Unassociated Document
     
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 June 30, 2007

o 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
(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)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes x No o
 
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act):
 
 Large Accelerated Filer o
Accelerated Filer x
Non-accelerated Filer o
  
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):
Yes o 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
9,414,325 shares
(class)
Outstanding at August 6, 2007
 

 
 
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
 
INDEX
 
PART I. FINANCIAL INFORMATION

Item 1. Financial Statements
  
Page
  
       
Condensed Consolidated Balance Sheets -
At June 30, 2007 (Unaudited) and At December 31, 2006
    
2
  
 
        
Condensed Consolidated Statements of Operations (Unaudited)
Three and Six Months Ended June 30, 2007 and 2006
    
3
  
         
Condensed Consolidated Statements of Stockholders' Equity (Unaudited)
Six Months Ended June 30, 2007 and 2006
    
4
  
         
Condensed Consolidated Statements of Cash Flows (Unaudited)
Six Months Ended June 30, 2007 and 2006
    
5-6
  
         
Notes to Condensed Consolidated Financial Statements (Unaudited)
    
7-14
  
         
Review by Independent Registered Public Accounting Firm
    
15
  
         
Report of Independent Registered Public Accounting Firm
    
16
  
         
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
    
17-22
  
         
Item 3. Quantitative and Qualitative Disclosures about Market Risk
   
23
  
 
        
Item 4. Controls and Procedures
    
23
  
         
PART II. OTHER INFORMATION
         
Item 1. Legal Proceedings
    
23
  
         
Item 1A. Risk Factors
    
23
  
         
Item 4. Submission of Matters to a Vote of Security Holders
    
24
  
         
Item 6. Exhibits
    
25
  
         
SIGNATURES
    
26
  
 
1

FEDERAL TRUST CORPORATION AND SUBSIDIARIES

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Condensed Consolidated Balance Sheets
($ in thousands, except per share amounts)

   
At
  
   
June 30,
2007
  
December 31,
2006
  
   
(Unaudited)
      
Assets
          
Cash and due from banks
  
$
7,353
  
$
7,095
  
Interest-earning deposits
    
808
    
1,585
  
               
    Cash and cash equivalents
    
8,161
    
8,680
  
               
Securities available for sale
    
64,389
    
65,558
  
Loans, less allowance for loan losses of $10,292 in 2007 and $5,098 in 2006
    
599,218
    
603,917
  
Accrued interest receivable
    
4,477
    
4,832
  
Premises and equipment, net
    
17,606
    
17,378
  
Foreclosed assets
    
2,438
    
36
  
Federal Home Loan Bank stock
    
9,457
    
9,591
  
Mortgage servicing rights, net
    
536
    
599
  
Bank-owned life insurance
    
7,366
    
7,231
  
Other assets
    
7,476
    
5,142
  
               
    Total assets
  
$
721,124
  
$
722,964
  
               
Liabilities and Stockholders' Equity
              
               
Liabilities:
              
Noninterest-bearing demand deposits
  
$
12,828
  
$
13,887
  
Interest-bearing demand deposits
    
56,075
    
51,584
  
Money-market deposits
    
65,081
    
64,458
  
Savings deposits
    
2,808
    
3,065
  
Time deposits
    
338,410
    
339,800
  
               
    Total deposits
    
475,202
    
472,794
  
               
Federal Home Loan Bank advances
    
181,500
    
179,700
  
Other borrowings
    
58
    
1,393
  
Junior subordinated debentures
    
5,155
    
5,155
  
Capital lease obligation
    
-
    
2,504
  
Accrued interest payable
    
2,258
    
1,506
  
Official checks
    
1,266
    
1,933
  
Other liabilities
    
5,740
    
3,359
  
               
    Total liabilities
    
671,179
    
668,344
  
               
Stockholders' equity:
              
Common stock, $.01 par value, 15,000,000 shares authorized;
              
9,414,325 shares outstanding in 2007 and 9,351,542 in 2006, respectively
    
94
    
94
  
Additional paid-in capital
    
44,344
    
43,858
  
Retained earnings
    
7,016
    
11,160
  
Unallocated ESOP shares (43,386 shares in 2007 and 31,939 shares in 2006)
    
(373
)
  
(257
)
Accumulated other comprehensive loss
    
(1,136
)
  
(235
)
               
    Total stockholders' equity
    
49,945
    
54,620
  
               
    Total liabilities and stockholders' equity
  
$
721,124
  
$
722,964
  

See Accompanying Notes to Condensed Consolidated Financial Statements.
 
