UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark one)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2005
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from __________ to______________
Commission File Number 0-25045
CENTRAL FEDERAL CORPORATION
---------------------------
(Exact name of small business issuer as specified in its charter)
Delaware 34-1877137
-------- ----------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
2923 Smith Road, Fairlawn, Ohio 44333
-------------------------------------
(Address of principal executive offices)
(330) 666-7979
--------------
(Issuer's telephone number)
--------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since
last report)
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 April 29, 2005
Common stock, $0.01 par value 2,225,987 shares
Transitional Small Business Disclosure Format (check one) Yes [ ] No [X]
CENTRAL FEDERAL CORPORATION
FORM 10-QSB
QUARTER ENDED MARCH 31, 2005
INDEX
PART I. Financial Information
Page
----
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of March 31, 2005 and December 31, 2004 ......................... 3
Consolidated Statements of Operations for the three months ended
March 31, 2005 and 2004......................................................................... 4
Consolidated Statement of Changes in Shareholders' Equity
for the three months ended March 31, 2005....................................................... 5
Consolidated Statements of Comprehensive Loss for the three
months ended March 31, 2005 and 2004 ........................................................... 6
Condensed Consolidated Statements of Cash Flows for the three months
ended March 31, 2005 and 2004................................................................... 7
Notes to Consolidated Financial Statements ..................................................... 8
Item 2. Management's Discussion and Analysis......................................................... 14
Item 3. Controls and Procedures...................................................................... 20
PART II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders ......................................... 21
Item 6. Exhibits..................................................................................... 21
Signatures ........................................................................................... 22
CENTRAL FEDERAL CORPORATION
PART I. Financial Information
Item 1. Financial Statements
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands except per share data)
--------------------------------------------------------------------------------
March 31, 2005 December 31, 2004
-------------- -----------------
(unaudited)
ASSETS
Cash and cash equivalents $ 3,346 $ 32,675
Securities available for sale 15,732 13,508
Loans, net of allowance of $1,110 and $978 116,546 108,149
Federal Home Loan Bank stock 3,820 3,778
Loan servicing rights 198 208
Foreclosed assets, net 112 132
Premises and equipment, net 2,611 2,690
Goodwill 1,749 1,749
Other intangible assets 268 299
Bank owned life insurance 3,435 3,401
Loan sales proceeds receivable 2,243 1,888
Deferred tax asset 1,772 1,491
Accrued interest receivable and other assets 1,029 1,037
----------- -----------
$ 152,861 $ 171,005
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Non-interest bearing $ 6,078 $ 5,505
Interest bearing 104,555 96,119
----------- -----------
Total deposits 110,633 101,624
Federal Home Loan Bank advances 15,895 41,170
Other borrowings - 2,249
Advances by borrowers for taxes and insurance 199 321
Accrued interest payable and other liabilities 1,580 979
Subordinated debentures 5,155 5,155
----------- -----------
Total liabilities 133,462 151,498
Shareholders' equity
Preferred stock, 1,000,000 shares authorized;
none issued - -
Common stock, $.01 par value; 6,000,000 shares
authorized; 2,294,520 shares issued 23 23
Additional paid-in capital 12,608 12,519
Retained earnings 7,922 8,497
Accumulated other comprehensive income (79) 61
Unearned stock based incentive plan shares (291) (351)
Treasury stock, at cost (2005 - 68,533 shares, -
2004 - 108,671 shares) (784) (1,242)
----------- -----------
Total shareholders' equity 19,399 19,507
----------- -----------
$ 152,861 $ 171,005
=========== ===========
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See accompanying notes to consolidated financial statements.
