Post - effective Amendment No.1
Table of Contents

As filed with the Securities and Exchange Commission on June 27, 2008

Registration No. 333-150051

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

POST-EFFECTIVE AMENDMENT NO. 1 TO THE

FORM S-1

REGISTRATION STATEMENT

UNDER THE SECURITIES ACT OF 1933

FEDERAL TRUST CORPORATION

(Exact Name of Registrant as Specified in Its Charter)

 

Florida   6712   59-2935028
(State or Other Jurisdiction of   (Primary Standard Industrial   (I.R.S. Employer
Incorporation or Organization)   Classification Code Number)   Identification Number)

312 West First Street, Suite 110

Sanford, Florida 32771

(407) 323-1833

(Address, Including Zip Code, and Telephone Number, Including Area Code, of

Registrant’s Principal Executive Offices)

Dennis T. Ward

312 West First Street, Suite 110

Sanford, Florida 32771

(407) 323-1833

(Address, Including Zip Code, and Telephone Number, Including Area Code, of

Agent for Service)

Copies to:

Ned Quint, Esq.    Randolph A. Moore III, Esq.
Eric Luse Esq.    Alison N. LaBruyere, Esq.
Luse Gorman Pomerenk & Schick, P.C.    Alston & Bird LLP
5335 Wisconsin Avenue, N.W., Suite 400    1201 W. Peachtree Street
Washington, D.C. 20015    Atlanta, Georgia 30309
(202) 274-2000    404-881-7794

Approximate date of commencement of proposed sale to the public: As soon as practicable after this registration statement becomes effective.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box: x

If this Form is filed to register additional shares for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of a “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one)

 

Large accelerated filer ¨    Accelerated filer x

Non-accelerated filer ¨

(Do not check if a smaller reporting company)

   Smaller reporting company x

CALCULATION OF REGISTRATION FEE

 

 

Title of each class of

securities to be registered

  Amount to be
registered
 

Proposed maximum
offering price

per share

 

Proposed maximum
aggregate

offering price

  Amount of
registration fee

Common Stock, $0.01 par value per share

  40,000,000 shares   $1.25   $50,000,000 (1)   $1,985 (2)

Rights to Purchase Shares of Common Stock

  15,000,000 rights           (3)

Warrants to Purchase Shares of Common Stock

  10,000,000 warrants   $1.00   $10,000,000   $397 (2)
 
 

 

(1) Estimated solely for the purpose of calculating the registration fee.

 

(2) Previously paid.

 

(3) Pursuant to Rule 457(g), no separate registration fee is required for the rights.

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

Subject to Completion dated June 27, 2008

PRELIMINARY PROSPECTUS

FEDERAL TRUST CORPORATION

36,842,105 Shares of Common Stock

Subscription Rights to Purchase up to 15,788,825

Shares of Common Stock at $0.95 per share

Warrants to Purchase 10,000,000

Shares of Common Stock at $0.95 per share

We are distributing, at no charge to our shareholders, non-transferable subscription rights to purchase up to 15,788,825 shares of our common stock, par value $0.01 per share. Subscription rights will be distributed to persons who owned shares of our common stock as of 5:00 p.m. Eastern Time, on [Record Date], the record date of the rights offering.

Each subscription right will entitle you to purchase [exchange ratio] shares of our common stock at the subscription price of $0.95 per share, which we refer to as the basic subscription privilege. If you fully exercise your basic subscription privilege and other shareholders do not fully exercise their basic subscription privileges, you will be entitled to exercise an over-subscription privilege, subject to certain limitations and subject to allotment, to purchase a portion of the unsubscribed shares of our common stock at the same subscription price of $0.95 per share. To the extent you properly exercise your over-subscription privilege for an amount of shares that exceeds the number of the unsubscribed shares available to you, any excess subscription payments received by the subscription agent will be returned to you, without interest, as soon as practicable following the expiration of the rights offering. Funds we receive from subscribers in the rights offering will be held in escrow by the subscription agent until the rights offering is completed or canceled.

The subscription rights will expire if they are not exercised by 5:00 p.m., Eastern Time, on [Expiration Date]. We reserve the right to extend the expiration date one or more times, but in no event will we extend the rights offering beyond [Extension Date].

We have separately entered into standby purchase agreements with certain institutional investors and high net worth individuals, pursuant to which these investors and individuals have severally agreed to acquire from us, at the subscription price of $0.95 per share, up to 24,623,646 shares of common stock, and pursuant to which we have agreed to provide two of these investors a total of 10,000,000 warrants that would entitle these investors to purchase in the future 10,000,000 shares of our common stock at $0.95 per share. The warrants expire upon the later of (i) seven years from the date of effectiveness of the registration statement filed with respect to such exercise or (ii) nine years from the completion of the stock offerings. The number of shares available for sale to standby purchasers will depend on the number of shares subscribed for in the rights offering. However, in no event will we issue fewer than 21,053,280 shares to standby purchasers. If 15,788,825 shares are purchased in the rights offering, then only 21,053,280 shares will be sold to the standby purchasers. The maximum number of shares that may be sold in the rights offering and to standby purchasers is 36,842,105.

We reserve the right to cancel the rights offering at any time. In the event the rights offering is cancelled, all subscription payments received by the subscription agent will be returned, without interest or penalty, as soon as practicable.

You should carefully consider whether to exercise your subscription rights prior to the expiration of the rights offering. All exercises of subscription rights are irrevocable. Our Board of Directors is making no recommendation regarding your exercise of the subscription rights. The subscription rights may not be sold, transferred or assigned and will not be listed for trading on the American Stock Exchange or any other stock exchange or market or on the OTC Bulletin Board.

Our common stock is traded on the American Stock Exchange under the trading symbol “FDT.” The last reported sales price of our shares of common stock on             , 2008 was $             per share.

OFFERING SUMMARY

Price: $0.95 per share

 

Number of shares

     31,578,948      36,842,105

Gross offering proceeds

   $ 30,000,000    $ 35,000,000

Estimated offering expenses excluding selling agent

commissions and expenses

   $ 898,500    $ 898,500

Selling agent commissions and expenses (1)

   $ 2,194,622    $ 2,194,622

Selling agent commissions and expenses per share (1)

   $ 0.07    $ 0.06

Net proceeds

   $ 26,906,878    $ 31,906,878

Net proceeds per share

   $ 0.85    $ 0.87

 

 

(1) We have engaged Stifel, Nicolaus & Company, Incorporated as our financial and marketing advisor and information agent in connection with the rights offering and the offering to standby purchasers. This is not an underwritten offering. Stifel, Nicolaus & Company, Incorporated is not obligated to purchase any of the shares of common stock that are being offered for sale. Please see “Plan of Distribution—Financial Advisor” for a discussion of Stifel, Nicolaus & Company, Incorporated’s compensation for the rights offering and the offering to standby purchasers.

This investment involves risks, including the possible loss of principal.

Please read “Risk Factors” beginning on page 16.

These securities are not deposits, savings accounts or other obligations of any bank and are not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Neither the Securities and Exchange Commission, the Office of Thrift Supervision, nor any state securities regulator has approved or disapproved of these securities or determined if this prospectus is accurate or complete. Any representation to the contrary is a criminal offense.

STIFEL NICOLAUS

The date of this prospectus is                 , 2008.


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Table of Contents

TABLE OF CONTENTS

 

     Page

QUESTIONS AND ANSWERS RELATING TO THE RIGHTS OFFERING

   1

SUMMARY

   8

RISK FACTORS

   16

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

   29

USE OF PROCEEDS

   30

MARKET FOR THE COMMON STOCK AND DIVIDEND INFORMATION

   30

CAPITALIZATION

   32

SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA

   34

RECENT DEVELOPMENTS

   34

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

   35

BUSINESS OF FEDERAL TRUST CORPORATION AND FEDERAL TRUST BANK

   76

SUPERVISION AND REGULATION

   82

MANAGEMENT

   94

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS

   106

SUBSCRIPTIONS BY DIRECTORS AND EXECUTIVE OFFICERS

   107

THE RIGHTS OFFERING

   108

MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES

   118

PLAN OF DISTRIBUTION

   120

DESCRIPTION OF CAPITAL STOCK

   123

RESTRICTIONS ON ACQUISITION OF FEDERAL TRUST CORPORATION

   124

TRANSFER AGENT

   127

EXPERTS

   127

LEGAL MATTERS

   127

WHERE YOU CAN FIND ADDITIONAL INFORMATION

   127

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

   F-1

You should rely only on the information contained in this prospectus. We have not, and our agent, Stifel, Nicolaus & Company, Incorporated, has not, authorized anyone to provide you with different information. The information contained in this prospectus is accurate only as of the date of this prospectus regardless of the time of delivery of this prospectus or any exercise of the subscription rights. Our business, financial condition, results of operations and prospects may have changed since those dates. We are not making an offer of these securities in any state or jurisdiction where the offer is not permitted.

In the prospectus we rely on and refer to information and statistics regarding the banking industry and the banking market in Florida. We obtained this market data from independent publications or other publicly available information. Although we believe these sources are reliable, we have not independently verified and do not guarantee the accuracy and completeness of this information.

Unless the context indicates otherwise, all references in this prospectus to “we,” “our” and “us” refer to Federal Trust Corporation and our subsidiaries, Federal Trust Bank and Federal Trust Mortgage Company; except that in the discussion of our subscription rights and capital stock and related matters these terms refer solely to Federal Trust Corporation and not to any of our subsidiaries.

 

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QUESTIONS AND ANSWERS RELATING TO THE RIGHTS OFFERING

What is the rights offering?

We are distributing, at no charge, to holders of our shares of common stock, non-transferable subscription rights to purchase shares of our common stock. You will receive one subscription right for each share of common stock you owned as of 5:00 p.m., Eastern Time, on [Record Date], the record date. Each subscription right entitles the holder to a basic subscription privilege and an over-subscription privilege, which are described below. The shares to be issued in the rights offering, like our existing shares of common stock, will be traded on the American Stock Exchange under the symbol “FDT.”

What is the offering to the standby purchasers?

We have entered into separate standby purchase agreements with certain institutional investors and high net worth individuals, pursuant to which we have agreed to sell, and these investors and individuals have severally agreed to purchase from us, up to 24,623,646 shares of our common stock. We have also agreed to provide two of these investors a total of 10,000,000 warrants that would entitle these investors to purchase up to 10,000,000 shares of our common stock at $0.95 per share. The standby purchase commitments are subject to certain conditions as set forth in the standby purchase agreements. The number of shares available for sale to the standby purchasers will depend on the number of shares subscribed for in the rights offering. The standby purchase agreements assure that in no event will we issue fewer than 21,053,280 shares and 10,000,000 warrants, in the aggregate, to standby purchasers. The price per share paid by the standby purchasers for such common stock, and the exercise price of the warrants, will be equal to the subscription price paid by our shareholders in the rights offering. Subject to receipt of regulatory approval, we have also agreed to provide each of two of the standby purchasers the right to select one candidate for appointment to the boards of directors of Federal Trust Corporation and Federal Trust Bank and one individual who will have observer rights at these board meetings. In the event we terminate the standby purchase agreements because our Board of Directors determines, in the exercise of its fiduciary duties, that it is not in the best interests of Federal Trust Corporation and our shareholders to go forward with the stock offerings, then we will pay the standby purchasers liquidated damages totaling $3.3 million. Prior to the completion of the stock offerings, we may enter into additional standby purchase agreements with new standby purchasers. See “The Rights Offering—Standby Commitments.”

What is the public offering?

To the extent that shares of our common stock remain available for purchase after satisfaction of all subscriptions received in the rights offering and subject to the standby purchase agreements we have entered into with our standby purchasers whereby we are obligated to sell to them a maximum of $23.4 million of shares (24,623,646 shares), we may, in our discretion, offer shares of our common stock to the general public in a public offering so that we sell up to the maximum of 36,842,105 shares of our common stock. Shares of common stock will be sold at the $0.95 per share subscription price. Shares of our common stock purchased in the public offering will be subject to the same overall purchase and ownership limitations as provided in the rights offering. The public offering, if any, may begin concurrently with, during or promptly after the rights offering, and may terminate at any time without notice, but may not terminate later than [Extension Date]. The payment method and escrow procedures will be the same as those described relating to the rights offering. The public offering will not be an underwritten offering and will be conducted on a best efforts basis by our financial advisor and marketing and information agent, Stifel, Nicolaus & Company, Incorporated. Stifel, Nicolaus & Company, Incorporated is not obligated to sell or purchase any shares of our common stock in the public offering. See “The Rights Offering—Public Offering.”

Why are we conducting the stock offerings?

In this Prospectus we will refer to the rights offering and the offering to standby purchasers collectively as the “stock offerings.” We are conducting the stock offerings to raise equity capital to improve Federal Trust Bank’s capital position, and to retain additional capital at Federal Trust Corporation for general corporate purposes. Our Board of Directors has chosen to raise capital through a rights offering to give our shareholders the opportunity to

 

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limit ownership dilution by permitting them to buy additional shares of our common stock, and has chosen to raise additional capital through the sale of shares to standby purchasers to improve the likelihood of success of our capital-raising efforts. There can be no assurance of the amount of dilution that a shareholder may experience from the stock offerings or that the stock offerings will be successful. Furthermore, we cannot assure you that we will not need to seek additional financing or engage in additional capital offerings in the future.

What is the basic subscription privilege?

The basic subscription privilege of each subscription right gives our shareholders the opportunity to purchase [exchange ratio] shares of our common stock at a subscription price of $0.95 per share. We have granted to you, as a shareholder of record as of 5:00 p.m., Eastern Time, on the record date, one subscription right for each share of our common stock you owned at that time. Fractional shares of our common stock resulting from the exercise of the basic subscription privilege will be eliminated by rounding down to the nearest whole share. For example, if you owned 100 shares of our common stock as of 5:00 p.m., Eastern Time, on the record date, you would have received 100 subscription rights and would have the right to purchase              shares of common stock for $0.95 per share. You may exercise all or a portion of your basic subscription privilege or you may choose not to exercise any subscription rights at all. However, if you exercise less than your full basic subscription privilege, you will not be entitled to purchase any additional shares by using your over-subscription privilege.

If you hold a Federal Trust Corporation stock certificate, the number of rights you may exercise pursuant to your basic subscription privilege is indicated on the enclosed rights certificate. If you hold your shares in the name of a custodian bank, broker, dealer or other nominee, you will not receive a rights certificate. Instead, the Depository Trust Company (DTC) will issue one subscription right to the nominee record holder for each share of our common stock that you own at the record date. If you are not contacted by your custodian bank, broker, dealer or other nominee, you should contact your nominee as soon as possible.

What is the over-subscription privilege?

In the event that you purchase all of the shares of our common stock available to you pursuant to your basic subscription privilege, you may also choose to purchase a portion of any shares of our common stock that are not purchased by our other shareholders through the exercise of their basic subscription privileges. You should indicate on your rights certificate how many additional shares you would like to purchase pursuant to your over-subscription privilege. Limitations on the amount of common stock that may be subscribed for pursuant to your over-subscription privilege are described below under the heading “Are there any limits on the number of shares I may purchase in the rights offering or own as a result of the rights offering?”

If sufficient shares of common stock are available, we will seek to honor your over-subscription request in full. If, however, over-subscription requests exceed the number of shares of common stock available, we will allocate the available shares of common stock among shareholders who over-subscribed by multiplying the number of shares requested by each shareholder through the exercise of their over-subscription privileges by a fraction that equals (x) the number of shares available to be issued through over-subscription privileges divided by (y) the total number of shares requested by all subscribers through the exercise of their over-subscription privileges. As described above for the basic subscription privilege, we will not issue fractional shares through the exercise of over-subscription privileges.

In order to properly exercise your over-subscription privilege, you must deliver the subscription payment related to your over-subscription privilege at the time you deliver payment related to your basic subscription privilege. Because we will not know the actual number of unsubscribed shares prior to the expiration of the rights offering, if you wish to maximize the number of shares you purchase pursuant to your over-subscription privilege, you will need to deliver payment in an amount equal to the aggregate subscription price for the maximum number of shares of our common stock that may be available to you. For that calculation, you must assume that no other shareholder, other than you and the standby purchasers, who have agreed to exercise their basic subscription privileges for an aggregate of approximately 1,698,216 shares, will subscribe for any shares of our common stock

 

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pursuant to their basic subscription privilege. See “The Rights Offering—The Subscription Rights—Over-Subscription Privilege.”

How was the $0.95 per share subscription price determined?

In determining the subscription price, our Board of Directors considered a number of factors, including: the price at which our shareholders might be willing to participate in the rights offering, historical and current trading prices for our common stock, the need for liquidity and capital, negotiations with standby purchasers, and the desire to provide an opportunity to our shareholders to participate in the rights offering on a pro rata basis. In conjunction with its review of these factors, our Board of Directors also reviewed our history and prospects, including our past and present earnings, our prospects for future earnings, our current financial condition and regulatory status. Our Board of Directors received a fairness opinion dated May 21, 2008, from Stifel, Nicolaus & Company, Incorporated, our financial and marketing advisor, to the effect that, as of the date of such opinion, and subject to the assumptions and qualifications therein, the financial terms of the stock offerings were fair to Federal Trust Corporation from a financial point of view. The subscription price is not necessarily related to our book value, net worth or any other established criteria of value and may or may not be considered the fair value of our common stock to be offered in the rights offering. You should not assume or expect that, after the stock offerings, our shares of common stock will trade at or above the $0.95 purchase price.

Am I required to exercise all of the subscription rights I receive in the rights offering?

No. You may exercise any number of your subscription rights, or you may choose not to exercise any subscription rights. If you do not exercise any subscription rights, the number of shares of our common stock you own will not change. However, if you choose not to exercise your basic subscription rights in full, your ownership interest in Federal Trust Corporation will be diluted as a result of the stock offerings, and if you fully exercise your basic subscription rights, but do not exercise a certain level of over-subscription rights, you will experience dilution as a result of the sale of shares to standby purchasers. In addition, if you do not exercise your basic subscription privilege in full, you will not be entitled to participate in the over-subscription privilege. See “Risk Factors—Risks Related to the Rights Offering—The stock offerings may reduce your percentage ownership in Federal Trust Corporation.”

How soon must I act to exercise my subscription rights?

If you received a rights certificate and elect to exercise any or all of your subscription rights, the subscription agent must receive your completed and signed rights certificate and payments prior to the expiration of the rights offering, which is [Expiration Date], at 5:00 p.m., Eastern Time. If you hold your shares in the name of a custodian bank, broker, dealer or other nominee, your nominee may establish a deadline prior to 5:00 p.m. Eastern Time, on [Expiration Date] by which you must provide it with your instructions to exercise your subscription rights and payment for your shares. Our Board of Directors may, in its discretion, extend the rights offering one or more times, but in no event will the expiration date be later than [Extension Date]. Our Board of Directors may cancel the rights offering at any time. In the event that the rights offering is cancelled, all subscription payments received will be returned, without interest, as soon as practicable.

Although we will make reasonable attempts to provide this prospectus to holders of subscription rights, the rights offering and all subscription rights will expire at 5:00 p.m., Eastern Time on [Expiration Date] (unless extended), whether or not we have been able to locate each person entitled to subscription rights.

May I transfer my subscription rights?

No. You may not sell, transfer or assign your subscription rights to anyone. Subscription rights will not be listed for trading on the American Stock Exchange or any other stock exchange or market or on the OTC Bulletin Board. Rights certificates may only be completed by the shareholder who receives the certificate.

 

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Are we requiring a minimum subscription to complete the stock offerings?

There is no individual minimum purchase requirement in the rights offering. However, we cannot complete the stock offerings unless we receive aggregate subscriptions for at least $30.0 million (31,578,948 shares) of common stock in the stock offerings. This includes purchases by the standby purchasers of up to 24,623,646 shares of our common stock.

Has our Board of Directors made a recommendation to our shareholders regarding the rights offering?

Our Board of Directors is making no recommendation regarding your exercise of the subscription rights. Shareholders who exercise subscription rights risk investment loss on new money invested. We cannot predict the price at which our shares of common stock will trade; therefore, we cannot assure you that the market price for our common stock will be above the subscription price or that anyone purchasing shares at the subscription price will be able to sell those shares in the future at the same price or a higher price. You are urged to make your decision based on your own assessment of our business and the rights offering. Please see “Risk Factors” for a discussion of some of the risks involved in investing in our common stock.

Are there any limits on the number of shares I may purchase in the rights offering or own as a result of the rights offering?

A person, together with certain related persons, may not purchase more than $3.8 million (4,000,000 shares) of our common stock, and a person, together with certain related persons, may not own more than 4,000,000 shares of our common stock as a result of purchases in the rights offering. These limitations do not apply to certain of the standby purchasers. See “The Rights Offering—Limit on How Many Shares of Common Stock You May Purchase in the Rights Offering.”

In addition, with the exception of the issuance of shares to certain of our standby purchasers, we will not issue shares of our common stock pursuant to the exercise of basic subscription rights or over-subscription rights, or to any shareholder or standby purchaser who, in our sole opinion, could be required to obtain prior clearance or approval from or submit a notice to any state or federal bank regulatory authority to acquire, own or control such shares if, as of [Expiration Date], such clearance or approval has not been obtained and/or any applicable waiting period has not expired. If we elect not to issue shares in such a case, the unissued shares will become available to satisfy over-subscriptions by other shareholders pursuant to their subscription rights and will thereafter be available to standby purchasers.

How do I exercise my subscription rights if I own shares in certificate form?

If you hold a Federal Trust Corporation stock certificate and you wish to participate in the rights offering, you must take the following steps:

 

   

deliver payment to the subscription agent; and

 

   

deliver a properly completed and signed rights certificate, and related subscription documents, to the subscription agent.

In certain cases, you may be required to provide additional documentation or signature guarantees.

Please follow the delivery instructions on the rights certificate. Do not deliver documents to Federal Trust Corporation. You are solely responsible for completing delivery to the subscription agent of your subscription documents, rights certificate and payment. We urge you to allow sufficient time for delivery of your subscription materials to the subscription agent so that they are received by the subscription agent by 5:00 p.m. Eastern Time, on [Expiration Date].

 

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If you send a payment that is insufficient to purchase the number of shares you requested, or if the number of shares you requested is not specified in the forms, the payment received will be applied to exercise your subscription rights to the full extent possible based on the amount of the payment received, subject to the availability of shares under the over-subscription privilege and the elimination of fractional shares. Any excess subscription payments received by the subscription agent will be returned, without interest, as soon as practicable following the expiration of the rights offering.

What form of payment is required to purchase the shares of our common stock?

As described in the instructions accompanying the rights certificate, payments submitted to the subscription agent must be made in full United States currency by:

 

   

bank check or bank draft payable to Registrar and Transfer Company, drawn upon a United States bank;

 

   

postal, telegraphic or express money order payable to Registrar and Transfer Company; or

 

   

wire transfer of immediately available funds to the account maintained by Registrar and Transfer Company.

You may not remit personal checks of any type.

What should I do if I want to participate in the rights offering, but my shares are held in the name of a custodian bank, broker, dealer or other nominee?

If you hold your shares of common stock through a custodian bank, broker, dealer or other nominee, then your nominee is the record holder of the shares you own. If you are not contacted by your nominee, you should contact your nominee as soon as possible. Your nominee must exercise the subscription rights on your behalf for the shares of common stock you wish to purchase. You will not receive a rights certificate. Please follow the instructions of your nominee. Your nominee may establish a deadline that may be before the 5:00 p.m., Eastern Time, [Expiration Date] expiration date that we have established for the rights offering.

When will I receive my new shares?

If you purchase stock in the rights offering by submitting a rights certificate and payment, we will mail you a stock certificate as soon as practicable after the expiration date of the rights offering. If your shares as of [Record Date] were held by a custodian bank, broker, dealer or other nominee, and you participate in the rights offering, you will not receive stock certificates for your new shares. Your account with your nominee will be credited with the shares of common stock you purchase in the rights offering as soon as practicable after the expiration of the rights offering.

After I send in my payment and rights certificate, may I cancel my exercise of subscription rights?

No. All exercises of subscription rights are irrevocable unless the rights offering is terminated, even if you later learn information that you consider to be unfavorable to the exercise of your subscription rights. You should not exercise your subscription rights unless you are certain that you wish to purchase shares of our common stock in the rights offering.