2

FEDERAL TRUST CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Operations (Unaudited)
($ in thousands, except per share amounts)

   
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
 
2007
 
2006
 
2007
 
2006
  
                   
Interest income:
                  
Loans
  
$
9,704
  
$
10,166
  
$
19,403
  
$
20,021
  
Securities
    
819
    
766
    
1,663
    
1,364
  
Other
    
167
    
176
    
343
    
376
  
                           
Total interest income
    
10,690
    
11,108
    
21,409
    
21,761
  
                           
Interest expense:
                          
Deposits
    
5,576
    
4,890
    
10,943
    
9,244
  
Other
    
2,039
    
2,040
    
4,167
    
4,125
  
                           
Total interest expense
    
7,615
    
6,930
    
15,110
    
13,369
  
                           
Net interest income
    
3,075
    
4,178
    
6,299
    
8,392
  
                           
Provision for loan losses
    
5,145
    
95
    
5,295
    
234
  
                           
Net interest (expense) income after
                          
provision for loan losses
    
(2,070
)
  
4,083
    
1,004
    
8,158
  
                           
Other income:
                          
Service charges and fees
    
106
    
98
    
213
    
326
  
Gains on sales of loans held for sale
   
33
    
93
    
105
    
120
  
Net gains (loss) on sales of securities available for sale
    
-
    
(16
)
  
35
    
(17
)
Rental income
    
84
    
75
    
169
    
144
  
Increase in cash surrender value of life insurance policies
    
69
    
54
    
136
    
118
  
Other
    
144
    
249
    
254
    
511
  
                           
Total other income
    
436
    
553
    
912
    
1,202
  
                           
Other expenses:
                          
Salary and employee benefits
    
2,111
    
1,873
    
4,033
    
3,576
  
Occupancy expense
    
593
    
479
    
1,104
    
944
  
Professional services
    
374
    
202
    
634
    
397
  
Data processing
    
225
    
187
    
455
    
371
  
Marketing and advertising
    
115
    
105
    
231
    
196
  
Write down of foreclosed assets
    
354
    
-
    
354
    
-
  
Other
    
437
    
459
    
837
    
813
  
                           
Total other expenses
    
4,209
    
3,305
    
7,648
    
6,297
  
                           
(Loss) earnings before income taxes
    
(5,843
)
  
1,331
    
(5,732
)
  
3,063
  
                           
Income tax (benefit) expense
    
(2,291
)
  
434
    
(2,340
)
  
1,015
  
                           
Net (loss) earnings
  
$
(3,552
)
$
897
  
$
(3,392
)
$
2,048
  
                           
(Loss) earnings per share:
                          
Basic
  
$
(.38
)
$
.10
  
$
(.36
)
$
.24
  
                           
Diluted
  
$
(.38
)
$
.10
  
$
(.36
)
$
.23
  
                           
Weighted-average shares outstanding for (in thousands):
                          
Basic
    
9,361
    
9,069
    
9,352
    
8,676
  
                           
Diluted
    
9,361
    
9,209
    
9,352
    
8,801
  
                           
Cash dividends per share
  
$
.04
  
$
.05
  
$
.08
  
$
.09
  

See Accompanying Notes to Condensed Consolidated Financial Statements.
 
3
 
FEDERAL TRUST CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Stockholders' Equity
For the Six Months Ended June 30, 2007 and 2006
($ in thousands)

 
  
Common Stock
  
Additional
Paid-In
  
Retained
  
Unallocated
ESOP
  
Accumulated Other Comprehensive
  
Total Stockholders'
  
 
  
Shares
  
Amount
  
Capital
  
Earnings
  
Shares
  
Loss
  
Equity
  
                               
Balance at December 31, 2005
    
8,299,343
  
$
83
  
$
33,679
  
$
11,459
  
$
(157
)
$
(923
)
$
44,141
  
                                             
Comprehensive income:
                                            
Net earnings (unaudited)
    
-
    
-
   
-
    
2,048
    
-
   
-
   
2,048
  
                                             
Change in unrealized loss on securities available for sale, net of income taxes of $166 (unaudited)
    
-
    
-
   
-
    
-
   
-
   
(274
)
  
(274
)
                                             
Comprehensive income (unaudited)
    
-
    
-
    
-
    
-
    
-
    
-
    
1,774
  
                                             
Issuance of common stock:
                                            
Options exercised (unaudited)
    
19,300
    
-
    
101
    
-
    
-
    
-
    
101
  
Private equity offering, net of offering costs (unaudited)
    
850,000
    
9
    
7,870
    
-
    
-
    
-
    
7,879
  
Stock dividend (unaudited)
    
182,899
    
2
    
2,074
    
(2,076
)
  
-
    
-
    
-
  
                                             
Share-based compensation (unaudited)
    
-
    
-
    
27
    
-
    
-
    
-
    
27
  
                                             
Dividends paid (unaudited)
    
-
    
-
   
-
    
(792
)
  
-
   
-
   
(792
)
                                             
Balance at June 30, 2006 (unaudited)
    
9,351,542
  
$
94
  
$
43,751
  
$
10,639
  
$
(157
)
$
(1,197
)
$
53,130
  
                                             
Balance at December 31, 2006
    
9,351,542
  
$
94
  
$
43,858
  
$
11,160
  
$
(257
)
$
(235
)
$
54,620
  
                                             
Comprehensive (loss) income:
                                            
Net loss (unaudited)
    
-
    
-
    
-
    
(3,392
)
  
-
   
-
   
(3,392
)
                                             
Change in unrealized loss on securities available for sale, net of income taxes of $(546) (unaudited)
    
