248
------ ------
Net earnings $ 654 452
====== ======
Earnings per share:
Basic $ .10 .08
====== ======
Diluted $ .10 .08
====== ======
Weighted-average shares outstanding for (in thousands):
Basic 6,591 5,451
====== ======
Diluted 6,681 5,451
====== ======
Cash dividends per share $ .01 -
====== ======
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, 2003 and 2002
(Dollars in thousands)
Accumulated
Other
Compre-
Common Stock Additional hensive Total
------------------- Paid-In Retained Income Stockholders'
Shares Amount Capital Earnings (Loss) Equity
------ ------ ------- -------- ------ ------
Balance at December 31, 2001 5,409,449 $ 54 17,492 1,121 (136) 18,531
------
Comprehensive income:
Net earnings (unaudited) - - - 452 - 452
Change in unrealized loss on
securities available for sale,
net of income taxes of $8
(unaudited) - - - - 22 22
------
Comprehensive income (unaudited) 474
------
Accretion of stock options for stock
compensation programs (unaudited) - - 7 - - 7
Issuance of common stock (unaudited) 83,333 1 299 - - 300
--------- ---- ------- -------- ------ ------
Balance at March 31, 2002 (unaudited) 5,492,782 $ 55 17,798 1,573 (114) 19,312
========= ==== ======= ======== ====== ======
Balance at December 31, 2002 6,591,338 $ 66 21,778 3,180 15 25,039
------
Comprehensive income:
Net earnings (unaudited) - - - 654 - 654
Change in unrealized loss on
securities available for sale,
net of income taxes of $131
(unaudited) - - - - 218 218
------
Comprehensive income (unaudited) 872
------
Accretion of stock options for stock
compensation programs (unaudited) - - 6 - - 6
Dividends paid, $.01 per share
(unaudited) - - - (65) - (65)
--------- ---- ------- -------- ------ ------
Balance at March 31, 2003 (unaudited) 6,591,338 $ 66 21,784 3,769 233 25,852
========= ==== ======= ======== ====== ======
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,
---------
2003 2002
---- ----
Cash flows from operating activities:
Net earnings $ 654 452
Adjustments to reconcile net earnings to net cash provided by operating
activities:
Depreciation and amortization 127 107
Net amortization of loan origination fees, costs, premiums and discounts 334 197
Net amortization of premiums and discounts on securities 78 65
Amortization of mortgage servicing rights 121 123
Provision for loan losses 220 30
Accretion of stock option expense 6 7
Increase in cash surrender value of life insurance policies (31) (32)
Proceeds from sales of loans held for sale 7,249 15,577
Loans originated for resale (2,459) (4,658)
Gain on sale of loans held for sale (107) (258)
Gain on sale of securities available for sale (195) -
Cash provided by (used in) resulting from changes in:
Accrued interest receivable (415) (48)
Other assets (245) 145
Accrued interest payable 128 195
Official checks (606) 660
Other liabilities (790) (83)
-------- --------
Net cash provided by operating activities 4,069 12,479
-------- --------
Cash flows from investing activities:
Purchase of securities available for sale (19,165) (4,059)
Proceeds from principal repayments and sales of securities available for sale 3,852 524
Principal repayments, net of loans originated 6,973 1,446
Purchase of loans (61,471) (11,255)
Purchase of premises and equipment (947) (841)
Purchase of Federal Home Loan Bank stock (1,950) -
Net proceeds from sale of foreclosed assets - 143
-------- --------
Net cash used in investing activities (72,708) (14,042)
-------- --------
Cash flows from financing activities:
Net increase in deposits 15,768 3,892
Net increase (decrease) in Federal Home Loan Bank advances 42,000 (5,000)
Net increase in line of credit 3,250 200
Principal repayments under capital lease obligation (81) (77)
Dividends paid (65) -
-------- --------
Net cash provided by (used in) financing activities 60,872 (985)
-------- --------
Net decrease in cash and cash equivalents (7,767) (2,548)
Cash and cash equivalents at beginning of period 18,833 11,566
-------- --------
Cash and cash equivalents at end of period $ 11,066 9,018
======== ========
(continued)
5
FEDERAL TRUST CORPORATION AND SUBSIDIARY
Condensed Consolidated Statements of Cash Flows, Continued
(Unaudited)
(In Thousands)
Three Months Ended
March 31,
---------
2003 2002
---- ----
Supplemental disclosure of cash flow information- Cash paid during the period
for:
Interest $ 2,644 2,575
========== =====
Income taxes $ 410 30
========== =====
Noncash transactions:
Foreclosed assets acquired in settlement of loans $ 207 61
========== =====
Accumulated other comprehensive income, change in unrealized gain
on securities available for sale, net of tax $ 218 22
========== =====
Common stock issued in connection with capital land lease $ - 300
========== =====
Transfer of loans in portfolio to loans held for sale $ 4,388 9,839
========== =====
Mortgage servicing rights recognized upon sale of loans held for sale $ 48 87
========== =====
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
General. Federal Trust Corporation ("Federal Trust") is a unitary savings
and loan holding company and sole shareholder of Federal Trust Bank
(the "Bank"), a federally-chartered stock savings bank. Federal Trust's
primary investment is the ownership of the Bank. The Bank provides a
wide range of banking services to individual and corporate customers
through its four offices located in Orange, Seminole and Volusia
Counties, Florida. FTB Financial Services, Inc., a wholly-owned
subsidiary of the Bank, provides investment services to customers of
the Bank.