 

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Are there any conditions to completing the rights offering?

Yes. We must sell the minimum offering amount of at least $30.0 million (31,578,948 shares) of common stock in the stock offerings, which includes the purchases by the standby purchasers of up to 24,623,646 shares of our common stock.

Will our directors and officers participate in the rights offering?

We expect our directors and officers, together with their affiliates, will subscribe for, in the aggregate, 305,267 shares of common stock in the rights offering. The purchase price paid by them will be $0.95 per share, the same paid by all other persons who purchase shares of our common stock in the stock offerings. Following the stock offerings, our directors and executive officers, together with their affiliates, are expected to own 633,724 shares of common stock, or 1.5% of our total outstanding shares of common stock if we sell 31,578,948 shares of stock in the stock offerings, including shares they currently own in Federal Trust Corporation.

Are the standby purchasers receiving any compensation for the standby commitments?

No. The standby purchasers are not receiving compensation for their standby commitments. However, two of the standby purchasers are each receiving up to $150,000 for payment of reimbursable expenses. In addition, in connection with their purchase of shares of common stock, we are issuing an aggregate of 10,000,000 warrants with an exercise price of $0.95 per share to these two standby purchasers.

What agreements do we have with the standby purchasers?

Each of the standby purchasers executed a non-disclosure agreement and accordingly gained access to certain nonpublic information about us and participated in discussions with our management. In addition, the standby purchasers performed a due diligence review of Federal Trust Corporation and subsequently negotiated and executed standby purchase agreements.

How many shares will the standby purchasers own after the stock offerings?

After the stock offerings, the standby purchasers will own between 22,068,231 shares of our common stock (47.7% of our outstanding shares) and 25,638,597 shares of our common stock (up to 62.5% of our outstanding shares), depending on how many shares of common stock we sell in the stock offerings. The standby purchasers will also hold warrants to purchase 10,000,000 shares (24.4% of our outstanding shares if we sell 31,578,948 shares in the stock offerings.

What effects will the stock offerings have on our outstanding common stock?

As of [Record Date], we had [record shares] shares of our common stock issued and outstanding. Assuming no options are exercised prior to the expiration of the rights offering and assuming all shares are sold in the rights offering and to standby purchasers, we expect approximately 46,278,410 shares of our common stock will be outstanding immediately after completion of the rights offering and the closing of the transactions contemplated by the standby purchase agreements.

The issuance of shares of our common stock in the stock offerings will dilute, and thereby reduce, your proportionate ownership in our shares of common stock unless you fully exercise your basic subscription privilege and a certain level of your over-subscription privilege. The exercise of warrants to be issued in the stock offerings would further dilute your proportionate ownership. In addition, the issuance of shares of our common stock at the subscription price, which is less than the market price as of             , 2008, will likely reduce the price per share of shares held by you prior to the stock offerings.

 

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How much will we receive in net proceeds from the stock offerings?

We expect that the aggregate stock offering proceeds, net of expenses, to be between $26.9 million and $31.9 million. Subject to Office of Thrift Supervision approval of or non-objection to the capital plan we intend to adopt, described in “Supervision and Regulation—Cease and Desist Orders,” we intend to invest between $15.0 million and $20.0 million of the net proceeds in Federal Trust Bank to improve its regulatory capital position, and retain the remainder of the net proceeds. The net proceeds we retain may be used for the repayment of debt and general corporate purposes and further investment in Federal Trust Bank, if required by the Office of Thrift Supervision or if we otherwise determine to make such a further investment. Please see “Use of Proceeds.”

Are there risks in exercising my subscription rights?

Yes. The exercise of your subscription rights involves risks. Exercising your subscription rights involves the purchase of additional shares of our common stock and should be considered as carefully as you would consider any other equity investment. Among other things, you should carefully consider the risks described under the heading “Risk Factors” in this prospectus.

If the rights offering is not completed, will my subscription payment be refunded to me?

Yes. The subscription agent will hold all funds it receives in a segregated bank account until completion of the rights offering. If the rights offering is not completed, all subscription payments received by the subscription agent will be returned, without interest, as soon as practicable. If your shares are held in the name of a custodian bank, broker, dealer or other nominee, it may take longer for you to receive the refund of your subscription payment because the subscription agent will return payments through the record holder of your shares.

What fees or charges apply if I purchase shares of the common stock in the rights offering?

We are not charging any fee or sales commission to issue subscription rights to you or to issue shares to you if you exercise your subscription rights (other than the subscription price). If you exercise your subscription rights through a custodian bank, broker, dealer or other nominee, you are responsible for paying any fees your nominee may charge you.

What is the role of Stifel, Nicolaus & Company, Incorporated in the stock offerings?

We have entered into an agreement with Stifel, Nicolaus & Company, Incorporated, pursuant to which Stifel, Nicolaus & Company, Incorporated is acting as our financial advisor and marketing and information agent in connection with the stock offerings and will use its best efforts to assist us in soliciting the exercise of subscription rights for the purchase of shares of our common stock, soliciting the standby purchasers and, if necessary, in soliciting new investors through the public offering. Stifel, Nicolaus & Company, Incorporated is not acting as an underwriter and is not obligated to purchase or sell any shares of our common stock in the stock offerings. We have agreed to pay certain fees and expenses of, Stifel, Nicolaus & Company, Incorporated. Please see “Plan of Distribution.”

Who should I contact if I have other questions?

If you have other questions regarding Federal Trust Corporation, Federal Trust Bank or the stock offerings, please contact our information agent, Stifel, Nicolaus & Company, Incorporated, at (866) 779-2408 (toll free), Monday through Friday (except bank holidays), between 10:00 a.m. and 4:00 p.m., Eastern Time.

If you have any questions regarding completing a rights certificate or submitting payment in the rights offering, please contact our subscription agent for the rights offering, Registrar and Transfer Company, at (800) 368-5948 (toll free), Monday through Friday (except bank holidays), between 10:00 a.m. and 4:00 p.m., Eastern Time.

 

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SUMMARY

The following summary contains basic information about us and the rights offering. Because it is a summary, it may not contain all of the information that is important to you. For additional information before making a decision to invest in our shares of common stock, you should read this prospectus carefully, including the consolidated financial statements, the notes to the consolidated financial statements and the sections entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “The Rights Offering” and “Risk Factors.”

Federal Trust Corporation

Federal Trust Corporation is a savings and loan holding company, headquartered in Sanford, Florida. Our primary subsidiary, Federal Trust Bank, is a federally chartered savings bank that operates 11 full service branch offices located in Central Florida as set forth on the map on the inside cover of this prospectus. Through Federal Trust Bank, we offer a range of lending services to small- to medium-sized businesses and individuals located in our market areas, including real estate, construction, commercial and consumer loans. We fund our lending services with an array of deposit products, including checking, savings and money market accounts and certificates of deposit. Until April 2008, we operated a residential mortgage company, Federal Trust Mortgage Company, where we originated residential mortgage loans, purchased and sold mortgage loans in the secondary market, and serviced residential mortgage loans, including loans in Federal Trust Bank’s loan portfolio. In April 2008, the operations of Federal Trust Mortgage Company were consolidated into Federal Trust Bank, and will operate as a department of Federal Trust Bank. Also in April of 2008, certain staff reductions in our residential loan department were completed to reflect current market conditions and origination volumes. At March 31, 2008, we had consolidated assets of $672.9 million, deposits of $454.0 million and stockholders’ equity of $37.3 million.

Federal Trust Corporation’s executive offices are located at 312 West 1st Street, Sanford, Florida 32771. Our telephone number at this address is (407) 323-1833. Our website is www.federaltrust.com. Information on our website is not incorporated in this prospectus and is not part of this prospectus.

Cease and Desist Orders

Following its most recent examinations of the operations of Federal Trust Corporation and Federal Trust Bank, the Office of Thrift Supervision noted weaknesses and failures relating primarily to our real estate lending practices and asset quality, and their impact on our capital and earnings. We have taken action and implemented procedures that management believes will address the weaknesses identified by the Office of Thrift Supervision. Effective May 12, 2008, Federal Trust Corporation and Federal Trust Bank consented to the issuance by the Office of Thrift Supervision of cease and desist orders to Federal Trust Corporation and Federal Trust Bank, which are designed to ensure that the weaknesses noted in the recently concluded examinations are properly addressed. The orders provide that:

 

   

we must submit for review and approval by the Office of Thrift Supervision a capital plan to raise additional capital for Federal Trust Bank by July 15, 2008 and, if the additional capital cannot be raised by such date, to enter into a merger agreement with a merger or acquisition partner by August 31, 2008;

 

   

Federal Trust Bank must submit for review and approval or non-objection by the Office of Thrift Supervision a detailed business plan to strengthen and improve Federal Trust Bank’s operations, earnings, liquidity and capital;

 

   

Federal Trust Bank must submit quarterly reports to the Office of Thrift Supervision regarding compliance with the business plan;

 

   

until the Office of Thrift Supervision has approved or provided its non-objection to Federal Trust Bank’s business plan, Federal Trust Bank will not be permitted to increase its current levels of

 

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construction loans, acquisition and development loans, non-residential permanent mortgage loans, land loans and certain other loans without the prior approval of the Office of Thrift Supervision;

 

   

until the Office of Thrift Supervision has approved or provided its non-objection to Federal Trust Bank’s business plan, Federal Trust Bank will not be permitted to increase its total assets during any quarter in excess of an amount equal to the net interest credited on deposit liabilities during the quarter without the prior approval of the Office of Thrift Supervision;

 

   

Federal Trust Bank must submit for review and approval or non-objection by the Office of Thrift Supervision an asset review program that will (i) strengthen and ensure the timely identification and proper classification of problem assets, (ii) ensure adequate and proper levels of the allowance for loan and lease losses, and (iii) establish individualized resolution plans for problem assets;

 

   

Federal Trust Bank will not be permitted to declare a dividend without the prior written approval of the Office of Thrift Supervision;

 

   

Federal Trust Bank must revise its legal lending limit policies and procedures to ensure compliance with applicable law and devise an action plan to correct any legal lending limit violations;

 

   

Federal Trust Bank will not be permitted to enter into, renew or modify any agreements with us or enter into affiliated transactions with us, without prior approval of the Office of Thrift Supervision;

 

   

Federal Trust Bank will not be permitted to enter into any third-party contracts for services outside the normal course of business without prior review and approval of the Office of Thrift Supervision;

 

   

the Board of Directors of Federal Trust Bank must submit a plan to strengthen the Board of Directors’ oversight of management and Federal Trust Bank’s operations;

 

   

the Board of Directors of Federal Trust Bank must conduct a review of Federal Trust Bank’s lending functions and assess the qualifications, experience and proficiency of Federal Trust Bank’s management and lending staff; and

 

   

the Board of Directors of Federal Trust Bank must establish a committee comprised of non-employee directors to monitor and coordinate Federal Trust Bank’s compliance with the provisions of its enforcement order.

See “Risk Factors—Risks Related to Our Business—We have consented to the issuance of cease and desist orders with the Office of Thrift Supervision. These orders will significantly restrict our operations. The failure to comply with these orders can result in significant penalties.”

Additional Operating Restrictions

As a result of the loan loss provisions recorded during the year ended December 31, 2007, Federal Trust Bank’s risk-based capital ratio fell below the amount required for the “well capitalized” designation for bank regulatory purposes. As a result, Federal Trust Bank was considered “adequately capitalized” as of December 31, 2007 and March 31, 2008 with Tier 1 leverage, Tier 1 risk-based and total risk-based capital ratios of 5.38%, 7.83% and 9.09%, respectively at December 31, 2007 and Tier 1 leverage, Tier 1 risk-based and total risk-based capital ratios of 5.03%, 7.69% and 8.96%, respectively at March 31, 2008. Because Federal Trust Bank does not qualify for the “well capitalized” designation, it is subject to restrictions on its operations in addition to those that are being imposed through the cease and desist order, described above. Federal Trust Bank cannot accept brokered deposits or

 

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expand our branch network without prior regulatory approval. Furthermore, as a result of the Federal Home Loan Bank of Atlanta’s assessment of our recent financial condition, we will not have access to additional advances nor will we be able to renew existing advances from the Federal Home Loan Bank, which may harm our liquidity position.

On April 25, 2008, Federal Trust Corporation and Federal Trust Bank were notified by the Office of Thrift Supervision that the following regulatory and supervisory restrictions apply to Federal Trust Corporation and Federal Trust Bank, some of which restrictions are similar to those included in the cease and desist orders:

 

   

Federal Trust Corporation and Federal Trust Bank are not eligible to have applications or notices processed by the Office of Thrift Supervision on an expedited basis;

 

   

Federal Trust Corporation and Federal Trust Bank are required to provide prior notice to the Office of Thrift Supervision for additions or changes to directors or senior executive officers;

 

   

all employment contracts or compensation arrangements, including severance payments, to directors and senior executive officers are subject to prior review by the Office of Thrift Supervision;

 

   

the ability of Federal Trust Corporation and Federal Trust Bank to make any compensatory payments to any person previously affiliated with Federal Trust Corporation or Federal Trust Bank following such person’s termination of employment is restricted by applicable federal regulation; and

 

   

Federal Trust Bank’s growth is restricted in that it may not increase its assets during any quarter in excess of an amount equal to net interest credited on deposit liabilities.

In addition, the Office of Thrift Supervision placed the following restrictions on our operations, some of which restrictions are similar to those included in the cease and desist orders:

 

   

Federal Trust Bank may not pay any dividends or make any form of capital distribution without the prior written approval of the Office of Thrift Supervision, and Federal Trust Corporation may not request or accept any dividend or any form of capital distribution from Federal Trust Bank without the prior written approval of the Office of Thrift Supervision;

 

   

Federal Trust Corporation may not declare or pay any dividend without the prior written approval of the Office of Thrift Supervision, and Federal Trust Corporation must request Office of Thrift Supervision approval for the payment of a dividend in writing at least 30 calendar days prior to the proposed dividend declaration date;

 

   

Federal Trust Corporation may not issue any debt securities or otherwise incur any additional debt without the prior written approval of the Office of Thrift Supervision; and

 

   

Federal Trust Corporation may not make any payments of any kind, or in any form, to any person or entity in an amount exceeding $5,000 in any calendar month without the prior written approval of the Office of Thrift Supervision.

Federal Trust Corporation has received Office of Thrift Supervision approval to pay certain fees and expenses in connection with the stock offerings.

See “Risk Factors—Risks Related to Our Business—An inability to improve our regulatory capital position could adversely affect our operations” and “—The Office of Thrift Supervision has placed additional restrictions on our operations.”

 

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Recent Financial Performance

Our net income has declined in recent years, from $4.4 million for the year ended December 31, 2005, to $3.4 million for the year ended December 31, 2006, to a net loss of $14.2 million for the year ended December 31, 2007. For the first quarter of 2008, we lost $2.2 million as compared to net income of $160,000 for the first quarter of 2007. The net loss for the first quarter of 2008 and the year ended December 31, 2007 was caused primarily by a significant increase in non-performing assets, which necessitated a provision for loan losses of $2.0 million for the first quarter of 2008 and $16.4 million for the year ended December 31, 2007, compared to a provision for loan losses of $150,000 for the first quarter of 2007 and $639,000 for the year ended December 31, 2006. In addition, we experienced a decline in net interest income to $2.0 million for the quarter ended March 31, 2008 and $11.7 million for the year ended December 31, 2007 compared to $3.2 million for the quarter ended March 31, 2007 and $15.7 million for the year ended December 31, 2006, due to net interest margin compression as well as increased foregone interest income resulting from non-accrual loans. Non-interest expense increased to $4.4 million for the quarter ended March 31, 2008 and $19.5 million for the year ended December 31, 2007, compared to $3.4 million for the quarter ended March 31, 2007 and $12.5 million for the year ended December 31, 2006, primarily as a result of increased Federal Deposit Insurance Corporation insurance premiums in the first quarter of 2008 and expenses associated with working out our non-performing assets and charges during 2007 associated with the termination of our former Chief Executive Officer.

See “Risk Factors—Risks Related to Our Business—We experienced an operating loss during the year ended December 31, 2007 and the first quarter of 2008 and we may not return to profitability in the future” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for a further discussion of our recent financial performance.

Business Strategy

Our business strategy is to take the actions required in the enforcement orders of the Office of Thrift Supervision while building a profitable, well capitalized, full-service community bank with operations in Central Florida. We intend to focus on providing excellent customer service, expanding our product offerings, originating quality loans in our market area, and increasing the amount of deposits we receive from our local markets. The following are highlights of our business strategy:

New executive management team members. To execute on our strategy, we have made significant changes to our executive management team over the last year and assembled a team of bankers with significant depth and breadth, including 68 years of combined experience in the banking industry. Dennis T. Ward joined our executive team in February 2007 and was appointed President and Chief Executive Officer in September 2007, to provide the leadership to implement our revitalized business plan. In the last year, we also hired our Executive Vice President and Senior Loan Officer, Mark E. McRae, our Senior Vice President and Chief Credit Officer, Lindsay Sandham and our Senior Vice President and Special Assets Manager, Edward Walker.

Build core relationships with customers and enhance our sales culture. The primary goal of our management team is to build core relationships and better utilize our existing franchise to generate future growth when economic conditions improve. During 2007, we hired a new sales manager for our branch offices, implemented new training procedures for our staff and focused our efforts on developing a broader range of financial products, in order to establish a framework for an enhanced business and sales culture that will better enable us to serve our customers.

Increase loan originations in local markets with better credit underwriting standards while remaining focused on the effective management of non-performing assets. We believe that our renewed focus on in-market retail and small business loan originations, coupled with our recently strengthened underwriting policies and procedures, will help us originate higher-quality loans with favorable risk-adjusted returns. In light of current market conditions in Florida, we have spent considerable effort and resources on the early identification and quantification of potential problem assets. Our new management team is working aggressively toward resolving our non-performing loans and has established a team experienced in resolving problem assets and managing the workout

 

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process to minimize net charge-offs, including the recent hiring of an experienced loan workout specialist who focuses full time on the workout and resolution of non-performing and classified assets.

Decrease reliance on wholesale funding sources. Historically, we have relied significantly on brokered deposits and Federal Home Loan Bank advances in order to fund our loan portfolio. Given our current financial condition, the availability of funding sources is constrained in that we cannot renew, replace or accept brokered deposits without prior regulatory approval, and we cannot access additional advances or renew existing advances from the Federal Home Loan Bank. We are focused on replacing these more expensive and volatile funding options by leveraging our existing network of 11 branches to increase core deposits and lower cost transaction accounts.

In addition to our short-term objectives of resolving problem assets, and improving our liquidity and capital designation, our long-term goal is to transition our asset and liability mix to that of a traditional community bank. We believe that eliminating purchases of pooled residential real estate loans along with reducing our portfolio of large land acquisition, development and residential loans in favor of smaller commercial business loans, while establishing a lower cost deposit base through a strong retail banking franchise, will be critical to our ability to implement our long-term strategy.

See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Business Strategy.”

Our Dividend Policy

We discontinued paying cash dividends on our shares of common stock during the quarter ended September 30, 2007. Currently, we have no plans to resume the payment of cash dividends on our shares of common stock, and we are subject to Office of Thrift Supervision restrictions on our ability to pay dividends.

See “Selected Consolidated Financial and Other Data” and “Market for the Common Stock and Dividend Information” for information regarding our historical dividend payments.

The Rights Offering

 

Securities Offered    We are distributing to you, at no charge, one non-transferable subscription right for each share of our common stock that you owned as of 5:00 p.m., Eastern Time, on [Record Date], either as a holder of record or, in the case of shares held of record by custodian banks, brokers, dealers or other nominees on your behalf, as a beneficial owner of such shares.
Subscription Price    $0.95 per share.
Record Date    5:00 p.m., Eastern Time, on [Record Date].
Expiration of the Rights Offering    5:00 p.m., Eastern Time, on [Expiration Date]. We may extend the rights offering without notice to you until [Extension Date].
Use of Proceeds    We expect the aggregate net proceeds from the stock offerings to be between $26.9 million and $31.9 million. We intend to use the proceeds of the stock offerings to invest in Federal Trust Bank to improve its regulatory capital position, to repay debt and for general corporate purposes.
Basic Subscription Privilege    The basic subscription privilege of each subscription right will entitle you to purchase [exchange ratio] shares of our common stock at a subscription price of $0.95 per share; however, fractional shares of our common stock resulting from the exercise of the basic subscription privilege will be eliminated by rounding down to the nearest whole share. The number of rights you may exercise appears on your rights certificate.

 

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Over-Subscription Privilege    In the event that you purchase all of the shares of our common stock available to you pursuant to your basic subscription privilege, you may also choose to subscribe for a portion of any shares of our common stock that are not purchased by our shareholders through the exercise of their basic subscription privileges. You may subscribe for shares of common stock pursuant to your over-subscription privilege, subject to the purchase and ownership limitations described below under the heading “Limitations on the Purchase of Shares.”
Limitations on the Purchase of Shares   

A person, together with certain related persons, may not purchase more than $3.8 million (4,000,000 shares) of our common stock, and a person, together with certain related persons, may not own more than 4,000,000 shares of our common stock as a result of purchases in the rights offering. These limitations do not apply to certain of our standby purchasers. See “The Rights Offering—Limit on How Many Shares of Common Stock You May Purchase in the Rights Offering.”

 

In addition, except for our issuance to certain of our standby purchasers, we will not issue shares of our common stock pursuant to the exercise of basic subscription rights or over-subscription rights, or to any shareholder or standby purchaser who, in our sole opinion, could be required to obtain prior clearance or approval from or submit a notice to any state or federal bank regulatory authority to acquire, own or control such shares if, as of [Expiration Date], such clearance or approval has not been obtained and/or any applicable waiting period has not expired.

Non-Transferability of Rights    The subscription rights may not be sold, transferred or assigned and will not be listed for trading on the American Stock Exchange or on any other stock exchange or market.
No Board Recommendation    Our Board of Directors is making no recommendation regarding your exercise of your subscription rights. You are urged to make your decision based on your own assessment of our business and the rights offering. Please see “Risk Factors” for a discussion of some of the risks involved in investing in our common stock.
Standby Purchase Agreements    In connection with the rights offering, we have entered into standby purchase agreements with certain institutional investors and high net worth individuals. Subject to certain conditions, the standby purchase agreements obligate us to sell, and require the standby purchasers to purchase from us, up to 24,623,646 shares of common stock, and further obligate us to issue to the standby purchasers an aggregate of 10,000,000 warrants to purchase shares of common stock. The number of shares available for sale to the standby purchasers will depend on the number of shares subscribed for in the rights offering. However, in no event will we issue fewer than 21,053,280 shares to the standby purchasers. The price per share paid by the standby purchasers for such common stock and the exercise price of the warrants will be equal to the subscription price paid by our shareholders in the rights offering. The warrants expire upon the later of (i) seven years from the date of effectiveness of the registration statement filed with respect to such exercise or (ii) nine years from the completion of the stock offerings. Subject to the receipt of regulatory approval, we have also agreed to provide each of two standby purchasers the right to select one candidate for appointment to the boards of directors of Federal Trust Corporation and Federal Trust Bank, and one individual who will have observer rights at these board meetings. In the event we terminate the standby purchase agreements because our Board of Directors determines, in the exercise of its fiduciary duties, that it is not in the best interests of Federal Trust Corporation and our shareholders to go forward with the stock offerings, then we will pay the standby purchasers liquidated damages totaling $3.3 million. Prior to the completion of the stock offerings, we may

 

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   enter into additional standby purchase agreements with new standby purchasers.
Standby Purchasers    Our standby purchasers are Patriot Financial Partners, L.P., Sidhu Advisors FDT, LLC, Keefe Ventures Fund, LP, El Coronado Holdings, LLC, John Sheldon Clark and David Schwartz.
Public Offering    To the extent that shares of our common stock remain available for purchase after satisfaction of all subscriptions received in the rights offering and subject to the standby purchase agreements we have entered into with our standby purchasers whereby we are obligated to sell to them a maximum of $23.4 million of shares (24,623,646 shares), we may, in our discretion, offer shares of our common stock to the general public in a public offering so that we sell up to the maximum of 36,842,105 shares of our common stock. Shares will be sold at the $0.95 per share subscription price. Shares of our common stock purchased in the public offering will be subject to the same overall purchase and ownership limitations as provided in the rights offering. The public offering, if any, may begin concurrently with, during or promptly after the rights offering, and may terminate at any time without notice, but may not terminate later than [Extension Date]. The payment method and escrow procedures will be the same as those described relating to the rights offering. The public offering will not be an underwritten offering and will be conducted on a best efforts basis by our financial advisor and marketing and information agent, Stifel, Nicolaus & Company, Incorporated. Stifel, Nicolaus & Company, Incorporated is not obligated to sell or purchase any shares of our common stock in the public offering. See “The Rights Offering—Public Offering.”
No Revocation    All exercises of subscription rights are irrevocable, even if you later learn of information that you consider to be unfavorable to the exercise of your subscription rights. You should not exercise your subscription rights unless you are certain that you wish to purchase additional shares of our common stock at a subscription price of $0.95 per share.
Minimum Offering    The offering is conditioned upon the receipt of minimum offering proceeds of $30.0 million.
Purchase Intentions of Our Directors and Officers    Our directors and executive officers as a group, together with their affiliates, have indicated their intention to exercise rights to purchase, in the aggregate, approximately $290,000 (or 305,267 shares) of our common stock in the rights offering.
Material U.S. Federal Income Tax Considerations    For U.S. federal income tax purposes, you should not recognize income or loss upon receipt or exercise of a subscription right. You should consult your own tax advisor as to the tax consequences to you of the receipt, exercise or lapse of the rights in light of your particular circumstances.