-
    
-
    
-
    
-
   
-
   
(901
)
  
(901
)
                                             
Comprehensive (loss) income (unaudited)
    
-
    
-
    
-
    
-
    
-
    
-
    
(4,293
)
                                             
Issuance of common stock -options exercised (unaudited)
    
62,783
    
-
    
307
    
-
    
-
    
-
    
307
  
                                             
ESOP shares purchased (6,618 shares) (unaudited)
    
-
    
-
    
116
    
-
    
(116
)
  
-
    
-
  
                                             
Share-based compensation (unaudited)
    
-
    
-
    
63
    
-
    
-
    
-
    
63
  
                                             
Dividends paid (unaudited)
    
-
    
-
    
-
    
(752
)
  
-
         
(752
)
                                             
Balance at June 30, 2007
                                            
(unaudited)
    
9,414,325
  
$
94
  
$
44,344
  
$
7,016
  
$
(373
)
$
(1,136
)
$
49,945
  
 
See Accompanying Notes to Condensed Consolidated Financial Statements.
 
4

FEDERAL TRUST CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows (Unaudited)
($ in thousands)

   
Six Months Ended June 30,
  
   
2007
  
2006
  
           
Cash flows from operating activities:
          
Net (loss) earnings
  
$
(3,392
)
$
2,048
  
Adjustments to reconcile net (loss) earnings to net cash provided by operating activities:
              
Depreciation and amortization
    
432
    
383
  
Provision for loan losses
    
5,295
    
234
  
Write down of foreclosed assets
    
354
    
-
  
Capitalized costs on foreclosed assets
    
(25
)
  
-
  
Net amortization of premiums and discounts on securities
    
(56
)
  
(14
)
Net amortization of loan origination fees, costs, premiums and discounts
    
510
    
563
  
Amortization of mortgage servicing rights
    
88
    
120
  
Increase in cash surrender value of life insurance policies
    
(135
)
  
(118
)
Proceeds from sales of loans held for sale
    
7,709
    
6,728
  
Loans originated for resale
    
(4,719
)
  
(3,087
)
Gain on sale of loans held for sale
    
(105
)
  
(120
)
Net loss (gain) on sales of securities available for sale
    
(35
)
  
17
  
Share based compensation
    
63
    
27
  
Cash provided by (used in) resulting from changes in:
              
Accrued interest receivable
    
355
    
(182
)
Other assets
    
(1,788
)
  
379
  
Accrued interest payable
    
752
    
(184
)
Official checks
    
(667
)
  
1
  
Other liabilities
    
1,441
    
951
  
               
Net cash provided by operating activities
    
6,077
    
7,746
  
               
Cash flows from investing activities:
              
Purchase of securities available for sale
    
(14,010
)
  
(27,693
)
Proceeds from principal repayments and sales of securities available for sale
    
13,823
    
6,614
  
Loan principal repayments, net of originations
    
18,523
    
33,134
  
Purchase of loans
    
(25,270
)
  
(26,811
)
Purchase of premises and equipment
    
(660
)
  
(2,267
)
Net redemption of Federal Home Loan Bank stock
    
134
    
569
  
Net proceeds from sale of foreclosed assets
    
-
    
528
  
               
Net cash used in investing activities
    
(7,460
)
  
(15,926
)
               
Cash flows from financing activities:
              
Net decrease in other borrowings
    
(1,335
)
  
(4,100
)
Net increase in deposits
    
2,408
    
18,325
  
Net increase (decrease) in Federal Home Loan Bank advances
    
1,800
    
(18,500
)
Principal repayments under capital lease obligation
    
(2,504
)
  
(142
)
Net increase in advance payments from borrowers for taxes and insurance
    
940
    
1,933
  
Dividends paid
    
(752
)
  
(792
)
Net proceeds from private equity offering
    
-
    
7,879
  
Net proceeds from the exercise of options on common stock
    
307
    
101
  
               
Net cash provided by financing activities
    
864
    
4,704
  
               
Net decrease in cash and cash equivalents
    
(519
)
  
(3,476
)
               
Cash and cash equivalents at beginning of period
    
8,680
    
12,996
  
               
Cash and cash equivalents at end of period
  
$
8,161
  
$
9,520
  
 
(Continued)
 
5

FEDERAL TRUST CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows (Unaudited), continued
($ in thousands)

   
Six Months Ended June 30
  
   
2007
  
2006
  
Supplemental disclosure of cash flow information-
              
Cash paid during the period for:
              
Interest
  
$
14,358
  
$
13,242
  
               
Income taxes
  
$
-
  
$
1,805
  
               
Noncash transactions:
              
               
Accumulated other comprehensive loss, net change in unrealized loss on securities available for sale, net of tax
  
$
(901
)
$
(274
)
               
Transfer of loans in portfolio to loans held for sale
  
$
2,478
  
$
3,220
  
               
Mortgage servicing rights recognized upon sale of loans held for sale
  
$
25
  
$
-
  
               
Transfer of loans to foreclosed assets
  
$
2,731
  
$
-
  
 
See Accompanying Notes to Condensed Consolidated Financial Statements.
 