3
CENTRAL FEDERAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands except per share data)
(Unaudited)
--------------------------------------------------------------------------------
Three months ended
March 31,
--------------------------------
2005 2004
---------- ----------
Interest and dividend income
Loans, including fees $ 1,675 $ 970
Taxable securities 143 229
Tax exempt securities - 13
Federal Home Loan Bank stock dividends 42 36
Federal funds sold and other 78 23
---------- ----------
1,938 1,271
Interest expense
Deposits 535 324
Federal Home Loan Bank advances and other debt 164 24
Subordinated debentures 70 52
---------- ----------
769 400
---------- ----------
Net interest income 1,169 871
Provision for loan losses 218 36
---------- ----------
Net interest income after provision for loan losses 951 835
Noninterest income
Service charges on deposit accounts 41 31
Net gains on sales of loans 211 17
Loan servicing fees, net 7 6
Earnings on bank owned life insurance 34 34
Other 6 4
---------- ----------
299 92
Noninterest expense
Salaries and employee benefits 907 726
Occupancy and equipment 113 54
Data processing 124 114
Franchise taxes 52 56
Professional fees 96 65
Director fees 39 40
Postage, printing and supplies 62 36
Advertising and promotion 43 18
Telephone 36 21
Loan expenses 9 18
Foreclosed assets, net 4 6
Depreciation 105 69
Amortization of intangibles 31 -
Other 81 132
---------- ----------
1,702 1,355
---------- ----------
Loss before income taxes (452) (428)
Income tax benefit (163) (160)
---------- ----------
Net loss $ (289) $ (268)
========== ==========
Loss per share:
Basic $ (0.13) $ (0.13)
Diluted $ (0.13) $ (0.13)
--------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
4
CENTRAL FEDERAL CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(Dollars in thousands except per share data)
(Unaudited)
--------------------------------------------------------------------------------
Unearned
Accumulated Stock Based
Additional Other Incentive Total
Common Paid-In Retained Comprehensive Plan Treasury Shareholders'
Stock Capital Earnings Income Shares Stock Equity
-------- -------- -------- -------- -------- -------- --------
Balance at January 1, 2005 $ 23 $ 12,519 $ 8,497 $ 61 $ (351) $ (1,242) $ 19,507
Comprehensive loss:
Net loss (289) (289)
Other comprehensive loss (140) (140)
--------
Total comprehensive loss
(429)
Recognition of expense for 4,773 stock
based incentive plan shares 60 60
Tax benefits from stock based incentive
plan shares released 33 33
Stock options exercised (40,138 shares) 2 (86) 458 374
Tax benefits from stock options exercised 54 54
Cash dividends declared ($.09 per share) (200) (200)
-------- -------- -------- -------- -------- -------- --------
Balance at March 31, 2005 $ 23 $ 12,608 $ 7,922 $ (79) $ (291) $ (784) $ 19,399
======== ======== ======== ======== ======== ======== ========
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See accompanying notes to consolidated financial statements.
5
CENTRAL FEDERAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Dollars in thousands)
(Unaudited)
--------------------------------------------------------------------------------
Three months ended
March 31,
-----------------------------
2005 2004
-------- --------
Net loss $ (289) $ (268)
Change in net unrealized gain (loss) on securities
available for sale (212) 314
Tax effect 72 (107)
-------- --------
Other comprehensive income (loss) (140) 207
-------- --------
Comprehensive loss $ (429) $ (61)
======== ========
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See accompanying notes to consolidated financial statements.
6
CENTRAL FEDERAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
--------------------------------------------------------------------------------
Three months ended March 31,
2005 2004
---------- ----------
Cash flows from operating activities $ (768) $ (676)
Cash flows from investing activities
Available-for-sale securities:
Maturities, prepayments and calls 544 2,058
Purchases (2,017) -
Loan originations and payments, net (8,601) (7,611)
Additions to premises and equipment (26) (399)
---------- ----------
Net cash from investing activities (10,100) (5,952)
Cash flows from financing activities
Net change in deposits 9,007 1,524
Net change in short-term borrowings from the
Federal Home Loan Bank and other (26,524) -
Proceeds from Federal Home Loan Bank
advances and other debt - 8,000
Repayments on Federal Home Loan Bank
advances and other debt (1,000) (1,950)
Net change in advances by borrowers for
taxes and insurance (122) (100)
Cash dividends paid (196) (183)
Proceeds from exercise of stock options 374 92
Repurchase of common stock - (131)
---------- ----------
Net cash from financing activities (18,461) 7,252
Net change in cash and cash equivalents (29,329) 624
Beginning cash and cash equivalents 32,675 8,936
---------- ----------
Ending cash and cash equivalents $ 3,346 $ 9,560
========== ==========
Supplemental cash flow information:
Interest paid $ 722 $ 411
Income taxes paid - -
Supplemental noncash disclosures:
Transfers from loans to repossessed assets $ - $ 162
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See accompanying notes to consolidated financial statements.
7
CENTRAL FEDERAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
--------------------------------------------------------------------------------
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 "Company"),
the accompanying consolidated financial statements as of March 31, 2005 and
December 31, 2004 and for the three months ended March 31, 2005 and 2004 include
all adjustments necessary for a fair presentation of the financial condition and
the results of operations for those periods. The financial performance reported
for the Company for the three months ended March 31, 2005 are not necessarily
indicative of the results to be expected for the full year. This information
should be read in conjunction with the Company's Annual Report to Shareholders
and Form 10-KSB for the period ended December 31, 2004. Reference is made to the
accounting policies of the Company described in Note 1 of the Notes to
Consolidated Financial Statements contained in the Company's 2004 Annual Report
that was filed as Exhibit 13 to the Form 10-KSB. The Company has consistently
followed those policies in preparing this Form 10-QSB.
