UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark one)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2003
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 0-25045
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CENTRAL FEDERAL CORPORATION
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(Exact name of small business issuer as specified in its charter)
Delaware 34-1877137
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
601 Main Street, Wellsville, Ohio 43968
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(Address of principal executive offices)
(330) 532-1517
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(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date.
Class: Outstanding at October 31, 2003
Common stock, $0.01 par value 2,010,038 shares
Transitional Small Business Disclosure Format (check one) Yes [ ] No [X]
CENTRAL FEDERAL CORPORATION
FORM 10-QSB
QUARTER ENDED SEPTEMBER 30, 2003
INDEX
PART I. Financial Information
Page
----
Item 1. - Financial Statements (Unaudited)
Consolidated Balance Sheets as of September 30, 2003 and December 31, 2002 ............. 3
Consolidated Statements of Income for the three and nine months ended
September 30, 2003 and 2002............................................................. 4
Condensed Consolidated Statement of Changes in Shareholders' Equity
for the nine months ended September 30, 2003............................................ 5
Consolidated Statements of Comprehensive Income for the three and nine
months ended September 30, 2003 and 2002 ............................................... 6
Condensed Consolidated Statements of Cash Flows for the nine months
ended September 30, 2003 and 2002....................................................... 7
Notes to Consolidated Financial Statements ............................................. 8
Item 2. - Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................................... 11
Item 3. - Controls and Procedures............................................................. 17
PART II. Other Information
Item 1. Legal Proceedings.................................................................... 18
Item 2. Changes in Securities ............................................................... 18
Item 3. Defaults Upon Senior Securities...................................................... 18
Item 4. Submission of Matters to a Vote of Security Holders.................................. 18
Item 5. Other Information.................................................................... 18
Item 6. Exhibits and Reports on Form 8-K..................................................... 18
Signatures ................................................................................... 20
CENTRAL FEDERAL CORPORATION
Part I. Financial Information
Item 1. Financial Statements
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
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September 30, December 31,
2003 2002
---- ----
(Unaudited)
ASSETS
Cash and amounts due from depository institutions $ 20,994 $ 12,876
Interest-bearing deposits in other banks 3 3
----------------- -----------------
Total cash and cash equivalents 20,997 12,879
Time deposits with other banks 1,021 7,205
Securities available for sale 19,953 1,439
Securities held to maturity (estimated fair value
of $18,169 in 2002) - 17,822
Loans held for sale 201 -
Loans, net of allowance ($424 in 2003 and $361 in 2002) 55,368 62,565
Federal Home Loan Bank stock, at cost 3,590 3,485
Premises and equipment, net 1,328 833
Bank owned life insurance 3,216 3,068
Other assets 1,499 1,223
------------------ ------------------
Total assets $ 107,173 $ 110,519
================= =================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Non interest-bearing $ 1,264 $ 1,396
Interest-bearing 72,500 73,294
----------------- -----------------
Total deposits 73,764 74,690
Federal Home Loan Bank advances 11,211 11,430
Loan payable - 4,900
Advance payments by borrowers for taxes and insurance 131 487
Other liabilities 1,060 1,429
----------------- -----------------
Total liabilities 86,166 92,936
----------------- -----------------
Preferred stock, authorized 1,000,000 shares, no shares
issued and outstanding - -
Common stock, $.01 par value, 6,000,000 shares
authorized, 2,278,520 and 1,938,871 shares issued
in 2003 and 2002, respectively 23 19
Additional paid-in capital 11,690 8,306
Retained earnings, partially restricted 12,380 14,085
Unearned stock based incentive plan shares (351) (160)
Treasury stock, 268,482 and 292,950 shares, at cost (2,946) (3,270)
Unearned Employee Stock Ownership Plan shares - (1,425)
Accumulated other comprehensive income 211 28
----------------- -----------------
Total shareholders' equity 21,007 17,583
----------------- -----------------
Total liabilities and shareholders' equity $ 107,173 $ 110,519
================= =================
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See accompanying notes to consolidated financial statements.
3
CENTRAL FEDERAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)
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Three months ended Nine months ended
September 30, September 30,
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2003 2002 2003 2002
---- ---- ---- ----
INTEREST INCOME
Loans $ 1,116 $ 1,259 $ 3,352 $ 4,004
Interest on securities 288 419 876 1,306
FHLB stock dividends 36 41 105 117
--------------- -------------- -------------- ---------------
Total interest income 1,440 1,719 4,333 5,427
INTEREST EXPENSE
Deposits 458 628 1,219 1,977
FHLB borrowings 156 163 501 504
Loan payable - 74 17 237
--------------- -------------- -------------- ---------------
Total interest expense 614 865 1,737 2,718
NET INTEREST INCOME 826 854 2,596 2,709
Provision for loan losses - 5 83 5
--------------- -------------- -------------- ---------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 826 849 2,513 2,704
NON-INTEREST INCOME
Service charges 76 23 220 71
Gain on sale of loans 139 73 354 245
Gain on sale of securities 1 1 1 11
Other income 53 38 154 57
--------------- -------------- -------------- ---------------
Total non-interest income 269 135 729 384
NON-INTEREST EXPENSE
Salaries and employee benefits 608 440 2,893 1,342
Net occupancy expense 77 30 192 75
Data processing expense 64 49 176 147
FDIC assessments 3 3 13 10
Franchise taxes 62 74 255 225
Professional fees 76 40 445 191
Printing and supplies 37 11 98 50
Amortization and depreciation 34 27 100 75
Advertising 5 5 28 17
Other expenses 211 149 544 259
--------------- -------------- -------------- ---------------
Total non-interest expense 1,177 828 4,744 2,391
Income (loss) before income taxes (82) 156 (1,502) 697
Income tax expense (benefit) (48) 42 (397) 234
---------------- -------------- --------------- ---------------
Net income (loss) $ (34) $ 114 $ (1,105) $ 463
================ ============== =============== ===============
Earnings (loss) per share
Basic $ (.02) $ .08 $ (.62) $ .30
Diluted $ (.02) $ .07 $ (.60) $ .29
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See accompanying notes to consolidated financial statements.