6

FEDERAL TRUST CORPORATION AND SUBSIDIARIES
 
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”) and Federal Trust Mortgage Company (the “Mortgage Company”). Federal Trust operates as a unitary savings and loan holding company. Federal Trust's primary business activity is the operation of the Bank and the Mortgage Company. 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 nine offices located in Seminole, Volusia, Orange, and Lake Counties, Florida. The Mortgage Company was established to provide residential loan products for customers of the Bank, to close mortgage loans on behalf of certain third party purchasers, and to sell mortgage loans in the secondary market.

The condensed consolidated financial statements include the accounts of Federal Trust, the Bank and the Mortgage Company (collectively referred to herein as, 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 June 30, 2007, and the results of operations for the three- and six-month periods ended June 30, 2007 and 2006, and cash flows for the six months period ended June 30, 2007 and 2006. The results of operations for the six-month period ended June 30, 2007, are not necessarily indicative of the results to be expected for the entire year ended December 31, 2007. These statements should be read in conjunction with the consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2006.

Recent Accounting Pronouncements.
 
In February 2007, The Financial Accounting Standards Board issued SFAS No. 159 The Fair Value Option for Financial Assets and Financial Liabilities (“SFAS 159”). SFAS 159 provides companies with an option to report selected financial assets and liabilities at fair value. This statement is effective as of the beginning of an entity’s first fiscal year beginning after November 15, 2007. Management is in the process of evaluating the impact of SFAS 159 and does not anticipate it will have a material effect on the Company’s financial condition or results of operations.
 
On February 21, 2007, the Financial Accounting Standards Board issued FASB Staff Position No. FAS 158-1 Conforming Amendments to the Illustrations in FASB Statements No. 87, No. 88, and No. 106 and to the Related Staff Implementation Guides. This Staff Position and the related FASB Statements deal with accounting for pension plans and other postretirement benefits. The Company does not presently have pension plans or other postretirement benefit plans that require accounting under these pronouncements and as such does not anticipate this Staff Position will have any effect on the Company’s financial condition or results of operations.
 
In September 2006, the Financial Accounting Standards Board issued SFAS No. 157 Fair Value Measurements (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principals, and expands disclosures about fair value measurements. This statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. Management is in the process of evaluating the impact of SFAS 157 and does not anticipate it will have a material impact on the Company’s financial condition or results of operations.

7
 
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
 
Notes to Condensed Consolidated Financial Statements
(2) Loans
 
The components of loans are summarized as follows ($ in thousands):

   
At June 30,
2007
  
At December 31, 2006
  
   
(unaudited)
      
Residential Lending:
          
Mortgages (1)
  
$
367,268
  
$
356,133
  
Lot loans
    
41,781
    
42,676
  
Construction
    
34,727
    
36,570
  
               
Total Residential lending
    
443,776
    
435,379
  
               
Commercial Lending:
              
Real Estate Secured
    
105,578
    
93,095
  
Land, Development and Construction
    
71,125
    
88,586
  
Commercial loans
    
16,528
    
15,308
  
               
Total Commercial lending
    
193,231
    
196,989
  
               
Consumer loans
    
181
    
125
  
               
Total loans
    
637,188
    
632,493
  
               
Add (deduct):
              
Allowance for loan losses
    
(10,292
)
  
(5,098
)
Net premiums, discounts, deferred fees and costs
    
3,488
    
3,567
  
Undisbursed portion of loans in process
    
(31,166
)
  
(27,045
)
               
Loans, net
  
$
599,218
  
$
603,917
  
 
(1)
Includes approximately $710,000 and $1,142,000 of loans held for sale at June 30, 2007 and December 31, 2006, respectively.
 
(Continued)
 
8

FEDERAL TRUST CORPORATION AND SUBSIDIARIES
 
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

(2) Loans, Continued
 
A provision for loan losses is charged to earnings based upon management’s evaluation of the potential losses in the loan portfolio. During the six months ended June 30, 2007, management made a provision of $5,295,000 based on our evaluation of the loan portfolio, compared to a provision of $234,000 made in the comparable period in 2006. The increased provision for the 2007 second quarter was due to the increase in nonaccrual loans and a decline in real estate collateral values. Our evaluation of the allowance for loan losses at June 30, 2007, included an assessment of the current market values for the non-accrual loans, our ongoing evaluation of the loan portfolio and an independent credit review of our construction and commercial real estate loan portfolio. As a percent of loans, net of undisbursed loans in process, the total allowance increased from .84% at December 31, 2006 to 1.70% at June 30, 2007. Based on our review, management believes that the $10.3 million allowance for loan losses at June 30, 2007 is adequate.