The condensed consolidated financial statements, include the accounts of
Federal Trust, the Bank and the Bank's subsidiary (together, 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, 2003, and the results of operations and cash
flows for the three-month periods ended March 31, 2003 and 2002. The
results of operations for the three-month period ended March 31, 2003,
are not necessarily indicative of the results to be expected for the
entire year ended December 31, 2003. 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, 2002.
(2) Loans
The components of loans are summarized as follows (in thousands):
At March 31, At December 31,
2003 2002
---- ----
Mortgage loans:
Residential (1) $ 294,143 246,234
Commercial 45,656 44,766
Construction 9,509 12,258
--------- ---------
Total mortgage loans 349,308 303,258
Commercial loans 9,084 6,768
Consumer loans 1,055 969
--------- ---------
Total loans 359,447 310,995
Add (deduct):
Allowance for loan losses (2,332) (2,110)
Net premiums, discounts, deferred fees and costs 2,324 2,902
Undisbursed portion of loans in process (1,835) (3,189)
--------- ---------
Loans, net $ 357,604 308,598
========= =========
----------
(1) Includes $1.5 million and $1.8 million of loans held for sale at March 31,
2003 and December 31, 2002, 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,
--------- ------------
2003 2002
---- ----
Nonaccrual loans $ 4,957 5,579
======== =====
Accruing loans past due ninety days or more $ - -
======== =====
Total recorded investment in impaired loans $ 5,281 7,572
======== =====
Recorded investment in impaired loans for which
there is a related allowance for loan losses $ 5,281 7,572
======== =====
Recorded investment in impaired loans for which
there is no related allowance for loan losses $ - -
======== =====
Allowance for loan losses related to impaired loans $ 792 1,144
======== =====
Three Months Ended
March 31,
2003 2002
---- ----
Interest income recognized and received on impaired loans $ 7 35
====== ======
Average recorded investment in impaired loans $5,459 4,203
====== ======
The activity in the allowance for loan losses is as follows (in thousands):
Three Months Ended
March 31,
2003 2002
---- ----
Balance at beginning of period $ 2,110 1,765
Provision for loan losses 220 30
Charge-offs (13) (61)
Recoveries 15 5
------- -------
Balance at end of period $ 2,332 1,739
======= =======
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, 2003, management made a provision of $220,000 based
on its evaluation of the loan portfolio, compared to a provision of $30,000
made in the comparable period in 2002. At March 31, 2003, 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, as of March 31, 2003, that the Bank meets all capital
adequacy requirements to which it is subject.
As of March 31, 2003, the most recent notification from the Office of
Thrift Supervision categorized the Bank 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.
