Message to Shareholders
Dear Shareholders,
For more than 111 years the officers and employees of our Company have served
the financial services needs of the communities of Wellsville and Calcutta, Ohio
with distinction. In the past few years we have considered how best to take
advantage of our strong capital base and our proud heritage. After careful
planning we made the decision to make 2003 the year for positioning Central
Federal Corporation for growth and increased profitability.
While our plan was adopted by your Board of Directors, it is important to
recognize the contributions of Advisory Director Mr. Joseph M. Wells, Jr., who
was most influential in the process of making the decisions necessary to move
our Company forward. I would also like to thank retired Director Mr. Fred C.
Jackson for his advice and counsel during this year of significant change for
our Company.
Mr. William R. Williams, our former President and CEO, contributed significantly
to the successful execution of our plan. Mr. Williams decided he wanted to
retire on April 23, 2003. After 32 years of dedicated service to our Company, it
was everyone's desire that he be granted his wish to enjoy a well-deserved
retirement. However, we did not want to lose his counsel and insight, and he
remains a valued consultant to the Company.
Our plan involved the execution of a number of action items, which have been
discussed in various press releases and regulatory filings throughout the year.
I urge you to review the Management Discussion and Analysis section of this
annual report for additional details about the actions we have taken to position
Central Federal Corporation for the future.
During 2003 we established offices in Fairlawn and Columbus, Ohio, raised
additional capital, strengthened the management team, expanded the Board of
Directors, increased our technological capabilities, remodeled our existing
offices and began offering business financial services. In essence, we have
created the new Central Federal.
We look forward to the opportunity to build on the accomplishments of 2003,
which were made possible by the efforts of so many. Thank you for your support
of Central Federal Corporation. We are continuing our efforts to grow and become
even stronger.
David C. Vernon
Chairman, President and CEO
Management's Discussion and Analysis of Financial Condition and
Results of Operations
SELECTED FINANCIAL AND OTHER DATA
The selected financial and other data of the Company set forth below is derived
in part from, and should be read in conjunction with the Financial Statements of
the Company and Notes thereto presented elsewhere in this report.
AT DECEMBER 31,
------------------------------------------------------------
2003 2002 2001 2000 1999
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
SELECTED FINANCIAL CONDITION DATA:
Total assets $107,011 $110,551 $120,927 $140,933 $142,497
Cash and cash equivalents 8,936 12,861 4,329 2,930 4,928
Securities available for sale 27,126 1,439 2,092 3,090 3,795
Securities held to maturity - 17,822 23,343 35,796 54,708
Loans, net(1) 58,024 62,565 70,570 86,265 73,030
Allowance for loan losses 415 361 373 354 369
Nonperforming assets 934 783 985 489 104
Foreclosed assets 193 2 98 - 11
Deposits 73,358 74,690 76,168 73,997 75,833
Federal Home Loan Bank advances 7,500 11,430 18,393 40,536 36,419
Loan payable - 4,900 7,000 7,000 -
Subordinated debentures 5,155 - - - -
Total shareholders' equity 19,856 17,583 18,160 17,833 29,200
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------------
2003 2002 2001 2000 1999
------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
SUMMARY OF EARNINGS:
Total interest income $ 5,435 $ 7,067 $ 9,588 $ 9,834 $ 9,303
Total interest expense 3,521 3,462 5,299 5,802 4,714
------- ------- ------- ------- -------
Net interest income 1,914 3,605 4,289 4,032 4,589
Provision for loan losses 102 19 62 - -
------- ------- ------- ------- -------
Net interest income after provision for loan losses 1,812 3,586 4,227 4,032 4,589
Noninterest income
Net gain on sale of securities 42 16 15 10 38
Other 888 599 169 284 276
------- ------- ------- ------- -------
Total noninterest income 930 615 184 294 314
Noninterest expense 6,104 3,214 3,501 3,900 4,956
------- ------- ------- ------- -------
Income (loss) before income taxes (3,362) 987 910 426 (53)
Income tax expense (benefit) (988) 313 312 150 (11)
------- ------- ------- ------- -------
Net income (loss) $(2,374) $ 674 $ 598 $ 276 $ (42)
======= ======= ======= ======= =======
(See footnotes on next page)
- 1 -
Management's Discussion and Analysis of Financial Condition and
Results of Operations
AT OR FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------------------
2003 2002 2001 2000 1999
---------- ---------- ---------- ---------- -----------
SELECTED FINANCIAL RATIOS AND OTHER DATA:
PERFORMANCE RATIOS:(2)
Return on average assets (2.19%) 0.58% 0.45% 0.02% (0.03%)
Return on average equity (12.34%) 3.76% 3.32% 1.27% (0.14%)
Average yield on interest-earnings assets(3) 5.62% 6.98% 7.71% 7.42% 6.97%
Average rate paid on interest-bearing liabilities 2.63% 3.63% 4.65% 5.01% 4.55%
Average interest rate spread(4) 2.99% 3.35% 3.06% 2.21% 2.42%
Net interest margin, fully taxable equivalent(5) (11) 3.28% 3.56% 3.45% 2.96% 3.44%
Interest-earning assets to interest-bearing liabilities 113.38% 106.09% 109.17% 120.16% 127.68%
Efficiency ratio(6) 217.84% 76.45% 78.53% 90.36% 101.75%
Noninterest expense to average assets 5.63% 2.79% 2.63% 2.82% 3.60%
Dividend payout ratio n/m 83.72% 81.58% n/m n/m
CAPITAL RATIOS:(2)
Equity to total assets at end of period 18.56% 15.90% 15.02% 12.65% 20.49%
Average equity to average assets 17.76% 15.54% 13.54% 15.68% 22.48%
Tangible capital ratio (9) 13.90% 18.90% 18.40% 15.60% 15.10%
Core capital ratio (9) 13.90% 18.90% 18.40% 15.60% 15.10%
Risk-based capital ratio (9) 21.60% 38.60% 35.70% 32.40% 34.10%
ASSET QUALITY RATIOS:(2)
Nonperforming loans to total loans (7) 1.28% 1.25% 1.25% .56% .13%
Nonperforming assets to total assets(8) 0.87% 0.71% 0.81% 0.35% 0.07%
Allowance for loan losses to total loans 0.71% 0.57% 0.53% 0.41% 0.50%
Allowance for loan losses to nonperforming loans (7) 56.01% 46.22% 42.24% 72.39% 3.97%
Net charge-offs to average loans 0.08% 0.05% 0.05% 0.02% 0.02%
PER SHARE DATA:
Basic earnings (loss) per share $ (1.31) $ 0.44 $ 0.38 $ 0.17 $ (0.02)
Diluted earnings (loss) per share (1.28) 0.43 0.38 0.17 (0.02)
Dividends declared (10) 0.36 0.36 0.31 6.25 0.17
Book value per share at year end 9.81 10.68 10.42 10.19 15.85
---------------------------
(1) Loans, net represents gross loans receivable net of the allowance for loan
losses, loans in process and deferred loan origination fees.
(2) Asset quality ratios and capital ratios are end-of-period ratios. All other
ratios are based on average monthly balances during the indicated periods.
(3) Calculations of yield are presented on a taxable equivalent basis using the
federal income tax rate of 34%.
(4) The average interest rate spread represents the difference between the
weighted average yield on average interest-earning assets and the weighted
average cost of average interest-bearing liabilities.
(5) The net interest margin represents net interest income as a percent of
average interest-earning assets.
(6) The efficiency ratio equals noninterest expense divided by net interest
income plus noninterest income (excluding gains or losses on securities
transactions).
(7) Nonperforming loans consist of nonaccrual loans and other loans 90 days or
more past due.
(8) Nonperforming assets consist of nonperforming loans, other repossessed
assets and REO.
(9) Regulatory capital ratios of Central Federal Bank.
(10) The Company paid a return of capital dividend of $6.00 per share in 2000.
(11) Calculated excluding the $1.3 million penalty on prepayment of Federal Home
Loan Bank advances in 2003.
n/m - not meaningful
- 2 -
Management's Discussion and Analysis of Financial Condition and
Results of Operations
GENERAL
Central Federal Corporation (formerly known as Grand Central Financial Corp.)
was formed as a thrift holding company as a result of the conversion of Central
Federal Bank (formerly known as Central Federal Savings and Loan Association of
Wellsville) from a federally chartered mutual savings and loan association to a
federally chartered stock savings and loan association in December of 1998.
Management's discussion and analysis represents a review of the Company's
consolidated financial condition and results of operations. This review should
be read in conjunction with the consolidated financial statements and footnotes.
The Company's results of operations are dependent primarily on net interest
income, which is the difference ("spread") between the interest income earned on
its loans and securities and its cost of funds, consisting of interest paid on
its deposits and borrowed funds. The interest rate spread is affected by
regulatory, economic and competitive factors that influence interest rates, loan
demand and deposit flows. The Company's net income is also affected by, among
other things, loan fee income, provisions for loan losses, service charges,
operating expenses and franchise and income taxes. The Company's revenues are
derived primarily from interest on mortgage loans, consumer loans, commercial
loans and securities, as well as income from service charges and loan sales. The
Company's operating expenses principally consist of interest expense, 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.
FORWARD-LOOKING STATEMENTS
When used in this Annual Report, or in future filings with the Securities and
Exchange Commission, 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
- 3 -
Management's Discussion and Analysis of Financial Condition and
Results of Operations
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.
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, to originate single-family residential mortgage
loans, short-term consumer loans and commercial loans. To a lesser extent, the
Company also originates residential construction loans in its market area and
loans secured by multi-family real estate.
The Company implemented 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. The Company completed a private placement transaction which
further strengthened its capital position and provided additional funds for
growth. The management team was expanded and strengthened. Offices were opened
in Fairlawn and Columbus, Ohio. The Company restructured its borrowings to
reduce funding costs and restructured employee benefit plans to reduce future
expenses. The data processing system was upgraded, and the Company's subsidiary
Bank began originating commercial loans.
The Company's management team now includes Raymond E. Heh, former Chairman,
President and CEO of Bank One Akron NA, who is President and Chief Operating
Officer of Central Federal Bank. R. Parker MacDonell, former Senior Vice
President of Bank One Columbus NA and third generation Ohio banker, is Regional
President, Columbus. Edward L. Baumgardner, former President and CEO of Potters
Bank and Potters Financial Company, is Regional President, Columbiana County.
Eloise L. Mackus, Esq. joined the Company and Bank as Senior Vice President,
General Counsel and Secretary. Therese A. Liutkus, CPA, former CFO of First
Place Financial Corp., joined the Company and Bank as Chief Financial Officer.
William R. Reed, former Senior Vice President and Senior Credit Officer of
FirstMerit Bank, Akron, Ohio, is Senior Credit Officer. Three directors were
added to the Boards of the Company and the Bank in 2003: Mark S. Allio,
President and CEO, Rock Financial Services; William R. Downing, President, R.H.
Downing, Inc.; and Jerry F. Whitmer, Partner, Brouse McDowell. William R.
Williams, former President and CEO of Central Federal Corporation retired from
the Board of Directors in 2003.
The Columbus office opened in November 2003 and construction of the new Fairlawn
office is expected to be completed in March 2004. Currently, the Company rents
office space in a Fairlawn office building, and is a one-third owner of a
limited liability company that will own and manage the new office building.
The Company restructured its borrowings and eliminated costly long-term Federal
Home Loan Bank advances and issued less costly subordinated debentures in
exchange for the proceeds of a trust preferred security offering by a trust
formed by the Company.
- 4 -
Management's Discussion and Analysis of Financial Condition and
Results of Operations
The proceeds from this offering are available to provide additional capital to
Central Federal Bank to support growth. The Company terminated the Employee
Stock Ownership Plan, froze pension benefits and instituted a 401(k) plan to
reduce future expenses.
The Company allowed mortgage loan portfolio balances to decline as interest
rates fell to 40-year lows and consumers continued to refinance during 2003.
Current originations of long-term fixed-rate mortgages continue to be sold
rather than retained in portfolio. The Company shortened the maturities of its
securities portfolio in anticipation of growth in the commercial loan portfolio.
To improve liquidity, all securities previously classified as held to maturity
were reclassified as available for sale during 2003. Cash flows from the
mortgage and securities portfolios will continue to be used to fund commercial
loan growth.
