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 June 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)
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 August 6, 2003
Common stock, $.01 par value 1,974,621 common shares
Transitional Small Business Disclosure format (check one) Yes [ ] No [X]
CENTRAL FEDERAL CORPORATION
FORM 10-QSB
QUARTER ENDED JUNE 30, 2003
INDEX
PART I. Financial Information
Page
----
Item 1. - Financial Statements (Unaudited)
Consolidated Balance Sheets as of June 30, 2003 and
December 31, 2002 ............................................................. 3
Consolidated Statements of Income for the three and six months ended
June 30, 2003 and 2002......................................................... 4
Condensed Consolidated Statements of Changes in Shareholders' Equity
for the six months ended June 30, 2003......................................... 5
Consolidated Statements of Comprehensive Income for the three and six
months ended June 30, 2003 and 2002 ........................................... 6
Condensed Consolidated Statements of Cash Flows for the six months
ended June 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................................................... 16
PART II. Other Information
Item 1. Legal Proceedings.......................................................... 17
Item 2. Changes in Securities ..................................................... 17
Item 3. Defaults Upon Senior Securities............................................ 17
Item 4. Submission of Matters to a Vote of Security Holders........................ 17
Item 5. Other Information.......................................................... 17
Item 6. Exhibits and Reports on Form 8-K........................................... 18
Signatures ......................................................................... 19
Section 302 Certifications
EX-31.1 Certification of David C. Vernon............................................ 20
EX-31.2 Certification of Kelley L. Nanna, CPA....................................... 21
Section 906 Certifications
EX-32.1 Certification of David C. Vernon............................................ 22
EX-32.2 Certification of Kelley L. Nanna, CPA....................................... 23
CENTRAL FEDERAL CORPORATION AND SUBSIDIARY
PART I. Financial Information
Item 1. Financial Statements
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
(Unaudited)
June 30, December 31,
2003 2002
--------- -----------
(unaudited)
ASSETS
Cash and amounts due from depository institutions $ 5,131 $ 12,876
Federal funds sold 11,000 --
Interest-bearing deposits in other banks 3 3
--------- ---------
Total cash and cash equivalents 16,134 12,879
Time deposits with other banks 1,698 7,205
Securities available for sale 28,291 1,439
Securities held to maturity (estimated fair value
of $0 in 2003 and $18,169 in 2002) -- 17,822
Loans held for sale 1,150 --
Loans, net (of allowance of $428 in 2003 and $361 in 2002) 55,591 62,565
Federal Home Loan Bank stock, at cost 3,554 3,485
Premises and equipment, net 1,077 833
Bank owned life insurance 3,167 3,068
Other assets 1,085 1,223
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Total assets $ 111,747 $ 110,519
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Non interest-bearing $ 349 $ 1,396
Interest-bearing 75,708 73,294
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Total deposits 76,057 74,690
Federal Home Loan Bank advances 11,240 11,430
Loan payable -- 4,900
Advance payments by borrowers for taxes and insurance 593 487
Other liabilities 2,695 1,429
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Total liabilities 90,585 92,936
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Preferred stock, authorized 1,000,000 shares, no shares
issued and outstanding -- --
Common stock, $.01 par value, 6,000,000 shares
authorized, 2,266,371 and 1,938,871 shares issued in
2003 and 2002, respectively 23 19
Additional paid-in capital 11,521 8,306
Retained earnings 12,687 14,085
Unearned stock based incentive plan shares (108) (160)
Treasury stock, 291,750 and 292,950 shares, at cost (3,254) (3,270)
Unearned Employee Stock Ownership Plan shares -- (1,425)
Accumulated other comprehensive income 293 28
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Total shareholders' equity 21,162 17,583
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Total liabilities and shareholders' equity $ 111,747 $ 110,519
========= =========
See accompanying notes to consolidated financial statements.
3.