4
CENTRAL FEDERAL CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(In thousands, except per share data)
(Unaudited)
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Unearned
Employee
Additional Stock
Common Paid-in Retained Ownership
Stock Capital Earnings Plan Shares
----- ------- -------- -----------
BALANCES AT JANUARY 1, 2003 $ 19 $ 8,306 $ 14,085 $ (1,425)
Release of ESOP shares (9) 524
Sale of ESOP shares 901
Issuance of stock based incentive awards
(27,000 shares) 317
Release of incentive shares
Cash dividends ($.27 per share) (502)
Issuance of common stock (312,649 shares),
net of offering costs of $64 4 3,076
Stock options exercised (24,468 shares) (98)
Net (loss) (1,105)
Other comprehensive income
----------- ----------- ----------- -----------
BALANCES AT SEPTEMBER 30, 2003 $ 23 $ 11,690 $ 12,380 $ -
=========== =========== =========== ===========
Unearned
Stock Accumulated
Based Other Total
Incentive Treasury Comprehensive Shareholders'
Plan Shares Stock Income Equity
----------- ----- ------ ------
BALANCES AT JANUARY 1, 2003 $ (160) $ (3,270) $ 28 $ 17,583
Release of ESOP shares 515
Sale of ESOP shares 901
Issuance of stock based incentive awards
(27,000 shares) (317) -
Release of incentive shares 126 126
Cash dividends ($.27 per share) (502)
Issuance of common stock (312,649 shares),
net of offering costs of $64 3,080
Stock options exercised (24,468 shares) 324 226
Net (loss) (1,105)
Other comprehensive income 183 183
----------- ----------- ----------- ---------
BALANCES AT SEPTEMBER 30, 2003 $ (351) $ (2,946) $ 211 $ 21,007
=========== =========== =========== =========
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See accompanying notes to consolidated financial statements.
5
CENTRAL FEDERAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
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Three Months Ended Nine Months Ended
September 30, September 30,
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2003 2002 2003 2002
---- ---- ---- ----
NET INCOME (LOSS) $ (34) $ 114 $ (1,105) $ 463
Change in net unrealized gain (loss)
on securities available for sale (123) 8 (179) 27
Less: Reclassification adjustment for
accumulated gains and losses later
recognized in net income 1 1 1 11
--------------- -------------- --------------- ---------------
Net unrealized gains and losses (124) 7 (180) 16
Unrealized gain on securities transferred
from held to maturity to available for
sale during the period - - 458 -
Tax effect 42 (3) (95) (9)
--------------- --------------- --------------- ----------------
Unrealized gains (losses)
on securities (82) 4 183 7
---------------- -------------- -------------- ---------------
COMPREHENSIVE INCOME (LOSS) $ (116) $ 118 $ (922) $ 470
================ ============== =============== ===============
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See accompanying notes to consolidated financial statements.
6
CENTRAL FEDERAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
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Nine Months Ended
September 30,
-------------
2003 2002
---- ----
NET CASH FROM OPERATING ACTIVITIES $ (206) $ 5,673
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available for sale
Purchases (33,684) (228)
Proceeds from sales 1,001 319
Proceeds from maturities and payments 24,680 513
Securities held to maturity
Purchases - (18,020)
Proceeds from maturities and payments 7,232 18,642
Change in time deposits with other banks 6,184 (149)
Net purchases of premises and equipment (595) 88
Net change in loans 7,077 8,182
--------------- ----------------
Net cash from investing activities 11,895 9,347
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits (926) 710
Net change in advance payments by borrowers for taxes and insurance (356) 111
Payment of loan payable (4,900) (2,100)
Cash dividends (476) (459)
Proceeds from stock options exercised 226 -
Purchase of treasury stock - (651)
Proceeds from private placement 3,080 -
Repayment of long-term FHLB advances (219) (6,830)
--------------- ----------------
Net cash from financing activities (3,571) (9,219)
NET CHANGE IN CASH AND CASH EQUIVALENTS 8,118 5,801
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 12,879 4,380
--------------- ----------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 20,997 $ 10,181
=============== ================
Supplemental disclosure:
Non-cash transfer of securities from
held to maturity to available for sale $ 10,533 $ -
=============== ================
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See accompanying notes to consolidated financial statements.
7
CENTRAL FEDERAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation:
---------------------
The accompanying consolidated financial statements have been prepared pursuant
to rules and regulations of the Securities and Exchange Commission the ("SEC")
and in compliance with accounting principles generally accepted in the United
States of America. Because this report is based on an interim period, certain
information and footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the
United States of America have been condensed or omitted.
