FEDERAL
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the Fiscal Year Ended December 31, 2004
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from __________ to __________
Commission File Number: 0-25045
CENTRAL FEDERAL CORPORATION.
----------------------------------------------
(Name of Small Business Issuer in Its Charter)
Delaware 34-1877137
State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
2923 Smith Road, Fairlawn, Ohio 44333
(Address of Principal Executive Offices) (Zip Code)
(330) 666-7979
(Issuer's Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, par value $.01 per share
(Title of Class)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES [X] NO [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ ]
The issuer's revenues for the fiscal year ended December 31, 2004 were $6.7
million.
The aggregate market value of the voting and non-voting common equity held by
non-affiliates as of March 15, 2005 was $20,953,000.
As of March 15, 2005, there were 2,225,987 shares of the Registrant's Common
Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Rule 14a-3(b) Annual Report to Shareholders for
2004 and its Proxy Statement for the 2005 Annual Meeting of Stockholders to be
held on May 19, 2005, which was filed with the Securities and Exchange
Commission (the "Commission") on March 30, 2005, are incorporated herein by
reference into Parts II and III, respectively, of this Form 10-KSB.
Transitional Small Business Disclosure Format (Check One): YES [ ] NO [X]
INDEX
PAGE
----
PART I
Item 1. Description of Business.......................................................... 3
Item 2. Description of Property.......................................................... 28
Item 3. Legal Proceedings................................................................ 28
Item 4. Submission of Matters to a Vote of Security Holders.............................. 28
PART II
Item 5. Market for Common Equity, Related Stockholder Matters and Small Business
Issuer Purchases of Equity Securities ........................................... 29
Item 6. Management's Discussion and Analysis or Plan of Operation........................ 30
Item 7. Financial Statements............................................................. 30
Item 8. Changes In and Disagreements With Accountants on Accounting and Financial
Disclosure....................................................................... 30
Item 8A. Controls and Procedures.......................................................... 30
Item 8B. Other Information................................................................ 30
PART III
Item 9. Directors and Executive Officer of the Registrant................................ 31
Item 10. Executive Compensation........................................................... 33
Item 11. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters.................................................. 33
Item 12. Certain Relationships and Related Transactions................................... 33
Item 13. Exhibits......................................................................... 33
Item 14. Principal Accountant Fees and Services........................................... 33
SIGNATURES
EXHIBIT INDEX
2
FORWARD-LOOKING STATEMENTS
When used in this Form 10-KSB, or in future filings with the 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 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.
PART I
ITEM 1 DESCRIPTION OF BUSINESS
GENERAL
Central Federal Corporation (the "Company"), formerly known as Grand Central
Financial Corp., was organized as a Delaware corporation in September 1998 as
the holding company for CFBank (the "Bank"), a community-oriented savings
institution which was originally organized in 1892 formerly known as Central
Federal Savings and Loan Association of Wellsville and, more recently as Central
Federal Bank, in connection with the Bank's conversion from a mutual to stock
form of organization. As a savings and loan holding company, the Company is
subject to regulation by the Office of Thrift Supervision (the "OTS"). Reserve
Mortgage Services, Inc. ("Reserve"), a wholly owned subsidiary of the Bank, was
acquired in October 2004 to expand the Company's mortgage services business.
Central Federal Capital Trust I (the "Trust"), a wholly owned subsidiary of the
Company, was formed in 2003 as to raise additional funding for the Company.
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. Currently, the Company does not transact any material
business other than through the Bank and its subsidiary mortgage services
company and the Trust. At December 31, 2004, the Company had total assets of
$171.0 million and stockholders' equity of $19.5 million.
The Company's principal business consists of attracting deposits from the
general public primarily in its principal market area and investing those
deposits and other funds, generated from operations and from borrowings,
primarily to originate commercial and commercial real estate loans, single- and
multi-family residential mortgage loans, home equity lines of credit and
short-term consumer loans. To a lesser extent, the Company invests in closed-end
home equity, construction and land loans. In 2003, the Company began originating
more commercial, commercial real estate and multi-family mortgage loans than it
had in the past as management positioned the Company for expansion into business
financial services. The Company also invests in securities, primarily those
guaranteed or insured by government agencies, and other investment-grade
securities. Revenues are derived principally from the generation of interest and
3
fees on loans originated and, to a lesser extent, interest and dividends on
securities. The Company's primary sources of funds are retail savings deposits
and, to a lesser extent, brokered certificates of deposit, principal and
interest payments on loans and securities, FHLB advances and other borrowings
and proceeds from the sale of loans. The Company operates through its executive
offices in Fairlawn, Ohio, an office in Columbiana County, Ohio, an office in
Jefferson County, Ohio, an office in Columbus, Ohio and a mortgage services
location in Akron, Ohio.
MARKET AREA AND COMPETITION
The Company's primary market area is a competitive market for financial services
and it faces competition both in making loans and in attracting deposits. Direct
competition comes from a number of financial institutions operating in its
market area, many with a state-wide or regional presence, and in some cases, a
national presence. Many of these financial institutions are significantly larger
and have greater financial resources than the Company. Competition for loans and
deposits comes from savings institutions, mortgage banking companies, commercial
banks and credit unions brokerage firms and insurance companies.
LENDING ACTIVITIES
LOAN PORTFOLIO COMPOSITION. The loan portfolio consists primarily of mortgage
loans secured by single-family and multi-family residences and commercial real
estate loans. At December 31, 2004, gross loans receivable totaled $109.3
million. Commercial, commercial real estate and multi-family mortgage loans
totaled $52.7 million and represented 48.3% of the gross loan portfolio at
December 31, 2004, compared to 17.8% at December 31, 2003. The increase in the
percentage of commercial, commercial real estate and multi-family mortgage loans
in the portfolio was a result of the growth strategy implemented in 2003 to
expand into business financial services. Single-family residential mortgage
loans totaled $41.4 million and represented 37.9% of total gross loan at
year-end 2004. The remainder of the portfolio consisted of the following at
December 31, 2004: consumer loans totaled $14.0 million, or 12.8% of gross loans
receivable and construction loans totaled $1.1 million, or 1.0% of gross loans
receivable. At year-end 2004, 32.8% of the loan portfolio had fixed rates,
compared to 55.7% at year-end 2003. The decline in the percentage of fixed rate
loans in the portfolio was a result of growth in commercial, commercial real
estate and multi-family mortgage loans during 2004, which are predominantly
adjustable rate loans.
The types of loans originated are subject to federal and state law and
regulations. Interest rates charged on loans are affected by the demand for such
loans and the supply of money available for lending purposes and the rates
offered by competitors. In turn, these factors are affected by, among other
things, economic conditions, fiscal policies of the federal government, the
monetary policies of the Federal Reserve Board and legislative tax policies.
4
The following table sets forth the composition of the loan portfolio in dollar
amounts and as a percentage of the portfolio at the dates indicated.
AT DECEMBER 31,
------------------------------------------------------------------------------
2004 2003 2002
---------------------- --------------------- ---------------------
PERCENT PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL
-------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Real estate mortgage loans:
Single-family $ 41,450 37.94% $ 34,810 59.58% $ 47,108 74.84%
Multi-family 25,602 23.43% 1,250 2.14% 1,536 2.44%
Construction 1,127 1.03% 610 1.04% 134 0.22%
Commercial real estate 20,105 18.40% 5,040 8.63% - 0.00%
-------- ------ -------- ------ -------- ------
Total real estate mortgage loans 88,284 80.80% 41,710 71.39% 48,778 77.50%
Consumer loans:
Home equity loans 663 0.61% 1,003 1.72% 1,378 2.19%
Home equity lines of credit 5,928 5.43% 1,640 2.81% 1,109 1.76%
Automobile 6,735 6.16% 9,292 15.90% 10,540 16.75%
Other 626 0.57% 663 1.13% 877 1.39%
-------- ------ -------- ------ -------- ------
Total consumer loans 13,952 12.77% 12,598 21.56% 13,904 22.09%
Commercial loans 7,030 6.43% 4,116 7.05% 261 0.41%
-------- ------ -------- ------ -------- ------
Total loans receivable 109,266 100.00% 58,424 100.00% 62,943 100.00%
======== ====== ======== ====== ======== ======
Less:
Net deferred loan fees (139) 15 (17)
Allowance for loan losses (978) (415) (361)
-------- -------- --------
Loans receivable, net $108,149 $ 58,024 $ 62,565
======== ======== ========
LOAN MATURITY. The following table shows the remaining contractual maturity of
the loan portfolio at December 31, 2004. Demand loans and other loans having no
stated schedule of repayments or no stated maturity are reported as due within
one year. The table does not include potential prepayments or scheduled
principal amortization.
AT DECEMBER 31, 2004
-----------------------------------------------------------------
REAL ESTATE TOTAL LOANS
MORTGAGE CONSUMER COMMERCIAL RECEIVABLE
-------- -------- ---------- ----------
(DOLLARS IN THOUSANDS)
Amounts due:
Within one year $ 1,027 $ 625 $ 6,264 $ 7,916
--------- -------- ---------- ----------
After one year:
More than one year to three years 2,483 2,549 2,874 7,906
More than three years to five years 1,257 4,359 3,219 8,835
More than five years to 10 years 24,197 1,801 3,995 29,993
More than 10 years to 15 years 13,074 - 7,831 20,905
More than 15 years 26,141 4,618 2,952 33,711
--------- -------- ---------- ----------
Total due after 2005 67,152 13,327 20,871 101,350
--------- -------- ---------- ----------
Total amount due $ 68,179 $ 13,952 $ 27,135 $ 109,266
========= ======== ========== ==========
5
The following table sets forth at December 31, 2004, the dollar amount of total
loans receivable contractually due after December 31, 2005, and whether such
loans have fixed interest rates or adjustable interest rates.
DUE AFTER DECEMBER 31, 2005
------------------------------------------
FIXED ADJUSTABLE TOTAL
------- ---------- --------
(DOLLARS IN THOUSANDS)
Real estate mortgage loans $21,131 $46,021 $ 67,152
Consumer loans 7,407 5,920 13,327
Commercial loans 5,386 15,485 20,871
------- ------- --------
Total loans $33,924 $67,426 $101,350
======= ======= ========
ORIGINATION OF LOANS. Lending activities are conducted through the Company's
offices. In 2003, the Company began originating commercial, commercial real
estate and multi-family mortgage loans as it started the process of utilizing
its strong capital position to take advantage of opportunities for expansion
into business financial services and growth in the Fairlawn and Columbus, Ohio
markets. These loans are predominantly adjustable rate loans. A majority of the
Company's single-family mortgage loan originations are fixed-rate loans.