The activity in the allowance for loan losses is as follows ($ in thousands):

   
Three Months Ended June 30,
  
Six Months Ended June 30,
  
   
2007
  
2006
  
2007
  
2006
  
Balance at beginning of period
  
$
5,248
  
$
4,637
  
$
5,098
  
$
4,477
  
Provision for loan losses
    
5,145
    
95
    
5,295
    
234
  
Charge-offs
    
(102
)
  
(24
)
  
(102
)
  
(24
)
Recoveries
    
1
    
-
    
1
    
21
  
                           
Balance at end of period
  
$
10,292
  
$
4,708
  
$
10,292
  
$
4,708
  
 
The following is a summary of information regarding nonaccrual and impaired loans ($ in thousands):

   
At June 30,
2007
  
At December 31,
2006
  
Non-accrual loans
  
$
31,190
  
$
11,970
  
               
Accruing loans past due ninety days or more
  
$
-
  
$
-
  
               
Recorded investment in impaired loans for which there is a related allowance for loan losses
  
$
20,821
  
$
8,623
  
               
Recorded investment in impaired loans for which there is no related allowance for loan losses
  
$
8,278
  
$
-
  
               
Allowance for loan losses related to impaired loans
  
$
6,854
  
$
2,327
  

 
9
 
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
 
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

(2) Loans, Continued

   
Three Months Ended June 30,
  
Six Months Ended June 30,
  
   
2007
  
2006
  
2007
  
2006
  
Interest income recognized and received on impaired loans
  
$
-
  
$
24
  
$
22
  
$
48
  
                           
Average net recorded investment in impaired loans
  
$
19,433
  
$
6,387
  
$
15,001
  
$
4,656
  
 
The total non-accrual loans at June 30, 2007 were $31.2 million, up from $12.0 million at December 31, 2006. The increase during the first six months of 2007 was largely attributable to commercial loans involving residential properties located in Florida and included $9.8 million of residential construction loans, of which $7.2 million was to two related companies. Most of these loans were for construction of pre-sold residences where the ultimate buyer of the home defaulted on their purchase contract. In certain instances, construction had not commenced and the builder was left with unsold lots, in other cases the home was completed. The borrower was unable to make the interest payments and the loans are in default. Also included in the June total was $7.0 million of single family construction loans that are located primarily in Lee County, Florida. The loans were originated and are being serviced by a third party. These delinquencies were due, in most cases, to loans that matured before construction commenced and were not renewed by the borrower due to declining values in the local real estate market. Our advances in these loans were primarily for the vacant lots and they will either be converted to lot loans or be foreclosed.

Also included in non-accrual loans at June 30, 2007, was a $4.0 million participation in a real estate loan secured by a planned condominium site on the Gulf of Mexico in the Florida panhandle. The borrower has been unable to secure additional financing or equity partners and the loan is in process of foreclosure. Three other commercial loans which totaled $8.3 million at June 30, 2007, have collateral well in excess of the respective loan balances and we anticipate a full recovery of principal, interest and fees. Therefore, there was also no specific allowance for loan losses related to those three loans.

The remaining $2.0 million in non-accrual loans at June 30, 2007, was in one-to-four residential properties to both domestic and foreign national borrowers for properties in Florida.

We have not originated or purchased payment option adjustable rate loans and our core portfolio of residential loans continues to perform well.

Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer and residential loans for impairment disclosures, unless such loans are the subject of a restructuring agreement.
(Continued)

10
 
FEDERAL TRUST CORPORATION AND SUBSIDIARIES
 
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

(3) Regulatory Capital
 
The Bank is required to maintain certain minimum regulatory capital requirements. The following is a summary at June 30, 2007, of the regulatory capital requirements for a well capitalized financial institution and the Bank’s actual capital on a percentage basis:

   
Actual
 
Regulatory Requirements
  
Total capital to risk-weighted assets
    
11.24
%
  
10.00
%
               
Tier I capital to risk-weighted assets
    
10.62
%
  
6.00
%
               
Tier I capital to total assets-leverage ratio
    
7.29
%
  
5.00
%

(4) (Loss) 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 (loss) earnings per share. Basic (loss) earnings per share of common stock, has been computed by dividing the net loss or 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 (loss) earnings per share is computed by dividing net loss or earnings by the weighted-average number of shares outstanding including the dilutive effect of stock options computed using the treasury stock method and the restricted stock units. Outstanding stock options are not considered dilutive securities for the three- and six-month periods ended June 30, 2007, due to the net loss incurred by the Company. The following table presents the calculation of basic (loss) earnings per share for the three- and six-month periods ending June 30, 2007 and 2006, and the calculation of diluted earnings per share for the three- and six-month periods ending June 30, 2006.

   
Three Months Ended June 30,
  
Six Months Ended June 30,
  
   
2007
  
2006
  
2007
  
2006
  
                   
Weighted-average shares outstanding before adjustment for unallocated ESOP shares
    
9,404
    
9,091
    
9,389
    
8,698
  
                           
Adjustment to reflect the effect of unallocated ESOP shares
    
(43
)
  
(22
)
  
(37
)
  
(22
)
                           
Weighted-average shares outstanding for basic earnings per share
    
9,361
    
9,069
    
9,352
    
8,676
  
                           
Basic (loss) earnings per share
  
$
(.38
)
$
.10
  
$
(.36
)
$
.24
  
                           
Total weighted-average shares outstanding for basic earnings per share computation
    