In the opinion of the Management of Central Federal Corporation (the
"Corporation"), the accompanying consolidated financial statements for the nine
months and three months ended September 30, 2003 and 2002 include all
adjustments, consisting of only normal recurring adjustments, necessary for a
fair presentation of the financial condition and the results of operations for
those periods. The financial performance reported for the Corporation for the
nine months and three months ended September 30, 2003 are not necessarily
indicative of the results to be expected for the full year. This information
should be read in conjunction with the Corporation's Annual Report to
Shareholders and Form 10-KSB for the period ended December 31, 2002. Reference
is made to the accounting policies of the Corporation described in Note 1 of the
Notes to Consolidated Financial Statements contained in the Corporation's 2002
Annual Report that was filed as Exhibit 13 to the Form 10-KSB. The Corporation
has consistently followed those policies in preparing this form 10-QSB.
Securities:
----------
The Corporation transferred securities with a carrying value of $10.5 million
previously classified as "held to maturity" to "available for sale" during the
quarter ended June 30, 2003. The unrealized gain on the securities transferred
totaled $458,000 before tax. The Corporation's equity and accumulated other
comprehensive income increased $302,000 after tax as a result of the transfer.
Shareholders' Equity:
--------------------
The Corporation sold 312,649 shares of its common stock in a private placement
that commenced in April 2003 and was completed in August 2003. Net proceeds from
this sale, which totaled approximately $3.1 million, will be used to support
future growth and expansion. Costs associated with this offering in the amount
of $64,000 were capitalized. Important information relating to this offering can
be found in the Corporation's Form 10-QSB for the quarter ended June 30, 2003
and as part of the offering materials.
Earnings Per Share:
------------------
Basic earnings per common share is net income divided by the weighted average
number of common shares outstanding during the period. ESOP shares are
considered outstanding for this calculation unless unearned. Stock-based
incentive plan shares are considered outstanding as they become vested. Diluted
earnings per common share include the dilutive effect of stock-based incentive
plan shares and the additional potential common shares issuable under stock
options.
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8
CENTRAL FEDERAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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The weighted average number of common shares outstanding for basic and diluted
earnings per share computations were as follows:
(In thousands, except per share data)
Three Months Ended Nine Months Ended
September 30, September 30,
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2003 2002 2003 2002
---- ---- ---- ----
Numerator:
Net income (loss) $ (34) $ 114 $ (1,105) $ 463
Denominator:
Weighted-average common
shares outstanding (basic) 1,977,276 1,516,970 1,771,234 1,542,098
Dilutive effect of assumed exercise
of stock options and incentive plan shares 67,120 23,078 64,274 33,578
Weighted-average common
shares outstanding (diluted) 2,044,396 1,540,048 1,835,508 1,575,676
Earnings (loss) per share:
Basic $ (.02) $ .08 $ (.62) $ .30
Diluted $ (.02) $ .07 $ (.60) $ .29
Stock Compensation:
------------------
Employee compensation expense under stock options is reported using the
intrinsic value method. No stock-based compensation cost is reflected in net
income, as all options granted had an exercise price equal to or greater than
the market price of the underlying common stock at date of grant. The following
table illustrates the effect on net income and earnings per share if expense was
measured using the fair value recognition provisions of Statement of Financial
Accounting Standards ("SFAS") No. 123, Accounting for Stock-Based Compensation.
(In thousands, except per share data)
Three months ended September 30, Nine months ended September 30,
----------------------------------- -----------------------------------
2003 2002 2003 2002
---------------- ---------------- ---------------- ----------------
Net income (loss), as reported $ (34) $ 114 $ (1,105) $ 463
Less stock-based compensation
expense determined under fair value
based method (45) (30) (116) (91)
---------------- ---------------- ---------------- ----------------
Pro forma net income (loss) (79) 84 (1,221) 372
================ ================ ================ ================
Based earnings per share, as reported $ (0.02) $ 0.08 $ (0.62) $ 0.30
Pro forma basic earnings per share (0.04) 0.06 (0.69) 0.24
Diluted earnings per share, as reported (0.02) 0.07 (0.60) 0.29
Pro forma diluted earnings per share (0.04) 0.05 (0.67) 0.24
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9
CENTRAL FEDERAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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The proforma effects are computed using option pricing models, using the
following weighted-average assumptions as of grant date:
Granted 2003
------------
Risk-free interest rate 2.96%
Expected option life 5.8 years
Expected stock price volatility 44%
Dividend yield 3.25%
Weighted average fair value of options granted $3.81
Employee Benefits:
------------------
During 2003, salaries and employee benefits expense included $1.4 million
related to termination of the Bank's leveraged ESOP, a supplemental executive
retirement agreement in connection with the retirement of William R. Williams as
President and a severance agreement with John A. Rife, former Executive Vice
President and Treasurer.
Employee Stock Ownership Plan (ESOP):
-------------------------------------
At the time of termination, there were 119,416 unearned ESOP shares. From the
119,416 shares, 77,818 shares were sold and the proceeds were used to repay the
remaining balance of the loan incurred to fund the ESOP plan at inception and
the remaining 41,598 shares were allocated to participants on a fully vested
basis. The cost associated with terminating the ESOP totaled $509,000.
Pension Plan:
-------------
The Corporation participates in a multiemployer contributory trustee pension
plan. The retirement benefits to be provided by the plan were frozen as of June
30, 2003 and future employee participation in the plan was stopped. The plan was
maintained for all eligible employees and the benefits were funded as accrued
through the purchase of individual life insurance policies. The cost of funding
was charged directly to operations. During the quarter ended March 31, 2003, the
Corporation recorded an expense of $413,000 representing the unfunded liability
associated with a decision to withdraw from the plan. However, this decision was
reversed during the quarter ended June 30, 2003, as was the expense, when the
Corporation decided, instead, only to stop future employee participation in the
plan, not to withdraw. The unfunded liability at June 30, 2003 totaled $96,000.
