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, 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 July 29, 2005
Common stock, $0.01 par value 2,243,662 shares
Transitional Small Business Disclosure Format (check one) Yes [ ] No [X]
CENTRAL FEDERAL CORPORATION
FORM 10-QSB
QUARTER ENDED JUNE 30, 2005
INDEX
Page
----
PART I. Financial Information
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of June 30, 2005 and December 31, 2004 ...................... 3
Consolidated Statements of Operations for the three and six months ended
June 30, 2005 and 2004...................................................................... 4
Consolidated Statement of Changes in Shareholders' Equity
for the six months ended June 30, 2005...................................................... 5
Consolidated Statements of Comprehensive Income (Loss) for the three and six
months ended June 30, 2005 and 2004 ........................................................ 6
Condensed Consolidated Statements of Cash Flows for the six months ended
June 30, 2005 and 2004...................................................................... 7
Notes to Consolidated Financial Statements ................................................. 8
Item 2. Management's Discussion and Analysis..................................................... 19
Item 3. Controls and Procedures.................................................................. 27
PART II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders ..................................... 28
Item 6. Exhibits................................................................................. 28
Signatures ...................................................................................... 29
CENTRAL FEDERAL CORPORATION
PART I. Financial Information
Item 1. Financial Statements
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands except per share data)
June 30, 2005 December 31, 2004
------------- -----------------
(unaudited)
ASSETS
Cash and cash equivalents $ 1,429 $ 32,675
Securities available for sale 35,271 13,508
Loans, net of allowance of $1,242 and $978 108,600 108,149
Federal Home Loan Bank stock 3,866 3,778
Loan servicing rights 302 208
Foreclosed assets, net 112 132
Premises and equipment, net 2,705 2,690
Goodwill 1,749 1,749
Other intangible assets 237 299
Bank owned life insurance 3,469 3,401
Loan sales proceeds receivable 3,526 1,888
Deferred tax asset 1,689 1,491
Accrued interest receivable and other assets 2,137 1,037
------------- -------------
$ 165,092 $ 171,005
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest bearing $ 7,222 $ 5,505
Interest bearing 111,151 96,119
------------- -------------
Total deposits 118,373 101,624
Federal Home Loan Bank advances 21,045 41,170
Other borrowings - 2,249
Advances by borrowers for taxes and insurance 236 321
Accrued interest payable and other liabilities 855 979
Subordinated debentures 5,155 5,155
------------- -------------
Total liabilities 145,664 151,498
Shareholders' equity
Preferred stock, 1,000,000 shares authorized;
none issued - -
Common stock, $.01 par value; 6,000,000 shares
authorized; 2005 - 2,312,195 shares issued,
2004 - 2,294,520 shares issued 23 23
Additional paid-in capital 12,801 12,519
Retained earnings 7,449 8,497
Accumulated other comprehensive income 366 61
Unearned stock based incentive plan shares (427) (351)
Treasury stock, at cost (2005 - 68,533 shares, -
2004 - 108,671 shares) (784) (1,242)
------------- -------------
Total shareholders' equity 19,428 19,507
------------- -------------
$ 165,092 $ 171,005
============= =============
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 Six months ended
June 30, June 30,
----------------------- -----------------------
2005 2004 2005 2004
Interest and dividend income
Loans, including fees $ 1,875 $ 1,071 $ 3,550 $ 2,041
Taxable securities 173 210 316 439
Tax exempt securities - 7 - 20
Federal Home Loan Bank stock dividends 46 36 88 72
Federal funds sold and other 4 48 82 71
---------- ---------- ---------- ----------
2,098 1,372 4,036 2,643
Interest expense
Deposits 646 309 1,181 633
Federal Home Loan Bank advances and other debt 132 80 296 104
Subordinated debentures 78 52 148 104
---------- ---------- ---------- ----------
856 441 1,625 841
---------- ---------- ---------- ----------
Net interest income 1,242 931 2,411 1,802
Provision for loan losses 134 34 352 70
---------- ---------- ---------- ----------
Net interest income after provision for loan losses 1,108 897 2,059 1,732
Noninterest income
Service charges on deposit accounts 55 31 96 62
Net gains on sales of loans 96 27 307 44
Loan servicing fees, net - 49 7 55
Net gains (losses) on sales of securities - (19) - (19)
Earnings on bank owned life insurance 34 40 68 74
Other 28 6 34 10
---------- ---------- ---------- ----------
213 134 512 226
Noninterest expense
Salaries and employee benefits 877 810 1,784 1,536
Occupancy and equipment 120 84 233 138
Data processing 119 96 243 210
Franchise taxes 57 57 109 113
Professional fees 135 127 231 192
Director fees 42 40 81 80
Postage, printing and supplies 35 59 97 95
Advertising and promotion 55 31 98 49
Telephone 30 23 66 44
Loan expenses 10 12 19 30
Foreclosed assets, net 3 (15) 7 (9)
Depreciation 107 85 212 154
Amortization of intangibles 31 - 62 -
Other 117 74 198 206
---------- ---------- ---------- ----------
1,738 1,483 3,440 2,838
---------- ---------- ---------- ----------
Loss before income taxes (417) (452) (869) (880)
Income tax benefit (147) (168) (310) (328)
---------- ---------- ---------- ----------
Net loss $ (270) $ (284) $ (559) (552)
========== ========== ========== ==========
Loss per share:
Basic $ (0.12) $ (0.14) $ (0.25) $ (0.28)
Diluted $ (0.12) $ (0.14) $ (0.25) $ (0.28)
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)
Accumulated
Additional Other Unearned Stock Total
Common Paid-In Retained Comprehensive Based Incentive Treasury Shareholders'
Stock Capital Earnings Income Plan Shares Stock Equity
------ ---------- -------- ------------- --------------- -------- -------------
Balance at January 1, 2005 $ 23 $ 12,519 $ 8,497 $ 61 $ (351) $ (1,242) $ 19,507
Comprehensive loss:
Net loss (559) (559)
Other comprehensive income 305 305
-------------
Total comprehensive loss (254)
Issuance of stock based incentive plan
shares (17,675 shares) 193 (193) -
Recognition of expense for 9,552 stock
based incentive plan shares 117 117
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 ($.18 per share) (403) (403)
------ ---------- -------- ------------- --------- -------- -------------
Balance at June 30, 2005 $ 23 $ 12,801 $ 7,449 $ 366 $ (427) $ (784) $ 19,428
====== ========== ======== ============= ========= ======== =============
See accompanying notes to consolidated financial statements.