Operating Segments:
Internal financial information is primarily reported and aggregated in two lines
of business, banking and mortgage banking.
Earnings Per Share:
Basic earnings per common share is net income divided by the weighted average
number of common shares outstanding during the period. Stock based incentive
plan shares are considered outstanding as they are earned over the vesting
period. Diluted earnings per common share include the dilutive effect of stock
based incentive plan shares and additional potential common shares issuable
under stock options.
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8
CENTRAL FEDERAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
--------------------------------------------------------------------------------
The factors used in the loss per share computation follow.
Three months ended March 31,
2005 2004
----------- -----------
Basic
Net loss $ (289) $ (268)
=========== ===========
Weighted average common shares outstanding 2,189,716 1,990,246
=========== ===========
Basic loss per common share $ (0.13) $ (0.13)
=========== ===========
Diluted
Net loss $ (289) $ (268)
=========== ===========
Weighted average common shares outstanding for basic loss per share 2,189,716 1,990,246
Add: Dilutive effects of assumed exercises of stock options and
stock based incentive plan shares - -
----------- -----------
Average shares and dilutive potential common shares 2,189,716 1,990,246
=========== ===========
Diluted loss per common share $ (0.13) $ (0.13)
=========== ===========
The following potential average common shares were anti-dilutive and not
considered in computing diluted loss per share because the Company had a loss
from continuing operations, the exercise price of the options was greater than
the average stock price for the periods or the fair value of the stock based
incentive plan shares at the date of grant was greater than the average stock
price for the periods.
Three months ended March 31,
2005 2004
------- -------
Stock options 216,398 215,097
Stock based incentive plan shares 24,107 28,049
In prior periods, the Company had included stock options and stock based
incentive plan shares that increased the number of outstanding shares in
computing diluted loss per share. However, because the Company had a loss from
continuing operations, these potential common shares were anti-dilutive and
should not have been considered for the computation. As a result, the Company
has revised prior period diluted loss per share amounts. The impact of this
change was not material to the diluted loss per share amounts disclosed.
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9
CENTRAL FEDERAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
--------------------------------------------------------------------------------
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.
Three months ended March 31,
2005 2004
--------- ---------
Net loss as reported $ (289) $ (268)
Deduct: Stock-based compensation expense
determined under fair value based method 45 56
--------- ---------
Pro forma net loss $ (334) $ (324)
========= =========
Basic loss per share as reported $ (0.13) $ (0.13)
Pro forma basic loss per share (0.15) (0.16)
Diluted loss per share as reported $ (0.13) $ (0.13)
Pro forma diluted loss per share (0.15) (0.16)
The pro forma effects are computed using option pricing models, using the
following weighted-average assumptions as of grant date.
Three months ended
March 31,
2004
-----------------
Risk-free interest rate 3.11%
Expected option life (years) 6.0 years
Expected stock price volatility 23%
Dividend yield 2.75%
Weighted average fair value of options granted during the
period $ 2.56
Reclassifications:
Some items in the prior year period financial statements were reclassified to
conform to the current presentation.
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10
CENTRAL FEDERAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
--------------------------------------------------------------------------------
NOTE 2 - LOANS
Loans were as follows:
March 31, 2005 December 31, 2004
-------------- -----------------
Commercial $ 9,677 $ 7,030
Real estate:
Single-family residential 41,765 41,450
Multi-family residential 28,402 25,602
Commercial 22,308 20,105
Construction - 1,127
Consumer 15,673 13,952
--------- ---------
Subtotal 117,825 109,266
Less: Net deferred loan fees (169) (139)
Allowance for loan losses (1,110) (978)
--------- ---------
Loans, net $ 116,546 $ 108,149
========= =========
Activity in the allowance for loan losses was as follows:
Three months ended
March 31,
-----------------------------
2005 2004
--------- ---------
Beginning balance $ 978 $ 415
Provision for loan losses 218 36
Loans charged-off (109) (12)
Recoveries 23 1
--------- ---------
Ending balance $ 1,110 $ 440
========= =========
Impaired loans were not material for any period presented.
Nonperforming loans were as follows:
March 31, December 31,
2005 2004
-------- ------------
Loans past due over 90 days still on accrual $ - $ -
Nonaccrual loans 541 286
Nonperforming loans include both smaller balance homogeneous loans that are
collectively evaluated for impairment and individually classified impaired
loans.