Beginning in 2002 and more pronouncedly in 2003 and 2004, current originations
of long-term fixed-rate single-family mortgages were sold rather than retained
in portfolio. Although the decision to sell current single-family mortgage
originations rather than retain the loans in portfolio may result in declining
single-family 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. The Company allowed single-family mortgage loan portfolio
balances to decline as interest rates fell to 40-year lows and home owners
continued to refinance during 2003. The refinancing activity slowed as market
mortgage interest rates increased in 2004. The growth in single-family mortgage
loans in 2004 was predominantly adjustable rate loans. The acquisition of
Reserve is expected to significantly expand the Company's mortgage services and
increase the Company's mortgage loan production. Although the Company currently
expects that most of the long-term fixed-rate mortgage loan originations will be
sold on a servicing-released basis, a portion of the loans may be retained for
portfolio within the Company's interest rate risk and profitability guidelines.
The Company also emphasizes the origination of home equity lines of credit.
SINGLE-FAMILY MORTGAGE LENDING. A significant lending activity of the Company
has been the origination of permanent conventional mortgage loans secured by
single-family residences located in the Company's primary market area. The
Company currently sells substantially all of the fixed-rate single-family
mortgage loans that it originates on a servicing released basis. Prior to 2004,
servicing rights were generally retained on loans sold. The Company retains
adjustable rate mortgage ("ARM") single-family mortgage loans for its portfolio.
Most single-family mortgage loans are underwritten according to Freddie Mac
guidelines. Loan originations are obtained from the Company's mortgage services
subsidiary, loan officers and their contacts with the local real estate
industry, existing or past customers, and members of the local communities. At
December 31, 2004, single-family mortgage loans totaled $41.4 million, or 37.9%
of total loans, of which $19.5 million, or 47.2% were fixed-rate loans.
The Company's policy is to originate single-family residential mortgage loans in
amounts up to 80% of the appraised value of the property securing the loan and
up to 95% of the appraised value if private mortgage insurance is obtained.
Mortgage loans generally include due-on-sale clauses which provide the
6
Company with the contractual right to deem the loan immediately due and payable
in the event the borrower transfers ownership of the property without the
Company's consent. Due-on-sale clauses are an important means of adjusting the
rates on the fixed-rate mortgage loan portfolio, and the Company exercises its
rights under these clauses. The single-family mortgage loan originations are
generally for terms to maturity of up to 30 years.
The Company offers several adjustable-rate loan programs with terms of up to 30
years and interest rates that adjust with a maximum adjustment limitation of
2.0% per year and a 6% lifetime cap. The interest rate adjustments on ARM loans
currently offered are indexed to a variety of established indices. ARM loans
offered by the Company do not provide for initial deep discount interest rates
or for negative amortization.
The volume and types of ARM loans originated have been affected by such market
factors as the level of interest rates, consumer preferences, competition and
the availability of funds. In recent years, demand for ARM loans in the
Company's primary market area has been weak due to the low interest rate
environment and consumer preference for fixed-rate loans. Consequently, in
recent years the Company has not originated a significant amount of ARM loans as
compared to its originations of fixed-rate loans. However, as a result of
management's strategy to sell current long-term fixed rate loan production, ARM
loans represent a larger percentage of the portfolio. At December 31, 2004,
$21.9 million, or 52.8% of the single-family mortgage loan portfolio had
adjustable rates, compared to $15.1 million, or 43.4% at December 31, 2003 and
$6.5 million, or 11% at December 31, 2002.
COMMERCIAL AND MULTI-FAMILY REAL ESTATE LENDING. In 2003, the Company expanded
into business financial services and positioned itself for growth in the
Fairlawn and Columbus, Ohio markets and, as a result, originations of commercial
real estate and multi-family residential mortgage loans increased significantly.
Commercial real estate and multi-family residential mortgage loans totaled $45.7
million at December 31, 2004 or 41.8% of gross loans, an increase of $39.4
million compared to $6.3 million or 10.8% of gross loans receivable at December
31, 2003. The Company anticipates that commercial real estate and multi-family
residential mortgage lending activities will continue to grow in the future.
The Company originates commercial real estate loans that are secured by
properties used for business purposes, such as manufacturing facilities, office
buildings or retail facilities. Commercial real estate and multi-family
residential mortgage loans are secured by properties generally located in its
primary market area. The Company's underwriting policies provide that commercial
real estate and multi-family residential mortgage loans may be made in amounts
up to 85% of the appraised value of the property. In underwriting commercial
real estate and multi-family residential mortgage loans, the Company considers
the appraisal value and net operating income of the property, the debt service
ratio and the property owner's financial strength, expertise and credit history.
Commercial real estate and multi-family residential mortgage loans are generally
considered to involve a greater degree of risk than single-family residential
mortgage loans. Because payments on loans secured by commercial real estate and
multi-family properties are dependent on successful operation or management of
the properties, repayment of such loans may be subject to a greater extent to
adverse conditions in the real estate market or the economy. The Company seeks
to minimize these risks through its underwriting policies, which require such
loans to be qualified at origination on the basis of the property's income and
debt coverage ratio and the financial strength of the owners.
COMMERCIAL LENDING. In 2003, the Company expanded into business financial
services and positioned itself for growth in the Fairlawn and Columbus, Ohio
markets and, as a result, originations of commercial loans increased. Commercial
loans totaled $7.0 million, or 6.4% of gross loans at December 31, 2004, an
increase of $2.9 million compared to $4.1 million, or 7.1% of gross loans at
December 31, 2003 and $261,000 or .4% of gross loans at December 31, 2002. The
Company anticipates that commercial lending activities will continue to grow in
the future.
7
The Company makes commercial business loans primarily to small business and
generally secured by business equipment, inventory, accounts receivable and
other business assets. In underwriting commercial loans, the Company considers
the net operating income of the company, the debt service ratio and the
financial strength, expertise and credit history of the owners.
Commercial loans are generally considered to involve a greater degree of risk
than loans secured by real estate. Because payments on commercial loans are
dependent on successful operation of the business enterprise, repayment of such
loans may be subject to a greater extent to adverse conditions in the economy.
The Company seeks to minimize these risks through its underwriting policies,
which require such loans to be qualified at origination on the basis of the
enterprise's income and debt coverage ratio and the financial strength of the
owners.
CONSTRUCTION AND LAND LENDING. The Company generally originates construction and
land development loans to contractors and individuals in its primary market
areas. Construction loans are made to finance the construction of owner-occupied
single-family residential properties and, to a substantially lesser extent,
individual properties built by developers for future sale. Construction loans to
individuals are fixed or adjustable-rate loans which may convert to permanent
loans with maturities of up to 30 years. The Company's policies provide that
construction loans may be made in amounts up to 80% of the appraised value of
the property for construction of single-family residences. The Company requires
an independent appraisal of the property. Loan proceeds are disbursed in
increments as construction progresses and as inspections warrant. The Company
requires regular inspections to monitor the progress of construction. Land loans
are determined on an individual basis, but generally they do not exceed 75% of
the actual cost or current appraised value of the property, whichever is less.
Construction and land financing is considered to involve a higher degree of
credit risk than long-term financing on improved, owner-occupied real estate.
Risk of loss on a construction loan is dependent largely upon the accuracy of
the initial estimate of the property's value at completion of construction or
development compared to the estimated cost (including interest) of construction.
If the estimate of value proves to be inaccurate, the Company may be confronted
with a project, when completed, having a value which is insufficient to assure
full repayment.
CONSUMER AND OTHER LENDING. The consumer loan portfolio generally consists of
home equity lines of credit, automobile loans, home equity and home improvement
loans and loans secured by deposits. Home equity lines of credit are generally
ARM loans with rates adjusting monthly at up to 2% above the prime rate of
interest as disclosed in The Wall Street Journal. At December 31, 2004, the
consumer loan portfolio totaled $14.0 million, or 12.8% of gross loans
receivable.
Loans secured by rapidly depreciable assets such as automobiles entail greater
risks than single-family residential mortgage loans. In such cases, repossessed
collateral for a defaulted loan may not provide an adequate source of repayment
of the outstanding loan balance, since there is a greater likelihood of damage,
loss or depreciation of the underlying collateral. Further, consumer loan
collections on these loans depend on the borrower's continuing financial
stability and, therefore, are more likely to be adversely affected by job loss,
divorce, illness or personal bankruptcy. Finally, the application of various
federal and state laws, including federal and state bankruptcy and insolvency
laws, may limit the amount which can be recovered on such loans in the event of
a default. A significant portion of the Company's automobile loans were
originated on the Company's behalf by automobile dealers at the time of sale.
This indirect lending requires the maintenance of relationships with such
dealers. Such loans do not have the benefit of direct interaction between the
borrowers and the Company's lending officers during the underwriting process,
which is heavily reliant on information contained in the borrowers' credit
reports.
DELINQUENCIES AND CLASSIFIED ASSETS. The Board of Directors monitors the status
of all delinquent mortgage and commercial loans thirty days or more past due
monthly. Additionally, the Board of
8
Directors review past due statistics and trends for all consumer and installment
loans. The procedures taken by the Company with respect to resolving
delinquencies vary depending on the nature and type of the loan and period of
delinquency. In general, the Company makes every effort, consistent with safety
and soundness principles, to work with the borrower to have the loan brought
current. If the loan is still not brought current it then becomes necessary for
the Company to repossess collateral and/or take legal action.