Extension and

Cancellation

   Although we do not presently intend to do so, we have the option to extend the rights offering expiration date, but in no event will we extend the rights offering beyond [Extension Date]. Our Board of Directors may cancel the rights offering at any time. In the event that the rights offering is cancelled, all subscription payments received by the subscription agent will be returned, without interest, as soon as practicable.

 

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Procedures for Exercising Rights To exercise your subscription rights, you must take the following steps:

 

 

•        If you hold a Federal Trust Corporation stock certificate, you may deliver payment and a properly completed and signed rights certificate to the subscription agent to be received before 5:00 p.m., Eastern Time, on [Expiration Date]. You may deliver the documents and payment by hand delivery, U.S. mail or courier service. If U.S. mail is used for this purpose, we recommend using registered mail, properly insured, with return receipt requested.

 

•        If you are a beneficial owner of shares that are registered in the name of a custodian bank, broker, dealer or other nominee, you will not receive a rights certificate. You should instruct your nominee to exercise your subscription rights on your behalf. Please follow the instructions of your nominee, who may require that you meet a deadline earlier than 5:00 p.m., Eastern Time, on [Expiration Date].

 

Subscription Agent

   Registrar and Transfer Company.
Financial Advisor and Information Agent    Stifel, Nicolaus & Company, Incorporated is acting as our financial advisor and marketing and information agent in connection with the stock offerings. We have agreed to pay certain fees to, and expenses of, Stifel, Nicolaus & Company, Incorporated.
Shares Outstanding Before the Rights Offering    [record shares] shares of our common stock were outstanding as of [Record Date].
Shares Outstanding After Completion of the Rights Offering    Assuming no options are exercised prior to the expiration of the rights offering and assuming all shares are sold in the rights offering and to standby purchasers, we expect approximately 46,278,410 shares of our common stock will be outstanding immediately after completion of the rights offering and the closing of the transactions contemplated by the standby purchase agreements.
American Stock Exchange Symbol    Shares of our common stock are currently listed for trading on the American Stock Exchange under the symbol “FDT.”

Risk Factors

Before you exercise your subscription rights to purchase shares of our common stock, you should be aware that there are risks associated with your investment, including the risks described in the section entitled “Risk Factors” beginning on page 16 of this prospectus, and the risks that we have highlighted in other sections of this prospectus. You should carefully read and consider these risk factors together with all of the other information included in this prospectus before you decide to exercise your subscription rights to purchase shares of our common stock.

 

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RISK FACTORS

An investment in our shares of common stock involves a number of risks. You should consider carefully the risks described below in evaluating an investment in the shares of common stock. If any of the events in the following risks actually occurs, or if additional risks and uncertainties not presently known to us or that we believe are immaterial, materialize, then our business, results of operations and financial condition could be materially adversely affected. In addition, the trading price of our shares of common stock could decline due to any of the events described in these risks.

Risks Related to Our Business

We have consented to the issuance of cease and desist orders with the Office of Thrift Supervision. These orders will significantly restrict our operations. The failure to comply with these orders can result in significant penalties.

Following its most recent examinations of the operations of Federal Trust Corporation and Federal Trust Bank, the Office of Thrift Supervision noted weaknesses and failures relating primarily to our real estate lending practices and asset quality, and their effect on our capital and earnings. We have taken action and implemented procedures that management believes will address the weaknesses identified by the Office of Thrift Supervision. Effective May 12, 2008, Federal Trust Corporation and Federal Trust Bank consented to the issuance by the Office of Thrift Supervision of cease and desist orders to Federal Trust Corporation and Federal Trust Bank, which are designed to ensure that the weaknesses noted in the recently concluded examinations are properly addressed. The orders provide that:

 

   

we must submit for review and approval by the Office of Thrift Supervision a capital plan to raise additional capital for Federal Trust Bank by July 15, 2008 and, if the additional capital cannot be raised by such date, to enter into a merger agreement with a merger or acquisition partner by August 31, 2008;

 

   

Federal Trust Bank must submit for review and approval or non-objection by the Office of Thrift Supervision a detailed business plan to strengthen and improve Federal Trust Bank’s operations, earnings, liquidity and capital;

 

   

Federal Trust Bank must submit quarterly reports to the Office of Thrift Supervision regarding compliance with the business plan;

 

   

until the Office of Thrift Supervision has approved or provided its non-objection to Federal Trust Bank’s business plan, Federal Trust Bank will not be permitted to increase its current levels of construction loans, acquisition and development loans, non-residential permanent mortgage loans, land loans and certain other loans without the prior approval of the Office of Thrift Supervision;

 

   

until the Office of Thrift Supervision has approved or provided its non-objection to Federal Trust Bank’s business plan, Federal Trust Bank will not be permitted to increase its total assets during any quarter in excess of an amount equal to the net interest credited on deposit liabilities during the quarter without the prior approval of the Office of Thrift Supervision;

 

   

Federal Trust Bank must submit for review and approval or non-objection by the Office of Thrift Supervision an asset review program that will (i) strengthen and ensure the timely identification and proper classification of problem assets, (ii) ensure adequate and proper levels of the allowance for loan and lease losses, and (iii) establish individualized resolution plans for problem assets;

 

   

Federal Trust Bank will not be permitted to declare a dividend without the prior written approval of the Office of Thrift Supervision;

 

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Federal Trust Bank must revise its legal lending limit policies and procedures to ensure compliance with applicable law and devise an action plan to correct any legal lending limit violations;

 

   

Federal Trust Bank will not be permitted to enter into, renew or modify any agreements with us or enter into affiliated transactions with us, without prior approval of the Office of Thrift Supervision;

 

   

Federal Trust Bank will not be permitted to enter into any third-party contracts for services outside the normal course of business without prior review and approval of the Office of Thrift Supervision;

 

   

the Board of Directors of Federal Trust Bank must submit a plan to strengthen the Board of Directors’ oversight of management and Federal Trust Bank’s operations;

 

   

the Board of Directors of Federal Trust Bank must conduct a review of Federal Trust Bank’s lending functions and assess the qualifications, experience and proficiency of Federal Trust Bank’s management and lending staff; and

 

   

the Board of Directors of Federal Trust Bank must establish a committee comprised of non-employee directors to monitor and coordinate Federal Trust Bank’s compliance with the provisions of its enforcement order.

In the event we are in material non-compliance with the terms of such cease and desist orders, the Office of Thrift Supervision has the authority to subject us to the terms of a more restrictive enforcement order, to impose civil money penalties on us and our directors and officers, and to remove directors and officers from their positions with Federal Trust Corporation and Federal Trust Bank.

The Office of Thrift Supervision has placed additional restrictions on our operations.

On April 25, 2008, Federal Trust Corporation and Federal Trust Bank were notified by the Office of Thrift Supervision that the following regulatory and supervisory restrictions apply to Federal Trust Corporation and Federal Trust Bank, some of which restrictions are similar to those included in the cease and desist orders:

 

   

Federal Trust Corporation and Federal Trust Bank are not eligible to have applications or notices processed by the Office of Thrift Supervision on an expedited basis;

 

   

Federal Trust Corporation and Federal Trust Bank are required to provide prior notice to the Office of Thrift Supervision for additions or changes to directors or senior executive officers;

 

   

all employment contracts or compensation arrangements, including severance payments, to directors and senior executive officers are subject to prior review by the Office of Thrift Supervision;

 

   

the ability of Federal Trust Corporation and Federal Trust Bank to make any compensatory payments to any person previously affiliated with Federal Trust Corporation or Federal Trust Bank following such person’s termination of employment is restricted by applicable federal regulation; and

 

   

Federal Trust Bank’s growth is restricted in that it may not increase its assets during any quarter in excess of an amount equal to net interest credited on deposit liabilities.

 

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In addition, the Office of Thrift Supervision placed the following restrictions on our operations, some of which restrictions are similar to those included in the cease and desist orders:

 

   

Federal Trust Bank may not pay any dividends or make any form of capital distribution without the prior written approval of the Office of Thrift Supervision and Federal Trust Corporation may not request or accept any dividend or any form of capital distribution from Federal Trust Bank without the prior written approval of the Office of Thrift Supervision;

 

   

Federal Trust Corporation may not declare or pay any dividend without the prior written approval of the Office of Thrift Supervision, and Federal Trust Corporation must request Office of Thrift Supervision approval for the payment of a dividend in writing at least 30 calendar days prior to the proposed dividend declaration date;

 

   

Federal Trust Corporation may not issue any debt securities or otherwise incur any additional debt without the prior written approval of the Office of Thrift Supervision; and

 

   

Federal Trust Corporation may not make any payments of any kind, or in any form, to any person or entity in an amount exceeding $5,000 in any calendar month without the prior written approval of the Office of Thrift Supervision.

Federal Trust Corporation has received Office of Thrift Supervision approval to pay certain fees and expenses in connection with the stock offerings.

An inability to improve our regulatory capital position could adversely affect our operations.

At March 31, 2008, Federal Trust Bank was classified as “adequately capitalized,” and not “well capitalized.” This further restricts our operations beyond restrictions that have been imposed by the cease and desist orders. As a result of our capital levels: (i) our loans to one borrower limit has been reduced, which affects the size of the loans that we can originate and also requires us to sell, participate, or refuse to renew loans that exceed our lower loans to one borrower limit, both of which could negatively impact our earnings; (ii) we cannot renew or accept brokered deposits without prior regulatory approval; (iii) we must obtain prior regulatory approval to undertake any branch expansion activities; and (iv) we will pay higher insurance premiums to the Federal Deposit Insurance Corporation, which will reduce our earnings. To mitigate or resolve these restrictions, we are attempting to raise additional capital through the stock offerings and reduce the amount of Federal Trust Bank’s assets to improve our capital ratios to satisfy the “well capitalized” requirements. There is no assurance at this time, however, that we will be able to raise additional capital or reduce Federal Trust Bank’s assets on favorable terms.

A deterioration of our current non-performing loans or an increase in the number of non-performing loans will continue to have an adverse effect on our operations.

Weakening economic conditions in the residential real estate sector have adversely affected, and may continue to adversely affect, our loan portfolio. Our percentage of non-performing assets relating to total assets increased significantly in 2007 and continued in increase in 2008 to 8.6% at March 31, 2008 as compared to 6.9% at December 31, 2007. This compares to 1.7% at December 31, 2006. If loans that are currently non-performing further deteriorate or loans that are currently performing become non-performing loans, we may need to increase our allowance for loan losses. Such an increase would have an adverse impact on our financial condition and results of operations.

We may experience increased costs of liquidity in future periods as a result of our current financial condition.

In recent periods, we have experienced an increase in non-performing assets, an increase in our allowance for loan losses and an increase in competition in our primary market area, as well as a decrease in interest rates. As a result of our recent financial condition, the Federal Home Loan Bank of Atlanta has decided not to provide us additional advances. Additionally, as a result of Federal Trust Bank being considered “adequately capitalized,” we

 

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may not accept brokered deposits without prior regulatory approval. Collectively, these factors reduce our liquidity and require us to seek alternative sources of liquidity to fund our operations and, in particular, the origination of new loans, the support of our continued growth and other strategic initiatives. Historically, we have had access to a number of alternative sources of liquidity, but given our financial performance and the recent downturn in the credit and liquidity markets, there is no assurance that we will have access to funding sources or whether terms will be favorable to us. If our funding costs increase, this will impede our growth and will have an adverse effect on our business, financial condition and results of operations.

Our business is subject to the success of the local economies where we operate.

Our success depends significantly upon the growth in population, income levels, deposits and housing starts in our primary market area of Orange, Seminole, Volusia, Lake, Flagler and Osceola Counties and throughout Florida. If the communities in which we operate do not grow or if prevailing economic conditions locally or nationally are unfavorable, our business may not succeed. We are currently experiencing adverse economic conditions in some of our market areas, which affects the ability of our customers to repay their loans to us and could negatively affect our financial condition and results of operations. We are less able than larger institutions to spread the risks of unfavorable local economic conditions across a large number of diversified economies and are thus disproportionately impacted. Moreover, we cannot give any assurance that we will benefit from any market growth or favorable economic conditions in our primary market areas if they do materialize in the future.

The market value of the real estate securing our loans as collateral has been adversely affected by the slowing economy and unfavorable changes in economic conditions in our market areas, and may be further adversely affected in the future. As of March 31, 2008, approximately 96.7% of our loans receivable were secured by real estate. Real estate values and real estate markets are generally affected by, among other things, changes in national, regional or local economic conditions; fluctuations in interest rates and the availability of loans to potential purchasers; changes in the tax laws and other governmental statutes, regulations and policies; and acts of nature. If real estate prices decline in any of our markets, the value of the real estate collateral securing our loans could be reduced, which could ultimately lead to an increase in loan losses. Any sustained period of increased payment delinquencies, foreclosures or losses caused by the adverse market and economic conditions, including a continued downturn in the real estate values in our markets will adversely affect the ultimate collectability of our loans and also affect our revenues, results of operations and financial condition.

We experienced an operating loss during the year ended December 31, 2007 and the first quarter of 2008 and we may not return to profitability in the future.

We experienced a net loss of $2.2 million and $14.2 million for the quarter ended March 31, 2008 and the year ended December 31, 2007, respectively. The losses for the quarter ended March 31, 2008 and the year ended December 31, 2007 were caused primarily by a significant increase in non-performing assets, which necessitated a provision for loan losses of $2.0 million and $16.4 million for the quarter ended March 31, 2008 and for the year ended December 31, 2007, respectively, compared to a provision for loan losses of $150,000 for the first quarter of 2007 and of $639,000 for the year ended December 31, 2006. We charged off $50,000 of loans during the first quarter of 2008 and $7.6 million of loans during 2007 (compared to no chargeoffs during the first quarter of 2007 and $39,000 during 2006), and non-accrual loans (generally loans 90 days or more past due in principal or interest payments) increased to $47.8 million, or 8.6% of total loans at March 31, 2008 and $38.2 million, or 6.4% of total loans at December 31, 2007, compared to $16.4 million, or 2.6% of total loans for the first quarter of 2007 and $12.0 million, or 1.9% of total loans at December 31, 2006. In addition, we experienced a decline in net interest income to $2.0 million for the quarter ended March 31, 2008 and $11.7 million for the year ended December 31, 2007 compared to $3.2 million for the quarter ended March 31, 2007 and $15.7 million for the year ended December 31, 2006, and our non-interest expense increased to $4.4 million for the quarter ended March 31, 2008 and $19.5 million for the year ended December 31, 2007, compared to $3.4 million for the quarter ended March 31, 2007 and $12.5 million for the year ended December 31, 2006. Non-interest expense for 2007 included a $2.9 million charge for the severance and retirement obligation related to the termination of our former Chief Executive Officer, which included $1.1 million to be paid pursuant to the termination of his employment agreement and $1.8 million pursuant to his

 

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supplemental retirement plan. We cannot assure you that we will generate net income or achieve profitability in the future.

Future economic growth in our Florida market area is likely to be slower compared to previous years.

The State of Florida’s population growth has historically exceeded national averages. Consequently, the state has experienced substantial growth in population, new business formation and public works spending. Due to the moderation of economic growth and migration into our market area and the downturn in the real estate market, management believes that growth in our market area will be restrained in the near term. Growth in our mortgage loan portfolio has been adversely affected by a slowing in residential real estate sales activity in our markets. Specifically, in 2007, the inventory of homes for sale in our market area increased to nearly a three-year supply. A decrease in existing and new home sales decreases lending opportunities and negatively affects our income. Our customers who are builders and developers face greater difficulty in selling homes in markets where these trends are more pronounced. Consequently, we are facing a sharp increase in delinquencies and non-performing assets as these builders and developers are forced to default on their loans with us. We do not anticipate that the housing market will improve in the near-term, and accordingly, this could lead to additional valuation adjustments on our loan portfolios and real estate owned as we continue to reassess the market value of our loan portfolio, the losses associated with the loans in default and the net realizable value of real estate owned.

We expect to grant stock options and/or adopt additional stock-based benefit plans after the stock offerings, which would increase our costs and reduce our income. Such awards may also dilute your ownership interest.

Following the completion of the stock offerings, we expect to grant stock options to purchase shares of our common stock to our executive officers and employees. Under existing stock options plans, we have authority to grant up to 427,301 stock options to our executive officers and employees. In addition, in the future, we may adopt one or more new stock-based benefit plans under which our directors, executive officers and employees would be eligible to receive shares of common stock and/or stock options.

Public companies must expense the grant-date fair value of stock awards and stock options. In addition, if such awards or options are considered variable in nature, public companies must revalue their estimated compensation costs at each subsequent reporting period and may be required to recognize additional compensation expense at these dates. When we record an expense for the grant of stock options and other stock awards using the fair value method as described in applicable accounting rules, we may incur significant compensation and benefits expense.

Awards under stock-based benefit plans will be funded through either open market purchases of common stock or from the issuance of authorized but unissued shares of common stock. Shareholders would experience a reduction in ownership interest in the event newly issued shares are used to fund stock options or awards of common stock.

We may not be able to continue to support the realization of our deferred tax asset.

We calculate income taxes in accordance with Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes,” which requires the use of the asset and liability method. In accordance with Statement of Financial Accounting Standards No. 109, we regularly assess available positive and negative evidence to determine whether it is more likely than not that our deferred tax asset balances will be recovered from reversals of deferred tax liabilities, potential utilization of net operating loss carrybacks, tax planning strategies and future taxable income. At March 31, 2008, our deferred tax asset was $9.1 million, for which we have not established a valuation allowance. We recognized the deferred tax asset because management believes, based on detailed financial projections, that it is more likely than not, we will have sufficient future earnings to utilize this asset to offset future income tax liabilities. Realization of a deferred tax asset requires us to apply significant judgment and is inherently speculative because it requires the future occurrence of circumstances that cannot be predicted with certainty. We cannot assure you that we will achieve sufficient future taxable income as the basis for the ultimate realization of our deferred tax asset and therefore we may have to establish a full or partial valuation allowance at

 

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some point in the future. If we determine that a valuation allowance is necessary, this would require us to incur a charge to operations that would adversely affect our capital position. At March 31, 2008, we had $1.6 million of allowable deferred tax assets for regulatory capital purposes. There is no assurance that we will be able to continue to recognize any or all of the deferred tax asset for regulatory capital purposes.

Our ability to use net operating losses, future recognized losses on the sale of our assets, or certain future tax deductions may be subject to certain limitations.

In general, under Section 382 of the Internal Revenue Code of 1986, as amended, a loss corporation, as defined therein, that undergoes an “ownership change” is subject to limitations on its ability to use its pre-change net operating losses to offset future taxable income. A corporation that undergoes an “ownership change” also may be subject to limitations on its ability to use losses recognized in the five-year period after an ownership change on assets with built-in losses on the date of the ownership change, and may be limited in its ability to use deductions for bad debts if such deductions are attributable to the 12-month period after an ownership change.

If we are a loss corporation and we undergo an ownership change in connection with the stock offerings, net operating losses that arise in our current taxable year, any losses from our assets with built-in losses, and bad debt deductions on debt we hold could be subject to the limitations imposed by Section 382 of the Internal Revenue Code. Further changes in our stock ownership, some of which are outside our control, could result in an ownership change under Section 382 of the Internal Revenue Code some time after the stock offerings. If we become subject to the limitations imposed by Section 382 of the Internal Revenue Code, this could have the effect of increasing our tax liability and reducing after-tax net income and available cash reserves.

We make and hold in our portfolio a significant number of land acquisition, development and construction loans, which are considered to have greater credit risk than other types of loans typically made by financial institutions.

We offer land acquisition, development and construction loans for builders and developers. As of March 31, 2008, approximately $62.1 million, or 11%, of our gross loan portfolio represented loans for which the related property is neither presold nor preleased. The majority of these loans are for residential developments. These land acquisition, development and construction loans are considered more risky than other types of residential mortgage loans. The primary credit risks associated with land acquisition, development and construction lending are underwriting, project risks and market risks. Project risks include cost overruns, borrower credit risk, project completion risk, general contractor credit risk, and environmental and other hazard risks. Market risks are risks associated with the sale of the completed residential units. They include affordability risk, which means the risk of affordability of financing by borrowers, product design risk, and risks posed by competing projects. While we believe we have established adequate reserves on our financial statements to cover the credit risk of our land acquisition, development and construction loan portfolio, there can be no assurance that losses will not exceed our reserves, which could adversely impact our future earnings.

Our allowance for loan losses may not be sufficient to absorb losses from loan defaults, which could have a material adverse effect on our business.

Our success depends to a significant extent upon the quality of our assets, particularly loans. In originating loans, there is a substantial likelihood that credit losses will be experienced. The risk of loss will vary with, among other things, general economic conditions, the type of loan being made, the creditworthiness of the borrower over the term of the loan and, in the case of a collateralized loan, the quality of the collateral for the loan.

Our loan customers may not repay their loans according to the terms of these loans, and the collateral securing the payment of these loans may be insufficient to assure repayment. As a result, we may experience significant loan losses, which could have a material adverse effect on our operating results. Management makes various assumptions and judgments about the collectibility of our loan portfolio, including the creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for the repayment of many of our loans. We maintain an allowance for loan losses in an attempt to cover any loan losses that may occur. In determining the size of the allowance, we primarily base our evaluation on a review of our loan portfolio and the

 

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known risks contained in the loan portfolio, composition and growth of the loan portfolio, Florida real estate values and economic factors. However, the determination of an appropriate level of loan loss allowance is an inherently difficult process and is based on numerous assumptions.

If our assumptions are wrong, our current allowance may not be sufficient to cover future loan losses, and adjustments may be necessary to allow for different economic conditions or adverse developments in our loan portfolio. Significant additions to our allowance would materially decrease our net income. As a result of a difficult real estate market, we increased our provision for loan losses to $2.0 million for the quarter ended March 31, 2008 and $16.4 million for the year ended December 31, 2007, as compared to a provision for loan losses of $150,000 for the first quarter of 2007 and $639,000 for the year ended December 31, 2006. We can make no assurance that our allowance will be adequate to cover future loan losses given current and future market conditions. In addition, our regulators periodically review our allowance for loan losses and may require us to increase our provision for loan losses or recognize further loan charge-offs, based on judgments different than those of our management. Any increase in our allowance for loan losses or loan charge-offs as required by these regulatory agencies would have a negative effect on our operating results.

Our net interest income could be negatively affected by the Federal Reserve’s recent interest rate adjustments, as well as by competition in our primary market area.