5.
CENTRAL FEDERAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Dollars in thousands)
(Unaudited)
Three months ended Six months ended
June 30, June 30,
----------------------- -----------------------
2005 2004 2005 2004
---------- ---------- ---------- ----------
Net loss $ (270) $ (284) $ (559) $ (552)
Change in net unrealized gain (loss) on securities
available for sale 145 (875) (67) (561)
Less: Reclassification adjustment for
losses later recognized in net income - (19) - (19)
---------- ---------- ---------- ----------
Net unrealized gains and (losses) 145 (856) (67) (542)
Initial unrealized gain on mortgage-backed securities
received in securitization 530 - 530 -
Tax effect (230) 291 (158) 184
---------- ---------- ---------- ----------
Other comprehensive income (loss) 445 (565) 305 (358)
---------- ---------- ---------- ----------
Comprehensive income (loss) $ 175 $ (849) $ (254) $ (910)
========== ========== ========== ==========
See accompanying notes to consolidated financial statements.
6.
CENTRAL FEDERAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Six months ended June 30,
2005 2004
------------ ------------
Cash flows from operating activities $ (3,077) $ (613)
Cash flows from investing activities
Net decrease in interest bearing deposits - 1,289
Available-for-sale securities:
Sales - 3,952
Maturities, prepayments and calls 1,079 3,516
Purchases (4,021) (2,987)
Loan originations and payments, net (19,259) (20,483)
Additions to premises and equipment (229) (954)
Other - 20
------------ ------------
Net cash from investing activities (22,430) (15,647)
Cash flows from financing activities
Net change in deposits 16,743 4,597
Net change in short-term borrowings from the
Federal Home Loan Bank and other (21,374) 8,100
Proceeds from Federal Home Loan Bank
advances and other debt - 10,000
Repayments on Federal Home Loan Bank
advances and other debt (1,000) -
Net change in advances by borrowers for
taxes and insurance (85) (12)
Cash dividends paid (397) (367)
Proceeds from exercise of stock options 374 92
Repurchase of common stock - (131)
------------ ------------
Net cash from financing activities (5,739) 22,279
Net change in cash and cash equivalents (31,246) 6,019
Beginning cash and cash equivalents 32,675 8,936
------------ ------------
Ending cash and cash equivalents $ 1,429 $ 14,955
============ ============
Supplemental cash flow information:
Interest paid $ 1,571 $ 873
Income taxes paid - -
Supplemental noncash disclosures:
Securitization of single-family residential mortgage loans $ 18,497 $ -
Transfers from loans to repossessed assets - 614
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 June 30, 2005 and
December 31, 2004 and for the three and six months ended June 30, 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 and six months ended June 30,
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.
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 June 30, Six months ended June 30,
2005 2004 2005 2004
------------ ------------ ------------ ------------
Basic
Net loss $ (270) $ (284) $ (559) $ (552)
============ ============ ============ ============
Weighted average common shares outstanding 2,202,538 1,995,758 2,196,163 1,993,002
============ ============ ============ ============
Basic loss per common share $ (0.12) $ (0.14) $ (0.25) $ (0.28)
============ ============ ============ ============
Diluted
Net loss $ (270) $ (284) $ (559) $ (552)
============ ============ ============ ============
Weighted average common shares outstanding for
basic loss per share 2,202,538 1,995,758 2,196,163 1,993,002
Add: Dilutive effects of assumed exercises of stock
options and stock based incentive plan shares - - - -
------------ ------------ ------------ ------------
Average shares and dilutive potential common shares 2,202,538 1,995,758 2,196,163 1,993,002
============ ============ ============ ============
Diluted loss per common share $ (0.12) $ (0.14) $ (0.25) $ (0.28)
============ ============ ============ ============
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 June 30, Six months ended June 30,
2005 2004 2005 2004
------------ ------------ ------------ ------------
Stock options 270,714 288,585 243,556 251,841
Stock based incentive plan shares 32,917 41,073 28,512 34,561
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 June 30, Six months ended June 30,
2005 2004 2005 2004
------------ ------------ ------------ ------------
Net loss as reported $ (270) $ (284) $ (559) $ (552)
Deduct: Stock-based compensation expense
determined under fair value based method 255 67 300 120
------------ ------------ ------------ ------------
Pro forma net loss $ (525) $ (351) $ (859) $ (672)
============ ============ ============ ============
Basic loss per share as reported $ (0.12) $ (0.14) $ (0.25) $ (0.28)
Pro forma basic loss per share (0.24) (0.18) (0.39) (0.34)
Diluted loss per share as reported $ (0.12) $ (0.14) $ (0.25) $ (0.28)
Pro forma diluted loss per share (0.24) (0.18) (0.39) (0.34)
The pro forma effects are computed using option pricing models, using the
following weighted-average assumptions as of grant date.