Federal regulations and the Company's Classification of Assets Policy require
use of an internal asset classification system as a means of reporting and
monitoring assets. The Company has incorporated the OTS internal asset
classifications as a part of its credit monitoring system. In accordance with
regulations, problem assets are classified as "substandard," "doubtful" or
"loss", and the classifications are subject to review by the OTS. An asset is
considered "substandard" under the regulations if it is inadequately protected
by the current net worth and paying capacity of the obligor or of the collateral
pledged, if any. An asset considered "doubtful" under the regulations has all of
the weaknesses inherent in those classified "substandard" with the added
characteristic that the weaknesses make "collection or liquidation in full," on
the basis of currently existing facts, conditions, and values, "highly
questionable and improbable." Assets considered "loss" under the regulations are
those considered "uncollectible" and having so little value that their
continuance as assets without the establishment of a specific loss allowance is
not warranted. Assets are required to be designated "special mention" when they
posses weaknesses but do not currently expose the insured institution to
sufficient risk to warrant classification in one of these categories. In order
to more closely monitor credit risk as the Company employs its growth strategy
in business financial services, the Company has developed internal loan review
procedures and a credit grading system for commercial, commercial real estate
and multi-family mortgage loans, and also utilizes an external firm for loan
review.
At December 31, 2004, no assets were designated as special mention; $419,000 in
assets were classified as substandard, 97.4% of which are single-family mortgage
loans and real estate owned, $1,000 in assets were classified as doubtful and no
assets were classified as loss.
9
The following table sets forth information concerning delinquent loans in dollar
amounts and as a percentage of the total loan portfolio. The amounts presented
represent the total remaining principal balances of the loans rather than the
actual payment amounts which are overdue.
DECEMBER 31, 2004 DECEMBER 31, 2003
------------------------------------------ -------------------------------------------
60-89 DAYS 90 DAYS OR MORE 60-89 DAYS 90 DAYS OR MORE
------------------- -------------------- ------------------- ---------------------
NUMBER PRINCIPAL PRINCIPAL NUMBER PRINCIPAL PRINCIPAL
OF BALANCE NUMBER BALANCE OF BALANCE NUMBER BALANCE
LOANS OF LOANS OF LOANS OF LOANS LOANS OF LOANS OF LOANS OF LOANS
------ --------- -------- -------- ------ --------- -------- --------
(DOLLARS IN THOUSANDS)
Real estate loans:
Single-family 2 $ 149 8 $ 276 3 $ 97 9 $ 714
Multi-family - - - - - - - -
Construction - - - - - - - -
Commercial - - - - - - - -
Consumer loans:
Home equity loans and lines of
credit 1 7 - - 3 37 - -
Automobile 5 43 2 9 2 13 2 6
Unsecured lines of credit - - - - - - 1 1
Other - - 1 1 - - 4 20
Commercial loans - - - - 1 25 - -
------ --------- -------- --------- ------ --------- -------- --------
Total delinquent loans 8 $ 199 11 $ 286 9 $ 172 16 $ 741
====== ========= ======== ========= ====== ========= ======== ========
Delinquent loans as a percent of
total loans .18% .26% .30% 1.28%
DECEMBER 31, 2002
----------------------------------------------
60-89 DAYS 90 DAYS OR MORE
-------------------- --------------------
PRINCIPAL NUMBER PRINCIPAL
NUMBER BALANCE OF BALANCE
OF LOANS OF LOANS LOANS OF LOANS
-------- --------- ------ ---------
(DOLLARS IN THOUSANDS)
Real estate loans:
Single-family 10 $ 559 10 $ 761
Multi-family - - - -
Construction - - - -
Commercial - - - -
Consumer loans:
Home equity loans and lines of
credit - - - -
Automobile 1 5 3 19
Unsecured lines of credit - - 1 1
Other 2 6 - -
Commercial loans - - - -
-------- --------- ------ ---------
Total delinquent loans 13 $ 570 14 $ 781
======== ========= ====== =========
Delinquent loans as a percent of
total loans .91% 1.25%
----------
The table does not include delinquent loans less than 60 days past due. At
December 31, 2004, 2003 and 2002, loans past due 30 to 59 days totaled $
549,000, $481,000, and $517,000, respectively.
10
NONPERFORMING ASSETS. The following table contains information regarding
nonperforming loans, real estate owned ("REO") and other repossessed assets. At
December 31, 2004, nonperforming loans totaled $286,000. It is the Company's
policy to stop accruing interest on loans 90 days or more past due and set up
reserves for all previously accrued interest. At December 31, 2004, the amount
of additional interest income that would have been recognized on nonaccrual
loans if such loans had continued to perform in accordance with their
contractual terms was approximately $12,000. At December 31, 2004, 2003 and
2002, there were no impaired loans or troubled debt restructurings.
AT DECEMBER 31,
------------------------
2004 2003 2002
---- ---- ----
(DOLLARS IN THOUSANDS)
Nonaccrual loans:
Single-family real estate $276 $ 714 $ 761
Consumer 10 27 20
---- ----- -----
Total(1) 286 741 781
Real estate owned (REO) 132 184 -
Other repossessed assets - 9 2
---- ----- -----
Total nonperforming assets(2) $418 $ 934 $ 783
==== ===== =====
Nonperforming loans to total loans .26% 1.28% 1.25%
Nonperforming assets to total assets .24% .87% .71%
----------
(1) Total nonaccrual loans equal total nonperforming loans.
(2) Nonperforming assets consist of nonperforming loans, other repossessed
assets and REO.
ALLOWANCE 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. 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. The allowance for loan losses is established
through a provision for loan losses based on management's evaluation of the risk
in its loan portfolio. Various regulatory agencies, as an integral part of their
examination process, periodically review the Company's allowance for loan
losses. Such agencies may require additional provisions for loan losses based
upon information available at the time of the review. As of December 31, 2004,
the allowance for loan losses totaled .90% of total loans as compared to .71% as
of December 31, 2003.
The OTS, in conjunction with the other federal banking agencies, has adopted an
interagency policy statement on the allowance for loan and lease losses. The
policy statement provides guidance for financial institutions on both the
responsibilities of management for the assessment and establishment of adequate
allowances in accordance with generally accepted accounting principles and
guidance for banking agency examiners to use in evaluating the allowances. The
policy statement requires that institutions have effective systems and controls
to identify, monitor and address asset quality problems; that management has
analyzed all significant factors that affect the collectibility of the portfolio
in a reasonable manner; and that management has established acceptable allowance
evaluation processes that meet the objectives set forth in the policy statement.
The Company adopted an Allowance for Loan Losses Policy designed to provide a
thorough, disciplined and consistently applied process that
11
incorporates management's current judgments about the credit quality of the loan
portfolio into determination of the allowance for loan and lease losses in
accordance with generally accepted accounting principles and supervisory
guidance. Management believes that an adequate allowance for loan losses has
been established. However, actual losses are dependent upon future events and,
as such, further additions to the level of allowances for estimated loan losses
may become necessary.
The following table sets forth activity in the allowance for loan losses for the
periods indicated.
AT OR FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------
2004 2003 2002
------ ------ ------
(DOLLARS IN THOUSANDS)
Allowance for loan losses, beginning of period $ 415 $ 361 $ 373
Charge-offs:
Consumer 117 50 35
--------- ------ ------
Total charge-offs 117 50 35
Recoveries on loans previously charged off:
Consumer 34 2 4
--------- ------ ------
Total recoveries 34 2 4
Net charge-offs 83 48 31
Provision for loan losses 646 102 19
--------- ------ ------
Allowance for loan losses, end of period $ 978 $ 415 $ 361
========= ====== ======
Allowance for loan losses to total loans .90% .71% .57%
Allowance for loan losses to nonperforming loans 341.96% 56.01% 46.22%
Net charge-offs to the allowance for losses 8.49% 11.57% 8.59%
Net charge-offs to average loans .10% .08% .05%
The Company's strategy to expand into business financial services and the
significant growth in commercial, commercial real estate and multi-family
mortgage loans that resulted from that strategy in 2004 required an increase in
the provision and allowance for loan losses related to these loan types. The
provision for loan losses totaled $646,000 in 2004, compared to $102,000 in 2003
and $19,000 in 2002 (which was prior to implementation of the growth strategy in
2003). At December 31, 2004, the allowance for commercial, commercial real
estate and multi-family mortgage loans totaled $862,000, an increase of $762,000
from $100,000 at December 31, 2003 as these loan types grew from 17.8% of the
total loan portfolio at year-end 2003 to 48.3% at year-end 2004. 88.4% of the
allowance was allocated to these loan types at December 31, 2004, as they tend
to be larger balance, higher risk loans than single-family residential
mortgages, where the Company has experienced low historical loss rates.
12
The following table sets forth the allowance for loan losses in each of the
categories listed at the dates indicated and the percentage of such amounts to
the total allowance and loans in each category as a percent of total loans.
Although the allowance may be allocated to specific loans or loan types, the
entire allowance is available for any loan that, in Management's judgment,
should be charged-off.
AT DECEMBER 31,
-------------------------------------------------------------------------------
2004 2003
----------------------------------- ----------------------------------
% OF PERCENT % OF PERCENT
ALLOWANCE OF LOANS ALLOWANCE OF LOANS
IN EACH IN EACH IN EACH IN EACH
CATEGORY CATEGORY CATEGORY CATEGORY
TO TOTAL TO TOTAL TO TOTAL TO TOTAL
AMOUNT ALLOWANCE LOANS AMOUNT ALLOWANCE LOANS
------ --------- -------- ------ --------- --------
(DOLLARS IN THOUSANDS)
Single-family mortgage and construction loans $ 4 .41% 38.97% $ 213 51.33% 60.62%
Consumer loans 112 11.45% 12.77% 102 24.58% 21.56%
Commercial, commercial real estate and
multi-family mortgage loans 862 88.14% 48.26% 100 24.09% 17.82%
------ ------ ------ ------ ------ ------
Total allowance for loan losses $ 978 100.00% 100.00% $ 415 100.00% 100.00%
====== ====== ====== ====== ====== ======
AT DECEMBER 31,
------------------------------------
2002
------------------------------------
% OF PERCENT
ALLOWANCE OF LOANS
IN EACH IN EACH
CATEGORY CATEGORY
TO TOTAL TO TOTAL
AMOUNT ALLOWANCE LOANS
------ --------- --------
(DOLLARS IN THOUSANDS)
Single-family mortgage and construction loans $ 296 82.00% 75.06%
Consumer loans 64 17.73% 22.09%
Commercial, commercial real estate and
multi-family mortgage loans 1 .27% 2.85%
------ ------ ------
Total allowance for loan losses $ 361 100.00% 100.00%
====== ====== ======
13
REAL ESTATE OWNED
At December 31, 2004, real estate owned totaled $132,000 and consisted of 2
single-family residential properties. 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.