9,361
    
9,069
    
9,352
    
8,676
  
                           
Additional dilutive shares using the average market value for the period utilizing the treasury stock method regarding stock options
    
-
    
140
    
-
    
125
  
                           
Weighted-average shares and equivalents outstanding for diluted earnings per share
    
9,361
    
9,209
    
9,352
    
8,801
  
                           
Diluted earnings per share
    
(.38
)
$
.10
    
(.36
)
$
.23
  

(Continued)
 
11

FEDERAL TRUST CORPORATION AND SUBSIDIARIES
 
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

(5) Stock Compensation Plans
 
The Company has three stock options plans. As a result of a 2% stock dividend declared on April 25, 2006, for shareholders of record on June 1, 2006, we have made proportionate adjustments to the number of shares of common stock covered by the stock options and stock units and in the purchase price per share of the stock option and stock units so as to prevent dilution of rights of the participant. 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 1,020,000 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 five or ten year terms and vest over various terms up to five years. At June 30, 2007, the Company had 266,501 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, are fully vested and exercisable and have all been allocated as of June 30, 2007.
 
At the Annual Meeting held on May 27, 2005, the shareholders approved the 2005 Directors’ Stock Plan (“2005 Directors’ Plan”), which is authorized to issue up to 91,800 shares. Awards made under the 2005 Directors’ Plan may be in the form of restricted shares, stock units, or stock options. A stock unit is the right to receive a share of common stock, after vesting, on a date elected by the director. While any stock unit is outstanding the director holding the stock unit will be entitled to receive a dividend in the form of additional stock units, if cash or stock dividends are declared on outstanding shares of common stock. Each stock unit, including fractional stock units, will be converted to one share of common stock, after vesting, on the date which has been selected by the director. Awards of shares or stock units may be awarded to a director as an annual stock retainer, which is dependent upon the amount of the director’s annual cash retainer.
 
The 2005 Directors’ Plan also provides for discretionary awards of restricted shares, stock units or stock options, which may be granted by the Board to recognize additional services provided to the Company. Any stock options granted may not be exercisable for less than fair market value per share on the date of grant, and can be exercised after 6 months from the date of grant and before the earlier of 10 years after the date of the award, or one year from the date the director’s service is terminated by reason of retirement or death. Restricted Stock Units have been issued to three directors under the 2005 Directors’ Plan. Under terms of those respective agreements, the units vest over periods from three to four years (in near equal installments), unless there is a change in control, at which point the units vest immediately. As a Restricted Stock Unit, no shares will be physically issued on vested units until the Director elects to receive the shares, or no longer serves on the Board.
(Continued)
 
12

 FEDERAL TRUST CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

(5) Stock Compensation Plans, Continued
 
Options are granted to certain employees and directors at a price equal to the market value of the stock on the dates the options were granted. The options granted have a term of either five or ten years and vest ratably over various terms up to five years. In accordance with SFAS 123(R), the fair value of each option is amortized using the straight-line method over the requisite service period of each option. We have estimated the fair value of all option awards as of the grant date by applying the Black-Scholes pricing valuation model. The application of this valuation model involves assumptions that are judgmental and sensitive in the determination of compensation expense. There were no stock options issued during the second quarter 2007. The weighted average amounts for key assumptions used in determining the fair value of options granted during the second quarter of 2006 and the first half of 2007 and 2006 follows:
 
   
Three-Months Ended
June 30,
  
Six-Months Ended June 30,
  
   
2006
  
2007
  
2006
  
Expected stock price volatility
    
25.00
%
  
47.95
%
  
25.00
%
Risk-free interest rate
    
4.88
% 
  
4.66
%
  
4.60
%
Weighted average expected life in years
    
3.0
  
6.5
    
3.0
  
Expected dividend yield
    
1.51
% 
  
1.58
%
  
1.40
%
Per share weighted-average grant date fair value
                    
of options issued during the period
  
$
2.31
  
$
4.66
  
$
2.42
 
 
As part of its adoption of SFAS 123(R), the Company examined its historical pattern of option exercises in an effort to determine if there was any pattern based on certain employee populations. From this analysis, the Company could not identify any patterns in the exercise of options. As such, the Company used the guidance in Staff Accounting Bulletin No. 107 issued by the Securities and Exchange Commission to determine the estimated life of options issued. Historical information was the primary basis for the selection of expected volatility and expected dividend yield. The risk-free rate was selected based upon yields of U.S. Treasury issues with a term equal to the expected life of the option being valued.
 