Near-term profitability is expected to be negatively impacted by the occupancy
costs of the new offices in Fairlawn and Columbus and salaries and employee
benefits expense associated with additions made to the management team, as noted
above. Profitability in the near term will also be negatively impacted by
Management's decision to shorten security maturities and allow mortgage loan
portfolio balances to decline. Although the decision to sell current mortgage
originations rather than retain the loans in portfolio results in declining
mortgage loan portfolio balances and lower earnings from that portfolio in the
near term, it protects future profitability as Management believes it is not
prudent to retain these long-term, fixed-rate loans and subject the Company to
the interest rate risk and reduced future earnings associated with a rise in
interest rates. Keeping security maturities short and selling long-term,
fixed-rate mortgage loans gives the Company the liquidity necessary to reinvest
in higher earning assets in a rising interest rate environment. Additionally, a
rise in mortgage interest rates would likely cause consumer refinancing to slow,
reducing the Bank's volume of loan originations, sales and resultant gains.
Longer term, however, growth in commercial loans and deposits at the Fairlawn
and Columbus offices are expected to result in improved financial performance.
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. Assets totaled $107.0 million at December 31, 2003, a decrease of $3.5
million, or 3.2% from $110.6 million at December 31, 2002. The decline was
primarily due to repayment of $11.4 million in long-term, fixed-rate Federal
Home Loan Bank advances and repayment of the remaining $4.9 million balance of a
loan which had been obtained to fund payment of a return of capital dividend
declared in 2000. These were partially offset by proceeds from $7.5 million in
short-term Federal Home Loan Bank advances and $5.2 million in proceeds from the
issuance of subordinated debentures.
- 5 -
Management's Discussion and Analysis of Financial Condition and
Results of Operations
CASH AND CASH EQUIVALENTS. Cash and cash equivalents totaled $8.9 million at
December 31, 2003, a decline of $4.0 million or 30.5% from $12.9 million at
December 31, 2002. The decline was primarily due to the net use of cash in the
transactions discussed above.
INTEREST-BEARING DEPOSITS IN OTHER FINANCIAL INSTITUTIONS. Interest-bearing
deposits in other financial institutions totaled $1.6 million at December 31,
2003, a decrease of $5.6 million from $7.2 million at December 31, 2002 due to
maturity of a $7.0 million certificate of deposit reflected in this balance at
December 31, 2002 offset by current year deposits.
SECURITIES. Securities available for sale increased $25.7 million during the
year and totaled $27.1 million at December 31, 2003, compared to $1.4 million at
December 31, 2002. Securities held to maturity decreased $17.8 million during
the same time frame. In 2003, the Company transferred all securities previously
classified as "held to maturity," which had a carrying value of $10.5 million,
to "available for sale". The unrealized gain on the securities transferred
totaled $458,000 before tax. The Company's equity and accumulated other
comprehensive income increased $302,000 after tax as a result of the transfer.
Management anticipates securities purchased in the future will be classified as
"available for sale". The $7.9 million net increase in securities reflected the
investment of funds from mortgage repayments and prepayments as the mortgage
portfolio declined during 2003.
LOANS. Loans, net totaled $58.0 million at December 31, 2003, a decrease of $4.6
million or 7.3% from $62.6 million at December 31, 2002 primarily as a result of
Management's strategy to sell current mortgage production in the existing low
rate environment rather than hold these long-term, low fixed-rate loans in
portfolio. The decline in mortgage loan balances was partially offset by growth
in commercial loans pursuant to Management's strategy to expand into business
financial services. Residential mortgage loan balances totaled $36.1 million at
December 31, 2003, a decline of $12.6 million or 25.9% from $48.6 million at
December 31, 2002. Commercial loan balances totaled $9.2 million at December 31,
2003, an increase of $8.9 million from $261,000 at December 31, 2002.
DEPOSITS. Deposits decreased $1.3 million, or 1.8%, during the year and totaled
$73.4 million at December 31, 2003, compared to $74.7 million at December 31,
2002. The decline was due to a $4.0 million decline in certificate accounts and
a $1.2 million decline in money market accounts partially offset by $3.6 million
growth in checking accounts, primarily commercial checking accounts, and
$327,000 growth in savings accounts. The decline in certificate accounts was
primarily due to customers seeking higher rates from competitors who may often
price irrationally in this current low interest rate environment as a way to
attract funding. The decline in certificate accounts could continue as
Management focuses on attracting lower cost, core deposit accounts, such as
checking and savings accounts.
FEDERAL HOME LOAN BANK ADVANCES. Federal Home Loan Bank advances totaled $7.5
million, a decline of $3.9 million during 2003, compared to $11.4 million at
year-end 2002. During 2003, the Company elected to prepay fixed rate Federal
Home Loan Bank
- 6 -
Management's Discussion and Analysis of Financial Condition and
Results of Operations
borrowings totaling $11.2 million. These borrowings had an average cost of 5.52%
and an average remaining maturity of 4.5 years. The repayment resulted in a
charge of $1.3 million pre-tax, or $838,000 after tax as a result of a penalty
associated with prepaying the loans. These fixed rate loans were arranged in
1998 and 1999 at much higher interest rates than current levels and were used to
finance mortgage loans which have since prepaid.
LOAN PAYABLE. The $4.9 million loan payable balance at December 31, 2002 was
repaid during 2003 and represented the remaining balance of a $7.0 million loan
which had been obtained to fund a return of capital dividend declared in 2000.
The loan was repaid with funds from the maturity of the certificate of deposit
discussed above.
SUBORDINATED DEBENTURES. Subordinated debentures totaled $5.2 million at
year-end and were issued by the Company in 2003 in exchange for the proceeds of
a $5.0 million trust preferred securities offering issued by a trust formed by
the Company. The proceeds of the offering are available to provide capital for
Central Federal Bank to support growth.
SHAREHOLDERS' EQUITY. Total shareholders' equity increased $2.3 million or 12.9%
during the year and totaled $19.9 million at December 31, 2003, compared to
$17.6 million at December 31, 2002. The increase in shareholders' equity was
primarily due to the completion of a private placement of 312,649 shares of the
Company's common stock which generated an additional $3.1 million in capital.
The Company's capital ratio increased to 18.6% at December 31, 2003 from 15.9%
at December 31, 2002 primarily as a result of the capital generated by the
private placement.
Office of Thrift Supervision (OTS) regulations require savings institutions to
maintain certain minimum levels of regulatory capital. Additionally, the
regulations establish a framework for the classification of savings institutions
into five categories: well-capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized and critically
undercapitalized. Generally, an institution is considered well-capitalized if it
has a core (Tier 1) capital ratio of at least 5.0% (based on adjusted total
assets); a core (Tier 1) risk-based capital ratio of a least 6.0%; and a total
risk-based capital ratio of at least 10.0%. The Bank had capital ratios above
the well-capitalized levels at December 31, 2003 and 2002.
COMPARISON OF RESULTS OF OPERATIONS FOR 2003 AND 2002
GENERAL. The Company incurred a net loss in 2003 of $2.4 million or $1.28 per
diluted share, compared to net income of $674,000 or $.43 per diluted share in
2002. The loss was primarily due to increased noninterest expense associated
with Management's strategy to expand into business financial services by opening
offices in the Fairlawn and Columbus, Ohio markets, costs associated with
additions to the management team and staff, restructuring of employee benefit
plans and payments on agreements with former executives. Additionally, a $1.3
million pre-tax prepayment penalty was incurred in the repayment of long-term,
fixed-rate Federal Home Loan Bank advances.
- 7 -
Management's Discussion and Analysis of Financial Condition and
Results of Operations
NET INTEREST INCOME. Net interest income is a significant component of the
Company's net income, and consists of the difference between interest income
generated on interest-earning assets and interest expense incurred on
interest-bearing liabilities. Net interest income is primarily affected by the
volumes, interest rates and composition of interest-earning assets and
interest-bearing liabilities. The following tables titled "Average Balances,
Interest Rates and Yields" and "Rate/Volume Analysis of Net Interest Income"
provide important information on factors impacting net interest income and
should be read in conjunction with this discussion of net interest income.
Net interest income decreased $1.7 million in 2003 to $1.9 million, compared to
$3.6 million in 2002 primarily due to the $1.3 million prepayment penalty
discussed above. Interest income decreased by $1.7 million or 23.1% to $5.4
million in 2003, compared to $7.1 million in 2002. The decline was due to a
decrease in mortgage loan portfolio balances and investment in securities with
short-term maturities, and resultant lower yields, in order to reduce interest
rate risk and provide liquidity for growth in commercial loans, as discussed
above. Interest income on loans decreased $1.1 million, or 20.0% in 2003 to $4.2
million, compared to $5.3 million in 2002, primarily due to continued high
levels of mortgage refinancing and the sale of current fixed-rate loan
production. Average loan balances decreased $9.4 million and average loan yields
declined 54 basis points (bp) during 2003. Interest income from securities
totaled $939,000 in 2003 and declined $579,000, or 38.1% from $1.5 million in
2002. The decrease in income was primarily due to prepayments received on
mortgage-backed securities and reinvestment of proceeds in securities with
short-term maturities and lower current market rates. The average balance of
securities decreased $177,000 and the average yield on the portfolio declined
234 bp during 2003. The decline in the yield of the portfolio is representative
of Management's strategic decision to shorten the maturity of the securities
portfolio.
Interest expense, not including the $1.3 million prepayment penalty, decreased
$1.2 million or 35.0% during 2003 to $2.3 million from $3.5 million in 2002. The
decline in interest expense resulted from a decrease in interest rates paid on
deposits as market interest rates declined, and from reduced interest expense on
borrowed funds, primarily as a result of the repayment of the $4.9 million loan
payable discussed above. The average balance of interest-bearing liabilities
decreased $9.8 million and the average cost of interest-bearing liabilities
declined 100 bp in 2003.
Net interest margin decreased 28 bp from 3.56% in 2002 to 3.28% in 2003.
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 inherent in its loan
portfolio and the general economy. Such evaluation, which includes a review of
all loans for which full collectibility may not be reasonably assured,
considers, among other matters, the estimated fair value of the
- 8 -
Management's Discussion and Analysis of Financial Condition and
Results of Operations
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 $102,000 in
2003, an increase of $83,000 from $19,000 in 2002. The increase primarily
reflected the $8.9 million growth in commercial loans during 2003. At December
31, 2003, the allowance for loan losses represented .71% of total loans compared
to .57% at December 31, 2002. Further, nonperforming loans, all of which are
nonaccrual loans, were $741,000 at December 31, 2003 and $781,000 at December
31, 2002. At both December 31, 2003 and December 31, 2002, nonaccrual loans
represented 1.3% of the net loan balance. More than 96% of the nonaccrual loan
balances are secured by single-family homes in the Bank's primary market area.
Management believes the allowance for loan losses is adequate to absorb probable
incurred losses at December 31, 2003; 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 $315,000 to $930,000 in 2003,
compared to $615,000 in 2002, primarily due to increased gains on sales of
loans, service charges and earnings on bank owned life insurance. Gains on sales
of loans totaled $429,000 during 2003, an increase of $116,000 or 37.1% from
$313,000 during 2002 due to increased originations experienced during the
current low market interest rate environment and Management's strategic decision
to sell current production rather than retain these long-term, low fixed-rate
loans in portfolio. Management anticipates loan sales will continue depending on
market conditions. A rise in mortgage interest rates would likely cause consumer
refinancing to slow, and likely reduce the Bank's volume of loan originations,
sales and resultant gains. Service charges totaled $165,000 in 2003, an increase
of $35,000 or 26.9% from $130,000 in 2002 primarily due to increased checking
account fees. Earnings from bank owned life insurance increased $120,000 and
totaled $188,000 in 2003, compared to $68,000 in 2002 primarily due to a full
year of earnings in 2003 versus a partial year in 2002 when the insurance was
originally purchased.
NONINTEREST EXPENSE. Noninterest expense increased $2.9 million or 89.9% and
totaled $6.1 million in 2003, compared to $3.2 million in 2002. The increase in
noninterest expense was primarily due to management, staff and benefits
restructuring, expansion to new locations in the Fairlawn and Columbus markets
and conversion of the data processing system in 2003. These expenses included
higher salaries and employee benefits, higher occupancy expense, professional
fees and data processing expenses. Salaries and employee benefits expense in
2003 included $638,000 associated with termination of the Company's ESOP and
$917,000 related to a supplemental executive retirement agreement in connection
with the retirement of William R. Williams as President and a severance
agreement with a former executive.