As a financial institution, our earnings and cash flows are significantly dependent upon our net interest income, which is the difference between the interest income that we earn on interest-earning assets, such as loans and investment securities, and the interest expense that we pay on interest-bearing liabilities, such as deposits and borrowings. Therefore, any change in general market interest rates, including changes resulting from changes in the Federal Reserve’s fiscal and monetary policies, affects us more than non-financial institutions and could influence not only the interest we receive on loans and investment securities and the interest we pay on deposits and borrowings, but also (1) our ability to originate loans and obtain deposits, (2) the fair value of our financial assets and liabilities, and (3) the average duration of our assets and liabilities. If the interest rates on deposits and other borrowings increase at a faster rate than the interest rates on our loans and other investments, our net interest income, and therefore earnings, would be adversely affected. Earnings could also be adversely affected if the interest rates on our loans and other investments fall more quickly than the interest rates on deposits and other borrowings.

In response to the dramatic deterioration of the subprime, mortgage, credit and liquidity markets, the Federal Reserve recently has taken action on seven occasions to reduce interest rates by a total of 325 basis points since September 2007, and may reduce rates again, which likely will reduce our net interest income for 2008. Any reduction in our net interest income would negatively affect our business, financial condition, liquidity, operating results, cash flows and/or the price of our securities.

Our ability to service our debt depends on capital distributions from Federal Trust Bank, which are subject to regulatory restrictions.

Federal Trust Corporation is a savings and loan holding company and relies upon dividends from Federal Trust Bank to fund a significant portion of its operations. We use dividends from Federal Trust Bank to service our debt obligations, and our ability to service our debt is further subject to restrictions under our indentures and loan covenants. Federal Trust Bank’s ability to pay dividends or make other capital distributions to Federal Trust Corporation is subject to the regulatory authority of the Office of Thrift Supervision and the Federal Deposit Insurance Corporation. Because of Federal Trust Bank’s operating losses for the quarter ended March 31, 2008 and the year ended December 31, 2007, and because of additional operating restrictions that the Office of Thrift Supervision has placed on Federal Trust Bank and Federal Trust Corporation, Federal Trust Bank cannot pay dividends to Federal Trust Corporation without prior regulatory approval. At March 31, 2008, Federal Trust Corporation had $44.9 million in unconsolidated cash and other liquid assets.

Our business may suffer if we lose key employees.

 

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Our success is largely dependent on the personal contacts of our officers and employees in our market areas. If we lose key employees, temporarily or permanently, our business could be negatively impacted. In particular, our business would be adversely affected if our key employees went to work for our competitors. Our future success depends on the continued contributions of our existing senior management personnel, including our: President and Chief Executive Officer, Dennis T. Ward; Executive Vice President and Chief Financial Officer, Gregory E. Smith; Executive Vice President and Senior Loan Officer, Mark E. McRae; Executive Vice President, Branch Administration, Jennifer B. Brodnax; and Senior Vice President and Chief Credit Officer, Lindsay Sandham. We have entered into severance agreements with Messrs. Ward, Smith and McRae and Ms. Brodnax, which contain non-competition provisions to help alleviate some of this risk.

We are subject to extensive laws and regulations that could limit or restrict our activities. Changes in such laws and regulations could have a negative effect on our business.

As a unitary savings and loan holding company, Federal Trust Corporation is regulated primarily by the Office of Thrift Supervision. Our current subsidiaries are regulated primarily by the Office of Thrift Supervision, the Federal Deposit Insurance Corporation and the Florida Office of Financial Regulation. We operate in a highly regulated industry and are subject to examination, supervision and comprehensive regulation by various federal and state agencies. Our compliance with these regulations is costly and restricts certain of our activities, including payment of dividends, mergers and acquisitions, incurring debt, investments, loans and interest rates charged, interest rates paid on deposits and locations of offices. We are also subject to capitalization guidelines established by our regulators, which require us to maintain adequate capital to support our growth.

Such laws and regulations govern the activities in which companies may engage and are intended primarily for the protection of the federal deposit insurance fund and depositors. These regulatory authorities have extensive discretion in connection with their supervisory and enforcement activities, including the imposition of restrictions on operations, the classification of assets and the adequacy of a financial institution’s allowance for loan losses. Any change in such regulation and oversight, whether in the form of regulatory policy, regulations, or legislation, could have a material effect on us.

Our business also is subject to laws, rules and regulations regarding the disclosure of non-public information about our customers to non-affiliated third parties. Our operations on the Internet are not currently subject to direct regulation by any government agency in the United States beyond regulations applicable to businesses generally. A number of legislative and regulatory proposals currently under consideration by the federal, state and local governmental organizations may lead to laws or regulations concerning various aspects of our business on the Internet, including: user privacy, taxation, content, access charges, liability for third-party activities and jurisdiction. The adoption of new laws or a change in the application of existing laws may decrease the use of the Internet, increase our costs or otherwise adversely affect our business.

The laws and regulations applicable to the banking industry could change at any time, and we cannot predict the effects of these changes on our business and profitability. Additionally, we cannot predict the effect of any legislation that may be passed at the state or federal level in response to the recent deterioration of the subprime, mortgage, credit and liquidity markets. Because government regulation greatly affects the business and financial results of all financial institutions and their holding companies, our cost of compliance could adversely affect our ability to operate profitably.

Our financial condition and results of operations are reported in accordance with accounting principles generally accepted in the United States of America. While not affecting economic results, future changes in accounting principles issued by the Financial Accounting Standards Board could affect our earnings as reported under accounting principles generally accepted in the United States of America. As a public company, we are also subject to the corporate governance standards set forth in the Sarbanes-Oxley Act of 2002, as well as applicable rules and regulations promulgated by the Securities and Exchange Commission and the American Stock Exchange. Complying with these standards, rules and regulations may impose administrative costs and burdens on us.

 

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Additionally, political conditions could impact our earnings. Acts or threats of war or terrorism, as well as actions taken by the United States or other governments in response to such acts or threats, could impact the business and economic conditions in which we operate.

Competition from financial institutions and other financial service providers may adversely affect our asset growth and profitability.

Our primary market area is the urban areas of Orange, Seminole, Volusia, Lake, Flagler and Osceola Counties, Florida. The banking business in these areas is highly competitive and we experience competition from many other financial institutions. Our subsidiary, Federal Trust Bank, experiences competition in both lending and attracting funds from other banks, savings institutions, and non-bank financial institutions located within our market area, many of which are significantly larger institutions. Non-bank institutions competing for deposits and deposit type accounts include mortgage bankers and brokers, finance companies, credit unions, securities firms, money market funds, life insurance companies and mutual funds. For loans, we encounter competition from other banks, savings banks, finance companies, mortgage bankers and brokers, insurance companies, small loan and credit card companies, credit unions, pension trusts and securities firms.

We compete with these institutions both in attracting deposits and in making loans. In addition, to maintain or increase our customer base, we have to attract new customers from other existing financial institutions and from new residents entering our market area. Many of our competitors are well-established, larger financial institutions. While we believe we can and do successfully compete with these other financial institutions in our primary markets, we may face a competitive disadvantage as a result of our smaller size, lack of geographic diversification and inability to spread our marketing costs across a broader market. Although we compete by concentrating our marketing efforts in our primary markets with local advertisements, personal contacts, and greater flexibility and responsiveness in working with local customers, we can give no assurance that this strategy will be successful.

We rely on other companies to provide key components of our business infrastructure and failures in this infrastructure could interrupt our operations or increase the cost of doing business.

Third parties provide key components of our business infrastructure such as banking services, processing, Internet connections and network access. Any disruption in such services provided by these third parties to handle current or higher volumes of use could adversely affect our ability to deliver products and services to clients and otherwise to conduct business. Technological or financial difficulties of a third party service provider could adversely affect our business to the extent those difficulties result in the interruption or discontinuation of services provided by that party. We may not be insured against all types of losses as a result of third party failures and our insurance coverage may be inadequate to cover all losses resulting from system failures or other disruptions. Failures in our business infrastructure could interrupt our operations or increase the cost of doing business.

We may face risks with respect to future expansion and mergers or acquisitions.

As a part of our strategy, in the future, we may seek to increase the size of our franchise through branch expansion and growth, and by aggressively pursuing business development opportunities. We may also consider and enter into new lines of business or offer new products or services. We also may receive future inquiries and have discussions with financial institutions that are interested in acquiring us. Acquisitions and mergers involve a number of risks, including:

 

   

the time and costs associated with identifying and evaluating potential merger and acquisition partners;

 

   

the estimates and judgments used to evaluate credit, operations, management and market risks with respect to the target institution may not be accurate;

 

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the time and costs of evaluating new markets, hiring experienced local management and opening new offices, and the time lags between these activities and the generation of sufficient assets and deposits to support the costs of the expansion;

 

   

our ability to finance an acquisition and possible dilution to our existing shareholders;

 

   

the diversion of our management’s attention to the negotiation of a transaction, and the integration of the operations and personnel of the combining businesses;

 

   

entry into new markets where we lack experience;

 

   

the introduction of new products and services into our business;

 

   

the incurrence and possible impairment of goodwill associated with an acquisition and possible adverse short-term effects on our results of operations; and

 

   

the risk of loss of key employees and customers.

To carry out some of our expansion plans, we would be required to obtain permission from the Office of Thrift Supervision. Applications for the acquisition of existing thrifts and banks are submitted to the federal and state bank regulatory agencies for their approval. The future climate for regulatory approval is impossible to predict. Regulatory agencies could prohibit or otherwise significantly restrict our expansion plans, as well as those of our subsidiaries, which could limit our ability to increase revenue.

Additionally, we may incur substantial costs to expand, and we can give no assurance that such expansion will result in the levels of profits we seek. There can be no assurance that, integration efforts for any future mergers or acquisitions will be successful. Also, we may issue equity securities, including common stock and securities convertible into shares of our common stock in connection with future acquisitions, which could cause ownership and economic dilution to our current shareholders. There is no assurance that, following any future merger or acquisition, our integration efforts will be successful or that our company, after giving effect to the acquisition, will achieve financial performance comparable to or better than our historical experience.

Future sales of our common stock could further depress the price of our common stock.

Sales of a substantial number of shares of our common stock in the public market by our shareholders, or the perception that such sales are likely to occur, could cause the market price of our common stock to decline.

Various factors may make takeover attempts more difficult to achieve.

Provisions of our Restated Articles of Incorporation and Bylaws, federal law and regulations, Florida law and various other factors may make it more difficult for companies or persons to acquire control of Federal Trust Corporation without the consent of our Board of Directors. You may want a takeover attempt to succeed because, for example, a potential acquiror could offer a premium over the then-prevailing price of our common stock. Factors that may discourage takeover attempts or make them more difficult include:

 

   

Florida statutes that restrict voting rights of shareholders who acquire certain amounts of our shares of common stock, that restrict transactions with certain shareholders and that allow a company to not require cumulative voting in the election of directors;

 

   

provisions in our Restated Articles of Incorporation that provide for staggered terms for our Board of Directors and that restrict transactions with certain shareholders;

 

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provisions in our Bylaws regarding the timing and content of shareholder proposals and nominations and qualification for service on the Board of Directors;

 

   

provisions in our Bylaws regarding the Board of Directors’ ability to declare a stock dividend consisting of a future right to purchase common stock, at the Board of Directors’ discretion, upon the acquisition of 15% of our outstanding shares of common stock; and

 

   

federal law and regulations that restrict the acquisition of control of a federal savings institution without prior written approval or non-objection from the Office of Thrift Supervision.

See “Restrictions on Acquisition of Federal Trust Corporation” for a complete discussion of the applicable restrictions on our ability to be acquired.

Risks Related to the Rights Offering

The future price of the shares of common stock may continue to be less than the $0.95 purchase price per share in the rights offering.

If you exercise your subscription rights to purchase shares of common stock in the rights offering, you may not able to sell them later at or above the $0.95 purchase price in the rights offering. The actual market price of our common stock could be subject to wide fluctuations in response to numerous factors, some of which are beyond our control. These factors include, among other things, actual or anticipated variations in our costs of doing business, operating results and cash flow, the nature and content of our earnings releases and our competitors’ earnings releases, changes in financial estimates by securities analysts, business conditions in our markets and the general state of the securities markets and the market for other financial stocks, changes in capital markets that affect the perceived availability of capital to companies in our industry, governmental legislation or regulation, currency and exchange rate fluctuations, as well as general economic and market conditions, such as downturns in our economy and recessions.

Once you exercise your subscription rights, you may not revoke them. If you exercise your subscription rights and, afterwards, the public trading market price of our shares of common stock continues to be below the subscription price, you will have committed to buying shares of our common stock at a price above the prevailing market price and could have an immediate unrealized loss. Our common stock is traded on the American Stock Exchange under the ticker symbol “FDT,” and the last reported sales price of our common stock on the American Stock Exchange on             , 2008 was $             per share. We cannot assure you that the market price of our shares of common stock will not decline further after you exercise your subscription rights. Moreover, we cannot assure you that following the exercise of your subscription rights you will be able to sell your common stock at a price equal to or greater than the subscription price.

The subscription price determined for the rights offering is not an indication of the fair value of our common stock.

In determining the subscription price, the Board of Directors considered a number of factors, including: the price at which our shareholders might be willing to participate in the rights offering, historical and current trading prices for our common stock, the need for liquidity and capital, negotiations with standby purchasers and the desire to provide an opportunity to our shareholders to participate in the rights offering on a pro rata basis. In conjunction with its review of these factors, the Board of Directors also reviewed our history and prospects, including our past and present earnings, our prospects for future earnings, our current financial condition and regulatory status. Our Board of Directors received a fairness opinion dated May 21, 2008, from Stifel, Nicolaus & Company, Incorporated, our financial and marketing advisor, to the effect that, as of the date of such opinion, and subject to the assumptions and qualifications therein, the financial terms of the stock offerings were fair to Federal Trust Corporation from a financial point of view. The per share subscription price is not necessarily related to our book value, net worth or any other established criteria of fair value and may or may not be considered the fair value of our common stock to

 

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be offered in the rights offering. After the date of this prospectus, our shares of common stock may trade at prices below the subscription price.

The stock offerings may reduce your percentage ownership in Federal Trust Corporation.

Even if our current shareholders fully exercise their basic subscription rights, they will experience dilution to their percentage ownership of our outstanding shares of common stock as a result of the stock offerings. In addition, current shareholders who do not exercise a certain level of over-subscription rights, will experience dilution as a result of the sale of shares to standby purchasers, and may experience further dilution as a result of the issuance of warrants to the standby purchasers. Standby purchasers will be able to purchase additional shares of our common stock beyond those shares issuable upon exercise of the subscription rights. We are obligated to sell additional shares to standby purchasers and issue warrants to two of the standby purchasers because the standby purchasers have a right to purchase 21,053,280 shares and receive 10,000,000 warrants, even if we issue all of the shares issuable upon exercise of the basic subscription privilege and the over-subscription privilege.

After the consummation of the rights offering and the sale of additional shares of common stock to the standby purchasers, a significant amount of our common stock will be concentrated in the hands of a few of our shareholders. Your interests may not be the same as the interests of these shareholders.

Upon the completion of the rights offering and the sale of additional shares of common stock to the standby purchasers, if we only sell $30.0 million of shares, the standby purchasers would collectively own approximately 62.5% of our common stock, and would have warrants to purchase an additional 24.4% of our common stock. As a result, if the standby purchasers and their respective affiliates were to elect to act together, they would have the ability to exercise control over matters generally requiring shareholder approval. These matters include the election of directors and the approval of significant corporate transactions, including potential mergers, consolidations or sales of all or substantially all of our assets. Your interests as a holder of the common stock may differ from the interests of the standby purchasers and their affiliates.

You may not revoke your exercise of rights; we may terminate the rights offering.

Once you have exercised your subscription rights, you may not revoke your exercise even if you learn information about us that you consider to be unfavorable. We may terminate the rights offering at our discretion, including without limitation if we fail to sell at least 31,578,948 shares and raise at least $30.0 million in the stock offerings. If we terminate the rights offering, neither we nor the subscription agent will have any obligation to you with respect to the rights except to return any payment received by the subscription agent, without interest or penalty.

You will not be able to sell the shares you buy in the rights offering until you receive your stock certificates or your account is credited with the shares of common stock.

If you purchase shares of our common stock in the rights offering by submitting a rights certificate and payment, we will mail you a stock certificate as soon as practicable after [Expiration Date], or such later date as to which the rights offering may be extended. If your shares are held by a custodian bank, broker, dealer or other nominee and you purchase shares of our common stock, your account with your nominee will be credited with the shares of common stock you purchased in the rights offering as soon as practicable after the expiration of the rights offering, or such later date as to which the rights offering may be extended. Until your stock certificates have been delivered or your account is credited, you may not be able to sell your shares even though the common stock issued in the rights offering will be listed for trading on the American Stock Exchange. The stock price may decline between the time you decide to sell your shares and the time you are actually able to sell your shares.

 

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Although publicly traded, our common stock has substantially less liquidity than the average liquidity of stocks listed on the American Stock Exchange.

Although our common stock is listed for trading on the American Stock Exchange our common stock has substantially less liquidity than the average liquidity for companies listed on the American Stock Exchange. A public trading market having the desired characteristics of depth, liquidity and orderliness depends on the presence in the marketplace of willing buyers and sellers of our common stock at any given time. This marketplace depends on the individual decisions of investors and general economic and market conditions over which we have no control. This limited market may affect your ability to sell your shares on short notice, and the sale of a large number of shares at one time could temporarily depress the market price of our common stock. For these reasons, our common stock should not be viewed as a short-term investment.

The market price of our common stock may fluctuate in the future, and this volatility may be unrelated to our performance. General market price declines or overall market swings in the future could adversely affect the price of our common stock, and the current market price may not be indicative of future market prices.

We have broad discretion in the use of proceeds of the stock offerings.

Other than an investment in Federal Trust Bank, we have not designated the anticipated net proceeds of the stock offerings for specific uses. Accordingly, our management will have considerable discretion in the application of the net proceeds of the stock offerings and you will not have the opportunity, as part of your investment decision, to assess whether the proceeds are being used appropriately. See “Use of Proceeds.”

 

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements, which can be identified by the use of words such as “estimate,” “project,” “believe,” “intend,” “anticipate,” “plan,” “seek,” “expect” and words of similar meaning. These forward-looking statements include, but are not limited to:

 

   

statements of our goals, intentions and expectations;

 

   

statements regarding our business plans, prospects, growth and operating strategies;

 

   

statements regarding the asset quality of our loan and investment portfolios; and

 

   

estimates of our risks and future costs and benefits.

These forward-looking statements are based on current beliefs and expectations of our management and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change.

The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements:

 

   

general economic conditions, either nationally or in our market areas, that are worse than expected;

 

   

competition among depository and other financial institutions;

 

   

inflation and changes in the interest rate environment that reduce our margins or reduce the fair value of financial instruments;

 

   

adverse changes in the securities markets;

 

   

changes in laws or government regulations or policies affecting financial institutions, including changes in regulatory fees and capital requirements;

 

   

our ability to enter new markets successfully and capitalize on growth opportunities;

 

   

our ability to successfully integrate acquired entities, if any;

 

   

changes in consumer spending, borrowing and savings habits;

 

   

changes in demand for new housing in our market area;

 

   

unfavorable changes in economic conditions affecting housing markets, credit markets, real estate values or oil and gas prices, either nationally or locally;

 

   

changes in accounting policies and practices, as may be adopted by the bank regulatory agencies and the Financial Accounting Standards Board; and

 

   

changes in our organization, compensation and benefit plans.

 

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Because of these and other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements. Please see “Risk Factors” beginning on page  16.

USE OF PROCEEDS

Although we cannot determine what the actual net proceeds from the sale of the shares of common stock in the stock offerings will be until the stock offerings are completed, we estimate that the aggregate net proceeds from the stock offerings will be between $26.9 million and $31.9 million. Subject to Office of Thrift Supervision approval of or non-objection to the capital plan we are adopting, described in “Supervision and Regulation—Cease and Desist Orders,” we intend to invest between $15.0 million and $20.0 million of the net proceeds in Federal Trust Bank to improve its regulatory capital position, and retain the remainder of the net proceeds. The net proceeds we retain may be used for the repayment of debt and general corporate purposes and further investment in Federal Trust Bank, if required by the Office of Thrift Supervision or if we otherwise determine to make such a further investment. Other than an investment in Federal Trust Bank, we currently have no arrangements or understandings regarding any specific use of proceeds.

The net proceeds may vary because total expenses relating to the offering may be more or less than our estimates. For example, our expenses will increase if our current shareholders do not purchase shares of common stock in the rights offering, but instead these shares are sold to standby purchasers.

MARKET FOR THE COMMON STOCK AND DIVIDEND INFORMATION

Federal Trust Corporation’s shares of common stock trade on the American Stock Exchange under the trading symbol “FDT.”

The development of a public market having the desirable characteristics of depth, liquidity and orderliness depends on the existence of willing buyers and sellers, the presence of which is not within our control or that of any market maker. The number of active buyers and sellers of our common stock at any particular time may be limited, which may have an adverse effect on the price at which our common stock can be sold. There can be no assurance that persons purchasing the common stock will be able to sell their shares at or above the $0.95 price per share in the stock offerings. Purchasers of our common stock should have long-term investment intent and should recognize that there may be a limited trading market in our common stock.

The following table sets forth the high and low trading prices for shares of our common stock and cash dividends paid per share for the periods indicated. As of [Record Date], there were [record shares] shares of common stock issued and outstanding.

 

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Year Ending December 31, 2008

   High    Low    Cash Dividends
Paid Per Share

Second quarter (through             )

   $      $      $ —  

First quarter

     2.95      1.12      —  

Year Ended December 31, 2007

   High    Low    Cash Dividends
Paid Per Share

Fourth quarter

   $ 5.10    $ 2.05    $ —  

Third quarter

     8.25      4.30      —  

Second quarter

     10.10      8.10      0.04

First quarter

     10.37      9.71      0.04

Year Ended December 31, 2006

   High    Low    Cash Dividends
Paid Per Share

Fourth quarter

   $ 10.50    $ 9.77    $ 0.04

Third quarter

     11.05      10.36      0.05

Second quarter

     12.15      10.00      0.04

First quarter

     12.52      9.77      0.04

On             , 2008, the most recent practicable date before the date of this prospectus, the closing price of our common stock as reported on the American Stock Exchange was $             per share. As of the close of business on the record date, [Record Date], Federal Trust Corporation had approximately              shareholders of record. This number does not include the number of persons or entities that hold our common stock in nominee or “street” name through various brokerage firms, banks and other nominees.

We discontinued paying cash dividends on our shares of common stock during the quarter ended September 30, 2007. Currently, we have no plans to resume the payment of cash dividends on our shares of common stock.

Under the rules of the Office of Thrift Supervision, Federal Trust Bank is not permitted to make a capital distribution if, after making such distribution, it would be undercapitalized. The Office of Thrift Supervision has informed Federal Trust Bank that it cannot pay dividends to Federal Trust Corporation without first receiving regulatory approval of such payments. In addition, the cease and desist orders with the Office of Thrift Supervision contain a similar restriction. For information concerning additional federal and state law and regulations regarding the ability of Federal Trust Bank to make capital distributions, including the payment of dividends to Federal Trust Corporation, see “Supervision and Regulation—Federal Banking Regulation.”

The Office of Thrift Supervision has further informed Federal Trust Corporation that it cannot declare or pay any dividend without first receiving regulatory approval. Unlike Federal Trust Bank, we are not otherwise restricted by Office of Thrift Supervision regulations on the payment of dividends to our shareholders, although the source of dividends will depend on the net proceeds retained by us and earnings and dividends from Federal Trust Bank. However, we are subject to state law limitations on the payment of dividends. Florida law generally restricts a corporation from paying dividends if (i) it would not be able to pay its debts as they become due in the usual course of business, or (ii) its total assets would be less than the sum of its total liabilities plus the amount that would be needed, if the corporation were to be dissolved at the time of payment of the dividend, to satisfy the preferential rights upon dissolution of shareholders whose preferential rights are superior to those receiving the dividend.

 

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CAPITALIZATION

The following table presents our historical consolidated capitalization at March 31, 2008 and our pro forma consolidated capitalization after giving effect to the receipt of net proceeds from the stock offerings, assuming in the alternative that the minimum and maximum of the offered shares are sold. The table also sets forth the historical regulatory capital ratios of Federal Trust Bank at March 31, 2008, and the pro forma regulatory capital ratios of Federal Trust Bank, assuming the receipt by Federal Trust Bank of $15.0 million of net proceeds from the stock offerings regardless of whether the minimum or maximum number of shares is sold in the stock offerings, and further assuming that $10.0 million of the proceeds received by Federal Trust Bank were invested in assets with a risk weighting of 20%, and $5.0 million were invested in assets with a risk weighting of 50% ($ in thousands).

