UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A
(RULE 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14 (a) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. 1)
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[X] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e) (2)
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.14a-11c or Section 240.14a-12
Central Federal Corporation
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(Name of Registrant as Specified In Its Charter)
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(Name of Person(s) Filing Proxy Statement, if Other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i) (1) and 0-11
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which
the filing fee is calculated and state how it was determined):
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
[ ] Fee paid previously with preliminary materials:
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 11(a) (2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
PRELIMINARY COPY
[CENTRAL FEDERAL CORPORATION LOGO]
2923 Smith Road
Fairlawn, Ohio 44333
330.666.7979
__________, 2005
Dear Fellow Stockholders:
You are cordially invited to attend a Special Meeting of Stockholders of Central
Federal Corporation to be held at the company's Fairlawn office at 2923 Smith
Road, Fairlawn, Ohio 44333 on ______, ____________, 2005 at 10:00 a.m., local
time. This proxy statement is being furnished to you in connection with a
proposal to amend the company's Certificate of Incorporation to effect a
one-for-500 reverse stock split of the company's common stock.
On the effective date of the reverse stock split, you will receive one share of
common stock for each 500 shares you held immediately prior thereto. If the
number of shares you hold is not evenly divisible by 500, the split will create
a fractional share. However, any fractional share that otherwise would have been
issuable to any holder of fewer than 500 shares before the reverse split will be
repurchased by the company from the holder for a cash payment equal to $14.50
per pre-split share. A fractional share created by the split will be issued to
any holder of 500 or more shares before the split, and such holder will not
receive any cash payment. However, in order to facilitate future trading in the
over-the-counter-market, the company expects to propose to its remaining
stockholders, at some time after the reverse stock split is completed, a
500-for-one forward stock split that will eliminate any then existing fractional
shares.
Commonly referred to as a "going private" transaction, completion of the reverse
stock split will reduce the number of stockholders of record to fewer than 300,
and the company will 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; thereafter, the company no longer will file
reports with the Securities and Exchange Commission, and the common stock will
not be quoted on Nasdaq(R).
The approving vote of a majority of the outstanding shares of the company's
common stock is required to adopt the amendment that will effect the proposed
reverse stock split. Under Delaware law and the company's Certificate of
Incorporation and Bylaws, a stockholder does not have a dissenter's right of
appraisal in connection with a reverse stock split, irrespective of whether the
stockholder votes for or against the split.
This proxy statement provides detailed information regarding the reverse stock
split. Please read it carefully in its entirety. You also may obtain information
about the company from publicly available documents filed with the Securities
and Exchange Commission.
Your vote is very important. Whether or not you expect to attend the Special
Meeting, please read the enclosed proxy statement and then complete, sign and
return the enclosed proxy promptly in the postage-paid envelope provided, so
that your shares will be represented. If you attend the Special Meeting, you may
vote in person, even if you have previously provided a proxy.
The Board of Directors unanimously supports the reverse stock split and
recommends that you vote FOR the proposal to amend the Certificate of
Incorporation.
On behalf of the Board and all the employees of the Company, thank you for your
continued interest and support.
Sincerely yours,
David C. Vernon
Chairman, President and Chief Executive Officer
PRELIMINARY COPY
[CENTRAL FEDERAL CORPORATION LOGO]
2923 Smith Road
Fairlawn, Ohio 44333
330.666.7979
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
To be held on _________, __________, 2005
NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders of Central Federal
Corporation will be held ______, _______, 2005 at the CFBank Fairlawn office
located at 2923 Smith Road, Fairlawn, Ohio at 10:00 a.m., local time.
The purpose of the Special Meeting is to consider and vote upon the following
matters:
1. Approval of an amendment to the company's Certificate of Incorporation to
effect a one-for-500 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; and
2. Such other matters as may properly come before the Special Meeting. The
Board of Directors is not aware of any other business to come before the
Special Meeting. If any matter not described in this proxy statement is
properly presented at the Special Meeting, the persons named on the proxy
will use their best judgment to determine how to vote your shares.