INVESTMENT ACTIVITIES
Federally chartered savings institutions have the authority to invest in various
types of liquid assets, including United States Treasury obligations, securities
of various federal agencies, certificates of deposit of insured banks and
savings institutions, bankers' acceptances and federal funds. Subject to various
restrictions, federally chartered savings institutions may also invest their
assets in commercial paper, investment-grade corporate debt securities and
mutual funds whose assets conform to the investments that a federally chartered
savings institution is otherwise authorized to make directly. Additionally,
minimum levels of investments that qualify as liquid assets under OTS
regulations must be maintained. Historically, liquid assets above the minimum
OTS requirements have been maintained at a level considered to be more than
adequate to meet its normal daily activities.
The investment policy established by the Board of Directors is designed to
provide and maintain liquidity, generate a favorable return on investments
without incurring undue interest rate and credit risk, and complement lending
activities. The Company's policies provide the authority to invest in United
States Treasury and federal agency securities meeting the Company's guidelines
and in mortgage-backed securities guaranteed by the U.S. government and agencies
thereof, as well as municipal bonds. To improve liquidity, the Company
transferred all securities previously classified as "held to maturity" to
"available for sale" in 2003. At December 31, 2004, the securities portfolio
totaled $13.5 million.
At December 31, 2004, all mortgage-backed securities in the securities portfolio
were insured or guaranteed by Freddie Mac or Fannie Mae. There were no
collateralized mortgage obligations that failed stress testing at December 31,
2004. Management reports high risk mortgage derivatives testing results the
Board of Directors each month, at which time the Board may direct management to
divest of any such securities failing any portion of the testing, in accordance
with regulations.
14
The following table sets forth certain information regarding the amortized cost
and fair value of securities at the dates indicated.
AT DECEMBER 31,
--------------------------------------------------------------------
2004 2003 2002
-------------------- -------------------- --------------------
AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE COST VALUE
--------- ------- --------- ------- --------- -------
(DOLLARS IN THOUSANDS)
Debt securities:
Debt securities available for sale:
Federal agency $ 5,018 $ 4,983 $12,755 $12,759 $ - $ -
State and municipal - - 1,370 1,375 - -
------- ------- ------- ------- ------- -------
Total debt securities available for sale 5,018 4,983 14,125 14,134 - -
Debt securities held to maturity:
U.S. Government and federal agency - - - - 2,527 2,557
Corporate - - - - 1,996 1,996
------- ------- ------- ------- ------- -------
Total debt securities held to maturity - - - - 4,523 4,553
------- ------- ------- ------- ------- -------
Total debt securities 5,018 4,983 14,125 14,134 4,523 4,553
Mortgage-backed securities:
Available for sale 8,397 8,525 12,697 12,992 1,395 1,439
Held to maturity - - - - 13,299 13,616
------- ------- ------- ------- ------- -------
Total mortgage-backed securities 8,397 8,525 12,697 12,992 14,694 15,055
Net unrealized gains on securities available for sale 93 - 304 - 44 -
------- ------- ------- ------- ------- -------
Total securities $13,508 $13,508 $27,126 $27,126 $19,261 $19,608
======= ======= ======= ======= ======= =======
15
The table below sets forth certain information regarding the carrying value,
weighted average yields and contractual maturities of the debt securities
available for sale as of December 31, 2004. Yields are stated on a fully taxable
equivalent basis.
AT DECEMBER 31, 2004
-------------------------------------------------------------------------
MORE THAN ONE YEAR TO MORE THAN FIVE YEARS TO
ONE YEAR OR LESS FIVE YEARS TEN YEARS
------------------- --------------------- ------------------------
WEIGHTED WEIGHTED WEIGHTED
CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE
VALUE YIELD VALUE YIELD VALUE YIELD
-------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Federal agency $ - $ 4,983 3.37% $ -
Mortgage-backed - 496 5.35% 3,197 4.55%
----- ------- -------
Total securities at fair value $ - $ 5,479 3.55% $ 3,197 4.55%
===== ======= =======
AT DECEMBER 31, 2004
--------------------------------------------------------
MORE THAN TEN YEARS TOTAL
---------------------- ------------------------
WEIGHTED WEIGHTED
CARRYING AVERAGE CARRYING AVERAGE
VALUE YIELD VALUE YIELD
-------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Federal agency $ - $ 4,983 3.37%
Mortgage-backed 4,832 4.95% 8,525 4.82%
-------- --------
Total securities at fair value $ 4,832 4.95% $ 13,508 4.28%
======== ========
16
SOURCES OF FUNDS
GENERAL. Deposits, loan repayments and prepayments, securities maturities and
prepayments, borrowings and cash flows generated from operations are the primary
sources of funds for use in lending, investing and for other general purposes.
DEPOSITS. The Company offers a variety of deposit accounts with a range of
interest rates and terms. The Company's deposits consist of passbook accounts,
savings and club accounts, interest-bearing checking accounts, money market
accounts and certificates of deposit. For the year ended December 31, 2004,
certificates of deposit constituted 46.8% of total average deposits. The term of
the certificates of deposit offered vary from seven days to five years and the
offering rates are established by the Company. Specific terms of an individual
account vary according to the type of account, the minimum balance required, the
time period funds must remain on deposit and the interest rate, among other
factors. The flow of deposits is influenced significantly by general economic
conditions, changes in money market rates, prevailing interest rates and
competition. At December 31, 2004, the Company had $29.3 million of certificate
accounts maturing in less than one year. The Company expects that most of these
accounts will be reinvested and does not believe that there are any material
risks associated with the respective maturities of these certificates. Deposits
are obtained predominantly from the area in which its banking offices are
located. The Company does, however, accept brokered deposits. At December 31,
2004, brokered deposits totaled $6.1 million. The Company relies primarily on a
willingness to pay market-competitive interest rates to attract and retain these
deposits. Accordingly, rates offered by competing financial institutions affect
the Company's ability to attract and retain deposits.
At December 31, 2004, the Company had $11.3 million in certificate accounts in
amounts of $100,000 or more maturing as follows:
WEIGHTED
MATURITY PERIOD AMOUNT AVERAGE RATE
--------------- ------- ------------
(DOLLARS IN THOUSANDS)
Three months or less $ 3,704 2.47%
Over 3 through 6 months 226 1.82%
Over 6 through 12 months 2,834 2.80%
Over 12 months 4,495 3.67%
-------
Total $11,259
=======
17
The following table sets forth the distribution of the Company's average deposit
accounts for the periods indicated and the weighted average interest rates on
each category of deposits presented. Averages for the periods presented are
based on month-end balances.
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------------------------
2004 2003 2002
--------------------------------- ------------------------------ -------------------------------
PERCENT PERCENT PERCENT
OF TOTAL AVERAGE OF TOTAL AVERAGE OF TOTAL AVERAGE
AVERAGE AVERAGE RATE AVERAGE AVERAGE RATE AVERAGE AVERAGE RATE
BALANCE DEPOSITS PAID BALANCE DEPOSITS PAID BALANCE DEPOSITS PAID
------- -------- ------- ------- -------- ------- ------- -------- -------
(DOLLARS IN THOUSANDS)
Interest-bearing checking
accounts $ 11,602 13.82% .58% $ 8,463 11.25% .86% $ 8,748 11.47% 1.66%
Money market accounts 10,688 12.73% 2.34% 7,843 10.43% 1.40% 6,146 8.06% 1.49%
Savings accounts 18,730 22.30% .57% 18,373 24.43% .82% 17,812 23.36% 1.69%
Certificates of deposit 39,285 46.78% 2.57% 38,761 51.52% 3.24% 42,792 56.12% 4.63%
Noninterest-bearing deposits:
Demand deposits 3,674 4.37% - 1,781 2.37% - 754 0.99% -
--------- ------ -------- ------ -------- ------
Total average deposits $ 83,979 100.00% 1.79% $ 75,221 100.00% 2.14% $ 76,252 100.00% 3.31%
========= ====== ======== ====== ======== ======
The following table presents by various rate categories, the amount of
certificate accounts outstanding at the dates indicated and the periods to
maturity of the certificate accounts outstanding at December 31, 2004.
PERIOD TO MATURITY FROM DECEMBER 31, 2004 AT DECEMBER 31,
-------------------------------------------------- -------- --------------- --------
LESS THAN ONE TO TWO TWO TO THREE OVER THREE
ONE YEAR YEARS YEARS YEARS 2004 2003 2002
--------- ---------- ------------ ---------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Certificate accounts:
0 to 3.99% $ 28,669 $ 6,449 $ 2,686 $ 1,582 $ 39,386 $ 29,492 $ 23,359
4.00 to 4.99% 448 2,930 303 2,592 6,273 6,152 12,167
5.00 to 5.99% 212 443 - - 655 977 3,421
6.00 to 6.99% - - - - - 61 1,547
7.00 to 7.99% - - - - - - 160
8.00% and above - - 10 - 10 11 67
-------- ------- -------- ------- -------- -------- --------
Total certificate accounts $ 29,329 $ 9,822 $ 2,999 $ 4,174 $ 46,324 $ 36,693 $ 40,721
======== ======= ======== ======= ======== ======== ========
18
BORROWINGS. The Company utilizes FHLB advances as an alternative to retail
deposits to fund its operations as part of its operating strategy. These FHLB
advances are collateralized primarily by certain mortgage loans, home equity
lines of credit, commercial real estate loans and mortgage-backed securities and
secondarily by the Company's investment in capital stock of the FHLB. FHLB
advances are made pursuant to several credit programs, each of which has its own
interest rate and range of maturities. The maximum amount that the FHLB will
advance to member institutions fluctuates from time to time in accordance with
the policies of the FHLB.
The Company had a revolving line of credit with an unaffiliated bank, acquired
in the Reserve acquisition, which provides financing primarily for single-family
mortgage loan originations and is collateralized by loan sales proceeds
receivable.
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 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.
The following table sets forth certain information regarding borrowed funds at
or for the periods ended on the dates indicated:
AT OR FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------
2004 2003 2002
---------- -------- ----------
(DOLLARS IN THOUSANDS)
FHLB advances and other borrowings:
Average balance outstanding $ 31,265 $ 12,192 $ 19,902
Maximum amount outstanding at any month-end during the period 48,574 16,542 19,370
Balance outstanding at end of period 48,574 12,655 16,330
Weighted average interest rate during the period 2.28% 5.59% 4.83%
Weighted average interest rate at end of period 2.76% 2.28% 5.53%
SUBSIDIARY ACTIVITIES
As of December 31, 2004, the Company maintained the Bank and Trust as wholly
owned subsidiaries. Reserve Mortgage Services, Inc., a wholly owned subsidiary
of the Bank was acquired in October 2004.