INCOME TAXES. The income tax benefit associated with the net loss in 2003
totaled $988,000 compared to $313,000 income tax expense associated with net
income in 2002.
- 9 -
Management's Discussion and Analysis of Financial Condition and
Results of Operations
COMPARISON OF RESULTS OF OPERATIONS FOR 2002 AND 2001
GENERAL. Net income totaled $674,000, or $.43 per diluted share in 2002 compared
to $598,000, or $.38 per diluted share in 2001. The 12.7% increase in net
income, or $76,000 was primarily due to an increase in non-interest income and a
decline in non-interest expense, partially offset by a decline in net interest
income.
NET INTEREST INCOME. Net interest income decreased $684,000 or 15.9%, from $4.3
million in 2001 to $3.6 million in 2002. The decrease was due to a $2.5 million,
or 26.3% decrease in interest income, which was partially offset by a $1.8
million, or 34.7% decrease in interest expense. The decline in both interest
income and interest expense was the result of declining interest rates in 2002.
Interest income on loans totaled $5.3 million in 2002, a decrease of $1.4
million or 21.3% from $6.7 million in 2001. Market interest rates fell to
historic lows during 2002 resulting in high mortgage refinancing activity. Due
to prepayment of higher rate portfolio mortgage loans and the sale of fixed-rate
mortgage loan production, a smaller portfolio and lower yield resulted in lower
interest income. The Company experienced similar declines in the auto loan
portfolio in 2002 as many dealers offered 0% financing. Average loan balances
decreased $15.8 million and average loan yields declined 23 bp during 2002.
Interest income from securities totaled $1.5 million in 2002 and declined $1.0
million, or 38.8% from $2.5 million in 2001. The decrease in income was
primarily due to prepayments received on mortgage-backed securities and
reinvestment of proceeds at lower current market rates. The average balance of
securities decreased $8.9 million and the average yield on the portfolio
declined 121 bp during 2002.
Interest expense totaled $3.5 million in 2002 and decreased $1.8 million, or
34.7% from $5.3 million in 2001. The decrease in interest expense was primarily
due to the declining interest rate environment in 2002. Additionally, the
Company reduced its borrowings from the Federal Home Loan Bank with proceeds
received from loan and security repayments. The average balance of
interest-bearing liabilities decreased $18.5 million and the average cost of
interest-bearing liabilities declined 102 bp in 2002.
Net interest margin increased 11 bp from 3.45% in 2001 to 3.56% in 2002.
However, average interest-earning assets declined $23.1 million, or $4.6 million
more than the $18.5 million decline in interest bearing liabilities and resulted
in a decrease in net interest income despite the increase in margin.
The tables below titled "Average Balances, Interest Rates and Yields" and
"Rate/volume Analysis of Net Interest Income" provide important information on
factors impacting net interest income and should be read in conjunction with
this discussion of net interest income.
PROVISION FOR LOAN LOSSES. The provision for loan losses is based on
Management's regular review of the loan portfolio as described in detail
previously. Based on this review, the provision for loan losses totaled $19,000
in 2002 and $62,000 and 2001. At
- 10 -
Management's Discussion and Analysis of Financial Condition and
Results of Operations
December 31, 2002, the allowance for loan losses represented 0.57% of total
loans compared to 0.53% at December 31, 2001. Further, nonperforming loans, all
of which are nonaccrual loans, were $781,000 at December 31, 2002 and $883,000
at December 31, 2001. Nonaccrual loans represented 1.3% of the net loan balance
at both December 31, 2002 and 2001. More than 97% of the nonaccrual loan
balances are secured by single-family homes in the Bank's primary market area.
NONINTEREST INCOME. Noninterest income increased $431,000 to $615,000 in 2002
from $184,000 in 2001 primarily due to increased gains on sales of loans and
earnings on bank owned life insurance. Gains on sales of loans totaled $313,000
in 2002, an increase of $376,000 from a loss of $63,000 in 2001 due to
Management's strategic decision in 2002 to sell current fixed rate production
rather than retain these long-term, low fixed-rate loans in portfolio. The
Company purchased bank owned life insurance in 2002, and earnings totaled
$68,000.
NONINTEREST EXPENSE. Noninterest expense for the year ended December 31, 2002
decreased $287,000, or 8.2% and totaled $3.2 million in 2002 compared to $3.5
million in 2001. The decrease in noninterest expense was primarily due to
salaries and benefits, data processing and other expenses which were not
incurred in 2002 relative to a branch that was closed in 2001. There was also a
charge of $154,000 related to the branch closing in 2001, which was not repeated
in 2002. These declines in expenses were slightly offset by an increase in
professional fees.
INCOME TAXES. The income tax expense in 2002 and 2001 were approximately the
same, $313,000 and $312,000 despite the increase in income primarily due to
nontaxable income from bank owned life insurance.
- 11 -
Management's Discussion and Analysis of Financial Condition and
Results of Operations
AVERAGE BALANCES, INTEREST RATES AND YIELDS. The following table presents for
the periods indicated the total dollar amount of fully taxable equivalent
interest income from average interest-earning assets and the resultant yields,
as well as the interest expense on average interest-bearing liabilities,
expressed in both dollars and rates.
For the Years Ended December 31,
--------------------------------------------------------------
2003 2002
------------------------------ ------------------------------
Average Interest Average Average Interest Average
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate
----------- -------- ------- ----------- -------- -------
(Dollars in thousands)
Interest-earning assets:
Securities (1) (2) $ 23,675 $ 942 4.02% $ 23,852 $ 1,518 6.36%
Loans (3) 57,449 4,203 7.32% 66,847 5,255 7.86%
Other earning assets 12,410 152 1.22% 7,105 137 1.93%
FHLB stock 3,557 141 3.96% 3,406 157 4.61%
--------- ------- --------- -------
Total interest-earning assets 97,091 5,438 5.62% 101,210 7,067 6.98%
Noninterest-earning assets 11,268 14,055
--------- ---------
Total assets $ 108,359 $ 115,265
========= =========
Interest-bearing liabilities:
Deposits $ 73,440 1,570 2.14% $ 75,498 2,501 3.31%
FHLB advances and other borrowings (4) 12,192 681 5.59% 19,902 961 4.83%
--------- ------- --------- -------
Total interest-bearing liabilities 85,632 2,251 2.63% 95,400 3,462 3.63%
Noninterest-bearing liabilities 3,484 1,958
--------- ---------
Total liabilities 89,116 97,358
Equity 19,243 17,907
--------- ---------
Total liabilities and equity $ 108,359 $ 115,265
========= =========
Net interest-earning assets $ 11,459 $ 5,810
========= =========
Net interest income/interest rate spread $ 3,187 2.99% $ 3,605 3.35%
======= ==== ======= ====
Net interest margin 3.28% 3.56%
==== ====
Average interest-earning assets
to average interest-bearing liabilities 113.38% 106.09%
========= =========
For the Years Ended December 31,
--------------------------------
2001
--------------------------------
Average Interest Average
Outstanding Earned/ Yield/
Balance Paid Rate
----------- -------- -------
Interest-earning assets:
Securities (1) (2) $ 32,757 $ 2,481 7.57%
Loans (3) 82,676 6,685 8.09%
Other earning assets 5,646 207 3.67%
FHLB stock 3,224 215 6.67%
-------- ------- ----
Total interest-earning assets 124,303 9,588 7.71%
Noninterest-earning assets 8,928
--------
Total assets $133,231
========
Interest-bearing liabilities:
Deposits $ 75,640 3,236 4.28%
FHLB advances and other borrowings (4) 38,217 2,063 5.40%
-------- -------
Total interest-bearing liabilities 113,857 5,299 4.65%
Noninterest-bearing liabilities 1,336
--------
Total liabilities 115,193
Equity 18,038
--------
Total liabilities and equity $133,231
========
Net interest-earning assets $ 10,446
========
Net interest income/interest rate spread $ 4,289 3.06%
======= ====
Net interest margin 3.45%
====
Average interest-earning assets
to average interest-bearing liabilities 109.17%
========
(1) Includes securities available for sale and held to maturity. Average
balance is computed using the carrying value of securities. Average yield
is computed using the historical amortized cost average balance for
available for sale securities.
(2) Average yields are stated on a fully taxable equivalent basis.
(3) Balance is net of deferred loan origination fees, undisbursed proceeds of
construction loans and includes nonperforming loans.
(4) Interest paid does not include $1.3 million penalty on prepayment of FHLB
advances in 2003.
- 12 -
Management's Discussion and Analysis of Financial Condition and
Results of Operations
RATE/VOLUME ANALYSIS OF NET INTEREST INCOME. The following table presents the
dollar amount of changes in interest income and interest expense for major
components of interest-earning assets and interest-bearing liabilities. It
distinguishes between the increase or decrease related to changes in balances
and/or changes in interest rates. For each category of interest-earning assets
and interest-bearing liabilities, information is provided on changes
attributable to (i) changes in volume (i.e., changes in volume multiplied by the
prior rate) and (ii) changes in rate (i.e., changes in rate multiplied by prior
volume). For purposes of this table, changes attributable to both rate and
volume which cannot be segregated have been allocated proportionately to the
change due to volume and the change due to rate.
Year Ended Year Ended
December 31, 2003 December 31, 2002
Compared to Year Ended Compared to Year Ended
December 31, 2002 December 31, 2001
--------------------------------- ---------------------------------
Increase (decrease) Increase (decrease)
due to due to
-------------------- --------------------
Rate Volume Net Rate Volume Net
------- ------- ------- ------- ------- -------
(Dollars in thousands)
Interest-earning assets:
Securities $ (565) $ (11) $ (576) $ (356) $ (607) $ (963)
Loans (345) (707) (1,052) (185) (1,245) (1,430)
Other earning assets (62) 77 15 (115) 45 (70)
FHLB stock (23) 7 (16) (69) 11 (58)
------- ------- ------- ------- ------- -------
Total interest-earning assets (995) (634) (1,629) (725) (1,796) (2,521)
Interest-bearing liabilities:
Deposits (865) (66) (931) (729) (6) (735)
FHLB advances and other borrowings 134 (414) (280) (199) (903) (1,102)
------- ------- ------- ------- ------- -------
Total interest-bearing liabilities (731) (480) (1,211) (928) (909) (1,837)
------- ------- ------- ------- ------- -------
Net change in net interest income $ (264) $ (154) $ (418) $ 203 $ (887) $ (684)
======= ======= ======= ======= ======= =======
- 13 -
Management's Discussion and Analysis of Financial Condition and
Results of Operations
ASSET/LIABILITY MANAGEMENT AND MARKET RISK
GENERAL. The Company's most significant market risk, or risk of loss from
adverse changes in market prices and rates, is interest rate risk.
Asset/liability management is the measurement and analysis of the Company's
exposure to changes in interest rates. Management actively monitors and manages
its interest rate risk exposure. The objective of the Company's asset/liability
management function is to maintain long-term profitability within the
constraints of an optimum earning-asset mix, capital adequacy, liquidity and
safety. The extent of the movement of interest rates is an uncertainty that
could have a negative impact on earnings of the Company.
QUALITATIVE ASPECTS OF MARKET RISK. The principal objective of the Company's
interest rate risk management function is to evaluate interest rate risk,
determine the level of risk appropriate to the Company's business strategy,
operating environment, capital and liquidity requirements and performance
objectives, and manage the risk consistent with Board of Directors' approved
guidelines. Through such management, the Company seeks to reduce the
vulnerability of its earnings to changes in interest rates. The Bank's Board of
Directors has established an Asset/Liability Committee, responsible for
reviewing its asset/liability policies and interest rate risk position, which
meets on a monthly basis and reports trends and interest rate risk position to
the Board. The Company manages interest rate risk on a continuing basis through
the use of a number of strategies as an ongoing part of its business plan.