A summary of stock option transactions for the six-month period ended June 30, 2007 follows;
($ in thousands, except per share data): 

   
Number of Options
 
Weighted Avg. Per Option Exercise Price
 
Weighted Avg. Remaining Contract Term (in years)
 
Aggregate Intrinsic Value
  
Options Granted Under the Employee Plan:
                  
Outstanding at December 31, 2006
    
432,388
  
$
8.33
              
Options exercised
    
(62,783
)
  
4.89
              
Options forfeited
    
(16,322
)
  
11.22
              
                           
Outstanding at June 30, 2007
    
353,283
  
$
8.81
    
4.15
  
$
242
  
                           
Exercisable at June 30, 2007
    
303,675
  
$
8.54
    
4.28
  
$
242
  

(Continued)

13
 
 FEDERAL TRUST CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited), Continued

(5) Stock Compensation Plans, Continued

   
Number of Options
 
Weighted Avg. Per Option Exercise Price
 
Weighted Avg. Remaining Contract Term (in years)
 
Aggregate Intrinsic Value
  
Options Granted Under the Director Plan:
                  
Outstanding at December 31, 2006
    
95,646
  
$
6.79
              
Options granted
    
28,500
    
10.10
              
                           
Outstanding at June 30, 2007
    
124,146
  
$
7.55
    
7.05
  
$
192
  
                           
Exercisable at June 30, 2007
    
69,422
  
$
5.49
    
3.95
  
$
192
  

The total intrinsic value of options exercised during the six months ended June 30, 2007 was $301,000. As of June 30, 2007, the Company had 104,332 nonvested options outstanding resulting in approximately $376,000 of total unrecognized compensation cost related to these nonvested options. This cost is expected to be recognized monthly over the related vesting periods using the straight-line method through December 2011.
 
A summary of the Restricted Stock Unit transactions follows:

   
Number of Units
  
Restricted Stock Units under the 2005 Director Plan:
      
Outstanding at December 31, 2006
    
14,631
  
         
Stock unit dividends earned
    
121
  
Stock units forfeited
    
(1,955
)
         
Outstanding at June 30, 2007
    
12,797
  
 
A summary of the status of the Company’s nonvested restricted stock units as of December 31, 2006, and changes during the six-months ended June 30, 2007, is presented below:

Nonvested Shares
  
Number of Units
  
Weighted-Average Grant-Date Fair Value
  
Nonvested at December 31, 2006
    
12,264
  
$
10.86
  
Dividends credited
    
100
    
10.75
  
Forfeited
    
(1,955
)
  
12.03
  
               
Nonvested at June 30, 2007
    
10,409
    
10.64
  

(6) Legal Contingencies
 
Various legal claims arise from time to time in the normal course of business. In the opinion of management of the Company, none have occurred that will have a material effect on the Company’s condensed consolidated financial statements.
 
14

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 June 30, 2007, and for the six-month period ended June 30, 2007 and 2006 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.
 
15
 
Report of Independent Registered Public Accounting Firm


The Board of Directors and Shareholders
Federal Trust Corporation
Sanford, Florida:

We have reviewed the accompanying condensed consolidated balance sheet of Federal Trust Corporation and Subsidiaries (the “Company”) as of June 30, 2007, the related condensed consolidated statements of operations for the three- and six-month period ended June 30, 2007 and 2006, and the related condensed consolidated statements of stockholders’ equity and cash flows for the six-month periods ended June 30, 2007 and 2006. 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, 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, the consolidated balance sheet as of December 31, 2006, 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 13, 2007 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, 2006, 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
August 1, 2007

16

FEDERAL TRUST CORPORATION AND SUBSIDIARIES

Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations

Comparison of June 30, 2007 and December 31, 2006

General

Federal Trust Corporation (“Federal Trust”) is the sole shareholder of Federal Trust Bank (the “Bank”) and Federal Trust Mortgage Company (the “Mortgage Company”). Federal Trust operates as a unitary savings and loan holding company. Federal Trust's business activities primarily include the operation of the Bank and the Mortgage Company. Federal Trust, the Bank and the Mortgage Company are collectively referred to herein as the “Company.” 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 nine offices located in Seminole, Volusia, Orange, and Lake Counties, Florida. The Mortgage Company was established to provide residential loan products for customers of the Bank, to close mortgage loans on behalf of certain third party purchasers, and to sell mortgage loans in the secondary market.

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 six-months ended June 30, 2007, the Company's primary source of funds consisted of net principal repayments and sales of loans of $26.2 million and net principal repayments and sales of securities available for sale of $13.8 million. The Company used its sources of funds principally to purchase loans of $25.3 million and to originate $4.7 million of loans for resale and to purchase securities available for sale totaling $14.0 million. On January 30, 2007, the Company exercised its option to purchase the office building which houses the Executive, Administrative, Lending and Operations departments, by paying off the outstanding capitalized lease balance of $2.5 million.

Off-Balance-Sheet Arrangements

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.
 
17

FEDERAL TRUST CORPORATION AND SUBSIDIARIES

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, standby letters 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 June 30, 2007, follows ($ in thousands):

   
Contract Amount
  
Commitments to extend credit
  
$
40,369
  
         
Unused lines of credit
  
$
12,359
  
         
Standby letters of credit
  
$
1,434
  
         
Loans in process
  
$
31,166
  
 
Management believes the Company has adequate resources to fund all its commitments. At June 30, 2007, the Company had approximately $302.1 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 June 30, 2007. 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, except for the increase in nonaccrual loans as discussed in Note 2 to the condensed consolidated financial statements.
 