 

     Historical at
March 31, 2008
    $0.95 Per Share Pro Forma  
       31,578,948
Shares
    36,842,105
Shares
 

Deposits

   $ 454,043     $ 454,043     $ 454,043  

Federal Home Loan Bank advances

     165,000       165,000       165,000  

Junior subordinated debentures

     5,155       5,155       5,155  

Other borrowings

     16       16       16  
                        

Total deposits and borrowed funds

   $ 624,214     $ 624,214     $ 624,214  
                        

Shareholders’ equity:

      

Common stock $0.01 par value, 65,000,000 shares authorized (post-shareholder approval); shares to be issued as reflected (1)(2)

     94       410       463  

Additional paid-in capital

     44,540       71,131       76,078  

Retained earnings

     (5,974 )     (5,974 )     (5,974 )

Accumulated other comprehensive loss

     (917 )     (917 )     (917 )

Less:

      

Unallocated ESOP shares

     (440 )     (440 )     (440 )
                        

Total shareholders’ equity

   $ 37,303     $ 64,210     $ 69,210  
                        

Total shares outstanding

     [record shares ]     41,015,253       46,278,410  

Total shareholders’ equity as a percentage of total assets

     5.54 %     9.18 %     9.82 %

Regulatory capital ratios of Federal Trust Bank:

      

Core (leverage) capital

     5.03 %     7.13 %     7.13 %

Tier I risk-based capital

     7.69 %     11.03 %     11.03 %

Total risk-based capital

     8.96 %     12.30 %     12.30 %

 

(1)

At March 31, 2008, we had 15,000,000 authorized shares of common stock, par value $0.01 per share. At our 2008 Annual Meeting of Shareholders, held on June 16, 2008, shareholders approved a proposal to amend the Restated Articles of Incorporation to increase the number of authorized shares of common stock to 65,000,000.

 

(2)

The number of shares of common stock to be outstanding after the stock offerings is based on the number of shares outstanding as of [Record Date] and excludes 357,097 shares of our common stock issuable upon exercise of outstanding options on such date, at a weighted average exercise price of $8.24, as well as the 10,000,000 warrants to be issued to the standby purchasers, which will be exercisable at $0.95 per share.

 

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The following table presents our historical consolidated capitalization at December 31, 2007 and our pro forma consolidated capitalization after giving effect to the receipt of net proceeds from the stock offerings, assuming in the alternative that the minimum and maximum of the offered shares are sold. The table also sets forth the historical regulatory capital ratios of Federal Trust Bank at December 31, 2007, and the pro forma regulatory capital ratios of Federal Trust Bank, assuming the receipt by Federal Trust Bank of $15.0 million of net proceeds from the stock offerings, and further assuming that $10.0 million of the proceeds received by Federal Trust Bank were invested in assets with a risk weighting of 20%, and $5.0 million were invested in assets with a risk weighting of 50% ($ in thousands).

 

     Historical at
December 31,
2007
    $0.95 Per Share Pro Forma  
       31,578,948
Shares
    36,842,105
Shares
 

Deposits

   $ 481,729     $ 481,729     $ 481,729  

Federal Home Loan Bank advances

     152,000       152,000       152,000  

Junior subordinated debentures

     5,155       5,155       5,155  

Other borrowings

     16       16       16  
                        

Total deposits and borrowed funds

   $ 638,900     $ 638,900     $ 638,900  
                        

Shareholders’ equity:

      

Common stock $0.01 par value, 65,000,000 shares authorized (post-shareholder approval); shares to be issued as reflected (1) (2)

     94       410       463  

Additional paid-in capital

     44,515       71,106       76,053  

Retained earnings

     (3,755 )     (3,755 )     (3,755 )

Accumulated other comprehensive loss

     (728 )     (728 )     (728 )

Less:

      

Unallocated ESOP shares

     (440 )     (440 )     (440 )
                        

Total shareholders’ equity

   $ 39,686     $ 66,593     $ 71,593  
                        

Total shares outstanding

     [record shares ]     41,015,253       46,278,410  

Total shareholders’ equity as a percentage of total assets

     5.75 %     9.29 %     9.91 %

Regulatory capital ratios of Federal Trust Bank:

      

Core (leverage) capital

     5.38 %     7.42 %     7.42 %

Tier I risk-based capital

     7.83 %     10.92 %     10.92 %

Total risk-based capital

     9.09 %     12.18 %     12.18 %

 

(1)

At March 31, 2008 we had 15,000,000 authorized shares of common stock, par value $0.01 per share. At our 2008 Annual Meeting of Shareholders, held on June 16, 2008, shareholders approved a proposal to amend the Restated Articles of Incorporation to increase the number of authorized shares of common stock to 65,000,000.

 

(2)

The number of shares of common stock to be outstanding after the stock offerings is based on the number of shares outstanding as of [Record Date] and excludes 357,097 shares of our common stock issuable upon exercise of outstanding options on such date, at a weighted average exercise price of $8.24, as well as the 10,000,000 warrants to be issued to the standby purchasers, which will be exercisable at $0.95 per share.

 

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SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA

The summary financial information presented below is derived in part from the consolidated financial statements of Federal Trust Corporation. The information at December 31, 2007 and 2006 and for the years ended December 31, 2007, 2006 and 2005 is derived in part from the audited consolidated financial statements of Federal Trust Corporation that appear in this prospectus. The information at December 31, 2005, 2004 and 2003 and for the years ended December 31, 2004 and 2003 is derived in part from audited consolidated financial statements that do not appear in this prospectus. The information at March 31, 2008 and for the three months ended March 31, 2008 and 2007 is unaudited. However, in the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the results of operations for the unaudited periods have been made. The selected operating data presented below for the three months ended March 31, 2008 are not necessarily indicative of the results that may be expected for the year ending December 31, 2008. The following is only a summary and you should read it in conjunction with the consolidated financial statements and notes beginning on page F-1. ($ in thousands, except per share amounts)

 

     At
March 31,
2008(1)
    At December 31,  
     2007     2006     2005     2004     2003  
     (Dollars in thousands, except per share amounts)  

Selected Financial Condition Data:

            

Total assets

   $ 672,879     $ 690,264     $ 722,964     $ 735,416     $ 603,131     $ 468,198  

Loans, net

     522,551       563,234       603,917       630,827       521,331       398,401  

Securities available for sale

     41,155       52,449       65,558       50,080       41,172       33,615  

Deposits

     454,043       481,729       472,794       471,062       404,116       314,630  

Federal Home Loan Bank advances

     165,000       152,000       179,700       201,700       143,700       107,700  

Stockholders’ equity

     37,303       39,686       54,620       44,141       39,387       26,457  

Book value per share

     3.97       4.22       5.86       5.23       4.86       3.97  

Shares outstanding(2)

     9,436,305       9,393,919       9,319,603       8,443,105       8,101,287       6,656,739  

Equity-to-assets ratio

     5.54 %     5.75 %     7.56 %     6.00 %     6.53 %     5.65 %

 

     At or For the Three Months
Ended
March 31,
    At or For the Years Ended December 31,  
     2008(1)     2007(1)     2007     2006     2005     2004     2003  
     (Dollars in thousands, except per share amounts)  

Selected Operating Data:

              

Interest income

   $ 9,006     $ 10,719     $ 42,486     $ 43,842     $ 33,977     $ 24,609     $ 20,921  

Interest expense

     6,966       7,495       30,797       28,114       19,336       10,851       9,750  
                                                        

Net interest income

     2,040       3,224       11,689       15,728       14,641       13,758       11,171  

Provision for losses on loans

     1,965       150       16,412       639       650       1,180       650  
                                                        

Net interest (loss) income after provision for loan losses

     75       3,074       (4,723 )     15,089       13,991       12,578       10,521  

Other income

     648       476       944       2,226       2,533       2,391       2,358  

Other-than-temporary impairment

         749       —         —         1,055       —    

Other expenses

     4,375       3,439       18,742       12,461       9,791       9,334       8,826  
                                                        

Net (loss) earnings

     (2,219 )     160       (14,163 )     3,410       4,436       3,089       2,777  

Basic (loss) earnings per share

     (0.24 )     0.02       (1.51 )     0.38       0.54       0.43       0.42  

Diluted (loss) earnings per share

     (0.24 )     0.02       (1.51 )     0.37       0.53       0.42       0.41  

Weighted average common shares outstanding

     9,393,919       9,342,093       9,363,223       9,002,900       8,269,423       7,224,069       6,679,936  

Return (loss) on average assets

     (1.28 )%     0.09 %     (1.97 )%     0.46 %     0.66 %     0.59 %     0.64 %

Return (loss) on average equity

     (22.46 )%     1.17 %     (26.83 )%     6.70 %     10.70 %     9.80 %     10.79 %

Net interest margin

     1.27 %     1.89 %     1.74 %     2.26 %     2.30 %     2.80 %     2.73 %

Average equity to average assets ratio

         7.33 %     6.92 %     6.16 %     6.02 %     5.95 %

Dividend payout ratio

     —   %     200 %     —   %     44.74 %     24.03 %     20.36 %     11.81 %

Allowance for loan losses as a percent of loans, net

     2.95 %     0.88 %     2.42 %     0.84 %     0.71 %     0.74 %     0.70 %

 

(1) Ratios at and for the three months ended March 31, 2008 and 2007 are annualized.

 

(2) Net of unallocated Employee Stock Ownership Plan shares of 42,386, 42,386, 31,939, 21,789 and 119,375 as of March 31, 2008, December 31, 2007, 2006, 2005 and 2004, respectively.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

This discussion and analysis reflects our consolidated financial statements and other relevant statistical data. The information in this section has been derived from the audited consolidated financial statements and unaudited consolidated financial statements, which appear beginning on page F-1 of this prospectus. You should read the information in this section in conjunction with the business and financial information regarding Federal Trust Corporation provided in this prospectus.

Overview

For the quarter ended March 31, 2008, we had a net loss of $2.2 million, compared to net earnings of $160,000 for the quarter ended March 31, 2007. On a per share basis, the net loss for the first quarter of 2008 was $.24 per basic and diluted share compared to earnings of $.02 per basic and diluted share for the first quarter of 2007. The primary factors contributing to the results for the first quarter in 2008 were higher levels of non-performing loans, which necessitated an increase in our provision for loan losses, net interest margin compression as well as interest income foregone as a result of nonaccrual loans and legal and foreclosure costs associated with the non-performing loans. In addition, our Federal Deposit Insurance Corporation insurance premium increased $292,000, from $15,000 for the first quarter of 2007 to $307,000 for the first quarter of 2008.

Total assets at March 31, 2008 were $672.9 million, a decrease of $17.4 million, or 2.5%, from December 31, 2007. Net loans declined by $40.7 million, or 7.2% from December 31, 2007 to $522.6 million at March 31, 2008. Total deposits and Federal Home Loan Bank advances at March 31, 2008, were $454.0 million and $165.0 million, respectively, compared to $481.7 million and $152.0 million, respectively, at the end of 2007.

Stockholders’ equity was $37.3 million at March 31, 2008, compared to $39.7 million at December 31, 2007. The book value per share declined to $3.97 at March 31, 2008, from $4.22 at December 31, 2007. We paid no cash dividends in the first quarter of 2008, compared to total cash dividends of $.04 per share in the first quarter of 2007.

For the year ended December 31, 2007, we had a net loss of $14.2 million, compared to net earnings of $3.4 million for 2006. On a per share basis, the net loss for 2007 was $1.51 per basic and diluted share compared to earnings of $.38 per basic and $.37 per diluted share for 2006. The primary factors contributing to the results in 2007 were higher levels of non-performing loans, which necessitated an increase in our provision for loan losses, net interest margin compression associated with a higher cost of deposits as well as foregone interest income as a result of nonaccrual loans and expenses associated with the termination of the contract of our former Chief Executive Officer.

Total assets at December 31, 2007 were $690.3 million, a decrease of $32.7 million, or 4.5%, from December 31, 2006. Net loans declined by $40.7 million, or 6.7% from December 31, 2006 to $563.2 million at December 31, 2007. Total deposits and Federal Home Loan Bank advances at December 31, 2007, were $481.7 million and $152.0 million, respectively, compared to $472.8 million and $179.7 million, respectively at the end of 2006.

Stockholders’ equity was $39.7 million at December 31, 2007, compared to $54.6 million at December 31, 2006. The book value per share declined to $4.22 at December 31, 2007, from $5.86 at December 31, 2006. We paid total cash dividends per share of $.08 per share in 2007, compared to $.17 per share in 2006.

Business Strategy

Our current business strategy is to build a profitable, well capitalized, full-service community bank with operations in Central Florida. As part of this strategy, we have focused on creating a strong community bank branch network serving our primary market area with competitive deposit and loan products. We also emphasize flexible

 

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and personalized services to individual customers and our target customer base of locally owned small-and medium-sized businesses, professional firms, non-profit companies, entrepreneurs and their business interests. Over the last several years, our branch expansion strategy has focused on markets in Central Florida that have favorable growth characteristics. We have completed our short-term expansion plans by opening five de novo branch locations in 2006 and 2007, which brings our total number of branch offices to 11. We will continue to leverage our existing investment in branches to reduce our reliance on wholesale funding sources in favor of lower cost transaction accounts and increase our loan opportunities with our retail and small business customer base.

Our executive management team has changed substantially over the past year, primarily with the addition of Dennis T. Ward, who joined our executive team in February 2007 and was appointed President and Chief Executive Officer in September 2007. We have also hired our Executive Vice President and Senior Loan Officer, Mark E. McRae, our Senior Vice President and Chief Credit Officer, Lindsay Sandham and our Senior Vice President and Special Assets Manager, Edward Walker. The primary strategy of our management team, all of whom have considerable banking experience, is to build core relationships and better utilize our existing franchise to generate future growth when economic conditions improve. During 2007, we also hired a new sales manager for our branches, implemented new training procedures for our staff and focused our efforts on developing a broader range of financial products, in order to establish a framework for an enhanced business and sales culture that will better enable us to service our customers. These initiatives, along with our strategically located branch network, complement our effort to originate loans to retail, commercial and business customers in our Central Florida branch footprint. Our current intention is not to pursue any further purchases of pools of residential real estate loans, which we have pursued in the past.

We believe that our renewed focus on in-market loan originations, coupled with recently strengthened underwriting policies and procedures, will help us originate higher-quality loans with favorable risk-adjusted returns. In light of current market conditions, we have spent considerable effort on early identification and quantification of potential problem assets. Our new management team is working aggressively toward resolving non-performing loans and is establishing a team experienced in problem asset resolution dedicated to managing the workout process. Depending on the type of loan, the underlying collateral and the particular circumstances regarding the credit, we will pursue various strategies to resolve problem loans.

As discussed previously, at March 31, 2008, Federal Trust Bank was classified as “adequately capitalized” for regulatory purposes, and not “well capitalized.” In the immediate term, the primary effect of this classification is that we cannot renew, replace or accept brokered deposits without prior regulatory approval. A total of $60.5 million in brokered deposits will mature during 2008. From December 31, 2007 through March 14, 2008, a total of $16.6 million of brokered deposits matured and were repaid. Of the remaining $43.9 million in brokered deposits that will mature during 2008, $18.8 million will mature through May 31, 2008. On March 14, 2008, we received conditional approval from the Federal Deposit Insurance Corporation to replace up to $16.0 million of brokered deposits through May 31, 2008. Between March 14, 2008 and May 31, 2008, $10.3 million of brokered deposits were replaced when they matured.

Similarly, as a result of the Federal Home Loan Bank of Atlanta’s assessment of our recent financial condition, we will not be able to access additional advances from the Federal Home Loan Bank. At March 31, 2008, our total Federal Home Loan Bank advances were $165.0 million. The inability to access these sources of funds places significant limitations on our ability to fund new loans, and requires us to generate liquidity from other funding sources to pay deposit withdrawals and to repay existing borrowings as they mature. One of our fixed-rate Federal Home Loan Bank advances, for $12.0 million, is scheduled to mature in December 2008, and 12 convertible advances with a total balance of $97.0 million and with rates ranging from 3.22% to 4.81% are callable during 2008. Although we do not know whether the Federal Home Loan Bank will call these advances with callable dates, due to the current level of market interest rates, we do not anticipate that the convertible advances will be called during 2008. However, subsequent to December 31, 2007, in order to provide additional liquidity and reduce our balance sheet in an effort to again be considered “well capitalized” for regulatory purposes, we sold $12.5 million in residential mortgage loans and $8.3 million of municipal bonds, and we had $43.6 million of overnight liquid assets at the end of March 2008. Through the stock offerings, we are attempting to raise additional capital to increase our liquidity. There is no assurance that we will be able to raise additional capital or reduce Federal Trust Bank’s assets

 

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under favorable terms, if at all. Even if we raise additional capital, we will need to request additional waivers from the Federal Deposit Insurance Corporation with respect to the additional maturing brokered deposits beyond May 31, 2008.

Despite our short-term actions to improve our liquidity and contract our balance sheet, our long-term goal is to transition our balance sheet asset and liability mix to that of a more traditional community bank. We believe that reducing our portfolio of large land acquisition, development and residential loans in favor of smaller commercial business loans, and establishing a lower cost deposit base through a strong retail banking franchise, will be key to our ability to implement our long-term strategy.

Critical Accounting Policies

Our financial condition and results of operations are sensitive to accounting measurements and estimates of matters that are inherently uncertain. A critical accounting policy is one that is both integral to the portrayal of a company’s financial condition and results, and requires difficult, subjective or complex judgments by management. When applying accounting policies in areas that are subjective in nature, we use our best judgments to arrive at the carrying value of certain assets. The most sensitive accounting measurement we apply is related to the valuation of the loan portfolio and the adequacy of the allowance for loan losses.

A number of factors affect the carrying value of the loan portfolio including the calculation of the allowance for loan losses, the value of the underlying collateral, the timing of loan charge-offs and the amount and amortization of loan fees and deferred origination costs. We believe that the determination of the allowance for loan losses represents a critical accounting policy. The allowance for loan losses is maintained at a level management considers to be adequate to absorb probable loan losses inherent in the portfolio, based on evaluations of the collectibility and historical loss experience of loans. Credit losses are charged and recoveries are credited to the allowance. Provisions for loan losses are based on our review of the historical loan loss experience and such factors that, in management’s judgment, deserve consideration under existing economic conditions in estimating probable credit losses.

The allowance for loan losses is based on ongoing assessments of the probable estimated losses inherent in the loan portfolio. Our methodology for assessing the appropriate allowance level consists of several key elements described in the section “Business—Lending Activities – Allowance for Loan Losses.” The allowance for loan losses is also discussed in Notes 1 and 3 to the consolidated financial statements appearing in this prospectus. The significant accounting policies are discussed in Note 1 to the consolidated financial statements.

Comparison of Financial Condition at March 31, 2008 and at December 31, 2007

Total assets at March 31, 2008 were $672.9 million, a decrease of $17.4 million, or 2.5%, from $690.3 million at December 31, 2007. This decrease in total assets during 2008 was part of our strategy to improve our capital position and reduce the size of the balance sheet due to our losses and the resultant decrease in our regulatory capital ratios, combined with our efforts to change our asset/liability mix through a reduction in wholesale loan purchases and borrowed funds. Our portfolio of securities available for sale decreased by $11.3 million, or 21.5%, to $41.2 million at March 31, 2008, from $52.4 million at December 31, 2007. Total loans declined $40.7 million, or 7.2%, to $522.6 million at March 31, 2008, from $563.2 million at December 31, 2007. Residential mortgage loans and residential construction loans declined $20.8 million and $7.0 million, or 5.8% and 31.7%, respectively, from December 31, 2007. In addition, commercial real estate secured loans and land, development and construction loans declined $8.4 million and $11.7 million, or 9.8% and 15.9%, respectively, from December 31, 2007. The funds provided by the sales and payoffs of loans and investments were used to repay brokered deposits and increase our liquidity. Cash and due from bank increased from $8.0 million at December 31, 2007 to $43.6 million at March 31, 2008.

Total deposits at March 31, 2008 were $454.0 million, a decrease of $27.7 million, or 5.7%, from $481.7 million at December 31, 2007. This decrease was primarily the result of a decrease of $11.3 million or 14.0% in interest-bearing demand deposits from $80.3 million at December 31, 2007, to $69.0 million at March 31, 2008.

 

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Time deposits also declined $16.6 million, or 5.1%, to $310.9 million at March 31, 2008, from $327.5 million at December 31, 2007. Included in the decline of time deposits for the three-month period ended March 31, 2008, were $21.4 million in brokered deposits that matured and were not renewed, rolled over or replaced, partially offset by $4.8 million in growth of our retail time deposits from our branch network. Federal Home Loan Bank advances increased $13.0 million, or 8.5%, during 2008 to $165.0 million at March 31, 2008. Total stockholders’ equity decreased $2.4 million in 2008, due primarily to the $2.2 million loss for the three months ended March 31, 2008.

Comparison of Financial Condition at December 31, 2007 and 2006

Total assets at December 31, 2007 were $690.3 million, a decrease of $32.7 million, or 4.5%, from $723.0 million at December 31, 2006. This decrease in total assets during 2007 was part of our strategy to shrink the balance sheet due to our losses and the need to strengthen our regulatory capital ratios, combined with our efforts to change our asset/liability mix through a reduction in wholesale loan purchases and borrowed funds. Decreases in land, development and commercial construction loans as well as residential construction loans represented most of the decrease in total assets. Land, development and commercial construction loans decreased $14.8 million, or 16.7%, and residential construction loans decreased $14.6 million, or 40.0%, from December 31, 2006. In addition to regular principal repayments and a reduction of loan originations in current market conditions, foreclosure actions resulted in a $9.5 million increase in total foreclosed assets, to $9.5 million at December 31, 2007. Our commercial real estate secured loans also decreased $7.6 million, or 8.2%, to $85.5 million at December 31, 2007 and our portfolio of securities available for sale decreased by $13.1 million, or 20.0%, to $52.4 million at December 31, 2007 from $65.6 million at December 31, 2006.

The changes in our sources of funds during 2007 reflected our efforts to reduce our reliance on wholesale funding and build our local customer base in our five new branches that we opened in 2006 and 2007. Total interest-bearing checking accounts increased $28.7 million, or 55.6%, during 2007 to $80.3 million at December 31, 2007. Partially offsetting our increase in these checking accounts was a decrease of $12.3 million, or 3.6%, in higher-costing certificate of deposit accounts and a decrease of $6.9 million, or 10.6%, in money market accounts. Federal Home Loan Bank advances decreased $27.7 million, or 15.4%, during 2007 to $152.0 million at December 31, 2007. Total stockholders’ equity decreased $14.9 million in 2007 due primarily to the $14.2 million loss for the year ended December 31, 2007 and the $752,000 we paid in dividends during the first two quarters of the year.

Lending Activities

Loan Portfolio Composition. Our net loan portfolio, which consists of total loans plus premiums paid for loans purchased, less loans in process, deferred loan origination fees and costs and allowance for loan losses, totaled $522.6 million at March 31, 2008, representing 78% of total assets. At December 31, 2007, our net loan portfolio was $563.2 million, representing 82% of total assets and at December 31, 2006, our net loan portfolio was $603.9 million, or 84% of total assets.