Record holders of the common stock of Central Federal Corporation at the close
of business on __________, 2005 are entitled to receive notice of the Special
Meeting and to vote at the Special Meeting. A list of stockholders entitled to
vote will be available at the Special Meeting and for the ten days immediately
preceding the Special Meeting at CFBank, 2923 Smith Road, Fairlawn, Ohio.
BY THE ORDER OF THE BOARD OF DIRECTORS
Eloise L. Mackus
Corporate Secretary
Fairlawn, Ohio
__________, 2005
IMPORTANT: THE PROMPT RETURN OF YOUR PROXY WILL SAVE THE COMPANY THE EXPENSE OF
FURTHER REQUESTS FOR PROXIES IN ORDER TO ENSURE A QUORUM. A SELF-ADDRESSED
ENVELOPE IS ENCLOSED FOR YOUR CONVENIENCE. NO POSTAGE IS REQUIRED IF MAILED IN
THE UNITED STATES.
PRELIMINARY COPY
[CENTRAL FEDERAL CORPORATION LOGO]
2923 Smith Road
Fairlawn, Ohio 44333
330.666.7979
PROXY STATEMENT
SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ______, _______, 2005
The Board of Directors (the "Board") of Central Federal Corporation, a Delaware
corporation (the "Company"), is providing this proxy statement (this "Proxy
Statement") to you to solicit your vote for the Special Meeting of Stockholders
to be held on ______, _______, 2005 (the "Special Meeting").
The Special Meeting will be held at 10:00 a.m., local time, at the Company's
principal executive offices, 2923 Smith Road, Fairlawn, Ohio 44333. The general
telephone number of the Company's principal executive offices is 330.666.7979.
This Proxy Statement and the accompanying proxy are being mailed on or about
__________, 2005 to stockholders of record as of __________, 2005.
At the Special Meeting, stockholders of record as of ____________, 2005 (the
"Record Date") will vote on a proposal to amend the Company's Certificate of
Incorporation (the "Certificate of Incorporation") to effect a one-for-500
reverse stock split of the Company's Common Stock (the "Common Stock"), thereby
permitting the Company to apply to the Securities and Exchange Commission (the
"SEC") to terminate the registration of the Common Sock pursuant to Section
12(g)(4) of the Securities Exchange Act of 1934 (the "Exchange Act").
On the effective date of the reverse stock split, you will receive one share of
Common Stock for each 500 shares you held immediately prior thereto. If the
number of shares you hold is not evenly divisible by 500, the split will create
a fractional share. However, any fractional share that otherwise would have been
issuable to any holder of fewer than 500 shares before the reverse split will be
repurchased by the company from the holder for a cash payment equal to $14.50
per pre-split share. A fractional share created by the split will be issued to
any holder of 500 or more shares before the split, and such holder will not
receive any cash payment. However, in order to facilitate future trading in the
over-the-counter-market, the company expects to propose to its remaining
stockholders, at some time after the reverse stock split is completed, a
500-for-one forward stock split that will eliminate any then existing fractional
shares.
This Proxy Statement contains important information regarding the Special
Meeting. Specifically, it discusses the proposal upon which you will be asked to
vote, provides information that you may find useful in deciding how to vote, and
describes voting procedures.
FORWARD LOOKING STATEMENTS
This Proxy Statement contains forward looking statements that describe
management's beliefs and expectations about the future. Forward looking
statements include those statements using words such as "anticipate," "believe,"
"could," "estimate," "may," "expect," and "intend." Although these expectations
are believed to be reasonable, the Company's operations involve a number of
risks and uncertainties, including those described in this Proxy Statement and
in other documents filed with the SEC. Therefore, these types of statements may
prove to be incorrect.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THIS TRANSACTION, PASSED UPON THE
MERITS OR FAIRNESS OF THIS TRANSACTION OR PASSED UPON THE ADEQUACY OR ACCURACY
OF THE DISCLOSURE IN THIS PROXY STATEMENT. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
SUMMARY TERM SHEET
The following Summary Term Sheet briefly describes the most material terms of
the proposed transaction. The terms described are cross-referenced to a more
detailed discussion contained elsewhere in this Proxy Statement. Please read the
entire Proxy Statement and any documents incorporated by reference before voting
your shares.