There are no conditions or events since that notification that
management believes have changed the institution' s category. 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, 2003:
Total capital (to risk-
weighted assets) $30,357 11.5% $21,067 8.0% $26,333 10.0%
Tier I capital (to risk
weighted assets) 28,069 10.7 10,533 4.0 15,800 6.0
Tier I capital (to average
adjusted assets) 28,069 6.6 17,000 4.0 21,251 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 year by the weighted-average number of shares
outstanding. 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,
2003 2002
---- ----
Weighted-average shares outstanding for basic earnings per share 6,591 5,451
===== =====
Basic earnings per share $ .10 .08
===== =====
Total weighted-average shares outstanding for basic earnings
per share computation 6,591 5,451
Additional dilutive shares using the average market value for the
period utilizing the treasury stock method regarding
stock options 90 -
----- -----
Weighted-average shares and equivalents outstanding for diluted
earnings per share 6,681 5,451
===== =====
Diluted earnings per share $ .10 .08
===== =====
(continued)
10
FEDERAL TRUST CORPORATION AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements (unaudited), Continued
(5) Federal Home Loan Bank Advances
A summary of advances from the Federal Home Loan Bank of Atlanta ("FHLB")
are as follows ($ in thousands):
Maturing During
the Year Ending Interest At March 31, At December 31,
December 31, Rate 2003 2002
------------ ---- ---- ----
2003 6.39 $ - 5,000
2003 1.30* - 17,000
2003 1.57* 24,000 -
2005 2.00 25,000 -
2006 1.24** 5,000 -
2006 .75** 5,000 -
2007 5.22 2,200 2,200
2007 1.26** 5,000 5,000
2008 1.98*** 5,000 -
2011 3.73**** 25,000 25,000
------ -------
$ 96,200 54,200
====== ======
* Daily advance - rate adjusts daily. ** FHLB has the option to call every
three months.
*** FHLB has the option to call every three months beginning in January
2005. *** * FHLB has a one-time call option in December 2004.
The security agreement with FHLB includes a blanket floating lien requiring
the Company to maintain qualifying first mortgage loans as pledged
collateral in an amount equal to at least, when discounted at 75% of
the unpaid principal balances, 100% of these advances. The FHLB stock
is also pledged as collateral for these advances.
(6) Stock Option Plans
The Company has two stock options plans. The Key Employee Stock
Compensation Program (the "Employee Plan") is authorized to issue up to
475,000 shares as either 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 lives and vest ratably over various terms
up to five years. At March 31, 2003, the Company had 152,554 shares
remaining under the Employee Plan available for future grants.
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 lives, vest immediately and are not exercisable for a
period of six months after the grant date. At March 31, 2003, the
Company had 36,939 shares remaining under the Director Plan available
for future grants.
(continued)
11
FEDERAL TRUST CORPORATION AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements (unaudited), Continued
(6) Stock Option Plans, Continued
During 1998, 350,000 options were granted under both plans at an exercise
price less than the then market price. This amount is being expensed
over the related vesting periods of options still outstanding.
Compensation costs relating to these options was approximately $6,000
and $7,000 for the three months ended March 31, 2003 and 2002,
respectively.
There were no stock option transactions during the three months ended March
31, 2003 or 2002.
SFASNo. 123 requires pro forma fair value disclosures if the intrinsic
value method is being utilized to calculate the fair value of options.
For purposes of pro forma disclosures, the estimated fair value is
included in expense in the period vesting occurs. The proforma
information has been determined as if the Company had accounted for its
stock options under the fair value method of SFAS No. 123. The Company
accounts for their stock option plans under the recognition and
measurement principles of APB No. 25. No stock-based employee
compensation cost is reflected in net earnings, except for those
options granted in 1998 as discussed above, as all stock options
granted under the plans had an exercise price equal to the market value
of the underlying common stock on the date of grant. The following
table illustrates the effect on net earnings and basic and diluted
earnings per share as if the Company had applied the fair value
recognition provisions of SFAS No. 123 to stock-based employee
compensation ($ in thousands, except per share amounts):
Three Months Ended
March 31,
---------
2003 2002
---- ----
Net earnings, as reported $ 654 452
Deduct: Total stock-based employee compensation
determined under the fair value based method for
all awards, net of related tax benefit (5) (14)
----- ------
Proforma net earnings $ 649 438
===== ======
Basic earnings per share:
As reported $ .10 .08
===== ======
Proforma $ .10 .08
===== ======
Diluted earnings per share:
As reported $ .10 .08
===== ======
Proforma $ .10 .08
===== ======
(7) Reclassifications
Certain amounts in 2002 condensed consolidated financial statements have
been reclassified to conform to the presentation for 2003.
12
FEDERAL TRUST CORPORATION AND SUBSIDIARY
Review by Independent Accountants
Hacker, Johnson & Smith PA, the Company's independent accountants, have made a
limited review of the financial data as of March 31, 2003, and for the
three-month periods ended March 31, 2003 and 2002 presented in this document, in
accordance with standards established by the American Institute of Certified
Public Accountants.