Three months ended June 30, Six months ended June 30,
2005 2004 2005 2004
------------ ------------ ------------ ------------
Risk-free interest rate 3.84% 3.24% 3.84% 3.15%
Expected option life (years) 6 6 6 6
Expected stock price volatility 27% 21% 27% 23%
Dividend yield 3.45% 2.74% 3.45% 2.77%
Weighted average fair value of options granted
during the period $ 2.28 $ 2.31 $ 2.28 $ 2.44
10.
CENTRAL FEDERAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
On June 23, 2005, the Board of Directors approved the accelerated vesting of all
unvested stock options awarded prior to 2005 to eligible participants under the
1999 Stock Based Incentive Plan and the 2003 Equity Compensation Plan. As a
result of the acceleration, unvested options granted in 2003 and 2004 to acquire
102,000 shares of the registrant's common stock, which otherwise would have
vested on various dates thru January 16, 2008, became immediately exercisable.
All other terms and conditions applicable to options granted under these plans,
including the exercise prices and the number of shares subject to the
accelerated options, are unchanged.
The decision to accelerate the vesting of these options was related to the
issuance of Statement of Financial Accounting Standard No. 123 (revised 2004),
Share Based Payment ("SFAS 123R"). In accordance with the provisions of SFAS
123R, the registrant will adopt the pronouncement on January 1, 2006 and
believes the above-mentioned acceleration of vesting will eliminate compensation
expense related to these options of approximately $115 and $33 in 2006 and 2007.
The total expense is reflected in the pro forma footnote disclosure above, as
permitted under the transition guidance provided by the Financial Accounting
Standards Board. As a result of the acceleration of the vesting of these
options, the Company currently has no options which will be unvested at January
1, 2006. Future option grants will be accounted for in accordance with SFAS
123R.
Reclassifications:
Some items in the prior year period financial statements were reclassified to
conform to the current presentation.
11.
CENTRAL FEDERAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
NOTE 2 - SECURITIES
The fair value of available for sale securities and the related gross unrealized
gains and losses recognized in accumulated other comprehensive income (loss)
were as follows:
Gross Gross
Fair Unrealized Unrealized
Value Gains Losses
---------- ---------- ----------
June 30, 2005
Federal agency $ 5,941 $ 9 $ (75)
Mortgage-backed 28,322 681 (63)
Municipal 1,008 3 -
---------- ---------- ----------
Total $ 35,271 $ 693 $ (138)
========== ========== ==========
December 31, 2004
Federal agency $ 4,983 $ 2 $ (37)
Mortgage-backed 8,525 195 (68)
---------- ---------- ----------
Total $ 13,508 $ 197 $ (105)
========== ========== ==========
Sales of available for sale securities were as follows:
Three months ended June 30, Six months ended June 30,
2005 2004 2005 2004
------------ ------------ ------------ ------------
Proceeds $ - $ 3,952 $ - $ 3,952
Gross gains - 41 - 41
Gross losses - (60) - (60)
The tax (benefit) provision related to these net realized gains and losses was
($6) for 2004.
The fair value of debt securities at June 30, 2005 by contractual maturity were
as follows. Securities not due at a single maturity date, primarily
mortgage-backed securities, are shown separately.
Available
for Sale
Fair
Value
------------
Due from one to five years $ 6,949
Mortgage-backed 28,322
------------
Total $ 35,271
============
12.
CENTRAL FEDERAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
NOTE 2 - SECURITIES (Continued)
Securities with a carrying amount of $19,233 and $770 at June 30, 2005 and
December 31, 2004 were pledged to secure Federal Home Loan Bank advances. At
June 30, 2005 and December 31, 2004, there were no holdings of securities of any
one issuer, other than federal agencies, in an amount greater than 10% of
shareholders' equity.