CENTRAL FEDERAL AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amount)
(Unaudited)
Three months ended Six months ended
June 30, June 30,
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2003 2002 2003 2002
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INTEREST INCOME
Loans, including fees $ 1,085 $ 1,280 $ 2,271 $ 2,745
Interest on securities 274 444 561 897
Interest-bearing deposits
in banks 39 43 96 66
------- ------- ------- -------
Total interest income 1,398 1,767 2,928 3,708
INTEREST EXPENSE
Deposits 362 662 762 1,350
FHLB borrowings 155 165 341 341
Loan payable 4 82 20 163
------- ------- ------- -------
Total interest expense 521 909 1,123 1,854
NET INTEREST INCOME 877 858 1,805 1,854
Provision for loan losses 83 -- 83 --
------- ------- ------- -------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 794 858 1,722 1,854
NON-INTEREST INCOME
Service charges 60 25 109 48
Gain on sale of loans 134 69 215 172
Gain on sale of securities -- -- -- 10
Other income 52 10 102 19
------- ------- ------- -------
Total non-interest income 246 104 426 249
NON-INTEREST EXPENSE
Salaries and employee benefits 20 461 2,285 902
Net occupancy expense 59 62 115 125
Data processing expense 63 32 112 66
FDIC assessments 3 3 10 7
Franchise taxes 94 73 193 152
Professional fees 198 21 369 50
Printing and supplies 18 15 29 24
Amortization and depreciation 29 36 66 70
Advertising 21 6 23 12
Other expenses 243 50 366 154
------- ------- ------- -------
Total non-interest expense 748 759 3,568 1,562
Income (loss) before income taxes 292 203 (1,420) 541
Income tax expense (benefit) 240 63 (349) 192
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Net income (loss) $ 52 $ 140 $(1,071) $ 349
======= ======= ======= =======
Earnings (loss) per share
Basic $ .03 $ .09 $ (.64) $ .22
Diluted $ .03 $ .09 $ (.63) $ .22
See accompanying notes to consolidated financial statements.
4.
CENTRAL FEDERAL CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(In thousands, except per share amount)
(Unaudited)
Unearned Unearned
Employee Stock Accumulated
Additional Stock Based Other
Common Paid-in Retained Ownership Incentive Treasury Comprehensive
Stock Capital Earnings Plan Shares Plan Shares Stock Income
----- ------- -------- ----------- ----------- ----- ------
BALANCES AT JANUARY 1, 2003 $ 19 $ 8,306 $ 14,085 $ (1,425) $ (160) $ (3,270) $ 28
Release of ESOP shares (9) 43
Sale of ESOP shares 1,382
Release of incentive shares 52
Cash dividends ($.18 per share) (325)
Issuance of common stock (327,500 shares) 4 3,206
Stock options exercised (2) 16
Total comprehensive income (loss) (1,071) 265
--------- --------- --------- --------- --------- --------- ---------
BALANCES AT JUNE 30, 2003 $ 23 $ 11,521 $ 12,687 $ - $ (108) $ (3,254) $ 293
========= ========= ========= ========= ========= ========= =========
Total
Shareholders'
Equity
------
BALANCES AT JANUARY 1, 2003 $17,583
Release of ESOP shares 34
Sale of ESOP shares 1,382
Release of incentive shares 52
Cash dividends ($.18 per share) (325)
Issuance of common stock (327,500 shares) 3,210
Stock options exercised 14
Total comprehensive income (loss) (806)
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BALANCES AT JUNE 30, 2003 $21,162
=======
See accompanying notes to consolidated financial statements.
5.
CENTRAL FEDERAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
2003 2002 2003 2002
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NET INCOME (LOSS) $ 52 $ 140 $(1,071) $ 349
Other comprehensive income (loss), net of tax
Unrealized gain (loss) on securities
available for sale arising during
the period (41) 5 (37) (4)
Cumulative effect of securities
transferred from held to maturity
to available for sale during the period 302 -- 302 --
Less: Reclassification adjustment for
accumulated gains included
in net income -- -- -- 7
------- ------- ------- -------
Unrealized gains on
securities 261 5 265 3
------- ------- ------- -------
COMPREHENSIVE INCOME (LOSS) $ 313 $ 145 $ (806) $ 352
======= ======= ======= =======
See accompanying notes to consolidated financial statements.
6.
CENTRAL FEDERAL CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Six Months Ended
June 30,
--------
2003 2002
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NET CASH FROM OPERATING ACTIVITIES $ 618 $ 8,169
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available for sale
Net (purchases) sales and maturities (16,319) 359
Securities held to maturity
Net sales and maturities 7,289 520
Change in time deposits with other banks 5,507 (98)
Net purchases of premises and equipment (192) (88)
Net change in loans 7,061 7,483
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Net cash from investing activities 3,346 8,176
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits 1,367 2,051
Net change in escrow accounts 106 1
Payment of loan payable (4,900) (200)
Cash dividends (325) (308)
Purchase of treasury stock -- (651)
Stock options exercised 14 --
Proceeds from private placement 3,219 --
Repayment of long-term FHLB advances (190) (6,495)
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Net cash from financing activities (709) (5,602)
NET CHANGE IN CASH AND CASH EQUIVALENTS 3,255 10,743
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 12,879 4,380
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 16,134 $ 15,123
======== ========
Supplemental disclosure:
Non-cash transfer of securities from
held to maturity to available for sale $ 10,533 $ --
======== ========
See accompanying notes to consolidated financial statements.