Their report furnished pursuant to Article 10 of Regulation S-X is included
herein.
13
Independent Accountants Report
The Board of Directors
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, 2003,
and the related condensed consolidated statements of earnings, stockholders'
equity and cash flows for the three-month periods ended March 31, 2003 and 2002.
These financial statements are the responsibility of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with auditing standards generally accepted in the United States of
America, 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 condensed consolidated financial statements referred to
above for them to be in conformity with accounting principles generally accepted
in the United States of America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet as of
December 31, 2002, 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 February 11, 2003 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, 2002, 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
April 29, 2003
14
FEDERAL TRUST CORPORATION AND SUBSIDIARY
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations
Comparison of March 31, 2003 and December 31, 2002
General
Federal Trust Corporation ("Federal Trust"), is the sole shareholder of
Federal Trust Bank (the "Bank") (together, the "Company"). Federal Trust
operates as a unitary savings and loan holding company and its primary
business activity is the operation of the Bank.
The Bank is chartered as a federal stock savings bank. The Bank provides a
wide range of banking services to individual and corporate customers
through its four offices located in Orange, Seminole and Volusia Counties,
Florida. FTB Financial Services, Inc., a wholly-owned subsidiary of the
Bank, provides investment services to customers of the Bank.
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, 2003, the Company's primary source
of funds consisted of net increases in Federal Home Loan Bank advances of
$42.0 million and deposits of $15.8 million, principal repayments and sales
of securities available for sale of $3.9 million and net cash provided by
operating activities of $4.1 million. The Company used its capital
resources principally to purchase and originate loans, net of principal
repayments of $54.5 million and to purchase securities available for sale
of $19.2 million.
15
FEDERAL TRUST CORPORATION AND SUBSIDIARY
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations, Continued
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 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.
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.
A summary of the amounts of the Company's financial instruments, with
off-balance sheet risk at March 31, 2003, follows (in thousands):
Contract
Amount
Commitments to extend credit......................... $ 8,897
=======
Unused lines of credit............................... $ 5,749
=======
Loans in process..................................... $ 1,835
=======
Management believes the Company has adequate resources to fund all its
commitments. At March 31, 2003, the Company had approximately $161.8
million in time deposits maturing in one year or less. Management also
believes that, if so desired, it can adjust the rates on time deposits to
retain or obtain new deposits in a changing interest rate environment.
Management believes the Bank was in compliance with all minimum capital
requirements which it was subject to at March 31, 2003. See note 3 to the
condensed consolidated financial statements.
Management is not aware of any trends, know demands, commitments or
uncertainties which are expected to have a material impact on future
operating results, liquidity or capital resources.
16
FEDERAL TRUST CORPORATION AND SUBSIDIARY
Results of Operations
The following table sets forth, for the periods indicated, information regarding
(i) the total dollar amount of interest income of the Company from
interest-earning assets and the resultant average yields; (ii) the total dollar
amount of interest expense on interest-bearing liabilities and the resultant
average costs; (iii) net interest/dividend income; (iv) interest-rate spread;
and (v) net interest margin.
Three Months Ended March 31,
2003 2002
------------------------------------------------------------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
------- -------- ---- ------- -------- ----
($ in thousands)
Interest-earning assets:
Loans (1) $ 356,086 5,129 5.76% $ 260,261 4,491 6.90%
Securities 26,259 300 4.57 13,430 155 4.62
Other interest-earning assets (2) 9,504 64 2.69 15,884 94 2.37
--------- -------- --------- -------
Total interest-earning assets 391,849 5,493 5.61 289,575 4,740 6.55
-------- -------
Noninterest-earning assets 18,922 17,463
--------- ---------
Total assets $ 410,771 $ 307,038
========= =========
Interest-bearing liabilities:
Noninterest-bearing demand deposits 7,760 - - 5,324 - -
Interest-bearing demand and money-
market deposits 85,285 476 2.23 43,809 302 2.76
Savings deposits 9,707 50 2.06 1,718 15 3.49
Time deposits 193,088 1,507 3.12 177,862 1,861 4.19
--------- -------- --------- -------
Total deposits 295,840 2,033 2.75 228,713 2,178 3.81
Other borrowings (3) 84,274 739 3.51 49,938 592 4.74
--------- -------- --------- -------
Total interest-bearing liabilities 380,114 2,772 2.92 278,651 2,770 3.98
-------- -------
Noninterest-bearing liabilities 5,212 9,465
Stockholders' equity 25,445 18,922
--------- ---------
Total liabilities and
stockholders' equity $ 410,771 $ 307,038
========= =========
Net interest income $ 2,721 $ 1,970
======== =======
Interest-rate spread (4) 2.69% 2.57%
==== ====
Net interest margin (5) 2.78% 2.72%
==== ====
Ratio of average interest-earning assets to
average interest-bearing liabilities 1.03 1.04
==== ====
----------
(1) Includes nonaccrual loans.