Securities with unrealized losses at June 30, 2005 and December 31, 2004,
aggregated by investment category and length of time that individual securities
have been in a continuous unrealized loss position, are as follows:
Less than 12 Months 12 Months or More Total
------------------- ----------------- -----
Unrealized Unrealized Unrealized
Description of Securities Fair Value Loss Fair Value Loss Fair Value Loss
------------------------- ---------- ---------- ---------- ---------- ---------- ----------
June 30, 2005
Federal agency $ 4,941 $ (75) $ - $ - $ 4,941 $ (75)
Mortgage-backed 1,012 (10) 2,242 (53) 3,254 (63)
---------- --------- ---------- ---------- ---------- ----------
Total temporarily impaired $ 5,953 $ (85) $ 2,242 $ (53) $ 8,195 $ (138)
========== ========= ========== ========== ========== ==========
December 31, 2004
Federal agency $ 3,976 $ (37) $ - $ - $ 3,976 $ (37)
Mortgage-backed 700 (1) 2,476 (67) 3,176 (68)
---------- --------- ---------- ---------- ---------- ----------
Total temporarily impaired $ 4,676 $ (38) $ 2,476 $ (67) $ 7,152 $ (105)
========== ========= ========== ========== ========== ==========
Unrealized losses on the above securities have not been recognized in income
because the issuers of the bonds are all federal agencies and the decline in
fair value is temporary and largely due to changes in market interest rates. The
fair value is expected to recover as the bonds approach their maturity date
and/or market rates decline.
13.
CENTRAL FEDERAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
NOTE 3 - LOANS
Loans were as follows:
June 30, 2005 December 31, 2004
------------- -----------------
Commercial $ 12,544 $ 7,030
Real estate:
Single-family residential 21,851 41,450
Multi-family residential 30,310 25,602
Commercial 27,111 20,105
Construction - 1,127
Consumer 18,185 13,952
------------- -------------
Subtotal 110,001 109,266
Less: Net deferred loan fees (159) (139)
Allowance for loan losses (1,242) (978)
------------- -------------
Loans, net $ 108,600 $ 108,149
============= =============
Activity in the allowance for loan losses was as follows:
Three months ended June 30, Six months ended June 30,
2005 2004 2005 2004
------------ ------------ ------------ ------------
Beginning balance $ 1,110 $ 440 $ 978 $ 415
Provision for loan losses 134 34 352 70
Loans charged-off (8) (16) (117) (28)
Recoveries 6 7 29 8
------------ ------------ ------------ ------------
Ending balance $ 1,242 $ 465 $ 1,242 $ 465
============ ============ ============ ============
Impaired loans were not material for any period presented.
Nonperforming loans were as follows:
June 30, 2005 December 31, 2004
------------- -----------------
Loans past due over 90 days still on accrual $ - $ -
Nonaccrual loans 603 286
Nonperforming loans include both smaller balance homogeneous loans that are
collectively evaluated for impairment and individually classified impaired
loans. There were no nonperforming commercial, commercial real estate or
multi-family loans at June 30, 2005 or December 31, 2004.
14.
CENTRAL FEDERAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
NOTE 4 - SECONDARY MORTGAGE MARKET ACTIVITIES
Mortgage loans serviced for others are not reported as assets. The principal
balances of these loans were $43,884 and $27,319 at June 30, 2005 and December
31, 2004.
Custodial escrow balances maintained in connection with serviced loans were $255
and $282 at June 30, 2005 and December 31, 2004.
Activity for capitalized mortgage servicing rights and the related valuation
allowance follows:
Three months ended June 30, Six months ended June 30,
2005 2004 2005 2004
------------ ------------ ------------ ------------
Servicing rights:
Beginning of period $ 198 $ 207 $ 208 $ 221
Additions 120 3 120 3
Amortized to expense (9) (2) (21) (29)
Provision for loss in fair value (7) 29 (5) 42
------------ ------------ ------------ ------------
End of period $ 302 $ 237 $ 302 $ 237
============ ============ ============ ============
Valuation allowance:
Beginning of period $ 18 $ 43 $ 20 $ 56
Additions expensed 7 - 5 -
Reductions credited to expense - (29) - (42)
------------ ------------ ------------ ------------
End of period $ 25 $ 14 $ 25 $ 14
============ ============ ============ ============
The fair value of capitalized mortgage servicing rights was $307 and $213 at
June 30, 2005 and December 31, 2004. Fair value was determined using a 10%
discount rate and prepayment speeds ranging from 200% to 478%, depending on the
stratification of the specific right.
Estimated amortization expense for the next five years:
June 30, 2006 $ 73
June 30, 2007 73
June 30, 2008 73
June 30, 2009 73
June 30, 2010 35
15.
CENTRAL FEDERAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
NOTE 5 - SECURITIZATON
On June 30, 2005, the Company securitized single-family residential mortgage
loans with an outstanding principal balance of $18.6 million, formerly held in
its portfolio, with Freddie Mac. The Company continues to hold the securities
and service the loans. The Company receives annual servicing fees of 0.25
percent of the outstanding balance. Since the Company cannot de-securitize the
securities to get back the loans, the securitization is not considered a sale or
transfer under SFAS 140, Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities, but an exchange of loans for
securities under SFAS No. 134, Accounting for Mortgage-Backed Securities
Retained after the Securitization of Mortgage Loans Held for Sale by a Mortgage
Banking Enterprise and SFAS No. 115, Accounting for Certain Investments in Debt
and Equity Securities because the Company received the beneficial interest in
the loans it transferred to Freddie Mac. As such, the mortgage backed securities
were recorded at the cost of the loans and were classified as "available for
sale" with the $530,000 initial unrealized gain reported in other comprehensive
income.
16.
CENTRAL FEDERAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
NOTE 6 - FEDERAL HOME LOAN BANK ADVANCES
Advances from the Federal Home Loan Bank were as follows.