QUANTITATIVE ASPECTS OF MARKET RISK. The Bank measures the effect of interest
rate changes on its net portfolio value (NPV), which is the difference between
the estimated market value of the Bank's assets and liabilities under different
interest rate scenarios. Changes in NPV are measured using instantaneous changes
in interest rates rather than linear changes in rates over a period of time. At
December 31, 2003, the Bank's NPV ratios, using interest rate shocks ranging
from a 300 bp rise in rates to a 100 bp decline in rates are shown in the
following table. All values are within the acceptable range established by the
Board of Directors.
Net Portfolio Value
(Bank only)
Basis Point
Change in
Rates NPV Ratio
----- ---------
+300 16.86%
+200 17.65%
+100 18.27%
0 18.58%
-100 18.76%
In evaluating the Bank's exposure to interest rate risk, certain shortcomings
inherent in the method of analysis presented in the foregoing table must be
considered. For example, although certain assets and liabilities may have
similar maturities or periods to which they reprice, they may react in different
degrees to changes in market interest rates. In addition, the interest rates on
certain types of assets and liabilities may fluctuate in advance of changes in
market interest rates, while interest rates on other
- 14 -
Management's Discussion and Analysis of Financial Condition and
Results of Operations
types may lag behind changes in market rates. Furthermore, in the event of a
change in interest rates, prepayments and early withdrawal levels would likely
deviate significantly from those assumed in calculating the table. Finally, the
ability of many borrowers to service their debt may decrease when interest rates
rise. Therefore, the actual effect of changing interest rates may differ
materially from that presented in the foregoing table.
The Company's interest rate risk position has improved as a result of
Management's strategic decisions to sell fixed rate mortgage loan originations
rather than retain these long-term, low fixed-rate loans in portfolio, shorten
securities maturities and grow commercial loans, which tend to have shorter
maturities than residential mortgage loans and, in many cases, adjustable
interest rates. Keeping security maturities short and selling long-term, low
fixed-rate mortgage production provide the liquidity necessary to reinvest in
higher earning assets in a rising interest rate environment.
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 Bank 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 2003, the Company
improved liquidity by transferring all securities previously classified as "held
to maturity" to "available for sale". 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 and the ability to obtain
deposits by offering above-market interest rates.
The Bank relies primarily on competitive rates, customer service and
long-standing relationships with customers to retain deposits. Based on the
Bank's experience with deposit retention and current retention strategies,
Management believes that, although it is not possible to predict future terms
and conditions upon renewal, a significant portion of such deposits will remain
with the Bank.
- 15 -
Management's Discussion and Analysis of Financial Condition and
Results of Operations
At December 31, 2003, the Bank exceeded all of its regulatory capital
requirements to be considered well-capitalized with a Tier 1 capital level of
$14.7 million, or 13.9% of adjusted total assets, which exceeds the required
level of $5.3 million, or 5.0%; Tier 1 risk-based capital level of $14.7
million, or 21.0% of risk-weighted assets, which exceeds the required level of
$4.2 million, or 6.0%; and risk-based capital of $15.1 million, or 21.6% of
risk-weighted assets, which exceeds the required level of $7.0 million, or
10.0%.
IMPACT OF INFLATION
The financial statements and related data presented herein have been prepared in
accordance with generally accepted accounting principles, which presently
require the Company to measure financial position and results of operations
primarily in terms of historical dollars. Changes in the relative value of money
due to inflation are generally not considered. In Management's opinion, changes
in interest rates affect the financial condition of the Company to a far greater
degree than change in the inflation rate. While interest rates are generally
influenced by changes in the inflation rate, they do not move concurrently.
Rather, interest rate volatility is based on changes in the expected rate of
inflation, as well as changes in monetary and fiscal policy. A financial
institution's ability to be relatively unaffected by changes in interest rates
is a good indicator of its ability to perform in a volatile economic
environment. In an effort to protect itself from the effects of interest rate
volatility, the Company reviews its interest rate risk position frequently,
monitoring its exposure and taking necessary steps to minimize any detrimental
effects on the Company's profitability.
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. Some of
these accounting policies are considered to be critical accounting policies.
Critical accounting policies are those policies that require Management's most
difficult, subjective or complex judgments, often as a result of the need to
make estimates about the effect of matters that are inherently uncertain.
Application of assumptions different than those used by Management could result
in material changes in the Company's financial position or results of
operations. The Company has identified accounting polices that are critical
accounting policies and an understanding of these policies is necessary to
understand our financial statements. A critical accounting policy relates to
determining the adequacy of the allowance for loan losses. Additional
information regarding this policy is included in the notes to the consolidated
financial statements, Note 1 (Summary of Significant Accounting Policies), Note
3 (Loans), and the section above captioned "Provision for Loan Losses".
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.
- 16 -
Management's Discussion and Analysis of Financial Condition and
Results of Operations
MARKET PRICES AND DIVIDENDS DECLARED
The common stock of Central Federal Corporation trades on the Nasdaq SmallCap
Market under the symbol "GCFC." As of December 31, 2003, there were 2,024,372
shares of common stock outstanding and 619 shareholders, excluding persons or
entities holding stock in nominee or street name through various brokerage
firms.
The following table shows the quarterly reported high and low trade prices of
the common stock and cash dividends per share declared during 2003 and 2002.
High Low Dividends
------ ------ ---------
2003
First quarter $11.03 $ 9.28 $ 0.09
Second quarter 13.13 10.49 0.09
Third quarter 14.00 10.70 0.09
Fourth quarter 16.18 13.60 0.09
2002
First quarter $11.00 $ 9.90 $ 0.09
Second quarter 11.36 10.40 0.09
Third quarter 10.79 9.03 0.09
Fourth quarter 10.00 9.10 0.09
- 17 -
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Central Federal Corporation
Wellsville, Ohio
We have audited the accompanying consolidated balance sheets of Central Federal
Corporation as of December 31, 2003 and 2002 and the related consolidated
statements of income, changes in shareholders' equity and cash flows for each of
the three years in the period ended December 31, 2003. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Central Federal
Corporation as of December 31, 2003 and 2002 and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
2003, in conformity with accounting principles generally accepted in the United
States of America.
Crowe Chizek and Company LLC
Cleveland, Ohio
February 12, 2004
CENTRAL FEDERAL CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, 2003 and 2002
(Dollars in thousands except per share data)
2003 2002
---- ----
ASSETS
Cash and cash equivalents $ 8,936 $ 12,861
Interest-bearing deposits in other financial institutions 1,587 7,205
Securities available for sale 27,126 1,439
Securities held to maturity (fair value 2002 - $18,169) - 17,822
Loans held for sale 106 -
Loans, net of allowance of $415 and $361 58,024 62,565
Federal Home Loan Bank stock 3,626 3,485
Loan servicing rights 221 200
Foreclosed assets, net 193 2
Premises and equipment, net 1,932 833
Bank owned life insurance 3,256 3,068
Accrued interest receivable 487 403
Other assets 1,517 668
---------- ----------
$ 107,011 $ 110,551
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Non-interest bearing $ 2,457 $ 1,396
Interest bearing 70,901 73,294
---------- ----------
Total deposits 73,358 74,690
Federal Home Loan Bank advances 7,500 11,430
Loan payable - 4,900
Advances by borrowers for taxes and insurance 207 448
Accrued interest payable and other liabilities 935 1,500
Subordinated debentures 5,155 -
---------- ----------
Total liabilities 87,155 92,968
Shareholders' equity
Preferred stock, 1,000,000 shares authorized;
none issued - -
Common stock, $.01 par value; 6,000,000 shares
authorized; 2003 - 2,280,020 shares issued,
2002 - 1,938,871 shares issued 23 19
Additional paid-in capital 11,845 8,306
Retained earnings 10,997 14,085
Accumulated other comprehensive income 201 28
Unearned Employee Stock Ownership Plan shares - (1,425)
Unearned stock based incentive plan shares (357) (160)
Treasury stock, at cost (2003 - 255,648 shares,
2002 - 292,950 shares) (2,853) (3,270)
---------- ----------
Total shareholders' equity 19,856 17,583
---------- ----------
$ 107,011 $ 110,551
========== ==========
See accompanying notes.
CENTRAL FEDERAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, 2003, 2002 and 2001
(Dollars in thousands except per share data)
2003 2002 2001
---- ---- ----
Interest and dividend income
Loans, including fees $ 4,203 $ 5,255 $ 6,685
Taxable securities 934 1,518 2,481
Tax exempt securities 5 - -
Federal Home Loan Bank stock dividends 141 157 215
Federal funds sold and other 152 137 207
---------- ---------- ----------
5,435 7,067 9,588
Interest expense
Deposits 1,570 2,501 3,236
Federal Home Loan Bank advances and other debt 1,940 961 2,063
Subordinated debentures 11 - -
---------- ---------- ----------
3,521 3,462 5,299
---------- ---------- ----------
Net interest income 1,914 3,605 4,289
Provision for loan losses 102 19 62
---------- ---------- ----------
Net interest income after provision for loan losses 1,812 3,586 4,227
Noninterest income
Service charges on deposit accounts 165 130 174
Net gain (loss) on sales of loans 429 313 (63)
Loan servicing fees 73 58 22
Net gains on sales of securities 42 16 15
Earnings on bank owned life insurance 188 68 -
Other 33 30 36
---------- ---------- ----------
930 615 184
Noninterest expense
Salaries and employee benefits 3,549 1,713 1,758
Occupancy and equipment 224 96 105
Data processing 246 196 200
Franchise taxes 301 287 309
Professional fees 673 212 163
Director fees 119 84 81
Supplies 173 101 86
Loan expenses 91 143 130
Foreclosed assets, net 14 (34) 4
Depreciation and amortization 350 194 154
Branch closing expense - - 154
Other 364 222 357
---------- ---------- ----------
6,104 3,214 3,501
---------- ---------- ----------
Income (loss) before income taxes (3,362) 987 910
Income tax expense (benefit) (988) 313 312
---------- ---------- ----------
Net income (loss) $ (2,374) $ 674 $ 598
========== ========== ==========
Earnings (loss) per share:
Basic $ (1.31) $ 0.44 $ 0.38
Diluted (1.28) 0.43 0.38
See accompanying notes.
CENTRAL FEDERAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Years ended December 31, 2003, 2002 and 2001
(Dollars in thousands except per share data)
2003 2002 2001
---- ---- ----
Net income (loss) $(2,374) $ 674 $ 598
Change in net unrealized gain (loss) on securities
available for sale (154) 34 17
Less: Reclassification adjustment for
gains and losses later recognized in net income 42 16 15
------- ------- -------
Net unrealized gains and (losses) (196) 18 2
Unrealized gain on securities transferred from held
to maturity to available for sale 458 - -
Tax effect (89) (6) (1)
------- ------- -------
Other comprehensive income 173 12 1
------- ------- -------
Comprehensive income (loss) $(2,201) $ 686 $ 599
======= ======= =======
See accompanying notes.