(2) Includes Federal Home Loan Bank stock and interest-earning deposits.
(3) Includes Federal Home Loan Bank advances, line of credit 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, 2003 and 2002
General. The Company had net earnings for the three-month period ended
March 31, 2003, of $654,000 or $.10 per basic and diluted share,
compared to $452,000 or $.08 per basic and diluted share for the same
period in 2002. The increase in net earnings was primarily due to an
increase in net interest income, partially offset by increases in the
provision for loan losses and other expenses.
Interest Income. Interest income increased by $753,000 or 15.9% to $5.5
million for the three-month period ended March 31, 2003, from $4.7
million for the same period in 2002. Interest income on loans increased
$638,000 or 14.2% to $5.1 million in 2003 from $4.5 million in 2002,
primarily as a result of an increase in the average amount of loans
outstanding from $260.3 million in 2002 to $356.1 million in 2003,
partially offset by a decrease in the average yield earned on loans
from 6.90% for the three-month period ended March 31, 2002, to 5.76%
for the comparable period in 2003. Interest income on securities
increased by $145,000 for the three-month period ended March 31, 2003,
over the same period in 2002, primarily as a result of an increase in
the average balance of securities owned. Management expects the rates
earned on the portfolio to fluctuate with general market conditions.
Interest Expense. Interest expense increased by only $2,000 during the
three-month period ended March 31, 2003, compared to the same period in
2002. Interest on deposits decreased $145,000 or 6.7% to $2.0 million
in 2003 from $2.2 million in 2002, as a result of a decrease in the
average cost of deposits from 3.81% for the three-month period ended
March 31, 2002, to 2.75% for the comparable period in 2003, partially
offset by an increase in average deposits outstanding from $228.7
million in 2002 to $295.8 million in 2003. Interest on other borrowings
increased to $739,000 in 2003 from $592,000 in 2002, primarily as a
result of the increase in the average balance of other borrowings.
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, 2003, management recorded
a provision for loan losses of $220,000 based on its evaluation of the
loan portfolio, which was a increase of $190,000 from the same period
in 2002, primarily as a result of the increase in total loans
outstanding. The allowance for loan losses at March 31, 2003, was $2.3
million or .65% of total loans outstanding, versus $2.1 million at
December 31, 2002, or .68% of total loans outstanding. Management
believes the allowance for loan losses at March 31, 2003 is adequate.
Other Income. Other income decreased $33,000 or 5.2% from $640,000 for the
three-month period ended March 31, 2002, to $607,000 for the same
period in 2003. The decrease in other income was primarily due to
decreases of $151,000, $39,000 and $38,000 in gain on sale of loans
held for sale, service charges and fees and net loan servicing income,
respectively, partially offset by an increase of $195,000 in gain on
sale of securities available for sale. The decrease in gain on sale of
loans held for sale relates to the Company's strategy of retaining more
residential loans in the portfolio instead of selling them in the
secondary market. The decrease in service charges and fees primarily
resulted from a decrease in late fees and overdraft charges. The
decrease in net loan servicing income resulted from increased
amortization of mortgage servicing rights related to residential
mortgage loan refinancings and the decision to have the majority of the
Company's loans sub-serviced by a third party. The gain on sale of
securities available for sale resulted from the Company's decision to
sell two securities during the period.
Other Expenses. Other expenses increased $258,000 or 13.7% to $2.1 million
for the three-month period ended March 31, 2003, from $1.9 million for
the same period in 2002. Salary and employee benefits increased to $1.1
million in 2003, from $959,000 in 2002 due to an increase in commercial
lending personnel and the overall growth of the Company.
Income Taxes. Income taxes for the three months ended March 31, 2003, was
$316,000 (an effective rate of 32.6%), compared to $248,000 (an
effective rate of 35.4%) for the same period in 2002.