18

FEDERAL TRUST CORPORATION AND SUBSIDIARIES

Results of Operations

The following table sets forth, for the periods indicated, information regarding: (i) the total dollar amount of tax equivalent 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) tax equivalent net interest/dividend income; (iv) interest-rate spread; and (v) tax equivalent net interest margin ($ in thousands).

   
Three Months Ended June 30,
  
   
2007
  
2006
  
   
Average Balance
  
Interest
  
Average Yield/Cost
  
Average Balance
  
Interest
  
Average Yield/Cost
  
   
($ in thousands)
  
Assets:
                          
Loans (1)
  
$
592,704
  
$
9,704
    
6.55
%
$
633,786
  
$
10,166
    
6.42
%
Securities (2)
    
63,623
    
921
    
5.79
    
60,566
    
881
    
5.82
  
Other interest-earning assets (3)
    
8,945
    
167
    
7.47
    
11,715
    
176
    
6.01
  
                                       
Total interest-earning assets
    
665,272
    
10,792
    
6.49
    
706,067
    
11,223
    
6.36
  
                                       
Other noninterest-earning assets
    
44,478
                
40,946
              
                                       
Total assets
  
$
709,750
              
$
747,013
              
                                       
Liabilities and stockholders’ equity:
                                      
Noninterest-bearing demand deposits
  
$
12,427
    
-
    
-
  
$
14,789
    
-
    
-
  
Interest-bearing demand and money-
                                      
market deposits
    
116,454
    
1,118
    
3.84
    
135,181
    
1,279
    
3.78
  
Savings deposits
    
2,966
    
12
    
1.62
    
3,511
    
17
    
1.94
  
Time deposits
    
338,758
    
4,446
    
5.25
    
332,056
    
3,594
    
4.33
  
                                       
Total deposits
    
470,605
    
5,576
    
4.74
    
485,537
    
4,890
    
4.03
  
                                       
Other borrowings (4)
    
176,927
    
2,039
    
4.61
    
198,783
    
2,040
    
4.10
  
                                       
Total interest-bearing liabilities (5)
    
635,105
    
7,615
    
4.80
    
699,513
    
6,930
    
4.14
  
                                       
Other noninterest-bearing liabilities
    
7,948
                
9,720
              
Stockholders' equity
    
54,270
                
52,973
              
Total liabilities and stockholders' equity
  
$
709,750
              
$
747,013
              
                                       
Net interest margin (6)
        
$
3,177
    
1.91
%
      
$
4,293
    
2.43
%
                                       
Interest-rate spread (7)
                
1.69
%
              
2.22
%
                                       
Ratio of average interest-earning assets to average interest- bearing liabilities
    
1.05
                
1.05
              
 
(1)
Includes nonaccrual loans.
 
(2)
Interest income on tax-exempt securities has been adjusted to a fully tax equivalent basis.
 
(3)
Includes Federal Home Loan Bank stock and interest-earning deposits.
 
(4)
Includes Federal Home Loan Bank advances, other borrowings, junior subordinated debentures and capital lease obligation.
 
(5)
Total interest-bearing liabilities exclude noninterest-bearing demand deposits.
 
(6)
Net interest margin is annualized net interest income divided by average interest-earning assets.
 
(7)
Interest-rate spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities.


19
 
FEDERAL TRUST CORPORATION AND SUBSIDIARIES

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).

   
Six Months Ended June 30,
  
   
2007
  
2006
  
   
Average Balance
  
Interest
  
Average Yield/Cost
  
Average Balance
  
Interest
  
Average Yield/Cost
  
   
($ in thousands)
 
Assets:
                          
Loans (1)
  
$
598,784
  
$
19,403
    
6.48
%
$
633,158
  
$
20,021
    
6.32
%
Securities (2)
    
64,133
    
1,873
    
5.84
    
55,226
    
1,583
    
5.73
  
Other interest-earning assets (3)
    
10,564
    
343
    
6.49
    
13,127
    
376
    
5.73
  
                                       
Total interest-earning assets
    
673,481
    
21,619
    
6.42
    
701,511
    
21,980
    
6.27
  
                                       
Other noninterest-earning assets
    
41,528
                
40,328
              
                                       
Total assets
  
$
715,009
              
$
741,839
              
                                       
Liabilities and stockholders’ equity:
                                      
Noninterest-bearing demand deposits
  
$
12,688
    
-
    
-
  
$
14,387
    
-
    
-
  
Interest-bearing demand and money-
                                      
market deposits
    
116,875
    
2,211
    
3.78
    
130,645
    
2,406
    
3.68
  
Savings deposits
    
3,052
    
26
    
1.70
    
3,596
    
31
    
1.72
  
Time deposits
    
337,096
    
8,706
    
5.17
    
330,066
    
6,807
    
4.12
  
                                       
Total deposits
    
469,711
    
10,943
    
4.66
    
478,694
    
9,244
    
3.86
  
                                       
Other borrowings (4)
    
183,486
    
4,167
    
4.54
    
205,620
    
4,125
    
4.01
  
                                       
Total interest-bearing liabilities (5)
    
640,509
    
15,110
    
4.72
    
669,927
    
13,369
    
3.99