7.
CENTRAL FEDERAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 ("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. Certain 2002 amounts
have been reclassified to conform to the 2003 presentation.
In the opinion of the Management of Central Federal Corporation (the
"Corporation"), the accompanying consolidated financial statements for the six
months and three months ended June 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 six
months and three months ended June 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.
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
current quarter. The unrealized gain on the securities transferred totaled
$458,000 at the date of transfer. The Corporation's equity and accumulated other
comprehensive income increased $302,000 (after tax effects) as a result of the
transfer.
Shareholders' Equity:
Even though the Bank was categorized as well capitalized at year-end 2002 and
2001, the Board of Directors determined it was appropriate to raise additional
capital to support future growth and expansion. For this reason, a private
offering of 327,500 shares of the Corporation's common stock commenced in May
2003 and was completed in July 2003. Important information relating to this
offering can be found throughout the Form 10-QSB and as part of the offering
materials. Costs associated with this offering in the amount of $20,000 have
been capitalized.
8.
CENTRAL FEDERAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
The weighted average number of common shares outstanding for basic and diluted
earnings per share computations were as follows:
Three Months Ended Six Months Ended
June 30, June 30,
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2003 2002 2003 2002
----------- ----------- ----------- -----------
Numerator:
Net income $ 52 $ 140 $ (1,071) $ 349
Denominator:
Weighted-average common
shares outstanding (basic) 1,837,884 1,535,209 1,668,967 1,554,870
Dilutive effect assumes exercise
of stock options and RRP shares 45,219 33,289 33,430 32,682
Weighted-average common
shares outstanding (diluted) 1,883,103 1,568,898 1,702,397 1,587,552
Earnings per share:
Basic $ .03 $ .09 $ (.64) $ .22
Diluted $ .03 $ .09 $ (.63) $ .22
The proforma effects are computed using option pricing models, using the
following weighted-average assumptions as of grant date:
Granted Granted
01-21-03 04-17-03
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Risk-free interest rate 2.78% 2.99%
Expected option life 5 years 6 years
Expected stock price volatility 45% 44%
Dividend yield 3.92% 3.13%
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
Financial Accounting Standards Board Statement No. 123, Accounting for
Stock-Based Compensation.
Three months ended June 30, Six months ended June 30,
--------------------------- ---------------------------
2003 2002 2003 2002
--------- --------- --------- ---------
Net income (loss) as reported $ 52 $ 140 $ (1,071) $ 349
Less stock-based compensation
expense determined under fair value
based method (38) (30) (75) (60)
--------- --------- --------- ---------
Pro forma net income (loss) 14 110 (1,146) 289
========= ========= ========= =========
Based earnings per share as reported $ 0.03 $ 0.09 $ (0.64) $ 0.22
Pro forma basic earnings per share 0.01 0.07 (0.69) 0.19
Diluted earnings per share as reported 0.03 0.09 (0.63) 0.22
Pro forma diluted earnings per share 0.01 0.07 (0.67) 0.18
9.
CENTRAL FEDERAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Employee Benefits:
In the three month period ended March 31, 2003, expense for salaries and
employee benefits increased due to the termination of the Bank's leveraged ESOP,
pension plan, a supplemental executive retirement agreement in connection with
the retirement of William R. Williams as President and an agreement with John A.
Rife, as Executive Vice President and Treasurer. See below for discussion
regarding the ESOP and pension plans.
EMPLOYEE STOCK OWNERSHIP PLAN (ESOP)
At the time of termination of the ESOP, there were 119,416 shares unearned ESOP
shares. From the 119,416 shares, 77,818 shares were needed to pay off the loan
borrowed to fund the plan at inception, which leaves 41,598 ending shares to be
allocated to participants. The cost for all participants to become fully vested
in the ESOP per the Plan Document was $509,000.
PENSION PLAN
The Corporation participates in a multiemployer contributory trustee pension
plan for all eligible employees. The benefits contemplated by the plan are
funded as accrued through the purchase of individual life insurance policies.