The Corporation expects to make a contribution of $35,000 for the plan year
ending June 30, 2004. The Corporation made no contributions for 2002 or 2001.
Reclassifications:
------------------
Certain items in the prior year financial statements were reclassified to
conform to the current year presentation.
NOTE 2 - EFFECT OF NEW ACCOUNTING STANDARDS
The Financial Accounting Standards Board ("FASB") recently issued SFAS No. 149,
"Amendment of Statement 133 on Derivative Instruments and Hedging
Activities." This statement amends and clarifies financial accounting and
reporting for derivative instruments, including certain derivative instruments
embedded in other contracts. This statement was effective for contracts entered
into or modified after July 1, 2003, and did not have a material effect on the
Corporation's operating results or financial condition.
The FASB recently issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." This statement
establishes standards on the classification and measurement of certain financial
instruments with characteristics of both debt and equity. This statement was
effective for financial instruments entered into or modified after May 31, 2003,
and otherwise was effective at the beginning of the first interim period
beginning after June 15, 2003 and did not have a material effect on the
Corporation's operating results or financial condition.
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10
CENTRAL FEDERAL CORPORATION
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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The following analysis discusses changes in financial condition and results of
operations of the Corporation and its wholly owned subsidiary, Central Federal
Bank ("Bank"), during the periods included in the Condensed Consolidated
Financial Statements which are part of this filing.
FORWARD-LOOKING STATEMENTS
When used in this Form 10-QSB, or in future filings by Central Federal
Corporation with the Securities and Exchange Commission, in the Corporation's
press releases or other public or shareholder communications, or in oral
statements made with the approval of an authorized executive officer, the words
or phrases "will likely result", "are expected to", "will continue", "is
anticipated", "estimate", "project" or similar expressions are intended to
identify "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Such forward-looking statements
involve known and unknown risks, uncertainties and other factors, which may
cause the Corporation's actual results to be materially different from those
indicated. Such statements are subject to certain risks and uncertainties
including changes in economic conditions in the market areas where the
Corporation conducts business, which could materially impact credit quality
trends, changes in policies by regulatory agencies, fluctuations in interest
rates, demand for loans in the market areas where the Corporation conducts
business, and competition that could cause actual results to differ materially
from historical earnings and those presently anticipated or projected. The
Corporation wishes to caution readers not to place undue reliance on any such
forward-looking statements, which speak only as of the date made. The
Corporation undertakes no obligation to publicly release the result of any
revisions that may be made to any forward-looking statements to reflect events
or circumstances after the date of such statements or to reflect the occurrence
of anticipated or unanticipated events.
GENERAL
The Corporation's results of operations are dependent primarily on net interest
income, which is the difference ("spread") between the interest income earned on
its loans and securities and its cost of funds, consisting of interest paid on
its deposits and borrowed funds. The interest rate spread is affected by
regulatory, economic and competitive factors that influence interest rates, loan
demand and deposit flows. The Corporation's net income is also affected by,
among other things, loan fee income, provisions for loan losses, service
charges, operating expenses and franchise and income taxes. The Corporation's
revenues are derived primarily from interest on mortgage loans, consumer loans,
commercial loans and securities, as well as income from service charges and loan
sales. The Corporation's operating expenses principally consist of interest
expense, employee compensation and benefits, occupancy and other general and
administrative expenses. The Corporation's results of operations are
significantly affected by general economic and competitive conditions,
particularly changes in market interest rates, government policies and actions
of regulatory authorities. Future changes in applicable laws, regulations or
government policies may also materially impact the Corporation.
MANAGEMENT STRATEGY
The Corporation is in the process of implementing significant changes to utilize
its strong capital position and take advantage of opportunities for expansion
into business financial services and growth in the Fairlawn and Columbus, Ohio
markets. To further strengthen its capital position, the Corporation recently
completed the private placement of 312,649 shares which generated an additional
$3.1 million in capital to be used to fund growth. The management team has been
expanded and strengthened. A temporary office has opened in Fairlawn, Ohio and
an office is planned for Columbus, Ohio. The data processing system was
converted in the current quarter, and the Corporation's subsidiary Bank started
originating commercial loans.
The Corporation's management team now includes Raymond E. Heh, former Chairman,
President and CEO of Bank One Akron NA, who was named Regional President, Summit
County. Parker MacDonell, former Senior Vice President of Bank One Columbus NA
and third generation Ohio banker, was named Regional President, Columbus. Edward
Baumgardner, former President and CEO of Potters Bank and Potters Financial
Corporation, was named Regional President, Columbiana County. Eloise L. Mackus,
Esq. joined the Corporation and Bank as Senior Vice President, General Council
and Secretary. Three directors were added to the Boards of the Corporation and
the Bank
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11
CENTRAL FEDERAL CORPORATION
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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in April 2003: Mark S. Allio, former President of Third Federal Savings,
Cleveland; William R. Downing, President, R.H. Downing Company; and Jerry F.
Whitmer, Managing Partner, Brouse & McDowell. During the quarter ended September
30, 2003, William R. Williams, former President and CEO of Central Federal
Corporation, retired from the Board of Directors.