June 30, 2005 December 31, 2004
------------- -----------------
Maturity July 2005 at 3.53% floating rate $ 9,775 $ -
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% at June 30, 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 $ 21,045 $ 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 as follows.
June 30, 2005 December 31, 2004
------------- -----------------
First mortgage loans under a blanket lien arrangement $ 22,065 $ 41,269
Second mortgage loans 785 695
Multi-family mortgage loans 13,375 10,372
Home equity lines of credit 5,230 3,236
Commercial real estate loans 18,844 14,964
Securities 19,233 770
------------- -----------------
Total $ 79,532 $ 71,306
============= =================
Based on this collateral and the Company's holdings of FHLB stock, the Company
is eligible to borrow up to $43,702 at June 30, 2005.
Required payments over the next five years are:
June 30, 2006 $ 13,775
June 30, 2007 2,000
June 30, 2008 4,270
June 30, 2009 1,000
----------
Total $ 21,045
==========
17.
CENTRAL FEDERAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands except per share data)
NOTE 7 - SEGMENT INFORMATION
The Company manages and operates two reportable segments: banking and mortgage
services. Loans, securities, deposits and servicing fees provide the revenue in
the banking operation, and loan sales provide the revenues in mortgage services.
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 ("Reserve") in October 2004 as a division of the Company's
wholly owned subsidiary, CFBank, a federally chartered savings association (the
"Bank"), mortgage services 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.
Banking Mortgage Services Parent and Other Total
------- ----------------- ---------------- -----
Three months ended June 30, 2005
Net interest income (expense) $ 1,303 $ 16 $ (77) $ 1,242
Provision for loan losses (134) - - (134)
Other revenue 98 96 19 213
Other expense (1,411) (238) (89) (1,738)
--------- --------- --------- ---------
Loss before income tax (144) (126) (147) (417)
Income tax benefit (51) (47) (49) (147)
--------- --------- --------- ---------
Net loss $ (93) $ (79) $ (98) $ (270)
========= ========= ========= =========
Six months ended June 30, 2005
Net interest income (expense) $ 2,546 $ 12 $ (147) $ 2,411
Provision for loan losses (352) - - (352)
Other revenue 185 307 20 512
Other expense (2,761) (496) (183) (3,440)
--------- --------- --------- ---------
Loss before income tax (382) (177) (310) (869)
Income tax benefit (145) (60) (105) (310)
--------- --------- --------- ---------
Net loss $ (237) $ (117) $ (205) $ (559)
========= ========= ========= =========
June 30, 2005
Segment assets $ 163,000 $ 2,013 $ 79 $ 165,092
========= ========= ========= =========
18.
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 and
home equity lines of credit.
During the first half 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 loans increased $17.3
million or 32.8% in the first half of 2005 and totaled $70.0 million at June 30,
2005. Home equity lines of credit increased $5.5 million or 93.2% in the first
half of 2005 and totaled $11.4 million at June 30, 2005. Deposits increased
$16.8 million or 16.5% during the first six months of 2005 and totaled $118.4
million at June 30, 2005.
This growth positively impacted the Company's net interest income which
increased 33.4% and 33.8% and totaled $1.2 million and $2.4 million for the
three and six months ended June 30, 2005 compared to $931,000 and $1.8 million
for the prior year periods.
19.
CENTRAL FEDERAL CORPORATION
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
On June 30, 2005, the Company securitized single-family residential mortgage
loans with an outstanding principal balance of $18.6 million, formerly held in
its portfolio, with Freddie Mac. The Company continues to hold the securities
and service the loans. The securitization increased liquidity as the securities
retained are readily marketable, eliminated credit risk on the loans and reduced
the bank's risk-based capital requirement. As a result of the securitization,
net single-family residential mortgage loan balances declined $18.5 million, the
loan servicing asset increased $120,000 and securities available for sale
increased $18.9 million. The unrealized gain on the securities at June 30, 2005
was $530,000 which increased the Company's capital by $350,000.
Profitability in the first half 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 expenses associated with management,
technology and physical resources necessary to support our strategic growth
plan. Current projections indicate profitable operations in 2006 that are
significantly dependent on the Company's ability to continue to grow. Expenses
associated with management, improvements to technology and additional offices
which were essential for the Company's expansion into business and financial
services require the support of a larger asset base and resultant increased
earnings to achieve profitability.
Profitability during the first half of 2005 was also negatively impacted by
pretax operating losses of Reserve Mortgage Services (Reserve), the Company's
mortgage services division. The Company expected Reserve performance to be
accretive to earnings, but lower than projected loan origination volumes have
resulted in losses. Goodwill totaling $1.7 million resulted from the Reserve
acquisition and represented the excess of the purchase price over the fair value
of acquired tangible assets and liabilities and identifiable intangible assets.
Due to operating losses of Reserve, goodwill was tested for impairment at June
30, 2005 and management believes there was no impairment at that date. The
assessment of impairment is significantly dependent on estimates of Reserve's
future performance. Should circumstances change, any impairment will be
recognized in the period identified. See "Critical Accounting Policies" for
additional discussion.