The cost of funding is charged directly to operations. The Corporation made no
contributions for 2002 or 2001. Had the Corporation continued with the first
quarter decision to withdraw from the pension plan rather than stop future
employee participation in the pension plan, a contribution of $413,000 would
have been necessary to fund the liability at the time of withdrawal. The pension
plan has stopped future employee participation in the pension plan; therefore
the $413,000 recognized in the first quarter 2003 has been reversed in the
second quarter. No unfunded liability exists for past service costs.
NOTE 2 - POTENTIAL IMPACT OF ACCOUNTING PRINCIPLES TO BE IMPLEMENTED IN THE
FUTURE
The Financial Accounting Standards Board ("FASB") recently issued Statement of
Financial Accounting Standards ("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 is effective for contracts entered into or modified after July 1,
2003, and is not expected to have a material effect on the Company's financial
statements.
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 is
effective for financial instruments entered into or modified after May 31, 2003,
and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003 and is not expected to have a material effect on
the Company's financial statements.
10.
CENTRAL FEDERAL CORPORATION
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This report contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. The Corporation intends such
forward-looking statements to be covered by the safe harbor provisions that are
not subject to certain risks and uncertainties for forward-looking statements
contained in the Private Securities Reform Act of 1995, and is including this
statement for purposes of these safe harbor provisions. When used herein, the
terms "anticipates", "plans", "expects", "believes", and similar expressions as
they relate to the Corporation or its management are intended to identify such
forward-looking statements. The Corporation's actual results, performance or
achievements may materially differ from those expressed or implied in the
forward-looking statements. Risks and uncertainties that could cause or
contribute to such material differences include, but are not limited to, general
economic conditions, interest rate environment, competitive conditions in the
financial services industry, changes in law, governmental policies and
regulations, and rapidly changing technology affecting financial services.
These risks and uncertainties should be considered in evaluating forward-looking
statements and undue reliance should not be placed on such statements. Further
information concerning the Corporation and its business, including additional
factors that could materially affect the Corporation's financial results, is
included in the Corporation's filings with the SEC.
The Corporation does not undertake - and specifically disclaims any obligation -
to publicly release the result of any revisions which 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 portfolio 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,
securities, as well as income from service charges and loan originations. 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 law, regulations or
government policies may also materially impact the Corporation.
MANAGEMENT STRATEGY
The Corporation is in the process of implementing significant change to take
advantage of opportunities for growth by utilizing its strong capital position.
A private placement of 327,500 shares at $9.95 per share was recently completed.
The management team has been expanded and strengthened. Offices are planned for
Fairlawn and Columbus, Ohio. The data processing system is being converted and
the Corporation's subsidiary Bank has begun making commercial loans.
Raymond E. Heh, former Chainman, President and CEO of Bank One Akron has been
named Regional President, Summit County. Parker MacDonell, former Senior Vice
President of Bank One Columbus and third generation Ohio Banker, has been named
Regional President, Columbus. Edward Baumgardner, former President and CEO of
Potters Bank and Potters Financial Corporation has been named Regional
President, Columbiana County. Eloise L. Mackus Esq. joined the Company and Bank
as Senior Vice President, General Council and Secretary. Three directors have
been added to the Board: Mark S. Allio, former President of Third Federal
Savings, Cleveland;
11.
CENTRAL FEDERAL CORPORATION
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
William R. Downing, President R.H. Downing Company; and Jerry F. Whitmer,
Managing Partner, Brouse & McDowell, became members of the Board of the
Corporation and Bank in the second quarter.
A lease has been signed for office space and the Columbus office is expected to
open by November, 2003. Construction of a new office building has begun in
Fairlawn. The Fairlawn building is expected to be completed in early 2004 and
the Bank will be leasing the entire first floor. The Bank has been granted
approval to begin operations in Fairlawn and will operate out of a temporary
office until construction of the new facility is complete. The Corporation is
one third owner of a limited liability company that will own and manage the
Fairlawn building.
The Corporation has allowed its mortgage loan portfolio to decrease as interest
rates have fallen to historic lows. The Corporation has also held its
investments to shorter maturities in anticipation of growth in its commercial
loan portfolio. Cash flow from short term investments will be used to fund
commercial loan growth.
To improve liquidity, all investment securities have been reclassified as
available for sale. It is expected that all securities, purchased in the future,
will be classified as available for sale.