WHAT IS THE PURPOSE OF THE SPECIAL MEETING?
The Board is proposing an amendment to the Certificate of Incorporation to
effect a one-for-500 reverse stock split of the Common Stock, so that the
Company can apply to the SEC to terminate the registration of the Common Stock
pursuant to Section 12(g)(4) of the Exchange Act. The Company will repurchase
any fractional share that otherwise would be issuable to any holder of fewer
than 500 shares prior to the split.
WHO CAN ATTEND THE SPECIAL MEETING?
Any stockholder of record as of the close of business on __________, 2005, the
Record Date, may attend the Special Meeting. A beneficial owner of Common Stock
held by a broker, bank or other nominee, must have proof of ownership to be
admitted to the Special Meeting. A recent brokerage statement or letter from a
bank or broker is proof of ownership.
WHO CAN VOTE?
You are entitled to vote your shares of Common Stock if the Company's records
show that you held your shares as of the close of business on the Record Date.
Each share of Common Stock is entitled to one vote on each matter presented at
the Special Meeting. However, if you want to vote in person at the Special
Meeting your shares of Common Stock held in street name, you must obtain and
bring to the Special Meeting a written proxy in your name from the broker, bank,
or other nominee who holds your shares.
WHAT VOTE IS REQUIRED TO APPROVE THE PROPOSAL?
An affirmative vote of the holders of a majority of the outstanding shares of
Common Stock is required to approve the proposal to amend the Certificate of
Incorporation. Based upon 2,200,849 shares outstanding on the Record Date, the
proposal will pass if at least 1,100,425 shares are voted in favor of the
proposal. Of the outstanding shares, 1,783,189 shares are held by persons
unaffiliated with the Company. Assuming that all 417,660 shares held by
affiliates are voted in favor of the proposal, 682,765 shares held by
unaffiliated persons will be required to approve the proposal.
WHAT CONSTITUTES A QUORUM FOR THE SPECIAL MEETING?
The Special Meeting will be held if a quorum, consisting of at least 1,100,425
shares (a majority of the outstanding shares of Common Stock on the Record Date)
is represented at the Special Meeting. If you return a valid proxy or attend the
Special Meeting in person, your shares will be counted for purposes of
determining whether there is a quorum, even if you abstain from voting. Broker
non-votes also will be counted for purposes of determining a quorum. A broker
non-vote occurs when a broker, bank, or other nominee holding shares for a
beneficial owner does not vote on a particular proposal because the nominee does
not have discretionary voting power with respect to the proposal and has not
received voting instructions from the beneficial owner.
HOW DO I VOTE?
You may complete and return the enclosed proxy in the enclosed postage-paid
envelope or you may attend the Special Meeting and vote in person. If you hold
your shares through a broker, bank or other nominee (i.e., in "street name"),
you will receive separate instructions from the nominee describing how to vote
your shares. All shares represented at the Special Meeting by a properly
executed proxy will be voted according to the instructions indicated on the
proxy. If you sign and return a proxy without giving voting instructions, your
shares will be voted as recommended by the Board.
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CAN I REVOKE OR CHANGE MY VOTE AFTER I SUBMIT MY PROXY?