CENTRAL FEDERAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years ended December 31, 2003, 2002 and 2001
(Dollars in thousands except per share data)
Accumulated Unearned
Additional Other Employee Stock
Common Paid-In Retained Comprehensive Ownership Plan
Stock Capital Earnings Income Shares
----- ------- -------- ------ ------
Balance at January 1, 2001 $ 19 $ 8,322 $ 13,846 $ 15 $ (1,853)
Comprehensive income:
Net income 598
Other comprehensive income 1
Total comprehensive income
Commitment to release 18,864 employee stock
ownership plan shares (12) 202
Release of 15,516 stock based incentive plan shares
Purchase of 7,500 shares of treasury stock
Cash dividends declared ($.31 per share) (482)
---- --------- -------- ----- --------
Balance at December 31, 2001 19 8,310 13,962 16 (1,651)
Comprehensive income:
Net income 674
Other comprehensive income 12
Total comprehensive income
Commitment to release 21,588 employee stock
ownership plan shares (4) 226
Release of 15,516 stock based incentive plan shares
Purchase of 96,410 shares of treasury stock
Cash dividends declared ($.36 per share) (551)
---- --------- -------- ----- --------
Balance at December 31, 2002 19 8,306 14,085 28 (1,425)
Comprehensive income:
Net loss (2,374)
Other comprehensive income 173
Total comprehensive loss
Issuance of common stock in private
placement, net of offering costs of $64 (312,649 shares) 3 3,116
Issuance of stock based incentive plan shares (28,500) 1 337
Sale of employee stock ownership plan shares
at plan termination (81,000 shares) 125 748
Final allocation of employee stock ownership plan
shares at plan termination (41,882 shares) (39) 677
Release of 16,002 stock based incentive plan shares
Stock options exercised (37,302 shares) (72)
Tax benefits from stock options exercised 47
Cash dividends declared ($.36 per share) (689)
---- --------- -------- ----- --------
Balance at December 31, 2003 $ 23 $ 11,845 $ 10,997 $ 201 $ -
==== ========= ======== ===== ========
Unearned Stock Total
Based Incentive Treasury Shareholders'
Plan Shares Stock Equity
----------- ----- ------
Balance at January 1, 2001 $ (365) $ (2,151) $ 17,833
Comprehensive income:
Net income 598
Other comprehensive income 1
--------
Total comprehensive income 599
Commitment to release 18,864 employee stock
ownership plan shares 190
Release of 15,516 stock based incentive plan shares 95 95
Purchase of 7,500 shares of treasury stock (75) (75)
Cash dividends declared ($.31 per share) (482)
------- -------- --------
Balance at December 31, 2001 (270) (2,226) 18,160
Comprehensive income:
Net income 674
Other comprehensive income 12
--------
Total comprehensive income 686
Commitment to release 21,588 employee stock
ownership plan shares 222
Release of 15,516 stock based incentive plan shares 110 110
Purchase of 96,410 shares of treasury stock (1,044) (1,044)
Cash dividends declared ($.36 per share) (551)
------- -------- --------
Balance at December 31, 2002 (160) (3,270) 17,583
Comprehensive income:
Net loss (2,374)
Other comprehensive income 173
--------
Total comprehensive loss (2,201)
Issuance of common stock in private
placement, net of offering costs of $64 (312,649 shares) 3,119
Issuance of stock based incentive plan shares (28,500) (338) -
Sale of employee stock ownership plan shares
at plan termination (81,000 shares) 873
Final allocation of employee stock ownership plan
shares at plan termination (41,882 shares) 638
Release of 16,002 stock based incentive plan shares 141 141
Stock options exercised (37,302 shares) 417 345
Tax benefits from stock options exercised 47
Cash dividends declared ($.36 per share) (689)
------- -------- --------
Balance at December 31, 2003 $ (357) $ (2,853) $ 19,856
======= ======== ========
See accompanying notes.
CENTRAL FEDERAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2003, 2002 and 2001
(Dollars in thousands except per share data)
2003 2002 2001
---- ---- ----
Cash flows from operating activities
Net income (loss) $ (2,374) $ 674 $ 598
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Provision for loan losses 102 19 62
Valuation loss on mortgage servicing rights 56 - -
Depreciation and amortization 108 118 101
Net amortization of securities 63 (51) (131)
Net gain on sales of securities (42) (16) (15)
Loss on disposal of premises and equipment 50 - -
Write-down of assets from branch closing - - 154
Federal Home Loan Bank stock dividend (141) (157) (215)
ESOP expense 638 222 190
SBIP expense 141 110 95
Earnings on bank owned life insurance (188) (68) -
Net change in:
Loans held for sale (106) 8,221 (8,221)
Accrued interest receivable (84) 127 576
Other assets (1,021) (195) (120)
Accrued interest payable and other liabilities (600) 865 (303)
-------- -------- --------
Net cash from operating activities (3,398) 9,869 (7,229)
Cash flows from investing activities
Net change in interest bearing deposits 5,618 (199) (6)
Available-for-sale securities:
Sales 3,078 386 245
Maturities, prepayments and calls 28,968 594 1,077
Purchases (46,914) (290) (233)
Held-to-maturity securities:
Maturities, prepayments and calls 7,201 27,056 12,493
Purchases - (21,508) -
Loan originations and payments, net 4,434 8,010 15,676
Additions to premises and equipment (1,326) (127) (10)
Purchase of bank owned life insurance - (3,000) -
Cash received in repayment of ESOP loan 853 - -
-------- -------- --------
Net cash from investing activities 1,912 10,922 29,242
Cash flows from financing activities
Net change in deposits (1,332) (1,478) 2,171
Proceeds from Federal Home Loan Bank
advances and other debt 7,500 - 49,320
Repayments on Federal Home Loan Bank
advances and other debt (16,330) (9,063) (71,463)
See accompanying notes.
Net change in advances by borrowers for
taxes and insurance (241) (123) (85)
Proceeds from subordinated debentures 5,155 - -
Cash dividends paid (655) (551) (482)
Proceeds from private placement 3,119 - -
Proceeds from exercise of stock options 345 - -
Repurchase of common stock - (1,044) (75)
-------- -------- --------
Net cash from financing activities (2,439) (12,259) (20,614)
Net change in cash and cash equivalents (3,925) 8,532 1,399
Beginning cash and cash equivalents 12,861 4,329 2,930
-------- -------- --------
Ending cash and cash equivalents $ 8,936 $ 12,861 $ 4,329
======== ======== ========
Supplemental cash flow information:
Interest paid $ 3,519 $ 3,495 $ 5,852
Income taxes paid 106 160 226
Supplemental noncash disclosures:
Transfer of securities from held to maturity
to available for sale $ 10,533 $ - $ -
Transfers from loans to repossessed assets 193 - 145
See accompanying notes.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands except per share data)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations and Principles of Consolidation: The consolidated financial
statements include Central Federal Corporation and its wholly-owned subsidiary,
Central Federal Bank, together referred to as "the Company". Intercompany
transactions and balances are eliminated in consolidation.
The Company provides financial services through its offices in Wellsville,
Fairlawn and Columbus, Ohio. Its primary deposit products are checking, savings,
and term certificate accounts, and its primary lending products are residential
mortgage, commercial, and installment loans. Substantially all loans are secured
by specific items of collateral including business assets, consumer assets, and
commercial and residential real estate. Commercial loans are expected to be
repaid from cash flow from operations of businesses. Other financial
instruments, which potentially represent concentrations of credit risk, include
deposit accounts in other financial institutions.
Use of Estimates: To prepare financial statements in conformity with accounting
principles generally accepted in the United States of America, Management makes
estimates and assumptions based on available information. These estimates and
assumptions affect the amounts reported in the financial statements and the
disclosures provided, and actual results could differ. The allowance for loan
losses, loan servicing rights, and fair values of financial instruments are
particularly subject to change.
Cash Flows: Cash and cash equivalents include cash and deposits with other
financial institutions under 90 days. Net cash flows are reported for loan and
deposit transactions.
Securities: Debt securities are classified as held to maturity and carried at
amortized cost when Management has the positive intent and ability to hold them
to maturity. Debt securities are classified as available for sale when they
might be sold before maturity. Equity securities with readily determinable fair
values are classified as available for sale. Securities available for sale are
carried at fair value, with unrealized holding gains and losses reported in
other comprehensive income. Trading securities are carried at fair value, with
changes in unrealized holding gains and losses included in income. Other
securities such as Federal Home Loan Bank stock are carried at cost.
Interest income includes amortization of purchase premium or discount. Gains and
losses on sales are based on the amortized cost of the security sold. Securities
are written down to fair value when a decline in fair value is not temporary.
Loans Held for Sale: Loans originated and intended for sale in the secondary
market are carried at the lower of cost or market in the aggregate. Net
unrealized losses, if any, are recorded as a valuation allowance and charged to
earnings.
(Continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands except per share data)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Loans: Loans that Management has the intent and ability to hold for the
foreseeable future or until maturity or payoff are reported at the principal
balance outstanding, net of unearned interest, deferred loan fees and costs, and
an allowance for loan losses. Interest income is reported on the interest method
and includes amortization of net deferred loan fees and costs over the loan
term. Interest income on mortgage and commercial loans is discontinued at the
time the loan is 90 days delinquent unless the loan is well-secured and in
process of collection. Consumer and credit card loans are typically charged off
no later than 180 days past due. In all cases, loans are placed on nonaccrual or
charged-off at an earlier date if collection of principal or interest is
considered doubtful.
All interest accrued but not received for loans placed on nonaccrual is reversed
against interest income. Interest received on such loans is accounted for on the
cash-basis or cost-recovery method, until qualifying for return to accrual.
Loans are returned to accrual status when all the principal and interest amounts
contractually due are brought current and future payments are reasonably
assured.
Allowance for Loan Losses: The allowance for loan losses is a valuation
allowance for probable incurred credit losses. Loan losses are charged against
the allowance when Management believes the uncollectibility of a loan balance is
confirmed. Subsequent recoveries, if any, are credited to the allowance.
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. Allocations of the allowance may be made for specific loans, but
the entire allowance is available for any loan that, in Management's judgment,
should be charged-off.
The allowance consists of specific and general components. The specific
component relates to loans that are individually classified as impaired or loans
otherwise classified as substandard or doubtful. The general component covers
non-classified loans and is based on historical loss experience adjusted for
current factors.
A loan is impaired when full payment under the loan terms is not expected.
Commercial and commercial real estate loans are individually evaluated for
impairment. If a loan is impaired, a portion of the allowance is allocated so
that the loan is reported, net, at the present value of estimated future cash
flows using the loan's existing rate or at the fair value of collateral if
repayment is expected solely from the collateral. Large groups of smaller
balance homogeneous loans, such as consumer and residential real estate loans,
are collectively evaluated for impairment, and accordingly, they are not
separately identified for impairment disclosures.
(Continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands except per share data)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Servicing Rights: Servicing rights represent the allocated value of retained
servicing rights on loans sold and the cost of purchased rights. Servicing
assets are expensed in proportion to, and over the period of, estimated net
servicing revenues. Impairment is evaluated based on the fair value of the
assets, using groupings of the underlying loans as to interest rates and then,
secondarily, as to geographic and prepayment characteristics. Fair value is
determined using prices for similar assets with similar characteristics, when
available, or based upon discounted cash flows using market-based assumptions.
Any impairment of a grouping is reported as a valuation allowance, to the extent
that fair value is less than the capitalized amount for a grouping.
Foreclosed Assets: Assets acquired through or instead of loan foreclosure are
initially recorded at fair value when acquired, establishing a new cost basis.
If fair value declines subsequent to foreclosure, a valuation allowance is
recorded through expense. Costs after acquisition are expensed.
Premises and Equipment: Land is carried at cost. Premises and equipment are
stated at cost less accumulated depreciation. Buildings and related components
are depreciated using the straight-line method with useful lives ranging from 7
to 40 years. Furniture, fixtures and equipment are depreciated using the
straight-line method with useful lives ranging from 3 to 25 years. Leasehold
improvements are amortized over the lives of the respective leases.
Bank Owned Life Insurance: The Company has purchased life insurance policies on
certain key executives. Bank owned life insurance is recorded at its cash
surrender value, or the amount that can be realized.
Long-term Assets: Premises and equipment and other long-term assets are reviewed
for impairment when events indicate their carrying amount may not be recoverable
from future undiscounted cash flows. If impaired, the assets are recorded at
fair value.
Loan Commitments and Related Financial Instruments: Financial instruments
include off-balance- sheet credit instruments, such as commitments to make loans
and commercial letters of credit, issued to meet customer financing needs. The
face amount for these items represents the exposure to loss, before considering
customer collateral or ability to repay. Such financial instruments are recorded
when they are funded. Instruments, such as standby letters of credit, that are
considered financial guarantees in accordance with Financial Accounting
Standards Board (FASB) Interpretation No. 45 are recorded at fair value.
(Continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands except per share data)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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
FASB Statement No. 123, Accounting for Stock-Based Compensation.
2003 2002 2001
---- ---- ----
Net income (loss) as reported $ (2,374) $ 674 $ 598
Deduct: Stock-based compensation expense
determined under fair value based method 175 121 121
-------- ------- -------
Pro forma net income (loss) $ (2,549) $ 553 $ 477
======== ======= =======
Basic earnings (loss) per share as reported $ (1.31) $ 0.44 $ 0.38
Pro forma basic earnings (loss) per share (1.40) 0.36 0.30
Diluted earnings (loss) per share as reported $ (1.28) $ 0.43 $ 0.38
Pro forma diluted earnings (loss) per share (1.37) 0.35 0.30
The pro forma effects are computed using option pricing models, using the
following weighted- average assumptions as of grant date.