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11
CENTRAL FEDERAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
--------------------------------------------------------------------------------
NOTE 3 - FEDERAL HOME LOAN BANK ADVANCES
Advances from the Federal Home Loan Bank were as follows.
March 31, 2005 December 31, 2004
-------------- -----------------
Maturity April 2005 at 3.02% floating rate $ 4,625 $ -
Maturity January 2005 at 2.20% floating rate - 28,900
Maturities September 2005 thru September 2008, fixed at rates
from 1.78% to 3.41%, averaging 2.81% as of March 31, 2005, and
maturities March 2005 thru September 2008, fixed at rates from
1.50% to 3.41%, averaging 2.70% at December 31, 2004 11,270 12,270
---------- ----------
Total $ 15,895 $ 41,170
========== ==========
Fixed rate advances are due in full at their maturity date, with a penalty if
prepaid. Floating rate advances can be prepaid at any time with no penalty. The
advances were collateralized by $40,855 and $41,269 of first mortgage loans
under a blanket lien arrangement, $719 and $695 second mortgage loans, $11,076
and $10,372 of multi-family mortgage loans, $4,170 and $3,236 of home equity
lines of credit, $19,472 and $14,964 of commercial real estate loans and $711
and $770 of securities at March 31, 2005 and December 31, 2004. Based on this
collateral and the Company's holdings of FHLB stock, the Company is eligible to
borrow up to $44,992 at March 31, 2005.
Required payments over the next five years are:
March 31, 2006 $ 6,625
March 31, 2007 4,000
March 31, 2008 4,270
March 31, 2009 1,000
March 31, 2010 -
------------
Total $ 15,895
============
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12
CENTRAL FEDERAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
--------------------------------------------------------------------------------
NOTE 4 - SEGMENT INFORMATION
The Company manages and operates two reportable segments: banking and mortgage
banking. Loans, securities, deposits and servicing fees provide the revenue in
the banking operation, and loan sales provide the revenues in mortgage banking.
Parent and Other included activities that are not directly attributed to the
reportable segments, and is comprised of the Parent Company and elimination
entries between all segments.
All operations are domestic. Prior to the Company's acquisition of Reserve
Mortgage Services, Inc., an Ohio corporation ("Reserve"), in October 2004 as an
operating subsidiary of the Company's wholly owned subsidiary, CFBank, a
federally chartered savings association (the "Bank"), mortgage banking
operations were performed by the Bank, and there was only one reportable
segment. As such, no segment information is included for the previous period.
The accounting policies are the same as those described in the Summary of
Significant Accounting Policies. Income taxes are allocated and transactions
among the segments are made at fair value.
For the three months ended: March 31, 2005
Banking Mortgage Banking Parent and Other Total
---------- ---------------- ---------------- ----------
Net interest income (expense) $ 1,243 $ (4) $ (70) $ 1,169
Provision for loan losses (218) (218)
Other revenue 87 211 1 299
Other expense (1,360) (248) (94) (1,702)
---------- ---------- ---------- ----------
Loss before income tax (248) (41) (163) (452)
Income tax benefit (94) (13) (56) (163)
---------- ---------- ---------- ----------
Net loss $ (154) $ (28) $ (107) $ (289)
========== ========== ========== ==========
Segment assets $ 151,974 $ 2,287 $ (1,400) $ 152,861
========== ========== ========== ==========
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13
CENTRAL FEDERAL CORPORATION
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
--------------------------------------------------------------------------------
The following analysis discusses changes in financial condition and results of
operations during the periods included in the Consolidated Financial Statements
which are part of this filing.
FORWARD-LOOKING STATEMENTS
When used in this Form 10-QSB, or in future filings with the SEC, in 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 Company'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 Company 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 Company conducts business, and competition that could cause actual
results to differ materially from historical earnings and those presently
anticipated or projected. The Company wishes to caution readers not to place
undue reliance on any such forward-looking statements, which speak only as of
the date made. The Company 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 Company's results of operations are dependent primarily on net interest
income, which is the difference ("spread") between the interest income earned on
loans and securities and the cost of funds, consisting of interest paid on
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 Company's net income is also affected by, among other things,
loan fee income, provisions for loan losses, service charges, gains on loan
sales, operating expenses and franchise and income taxes. The Company's
operating expenses principally consist of employee compensation and benefits,
occupancy and other general and administrative expenses. The Company'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 Company.