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 June 30, 2005 and December 31, 2004. Continued
operating losses may cause the Bank's capital ratios to fall below the
well-capitalized levels of regulatory capital, which may require the Company to
raise additional capital to be infused into the Bank. In a press release on June
24, 2005, the Company reported that the Board of Directors anticipates the need
to retain capital as the Company continues to invest and position itself for
growth and increased profitability and indicated that the Board had considered
reducing the dividend and advised that payment of the dividend would continue to
be evaluated. The Company's common stock has historically yielded a dividend of
$.09 per quarter, or $.36 per year.
Other than described above, 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 or any current
recommendations by its regulators which would have a material effect if
implemented.
FINANCIAL CONDITION
General. Total assets at December 31, 2004 included $30.0 million in overnight
investments at a positive spread to the Federal Home Loan Bank advances used to
fund the investment. Approximately $30.0 million in overnight FHLB advances at a
cost of between 1.50% and 2.50% was borrowed and placed in overnight investments
earning 2.50% during the last half of 2004 and first quarter of 2005. As short
term interest rates increased and the spread between the earnings on the
investment and cost of borrowing declined, the cash was withdrawn to repay the
advances during the first quarter of 2005. The $5.9 million decline in total
assets to $165.1 million at June 30, 2005
20.
CENTRAL FEDERAL CORPORATION
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
from $171.0 million at December 31, 2004 was the result of the $30.0 million
reduction in cash and borrowings associated with the arbitrage transaction
offset by $17.3 million growth in commercial loans and $5.5 million growth in
home equity lines of credit. Loan growth was funded by deposits, which increased
$16.8 million, and FHLB advances, which increased $9.9 million after the
repayment associated with the arbitrage transaction.
Cash and cash equivalents. Cash and cash equivalents totaled $1.4 million at
June 30, 2005, a decline of $31.3 million from $32.7 million at December 31,
2004 due to the use of cash to repay FHLB advances as discussed above.
Securities. Securities available for sale totaled $35.3 million at June 30,
2005, an increase of $21.8 million from $13.5 million at December 31, 2004 due
to the securitization transaction, discussed above.
Loans. Loans totaled $108.6 million at June 30, 2005 compared to $108.1 million
at December 31, 2004. Single-family residential loan balances declined $19.6
million and totaled $21.9 million at June 30, 2005 due to the securitization
discussed above. Not considering the securitization transaction, overall loan
balances increased 17.5%. Commercial loan balances, which include multi-family
and commercial real estate loans, increased $17.3 million and totaled $70.0
million at June 30, 2005 compared to $52.7 million at December 31, 2004 as the
Company continued to focus on commercial lending. Total consumer loan balances
increased $4.2 million due to the growth in home equity lines of credit
mentioned above.
Deposits. Deposits increased $16.8 million or 16.5% during the first six months
of 2005 and totaled $118.4 million at June 30, 2005 compared to $101.6 million
at December 31, 2004. The increase was due to growth of $13.9 million in
certificate of deposit accounts and $4.3 million in demand deposit accounts,
largely commercial checking accounts. Traditional savings account balances
declined $1.4 million.
Federal Home Loan Bank advances. FHLB advances totaled $21.0 million at June 30,
2005, a decline of $20.2 million from $41.2 million at December 31, 2004 due to
repayment of borrowings associated with the arbitrage transaction, discussed
above, and use of additional advances to fund loan growth.
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 first
half of 2005 and totaled $19.4 million at June 30, 2005 compared to $19.5
million at December 31, 2004 due to the net loss and dividends during the
period. The decline was offset by the $350,000 after tax unrealized gain on the
securities retained in the securitization and $374,000 in proceeds from the
exercise of stock options. The Company's capital position increased to 11.8% at
June 30, 2005 compared to 11.4% at December 31, 2004.
COMPARISON OF THE RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2005
AND 2004
General. The Company incurred a net loss for the quarter ended June 30, 2005 of
$270,000 or $.12 per diluted share compared to a net loss of $284,000 or $.14
per diluted share for the quarter ended June 30, 2004. The loss for the current
year quarter was due to provisions for loan losses, expenses associated with
management, technology and physical resources necessary to support the Company's
strategic growth plan and $126,000 pretax operating losses of Reserve.
Net interest income. Net interest income increased 33.4% to $1.2 million for the
quarter ended June 30, 2005 from $931,000 in the prior year quarter due to
growth in assets in accordance with the Company's growth plan. Both the volume
and yield on interest-earning assets increased in the second quarter of 2005
compared to the prior year
21.
CENTRAL FEDERAL CORPORATION
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
quarter. 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 $32.2 million or 28.7% to $144.4
million in the second quarter of 2005 from $112.2 million in the second 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 92 basis points (bp) to 5.82% in the
second quarter of 2005 from 4.90% in the prior year quarter reflecting higher
yields on commercial, commercial real estate and multi-family loans. Interest
income increased $726,000 or 52.9% to $2.1 million in the second quarter of 2005
from $1.4 million in the prior year quarter due to growth in interest income on
loans, which increased $804,000 or 75.1% to $1.9 million for the quarter ended
June 30, 2005 from $1.1 million in the prior year quarter. Average loan balances
increased $45.7 million, or 63.8% to $117.3 million in the second quarter of
2005 from $71.6 million in the prior year quarter and the average yield on loans
increased 41 bp to 6.39% in the second quarter of 2005 from 5.98% in the prior
year quarter due to commercial, commercial real estate and multi-family mortgage
loan growth.