PERSONNEL
As of December 31, 2004, the Company had 54 full-time and 2 part-time employees.
19
REGULATION AND SUPERVISION
GENERAL. As a savings and loan holding company, the Company is required by
federal law to report to, and otherwise comply with the rules and regulations
of, the Office of Thrift Supervision ("OTS"). The Bank is subject to extensive
regulation, examination and supervision by the OTS, as its primary federal
regulator, and the Federal Deposit Insurance Corporation ("FDIC"), as the
deposit insurer. The Bank is a member of the Federal Home Loan Bank System and,
with respect to deposit insurance, of the Savings Bank Insurance Fund ("SAIF")
managed by the FDIC. The Bank must file reports with the OTS and the FDIC
concerning its activities and financial condition in addition to obtaining
regulatory approvals prior to entering into certain transactions such as mergers
with, or acquisitions of, other savings institutions. The OTS and/or the FDIC
conduct periodic examinations to test the Bank's safety and soundness and
compliance with various regulatory requirements. This regulation and supervision
establishes a comprehensive framework of activities in which an institution can
engage and is intended primarily for the protection of the insurance fund and
depositors. The regulatory structure also gives the regulatory authorities
extensive discretion in connection with their supervisory and enforcement
activities and examination policies, including policies with respect to the
classification of assets and the establishment of adequate loan loss reserves
for regulatory purposes. Any change in such regulatory requirements and
policies, whether by the OTS, the FDIC or Congress, could have a material
adverse impact on the Company and its operations. Certain regulatory
requirements applicable to the Company are referred to below or elsewhere
herein. The description of statutory provisions and regulations applicable to
savings institutions and their holding companies set forth in this Form 10-KSB
does not purport to be a complete description of such statutes and regulations
and their effects on the Bank and the Company.
SARBANES-OXLEY ACT OF 2002. The Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley Act)
was enacted on July 30, 2002. The Sarbanes-Oxley Act represents a comprehensive
revision of laws affecting corporate governance and financial disclosure. The
Sarbanes-Oxley Act is applicable to all companies with equity securities
registered or that file reports under the Securities Exchange Act of 1934,
including the Company. The Sarbanes-Oxley Act establishes, among other things:
(i) new requirements for audit committees; (ii) additional responsibilities
regarding financial statements for the Chief Executive Officer and Chief
Financial Officer; (iii) new standards for auditors and regulations governing
audits; (iv) increased disclosure and reporting obligations for the reporting
company and its directors and executive officers: and (v) new and increased
civil and criminal penalties for violations of the securities laws.
HOLDING COMPANY REGULATION. The Company is a nondiversified unitary savings and
loan holding company within the meaning of federal law. Under prior law, a
unitary savings and loan holding company, such as the Company, was not generally
restricted as to the types of business activities in which it may engage,
provided that the Bank continued to be a qualified thrift lender. See "Federal
Savings Institution Regulation - QTL Test." The Gramm-Leach-Bliley Act of 1999
provides that no company may acquire control of a savings Bank after May 4, 1999
unless it engages only in the financial activities permitted for financial
holding companies under the law or for multiple savings and loan holding
companies as described below. Further, the Gramm-Leach-Bliley Act specifies that
existing savings and loan holding companies may only engage in such activities.
The Gramm-Leach-Bliley Act, however, grandfathered the unrestricted authority
for activities with respect to unitary savings and loan holding companies
existing prior to May 4, 1999, so long as the holding company's savings Bank
subsidiary continues to comply with the QTL Test. The Company does qualify for
the grandfathering. Upon any non-supervisory acquisition by the Company of
another savings institution or savings bank that meets the qualified thrift
lender test and is deemed to be a savings institution by the OTS, the Company
would become a multiple savings and loan holding company (if the acquired
institution is held as a separate subsidiary) and would generally be limited to
activities permissible for bank holding companies under Section 4(c)(8) of the
Bank Holding Company Act, subject to the prior approval of the OTS, and certain
activities authorized by OTS regulation. However, the OTS has issued an
interpretation concluding that
20
multiple savings and loan holding companies may also engage in activities
permitted for financial holding companies.
A savings and loan holding company is prohibited from, directly or indirectly,
acquiring more than 5% of the voting stock of another savings institution or
savings and loan holding company, without prior written approval of the OTS and
from acquiring or retaining control of a depository institution that is not
insured by the FDIC. In evaluating applications by holding companies to acquire
savings institutions, the OTS considers the financial and managerial resources
and future prospects of the company and institution involved, the effect of the
acquisition on the risk to the deposit insurance funds, the convenience and
needs of the community and competitive factors.
The OTS may not approve any acquisition that would result in a multiple savings
and loan holding company controlling savings institutions in more than one
state, subject to two exceptions: (i) the approval of interstate supervisory
acquisitions by savings and loan holding companies and (ii) the acquisition of a
savings institution in another state if the laws of the state of the target
savings institution specifically permit such acquisitions. The states vary in
the extent to which they permit interstate savings and loan holding company
acquisitions.
Although savings and loan holding companies are not currently subject to
specific capital requirements or specific restrictions on the payment of
dividends or other capital distributions, federal regulations do prescribe such
restrictions on subsidiary savings institutions as described below. The Bank
must notify the OTS 30 days before declaring any dividend to the Company. In
addition, the financial impact of a holding company on its subsidiary
institution is a matter that is evaluated by the OTS and the agency has
authority to order cessation of activities or divestiture of subsidiaries deemed
to pose a threat to the safety and soundness of the institution.
ACQUISITION OF THE HOLDING COMPANY. Under the Federal Change in Bank Control Act
("CIBCA"), a notice must be submitted to the OTS if any person (including a
company), or group acting in concert, seeks to acquire 10% or more of the
Company's outstanding voting stock, unless the OTS has found that the
acquisition will not result in a change of control of the Company. Under the
CIBCA, the OTS has 60 days from the filing of a complete notice to act, taking
into consideration certain factors, including the financial and managerial
resources of the acquirer and the anti-trust effects of the acquisition. Any
company that acquires control would then be subject to regulation as a savings
and loan holding company.
FEDERAL SAVINGS INSTITUTION REGULATION
Business Activities. The activities of federal savings banks are governed by
federal law and regulations. These laws and regulations delineate the nature and
extent of the activities in which federal banks may engage. In particular,
certain lending authority for federal banks, e.g., commercial, non-residential
real property loans and consumer loans, is limited to a specified percentage of
the institution's capital or assets.
Capital Requirements. The OTS capital regulations require savings institutions
to meet three minimum capital standards: a 1.5% tangible capital to total assets
ratio, a 4% leverage ratio (3% for institutions receiving the highest rating on
the CAMELS examination rating system) and an 8% risk-based capital ratio. In
addition, the prompt corrective action standards discussed below also establish,
in effect, a minimum 2% tangible capital standard, a 4% leverage ratio (3% for
institutions receiving the highest CAMELS rating), and, together with the
risk-based capital standard itself, a 4% Tier 1 risk-based capital standard. The
OTS regulations also require that, in meeting the tangible, leverage and
risk-based capital standards, institutions must generally deduct investments in
and loans to subsidiaries engaged in activities as principal that are not
permissible for a national bank.
21
The risk-based capital standard for savings institutions requires the
maintenance of Tier 1 (core) and total capital (which is defined as core capital
and supplementary capital) to risk-weighted assets of at least 4% and 8%,
respectively. In determining the amount of risk-weighted assets, all assets,
including certain off-balance-sheet assets, are multiplied by a risk-weight
factor of 0% to 100%, assigned by the OTS capital regulation based on the risks
believed inherent in the type of asset. Core (Tier 1) capital is defined as
common stockholders' equity (including retained earnings), certain noncumulative
perpetual preferred stock and related surplus, and minority interests in equity
accounts of consolidated subsidiaries less intangibles other than certain
mortgage servicing rights and credit card relationships. The components of
supplementary capital currently include cumulative preferred stock, long-term
perpetual preferred stock, mandatory convertible securities, subordinated debt
and intermediate preferred stock, the allowance for loan and lease losses
limited to a maximum of 1.25% of risk-weighted assets and up to 45% of
unrealized gains on available-for-sale equity securities with readily
determinable fair market values. Overall, the amount of supplementary capital
included as part of total capital cannot exceed 100% of core capital.
The OTS also has authority to establish individual minimum capital requirements
in appropriate cases upon a determination that an institution's capital level is
or may become inadequate in light of the particular circumstances. At December
31, 2004, the Bank met each of its capital requirements.
The following table presents the Bank's capital position at December 31, 2004:
EXCESS CAPITAL
------------ -------------------
ACTUAL REQUIRED (DEFICIENCY) ACTUAL REQUIRED
CAPITAL CAPITAL AMOUNT PERCENT PERCENT
-------- -------- ------------ ------- --------
(DOLLARS IN THOUSANDS)
Tangible $ 13,576 $ 2,522 $ 11,054 8.1% 1.5%
Core (Leverage) 13,576 6,726 6,850 8.1% 4.0%
Risk-based 14,555 9,580 4,975 12.2% 8.0%
Prompt Corrective Regulatory Action. The OTS is required to take certain
supervisory actions against undercapitalized institutions, the severity of which
depends upon the institution's degree of undercapitalization. Generally, a
savings institution that has a ratio of total capital to risk weighted assets of
less than 8%, a ratio of Tier 1 (core) capital to risk-weighted assets of less
than 4% or a ratio of core capital to total assets of less than 4% (3% or less
for institutions with the highest examination rating) is considered to be
"undercapitalized." A savings institution that has a total risk-based capital
ratio less than 6%, a Tier 1 capital ratio of less than 3% or a leverage ratio
that is less than 3% is considered to be "significantly undercapitalized" and a
savings institution that has a tangible capital to assets ratio equal to or less
than 2% is deemed to be "critically undercapitalized." Subject to a narrow
exception, the OTS is required to appoint a receiver or conservator for an
institution that is "critically undercapitalized." The regulation also provides
that a capital restoration plan must be filed with the OTS within 45 days of the
date a savings institution receives notice that it is "undercapitalized,"
"significantly undercapitalized" or "critically undercapitalized." Compliance
with the plan must be guaranteed by any parent holding company. In addition,
numerous mandatory supervisory actions become immediately applicable to an
undercapitalized institution, including, but not limited to, increased
monitoring by regulators and restrictions on growth, capital distributions and
expansion. The OTS could also take any one of a number of discretionary
supervisory actions, including the issuance of a capital directive and the
replacement of senior executive officers and directors.