18
FEDERAL TRUST CORPORATION AND SUBSIDIARY
Item 3. 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 performed within 90 days of the filing
date of 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
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits. The following exhibits are incorporated by reference into
this report. The exhibits which are marked by a single asterisk (*)
were previously filed as a part of, and are hereby incorporated by
reference from the Company'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 double asterisk (**) were previously filed with the SEC,
and are hereby incorporated by reference from the Company's 1998
Definitive Proxy Statement. The exhibits which are marked with a triple
asterisk (***) were previously filed with the SEC, and are hereby
incorporated by reference from the Company's 1999 Definitive Proxy
Statement. The exhibits which are marked with a quadruple asterisk
(****) were previously filed with the SEC, and are hereby incorporated
by reference from the Company's 1999 10-KSB. The exhibits which are
marked with a quintuple asterisk (*****) were previously filed with the
SEC, and are hereby incorporated by reference from the Company's June
30, 2002 Form 10-QSB. The exhibit numbers correspond to the exhibit
numbers in the referenced documents.
Exhibit No. Description of Exhibit
* 3.1 1996 Amended Articles of Incorporation and the
1995 Amended and Restated Articles of
Incorporation of Federal Trust
* 3.2 1995 Amended and Restated Bylaws of Federal Trust
** 3.3 1998 Articles of Amendment to Articles of
Incorporation of Federal Trust
*** 3.4 1999 Articles of Amendment to Articles of
Incorporation of Federal Trust
* 4.0 Specimen of Common Stock Certificate
****10.1 Amended Employment Agreement By and Among
Federal Trust, the Bank and James V. Suskiewich
****10.2 First Amendment to the Amended Employment
Agreement By and Among Federal Trust, the Bank
and James V. Suskiewich
****10.3 Amended Employment Agreement By and Among Federal
Trust, the Bank and Aubrey W. Wright, Jr.
***** 10.4 Amendment to Federal Trust 1998 Key Employee
Stock Compensation Program
***** 10.5 Amendment to Federal Trust 1998 Directors' Stock
Option Plan
99.1 CEO Certification required under Section 906 of
Sarbanes-Oxley Act of 2002
99.2 CFO Certification required under Section 906 of
Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K. There were no reports filed on Form 8-K during the
three-month period ended March 31, 2003.
20
FEDERAL TRUST CORPORATION AND SUBSIDIARY
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FEDERAL TRUST CORPORATION
(Registrant)
Date: May 13, 2003 By: /s/ James V. Suskiewich
--------------- ---------------------------------------
James V. Suskiewich
President and Chief Executive Officer
Date: May 13, 2003 By: /s/ Aubrey H. Wright
--------------- ---------------------------------------
Aubrey H. Wright
Senior Vice President and Chief
Financial Officer
21
CERTIFICATIONS
--------------
I, James V. Suskiewich, certify, that:
1. I have reviewed this quarterly report on Form 10-QSB of
Federal Trust Corporation;
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report,
fairly present in all material respects the financial
condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries, is
made known to us by others within those entities,
particularly during the period in which this quarterly
report is being prepared;
(b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date within
90 days prior to the filing date of this quarterly
report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation
Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's
board of directors:
(a) all significant deficiencies in the design or operation
of the internal controls which could adversely affect
the registrant's ability to record, process, summarize
and report financial data and have identified for the
registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have
indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors
that could significantly affect the internal controls
subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: May 13, 2003 By: /s/ James V. Suskiewich
-------------- ----------------------------------
James V. Suskiewich, President and
Chief Executive Officer
22
I, Gregory E. Smith, certify, that:
1. I have reviewed this quarterly report on Form 10-QSB of
Federal Trust Corporation;
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report,
fairly present in all material respects the financial
condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries, is
made known to us by others within those entities,
particularly during the period in which this quarterly
report is being prepared;
(b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date within
90 days prior to the filing date of this quarterly
report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation
Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's
board of directors:
(a) all significant deficiencies in the design or operation
of the internal controls which could adversely affect
the registrant's ability to record, process, summarize
and report financial data and have identified for the
registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have
indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors
that could significantly affect the internal controls
subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: May 13, 2003 By: /s/ Aubrey H. Wright
--------------- ---------------------------
Aubrey H. Wright, Senior
Vice President and Chief
Financial Officer
23