A lease was signed for office space in Columbus and the office is expected to
open during the quarter ending December 31, 2003. Construction of a new office
building is underway in Fairlawn and is expected to be completed in the first
quarter of 2004, with the Bank leasing the entire first floor. The Bank was
granted approval to begin operations in Fairlawn during the quarter ended
September 30, 2003 and is currently operating out of a temporary office until
construction of the new facility is complete. The Corporation is a one-third
owner in a limited liability company that will own and manage the Fairlawn
building.
The Corporation has allowed mortgage loan portfolio balances to decline as
interest rates have fallen to 40 year lows and consumers continue to refinance.
Current originations of long-term fixed-rate mortgages are sold rather than
retained in portfolio. The Corporation has shortened the maturities of its
securities in anticipation of growth in the commercial loan portfolio. To
improve liquidity, all securities were reclassified as available for sale during
the quarter ended June 30, 2003. Cash flows from mortgage repayments and
securities will be used to fund commercial loan growth.
Near-term profitability is expected to be impacted by the cost of opening the
offices in Fairlawn and Columbus and the additions made to the management team,
as noted earlier. Profitability will be further impacted by Management's
decision to shorten security maturities and by allowing the mortgage loan
portfolio balances to decline. Profitability may also be negatively impacted by
a rise in mortgage interest rates, which may cause consumer refinancing to slow,
thereby reducing the Bank's volume of loan originations and loan sales. Longer
term, however, growth in commercial loans and deposits at the Fairlawn and
Columbus offices are expected to result in improved financial performance.
The Corporation is not aware of any market or institutional trends, events or
uncertainties that are expected to have a material effect on liquidity, capital
resources or operations. The Corporation is not aware of any current
recommendations by its regulators which would have a material effect if
implemented.
FINANCIAL CONDITION
General. Assets totaled $107.2 million at September 30, 2003, a decrease of $3.3
million, or 3.0% from $110.5 million at December 31, 2002. The decrease was
primarily due to repayment of the remaining $4.9 million balance of a loan which
had been obtained to fund payment of a return of capital dividend declared in
2000 and a decline in deposits, partially offset by additional capital raised in
the private placement.
Cash and cash equivalents. Cash and cash equivalents totaled $21.0 million at
September 30, 2003, an increase of $8.1 million or 63.0% from $12.9 million at
December 31, 2002. The increase was primarily due to cash from mortgage loan
repayments and prepayments as the mortgage portfolio continues to decline
pursuant to management's strategy to sell current loan production rather than
hold the loans in portfolio during this period of historically low interest
rates.
Time deposits with other banks. Time deposits with other banks declined $6.2
million during the quarter and totaled $1.0 million at September 30, 2003,
compared to $7.2 million at December 31, 2002, due to maturity of a $7.0 million
certificate of deposit during the quarter ended March 31, 2003.
Securities. Securities available for sale increased $18.5 million during the
quarter and totaled $20.0 million at September 30, 2003, compared to $1.4
million at December 31, 2002. Securities held to maturity decreased $17.8
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12
CENTRAL FEDERAL CORPORATION
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
-------------------------------------------------------------------------------
million during the same time frame. During the quarter ended June 30, 2003, the
Corporation transferred all securities previously classified as "held to
maturity," which had a total carrying value of $10.5 million, to "available for
sale". The unrealized gain on the securities transferred totaled $458,000 before
tax. The Corporation's equity and accumulated other comprehensive income
increased $302,000 after tax as a result of the transfer. Management anticipates
securities purchased in the future will be classified as "available for sale".
Loans. Loans, net totaled $55.4 million at September 30, 2003, a decrease of
$7.2 million or 11.5% from $62.6 million at December 31, 2002 primarily as a
result of management's strategy to sell current mortgage production in the
existing low rate environment rather than hold these long-term, low fixed-rate
loans in portfolio. The decline in mortgage loan balances was partially offset
by growth in commercial loans pursuant to management's strategy to expand into
business financial services. Mortgage loan balances totaled $37.0 million at
September 30, 2003, a decline of $12.6 or 25.4% from $49.6 million at December
31, 2002. Commercial loan balances totaled $5.3 million at September 30, 2003,
an increase of $5.0 million from $261,000 at December 31, 2002.
Deposits. Deposits decreased $926,000, or 1.2%, during the first nine months and
totaled $73.8 million at September 30, 2003, compared to $74.7 million at
December 31, 2002. The decline was primarily due to normal fluctuations in
customer accounts.
Loan payable. The $4.9 million loan payable balance at December 31, 2002 was
repaid in full during 2003 and represented the remaining balance of a $7.0
million loan which had been obtained to fund a return of capital dividend
declared in 2000. The loan was repaid with funds from the maturity of the
certificate of deposit discussed above.
Shareholders' equity. Total shareholders' equity increased $3.4 million or 19.5%
during the first nine months and totaled $21.0 million at September 30, 2003,
compared to $17.6 million at December 31, 2002. The increase in shareholders'
equity was primarily due to the completion of a private placement of 312,649
shares of the Corporation's common stock in August 2003, which generated an
additional $3.1 million in capital. The Corporation's capital ratio increased to
19.6% at September 30, 2003 from 15.9% at December 31, 2002 primarily as a
result of the capital generated by the private placement.