2003
----
Risk-free interest rate 2.96%
Expected option life 5.9 years
Expected stock price volatility 44%
Dividend yield 3.13%
(Continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands except per share data)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Income Taxes: Income tax expense is the total of the current year income tax due
or refundable and the change in deferred tax assets and liabilities. Deferred
tax assets and liabilities are the expected future tax amounts for the temporary
differences between carrying amounts and tax bases of assets and liabilities,
computed using enacted tax rates. A valuation allowance, if needed, reduces
deferred tax assets to the amount expected to be realized.
Employee Stock Ownership Plan: The cost of shares issued to the ESOP, but not
yet allocated to participants, is shown as a reduction of shareholders' equity.
Compensation expense is based on the market price of shares as they are
committed to be released to participant accounts. Dividends on allocated ESOP
shares reduce retained earnings; dividends on unearned ESOP shares reduce debt
and accrued interest. See Note 9 - ESOP Plan for information regarding
termination of this plan in 2003.
Earnings Per Common Share: Basic earnings per common share is net income divided
by the weighted average number of common shares outstanding during the period.
ESOP shares are considered outstanding for this calculation unless unearned.
Stock based incentive plan shares are considered outstanding as they are earned
over the vesting period. Diluted earnings per common share includes the dilutive
effect of stock based incentive plan shares and additional potential common
shares issuable under stock options.
Comprehensive Income: Comprehensive income consists of net income and other
comprehensive income. Other comprehensive income includes unrealized gains and
losses on securities available for sale, which are also recognized as a separate
component of equity.
Adoption of New Accounting Standards: During 2003, the Company adopted FASB
Interpretation 45, Guarantor's Accounting and Disclosure Requirements for
Guarantees, and FASB Interpretation 46, Consolidation of Variable Interest
Entities. Adoption of the new standards did not materially affect the Company's
operating results or financial condition.
Interpretation 45 requires recognizing the fair value of guarantees made and
information about the maximum potential payments that might be required, as well
as the collateral or other recourse obtainable. Interpretation 45 covers
guarantees such as standby letters of credit, performance guarantees, and direct
or indirect guarantees of the indebtedness of others, but not guarantees of
funding.
Interpretation 46, as revised in December 2003, changes the accounting model for
consolidation from one based on consideration of control through voting
interests. Whether to consolidate an entity will now also consider whether that
entity has sufficient equity at risk to enable it to operate without additional
financial support, whether the equity owners in that entity lack the obligation
to absorb expected losses or the right to receive residual returns of the
entity, or whether voting rights in the entity are not proportional to the
equity interest and substantially all the entity's activities are conducted for
an investor with few voting rights. The Company owns a 100% interest in a trust
formed by the Company in 2003. Under this new accounting guidance, the trust is
not consolidated with the Company.
(Continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands except per share data)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Loss Contingencies: Loss contingencies, including claims and legal actions
arising in the ordinary course of business, are recorded as liabilities when the
likelihood of loss is probable and an amount or range of loss can be reasonably
estimated. Management does not believe there now are such matters that will have
a material effect on the financial statements.
Restrictions on Cash: Cash on hand or on deposit with the Federal Reserve Bank
of $300 and $148 was required to meet regulatory reserve and clearing
requirements at year-end 2003 and 2002. These balances do not earn interest.
Dividend Restriction: Banking regulations require maintaining certain capital
levels and may limit the dividends paid by the bank to the holding company or by
the holding company to shareholders.
Fair Value of Financial Instruments: Fair values of financial instruments are
estimated using relevant market information and other assumptions, as more fully
disclosed in a separate note. Fair value estimates involve uncertainties and
matters of significant judgment regarding interest rates, credit risk,
prepayments, and other factors, especially in the absence of broad markets for
particular items. Changes in assumptions or in market conditions could
significantly affect the estimates.
Operating Segments: While the chief decision-makers monitor the revenue streams
of the various products and services, the identifiable segments are not material
and operations are managed and financial performance is evaluated on a
Company-wide basis. Accordingly, all of the financial service operations are
considered by Management to be aggregated in one reportable operating segment.
Reclassifications: Some items in the prior year financial statements were
reclassified to conform to the current presentation.
(Continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts 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
----- ----- ------
2003
Federal agency $12,759 $ 8 $ (4)
State and municipal 1,375 5 -
Mortgage-backed 12,992 400 (105)
------- ------- -------
Total $27,126 $ 413 $ (109)
======= ======= =======
2002
Mortgage-backed $ 1,439 $ 45 $ (1)
------- ------- -------
Total $ 1,439 $ 45 $ (1)
======= ======= =======
The carrying amount, unrecognized gains and losses, and fair value of securities
held to maturity were as follows:
Gross Gross
Carrying Unrecognized Unrecognized Fair
Amount Gains Losses Value
------ ----- ------ -----
2002
U.S. Government and federal agency $ 2,527 $ 30 $ - $ 2,557
Corporate 1,996 - - 1,996
Mortgage-backed 13,299 322 (5) 13,616
------- ------- ------- -------
Total $17,822 $ 352 $ (5) $18,169
======= ======= ======= =======
(Continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands except per share data)
NOTE 2 - SECURITIES (Continued)
Sales of available for sale securities were as follows:
2003 2002 2001
---- ---- ----
Proceeds $ 3,078 $ 386 $ 245
Gross gains 42 16 15
The fair value of debt securities at year-end 2003 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 in one year or less $ 503
Due from one to five years 12,256
Due from five to ten years 400
Due after ten years 975
Mortgage-backed 12,992
---------
Total $ 27,126
=========
At year-end 2003 and 2002, there were no holdings of securities of any one
issuer, other than the U.S. Government and its agencies, in an amount greater
than 10% of shareholders' equity.
(Continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands except per share data)
NOTE 2 - SECURITIES (Continued)
Securities with unrealized losses at year-end 2003 not recognized in income 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
------------------------- ---------- ---- ---------- ---- ---------- ----
Federal agency $4,026 $ 4 $ - $ - $4,026 $ 4
Mortgage-backed 4,021 105 - - 4,021 105
------ ------ ------ ------ ------ ------
Total temporarily impaired $8,047 $ 109 $ - $ - 8,047 $ 109
====== ====== ====== ====== ====== ======
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.
To improve liquidity, in 2003 the Company transferred all securities previously
classified as "held to maturity," which had a carrying value of $10,533, to
"available for sale." The unrealized gain on the securities transferred totaled
$458 before tax. The Company's equity and accumulated other comprehensive income
increased $302 after tax as a result of the transfer.
NOTE 3 - LOANS
Loans at year-end were as follows:
2003 2002
-------- --------
Commercial $ 4,116 $ 261
Real estate:
Residential 36,060 48,644
Commercial 5,040 -
Construction 610 134
Consumer 12,598 13,904
-------- --------
Subtotal 58,424 62,943
Less: Net deferred loan fees 15 (17)
Allowance for loan losses (415) (361)
-------- --------
Loans, net $ 58,024 $ 62,565
======== ========
(Continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands except per share data)
NOTE 3 - LOANS (Continued)
Activity in the allowance for loan losses was as follows:
2003 2002 2001
---- ---- ----
Beginning balance $ 361 $ 373 $ 354
Provision for loan losses 102 19 62
Loans charged-off (50) (35) (53)
Recoveries 2 4 10
----- ----- -----
Ending balance $ 415 $ 361 $ 373
===== ===== =====
Impaired loans are not material for any period presented.
Nonperforming loans were as follows:
2003 2002
---- ----
Loans past due over 90 days still on accrual $ - $ -
Nonaccrual loans 741 781
Nonperforming loans include both smaller balance homogeneous loans that are
collectively evaluated for impairment and individually classified impaired
loans.
(Continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts 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 $32,584 and $25,930 at year-end 2003 and 2002.
Custodial escrow balances maintained in connection with serviced loans were $100
and $26 at year-end 2003 and 2002.
Activity for capitalized mortgage servicing rights and the related valuation
allowance follows:
2003 2002 2001
---- ---- ----
Servicing rights:
Beginning of year $ 200 $ 88 $ 58
Additions 195 162 45
Amortized to expense (118) (50) (15)
--------- -------- --------
End of year $ 277 $ 200 $ 88
========= ======== ========
2003 2002 2001
---- ---- ----
Valuation allowance:
Beginning of year $ - $ - $ -
Additions expensed 56 - -
--------- -------- --------
End of Year $ 56 $ - $ -
========= ======== ========
(Continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands except per share data)
NOTE 5 - PREMISES AND EQUIPMENT
Year-end premises and equipment were as follows:
2003 2002
---- ----
Land $ 117 $ 63
Buildings 1,713 1,485
Furniture, fixtures and equipment 1,416 1,227
Leasehold improvements 10 -
-------- -------
3,256 2,775
Less: Accumulated depreciation (1,324) (1,942)
-------- -------
$ 1,932 $ 833
======== =======
Depreciation expense was $176, $118 and $101 for 2003, 2002 and 2001.
Rent expense was $14, $0, and $16 for 2003, 2002 and 2001. Rent commitments
under noncancelable operating leases were as follows, before considering renewal
options that generally are present.
2004 $ 60
2005 57
2006 57
2007 57
2008 57
---------
Total $ 288
=========
The Company is a one-third owner of a limited liability company that will own
and manage the office building at 2923 Smith Road, Fairlawn, Ohio 44333 where
the Company's headquarters and Central Federal Bank Fairlawn office will be
located. The Company is currently in negotiations with the limited liability
company to complete a lease agreement for this office space. As a result, rent
expense for this office is not included above. The lease is expected to be
accounted for as an operating lease.
The Company closed one branch during 2001 and took charges totaling $154. In
connection with the branch closings the Company paid a cancellation fee for
terminating the lease, wrote-off the remaining leasehold improvements and
abandoned equipment and wrote down the remaining equipment to its estimated
realizable value.
(Continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands except per share data)
NOTE 6 - DEPOSITS
Time deposits of $100 or more were $4,285 and $3,520 at year-end 2003 and 2002.
Scheduled maturities of time deposits for the next five years were as follows.
2004 $ 22,702
2005 8,652
2006 4,122
2007 703
---------
2008 514
---------
$ 36,693
=========
NOTE 7 - FEDERAL HOME LOAN BANK ADVANCES AND OTHER DEBT
At year end, advances from the Federal Home Loan Bank were as follows.
2003 2002
---- ----
Maturity January 2004 at 1.09% floating rate $ 7,500 $ -
Maturities August 2005 thru March 2009, primarily fixed
at rates from 5.07% to 6.96%, averaging 5.53% - 11,430
--------- ----------
Total $ 7,500 $ 11,430
========= ==========
In December 2003, the Company prepaid $11,195 in Federal Home Loan Bank
advances, with an average cost of 5.52% and an average remaining maturity of 4.5
years. These fixed rate advances were arranged primarily in 1998 and 1999 and
were used to finance mortgage loans which had prepaid. Accordingly, the loans
represented an inappropriate and costly source of funding which was not
necessary due to the liquidity position of the Company. The pre-tax prepayment
penalty associated with this transaction was $1,270 and is included in interest
expense on Federal Home Loan Bank advances and other debt in the 2003
Consolidated Statement of Operations.
The floating rate advances outstanding at year-end 2003 can be prepaid at any
time with no penalty. The advances were collateralized by $34,795 and $47,004 of
first mortgage loans under a blanket lien arrangement and $1,296 and $2,343 of
securities at year-end 2003 and 2002.
Loan Payable: The Company had a 4.30% note payable with a financial institution
with a balance of $4,900 at year-end 2002. The loan was repaid in full during
2003 and represented the remaining balance of a $7,000 loan which had been
obtained to fund a return of capital dividend declared in 2000. The note was
secured by stock the Company owns in the Bank and the Bank was required to
maintain a deposit with the lending institution in the amount of the loan which
earned interest at 1.90% below the loan rate.
(Continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands except per share data)
NOTE 7 - FEDERAL HOME LOAN BANK ADVANCES AND OTHER DEBT (Continued)
Trust Preferred Securities: A trust formed by the Company issued $5,000 of 3
month LIBOR plus 2.85% floating rate trust preferred securities in 2003 as part
of a pooled offering of such securities. The Company issued subordinated
debentures to the trust in exchange for the proceeds of the offering, which
debentures represent the sole asset of the trust. The Company may redeem the
subordinated debentures, in whole but not in part, any time after five years at
par. The subordinated debentures must be redeemed no later than 2033.