MANAGEMENT STRATEGY
The Company is a community-oriented financial institution offering a variety of
financial services to meet the needs of the communities it serves. The Company
attracts deposits from the general public and uses such deposits, together with
borrowings and other funds, primarily to originate commercial and commercial
real estate loans, single-family and multi-family residential mortgage loans,
home equity lines of credit and short-term consumer loans.
During the first quarter of 2005, the Company continued to execute the plan for
growth, which started with significant changes in 2003 to utilize its strong
capital position to take advantage of opportunities for expansion into business
financial services and position itself for growth in the Fairlawn and Columbus,
Ohio markets.
Commercial, commercial real estate and multi-family loan balances increased
14.5% during the first quarter of 2005 and totaled $60.4 million at March 31,
2005, as the Company continued its focus on this business. Growth in the loan
portfolio was primarily funded through growth in deposits and the Company's
existing liquidity. Mortgage loan originations increased and gains on sales
totaled $211,000 during the quarter due to production from Reserve, the
Company's mortgage services subsidiary which was acquired in October 2004.
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14
CENTRAL FEDERAL CORPORATION
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
--------------------------------------------------------------------------------
Profitability in the first quarter of 2005 was impacted by, and near-term
profitability is expected to continue to be impacted by provisions for loan
losses resulting from increased commercial, commercial real estate and
multi-family residential lending and operating costs associated with the
Company's growth plan.
The Company 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 Company is not aware of any current recommendations
by its regulators which would have a material effect if implemented.
FINANCIAL CONDITION
General. Total assets declined $18.1 million and totaled $152.9 million at March
31, 2005 compared to $171.0 million at December 31, 2004. The decline was caused
by using cash of $25.3 million to repay overnight Federal Home Loan Bank (FHLB)
advances.
Cash and cash equivalents. Cash and cash equivalents totaled $3.3 million at
March 31, 2005, a decline of $29.3 million from $32.7 million at December 31,
2004 due to the use of cash to repay FHLB advances and other borrowings.
Securities. Securities available for sale totaled $15.7 million at March 31,
2005, an increase of $2.2 million from $13.5 million at December 31, 2004 due to
security purchases during the quarter.
Loans. Loans totaled $116.5 million at March 31, 2005, an increase of $8.4
million or 7.8% from $108.1 million at December 31, 2004 due to growth in
commercial, commercial real estate, multi-family residential and consumer loans
offset by a decline in single-family mortgage and construction loan balances.
Commercial, commercial real estate and multi-family loan balances increased $7.7
million, or 14.5% during the quarter and totaled $60.4 million at March 31, 2005
compared to $52.7 million at December 31, 2004. Consumer loan balances increased
$1.7 million or 12.1% during the quarter and totaled $15.7 million at March 31,
2005 compared to $14.0 million at December 31, 2004 due to growth in home equity
lines of credit. Single-family residential mortgage and construction loan
balances declined $812,000 or 1.9% during the quarter and totaled $41.8 million
at March 31, 2005 compared to $42.6 million at December 31, 2004 due to the sale
of current mortgage loan production. Construction loans, which totaled $1.1
million at December 31, 2004, were completed and transferred to permanent
mortgage loans during the quarter.
Deposits. Deposits increased $9.0 million, or 8.9% during the first quarter of
2005 and totaled $110.6 million at March 31, 2005 compared to $101.6 million at
December 31, 2004. The increase was due to growth of $7.0 million in certificate
of deposit accounts and $2.0 million in demand deposit accounts, largely
commercial checking accounts.
Federal Home Loan Bank advances. FHLB advances totaled $15.9 million at March
31, 2005, a decline of $25.3 million from $41.2 million at December 31, 2004 due
to repayments, discussed above.
Other borrowings. Other borrowings, which totaled $2.2 million at December 31,
2004 and represented the outstanding balance on a revolving line of credit with
an unaffiliated bank acquired in the Reserve acquisition, were repaid during the
quarter ended March 31, 2005.
Shareholders' equity. Total shareholders' equity declined 0.5% during the
quarter and totaled $19.4 million at March 31, 2005 compared to $19.5 million at
December 31, 2004 due to the net loss and dividends during the quarter.
Shareholders' equity was increased by $374,000 from the proceeds of stock
options exercised during the quarter. The Company's capital position remains
strong and increased to 12.7% at March 31, 2005 compared to 11.4% at December
31, 2004.
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15
CENTRAL FEDERAL CORPORATION
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
--------------------------------------------------------------------------------
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 March 31, 2005 and December 31, 2004.