 

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The following table sets forth information on our loan portfolio by type, and the amounts provided include loans held for sale ($ in thousands):

 

     At March 31,
2008
    At December 31,  
       2007     2006     2005     2004     2003  
     Amount     Percent
of Total
    Amount     Percent
of Total
    Amount     Percent
of Total
    Amount     Percent
of Total
    Amount     Percent
of Total
    Amount     Percent
of Total
 

Residential loans:

            

Mortgages

   $ 339,139     61.4 %   $ 359,954     60.3 %   $ 356,133     56.4 %   $ 399,973     56.6 %   $ 374,581     70.8 %   $ 302,083     75.4 %

Lot

     41,650     7.5       39,994     6.7       42,676     6.7       40,203     5.7       41,369     7.8       20,816     5.2  

Construction

     14,974     2.7       21,926     3.7       36,570     5.8       81,572     11.5       5,405     1.0       780     0.2  
                                                                                    

Total residential loans

     395,763     71.6       421,874     70.7       435,379     68.9       521,748     73.8       421,355     79.6       323,679     80.8  

Commercial loans:

                        

Real estate secured

     77,125     14.0       85,492     14.3       93,095     14.7       71,253     10.1       56,267     10.6       47,918     12.0  

Land, development and construction

     62,051     11.2       73,752     12.3       88,586     14.0       90,794     12.8       38,091     7.2       16,524     4.1  

Commercial business

     17,932     3.2       15,866     2.7       15,308     2.4       22,529     3.2       13,257     2.5       11,639     2.9  
                                                                                    

Total commercial loans

     157,108     28.4       175,110     29.3       196,989     31.1       184,576     26.1       107,615     20.3       76,081     19.0  

Consumer loans

     121     —         214     —         125     —         447     0.1       657     0.1       864     0.2  
                                                                                    

Total loans

     552,992     100.00 %     597,198     100.00 %     632,493     100.00 %     706,771     100.00 %     529,627     100.00 %     400,624     100.00 %
                                                

Add (deduct):

                        

Allowance for loan losses

     (15,793 )       (13,869 )       (5,098 )       (4,477 )       (3,835 )       (2,779 )  

Net premiums, discounts, deferred fees and costs

     2,711         3,033         3,567         4,584         3,524         3,346    

Loans in process

     (17,359 )       (23,128 )       (27,045 )       (76,051 )       (7,985 )       (2,790 )  
                                                            

Net loans

   $ 522,551       $ 563,234       $ 603,917       $ 630,827       $ 521,331       $ 398,401    
                                                            

 

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Residential mortgage loans, not including construction and lot loans, continued to comprise the largest group of loans in our loan portfolio, totaling $339.1 million, or 61% of the total loan portfolio at March 31, 2008, down from $360.0 million, or 60% of the total loan portfolio at December 31, 2007. We offer and purchase adjustable rate mortgage loans with maturities up to 30 years. As of March 31, 2008, approximately 91% of our residential loan portfolio consisted of adjustable-rate mortgage loans and 9% were fixed-rate. Fixed-rate loans are generally underwritten to secondary market standards to insure liquidity and interest-rate risk protection. Residential lot loans totaled $41.7 million, or 8% of total loans at March 31, 2008. These loans are secured by developed lots ready for construction of single-family homes. As a result of the softening in the housing market during 2007, we also reduced our residential construction loans to $15.0 million, or 3% of total loans at March 31, 2008, from $36.6 million, or 6% of total loans at the end of 2006. These loans are generally secured by property in Southwest Florida and Central Florida and are underwritten directly to the individual or family for their primary residence or second home.

At March 31, 2008, our loan portfolio included $177.3 million of loans to foreign nationals, of which $104.2 million was to borrowers who reside in the United Kingdom. All of these loans are residential mortgage loans, and are primarily secured by vacation and rental properties near the Orlando resort attractions. Our general strategy with respect to loans to foreign nationals was to originate these loans for retention in our portfolio. We also package and sell pools of such loans in the secondary market. However, with the weak secondary market for residential mortgage loans in 2007, we were not able to sell as many of these loans as we had originally planned. As a result, our portfolio balance of these loans currently exceeds our internal guidelines. Therefore, despite our desire to originate more of these loans, we have discontinued the origination of loans to foreign nationals until we can find purchasers for this type of loan. See “—Non-performing Loans and Foreclosed Assets” for a discussion of the asset quality of our loans to foreign nationals.

Commercial real estate secured loans totaled $77.1 million, or 14% of the total loan portfolio at March 31, 2008, compared to $85.5 million, or 14% of total loans at December 31, 2007. This portfolio includes loans to businesses to finance office, manufacturing or retail facilities. Commercial land, development and construction loans totaled $62.1 million, or 11% of total loans at March 31, 2008, down from $73.8 million, or 12% of total loans at December 31, 2007. The land loans are generally secured by larger parcels of property held for future development. The development and construction loans include loans for the acquisition and development of both residential and commercial projects. The construction loans are made directly to the builders of single and multi-family homes for pre-sold or speculative units. We also finance the construction of commercial facilities, generally for the owner/operator.

Commercial loans totaled $17.9 million and $15.9 million at March 31, 2008 and December 31, 2007, respectively. These loans are generally secured by the assets of the borrower including accounts receivable, inventory and fixed assets, including company owned real estate and are usually personally guaranteed by the owners.

Consumer loans, consisting of installment loans and savings account loans, totaled $121,000 and $214,000 at March 31, 2008 and December 31, 2007, respectively, or less than 1% of the total loan portfolio.

Contractual Repayments. Scheduled contractual principal repayments of loans do not reflect the actual life of such assets. The average life of loans is substantially less than their average contractual terms because of prepayments. In addition, due-on-sale clauses on loans generally give Federal Trust Bank the right to declare a conventional loan immediately due and payable in the event, among other things, that the borrower sells the real property subject to the mortgage and the loan is not repaid. The average life of a mortgage loan tends to be affected by a variety of factors, including changes in real estate values, interest rates and general economic conditions. Residential lot loans generally mature in less than five years and are typically repaid or converted to a construction loan when the owner begins construction of the residence. Construction loans generally mature in one year or less.

 

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The table below shows the contractual maturities of Federal Trust Bank’s loan portfolio at December 31, 2007. Loans that have adjustable rates are shown as amortizing to final maturity rather than when the interest rates are next subject to change. The following table does not include prepayments or scheduled principal repayments ($ in thousands):

 

     Residential    Commercial    Consumer    Total
Loans

Amounts due:

           

Less than one year

   $ 23,111    $ 99,285    $ 164    $ 122,560
                           

One year to three years

     27,562      35,593      35      63,190

Over three years to five years

     31,333      28,588      15      59,936

Over five years to 10 years

     36,587      9,477      —        46,064

Over 10 years to 20 years

     99,420      2,054      —        101,474

Over 20 years

     203,861      113      —        203,974
                           

Total due after one year

     398,763      75,825      50      474,638
                           

Total amounts due

   $ 421,874    $ 175,110    $ 214    $ 597,198
                           

Loans Due After December 31, 2008. The following table sets forth at December 31, 2007, the dollar amount of all loans due after December 31, 2008, classified according to whether such loans have fixed or adjustable interest rates ($ in thousands):

 

     Due after December 31, 2008
     Fixed    Adjustable    Total

Residential loans

   $ 27,976    $ 370,787    $ 398,763

Commercial loans

     36,742      39,083      75,825

Consumer loans

     50      —        50
                    

Total

   $ 64,768    $ 409,870    $ 474,638
                    

Purchase, Origination and Sale of Loans. Florida’s rate of population growth has historically exceeded national averages. The real estate development and construction industries in Florida, however, have been sensitive to cyclical changes in economic conditions and the demand for and supply of residential units. In 2007 and the first quarter of 2008, both the demand for real estate mortgage loans in Florida and home prices in general declined, and the inventory of homes for sale increased to nearly a three-year supply.

Our loan portfolio consists of purchased and internally originated loans. When we acquired loans, the loan packages were generally between $2 million to $25 million in single-family residential mortgages, comprised of new and seasoned adjustable rate mortgage loans. In the past, when we purchased loan pools, we preferred to purchase loans secured by real estate located in Florida, but, because of pricing and the limited number of loan packages available consisting only of Florida loans, we also purchased loans secured by properties outside of Florida. When purchasing loan packages, we underwrote and reviewed each loan in a loan package prior to purchasing the loans. Due to the weak real estate market and decline in residential loan prepayments, we did not purchase any loans during the first quarter of 2008. We purchased $38.3 million in loans during all of 2007, compared to $62.7 million purchased in 2006. During 2007, all of the loans we purchased were secured by residential properties located in Florida. Although we previously purchased loan pools, we do not currently intend to purchase loan pools (either inside or outside of our market area) going forward. See “—Non-performing Loans and Foreclosed Assets” for a discussion of the asset quality of certain construction loans we purchased from Transland Financial Services, Inc.

Loans that Federal Trust Bank and Federal Trust Mortgage Company originate are generally secured by real estate located in our primary lending area of Central Florida. Sources for residential mortgage loan originations include direct solicitation by employed loan originators, depositors and other existing customers, advertising and referrals from

 

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real estate brokers, mortgage brokers and developers. Our residential mortgage loans are originated in accordance with written underwriting standards approved by Federal Trust Bank’s Board of Directors. Most fixed-rate loan originations are eligible for sale to Fannie Mae and other investors in the secondary market. In April 2008, all of Federal Trust Mortgage Company’s residential loan staff was transferred to Federal Trust Bank and certain staff reductions were completed to reflect current market conditions and origination volumes.

Our loan officers and existing customers are the primary source of commercial and commercial real estate loan originations, while depositors and walk-in customers are the primary source of consumer loan originations. In addition, if the size of a particular loan request exceeds our legal or internal lending limit, we may sell a participation in that loan to a correspondent bank. From time to time, we also purchase participations from other correspondent banks. Our commercial and commercial real estate loans are predominately secured by properties located throughout Florida, but we have also originated and participated in loans secured by properties outside the state. At March 31, 2008, and at December 31, 2007, $5.5 million of such loans were secured by property outside of Florida.

The following tables set forth the amount of loans originated, purchased, sold and repaid during the periods indicated ($ in thousands):

 

     For the Three Months Ended March 31,  
     2008     2007  

Originations:

    

Mortgage loans:

    

Loans on existing property

   $ 4,761     $ 13,291  

Land, development and construction

     6,214       17,380  
                

Total mortgage loans

     10,975       30,671  

Commercial loans

     1,492       2,022  

Consumer loans

     29       123  

Total loans originated

     12,496       32,816  

Purchases

     —         13,016  

Total loans originated and purchased

     12,496       45,832  
                

Sales and principal repayments:

    

Loans sold

     12,495       5,352  

Principal repayments and transfers to foreclosed assets

     44,207       48,677  
                

Total loans sold, principal repayments and transfers to foreclosed assets

     56,702       54,029  
                

Decrease in total loans (before net items)

   $ (44,206 )   $ (8,197 )
                

 

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     For the Year Ended December 31,  
     2007     2006     2005     2004     2003  

Originations:

          

Mortgage loans:

          

Loans on existing property

   $ 97,472     $ 45,766     $ 51,285     $ 62,999     $ 44,416  
                                        

Land, development and construction

     59,754       115,817       64,197       66,719       20,681  
                                        

Total mortgage loans

     157,226       161,583       115,482       129,718       65,097  

Commercial loans

     11,606       7,181       8,555       7,337       12,373  

Consumer loans

     264       1,290       478       635       701  
                                        

Total loans originated

     169,096       170,054       124,515       137,690       78,171  

Purchases

     38,286       62,668       207,136       178,482       176,828  
                                        

Total loans originated and purchased

     207,382       232,722       331,651       316,172       254,999  
                                        

Sales and principal repayments:

          

Loans sold

     (8,601 )     (27,972 )     (24,407 )     (28,632 )     (39,560 )

Principal repayments and transfers to foreclosed assets

     (234,076 )     (279,028 )     (130,100 )     (158,537 )     (125,810 )
                                        

Total loans sold, principal repayments and transfers to foreclosed assets

     (242,677 )     (307,000 )     (154,507 )     (187,169 )     (165,370 )
                                        

(Decrease) increase in total loans (before net items)

   $ (35,295 )   $ (74,278 )   $ 177,144     $ 129,003     $ 89,629  
                                        

Non-performing Loans and Foreclosed Assets. When a borrower fails to make a required payment on a loan, we take a number of steps to induce the borrower to cure the delinquency and restore the loan to current status. We attempt to collect the payment by contacting the borrower through our in-staff commercial loan officers or through our third party residential loan servicer. If a payment on a loan has not been received by the end of a grace period, notices are sent with follow-up contacts made thereafter. In many cases, the delinquencies are cured promptly. If the delinquency exceeds 90 days and is not cured through normal collection procedures, more formal measures are instituted to remedy the default, including the commencement of foreclosure proceedings. If foreclosure is effected, the property is sold at a public auction in which we typically participate as a bidder. If we are the successful bidder, the acquired real estate property is then included in our “foreclosed assets” account until it is sold. When assets are acquired through foreclosure, they are recorded at the lower of cost or fair value less estimated selling costs at the date of acquisition and any write-down resulting therefrom is charged to the allowance for loan losses. At March 31, 2008, our foreclosed assets totaled $10.1 million, which included $2.5 million on a vacant parcel in the Florida Panhandle that was intended for a condominium project. The remaining balance includes 27 developed residential lots, 15 single-family residences and 10 condominium and townhouse units. Of these residential properties, 19 residential lots and 12 single-family residences, for a total of $5.6 million, came from loans to two related residential builders whose customers failed to begin construction of their home as originally negotiated, or close on their home purchases when construction was completed. Under federal regulations, we are permitted to finance sales of foreclosed assets by “loans to facilitate,” which may involve more favorable interest rates and terms than generally would be granted under our underwriting guidelines. At March 31, 2008, we had no loans to facilitate the sale of foreclosed assets.

Loans are placed on non-accrual status when, in the judgment of management, the probability of collection of interest is deemed to be insufficient to warrant further accrual of interest. When a loan is placed on non-accrual status, previously accrued, but unpaid interest is reversed from interest income. Our policy is to stop accruing interest on loans as soon as it is determined that repayment of all principal and interest is not likely, and, in any case, where payment of principal or interest is 90 days past due.

 

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Total non-accrual loans at March 31, 2008 were $47.8 million. Included in this total was $8.3 million of loans secured by 35 single-family residences. Of these loans, 17 totaling $3.7 million, were to borrowers who reside in the United Kingdom and substantially all of the homes securing the loans are located in Lake, Polk, Osceola and Orange counties near the Orlando attractions. The remaining balance of $4.6 million is secured by 18 residential properties, of which 14 are located in the state of Florida. The non-accrual total at March 31, 2008, also included loans for $9.1 million to individual borrowers secured by developed residential lots. Of this amount, $4.6 million were loans related to a single subdivision in the Florida Panhandle.

Our non-accrual residential construction loans at March 31, 2008, totaled $6.6 million for loans to individual borrowers, primarily secured by properties located in Lee County in Southwest Florida. These loans were originated by Transland Financial Services, Inc. and acquired by Federal Trust Bank. Included in this amount was $4.1 million in loans for 20 single-family residences, three of which are partially completed and the remainder are completed homes that were never closed or occupied by the original buyer. An additional $2.5 million of this amount is for 21 developed lots where the original intent of the borrowers was to construct single-family residences, but the construction was delayed and the borrowers defaulted on the loans. Substantially all of these construction loans are in the process of foreclosure. The $500,000 balance of loans originated by Transland Financial Services, Inc. relating to unremitted loan proceeds was collected from Federal Trust Bank’s insurance carrier during the first quarter of 2008.

Five non-accrual loans for a total of $10.0 million were for commercial office projects, three of which were for $6.9 million, and are secured by property in our Central Florida market area.

Total land development and construction loans on non-accrual at March 31, 2008 were $12.8 million. This total included $8.2 million secured by three parcels of vacant land; one of these for $3.5 million was for property located in the Florida Panhandle area, the other two parcels are located in our Central Florida market area. The remaining $4.6 million represented residential construction loans to three separate borrowers; one of which was secured by a residential condominium project in the Florida Panhandle for $2.7 million, and the remaining two, which are in the process of foreclosure, are secured by properties located primarily across Central Florida from Daytona Beach on the east coast to Tampa on the west coast.

Management is aggressively pursuing resolutions of these non-performing assets. The amount and timing of losses, if any, cannot be determined at the present time. However, we believe that the allowance for loan losses is adequate to absorb potential losses on the non-accrual loans.

 

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The following table sets forth certain information regarding our non-accrual loans and foreclosed assets, the ratio of such loans and foreclosed assets to total assets as of the date indicated, and certain other related information ($ in thousands):

 

     At March 31,
2008
    At December 31,  
       2007     2006     2005     2004     2003  
     (Dollars in thousands)  

Non-accrual loans:

            

Residential loans:

            

Mortgages

   $ 8,521     $ 4,993     $ 3,140     $ 1,240     $ 1,862     $ 6,167  

Lot

     9,083       6,578       —         158       —         —    

Construction

     6,638       7,317       3,952       —         5       229  
                                                

Total residential loans

     24,242       18,888       7,092       1,398       1,867       6,396  

Commercial loans:

            

Real estate secured

     9,964       7,520       92       —         —         —    

Land, development and construction

     12,812       11,063       4,000       —         —         —    

Commercial business

     750       752       786       720       720       —    
                                                

Total commercial loans

     23,526       19,335       4,878       720       720       —    

Consumer loans

     6       —         —         —         13       —    
                                                

Total non-accrual loans

   $ 47,774     $ 38,223     $ 11,970     $ 2,118     $ 2,600     $ 6,396  
                                                

Total non-accrual loans to total loans

     8.6 %     6.4 %     1.9 %     0.3 %     0.5 %     1.6 %
                                                

Total non-accrual loans to total assets

     7.1 %     5.5 %     1.7 %     0.3 %     0.4 %     1.4 %
                                                

Total allowance for loan losses to total non-accrual loans

     33.1 %     36.3 %     42.6 %     211.4 %     147.5 %     43.4 %
                                                

Total foreclosed assets

   $ 10,093     $ 9,522     $ 36     $ 556     $ 326     $ 1,007  
                                                

Total non-accrual loans and foreclosed assets to total assets

     8.6 %     6.9 %     1.7 %     0.4 %     0.5 %     1.6 %
                                                

At March 31, 2008 and at December 31, 2007, we had no accruing loans that were contractually past due 90 days or more as to principal or interest and no troubled debt restructurings as defined by Statement of Financial Accounting Standards No. 15, “Accounting by Debtors and Creditors for Troubled Debt Restructuring.” For the quarter ended March 31, 2008 and for the year ended December 31, 2007, interest income that would have been recorded under the original terms of non-accrual loans and interest income actually recognized is summarized below ($ in thousands):

 

     Quarter Ended
March 31, 2008
   Year Ended
December 31, 2007

Interest income that would have been recorded

   $ 1,050    $ 4,037

Interest income recognized

     33      1,078
             

Interest income foregone

   $ 1,017    $ 2,959
             

Classified Assets; Potential Problem Loans. Federal regulations and Federal Trust Bank’s policies define “classified assets” as either loans or other assets, such as debt and equity securities, which have elevated risk or weaknesses and are classified as either “substandard,” “doubtful” or “loss.” An asset is considered “substandard” if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. “Substandard” assets include those characterized by the “distinct possibility” that the institution will sustain “some loss” if the deficiencies are not corrected. “Doubtful” assets have all of the weaknesses inherent in “substandard” assets, with the added characteristic that the weaknesses make “collection or liquidation in full,” on the basis of currently existing facts, conditions and values, “highly questionable and improbable.” Assets classified as “loss” are those considered “uncollectible” and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted. In addition, our policies require that assets which have one or more weaknesses but do not currently expose us to sufficient risk to warrant classification as substandard but possess other weaknesses are designated “special mention.”

 

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If an asset is graded special mention or classified, the estimated fair value of the asset is evaluated to determine if that value is less than the carrying value. If the estimated fair value is less than the carrying value, it is considered to be impaired and we establish a specific reserve. Pursuant to Statement of Financial Accounting Standards No. 114, “Accounting by Creditors for Impairment of a Loan,” if an asset is classified as loss, the amount of the asset classified as loss is fully reserved. General reserves or general valuation allowances represent loss allowances which have been established to recognize the inherent risk associated with lending activities but, unlike specific reserves, are not allocated to particular assets.

At March 31, 2008, we had loans totaling $16.7 million that were graded special mention. Our substandard loans included $47.8 million of non-accrual loans and $26.7 million of accruing loans. We also held $10.1 million of foreclosed assets, which are also classified as substandard. There were no loans classified as doubtful or loss at March 31, 2008. Of the total special mention loans, one loan with a total balance of $4.0 million was secured by developed lots in Florida. The remaining $12.7 million of loans were secured by commercial properties, two of which, for $2.5 million, were secured by property in Miami Beach, Florida.

The $26.7 million of accruing substandard loans includes six loans with a total balance of $17.7 million for vacant land and developed residential lots. Also included in the substandard total were two Central Florida residential home builders with a combined balance of $3.5 million. One loan with a balance of $5.0 million was secured by a commercial property located in the state of Georgia. Subsequent to March 31, 2008, we completed foreclosure on this property and are in the process of seeking a buyer for the property. One substandard loan for $498,000 was unsecured.

We closely monitor and are in regular contact with all borrowers of classified and special mention loans. The amount and timing of losses on these loans, if any, cannot be determined at the present time, however, we believe that the allowance for loan losses is adequate to absorb potential losses on the classified and special mention loans.

 

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The following table sets forth our loan delinquencies by type and by amount at the dates indicated ($ in thousands).

 

     Loans Delinquent For    Total
     60-89 Days    90 Days and Over (1)   
     Number    Amount    Number    Amount    Number    Amount

At March 31, 2008

                 

Residential loans:

                 

Mortgages

   15    $ 2,671    36    $ 8,521    51    $ 11,192

Lot

   1      55    52      9,083    53      9,138

Construction

   1      432    41      6,638    42      7,070

Commercial loans:

                 

Real estate secured

   2      3,383    6      9,964    8      13,347

Land, development and construction

   1      409    18      12,812    19      13,221

Commercial business

   1      200    2      750    3      950

Consumer loans

   1      16    1      6    2      22
                                   

Total

   22    $ 7,166    156    $ 47,774    178    $ 54,940
                                   

At December 31, 2007

                 

Residential loans:

                 

Mortgages

   24    $ 4,242    27    $ 4,993    51    $ 9,235

Lot

   4      368    34      6,578    38      6,946

Construction

   —        —      43      7,317    43      7,317

Commercial loans:

                 

Real estate secured

   1      1,448    4      7,520    5      8,968

Land, development and construction

   —        —      19      11,063    19      11,063

Commercial business

   3      600    2      752    5      1,352

Consumer loans

   1      20    —        —      1      20
                                   

Total

   33    $ 6,678    129    $ 38,223    162    $ 44,901
                                   

At December 31, 2006

                 

Residential loans:

                 

Mortgages

   —      $ —      27    $ 3,140    27    $ 3,140

Lot

   —        —      —        —      —        —  

Construction

   7      1,012    27      3,952    34      4,964

Commercial loans:

                 

Real estate secured

   —        —      2      92    2      92

Land, development and construction

   —        —      1      4,000    1      4,000

Commercial business

   1      500    2      786    3      1,286

Consumer loans

   —        —      —        —      —        —  
                                   

Total

   8    $ 1,512    59    $ 11,970    67    $ 13,482
                                   

At December 31, 2005

                 

Residential loans:

                 

Mortgages

   5    $ 775    18    $ 1,240    23    $ 2,015

Lot

   —        —      —        —      —        —  

Construction

   2      658    1      158    3      816

Commercial loans:

                 

Real estate secured

   —        —      —        —      —        —  

Land, development and construction

   —        —      —        —      —        —  

Commercial business

   —        —      1      720    1      720

Consumer loans

   —        —      —        —      —        —  
                                   

Total

   7    $ 1,433    20    $ 2,118    27    $ 3,551
                                   

At December 31, 2004

                 

Residential loans:

                 

Mortgages

   6    $ 425    31    $ 1,862    37    $ 2,287

Lot

   —        —      —        —      —        —  

Construction

   —        —      1      5    1      5

Commercial loans:

                 

Real estate secured

   1      171    —        —      1      171

Land, development and construction

   —        —      —        —      —        —  

Commercial business

   —        —      1      720    1      720

Consumer loans

   1      2    1      13    2      15
                                   

Total

   8    $ 598    34    $ 2,600    42    $ 3,198
                                   

 

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     Loans Delinquent For    Total
     60-89 Days    90 Days and Over (1)   
     Number    Amount    Number    Amount    Number    Amount

At December 31, 2003

                 

Residential loans:

                 

Mortgages

   11    $ 577    73    $ 6,167    84    $ 6,744

Lot

   —        —      —        —      —        —  

Construction

   —        —      1      229    1      229

Commercial loans:

                 

Real estate secured

   1      972    —        —      1      972

Land, development and construction

   —        —      —        —      —        —  

Commercial business

   —        —      —        —      —        —  

Consumer loans

   1      47    —        —      1      47
                                   

Total

   13    $ 1,596    74    $ 6,396    87    $ 7,992
                                   

Allowance for Loan Losses

A number of factors are considered when establishing our allowance for loan losses. For loan loss purposes, the loan portfolio is segregated into broad segments, including: residential real estate loans to United States citizens; residential real estate loans to foreign national borrowers; various types of commercial real estate loans; land development and construction loans; commercial business loans and other loans. A general allowance for losses is then provided for each of the aforementioned categories, which consists of general loss percentages based upon historical analyses and inherent losses that probably exist as of the evaluation date even though they might not have been identified by the more objective processes used to evaluate individual past due, special mention and classified loans. The adequacy of the allowance is subjective and requires complex judgments based on qualitative factors that do not lend themselves to exact mathematical calculations such as: trends in delinquencies and nonaccruals; trends in real estate values; migration trends in the portfolio; trends in volume, terms, and portfolio mix; new credit products and/or changes in the geographic distribution of those products; changes in lending policies and procedures; collection practices; examination results from bank regulatory agencies; external loan reviews and our internal credit review function; changes in the outlook for local, regional and national economic conditions; concentrations of credit; and peer group comparisons.