Average interest-bearing liabilities increased $31.7 million or 31.2% to $133.2
million in the second quarter of 2005 from $101.5 million in the second quarter
of 2004 due to growth in deposits used to fund loan growth. The average cost of
interest-bearing liabilities increased 83 bp or 47.7% to 2.57% in the second
quarter of 2005 from 1.74% in the second 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
$337,000 or 109.1% to $646,000 for the quarter ended June 30, 2005 from $309,000
in the prior year quarter. Average deposit balances increased $34.3 million or
46.0% to $108.9 million in the quarter ended June 30, 2005 from $74.6 million in
the prior year quarter due to an increase in certificate of deposit and
commercial deposit accounts. The average cost of deposits increased 71 bp to
2.37% in the quarter ended June 30, 2005 from 1.66% in the prior year quarter.
Interest expense on FHLB advances and other debt, including subordinated
debentures increased $78,000 to $210,000 in the quarter ended June 30, 2005 from
$132,000 in the prior year quarter due to a 150 bp increase in borrowing costs
to 3.46% in the second quarter of 2005 from 1.96% in the prior year quarter.
Net interest margin increased 11 bp to 3.44% for the quarter ended June 30, 2005
compared to 3.33% in 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 increased $100,000
to $134,000 in the second quarter of 2005 from $34,000 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. At June 30,
2005, the allowance for commercial, commercial real estate and multi-family
mortgage loans totaled $1.1 million or 91.2% of the total allowance for loan
losses, compared to $325,000 or 69.9% at June 30, 2004. At June 30, 2005, the
allowance for loan losses on all loan types represented 1.1% of total loans
compared to .6% at June 30, 2004. Nonperforming loans, all of which are
nonaccrual loans, increased $317,000 to $603,000 or .6% of total loans at June
30, 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
22.
CENTRAL FEDERAL CORPORATION
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
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 June 30, 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 $79,000 or 59.0% to $213,000 in
the second quarter of 2005 from $134,000 in the second quarter of 2004 due to
increased gains on sales of loans in the current year quarter. Gains on sales of
loans increased $69,000 or 255.6% to $96,000 in the current year quarter from
$27,000 in the prior year period due to mortgage originations and sales from
Reserve. The Company sells loans on a servicing released basis.
Noninterest expense. Noninterest expense increased $255,000 to $1.7 million in
the second quarter of 2005 from $1.5 million in the prior year period due to
operating costs of Reserve which totaled $238,000, including $31,000
amortization of intangible assets during the current year quarter compared to
none in the prior year period as the acquisition of Reserve was completed in
October 2004.
Income taxes. The income tax benefit associated with the pretax loss for the
quarter ended June 30, 2005 totaled $147,000, comparable to the $168,000 tax
benefit in the prior year quarter.
COMPARISON OF THE RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2005
AND 2004
General. The Company incurred a net loss for the six months ended June 30, 2005
of $559,000 or $.25 per diluted share, compared to a net loss of $552,000 or
$.28 per diluted share for the six months ended June 30, 2004. The loss for the
current year period was due to provisions for loan losses, expenses associated
with management, technology and physical resources necessary to support the
Company's strategic growth plan and $177,000 pretax operating losses of Reserve.
Net interest income. Net interest income increased 33.8% to $2.4 million for the
six months ended June 30, 2005 from $1.8 million in the prior year period due to
growth in assets in accordance with the Company's growth plan. Both the volume
and yield on interest-earning assets increased in the first half of 2005
compared to the prior year period. 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 in the
current year period.
Average interest earning assets increased $38.9 million or 37.0% to $144.1
million in the first half of 2005 from $105.2 million in the first half 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 55 bp to 5.60% in the first half of 2005 from
5.05% in the prior year period reflecting higher yields on commercial,
commercial real estate and multi-family loans. Interest income increased $1.4
million or 52.7% to $4.0 million in the first half of 2005 from $2.6 million in
the prior year period due to growth in interest income on loans, which increased
$1.5 million or 73.9% to $3.5 million for the six months ended June 30, 2005
from $2.0 million in the prior year period. Average loan balances increased
$48.3 million, or 72.2% to $115.2 million in the first half of 2005 from $66.9
million in the prior year period and the average yield on loans increased 6 bp
to 6.16% in the first half of 2005 from 6.10% in the prior year period due to
commercial, commercial real estate and multi-family mortgage loan growth.
Average interest-bearing liabilities increased $38.6 million or 41.1% to $132.6
million in the first half of 2005 from $94.0 million in the first half of 2004
due to growth in deposits and borrowings used to fund loan growth. The average
cost of interest-bearing liabilities increased 66 bp or 36.9% to 2.45% in the
first half of 2005 from 1.79% in prior year period primarily due to higher
short-term interest rates in the current year period which resulted in both
higher deposit and borrowing costs. Interest expense on deposits increased
$548,000 or 86.6% to $1.2 million for the six months ended June 30, 2005 from
$633,000 in the prior year period. Average deposit balances increased $32.2
million or 43.9% to $105.5 million in the six months ended June 30, 2005 from
$73.3 million in the prior year period due to an increase in certificate of
deposit and commercial deposit accounts. The average cost of deposits
23.