Near term profitability is expected to be significantly impacted by the cost of
opening the offices in Fairlawn and Columbus. Profitability will be further
impacted by the decision to shorten the investment portfolio and by allowing the
mortgage loan portfolio to decline, as borrowers refinanced to take advantage of
lower interest rates. Longer term, however, growth in commercial loans and
deposits at our soon to be established Fairlawn and Columbus offices should
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, except as discussed therein. The Corporation is not
aware of any current recommendations by its regulators which would have a
material effect if implemented, except as discussed below.
The following discussion compares the financial condition of the Corporation and
its wholly-owned subsidiary, Central Federal Bank, at June 30, 2003 to December
31, 2002 and the results of operations for the three months ended June 30, 2003
and 2002 and the six months ended June 30, 2003 and 2002. This discussion should
be read in conjunction with the interim financial statements and footnotes
included therein.
COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 2003 AND DECEMBER 31, 2002
Total assets of the Corporation were $111.7 million at June 30, 2003 compared to
$110.5 million at December 31, 2002, representing an increase of $1.2 million,
or 1.1%. The primary components in the increase in total assets were a $3.3
million increase in cash and cash equivalents, which includes federal funds
sold, a $9.0 million increase in securities available for sale and securities
held to maturity combined, and a $1.2 million increase in loans held for sale,
which were partially offset by a decrease in time deposits with other banks of
$5.5 million and a $7.0 million decrease in loans, net. The decrease in loans,
net was primarily due to the Corporation's decision to allow the mortgage loan
portfolio to decline as borrowers refinanced to take advantage of lower interest
rates. Interest rates for long-term, fixed rates continue to stay near 40 year
lows. Management decided to sell the new loans rather than hold them in its
portfolio. The cost of equipment associated with the conversion of the
Corporation's core data processing system, scheduled to be completed in the
third quarter, has been capitalized. Additional equipment has been capitalized
in connection with significant upgrades to the Bank's information and
communications systems. The Corporation transferred securities with a carrying
value of $10.5 million previously classified as "held to maturity" to "available
for sale" during the current quarter. The unrealized gain on the
12.
CENTRAL FEDERAL CORPORATION
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
securities transferred totaled $458,000. The Corporation's equity and
accumulated other comprehensive income increased $302,000 (after tax effects) as
a result of the transfer.
Total liabilities of the Corporation were $90.6 million at June 30, 2003
compared to $92.9 million at December 31, 2002, representing a decrease of $2.3
million, or 2.5%. The decrease was due to repayment of the $4.9 million
principal balance of a $7 million loan, which had been obtained to fund the
payment of a return of capital dividend declared in 2000.
At June 30, 2003, shareholders' equity was $21.2 million compared to $17.6
million from one year ago as the Corporation neared completion of the private
placement of 327,500 shares at $9.95 per share. The proceeds from the private
placement will be used to fund operations. The Bank continues to exceed all
applicable regulatory capital requirements. Under Federal Deposit Insurance
Corporation (FDIC) guidelines, the Bank is categorized as "well capitalized,"
which is the highest rating category available.
COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTHS AND SIX MONTHS ENDED
JUNE 30, 2003 AND JUNE 30, 2002
General. Net income for the three months ended June 30, 2003 decreased by
$88,000 or 62.9% from $140,000 for the three months ended June 30, 2002 to
$52,000 for the three months ended June 30, 2003. Net income decreased $1.4
million or 406.9% for the six months ended June 30, 2003 compared to the six
months ended June 30, 2002. See below for an explanation about the changes to
net income.
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.
Net interest income increased approximately $19,000 or 2.2% for the three months
ended June 30, 2003 and decreased $49,000 or 2.6% for the six months ended June
30, 2003 in comparison to the comparable periods in 2002. The primary reason for
the change in net interest income was the $369,000, or 20.9% decrease in
interest income for the three months ended June 30, 2003 and the decrease of
$780,000 or 21.0% for the six months ended June 30, 2003 compared to the 2002
periods. Residential and installment loans were allowed to decrease marginally
and investments were held to low rate short term investments in order to make
funds available for commercial loans, expected to close in the third quarter.