Under new accounting guidance, FASB Interpretation No. 46, as revised in
December 2003, the trust is not consolidated with the Company. Accordingly, the
Company does not report the securities issued by the trust as liabilities, and
instead reports as liabilities the subordinated debentures issued by the Company
and held by the trust.
PAYMENT INFORMATION:
Required payments on all debt over the next five years are:
2004 $ 7,500
==========
NOTE 8 - OTHER BENEFIT PLANS
Multi-employer pension plan: The Company participates in a multiemployer
contributory trustee pension plan. The retirement benefits to be provided by the
plan were frozen as of June 30, 2003 and future employee participation in the
plan was stopped. The plan was maintained for all eligible employees and the
benefits were funded as accrued through the purchase of individual life
insurance policies. The cost of funding was charged directly to operations. The
unfunded liability at June 30, 2003 totaled $96. The Company's contribution for
the plan year ending June 30, 2004 totaled $34. The Company made no
contributions for 2002 or 2001.
401(k) Plan: In 2003, the Company instituted a 401(k) benefit plan. Employees 21
years of age and older are eligible to participate and are eligible for Company
matching contributions after one year of service. The plan allows employee
contributions up to 90% of their compensation, which may be matched by the
Company on a discretionary basis. There was no match in 2003.
Stock Based Incentive Plans: Stock based incentive plans (SBIP) provide for
stock option grants and restricted stock awards to directors, officers and
employees. The 1999 Stock Based Incentive Plan was approved by shareholders on
July 13, 1999. The plan provided for 193,887 shares for stock option grants and
77,554 shares for restricted stock awards. The 2003 Equity Compensation Plan was
ratified by shareholders on April 23, 2003. The plan provided an aggregate of
100,000 shares for stock option grants and restricted stock awards, including up
to a maximum of 30,000 shares for restricted stock awards. Both plans provide
for options to be granted for terms of up to, but not exceeding ten years from
the date of grant and cannot be granted at a price less than the fair market
value of the common stock on the date of grant. Shares related to forfeited
stock options and restricted stock awards become available for subsequent grant
under the terms of the plans.
(Continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands except per share data)
Compensation expense for restricted stock awards is based on the fair value of
the stock at the date of grant and is recognized over the vesting period. Total
restricted stock awards issuable under the plans are 107,554. 28,500 shares were
issued in 2003 and no shares were issued in 2002. At December 31, 2003, 97,526
restricted stock awards were outstanding of which 57,007 had vested.
Compensation expense was $141, $110 and $95 for 2003, 2002 and 2001. Unearned
compensation is reported as a reduction of shareholders' equity until earned.
(Continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands except per share data)
NOTE 9 - ESOP PLAN
Until the plan was terminated in 2003, employees participated in an Employee
Stock Ownership Plan (ESOP). The ESOP borrowed from the Company to purchase
155,111 shares of stock at $10 per share. The Company made discretionary
contributions to the ESOP, and paid dividends on unallocated shares to the ESOP,
and the ESOP used funds it received to repay the loan. When loan payments were
made, ESOP shares were allocated to participants based on relative compensation
and expense was recorded. Dividends on allocated shares increased participant
accounts.
The ESOP received $738 from a return of capital distribution paid by the Company
in 2000 and purchased an additional 83,353 shares with the proceeds.
At the time of termination, there were 122,882 unearned ESOP shares of which
81,000 shares were sold and the proceeds were used to repay the outstanding
balance of the loan incurred to fund the ESOP plan at inception. The remaining
41,882 shares were allocated to participants on a fully vested basis. The cost
associated with terminating the ESOP totaled $638 and is included in salaries
and employee benefits expense in the 2003 Consolidated Statement of Operations.
Contributions to the ESOP during 2003, 2002 and 2001 were $0, $159 and $152.
Expense for 2003, 2002, and 2001 was $638, $222 and $190.
Shares held by the ESOP were as follows:
2002
----
Allocated to participants 108,483
Unearned 122,882
----------
Total ESOP shares 231,365
==========
Fair value of unearned shares $ 1,153
==========
(Continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands except per share data)
NOTE 10 - INCOME TAXES
Income tax expense (benefit) was as follows.
2003 2002 2001
---- ---- ----
Current federal $ 95 $ 175 $ 276
Deferred federal (1,083) 138 36
------- ------- -------
Total $ (988) $ 313 $ 312
======= ======= =======
Effective tax rates differ from federal statutory rate of 34% applied to income
(loss) before income taxes due to the following.
2003 2002 2001
---- ---- ----
Federal statutory rate times financial statement income
(loss) $(1,143) $ 336 $ 309
Effect of:
ESOP shares released at fair market value 207 1 -
Bank owned life insurance income (64) (23) -
Other 12 (1) 3
------- ------- -------
$ (988) $ 313 $ 312
======= ======= =======
Effective tax rate (29.4%) 31.7% 34.3%
Year-end deferred tax assets and liabilities were due to the following.
2003 2002
---- ----
Deferred tax assets:
Allowance for loan losses $ 141 $ 123
Deferred loan fees 160 265
Nonaccrual interest 36 30
Accrued stock awards 39 16
Net operating loss 1,325 -
Other 14 -
------- ------
1,715 434
Deferred tax liabilities:
Depreciation 229 76
FHLB stock dividend 378 330
Mortgage servicing rights 75 68
Unrealized gain on securities available for sale 103 14
Other - 10
------- ------
785 498
------- ------
Net deferred tax asset (liability) $ 930 $ (64)
======= ======
(Continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands except per share data)
NOTE 10 - INCOME TAXES (Continued)
Federal income tax laws provided additional bad debt deductions through 1987,
totaling $2,250. Accounting standards do not require a deferred tax liability to
be recorded on this amount, which otherwise would total $765 at year-end 2003.
If the Bank were liquidated or otherwise ceases to be a bank or if tax laws were
to change, this amount would be expensed.
No valuation allowance has been recorded against the deferred tax asset for net
operating losses totaling $3,897 which expire in 2023 because the benefit is
more likely than not to be realized.
NOTE 11 - RELATED PARTY TRANSACTIONS
Loans to principal officers, directors, and their affiliates in 2003 were as
follows.
Beginning balance $ 607
New loans -
Effect of changes in related parties (599)
Repayments (8)
------
Ending balance $ -
======
Deposits from principal officers, directors, and their affiliates at year-end
2003 and 2002 were $384 and $300.
NOTE 12 - STOCK OPTIONS
Options to buy stock are granted to directors, officers and employees under the
1999 Stock Based Incentive Plan and 2003 Equity Compensation Plan, which provide
for issue of up to 293,887 options. Exercise price is the market price at date
of grant, so there is no compensation expense recognized in the income
statement. The maximum option term is ten years, and options vest over three to
five years.
(Continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands except per share data)
NOTE 12 - STOCK OPTIONS (Continued)
A summary of the activity in the plan is as follows.
2003 2002 2001
---- ---- ----
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
Outstanding at
beginning of year 182,497 $ 9.23 182,497 $ 9.23 182,497 $ 9.23
Granted 77,758 11.79 - -
Exercised (37,302) 9.23 - -
Forfeited (13,232) 9.26 - -
-------- -------- ------- -------- ------- --------
Outstanding at end
of year 209,721 $ 10.17 182,497 $ 9.23 182,497 $ 9.23
======== ======== ======= ======== ======= ========
Options exercisable
at year-end 101,285 $ 9.20 107,903 $ 9.22 71,402 $ 9.21
======== ======== ======= ======== ======= ========
Weighted average
fair value of
options granted
during year $ 3.96 $ - $ -
======== ======= =======
Options outstanding at year-end 2003 were as follows.
Outstanding Exercisable
------------------------------------ -------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Contractual Exercise Exercise
Prices Number Life Price Number Price
------ ------ ---- ----- ------ -----
$9.19 - $13.94 209,721 7.0 years $ 10.17 101,285 $ 9.20
======= ========= ======== ======= ========
(Continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands except per share data)
NOTE 13 - CAPITAL REQUIREMENTS AND RESTRICTIONS ON RETAINED EARNINGS
The Bank is subject to regulatory capital requirements administered by federal
banking agencies. Capital adequacy guidelines and, additionally for banks,
prompt corrective action regulations involve quantitative measures of assets,
liabilities, and certain off-balance-sheet items calculated under regulatory
accounting practices. Capital amounts and classifications are also subject to
qualitative judgments by regulators. Failure to meet capital requirements can
initiate regulatory action.
Prompt corrective action regulations provide five classifications: well
capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized, and critically undercapitalized, although these terms are not
used to represent overall financial condition. If adequately capitalized,
regulatory approval is required to accept brokered deposits. If
undercapitalized, capital distributions are limited, as is asset growth and
expansion, and capital restoration plans are required. At year-end 2003 and
2002, the most recent regulatory notifications categorized the Bank as well
capitalized under the regulatory framework for prompt corrective action. There
are no conditions or events since that notification that Management believes
have changed the institution's category.
Actual and required capital amounts and ratios are presented below at year-end.
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------ ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
2003
Total Capital to risk
weighted assets $ 15,093 21.6% $ 5,597 8.0% $ 6,997 10.0%
Tier 1 (Core) Capital to risk
weighted assets 14,678 21.0% 2,799 4.0% 4,198 6.0%
Tier 1 (Core) Capital to
adjusted assets 14,678 13.9% 4,217 4.0% 5,272 5.0%
Tangible Capital (to
adjusted total assets) 14,678 13.9% 1,584 1.5% N/A N/A
(Continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands except per share data)
NOTE 13 - CAPITAL REQUIREMENTS AND RESTRICTIONS ON RETAINED EARNINGS (CONTINUED)
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------ ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
2002
Total Capital to risk
weighted assets $ 21,163 38.6% 4,385 8.0% $ 5,482 10.0%
Tier 1 (Core) Capital to risk
weighted assets 20,802 38.0% 2,193 4.0% 3,289 6.0%
Tier 1 (Core) Capital to
adjusted assets 20,802 18.9% 4,403 4.0% 5,504 5.0%
Tangible Capital (to adjusted
total assets) 20,802 18.9% 1,650 1.5% N/A N/A
The Qualified Thrift Lender test requires at least 65% of assets be maintained
in housing-related finance and other specified areas. If this test is not met,
limits are placed on growth, branching, new investments, FHLB advances and
dividends, or the Bank must convert to a commercial bank charter. Management
believes that this test is met.
When the Bank converted from a mutual to a stock institution, a "liquidation
account" was established at $14,300, which was net worth reported in the
conversion prospectus. Eligible depositors who have maintained their accounts,
less annual reductions to the extent they have reduced their deposits, would
receive a distribution from this account if the Bank liquidated. Dividends may
not reduce shareholders' equity below the required liquidation account balance.
Office of Thrift Supervision (OTS) regulations limit capital distributions by
savings associations. Generally, capital distributions are limited to
undistributed net income for the current and prior two years. At year-end 2003,
no amount is available to pay dividends to the Company without prior approval
from the OTS.
(Continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands except per share data)
NOTE 14 - LOAN COMMITMENTS AND OTHER RELATED ACTIVITIES
Some financial instruments, such as loan commitments, credit lines, letters of
credit, and overdraft protection, are issued to meet customer financing needs.
These are agreements to provide credit or to support the credit of others, as
long as conditions established in the contract are met, and usually have
expiration dates. Commitments may expire without being used. Off-balance-sheet
risk to credit loss exists up to the face amount of these instruments, although
material losses are not anticipated. The same credit policies are used to make
such commitments as are used for loans, including obtaining collateral at
exercise of the commitment.
The contractual amount of financial instruments with off-balance-sheet risk was
as follows at year-end.
2003 2002
Fixed Variable Fixed Variable
Rate Rate Rate Rate
---- ---- ---- ----
Commitments to make loans $ 486 $ 520 $ 123 $ 769
Unused lines of credit 4,257 2,294
Commitments to make loans are generally made for periods of 60 days or less. The
fixed rate loan commitments have interest rates ranging from 5.25% to 7.00% and
maturities ranging from 15 years to 30 years.
(Continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands except per share data)
NOTE 15 - FAIR VALUES OF FINANCIAL INSTRUMENTS
Carrying amount and estimated fair values of financial instruments were as
follows at year-end:
2003 2002
---- ----
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
Financial assets
Cash and cash equivalents $ 8,936 $ 8,936 $ 12,861 $ 12,861
Interest-bearing deposits in other financial institutions 1,587 1,587 7,205 7,205
Securities available for sale 27,126 27,126 1,439 1,439
Securities held to maturity - - 17,822 18,169
Loans held for sale 106 107 - -
Loans, net 58,024 59,341 62,565 65,119
Federal Home Loan Bank stock 3,626 3,626 3,485 3,485
Accrued interest receivable 487 487 403 403
Financial liabilities
Deposits (73,358) (72,789) (74,690) (75,345)
Federal Home Loan Bank advances (7,500) (7,500) (11,430) (12,819)
Loan payable - - (4,900) (4,900)
Subordinated debentures (5,155) (5,155) - -
Accrued interest payable (65) (65) (63) (63)
The methods and assumptions used to estimate fair value are described as
follows.
Carrying amount is the estimated fair value for cash and cash equivalents,
short-term borrowings, Federal Home Loan Bank stock, accrued interest receivable
and payable, demand deposits, short-term debt, and variable rate loans or
deposits that reprice frequently and fully. Security fair values are based on
market prices or dealer quotes, and if no such information is available, on the
rate and term of the security and information about the issuer. For fixed rate
loans or deposits and for variable rate loans or deposits with infrequent
repricing or repricing limits, fair value is based on discounted cash flows
using current market rates applied to the estimated life and credit risk. Fair
values for impaired loans are estimated using discounted cash flow analysis or
underlying collateral values. Fair value of loans held for sale is based on
market quotes. Fair value of debt is based on current rates for similar
financing. The fair value of off-balance-sheet items is based on the current
fees or cost that would be charged to enter into or terminate such arrangements.
(Continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands except per share data)
NOTE 16 - PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION
Condensed financial information of Central Federal Corporation follows.
CONDENSED BALANCE SHEETS
December 31
2003 2002
---- ----
ASSETS
Cash and cash equivalents $ 9,238 $ 516
Investment in banking subsidiary 15,099 20,831
Investment in and advances to other subsidiaries 155 -
Other assets 755 1,291
---------- ----------
Total assets $ 25,247 $ 22,638
========== ==========
LIABILITIES AND EQUITY
Debt $ 5,155 $ 4,900
Accrued expenses and other liabilities 236 155
Shareholders' equity 19,856 17,583
---------- ----------
Total liabilities and shareholders' equity $ 25,247 $ 22,638
========== ==========
CONDENSED STATEMENTS OF OPERATIONS
Years ended December 31
2003 2002 2001
---- ---- ----
Interest income $ 20 $ 77 $ 86
Other income 11 - -
Interest expense 59 297 494
Other expense 338 173 204
----------- -------- --------
Loss before income tax and
effect of subsidiaries' operations (366) (393) (612)
Income tax benefit (125) (137) (208)
Effect of subsidiaries' operations (2,133) 930 1,002
----------- -------- --------
Net income (loss) $ (2,374) $ 674 $ 598
=========== ======== ========
(Continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands except per share data)
NOTE 16 - PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION (Continued)
CONDENSED STATEMENTS OF CASH FLOWS
Years ended December 31
2003 2002 2001
---- ---- ----
Cash flows from operating activities
Net income (loss) $ (2,374) $ 674 $ 598
Adjustments:
Effect of subsidiaries' operations 2,133 (930) (1,002)
Change in other assets and other liabilities (236) (230) 421
----------- -------- --------
Net cash from operating activities (477) (486) 17
Cash flows from investing activities
Cash received in repayment of ESOP loan 853 212 212
Dividends received from bank 5,437 2,800 -
Investments in subsidiaries (155) - -
----------- -------- --------
Net cash from investing activities 6,135 3,012 212
Cash flows from financing activities
Proceeds of borrowings 5,155 - -
Repayments of borrowings (4,900) (2,100) -
Proceeds from stock issue 3,119 - -
Proceeds from exercise of stock options 345 - -
Purchase of treasury stock - (1,044) (75)
Dividends paid (655) (551) (482)
Dividends on unallocated ESOP shares - (53) (60)
----------- -------- --------
Net cash from financing activities 3,064 (3,748) (617)
----------- -------- --------
Net change in cash and cash equivalents 8,722 (1,222) (388)
Beginning cash and cash equivalents 516 1,738 2,126
----------- -------- --------
Ending cash and cash equivalents $ 9,238 $ 516 $ 1,738
=========== ======== ========
(Continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands except per share data)
NOTE 17 - EARNINGS PER SHARE
The factors used in the earnings per share computation follow.
2003 2002 2001
---- ---- ----
Basic
Net income (loss) $ (2,374) $ 674 $ 598
=========== ============ ============
Weighted average common shares outstanding 1,815,210 1,530,429 1,564,797
=========== ============ ============
Basic earnings (loss) per common share $ (1.31) $ 0.44 $ 0.38
=========== ============ ============
Diluted
Net income (loss) $ (2,374) $ 674 $ 598
=========== ============ ============
Weighted average common shares outstanding for basic earnings
(loss) per share 1,815,210 1,530,429 1,564,797
Add: Dilutive effects of assumed exercises of stock options and
stock based incentive plan shares 45,349 31,570 4,713
----------- ------------ ------------
Average shares and dilutive potential common shares 1,860,559 1,561,999 1,569,510
=========== ============ ============
Diluted earnings (loss) per common share $ (1.28) $ 0.43 $ 0.38
=========== ============ ============
All stock options for shares of common stock were considered in computing
diluted earnings per common share for 2003. Stock options for 8,000 shares of
common stock were not considered in computing diluted earnings per common share
for 2002 and 2001 because they were antidilutive.
CENTRAL FEDERAL CORPORATION
AND CENTRAL FEDERAL BANK
BOARD OF DIRECTORS
David C. Vernon, Chairman
President & Chief Executive Officer
Central Federal Corporation
Chairman & Chief Executive Office
Central Federal Bank
Jeffrey W. Aldrich
Former President
Sterling China Co.
Mark S. Allio
President and CEO
Rock Financial Services
Thomas P. Ash
Superintendent
Mid-Ohio Educational Service Center
William R. Downing
President
R.H. Downing, Inc.
Gerry W. Grace
President
Grace Services, Inc.
Jerry F. Whitmer
Partner
Brouse McDowell
CENTRAL FEDERAL BANK
COLUMBUS DEVELOPMENT BOARD
Daniel P. Finkelman
Senior Vice President
Limited Brands, Inc.
Julia F. Johnson
Former Senior Vice President
Bank One Corp.
R. Parker MacDonell
President - Columbus Region
Central Federal Bank
John L. Mead
Owner
Little Turtle Golf Course
Louis A. Nobile, Jr.
Former President
Bank One Lima
Robert F. Parsons
Director of Development & Marketing
Communities in Schools, Columbus Inc.
Kim Rice Wilson
President
Six String Concerts
CENTRAL FEDERAL CORPORATION
OFFICERS
David C. Vernon
Chairman, President &
Chief Executive Officer
Eloise L. Mackus
Senior Vice President,
General Counsel & Secretary
Therese A. Liutkus, CPA
Chief Financial Officer
CENTRAL FEDERAL BANK
OFFICERS
David C. Vernon
Chairman & Chief Executive Officer
Raymond E. Heh
President & Chief Operating Officer
Edward L. Baumgardner
Regional President - Columbiana County
R. Parker MacDonell
Regional President - Columbus
Eloise L. Mackus
Senior Vice President, General Counsel & Secretary
Therese A. Liutkus, CPA
Chief Financial Officer
William R. Reed
Senior Credit Officer
Daniel F. Galeoti
Vice President
Charles O. Standley
Vice President
J. Brent Thomas
Vice President
Nancianne Dodgson
Assistant Vice President
Deborah L. Jacob
Assistant Vice President
John S. Lawell
Assistant Vice President
Daphne U. Moehring
Assistant Vice President
Diana M. Spencer
Assistant Vice President
Allan G. Dingey
Bank Security Officer
Stephen C. Burt
Commercial Banking Officer
Janna L. Cable
Loan Officer
Marjorie K. Minor
Loan Officer
Laura L. Martin
Assistant Secretary
CENTRAL FEDERAL BANK
OFFICE LOCATIONS
FAIRLAWN
2923 Smith Road
Akron, Ohio 44333
330-666-7979
David C. Vernon
Chairman & Chief Executive Officer
Raymond E. Heh
President & Chief Operating Officer
Eloise L. Mackus
Senior Vice President,
General Counsel & Secretary
Therese A. Liutkus, CPA
Chief Financial Officer
William R. Reed
Senior Credit Officer
Nancianne Dodgson
Assistant Vice President,
Office Manager
Danielle M. Boxler
Client Service Manager
Stephen C. Burt
Commercial Banking Officer
Krista J. Dobronos
Client Service Representative
Kenneth V. Hastings
Client Service Manager
Deborah L. Jacob
Assistant Vice President, Compliance & Audit
John S. Lawell
Assistant Vice President
Operations
Leigh Ann Martelon
Staff Accountant
Laura L. Martin
Assistant Secretary,
Executive Assistant
Richard J. Miller
Accounting Manager
Amy L. Tenney
Controller
Mary D. Williams
Accounting
Bank Secrecy Act Officer
WELLSVILLE
601 Main Street
Wellsville, Ohio 43968
330-532-1517
Edward L. Baumgardner
Regional President -
Columbiana County
Diana M. Spencer
Assistant Vice President,
Wellsville and Calcutta
Office Manager
Joan L. Boley
Loan Operations
Lisa A. Conkle
Mortgage Loan Processor
Amy Dalrymple
Teller
Allan G. Dingey
Client Service Manager
and Collections
Daniel F. Galeoti
Vice President,
Mortgage Lending
Sheryl A. Gibson
Teller
Michele R. Guildoo
Administrative Assistant,
Human Resources Coordinator
Carolyn J. LaScola
Teller
Kimberlee K. Little
Mortgage Loan Processor
Marjorie K. Minor
Loan Officer
Vicky M. Novacky
Teller
Susan D. Pickens
Deposit Operations
Becky Sant
Teller
Patricia A. Wilson
Teller
Teresa L. Wilson
Teller
CALCUTTA
49028 Foulks Drive
Calcutta, Ohio 43920
330-385-4323
Charles O. Standley
Vice President,
Consumer Lending
Janice L. Boso
Teller
Janna L. Cable
Loan officer
Margie C. Cline
Teller
Pamela S. Davis
Commercial Loan Operations and Consumer Lending
Marian C. Ferlaino
Client Service Supervisor
Mary C. Gilkinson
Teller
Rhonda R. McDole
Teller
Delores M. Mosti
Consumer Lending
COLUMBUS
4249 Easton Way, Suite 125
Columbus, Ohio 43219
614-334-7979
R. Parker MacDonell
Regional President -
Columbus
Daphne U. Moehring
Assistant Vice President,
Office Manager
Matthew Allyn
Client Service Manager
Arline R. Moore
Administrative Assistant
J. Brent Thomas
Vice President,
Business Banker
Corporate Data
Annual Report
A copy of the Annual Report on Form 10-KSB filed with the Securities and
Exchange Commission will be available March 30, 2003 without charge upon written
request to:
Therese A. Liutkus - Chief Financial Officer
Central Federal Corporation
2923 Smith Road
Fairlawn, Ohio 44333
Phone: 330-666-7979 ext. 1012
Fax: 330-666-7959
Email: TerriLiutkus@centralfedbank.com
Annual Meeting
The Annual Meeting of Shareholders of Central Federal Corporation will be held
at 10 a.m. on Tuesday, April 20, 2004 at the Central Federal Bank Fairlawn
Office, 2923 Smith Road, Fairlawn, Ohio 44333.
Shareholder Services
The Registrar and Transfer Company serves as transfer agent for Central Federal
Corporation shares. Communications regarding change of address, transfer of
shares or lost certificates should be sent to:
The Registrar & Transfer Company
10 Commerce Drive
Cranford, New Jersey 07016
Phone: 800-368-5948