22
Insurance of Deposit Accounts. The Bank is a member of the SAIF. The FDIC
maintains a risk-based assessment system by which institutions are assigned to
one of three categories based on their capitalization and one of three
subcategories based on examination ratings and other supervisory information. An
institution's assessment rate depends upon the categories to which it is
assigned. Assessment rates for SAIF member institutions are determined
semi-annually by the FDIC and currently range from zero basis points for the
healthiest institutions to 27 basis points of assessable deposits for the
riskiest.
In addition to the assessment for deposit insurance, institutions are required
to make payments on bonds issued in the late 1980s by the Financing Corporation
("FICO") to recapitalize the predecessor to the SAIF. During 2003, FICO payments
for SAIF members approximated 1.54 basis points of assessable deposits. The
Bank's total assessment paid for 2004 (including the FICO assessment) was
$12,167. The FDIC has authority to increase insurance assessments. A significant
increase in SAIF insurance premiums would likely have an adverse effect on the
operating expenses and results of operations of the Company. Management cannot
predict what insurance assessment rates will be in the future.
Insurance of deposits may be terminated by the FDIC upon a finding that the
institution has engaged in unsafe or unsound practices, is in an unsafe or
unsound condition to continue operations or has violated any applicable law,
regulation, rule, order or condition imposed by the FDIC or the OTS. The
management of the Company does not know of any practice, condition or violation
that might lead to termination of deposit insurance.
Loans to One Borrower. Federal law provides that savings institutions are
generally subject to the limits on loans to one borrower applicable to national
banks. A savings institution may not make a loan or extend credit to a single or
related group of borrowers in excess of 15% of its unimpaired capital and
surplus. An additional amount may be lent, equal to 10% of unimpaired capital
and surplus, if secured by specified readily-marketable collateral. At December
31, 2004, the Bank's 15% limit on loans to one borrower was $2.1 million. At
December 31, 2004, the Bank did not have a lending relationship in excess of
this limit.
QTL Test. The HOLA requires savings institutions to meet a qualified thrift
lender test. Under the test, a savings bank is required to either qualify as a
"domestic building and loan bank" under the Internal Revenue Code or maintain at
least 65% of its "portfolio assets" (total assets less: (i) specified liquid
assets up to 20% of total assets; (ii) intangibles, including goodwill; and
(iii) the value of property used to conduct business) in certain "qualified
thrift investments" (primarily residential mortgages and related investments,
including certain mortgage-backed securities) in at least 9 months out of each
12 month period.
A savings institution that fails the qualified thrift lender test is subject to
certain operating restrictions and may be required to convert to a bank charter.
As of December 31, 2004, the Bank maintained 95.06% of its portfolio assets in
qualified thrift investments and, therefore, met the qualified thrift lender
test. Recent legislation has expanded the extent to which education loans,
credit card loans and small business loans may be considered "qualified thrift
investments."
Limitation on Capital Distributions. OTS regulations impose limitations upon all
capital distributions by a savings institution, including cash dividends,
payments to repurchase its shares and payments to shareholders of another
institution in a cash-out merger. Under the regulation, an application to and
the prior approval of the OTS is required prior to any capital distribution if
the institution does not meet the criteria for "expedited treatment" of
applications under OTS regulations (i.e., generally, examination ratings in the
two top categories), the total capital distributions for the calendar year
exceed net income for that year plus the amount of retained net income for the
preceding two years, the institution would be undercapitalized following the
distribution or the distribution would otherwise be contrary to a statute,
regulation or agreement with the OTS. If an application is not required, the
institution must still provide
23
prior notice to the OTS of the capital distribution if, like the Bank, it is a
subsidiary of a holding company. In the event the Bank's capital fell below its
regulatory requirements or the OTS notified it that it was in need of increased
supervision, the Bank's ability to make capital distributions could be
restricted. In addition, the OTS could prohibit a proposed capital distribution
by any institution, which would otherwise be permitted by the regulation, if the
OTS determines that such distribution would constitute an unsafe or unsound
practice.
Assessments. Savings institutions are required to pay assessments to the OTS to
fund the agency's operations. The general assessments, paid on a semi-annual
basis, are computed upon the savings institution's total assets, including
consolidated subsidiaries, as reported in the Bank's latest quarterly thrift
financial report. The assessments paid by the Bank for 2004 totaled $36,113.
Transactions with Related Parties. The Bank's authority to engage in
transactions with "affiliates" (e.g., any company that controls or is under
common control with an institution, including the Company and its non-savings
institution subsidiaries) is limited by federal law. The aggregate amount of
covered transactions with any individual affiliate is limited to 10% of the
capital and surplus of the savings institution. The aggregate amount of covered
transactions with all affiliates is limited to 20% of the savings institution's
capital and surplus. Certain transactions with affiliates are required to be
secured by collateral in an amount and of a type described in federal law. The
purchase of low quality assets from affiliates is generally prohibited. The
transactions with affiliates must be on terms and under circumstances, that are
at least as favorable to the institution as those prevailing at the time for
comparable transactions with non-affiliated companies. In addition, savings
institutions are prohibited from lending to any affiliate that is engaged in
activities that are not permissible for bank holding companies and no savings
institution may purchase the securities of any affiliate other than a
subsidiary.
The recently enacted Sarbanes Oxley Act generally prohibits loans by the Company
to its executive officers and directors. However, that act contains a specific
exception for loans by the Bank to its executive officer's and directors in
compliance with federal banking laws. Under such laws the Bank's authority to
extend credit to executive officers, directors and 10% shareholders
("insiders"), as well as entities such persons control, is limited. The law
limits both the individual and aggregate amount of loans the Bank may make to
insiders based, in part, on the Bank's capital position and requires certain
board approval procedures to be followed. Such loans are required to be made on
terms substantially the same as those offered to unaffiliated individuals and
not involve more than the normal risk of repayment. There is an exception for
loans made pursuant to a benefit or compensation program that is widely
available to all employees of the institution and does not give preference to
insiders over other employees.
Enforcement. The OTS has primary enforcement responsibility over savings
institutions and has the authority to bring actions against the institution and
all institution-affiliated parties, including stockholders, and any attorneys,
appraisers and accountants who knowingly or recklessly participate in wrongful
action likely to have an adverse effect on an insured institution. Formal
enforcement action may range from the issuance of a capital directive or cease
and desist order to removal of officers and/or directors to institution of
receivership, conservatorship or termination of deposit insurance. Civil
penalties cover a wide range of violations and can amount to $25,000 per day, or
even $1 million per day in especially egregious cases. The FDIC has the
authority to recommend to the Director of the OTS that enforcement action to be
taken with respect to a particular savings institution. If action is not taken
by the Director, the FDIC has authority to take such action under certain
circumstances. Federal law also establishes criminal penalties for certain
violations.
Standards for Safety and Soundness. The federal banking agencies have adopted
interagency guidelines prescribing standards for safety and soundness. The
guidelines set forth the safety and soundness standards that the federal banking
agencies use to identify and address problems at insured depository institutions
before capital becomes impaired. If the OTS determines that a savings
institution fails to
24
meet any standard prescribed by the guidelines, the OTS may require the
institution to submit an acceptable plan to achieve compliance with the
standard.
FEDERAL HOME LOAN BANK SYSTEM
The Bank is a member of the Federal Home Loan Bank System, which consists of 12
regional Federal Home Loan Banks. The Federal Home Loan Bank provides a central
credit facility primarily for member institutions. The Bank, as a member of the
Federal Home Loan Bank, is required to acquire and hold shares of capital stock
in that Federal Home Loan Bank in an amount at least equal to 1.0% of the
aggregate principal amount of its unpaid residential mortgage loans and similar
obligations at the beginning of each year, or 1/20 of its advances (borrowings)
from the Federal Home Loan Bank, whichever is greater. The Bank was in
compliance with this requirement with an investment in Federal Home Loan Bank
stock at December 31, 2004 of $3.8 million.
The Federal Home Loan Banks are required to provide funds for the resolution of
insolvent thrifts in the late 1980s and to contribute funds for affordable
housing programs. These requirements could reduce the amount of dividends that
the Federal Home Loan Banks pay to their members and could also result in the
Federal Home Loan Banks imposing a higher rate of interest on advances to their
members. If dividends were reduced, or interest on future Federal Home Loan Bank
advances increased, The Company's net interest income would likely also be
reduced. Recent legislation has changed the structure of the Federal Home Loan
Banks funding obligations for insolvent thrifts, revised the capital structure
of the Federal Home Loan Banks and implemented entirely voluntary membership for
Federal Home Loan Banks. Management cannot predict the effect that these changes
may have with respect to its Federal Home Loan Bank membership.
FEDERAL RESERVE SYSTEM
The Federal Reserve Board regulations require savings institutions to maintain
non-interest earning reserves against their transaction accounts (primarily
checking accounts). The regulations generally provide that reserves be
maintained against aggregate transaction accounts as follows: a 3% reserve ratio
is assessed on net transaction accounts up to and including $47.6 million; a 10%
reserve ratio is applied above $47.6. The first $7.0 million of otherwise
reservable balances (subject to adjustments by the Federal Reserve Board) are
exempted from the reserve requirements. These amounts are adjusted annually. The
Bank complies with the foregoing requirements.
FEDERAL AND STATE TAXATION
FEDERAL TAXATION
General. The Company reports income on a calendar year, consolidated basis using
the accrual method of accounting, and is subject to federal income taxation in
the same manner as other corporations, with some exceptions discussed below. The
following discussion of tax matters is intended only as a summary and does not
purport to be a comprehensive description of the tax rules applicable to the
Company. For its 2004 taxable year, the Company is subject to a maximum federal
income tax rate of 34%.