The decrease in interest income was offset substantially by the decrease in
interest expense. Interest expense decreased $388,000 or 42.7% for the three
months ended June 30, 2003 when compared to the three months ended June 30, 2002
and for the six months ended June 30, 2003 decreased $731,000 or 39.4% when
compared to the first six months of 2002. The decreases were due to the
declining interest rate environment during 2002 and 2003. The Corporation was
able to decrease its expense while increasing overall deposits. The Corporation
reduced interest expense for FHLB advances by $10,000 or 6.1% and $0 or 0% when
compared to the same periods in 2002. The loan payable of $4.9 million at
December 31, 2002 has been repaid in the current period which will result in a
savings of approximately $65,000 in interest expense for the year ending
December 31, 2003.
Provision for Loan Losses. The provision for loan losses is based on
management's regular review of the loan portfolio, when it considers factors
such as past experience, prevailing general economic conditions and
considerations applicable to specific loans, such as the ability of the borrower
to repay the loan and the estimated value of the underlying collateral, as well
as changes in the size and growth of the loan portfolio.
13.
CENTRAL FEDERAL CORPORATION
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Based on management's review, provision for loan losses of $83,000 was recorded
in the three month and six month periods in 2003 due to the change in the mix of
the loan portfolio which included an increase in commercial lending. No
provision for loan losses was recorded during the six months and three months
ended June 30, 2002. At June 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 $862,000 at June
30, 2003 and $781,000 at December 31, 2002. At June 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; however, future additions to the allowance may be necessary
based on changes in economic conditions, changes in the mix of the loan
portfolio and level of nonperforming loans.
Non-interest Income. The Corporation experienced a $142,000, or 136.5%, increase
in non-interest income for the three months ended June 30, 2003 compared to the
2002 period. For the six months ended June 30, 2003, non-interest income
increased $177,000 or 71.1% over the comparable period in 2002. Gain on sale of
loans for the six months ended June 30, 2003 increased $43,000 from $172,000
in the 2002 period to $215,000 in 2003. The Corporation sold $10.5 million of
loans, all of which were loans originated during the first six months of 2003.
Management decided to sell the low-rate, long-term assets instead of holding
them in the portfolio. Management has sold loans in the past and will continue
to do so depending on the market environment.
Non-interest Expense. Non-interest expense decreased $11,000 or 1.4% and
increased $2 million or 128.4% for the three months and six months ended June
30, 2003 compared to the 2002 periods. Non-interest expense, excluding a partial
$413,000 reversal of the charge taken in the first quarter, which has been
included in salaries and employee benefits, more fully described below,
increased 53% from $759,000 in 2002 to $1,161,000 for 2003. Salaries and
employee benefits was $433,000 prior to the reversal's being recorded. The
increase was primarily the result of expenses associated with establishing the
Fairlawn and Columbus offices. Professional fees have increased in 2003 due to
the change of the name of the Corporation and the Bank and consulting fees
resulting from the upgrade in computer systems necessary for the core system
conversion to be completed in the next quarter. Last quarter the Corporation
highlighted, among other things, a one-time charge for terminating the Employee
Stock Option Plan (ESOP) and the pension plan. Management proceeded with
termination of the ESOP. On reevaluation, the Board of Directors concluded that
stopping future employee participation in the pension plan rather than
withdrawing from it, would be in the best interest of the Corporation. The
decision resulted in reversing the majority of the expense during the second
quarter which had been taken in the first quarter of 2003.
Income Taxes. The provision for (benefit of) income taxes totaled $240,000 and
($350,000) for the three months and six months ended June 30, 2003 compared to
$63,000 and $192,000 for the three months and six months ended June 30, 2002,
due to the change in income before taxes.
LIQUIDITY AND CAPITAL RESOURCES
The Corporation's primary sources of funds are the Bank's deposits, principal
and interest payments on loans, mortgage-backed and investment securities and
borrowings from the FHLB. The Corporation 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, 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.
At June 30, 2003, the Bank exceeded all of its regulatory capital requirements
with a Tier 1 of $15.5 million, or 14.1%, of adjusted total assets, which
exceeds the required level of $5.5 million, or 5.0%; Tier 2 capital level of
$15.5 million, or 25.3%, of total adjusted assets, which exceeds the required
level of $3.7 million, or 6.0%; and risk-based capital of $16.2 million, or
26.3% of risk-weighted assets, which exceeds the required level of $6.2 million,
or 10.0%.
14.
CENTRAL FEDERAL CORPORATION
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 June 30, 2003, cash and cash equivalents
totaled $16.1 million, or 14.4% of total assets.