CENTRAL FEDERAL CORPORATION
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
increased 51 bp to 2.24% in the six months ended June 30, 2005 from 1.73% in the
prior year period. Interest expense on FHLB advances and other debt, including
subordinated debentures increased $236,000 to $444,000 in the six months ended
June 30, 2005 from $208,000 in the prior year period due to a 127 bp increase in
borrowing costs to 3.28% in the first half of 2005 from 2.01% in the prior year
quarter.
Net interest margin decreased 10 bp to 3.35% for the six months ended June 30,
2005 compared to 3.45% in the prior year period.
Provision for loan losses. Based on management's review of the factors and
market conditions discussed above, the provision for loan losses increased
$282,000 to $352,000 in the first half of 2005 from $70,000 in the prior year
period. The provision for loan losses reflects growth in commercial, commercial
real estate and multi-family loans in the current year period as discussed
previously.
Noninterest income. Noninterest income increased $286,000 or 126.5% to $512,000
in the first half of 2005 from $226,000 in the first half of 2004 due to
mortgage originations and sales from Reserve which resulted in $307,000 in gains
on sales of loans in the six months ended June 30, 2005, a $263,000 increase
from $44,000 in the prior year period.
Noninterest expense. Noninterest expense increased $602,000 to $3.4 million in
the first half of 2005 from $2.8 million in the prior year period due to
operating costs of Reserve which totaled $496,000, including $62,000
amortization of intangible assets during the current year period compared to
none in the prior year period as the acquisition of Reserve was completed in
October 2004. The current year period also included $37,500 costs related to the
reverse stock split transaction which was abandoned by the Board in March 2005.
The Company moved to its new headquarters and CFBank location in Fairlawn in
April 2004, and occupancy expenses related to the facility increased
approximately $56,000 during the six months ended June 30, 2005 compared to the
prior year period.
Income taxes. The income tax benefit associated with the pretax loss for the six
months ended June 30, 2005 totaled $310,000, comparable to the $328,000 tax
benefit in the prior year period.
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 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
24.
CENTRAL FEDERAL CORPORATION
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
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, mortgage service operations are 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).
Another critical accounting policy relates to the valuation of goodwill and the
assessment of impairment. Goodwill is not subject to amortization and is tested
for impairment annually or more frequently if events or changes in circumstances
indicate that the asset might be impaired. Goodwill totaling $1.7 million
resulted from the Reserve acquisition and represented the excess of the purchase
price over the fair value of acquired tangible assets and liabilities and
identifiable intangible assets. Due to operating losses of Reserve, goodwill was
tested for impairment at June 30, 2005 and management believes there was no
impairment at that date. The assessment of impairment is significantly dependent
on estimates of Reserve's future performance. Should circumstances change, any
impairment will be recognized in the period identified. 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 1 (Summary of Significant
Accounting Policies) and Note 2 (Business Combination).
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 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.
25.
CENTRAL FEDERAL CORPORATION
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
At June 30, 2005, the Bank exceeded all of its regulatory capital requirements
to be considered well-capitalized with a Tier 1 capital level of $13.4 million,
or 8.2% of adjusted total assets, which exceeds the required level of $8.2
million, or 5.0%; Tier 1 risk-based capital level of $13.4 million, or 9.9% of
risk-weighted assets, which exceeds the required level of $8.1 million, or 6.0%;
and risk-based capital of $14.7 million, or 10.8% of risk-weighted assets, which
exceeds the required level of $13.6 million, or 10.0%.
26.
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.
27.
CENTRAL FEDERAL CORPORATION
PART II. - Other Information
Item 4. Submission of Matters to a Vote of Security Holders
Central Federal Corporation held its Annual Meeting of shareholders on May 29,
2005. Results of shareholder voting were as follows:
a. Election of Directors:
William R. Downing Gerry W. Grace
------------------ --------------
Term of office Three years Three years
For 1,745,367 1,760,218
Withheld 76,929 62,078
The following directors' terms of office as a director continued
after the meeting:
Jeffrey W. Aldrich
Mark S. Allio
Thomas P. Ash
David C. Vernon
Jerry F. Whitmer
b. Approval of the Second Amended and Restated 2003 Equity Compensation
Plan:
For 983,298
Against 164,070
Abstain 4,830
Broker non-votes 670,098
b. Ratification of the appointment of Crowe Chizek and Company LLC as
independent auditors of the Company for the year ending December 31,
2005:
For 1,790,284
Against 25,225
Abstain 6,787
Item 6. Exhibits
(a) Exhibit
Number Exhibit
------ -------
3.1* Certificate of Incorporation
3.2* Bylaws
4.0* Form of Common Stock Certificate
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.
28.
CENTRAL FEDERAL CORPORATION
SIGNATURES
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: August 15, 2005 By: /s/ Mark S. Allio
-----------------------------------
Mark S. Allio
Vice Chairman of the Board, President
and Chief Executive Officer
Dated: August 15, 2005 By: /s/ Therese Ann Liutkus
-----------------------------------
Therese Ann Liutkus, CPA
Treasurer and Chief Financial Officer
29.