Large commercial loans that exhibit probable or observed credit weaknesses that we have graded special mention or classified, are subject to individual review for impairment. Reserves are allocated to specific impaired loans based on our estimate of the borrower’s ability to repay the loan given the value of the underlying collateral, other sources of cash flows, and available legal options. Our review of individual loans is based on the definition of impairment as provided in Statement of Financial Accounting Standards No. 114, “Accounting by Creditors for Impairment of a Loan,” as amended. We evaluate the collectibility of both principal and interest when assessing the need for a specific reserve. Specific reserves on individual loans and historical loss rates are reviewed throughout the year and adjusted as necessary based on changing borrower and collateral conditions and actual collection and charge-off experience. Historical loss rates are used to evaluate the adequacy of the allowance on other commercial loans not subject to specific reserve allocations.

Homogenous loans, such as installment and residential mortgage loans, are not individually reviewed by management but collectively evaluated for impairment, except in the case of delinquencies. Reserves are established for each pool of loans based on the expected net charge-offs. Loss rates are based on the average net charge-off history and an analysis of the risks and trend information by loan category. Historical loss rates for commercial and consumer loans may be adjusted for significant factors that, in management’s judgment, reflect the impact of current market conditions.

Based on these procedures, management believes that the allowance for loan losses was adequate to absorb estimated loan losses inherent in the loan portfolio at March 31, 2008. Actual results could differ from these estimates. However, since the allowance is affected by management’s judgments and uncertainties, there is the likelihood that materially different amounts would be reported under different conditions or assumptions. To the extent that the economy, collateral values, reserve factors or the nature and volume of problem loans change, we may need to adjust the provision for loan losses. In addition, federal regulatory agencies, as an integral part of the examination process,

 

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periodically review our allowance for loan losses. Such agencies may require us to recognize additions to the allowance level based upon their judgment of the information available to them at the time of their examination. As we experienced in 2007, material additions to our provision for loan losses in 2008 could result in a decrease in net earnings and capital.

At March 31, 2008, the allowance for loan losses was $15.8 million, or 33.1% of non-performing loans and 2.92% of total loans net of loans in process at that date. At December 31, 2007, the allowance for loan losses was $13.9 million, or 36.3% of non-performing loans and 2.42% of total loans net of loans in process at that date. At December 31, 2006, the allowance for loan losses was $5.1 million, or 42.6% of non-performing loans and .84% of total loans net of loans in process at that date. The allowance at March 31, 2008 and at December 31, 2007, consisted of reserves for performing loans in the portfolio and reserves against certain impaired loans based on management’s evaluation of these individual loans.

 

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The following table sets forth information with respect to our allowance for loan losses during the periods indicated. The allowances shown in the table below should not be interpreted as an indication that charge-offs in future periods will occur in these amounts or proportions or that the allowance indicates future charge-off amounts or trends ($ in thousands):

 

     At or For the
Three Months Ended
March 31,
    At or For the Years Ended December 31,  
     2008     2007     2007     2006     2005     2004     2003  

Average loans outstanding, net of loans in process

   $ 557,196     $ 604,864     $ 600,465     $ 621,670     $ 579,811     $ 447,773     $ 366,488  
                                                        

Allowance at beginning of period

     13,869       5,098       5,098       4,477       3,835       2,779       2,110  
                                                        

Charge-offs:

              

Residential loans:

              

Mortgage

     (50 )     —         (290 )     (25 )     —         (106 )     (30 )

Construction

     —         —         (4,072 )     (14 )     —         —         —    

Commercial loans:

              

Real estate loans

     —         —         (2,843 )     —         —         —         —    

Commercial business

     —         —         (438 )     —         —         (48 )     —    

Consumer loans

     —         —         —         —         (10 )     —         (1 )
                                                        

Total loans charge-offs

     (50 )     —         (7,643 )     (39 )     (10 )     (154 )     (31 )

Recoveries

     9       —         2       21       2       30       50  
                                                        

Net (charge-offs) recoveries

     (41 )     —         (7,641 )     (18 )     (8 )     (124 )     19  
                          

Provision for loan losses

     1,965       150       16,412       639       650       1,180       650  
                                                        

Allowance at end of period

     15,793       5,248     $ 13,869     $ 5,098     $ 4,477     $ 3,835     $ 2,779  
                                                        

Ratio of net charge-offs (recoveries) to average loans outstanding, net of loans in process

     0.01 %     —   %     1.27 %     0.00 %     0.00 %     0.03 %     (0.01 )%

Ratio of allowance to period-end total loans, net of loans in process

     2.95 %     0.88 %     2.42 %     0.84 %     0.71 %     0.74 %     0.70 %

Period-end total loans, net of loans in process

   $ 535,633     $ 595,711     $ 574,070     $ 605,448     $ 630,720     $ 521,642     $ 397,834  
                                                        

 

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The following table represents information regarding our allowance for loan losses, as well as the allocations to the various categories of loans. The allowance for loan losses allocated to each category is not necessarily indicative of future losses in any particular category and does not restrict the use of the allowance to absorb losses in other categories ($ in thousands):

 

           At December 31,  
     At March 31, 2008     2007     2006  
     Amount    % of Loans to
Total Loans
    Amount    % of Loans to
Total Loans
    Amount    % of Loans to
Total Loans
 

Residential loans

   $ 12,127    71.6  %   $ 10,341    70.7 %   $ 2,671    68.9 %

Commercial loans

     3,666    28.4  %     3,528    29.3 %     2,427    31.1 %

Consumer loans

     —      —    %     —      —   %     —      —   %
                                       

Total allowance for loan losses

   $ 15,793    100.0  %   $ 13,869    100.0 %   $ 5,098    100.0 %
                                       

 

     At December 31,  
     2005     2004     2003  
     Amount    % of Loans to
Total Loans
    Amount    % of Loans to
Total Loans
    Amount    % of Loans to
Total Loans
 

Residential loans

   $ 2,337    73.8 %   $ 2,488    79.6 %   $ 1,886    80.8 %

Commercial loans

     2,130    26.1 %     1,055    20.3 %     825    19.0 %

Consumer loans

     10    0.1 %     292    0.1 %     68    0.2 %
                                       

Total allowance for loan losses

   $ 4,477    100.0 %   $ 3,835    100.0 %   $ 2,779    100.0 %
                                       

The allowance for loan losses allocated to residential loans at March 31, 2008 included $4.7 million for mortgage loans, $3.8 million for lot loans and $3.6 million for construction loans. The allowance for loan losses allocated to commercial loans at March 31, 2008 included $1.8 million for real estate secured loans, $1.7 million for land, development and construction loans and $144,000 for commercial business loans.

Investment Activities

Mortgage-Backed Securities. We purchase mortgage-backed securities and other collateralized mortgage obligations, which are guaranteed as to principal and interest by Fannie Mae or Freddie Mac, which are enterprises sponsored by the United States Government. We also purchase mortgage-backed securities issued or guaranteed by entities that are not Federal government agencies or government sponsored enterprises. These securities are acquired primarily for their liquidity, yield and credit characteristics, and may be used as collateral for borrowings. The mortgage-backed securities we purchase are backed by either fixed-rate or adjustable-rate mortgage loans. At March 31, 2008, our mortgage-backed securities portfolio had a carrying value of $19.7 million, including $8.2 million of collateralized mortgage obligations, $6.1 million of which were issued by Fannie Mae or Freddie Mac. At that date, all of our mortgage-backed securities were issued by government sponsored enterprises.

Other Investments. As a condition to our membership in the Federal Home Loan Bank of Atlanta we are required to own Federal Home Loan Bank stock. At March 31, 2008, we owned $8.7 million of Federal Home Loan Bank stock. The other investments in our investment portfolio, with the exception of corporate equity securities, are eligible for inclusion in our liquidity base when calculating our regulatory liquidity. We also purchase municipal bonds and corporate equity and debt securities. At March 31, 2008, we held $7.0 million of insured, bank-qualified municipal bonds. Subsequent to March 31, 2008, in order to improve our liquidity, we sold $8.9 million of municipal bonds for a gain of $58,000.

We invest in trust preferred securities, primarily issued by pools of issuers sponsored by financial institution holding companies. At March 31, 2008, the carrying value of our three trust preferred securities was $4.2 million, and

 

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included $1.1 million of securities related to financial institution holding company issuers and $3.1 million of securities related to insurance company issuers.

At March 31, 2008, we had $15.9 million in carrying value of investment securities and all of our Federal Home Loan Bank stock pledged to the Federal Home Loan Bank as collateral for advances. At March 31, 2008, our entire investment securities portfolio was classified as available for sale.

Impairment of Securities. Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to: (1) the length of time and the extent to which fair value has been less than cost; (2) the financial condition and near-term prospects of the issuer; and (3) our intent and ability to retain the investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair market value.

During 2007, we recorded an other-than-temporary impairment write-down charge of $749,000 to adjust for the market value decline of one of our collateralized mortgage obligations. The investment was secured by second mortgage loans that had experienced significant delinquencies and some portfolio losses. At March 31, 2008, the remaining principal balance of this investment was $1.5 million, the market value was $849,000 and our carrying value, after our other-than-temporary impairment write-down was $754,000. We expect to receive all of our remaining principal and interest due.

The following table sets forth the carrying values of our total investments and liquidity as of the dates indicated ($ in thousands):

 

     At March 31,
2008
   At December 31,
        2007    2006    2005

Interest-earning deposits

   $ 708    $ 1,131    $ 1,585    $ 6,424

Mortgage-back securities

     19,712      20,169      26,960      21,807

Debt securities:

           

Government sponsored enterprises

     8,787      10,703      8,855      4,798

Municipal bonds

     6,956      15,237      14,056      12,321

Corporate debt

     1,420      1,495      5,289      5,068

Trust preferred securities

     4,218      4,785      6,489      —  

Equity securities:

           

Federal Home Loan Bank stock

     8,663      8,129      9,591      10,273

Corporate equity

     62      60      3,909      6,086
                           

Total investment portfolio

   $ 50,526    $ 61,709    $ 76,734    $ 66,777
                           

 

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The following table sets forth the remaining maturity and weighted-average yields as of March 31, 2008 ($ in thousands):

 

     One Year or Less     Over One Year to
Five Years
    Over Five Years to
Ten Years
    More than Ten Years     Total  
     Carrying
Value
   Yield     Carrying
Value
   Yield     Carrying
Value
   Yield     Carrying
Value
   Yield     Carrying
Value
   Yield  

Interest-earning deposits

   $ 708    2.96 %   $ —      —   %   $ —      —   %   $ —      —   %   $ 708    2.96 %

Mortgage-backed securities (*)

     —      —         —      —         —          19,712    5.68       19,712    5.68  

Government sponsored Enterprises

     —      —         —      —         1,347    5.04       7,440    6.62       8,787    6.38  

Municipal bonds

     —      —         928    6.21       1,361    6.36       4,667    6.35       6,956    6.33  

Corporate debt

     —      —         —      —         1,420    5.70       —      —         1,420    5.70  

Trust preferred securities

     —      —         —      —         —      —         4,218    4.10       4,218    4.10  

FHLB stock (*)

     —      —         —      —         —      —         8,663    5.97       8,663    5.97  

Corporate equity securities (*)

     —      —         —      —         —      —         62    1.47       62    1.47  
                                                                 

Total

   $ 708    2.96 %   $ 928    6.21 %   $ 4,128    5.70 %   $ 44,762    5.81 %   $ 50,526    5.76 %
                                                                 

 

* Estimated and scheduled prepayments of principal on mortgage-backed securities are not allocated in the above table, and corporate equity securities and Federal Home Loan Bank stock are perpetual investments with no maturity date.

 

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Impact of Interest Rates on the Investment Portfolio. Between June 2006 and September 2007, the Federal Reserve Board maintained the Federal Funds rate at 5.25%. In September 2007, the Federal Reserve Board decreased the rate by 50 basis points, followed by several additional reductions to 2.00% at the April 30, 2008 meeting, representing a 3.25% decrease in the Federal Funds rate since September 2007. At the same time, longer term Treasury rates declined by less than 100 basis points. Throughout the period, the Treasury yield curve steepened as the economy grew weaker and inflation fears increased due to rising oil prices.

The yields and market values of the investment portfolio are significantly affected by changes in the Federal Funds rate set by the Federal Reserve Board, Treasury rates and other market interest rates. Also affecting investment portfolio rates and values are changing market conditions on individual investments and groups of investments. As mentioned above, we recognized an other-than-temporary impairment on a single mortgage-backed security investment in September 2007. However, the price has improved on this investment during the first quarter of 2008 and no further write-downs are expected at this time. Other mortgage-backed securities investments and trust preferred securities also have been affected by the market deterioration in 2007 and 2008. However, we have determined at this time that the decline in values is temporary and values will recover as market conditions improve, or we expect to receive all of our principal and interest due at maturity.

Sources of Funds

General. Deposits are our primary source of funds for use in lending, investments and for other general business purposes. In addition to deposits, funds are also obtained from normal loan amortization, maturities of investment securities, prepayments of loan principal and loan sales. Historically, we have used brokered deposits as a supplemental source of funding for our operations, as these deposits generally have lower interest rates than rates offered for certificates of deposit in our local market area. It has been our recent funding strategy to reduce our reliance on brokered deposits, and instead focus on attracting retail deposits through our network of 11 branches. In addition, as described below, we are restricted in the amount of brokered deposits that we can renew, replace or accept. Contractual loan payments are a relatively stable source of funds, while deposit inflows and outflows and loan prepayments and sales are significantly influenced by general market interest rates and economic conditions. Other borrowings are also used on a short-term basis to compensate for seasonal or other reductions in normal sources of funds, and provide diversity in our funding sources among providers and across maturities. Until recently, Federal Home Loan Bank borrowings have been used by Federal Trust Bank on a short-term and longer term basis to support expanded lending or investment activities. However, as described below, we are not currently able to access additional advances from the Federal Home Loan Bank. Borrowings by Federal Trust Corporation (like the trust preferred securities we have issued) could also be used as an additional source of capital for Federal Trust Bank, but the Office of Thrift Supervision has restricted Federal Trust Corporation from issuing any debt securities or otherwise incurring any debt without the prior approval of the Office of Thrift Supervision.

Deposits. Our primary deposit products include fixed-rate certificate accounts, money-market deposit accounts and both noninterest and interest-bearing transaction accounts. We have a number of different programs that are designed to attract both short-term and long-term deposits and we continue to promote transaction accounts, which generally provide higher fee revenue compared to time deposits.

Deposits have generally been obtained from residents in our primary market area and, to a lesser extent, nationwide, through a network of deposit brokers. Of the total $310.9 million in time deposits at March 31, 2008, $57.3 million were acquired through deposit brokers at rates that are typically comparable to the rates paid for like-term certificates offered in our local market. At March 31, 2008, Federal Trust Bank’s capital ratio was below the “well capitalized” level and, therefore, we cannot renew, replace or accept brokered deposits until we are “well capitalized,” or we receive a waiver from the Federal Deposit Insurance Corporation. A total of $60.5 million in brokered deposits will mature during 2008. From December 31, 2007 through March 14, 2008, a total of $16.6 million of brokered deposits matured and were repaid. Of the remaining $43.9 million in brokered deposits that will mature during 2008, $18.8 million will mature through May 31, 2008. On March 14, 2008, we received conditional approval from the Federal Deposit Insurance Corporation to replace up to $16.0 million of brokered deposits through May 31, 2008. Between March 14, 2008 and May 31, 2008, $10.3 million of brokered deposits were replaced when they matured. We

 

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will need to request additional waivers from the Federal Deposit Insurance Corporation with respect to the additional maturing brokered deposits beyond May 31, 2008. If we do not obtain a waiver from the Federal Deposit Insurance Corporation to permit us to renew or replace the additional maturing brokered deposits beyond May 31, 2008, we may be required to repay these deposits through other sources of funds, including retail deposits in our local market and loan prepayments and sales. While it has been our strategy during 2007 and 2006 to reduce our reliance on brokered deposits through the opening of additional branch offices and slowing our growth, the brokered deposit restriction could force us to pay higher rates on our other deposit products or sell loans at less than favorable terms in order to repay these maturing deposits as they come due.

The principal methods used to attract “in market” deposit accounts have included offering a wide variety of services and accounts, competitive interest rates and convenient office locations, including access to automated teller machines and Internet banking. We currently operate 11 automated teller machines and our customers also have access to the AllPoint Honor and other shared automated teller machine networks. We also offer customers Internet banking with access to their accounts, funds transfer and bill paying.

 

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The following table shows the distribution of, and certain other information relating to, our deposits by account type as of the dates indicated ($ in thousands):

 

     For the Three Months
Ended March 31, 2008
    For the Year Ended December 31,  
       2007     2006     2005  
     Amount    Percent of
Deposits
    Amount    Percent of
Deposits
    Amount    Percent of
Deposits
    Amount    Percent of
Deposits
 

Noninterest-bearing checking accounts

   $ 14,830    3.3 %   $ 13,916    2.9 %   $ 13,887    2.9 %   $ 13,628    2.9 %

Interest-bearing checking accounts

     68,997    15.2       80,275    16.6       51,584    10.9       51,682    11.0  

Money-market accounts

     57,060    12.6       57,608    12.0       64,458    13.7       78,371    16.6  

Savings accounts

     2,233    0.5       2,422    0.5       3,065    0.6       4,062    0.8  
                                                    

Subtotal

     143,120    31.6       154,221    32.0       132,994    28.1       147,743    31.3  
                                                    

Time deposits:

                    

0% - 0.99%

     8    —         —      —         —      —         —      —    
                            

1.00% - 1.99%

     53    —         —      —         —      —         2,160    0.5  
                            

2.00% - 2.99%

     1,671    0.4       274    0.1       695    0.1       40,677    8.6  
                            

3.00% - 3.99%

     40,434    8.9       1,678    0.3       5,747    1.2       171,712    36.5  
                            

4.00% - 4.99%

     115,257    25.4       75,239    15.6       120,416    25.5       108,004    22.9  
                            

5.00% - 5.99%

     153,500    33.7       250,317    52.0       212,942    45.1       720    0.2  
                            

6.00% - 6.99%

     —      —         —      —         —      —         46    —    
                        

7.00% - 7.99%

     —      —         —      —         —      —         —      —    
                                                    

Total time deposits

     310,923    68.4       327,508    68.0       339,800    71.9       323,319    68.7  
                                                    

Total deposits

   $ 454,043    100.0 %   $ 481,729    100.0 %   $ 472,794    100.0 %   $ 471,062    100.0 %
                                                    

The following table shows the average amount of and the weighted average rate paid on each of the following deposit categories during the periods indicated ($ in thousands):

 

     For the Three Months
Ended March 31, 2008
    For the Year Ended December 31,  
       2007     2006     2005  
     Average
Balance
   Average
Rate
    Average
Balance
   Average
Rate
    Average
Balance
   Average
Rate
    Average
Balance
   Average
Rate
 

Noninterest-bearing checking accounts

   $ 14,388    —   %   $ 12,844    —   %   $ 13,615    —   %   $ 14,667    —   %

Money market and interest-bearing

checking accounts

     129,562    3.31       125,054    3.96       127,182    3.77       127,485    2.83  

Savings

     2,437    0.66       2,808    1.53       3,417    1.76       5,103    1.37  

Time deposits

     324,894    4.95       332,839    5.19       340,144    4.50       282,693    3.16  
                                                    

Total deposits

   $ 471,281    4.33 %   $ 473,545    4.70 %   $ 484,358    4.16 %   $ 429,948    2.93 %
                                                    

The variety of deposit accounts that we offer has increased our ability to retain deposits and has allowed us to be competitive in obtaining new funds, although the threat of disintermediation (the flow of funds away from savings institutions into direct investment vehicles such as government and corporate securities) still exists. Our ability to attract and retain deposits and maintain a favorable cost of funds has been, and will continue to be, significantly affected by national and local economic conditions, changes in prevailing interest rates, pricing of deposits and competition.

On a weekly basis, we review the rates offered by other depository institutions in our market area and make adjustments to the rates we offer to meet our funding needs and to remain competitive with the local market. Our total deposits decreased to $454.0 million at March 31, 2008, from $481.7 million at December 31, 2007.

 

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The following table sets forth maturities of jumbo certificates of $100,000 and more at March 31, 2008 ($ in thousands):

 

     Amount

Due three months or less

   $ 37,808

Due over three months to six months

     54,596

Due over six months to one year

     39,296

Due over one year

     27,009
      
   $ 158,709
      

The following table sets forth maturities of all of our time deposits at March 31, 2008 ($ in thousands):

 

Twelve Month Period Ending March 31,

   Amount

2009

   $ 271,114

2010

     25,623

2011

     7,566

2012

     5,190

2013

     1,430
      
   $ 310,923
      

Federal Home Loan Bank Advances. Advances from the Federal Home Loan Bank have been a significant source of funds that we have relied upon to support our lending activities. Such advances may be made pursuant to several different credit programs. Each credit program has its own interest rate based on the range of maturities. The Federal Home Loan Bank has limitations on the total amount and terms of advances that are available to Federal Trust Bank based on, among other things, asset size, capital strength, earnings and the amount of collateral available to be pledged for such advances. Prepayment of Federal Home Loan Bank advances may result in prepayment penalties. At March 31, 2008, we had $165.0 million in such advances, up from $152.0 million at the end of 2007.

As a result of the Federal Home Loan Bank of Atlanta’s assessment of our recent financial condition, we will not be able to access additional advances from the Federal Home Loan Bank at the present time. One fixed-rate advance for $12.0 million is scheduled to mature in December 2008, and 12 convertible advances with a total balance of $97.0 million and with rates ranging from 3.22% to 4.81% are callable during 2008. Although we do not know whether the Federal Home Loan will call those advances with callable dates, due to the current level of market interest rates, Federal Trust Bank does not anticipate that the convertible advances will be called during 2008. At March 31, 2008, our daily rate credit balance was $6.0 million.