Office of Thrift Supervision (OTS) regulations require savings institutions to
maintain certain minimum levels of regulatory capital. Additionally, the
regulations establish a framework for the classification of savings institutions
into five categories: well-capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized and critically
undercapitalized. Generally, an institution is considered well-capitalized if it
has a core (Tier 1) capital ratio of at least 5.0% (based on adjusted total
assets); a core (Tier 1) risk-based capital ratio of a least 6.0%; and a total
risk-based capital ratio of at least 10.0%. The Bank had capital ratios above
the well-capitalized levels at September 30, 2003 and December 31, 2002.
COMPARISON OF THE RESULTS OF OPERATIONS FOR THE
THREE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
General. Net (loss) for the quarter ended September 30, 2003 totaled ($34,000)
or ($.02) per diluted share, compared to net income of $114,000 or $.07 per
diluted share for the quarter ended September 30, 2002. The decline in net
income was primarily due to increased non-interest expenses associated with
Management's strategy to expand into business financial services and the
Fairlawn and Columbus, Ohio markets as discussed above.
Net interest income. Net interest income is the largest component of the
Corporation's net income, and consists of the difference between interest income
generated on interest-earning assets and interest expense incurred on
interest-bearing liabilities. Net interest income is primarily affected by the
volumes, interest rates and composition of interest-earning assets and
interest-bearing liabilities.
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13
CENTRAL FEDERAL CORPORATION
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
-------------------------------------------------------------------------------
Net interest income decreased $28,000 or 3.3% during the quarter ended September
30, 2003 to $826,000, compared to $854,000 for the quarter ended September 30,
2002. Interest income decreased by $279,000 or 16.2% to $1.4 million for the
third quarter of 2003, compared to $1.7 million for the third quarter of 2002.
The decline was due to a decrease in mortgage loan portfolio balances and
investment in securities with short-term maturities, and resultant lower yields,
in order to reduce interest rate risk and provide liquidity for growth in
commercial loans, as discussed above. Interest expense decreased $251,000 or
29.0% during the quarter ended September 30, 2003 to $614,000 from $865,000 for
the quarter ended September 30, 2002. The decline in interest expense resulted
from a decrease in interest rates paid on deposits as market interest rates have
declined, and from reduced interest expense on borrowed funds, primarily as a
result of the repayment of the $4.9 million loan payable discussed above.
Provision for loan losses. Management analyzes the adequacy of the allowance for
loan losses regularly through reviews of the performance of the loan portfolio
considering economic conditions, changes in interest rates and the effect of
such changes on real estate values and changes in the composition of the loan
portfolio. The allowance for loan losses is a material estimate that is
particularly susceptible to significant changes in the near term and is
established through a provision for loan losses based on Management's evaluation
of the risk inherent in its loan portfolio and the general economy. Such
evaluation, which includes a review of all loans for which full collectibility
may not be reasonably assured, considers, among other matters, the estimated
fair value of the underlying collateral, economic conditions, historical loan
loss experience, changes in the size and growth of the loan portfolio and other
factors that warrant recognition in providing for an adequate loan loss
allowance. Future additions to the allowance for loan losses will be dependent
on these factors.
Based on Management's review, no provision for loan losses was recorded in the
quarter ended September 30, 2003. The provision for loan losses totaled $5,000
for the quarter ended September 30, 2002. At September 30, 2003, the allowance
for loan losses represented .75% of total loans compared to .57% at December 31,
2002. Further, nonperforming loans, all of which are nonaccrual loans, were
$829,000 at September 30, 2003 and $781,000 at December 31, 2002. At September
30, 2003 and December 31, 2002, nonaccrual loans represented 1.5% and 1.2%,
respectively, of the net loan balance. Management believes the allowance for
loan losses is adequate to absorb probable losses at September 30, 2003;
however, future additions to the allowance may be necessary based on changes in
economic conditions and the factors discussed in the previous paragraph.
Non-interest income. Non-interest income increased $134,000 to $269,000 in the
third quarter of 2003, compared to $135,000 in the third quarter of 2002,
primarily due to increased gains on the sale of loans and increased service
charges. Gain on sale of loans totaled $139,000 during the quarter ended
September 30, 2003, an increase of $66,000 from $73,000 during the quarter ended
September 30, 2002 due to increased originations experienced during the current
low market rate environment and Management's strategic decision to sell current
production rather than retain these long-term, low fixed-rate loans in
portfolio. During the three months ended September 30, 2003, the Bank sold $5.3
million in mortgage loans, all of which were loans originated during the current
year. The Bank has sold loans in the past, and management anticipates it will
continue to do so depending on the market environment. Service charges totaled
$76,000 during the quarter ended September 30, 2003, an increase of $53,000 from
$23,000 during the quarter ended September 30, 2002. The increase was primarily
due to additional loan servicing income and customer account fees.
Non-interest expense. Non-interest expense increased $349,000 or 42.1% and
totaled $1.2 million in the third quarter of 2003, compared to $828,000 in the
third quarter of 2002. The increase in non-interest expense was primarily due to
management and staff restructuring and expansion to new locations in the
Fairlawn and Columbus markets. These expenses included higher salaries and
employee benefits, higher occupancy expense and contracted professional fees.
Non-interest expense also increased due to conversion of the data processing
system, which was completed during the third quarter. Costs of $77,000 were
incurred for company-wide training and related expenses on the new core data
processing system during the quarter ended September 30, 2003.
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14
CENTRAL FEDERAL CORPORATION
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
-------------------------------------------------------------------------------
Income taxes. The income tax benefit associated with the net loss for the
quarter ended September 30, 2003 totaled $48,000 compared to $42,000 income tax
expense associated with net income for the three months ended September 30,
2002.