COMPARISON OF THE RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31,
2005 AND 2004
General. The Company incurred a net loss for the quarter ended March 31, 2005 of
$289,000 or $.13 per diluted share, compared to a net loss of $268,000 or $.13
per diluted share for the quarter ended March 31, 2004. The loss for the quarter
ended March 31, 2005 was due to an increase in the provision for loan losses
reflecting growth in the loan portfolio and the result of increased operating
expenses associated with the Company's growth strategy.
Net interest income. Net interest income increased 34.2% and totaled $1.2
million for the quarter ended March 31, 2005, compared to $871,000 for the prior
year quarter. The improvement in net interest income was due to growth in assets
in accordance with the Company's growth plan. Both the volume and yield on
interest-earning assets increased during the first quarter of 2005 compared to
the first quarter of 2004. The resultant growth in interest income was partially
offset by increased interest expense related to funding loan growth, due to an
increase in volume and cost of interest-bearing liabilities during the current
year quarter.
Average interest earning assets increased $45.7 million or 46.5% and totaled
$143.9 million during the first quarter of 2005 compared to $98.2 million during
the first quarter of 2004 due to loan growth pursuant to the Company's strategy
to expand into business financial services in the Fairlawn and Columbus, Ohio
markets. The yield on interest earning assets increased 15 basis points (bp) and
totaled 5.39% during the first quarter of 2005 compared to 5.24% during the
prior year quarter as a result of higher short term interest rates in the
current year quarter. Interest income increased $667,000 or 52.5% and totaled
$1.9 million during the first quarter of 2005 compared to $1.3 million during
the prior year quarter due to growth in loan balances. Interest income on loans
increased $705,000 or 72.7% and totaled $1.7 million for the quarter ended March
31, 2005 compared to $970,000 for the prior year quarter. Average loan balances
increased $50.8 million, or 81.7% to $113.1 million during the first quarter of
2005 compared to $62.2 million during the first quarter of 2004 due to
commercial, commercial real estate and multi-family mortgage loan growth. The
average yield on loans declined 31 bp to 5.93% during the first quarter of 2005
compared to 6.24% during the first quarter of 2004 reflecting a change in the
mix of the loan portfolio resulting from growth in commercial, commercial real
estate and multi-family loans which are predominantly adjustable rate loans and
tend to have lower yields than long-term fixed-rate mortgage loans.
Single-family mortgage loans declined to 35.8% of the net loan portfolio at
March 31, 2005 from 56.8% at March 31, 2004. Commercial, commercial real estate
and multi-family mortgage loans grew to 51.8% of the net loan portfolio at March
31, 2005 from 24.2% at March 31, 2004.
Average interest-bearing liabilities increased $45.5 million or 52.6% and
totaled $132.0 million during the first quarter of 2005 compared to $86.5
million during the first quarter of 2004 due to growth in deposits and
borrowings used to fund loan growth. The average cost of interest-bearing
liabilities increased 48 bp or 25.9% and totaled 2.33% for the first quarter of
2005 compared to 1.85% for the first quarter of 2004 primarily due to higher
short-term interest rates in the current year quarter which resulted in both
higher deposit and borrowing costs. Interest expense on deposits increased
$211,000 or 65.1% and totaled $535,000 for the quarter ended March 31, 2005
compared to $324,000 for the prior year quarter. Average deposit balances
increased $30.1 million and totaled $102.2 million during the quarter ended
March 31, 2005 compared to $72.0 million during the prior year quarter due to an
increase in certificate of deposit and commercial deposit accounts. The average
cost of deposits increased 29 bp to 2.09%
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CENTRAL FEDERAL CORPORATION
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
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during the quarter ended March 31, 2005 from 1.80% in the prior year quarter.
Interest expense on FHLB advances and other debt, including subordinated
debentures increased $158,000 and totaled $234,000 during the quarter ended
March 31, 2005 compared to $76,000 during the prior year quarter due to a $15.4
million increase in the average balance of debt outstanding, which totaled $29.8
million during the quarter ended March 31, 2005 compared to $14.4 million during
the prior year quarter and a 106 bp increase in borrowing costs, to 3.14% during
the first quarter of 2005 compared to 2.08% in the prior year quarter.
Net interest margin declined 35 bp to 3.25% for the quarter ended March 31, 2005
compared to 3.60% for the prior year quarter.
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 established through a provision for
loan losses based on Management's evaluation of the risk in its loan portfolio.