Distributions. Under the 1996 Act, if the Bank makes "non-dividend
distributions" to the Company, such distributions will be considered to have
been made from the Bank's unrecaptured tax bad debt reserves (including the
balance of its reserves as of December 31, 1987) to the extent thereof, and then
from the Bank's supplemental reserve for losses on loans, to the extent thereof,
and an amount based on the amount distributed (but not in excess of the amount
of such reserves) will be included in the Bank's taxable income. Non-dividend
distributions include distributions in excess of the Bank's current and
25
accumulated earnings and profits, as calculated for federal income tax purposes,
distributions in redemption of stock, and distributions in partial or complete
liquidation.
Dividends paid out of the Bank's current or accumulated earnings and profits
will not be so included in the Bank's taxable income. At year-end 2004, the
Bank had approximately $922,000 in accumulated earnings and profits.
The amount of additional taxable income triggered by a non-dividend is an amount
that, when reduced by the tax attributable to the income, is equal to the amount
of the distribution. Thus, if the Bank makes a non-dividend distribution to the
Company, approximately one and one-half times the amount of such distribution
(but not in excess of the amount of such reserves) would be includable in income
for federal income tax purposes, assuming a 34% federal corporate income tax
rate. The Bank does not intend to pay dividends that would result in a recapture
of any portion of its bad debt reserves.
OHIO TAXATION
The Company is subject to the Ohio corporation franchise tax, which, as applied
to the Company, is a tax measured by both net earnings and net worth. In
general, the tax liability is the greater of 5.1% on the first $50,000 of
computed Ohio taxable income and 8.5% of computed Ohio taxable income in excess
of $50,000 or 0.4% times of taxable net worth. Under these alternative measures
of computing tax liability, complex formulas determine the jurisdictions to
which total net income and total net worth are apportioned or allocated. The
minimum tax is $1,000 per year and maximum tax liability as measured by net
worth is limited to $150,000 per year.
A special litter tax also applies to all corporations, including the Company,
subject to the Ohio Corporation franchise tax. This litter tax does not apply to
"financial institutions." If the franchise tax is paid on the net income basis,
the litter tax is equal to 0.11% of the first $50,000 of computed Ohio taxable
income and 0.22% of computed Ohio taxable income in excess of $50,000. If the
franchise tax is paid on the net worth basis, the litter tax is equal to 0.014%
times taxable net worth.
Certain holding companies, such as the Company, will qualify for complete
exemption from the net worth tax if certain conditions are met. The Company will
most likely meet these conditions, and thus, calculate its Ohio franchise tax on
the net income basis.
The Bank is a "financial institution" for State of Ohio tax purposes. As such,
it is subject to the Ohio corporate franchise tax on "financial institutions,"
which is imposed annually at a rate of 1.3% of the Bank's apportioned book net
worth, determined in accordance with generally accepted accounting principles,
less any statutory deduction. As a "financial institution," the Bank is not
subject to any tax based upon net income or net profits imposed by the State of
Ohio.
DELAWARE TAXATION
As a Delaware holding company not earning income in Delaware, the Company is
exempted from Delaware corporate income tax but is required to file an annual
report with and pay an annual franchise tax to the State of Delaware.
AVAILABLE INFORMATION
The Company's website address is www.CFBankonline.com. The Company makes
available free of charge through its website its annual report on Form 10-KSB,
its quarterly reports on Form 10-QSB, its current reports on Form 8-K and any
amendments to these reports as soon as reasonably practicable after it
electronically files such reports with the Securities and Exchange Commission.
These reports can be found on the Company's website under the caption "CF News
and Links - Investor Relations - SEC
26
Filings." Investors also can obtain copies of the Company's filings from the
Securities and Exchange Commission's website at www.sec.gov.
27
ITEM 2 DESCRIPTION OF PROPERTY
The Company conducts its business through five offices located in Summit,
Columbiana, Jefferson and Franklin Counties, Ohio.
ORIGINAL NET BOOK VALUE OF
YEAR DATE OF PROPERTY OR LEASEHOLD
LEASED OR LEASED OR LEASE IMPROVEMENTS AT
LOCATION OWNED ACQUIRED EXPIRATION DECEMBER 31, 2004
-------- --------- --------- ---------- ----------------------
(DOLLARS IN THOUSANDS)
OFFICES:
2923 Smith Rd Leased 2004 2014 $ 259
Fairlawn, Ohio 44333
601 Main Street Owned 1989 - 751
Wellsville, Ohio 43968
49028 Foulks Drive Owned 1979 - 327
East Liverpool, Ohio 43920
4249 Easton Way, Suite 125 Leased 2003 2009 15
Columbus, Ohio 43219
RESERVE MORTGAGE SERVICES
1730 Akron-Peninsula Rd Leased 2004 2009 44
Akron, Ohio 44313
ITEM 3 LEGAL PROCEEDINGS
The Company may, from time to time, be involved in various legal proceedings in
the normal course of business. Periodically, there have been various claims and
lawsuits involving the Company, such as claims to enforce liens, condemnation
proceedings on properties in which the Company holds security interests, claims
involving the making and servicing of real property loans and other issues
incident to the Company's business. The Company is not a party to any pending
legal proceedings that the Company believes would have a material adverse effect
on its financial condition or operations, if decided adversely to the Company.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held a special meeting of stockholders on March 14, 2005 to approve
an amendment to the Company's Certificate of Incorporation to effect a
one-for-325 reverse stock split of the Company's common stock, thereby
permitting the Company to apply to the Securities and Exchange Commission to
terminate the registration of its common stock pursuant to Section 12(g)(4) of
the Securities Exchange Act of 1934. Results of shareholder voting were as
follows:
For: 1,158,219
Against: 123,013
Abstain: 2,550
28
Although the measure was approved by stockholders, the Board of Directors
abandoned the transaction on March 17, 2004 in the interest of the Company and
its shareholders, as the capital cost of the transaction was in excess of the $2
million ceiling which the board had set as the cost for going private. A press
release announcing the abandonment of the transaction was issued on March 18,
2004, and the Company filed an amended Schedule 13E-3 with the Commission on
March 22, 2004 to report the abandonment.
PART II
ITEM 5 MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL
BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES
The market information required by Item 201(a), the stockholders information
required by Item 201(b) and the dividend information required by Item 201(c) of
Regulation S-B is incorporated by reference to the Company's 2004 Annual Report
to shareholders distributed to shareholders and furnished to the Commission
under Rule 14a-3(b) of the Exchange Act; the information appears under the
caption "Market Prices and Dividends Declared" on page 16 and in "Note 17 -
Capital Requirements and Restrictions on Retained Earnings" at page 37 therein,
respectively.
The equity compensation plan information required by Item 201(d) of Regulation
S-B is set forth herein under Part III, Item 11, Security Ownership of Certain
Beneficial Owners and Management and Related Stockholder Matters.
The information required by Item 701 of Regulation S-B with respect to the
Company's sales of unregistered securities during fiscal 2004 has been reported
previously in filings made with the Commission. The information required by Item
703 of Regulation S-B is as follows:
ISSUER PURCHASES OF EQUITY SECURITIES
Maximum
Number (or
Total Number Approximate
of Shares Dollar Value)
(or Units) of Shares (or
Purchased as Units) that
Part of May Yet Be
Average Publicly Purchased
Total Number of Price Paid Announced Under the
Shares (or Units) per Share Plans or Plans or
Period Purchased (or Unit) Programs Programs
------ ----------------- ---------- ------------ -------------
October 1 - 31, 2004 - - - -
November 1 - 30, 2004 - - - -
December 1 - 31, 2004 15,000 (1) $ 12.57 - -
----------
(1) shares purchased in an open market transaction.
29
ITEM 6 MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Information required by Item 303 of Regulation S-B is incorporated by reference
to the Company's 2004 Annual Report to shareholders distributed to shareholders
and furnished to the Commission under Rule 14a-3(b) of the Exchange Act; the
information appears under the caption "Management's Discussion and Analysis of
Financial Condition and Results of Operations" at page 4 therein.
ITEM 7 FINANCIAL STATEMENTS
The consolidated financial statements required by Item 310(a) of Regulation S-B
are incorporated by reference to the Company's 2004 Annual Report to
shareholders distributed to shareholders and furnished to the Commission under
Rules 14a-3(b) and (c) of the Exchange Act; the financial statements appear
under the caption "Financial Statements" at page 17 therein and include the
following:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Comprehensive Income (Loss)
Consolidated Statements of Changes in Shareholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
ITEM 8 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 8A CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures. The Company maintains
disclosure controls and procedures that are designed to ensure that information
required to be disclosed in the Company's Exchange Act reports is recorded,
processed, summarized and reported within the time periods specified in the
SEC's rules and forms, and that such information is accumulated and communicated
to the Company's management, including its Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions regarding required
disclosure based closely on the definition of "disclosure controls and
procedures" in Rule 13a-14(c). The Company's management, with the participation
of the Company's Chief Executive Officer and Chief Financial Officer, has
evaluated the effectiveness of its disclosure controls and procedures (as such
term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange
Act of 1934 (Exchange Act)) as of the end of the period covered by this report.
Based on such evaluation, the Company's Chief Executive Officer and Chief
Financial Officer have concluded that, as of the end of such period, the
Company's disclosure controls and procedures are effective in recording,
processing, summarizing and reporting, on a timely basis, information required
to be disclosed by the Company in the reports that it files or submits under the
Exchange Act.
Changes in internal controls. The Company made no significant changes in its
internal controls or in other factors that could significantly affect these
controls subsequent to the date of the completion of the evaluation of those
controls by the Chief Executive Officer and Chief Financial Officer.
ITEM 8B OTHER INFORMATION
None.
30
PART III
ITEM 9 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors. Information required by Item 401 of Regulation S-B with respect to
the Company's directors and committees of the Board of Directors is incorporated
by reference to the Company's definitive Proxy Statement for its 2005 Annual
Meeting of Stockholders filed with the Commission on March 30, 2005, under the
caption "PROPOSAL 1. ELECTION OF DIRECTORS."