COMPARISON OF RESULTS OF OPERATIONS FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
General. Net (loss) for the nine months ended September 30, 2003 totaled ($1.1)
million or ($.60) per diluted share, compared to net income of $463,000, or $.29
per diluted share for the nine months ended September 30, 2002. The decline in
net income was primarily due to increased non-interest expenses associated with
Management's strategy to expand into business financial services and the
Fairlawn and Columbus, Ohio markets as discussed above, termination of the
Corporation's ESOP and expenses related to agreements with former executives,
described below.
Net interest income. Net interest income decreased $113,000 or 4.2% during the
nine months ended September 30, 2003 to $2.6 million, compared to $2.7 million
for the nine months ended September 30, 2002. Interest income decreased by $1.1
million or 20.2% to $4.3 million for the nine months ended September 30, 2003,
compared to $5.4 million for the prior year period. The decline was due to a
decrease in mortgage loan portfolio balances and investment in securities with
short-term maturities, and resultant lower yields, in order to reduce interest
rate risk and provide liquidity for growth in commercial loans, as discussed
above. Interest expense decreased $981,000 or 36.1% during the nine months ended
September 30, 2003 to $1.7 million from $2.7 million for the prior year period.
The decline in interest expense resulted from a decrease in interest rates paid
on deposits as market interest rates have declined and from reduced interest
expense on borrowed funds, primarily as a result of the repayment of the $4.9
million loan payable discussed above.
Provision for loan losses. Based on Management's review of the allowance for
loan losses, described above, the provision for loan losses increased $78,000
and totaled $83,000 for the nine month period ended September 30, 2003, compared
to $5,000 for the nine month period ended September 30, 2002. The provision for
loan losses recorded in 2003 reflects the increase in the Bank's commercial loan
portfolio.
Non-interest income. Non-interest income increased $345,000 and totaled $729,000
for the nine months ended September 30, 2003, compared to $384,000 for the prior
year period, primarily due to increased gains on the sale of loans and increased
service charges. Gain on sale of loans totaled $354,000 for the nine months
ended September 30, 2003, an increase of $109,000 from $245,000 for the prior
year period, due to increased originations experienced during the current low
market rate environment and Management's strategic decision to sell current
production rather than retain these long-term, low fixed-rate loans in
portfolio. During the nine months ended September 30, 2003, the Bank sold $15.8
million in mortgage loans, all of which were loans originated during the current
nine month period. Service charges totaled $220,000 during the nine months ended
September 30, 2003, an increase of $149,000 from $71,000 during the prior year
period, primarily due to additional loan servicing income and customer account
fees.
Non-interest expense. Non-interest expense increased $2.4 million and totaled
$4.7 million for the nine months ended September 30, 2003, compared to $2.4
million for the prior year period. The increase in non-interest expense was
primarily due to management and staff restructuring and expansion to new
locations in the Fairlawn and Columbus markets. These expenses included higher
salaries and employee benefits, higher occupancy expense and contracted
professional fees. Non-interest expense also increased due to conversion of the
data processing system, which was completed during the third quarter. Costs of
$77,000 were incurred for company-wide training and relate expenses on the new
core data processing system during the quarter ended September 30, 2003.
Additionally, salaries and employee benefits expense includes $509,000 in
expense associated with termination of the Corporation's ESOP during the quarter
ended March 31, 2003 and $917,000 in expenses related to agreements with former
executives.
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15
CENTRAL FEDERAL CORPORATION
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
-------------------------------------------------------------------------------
Income taxes. The income tax benefit associated with the net loss for the nine
months ended September 30, 2003 totaled $397,000, compared to $234,000 income
tax expense associated with net income for the nine months ended September 30,
2002.
CRITICAL ACCOUNTING POLICIES
The Corporation follows financial accounting and reporting policies that are in
accordance with generally accepted accounting principles in the United States of
America. These policies are presented in Note 1 to the consolidated audited
financial statements in Central Federal Corporation's 2002 Annual Report to
Shareholders incorporated by reference into Central Federal Corporation's 2002
Annual Report on Form 10-KSB. Some of these accounting policies are considered
to be critical accounting policies. Critical accounting policies are those
policies that require management's most difficult, subjective or complex
judgments, often as a result of the need to make estimates about the effect of
matters that are inherently uncertain. The Corporation has identified accounting
polices that are critical accounting policies and an understanding of these
policies is necessary to understand our financial statements. A critical
accounting policy relates to determining the adequacy of the allowance for loan
losses. Additional information regarding this policy is included in the section
captioned "Provision for Loan Losses". Management believes that the judgments,
estimates and assumptions used in the preparation of our consolidated financial
statements are appropriate given the factual circumstances at the time.
LIQUIDITY AND CAPITAL RESOURCES
In general terms, liquidity is a measurement of the Corporation's ability to
meet its cash needs. The Corporation's objective in liquidity management is to
maintain the ability to meet loan commitments, purchase securities or to repay
deposits and other liabilities in accordance with their terms without an adverse
impact on current or future earnings. The Corporation's principal sources of
funds are deposits, amortization and prepayments of loans, maturities, sales and
principal receipts of securities, borrowings and operations. The Bank uses the
funds generated to support its lending and investment activities as well as any
other demands for liquidity such as deposit outflows. While maturities and
scheduled amortization of loans are predictable sources of funds, deposit flows
and loan prepayments are greatly influenced by general interest rates, economic
conditions and competition. OTS regulations require the Bank to maintain
sufficient liquidity to ensure its safe and sound operation. Management believes
that the Bank's liquidity is sufficient.