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, the provision for loan losses totaled $218,000 in
the first quarter of 2005, an increase of $182,000 from $36,000 in the prior
year quarter. The Company's strategy to expand into business financial services
and the significant growth in commercial, commercial real estate and
multi-family mortgage loans that resulted from that strategy required an
increase in the provision and allowance for loan losses related to these loan
types. The provision also included additional reserves for losses on mortgage
loans due to $74,000 in write-offs during the quarter ended March 31, 2005. At
March 31, 2005, the allowance for commercial, commercial real estate and
multi-family mortgage loans totaled $981,000, or 88.4% of the total allowance
for loan losses, compared to $142,000, or 32.3% at March 31, 2004. At March 31,
2005, the allowance for loan losses on all loan types represented .94% of total
loans compared to .67% at March 31, 2004. Nonperforming loans, all of which are
nonaccrual loans, increased $255,000 to $541,000, or .5% of total loans at March
31, 2005 compared to $286,000, or .3% of total loans at December 31, 2004 due to
an increase in delinquent single-family mortgage loans. More than 95% of the
nonaccrual loan balances are secured by single-family homes in the Company's
primary market area. Management believes the allowance for loan losses is
adequate to absorb probable incurred credit losses in the loan portfolio at
March 31, 2005, however future additions to the allowance may be necessary based
on changes in economic conditions and the factors discussed in the previous
paragraph.
Noninterest income. Noninterest income increased $207,000 to $299,000 in the
first quarter of 2005, compared to $92,000 in the first quarter of 2004, due to
increased gains on the sale of loans in the current year quarter. Gains on sale
of loans increased $194,000 and totaled $211,000 during the quarter ended March
31, 2005 compared to $17,000 during the quarter ended March 31, 2004 due to
increased mortgage originations and sales. The Company sells loans on a
servicing released basis.
Noninterest expense. Noninterest expense increased $347,000 and totaled $1.7
million for the quarter ended March 31, 2005 compared to $1.4 million in the
prior year period. Operating costs related to Reserve totaled $241,000,
including $31,000 amortization of intangible assets during the current year
quarter. The current year quarter also included $37,500 costs related to the
reverse stock split transaction which was abandoned by the Board of Directors in
March 2005. The Company moved to its new headquarters and CFBank location in
Fairlawn in April 2004, and occupancy expenses reflect approximately $42,000
more in the current year quarter as compared to the quarter ended March 31,
2004, which was prior to the move.
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17
CENTRAL FEDERAL CORPORATION
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
--------------------------------------------------------------------------------
Income taxes. The income tax benefit associated with the loss for the quarter
ended March 31, 2005 totaled $163,000, comparable to the $160,000 tax benefit in
the prior year quarter.
CRITICAL ACCOUNTING POLICIES
The Company follows financial accounting and reporting policies that are in
accordance with generally accepted accounting principles in the United States of
America and conform to general practices within the banking industry. These
policies are presented in Note 1 to the audited consolidated financial
statements in the Company's 2004 Annual Report to Shareholders incorporated by
reference into the Company's 2004 Annual Report on Form 10-KSB. Some of these
accounting policies are considered to be critical accounting policies, which 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. Application of assumptions different than
those used by Management could result in material changes in the Company's
financial position or results of operations. Management believes that the
judgments, estimates and assumptions used in the preparation of the consolidated
financial statements are appropriate given the factual circumstances at the
time.
The Company has identified accounting polices that are critical accounting
policies and an understanding of these policies is necessary to understand our
financial statements. One critical accounting policy relates to determining the
adequacy of the allowance for loan losses. The Company's Allowance for Loan
Losses Policy provides a thorough, disciplined and consistently applied process
that incorporates Management's current judgments about the credit quality of the
loan portfolio into determination of the allowance for loan and lease losses in
accordance with generally accepted accounting principles and supervisory
guidance. Management estimates the allowance balance required using past loan
loss experience, the nature and volume of the portfolio, information about
specific borrower situations and estimated collateral values, economic
conditions, and other factors. Management believes that an adequate allowance
for loan losses has been established. Additional information regarding this
policy is included in the section above captioned "Provision for loan losses"
and in the notes to the consolidated financial statements in the Company's 2004
Annual Report to Shareholders incorporated by reference into the Company's 2004
Annual Report on Form 10-KSB, Note 1 (Summary of Significant Accounting
Policies) and Note 4 (Loans).
Another critical accounting policy relates to the valuation of the deferred tax
asset for net operating losses. Net operating losses totaling $2.8 million and
$2.5 million expire in 2023 and 2024, respectively. No valuation allowance has
been recorded against the deferred tax asset for net operating losses because
the benefit is more likely than not to be realized. As the Company continues its
strategy to expand into business financial services and focus on growth, the
resultant increase in interest-earning assets is expected to increase
profitability. Additionally, the acquisition of Reserve is expected to increase
the Company's single-family mortgage loan volume and resultant gains on loan
sales. Additional information is included in the notes to the consolidated
financial statements in the Company's 2004 Annual Report to Shareholders
incorporated by reference into the Company's 2004 Annual Report on Form 10-KSB,
Note 14 (Income Taxes).