 

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The following table is a summary of our advances from the Federal Home Loan Bank of Atlanta ($ in thousands):

 

     Under
One Year
    One to Five
Years
    After
Five Years
    2008
Total
    2007
Total
 

By remaining contractual maturity at March 31, 2008

          

Fixed rate

   $ 31,000     $ 32,000     $ —       $ 63,000     $ 50,000  

Callable

     —         47,000       55,000       102,000       102,000  
                                        

Total advances from the Federal Home Loan Bank

   $ 31,000     $ 79,000     $ 55,000     $ 165,000     $ 152,000  
                                        

Interest rate

     3.00-4.92 %     3.34-5.35 %     3.22-4.00 %     3.00-5.35 %     3.22-5.35 %

By next call or repricing date as of March 31, 2008

          

Fixed rate

   $ 31,000     $ 32,000     $ —       $ 63,000     $ 50,000  

Callable

     97,000       5,000       —         102,000       102,000  
                                        

Total advances from the Federal Home Loan Bank

   $ 128,000     $ 37,000     $ —       $ 165,000     $ 152,000  
                                        

Interest rate

     3.00-4.92 %     3.34-5.35 %     —   %     3.00-5.35 %     3.22-5.35 %

At December 31, 2007, the security agreement with the Federal Home Loan Bank included a blanket floating lien requiring Federal Trust Bank to maintain qualifying first mortgage loans as pledged collateral for our advances. In addition, at December 31, 2007, Federal Trust Bank pledged investment securities with a fair value of $18.0 million and Federal Home Loan Bank stock of $8.1 million. In 2008, we were informed by the Federal Home Loan Bank that we cannot continue to utilize the blanket floating lien at the present time. We will be required to pledge specific qualifying first mortgage loans and investment securities to the Federal Home Loan Bank as collateral for our advances and deliver possession of such collateral to the Federal Home Loan Bank or its custodian. At March 31, 2008, we had a total of $165.0 million in advances outstanding. We are in the process of segregating certain residential mortgage loan documents for the Federal Home Loan Bank in conjunction with their security agreement on their advances. The Federal Home Loan Bank also requires the purchase of Federal Home Loan Bank common stock in proportion to the amount of advances outstanding.

The interest rate on the daily rate credit advances is subject to change daily and may be repaid at any time without penalty. Fixed-rate advances could result in the payment of a prepayment penalty or receipt of a premium by Federal Trust Bank depending upon the interest rate on the advance and market rates at the time of prepayment.

Other Borrowings. In addition to Federal Home Loan Bank advances, we borrow from correspondent banks to support our operations. During 2006 and 2007, Federal Trust Corporation had a revolving line of credit agreement with a correspondent bank that enabled us to borrow up to $8,000,000. The interest rate on the line of credit was floating at the prime lending rate minus 50 basis points as long as we maintain certain loan-to-book value ratios. The line of credit was secured by all of Federal Trust Bank’s common stock. Federal Trust Corporation could draw upon or repay the line of credit in whole or in part for the first 24 months without any prepayment penalties, at which time the remaining principal balance was scheduled for repayment over eight years. In February 2007 the balance outstanding on the line of credit was repaid. In July 2007, the revolving period of the line ended and has not been renewed or replaced.

Other borrowings also include securities sold under agreements to repurchase, which totaled $16,000 at March 31, 2008. Total interest expense on other borrowings for the quarter ended March 31, 2008 and for the years ended December 31, 2007, 2006 and 2005, was approximately $1,000, $32,000, $104,000 and $58,000, respectively.

Junior Subordinated Debentures. On September 17, 2003, Federal Trust Statutory Trust I sold adjustable-rate Trust Preferred Securities due September 17, 2033 in the aggregate principal amount of $5,000,000 in a pooled trust preferred securities offering. The interest rate on the Trust Preferred Securities adjusts quarterly, to a rate equal to the current three-month London Interbank Offered Rate, plus 295 basis points (5.75% at March 31, 2008). In addition,

 

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Federal Trust Corporation contributed capital of $155,000 to Federal Trust Statutory Trust I for the purchase of the common securities of Federal Trust Statutory Trust I. The proceeds from these sales were paid to Federal Trust Corporation in exchange for $5,155,000 of its adjustable-rate Junior Subordinated Debentures due September 17, 2033. The debentures have the same terms as the Trust Preferred Securities. The sole asset of Federal Trust Statutory Trust I, the obligor on the Trust Preferred Securities, is the debentures.

Federal Trust Corporation guaranteed Federal Trust Statutory Trust I’s payment of distributions on, payments on any redemptions of, and any liquidation distribution with respect to the Trust Preferred Securities. Cash distributions on both the Trust Preferred Securities and the debentures are payable quarterly in arrears on March 17, June 17, September 17 and December 17 of each year.

The Trust Preferred Securities are subject to mandatory redemption: (i) in whole, but not in part, upon repayment of the debentures at stated maturity or, at the option of Federal Trust Corporation, their earlier redemption in whole upon the occurrence of certain changes in the tax treatment or capital treatment of the Trust Preferred Securities, or a change in the law such that Federal Trust Statutory Trust I would be considered an Investment Company; and (ii) in whole or in part at any time on or after September 17, 2008, contemporaneously with the optional redemption by Federal Trust Corporation of the debentures in whole or in part. The debentures are redeemable prior to maturity at the option of Federal Trust Corporation: (i) on or after September 17, 2008, in whole at any time or in part from time to time; or (ii) in whole, but not in part, at any time within 90 days following the occurrence and continuation of certain changes in the tax treatment or capital treatment of the Trust Preferred Securities, or a change in law such that Federal Trust Statutory Trust I would be considered an Investment Company, required to be registered under the Investment Company Act of 1940.

On June 27, Federal Trust Corporation notified the trustee of Federal Trust Statutory Trust I of Federal Trust Corporation’s intention to defer its payments on the debentures, meaning that Federal Trust Statutory Trust I will defer its payments of dividends on the trust preferred securities. Federal Trust Corporation may not resume payments on the debentures until it receives prior regulatory approval from the Office of Thrift Supervision.

 

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The following tables set forth certain information relating to our borrowings at the dates and for the periods indicated ($ in thousands):

 

     At or For the Three Months
Ended March 31,
 
     2008     2007  

Federal Home Loan Bank advances:

    

Average balance outstanding

   $ 166,907     $ 183,122  

Maximum amount outstanding at any month end during the period

     168,000       188,200  

Balance outstanding at end of period

     165,000       165,700  

Weighted average interest rate during the period

     4.30 %     4.39 %

Weighted average interest rate at end of period

     4.21 %     4.47 %

Securities sold under agreement to repurchase;

    

Average balance outstanding

   $ 16     $ 759  

Maximum amount outstanding at any month end during the period

     16       871  

Balance outstanding at end of period

     16       78  

Weighted average interest rate during the period

     3.16 %     4.23 %

Weighted average interest rate at end of period

     2.84 %     4.13 %

Other borrowings and junior subordinated debentures:

    

Average balance outstanding

   $ 5,155     $ 6,164  

Maximum amount outstanding at any month end during the period

     5,155       5,655  

Balance outstanding at end of period

     5,155       5,155  

Weighted average interest rate during the period

     7.66 %     8.88 %

Weighted average interest rate at end of period

     6.98 %     8.24 %

Total borrowings:

    

Average balance outstanding

   $ 172,078     $ 190,045  

Maximum amount outstanding at any month end during the period

     173,171       194,726  

Balance outstanding at end of period

     170,171       170,933  

Weighted average interest rate during the period

     4.40 %     4.54 %

Weighted average interest rate at end of period

     4.30 %     4.59 %

 

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     At or For the Year Ended December 31,  
     2007     2006     2005  

Federal Home Loan Bank advances:

      

Average balance outstanding

   $ 178,688     $ 183,106     $ 186,122  

Maximum amount outstanding at any month end during the period

     191,500       207,400       212,500  

Balance outstanding at end of period

     152,000       179,700       201,700  

Weighted average interest rate during the period

     4.49 %     3.98 %     3.31 %

Weighted average interest rate at end of period

     4.29 %     4.22 %     3.67 %

Securities sold under agreement to repurchase;

      

Average balance outstanding

   $ 447     $ 69     $ —    

Maximum amount outstanding at any month end during the period

     871       893       —    

Balance outstanding at end of period

     16       893       —    

Weighted average interest rate during the period

     4.08 %     3.83 %     —   %

Weighted average interest rate at end of period

     3.70 %     3.83 %     —   %

Other borrowings and junior subordinated debentures:

      

Average balance outstanding

   $ 5,463     $ 9,167     $ 9,000  

Maximum amount outstanding at any month end during the period

     5,655       13,370       12,019  

Balance outstanding at end of period

     5,155       8,159       12,019  

Weighted average interest rate during the period

     8.74 %     7.68 %     5.98 %

Weighted average interest rate at end of period

     7.94 %     9.42 %     6.78 %

Total borrowings:

      

Average balance outstanding

   $ 184,598     $ 192,342     $ 195,122  

Maximum amount outstanding at any month end during the period

     198,026       221,663       224,519  

Balance outstanding at end of period

     157,171       188,752       213,719  

Weighted average interest rate during the period

     4.62 %     4.14 %     3.44 %

Weighted average interest rate at end of period

     4.41 %     4.44 %     3.85 %

 

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Comparison of Operating Results for the Three Month Periods Ended March 31, 2008 and 2007

General. We had a net loss for the three-month period ended March 31, 2008, of $2.2 million, or $.24 per basic and fully diluted share, compared to net earnings of $160,000 or $.02 per basic and fully diluted share for the same period in 2007. The loss for the three months ended March 31, 2008, is primarily attributable to a $2.0 million provision for loan losses, together with interest income foregone as a result of the increase in nonperforming assets.

Interest Income. Interest income decreased $1.7 million to $9.0 million for the 2008 first quarter, from $10.7 million for the quarter ended March 31, 2007. The decrease in interest income was primarily due to a decrease in market interest rates from the first quarter of 2007 to the first quarter of 2008, and $1.0 million in foregone interest for the three-months ended March 31, 2008.

Interest Expense. Interest expense decreased $529,000, or 7%, due to a decrease in the average rate paid on interest-bearing liabilities from 4.64% in the quarter ending March 31, 2007 to 4.43% for the 2008 first quarter. In addition, average interest bearing liabilities decreased from $645.9 million for the 2007 first quarter to $629.0 million for the first quarter of 2008.

Provision for Loan Losses. A provision for loan losses is charged to earnings based upon management’s evaluation of the loan portfolio. During the quarter ended March 31, 2008, we recorded a provision for loan losses of $2.0 million based on our evaluation of the loan portfolio, compared to $150,000 for the same period in 2007. The increased provision for the 2008 first quarter was due to the decline in real estate collateral values and an increase in nonaccrual loans. The allowance for loan losses at March 31, 2008, was $15.8 million compared to $5.2 million at March 31, 2007. Our evaluation of the allowance for loan losses at March 31, 2008, included an assessment of the current market values for the nonaccrual loans, and an ongoing evaluation of the loan portfolio. As a percent of total loans outstanding, the allowance for loan losses increased to 2.95% at March 31, 2008 from 2.42% at December 31, 2007, and .88% at March 31, 2007. Management believes the allowance for loan losses at March 31, 2008, was adequate to absorb estimated loan losses in the loan portfolio at March 31, 2008. However, we can make no assurance that our allowance will be adequate to cover future loan losses given current and future market conditions, including the recent downturn in our local real estate markets. In addition, our regulators periodically review our allowance for loan losses and may require us to increase our provision for loan losses or recognize further loan charge-offs, based on judgments different than those of our management. Any increase in our allowance for loan losses or loan charge-offs as required by these regulatory agencies would have a negative effect on our operating results.

Other Income. Other income increased 36% to $648,000 for the quarter ended March 31, 2008, from $476,000 for the quarter ended March 31, 2007 due primarily to net gains on sales of loans and securities of $257,000 in the 2008 first quarter, compared to $107,000 of such gains in the first quarter of 2007. These loan and security sales, which totaled approximately $21 million, were part of our plan to increase liquidity and reduce the size of the balance sheet in order to improve our capital ratios.

Other Expenses. Total other expenses for the 2008 first quarter were $4.4 million, up $936,000 or 27% from the first quarter of 2007. The increase was primarily due to an additional $292,000 Federal Deposit Insurance Corporation insurance premium, which totaled to $307,000 in 2008, compared to $15,000 in 2007, together with a $189,000 increase in occupancy expense resulting from our two new branches and the relocation of our New Smyrna Beach branch in the fourth quarter of 2007, and a $150,000 increase in expenses related to foreclosed properties. Personnel expense increased $64,000, or 3% in the first quarter of 2008 due to the additions in personnel in our new branches and credit department, partially offset by other strategic personnel reductions.

Income Taxes. Our consolidated tax position resulted in a tax benefit of $1.4 million (an effective rate of 39.2%) for the three months ended March 31, 2008, compared to a tax benefit of $49,000 (an effective rate of 44.1%) for the same period in 2007. We recognized the deferred tax asset because management believes, based on detailed financial projections, that it is more likely than not, that we will have sufficient future earnings to utilize this asset to offset future income tax liabilities.

 

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Comparison of Operating Results for the Years Ended December 31, 2007 and 2006

General. We had a net loss for 2007 of $14.2 million, or $1.51 per basic and diluted share, compared to net earnings of $3.4 million, or $.38 per basic and $.37 per diluted share for 2006.

Interest Income. Interest income is the principal source of our earnings. Interest income was $42.5 million in 2007 compared to $43.8 million in 2006. Interest income on loans decreased to $38.5 million in 2007 from $39.9 million in 2006. The decrease in interest income on loans in 2007 is attributable primarily to a decrease in the average amount of loans outstanding and an increase in non-accrual loans during the year. During 2007, we recognized $1.1 million of interest income on non-accruing loans. Had these loans been performing in accordance with their terms, we would have recognized $4.0 million of interest income on these loans. Interest income on investment securities remained flat at $3.2 million for both 2007 and 2006, as the decrease in the average balance was offset by an increase in the average rate earned. Other interest income decreased from $721,000 in 2006 to $710,000 during 2007.

Interest Expense. Interest expense increased to $30.8 million for 2007 compared to $28.1 million for 2006, due to an increase in the average rate paid on interest-bearing liabilities offset by a decline in the average amount of deposit accounts and borrowings outstanding. Interest expense on deposits increased by $2.1 million in 2007 as a result of an increase in the average rate paid on deposits, which was partially offset by a decline in the average amount of deposits outstanding. Interest rates on these accounts will increase or decrease according to the general level of market interest rates. Interest on borrowings increased to $8.5 million in 2007 from $8.0 million in 2006 due to an increase in the average rate paid on borrowings outstanding, partially offset by a decrease in the average amount of borrowings. As a result of the Federal Home Loan Bank of Atlanta’s assessment of our recent financial condition, we no longer have the ability to access additional funds from the Federal Home Loan Bank.

Provisions for Loan Losses. A provision for loan losses is charged to earnings based upon our evaluation of the inherent losses in the loan portfolio. The general nature of lending results in periodic charge-offs of non-performing loans, despite our loan review process, credit standards and internal controls. Our provision for loan losses for 2007 was $16.4 million compared to $639,000 in 2006. Despite a decrease in our loan portfolio between December 31, 2006 and December 31, 2007, our provision increased for 2007 due to an increase in delinquencies and weaknesses in real estate values in Florida. Total charge-offs were $7.6 million in 2007 and we recognized recoveries of $2,000 on loans previously charged-off. For 2006, total charge-offs and recoveries were $39,000 and $21,000, respectively. At December 31, 2007, the allowance for loan losses was $13.9 million, or 2.42% of year-end loans net, compared to $5.1 million or .84% of net loans at December 31, 2006.

Our total charge-offs for 2007 included $4.1 million in residential construction loans, of which $1.9 million was related to loans originated and serviced by Transland Financial Services, Inc., which had diverted loan payoff remittance proceeds for $2.4 million that were never forwarded to Federal Trust Bank. The remaining $500,000 balance of the unremitted loan proceeds was collected from our insurance carrier subsequent to December 31, 2007. During 2007, Federal Trust Bank and two other financial institutions filed a joint petition for involuntary Chapter 11 bankruptcy against Transland Financial Services, Inc. with regard to the diverted loan payments. In November 2007, Federal Trust Bank entered into an inter-creditor agreement with certain shareholders of Transland Financial Services, Inc. for the termination of the bankruptcy action and the liquidation of the company. The amount and timing of any future payments from Transland Financial Services, Inc. on the diverted loan proceeds, if any, cannot be determined at the present time.

The remaining $2.1 million in residential construction charge-offs were for several residential builders located primarily in Flagler County, Florida. The loans to these builders included developed residential lots and partially constructed, as well as completed homes. Also included in charge-offs for 2007 was $1.55 million relating to 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 remaining $2.45 million balance of the loan is included in the foreclosed asset total at December 31, 2007.

One additional charge-off of approximately $842,000 was recognized on a loan secured by land for a planned residential development. The charge-off resulted from a settlement whereby Federal Trust Bank received

 

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approximately $4.6 million in cash in satisfaction of the loan amount due. The remaining charge-offs of approximately $1.2 million related to several single-family residential properties and commercial loan customers.

Total non-accrual loans at December 31, 2007, increased to $38.2 million compared to $12.0 million at December 31, 2006. The amount needed in the allowance for loan losses relating to nonaccrual loans is based on the particular circumstances of the individual loans, including the type, amount and value of the collateral, if any, and the overall composition and amount of the performing loans in the portfolio at the time of evaluation, and, as a result, will vary over time. In 2007, our residential mortgage loan portfolio increased $3.8 million. As of December 31, 2007, 60% of our loan portfolio consisted of residential mortgage loans, which historically have had the lowest risk of loss in the overall portfolio, and as a result have had a lower reserve percentage applied to them based on historical loss percentages.

Based on our analysis, we believe that our allowance for loan losses is adequate to absorb loan losses inherent in the loan portfolio as of December 31, 2007. The allowance is based on the current and anticipated future operating conditions, thereby causing our estimate of inherent losses to be susceptible to changes that could result in material adjustments to results of operations in the near term. The amount needed in the allowance for loan losses is based on the particular circumstances of the individual non-performing loans, including the type, amount and value of the collateral, if any. In addition, the overall composition and amount of the classified assets and performing loans in the portfolio at the time of evaluation is considered to determine the adequacy of the allowance, and, as a result, will vary over time. Although more emphasis is being placed on originating new commercial loans, the composition of our loan portfolio continues to be concentrated primarily in residential mortgage loans, and residential land, development and construction loans which have been negatively impacted in 2007. Loan repayments are dependent on loan underwriting and also on economic, operating and other conditions that may be beyond our control. Therefore, although we believe our allowance for loan losses is adequate to absorb loan losses inherent in the loan portfolio as of December 31, 2007, further deterioration of the economy and/or declines in residential real estate prices in the market areas in which we extend credit could cause actual losses in future periods to differ materially from amounts provided in the current period and could result in a material adjustment to operations.

Other Income. Other income decreased $1.3 million to $944,000 for the year ended December 31, 2007. This decline was primarily the result of net losses on sales of securities and foreclosed assets of $119,000 and $618,000, respectively. Other income decreased $306,000 which includes a decline in loan prepayment fees of $366,000.

Other Expense. Other expense increased $7.0 million, or 56%, to $19.5 million for the year ended December 31, 2007, from $12.5 million for 2006. Salary and employee benefits increased $3.9 million and occupancy expense increased $327,000 primarily due to the $2.9 million charge for the severance and retirement obligation related to the termination of our former Chief Executive Officer, which included $1.1 million to be paid pursuant to the termination of his employment agreement and $1.8 million pursuant to his supplemental retirement plan, and due to the opening of the Palm Coast branch in August 2007 and the Wekiva branch in November 2007. Professional expenses increased $549,000 primarily as a result of legal fees associated with our non-performing assets and fees for the profit improvement review program completed during the year. In addition, other volume and growth-related expense increases included data processing expense of $301,000, and marketing and advertising expenses of $139,000. Also included in other expenses for 2007 was a $749,000 other-than-temporary impairment of a single mortgage-backed security investment which experienced significant delinquencies and some portfolio losses.

Income Taxes. Income taxes decreased from $1.4 million (an effective tax rate of 29.8%) in 2006 to a tax benefit of $9.1 million (an effective tax rate of 39.1%) in 2007.

 

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Comparison of Operating Results for the Years Ended December 31, 2006 and 2005

General. We had net earnings for 2006 of $3.4 million, or $.38 per basic share and $.37 per diluted share, compared to net earnings of $4.4 million, or $.54 per basic and $.53 per diluted share, for 2005. The decrease in the net earnings in 2006 was due to increases in employee compensation and benefits and occupancy expense relating to the three new branches opened in 2006 and the staffing of our Mortgage Company, together with decreases in net gains from sales of loans and securities available for sale, partially offset by an increase in net interest income.

Interest Income. Interest income was $43.8 million in 2006 compared to $34.0 million in 2005. Interest income on loans increased to $39.9 million in 2006 from $31.5 million in 2005. The increase in interest income on loans in 2006 is attributable primarily to an increase in the yield earned on the loans outstanding during the year and to a lesser extent by an increase in the average amount of loans outstanding. Interest income on securities increased to $3.2 million in 2006 from $2.0 million in 2005 as a result of an increase in the average balance of securities available for sale and an increase in the yield earned on the securities. Other interest income increased from $492,000 in 2005 to $721,000 during 2006.

Interest Expense. Interest expense increased to $28.1 million for 2006 compared to $19.3 million for 2005, due to an increase in the average amount of deposit accounts and borrowings outstanding and an increase in the average rate paid. Interest expense on deposits increased by $7.5 million in 2006 as a result of an increase in the average amount of deposits and an increase in average rate paid on deposits. Interest expense on these accounts will increase or decrease according to the general level of interest rates. Interest on borrowings increased to $8.0 million in 2006 from $6.7 million in 2005 due to an increase in the average rate paid on borrowings outstanding, offset by a small decrease in the average amount of borrowings.

Provisions for Loan Losses. Our provisions for loan losses for 2006 were $639,000 compared to $650,000 in 2005 based on our evaluation of the loan portfolio. Total loans declined by $74.3 million, or 11%, in 2006. Of this amount, $43.8 million were residential mortgage loans, $45.0 million were residential construction loans and $2.2 million were land development and construction loans, all offset by an increase of $21.8 million in non-residential real estate loans. As of December 31, 2006, 56% of our loan portfolio was in residential mortgage loans, which historically have had the lowest risk of loss in the overall portfolio, and as a result have had a lower reserve percentage applied to them based on historical loss percentages.

Total charge-offs were $39,000 in 2006 compared to recoveries of $21,000 on loans previously charged-off. For 2005, total charge-offs and recoveries were $10,000 and $2,000, respectively. At December 31, 2006, the allowance for loan losses was $5.1 million, or ..84%, of year-end loans net, compared to $4.5 million, or .71%, of net loans at December 31, 2005. Total non-accrual loans at December 31, 2006, increased to $12.0 million compared to $2.1 million at December 31, 2005.

Other Income. Other income decreased $307,000 to $2.2 million for the year ended December 31, 2006. This decline was primarily the result of declines in gains on sales of loans and securities of $256,000 and a decline of $297,000, which includes a decline in prepayment loan fees of $136,000, loan servicing fee income of $184,000, and gains on dispositions of foreclosed assets of $69,000, offset by an increase in service charges and fees of $226,000.

Other Expense. Other expense increased $2.7 million or 27% to $12.5 million for the year ended December 31, 2006, from $9.8 million for 2005. Salary and employee benefits increased $1.7 million and occupancy expense increased $413,000 primarily due to the staffing and opening of branches in Lake Mary in January 2006, Port Orange in July 2006 and Eustis in October 2006, increases in the lending staff, and the overall growth. Specifically, the three new branches that opened in 2006 have added approximately $613,000 to our overhead expenses. Professional expenses increased $121,000 primarily as a result of the proxy contest and lawsuit filed by Keefe Managers, LLC, regarding the election of directors at the 2006 Annual Meeting of Shareholders. In addition, other volume and growth related expense increases included data processing expense of $117,000, marketing and advertising of $66,000, printing and stationary of $86,000, and $36,000 in telephone expense.

 

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Income Taxes. Income taxes decreased from $2.3 million (an effective tax rate of 34.1%) in 2005 to $1.4 million (an effective tax rate of 29.8%) in 2006.

Average Balance Sheets

The following tables set forth, for the periods indicated, information regarding: (i) the total dollar amount of interest income 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 cost; (iii) net interest income; (iv) interest rate spread; (v) net interest margin; and (vi) weighted average yields and rates. Average balances are based on average daily balances ($ in thousands):

 

     For the Three Months Ended March 31,  
     2008     2007  
     Average
Balance
   Interest    Average
Yield/
Cost(7)
    Average
Balance
   Interest    Average
Yield/
Cost(7)
 

Interest-earning assets:

                

Loans(1)

   $ 557,196    $ 7,999    5.74 %   $ 604,864    $ 9,699    6.41 %

Securities

     45,000      641    5.70       64,643      844    5.22  

Other interest-earning assets(2)

     39,629      366    3.69       12,183      176    5.78  

Total interest-earning assets

     641,825      9,006    5.61       681,690      10,719    6.29