Executive Officers of the Registrant
AGE AT
DECEMBER 31,
NAME 2004 POSITION HELD WITH THE COMPANY AND/OR SUBSIDIARIES
-------------------- ------------ --------------------------------------------------
David C. Vernon (1) 64 Chairman, President and Chief Executive Officer,
Company; Chairman and Chief Executive Officer, Bank
Mark S. Allio (2) 50 Vice Chairman, President and Chief Executive
Officer, Company; Vice Chairman and Chief
Executive Officer, Bank
Raymond E. Heh 62 President and Chief Operating Officer, Bank
R. Parker MacDonell 50 Regional President - Columbus, Bank
Richard J. O'Donnell 55 President and Chief Executive Officer, Reserve
Mortgage Services, Inc.
Eloise L. Mackus 54 Senior Vice President, General Counsel and
Secretary, Company and Bank
Therese A. Liutkus 45 Treasurer and Chief Financial Officer, Company and
Bank
----------
(1) Mr. Vernon held these positions thru January 31, 2005, after which time he
retained the title of Chairman of the Board of Directors.
(2) Mr. Allio was appointed to these positions effective February 1, 2005
David C. Vernon is Chairman of the Board of the Company and Bank. He served as
President and Chief Executive Officer of the Company and Chief Executive Officer
of the Bank until January 31, 2005. Prior to assuming those positions with the
Company and Bank in 2003, he was Chairman and CEO of Founders Capital
Corporation. Prior to forming Founders Capital Corporation, Mr. Vernon was
Chairman, President and CEO of Summit Bancorp and Summit Bank in Akron, Ohio.
Mark S. Allio was appointed Vice Chairman, President and Chief Executive Officer
of the Company and Vice Chairman and Chief Executive Officer of the Bank on
February 1, 2005. Mr. Allio was President and Chief Executive Officer of Rock
Bank (in formation) in Livonia, Michigan from April 2003 to December 2004,
President of Third Federal Savings, MHC in Cleveland, Ohio from January 2000 to
31
December 2002, Chief Financial Officer of Third Federal from 1988 through 1999,
and has worked in banking for more than 17 years.
Raymond E. Heh, President and Chief Operating Officer, joined the Bank in June
2003. Formerly, Mr. Heh held numerous positions at Bank One Akron NA including
Chairman, President and CEO. He was with Bank One Akron NA for 18 years and has
40 years of experience in the commercial banking industry. Mr. Heh is a graduate
of The Pennsylvania State University.
R. Parker MacDonell is Regional President - Columbus and joined the Bank in May
2003. Mr. MacDonell is a third generation Ohio banker with 18 years of
commercial banking experience. He is a former Senior Vice President of Bank One
Columbus NA, a position he held for three years during his 15 year tenure with
Bank One. He is a graduate of Dartmouth College and received his master's degree
from Yale University.
Richard J. O'Donnell has been President and Chief Executive Officer, Reserve
Mortgage Services, Inc. (formerly RJO Financial Services, Inc.), 1730
Akron-Peninsula Road, Akron, Ohio 44313, since 1995. Reserve Mortgage Services,
Inc. was acquired by the Company in October 2004.
Eloise L. Mackus is Senior Vice President, General Counsel and Secretary of the
Company and Bank. Prior to joining the Company and Bank in July 2003, Ms. Mackus
practiced in law firms in Connecticut and Ohio and was the Vice President and
General Manager of International Markets for The J. M. Smucker Company. Ms.
Mackus completed a BA at Calvin College and a JD at The University of Akron
School of Law.
Therese A. Liutkus joined the Company and Bank as Chief Financial Officer in
November 2003. Prior to that time, Ms. Liutkus was Chief Financial Officer of
First Place Financial Corp. and First Place Bank for five years and she has 18
years of banking experience. Ms. Liutkus is a certified public accountant and
has a Bachelor's degree in accounting from Cleveland State University.
Compliance with Section 16(a) of the Exchange Act. Information required by Item
405 of Regulation S-B is incorporated by reference to the Company's definitive
Proxy Statement for its 2005 Annual Meeting of Stockholders filed with the
Commission on March 30, 2005, under the caption "ADDITIONAL INFORMATION ABOUT
DIRECTORS AND EXECUTIVE OFFICERS - Compliance with Section 16(a) of the Exchange
Act." Copies of Section 16 reports, Forms 3, 4 and 5, are available on the
Company's website, www.CFBankonline.com under the caption "CF News and Links -
Investor Relations - Section 16 Filings."
Code of Ethics. The Company has adopted a code of ethics, its Financial Code of
Ethics, which meets the requirements of Item 406 of Regulation S-B and applies
to the Company's principal executive officer, principal financial officer and
principal accounting officer. Since the Company's inception in 1998, it has had
a Code of Business Conduct and Ethics (Code of Conduct). The Company requires
all directors, officers and other employees to adhere to the Code of Conduct in
addressing the legal and ethical issues encountered in conducting their work.
The Code of Conduct requires that the Company's employees avoid conflicts of
interest, comply with all laws and other legal requirements, conduct business in
an honest and ethical manner and otherwise act with integrity and in the
Company's best interest. The Company's Financial Code of Ethics and Code of
Conduct are available on the Company's website, www.CFBankonline.com under the
caption "CF News and Links - Investor Relations - Corporate Governance."
32
ITEM 10 EXECUTIVE COMPENSATION
Information required by Item 402 of Regulation S-B is incorporated by reference
to the Company's definitive Proxy Statement for its 2005 Annual Meeting of
Stockholders filed with the Commission on March 30, 2005, under the caption
"EXECUTIVE COMPENSATION."
ITEM 11 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Security Ownership of Certain Beneficial Owners and Management. Information
required by Item 403 of Regulation S-B is incorporated by reference to the
Company's definitive Proxy Statement for its 2005 Annual Meeting of Stockholders
filed with the Commission on March 30, 2005, under the caption "STOCK
OWNERSHIP."
Related Stockholder Matters. Information required by Item 201(d) of Regulation
S-B is incorporated by reference to the Company's definitive Proxy Statement for
its 2005 Annual Meeting of Stockholders filed with the Commission on March 30,
2005, under the caption "PROPOSAL 2: SECOND AMENDED AND RESTATED CENTRAL FEDERAL
CORPORATION 2003 EQUITY COMPENSATION PLAN - EQUITY COMPENSATION PLAN
INFORMATION."
See Part II, Item 7, Financial Statements, Notes 12 and 16, for a description of
the principal provisions of the Company's equity compensation plans. The
information required by Item 7 is incorporated by reference to the Company's
2004 Annual Report to shareholders distributed to shareholders and furnished to
the Commission under Rules 14a-3(b) and (c) of the Exchange Act; the financial
statements appear under the caption "Financial Statements" at page 17 therein.
ITEM 12 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by Item 404 of Regulation S-B is incorporated by reference
to the Company's definitive Proxy Statement for its 2005 Annual Meeting of
Stockholders filed with the Commission on March 30, 2005, under the caption
"ADDITIONAL INFORMATION ABOUT DIRECTORS AND OFFICERS - Certain Relationships and
Related Transactions."
ITEM 13 EXHIBITS
See Exhibit Index at page 35 of this report on Form 10-KSB.
ITEM 14 PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information required by Item 9(e) of Schedule 14A pursuant to this Item 14 is
incorporated by reference to the Company's definitive Proxy Statement for its
2005 Annual Meeting of Stockholders filed with the Commission on March 30, 2005,
under the caption "PROPOSAL 3 RATIFICATION OF APPOINTMENT OF INDEPENDENT
ACCOUNTANTS."
33
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934,
the Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
CENTRAL FEDERAL CORPORATION
/s/ Mark S. Allio
----------------------------------------------------
Mark S. Allio
Vice Chairman, President and Chief Executive Officer
Date: March 30, 2005
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
Name Title Date
------------------------------------ ------------------------------------- ---------------
/s/ Mark S. Allio Vice Chairman of the Board, President March 30, 2005
------------------------------------ and Chief Executive Officer
Mark S. Allio
(principal executive officer)
/s/ Therese Ann Liutkus Treasurer and Chief Financial Officer March 30, 2005
------------------------------------
Therese Ann Liutkus, CPA
(principal accounting
and financial officer)
/s/ David C. Vernon Chairman of the Board March 30, 2005
------------------------------------
David C. Vernon
/s/ Jeffrey W. Aldrich Director March 30, 2005
------------------------------------
Jeffrey W. Aldrich
/s/ Thomas P. Ash Director March 30, 2005
------------------------------------
Thomas P. Ash
/s/ William R. Downing Director March 30, 2005
------------------------------------
William R. Downing
/s/ Gerry W. Grace Director March 30, 2005
------------------------------------
Gerry W. Grace
/s/ Jerry F. Whitmer Director March 30, 2005
------------------------------------
Jerry F. Whitmer
34
EXHIBIT INDEX
Exhibit No. Description of Exhibit
----------- -------------------------------------------------------------------------
3.1 Certificate of Incorporation of Central Federal Corporation (incorporated
by reference to Exhibit 3.1 to the Company's Registration Statement on
Form SB-2 No. 333-64089 filed with the Commission on September 23, 1998)
3.2 Bylaws of Central Federal Corporation (incorporated by reference to
Exhibit 3.2 to the Company's Registration Statement on Form SB-2 No.
333-64089 filed with the Commission on September 23, 1998)
4.1 Form of Stock Certificate of Central Federal Corporation (incorporated by
reference to Exhibit 4.0 to the Company's Registration Statement on Form
SB-2 No. 333-64089 filed with the Commission on September 23, 1998)
10.1* Salary Continuation Agreement between CFBank and David C. Vernon
10.2* Employment Agreement between CFBank and Richard J. O'Donnell
10.3* Amendment to Employment Agreement between Central Federal Corporation and
David C. Vernon
10.4* Amendment to Employment Agreement between CFBank and David C. Vernon
10.5* Second Amendment to Employment Agreement between Central Federal
Corporation and David C. Vernon
10.6* Second Amendment to Employment Agreement between CFBank and David C.
Vernon
11.1 Statement Re: Computation of Per Share Earnings
13.1 Annual Report to Security Holders for the Fiscal Year Ended December 31,
2004
21.1 Subsidiaries of the Registrant
23.1 Consent of Independent Registered Public Accounting Firm
31.1 Rule 13a-14(a) Certifications of the Chief Executive Officer
31.2 Rule 13a-14(a) Certifications of the Chief Financial Officer
32.1 Section 1350 Certifications of the Chief Executive Officer and Chief
Financial Officer
-------------
*Management contract or compensation plan or arrangement identified pursuant to
Item 13(a) of Form 10-KSB
35