LIQUIDITY AND CAPITAL RESOURCES
In general terms, liquidity is a measurement of the Company's ability to meet
its cash needs. The Company'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 Company's principal sources of funds are
deposits, amortization and prepayments of loans, maturities, sales and principal
receipts of securities, borrowings and operations. 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.
The Bank is required by regulation to maintain sufficient liquidity to ensure
its safe and sound operation. Thus, adequate liquidity may vary depending on the
Bank's overall asset/liability structure, market conditions, the activities
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18
CENTRAL FEDERAL CORPORATION
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
--------------------------------------------------------------------------------
of competitors and the requirements of its own deposit and loan customers.
Management believes that the Bank's liquidity is sufficient.
Liquidity management is both a daily and long-term responsibility of Management.
The Company adjusts its investments in liquid assets, primarily cash, short-term
investments and other assets that are widely traded in the secondary market,
based on Management's assessment of expected loan demand, expected deposit
flows, yields available on interest-earning deposits and securities and the
objective of its asset/liability management program. In addition to its liquid
assets, the Company has other sources of liquidity available including, but not
limited to access to advances from the Federal Home Loan Bank, use of brokered
deposits and the ability to obtain deposits by offering above-market interest
rates.
The Bank relies primarily on competitive rates, customer service and
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.
At March 31, 2005, the Bank exceeded all of its regulatory capital requirements
to be considered well-capitalized with a Tier 1 capital level of $13.5 million,
or 9.0% of adjusted total assets, which exceeds the required level of $7.5
million, or 5.0%; Tier 1 risk-based capital level of $13.5 million, or 10.7% of
risk-weighted assets, which exceeds the required level of $7.5 million, or 6.0%;
and risk-based capital of $14.6 million, or 11.6% of risk-weighted assets, which
exceeds the required level of $12.6 million, or 10.0%.
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19
CENTRAL FEDERAL CORPORATION
Item 3.
CONTROLS AND PROCEDURES
--------------------------------------------------------------------------------
Disclosure Controls and Procedures. The Company maintains disclosure controls
and procedures that are designed to ensure that information required to be
disclosed in the Company'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
Company's management, including its Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow timely decisions regarding required
disclosure.
The Company's management, with the participation of the Company's Chief
Executive Officer and Chief Financial Officer, has evaluated the effectiveness
of its disclosure controls and procedures (as defined in Exchange Act Rule
13a-15(e)) as of the end of the period covered by this report. Based on such
evaluation, the Company's Chief Executive Officer and Chief Financial Officer
have concluded that, as of the end of such period, the Company's disclosure
controls and procedures are effective to record, process, summarize and report,
on a timely basis, information required to be disclosed by the Company in the
reports that it files or submits under the Exchange Act.
Changes in Internal Control Over Financial Reporting. The Company made no change
in its internal control over financial reporting during its last fiscal quarter
that has materially affected, or is reasonably likely to materially affect, its
internal control over financial reporting.
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20
CENTRAL FEDERAL CORPORATION
PART II. - Other Information
--------------------------------------------------------------------------------
Item 4. Submission of Matters to a Vote of Security Holders
The information required by this item was contained in the Company's Annual
Report on Form 10-KSB filed with the Commission on March 30, 2005.
Item 6. Exhibits
(a) Exhibit
Number Exhibit
------- -------
3.1* Certificate of Incorporation
3.2* Bylaws
4.0* Form of Common Stock Certificate
10.1 Amendment to Salary Continuation Agreement between CFBank and David C. Vernon
31.1 Rule 13a-14(a) Certifications of the Chief Executive Officer
31.2 Rule 13a-14(a) Certifications of the Chief Financial Officer
32.1 Section 1350 Certifications of the Chief Executive Officer and Chief Financial
Officer
* 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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21
CENTRAL FEDERAL CORPORATION
SIGNATURES
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In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CENTRAL FEDERAL CORPORATION
Dated: May 13, 2005 By: /s/ Mark S. Allio
-----------------------------------
Mark S. Allio
Vice Chairman of the Board, President and
Chief Executive Officer
Dated: May 13, 2005 By: /s/ Therese Ann Liutkus
-----------------------------------
Therese Ann Liutkus, CPA
Treasurer and Chief Financial Officer
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22