The Bank has other sources of liquidity if a need for additional funds arises,
including FHLB advances. At June 30, 2003, the Bank had unused borrowing
capacity from the FHLB of $40.6 million. Depending on market conditions, the
pricing of deposit products and FHLB advances, the Bank may use FHLB borrowing
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.
15.
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
Chief 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).
In April 2003, the Corporation carried out an evaluation, under the
supervision and with the participation of the Corporation's management,
including the Corporation's Chief Executive Officer and the
Corporation's Chief Financial Officer, of the effectiveness of the
design and operation of the Corporation's disclosure controls and
procedures. Based on the foregoing, the Corporation's Chief Executive
Officer and Chief Financial Officer concluded that the Corporation's
disclosures and procedures were effective.
(b) Although the Corporation hired a new Chief Executive Officer and Chief
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.
16.
CENTRAL FEDERAL CORPORATION
FORM 10-QSB
Quarter ended June 30, 2003
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
Grand Central Financial Corp. held its Annual Meeting of Shareholders on April
23, 2003. Results of shareholder voting were as follows:
a. The election of two Directors to three-year terms of office each:
Jeffrey W. Aldrich William R. Williams
For 1,027,727 1,027,177
Withheld 1,100 1,650
The following directors' terms of office as a director continued after
the meeting:
- David C. Vernon
- Gerry W. Grace
- Thomas P. Ash
b. The ratification of the Corporation's 2003 Equity Compensation Plan:
For 317,784
Abstain 21,405
Against 5,080
Non-Vote 684,558
c. The ratification of the appointment of Crowe Chizek and Company LLC as
independent auditors for the Corporation for the fiscal year ending
December 31, 2003:
For 1,013,797
Abstain 780
Against 14,250
d. The amendment of the Certificate of Incorporation of Grand Central
Financial Corp. to change the Corporation's name to Central Federal
Corporation:
For 1,007,772
Abstain 130
Against 20,925
Item 5. Other Information
None
17.
CENTRAL FEDERAL CORPORATION
FORM 10-QSB
Quarter ended June 30, 2003
PART II. OTHER INFORMATION
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 by the Chief Executive Officer Pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification by the Chief Financial Officer Pursuant
to Section 302 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 documents from the Exhibits filed
with the Registration Statement on Form SB-2 and any amendments thereto,
Registration No. 333-64089.
(b) Reports on Form 8-K. The information reported is as follows:
On June 20, 2003, the registrant issued a press release announcing that Edward
L. Baumgardner has been named President, Columbiana County Region, for the
registrant's subsidiary, Central Federal Bank. Mr. Baumgardner will oversee the
bank's offices located in Wellsville and Calcutta, Ohio.
On June 20, 2003, the registrant issued a press release announcing a cash
dividend of $0.09 per share of common stock payable July 18, 2003 to
shareholders of record on July 7, 2003.
On June 18, 2003, the registrant issued a press release announcing that it will
open an office in a new building to be constructed on the northwest corner of
Smith and Ghent Roads in Fairlawn, Ohio. The office will open during the first
quarter of 2004, but in the interim a temporary office has been established at
2841 Riviera Drive, Suite 300, Fairlawn, Ohio. Further, the Corporation
announced the addition of Raymond E. Heh, Regional President of Northeast Ohio
and the addition of Mark Allio to the Board of Directors.
On May 7, 2003, an Amended and Restated Certificate of Incorporation was filed
by the Corporation with the State of Delaware Division of Corporations. The
Amended and Restated Certificate of Incorporation changed the name of the
Corporation from Grand Central Financial Corp. to Central Federal Corporation.
The proposal to change the name of the Corporation was approved at the Annual
Meeting of Shareholders on April 23, 2003.
On May 6, 2003, the registrant issued a press release announcing that it will
open its first central Ohio office in Columbus, Ohio this summer and another
office in Akron, Ohio later this year. R. Parker MacDonell will join the
Corporation as Regional President of Columbus.
On April 11, 2003, Grand Central Financial Corporation announced financial
results for the first fiscal quarter ended March 31, 2003. Further, the
Corporation announced the addition of Kelley L. Nanna, CPA as Treasurer of the
Corporation.
18.
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: August 14, 2003 By: /s/ David C. Vernon
-----------------------------
David C. Vernon
Chairman, President and CEO
(Principal Executive Officer)
Dated: August 14, 2003 By: /s/ Kelley L. Nanna
-----------------------------
Kelley L. Nanna, CPA
Treasurer
(Principal Financial Officer)
19.