At September 30, 2003, the Bank exceeded all of its regulatory capital
requirements with a Tier 1 capital level of $16.1 million, or 15.2% of adjusted
total assets, which exceeds the required level of $5.3 million, or 5.0%; Tier 1
risk-based capital level of $16.1 million, or 32.8% of risk-weighted assets,
which exceeds the required level of $3.0 million, or 6.0%; and risk-based
capital of $16.6 million, or 33.7% of risk-weighted assets, which exceeds the
required level of $4.9 million, or 10.0%.
The Bank's most liquid assets are cash and cash equivalents. The levels of those
assets are dependent on the Bank's operating, financing, lending and investing
activities during any given period. At September 30, 2003, cash and cash
equivalents totaled $21.0 million, or 19.6% of total assets.
The Bank has other sources of liquidity if a need for additional funds arises,
including Federal Home Loan Bank ("FHLB") advances. At September 30, 2003, the
Bank had unused borrowing capacity from the FHLB of $44.4 million. Depending on
market conditions, the pricing of deposit products and FHLB advances, the Bank
may use FHLB borrowings to fund asset growth.
The Bank relies primarily on competitive rates, customer service and
long-standing relationships with customers to retain deposits. Based on the
Bank's experience with deposit retention and current retention strategies,
management believes that, although it is not possible to predict future terms
and conditions upon renewal, a significant portion of such deposits will remain
with the Bank.
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16
CENTRAL FEDERAL CORPORATION
Item 3.
CONTROLS AND PROCEDURES
-------------------------------------------------------------------------------
(a) The Corporation maintains disclosure controls and procedures that are
designed to ensure that information required to be disclosed in the
Corporation's Exchange Act reports is recorded, processed, summarized and
reported within the time periods specified in the SEC's rules and forms,
and that such information is accumulated and communicated to the
Corporation's management, including its Chief Executive Officer and
Principal Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure based closely on the definition of
"disclosure controls and procedures" in Rule 13a-14(c).
The Corporation's management, with the participation of the Corporation's
Chief Executive Officer and Principal Financial Officer, has evaluated
the effectiveness of its disclosure controls and procedures (as such term
is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange
Act of 1934 (Exchange Act)) as of the end of the period covered by this
report. Based on such evaluation, the Corporation's Chief Executive Officer
and Principal Accounting Officer have concluded that, as of the end of such
period, the Corporation's disclosure controls and procedures are effective
in recording, processing, summarizing and reporting, on a timely basis,
information required to be disclosed by the Corporation in the reports that
it files or submits under the Exchange Act.
(b) Although the Corporation hired a new Chief Executive Officer and Principal
Financial Officer in the current calendar year, there have been no
significant changes in the Corporation's internal controls or in other
factors that could significantly affect the internal controls subsequent to
the date the Corporation completed its evaluation.
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17
CENTRAL FEDERAL CORPORATION
FORM 10-QSB
Quarter ended September 30, 2003
PART II. - OTHER INFORMATION
-------------------------------------------------------------------------------
Item 1. Legal Proceedings
None
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit
Number Exhibit
------- -------
3.1 Certificate of Incorporation*
3.2 Bylaws*
4.0 Form of Common Stock Certificate*
31.1 Certification of Principal Executive Officer
pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2 Certification of Principal Financial Officer
pursuant to Section 203 of the
Sarbanes-Oxley Act of 2002
32.1 Certification pursuant to 18 U.S.C.
Section 1350 as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification pursuant to 18 U.S.C.
Section 1350 as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
* Incorporated by reference into this document from the Exhibits filed with the
Registration Statement on Form SB-2 and any amendments thereto, Registration No.
333-64089.
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18
CENTRAL FEDERAL CORPORATION
FORM 10-QSB
Quarter ended September 30, 2003
OTHER INFORMATION
-------------------------------------------------------------------------------
(b) Reports on Form 8-K. The information reported is as follows:
On September 26, 2003, the registrant issued a press release
announcing that its Board of Directors, at their meeting on September
18, 2003, declared a cash dividend of 9 cents per share on its common
stock payable October 17, 2003 to shareholders of record on October 6,
2003.
On August 20, 2003, the registrant issued a press release announcing
that William R. Downing and Jerry F. Whitmer have been elected to the
Board of Directors of both the Corporation and the Bank.
On August 1, 2003, Central Federal Corporation announced financial
results for the quarter ended June 30, 2003.
On July 18, 2003, the registrant issued a press release announcing
that it had sold 327,500 shares of its common stock in a private
placement. The gross sales proceeds were approximately $3.2 million.
On July 2, 2003, the registrant issued a press release announcing that
Janna Cable and Marjorie Minor were promoted to Loan Officers for the
registrant's subsidiary, Central Federal Bank.
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19
CENTRAL FEDERAL CORPORATION
SIGNATURES
-------------------------------------------------------------------------------
In accordance with the requirements of the Securities Exchange Act of 1934, the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
CENTRAL FEDERAL CORPORATION
Dated: November 14, 2003 By: /s/ David C. Vernon
---------------------------------
David C. Vernon
Chairman, President and CEO
(Principal Executive Officer)
Dated: November 14, 2003 By: /s/ Kelley L. Nanna
---------------------------------
Kelley L. Nanna, CPA
Treasurer
(Principal Financial Officer)
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20