You may revoke your proxy at any time before the vote is taken at the Special
Meeting. To revoke your proxy, you must advise the Corporate Secretary of the
Company in writing before the vote is taken at the Special Meeting, deliver to
the Company another proxy that bears a later date, or attend the Special Meeting
and vote your shares in person. Attendance at the Special Meeting will not of
itself revoke your proxy. If your shares of Common Stock are held in street name
and you wish to change your voting instructions after you have returned your
voting instruction form to your broker or bank, you must contact your broker or
bank.
WHO WILL COUNT THE VOTE?
The Company's transfer agent, Registrar and Transfer Company, will tally the
vote, which will be certified by _____________________, an independent Inspector
of Election.
WHO IS SOLICITING PROXIES AND PAYING SOLICITATION COSTS?
The Board is requesting your proxy. The Company has retained Georgeson
Shareholder Communications Inc. to assist with the solicitation of proxies. The
Company will pay Georgeson a fee of $7,000 and reimburse its reasonable expenses
in an amount not to exceed $1,500. The Company also will reimburse brokerage
firms and other custodians, nominees and fiduciaries for reasonable expenses
incurred by them in sending proxy materials to the beneficial owners of the
Common Stock. Directors, officers and regular employees of the Company may also
solicit proxies personally or by telephone and will not receive additional
compensation for these activities. All costs of soliciting proxies will be paid
by the Company.
WHAT ARE THE PURPOSES OF AND REASONS FOR THE REVERSE STOCK SPLIT?
The reverse stock split will reduce the number of the Company's stockholders to
fewer than 300, which will cause the Common Stock to become eligible for
termination of registration under the Exchange Act and thus allow the Company to
"go private." A private company does not have to implement many complex and
costly requirements of Sarbanes-Oxley, file Exchange Act reports or comply with
the corporate governance rules and onerous disclosure requirements of the SEC
and Nasdaq(R). Thus, a private company's costs are much lower and its management
can focus on long-term goals and values, rather than each quarter's financial
results and the attendant market reaction. See "Special Factors - Purposes of
and Reasons for the Transaction" on page 8.
WHAT ALTERNATIVES TO THE REVERSE STOCK SPLIT AS A MEANS OF GOING PRIVATE WERE
CONSIDERED?
The Board first considered the comparative advantages and disadvantages of being
a public or private company. Once the determination had been made that it was in
the best interest of the Company and its stockholders for the Company to become
a private company, the Board considered, in addition to a reverse stock split,
an issuer tender offer, sale of the Company and market repurchases followed a
short-form merger, as alternative means to effecting a going private
transaction. See "Special Factors - Alternatives Considered" beginning on page
8.
IS THE REVERSE STOCK SPLIT FAIR TO UNAFFILIATED STOCKHOLDERS?
The Board believes the reverse stock split is fair to and in the best interest
of each unaffiliated stockholder. An unaffiliated stockholder who owns fewer
than 500 shares before the split will receive a cash payment equal to $14.50 per
pre-split share. That amount consists of a fair value of $14.04 per share, as
determined by an independent appraisal firm, plus a premium of $0.46 per share.
The stockholder must surrender the fractional share involuntarily for the
specified cash payment, will exert no control over the timing or price of the
sale and no longer will be a stockholder and thus will not be entitled to vote
as a stockholder or share in the Company's future assets, earnings or profits.
However, there is no certainty that the sale could be made at a time of the
stockholder's choosing or at the same or a more favorable price, and the sale
will be effected without any brokerage costs. No stockholder, whether
unaffiliated or affiliated, who holds 500 or more shares before the split will
receive a cash payment for any fractional share created by the reverse stock
split. A stockholder whose fractional share is not repurchased will not receive
the benefit of the premium or the opportunity to sell shares without transaction
costs and will hold stock in a company whose shares no longer are traded on
Nasdaq(R). However, the stockholder will enjoy the benefit of continued
ownership of a Company with significantly lower operating costs as a private
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company, and the Board believes that such costs savings will be more significant
to any such stockholder than the benefits that derive from ownership of the
Company as a public company. See "Special Factors - Fairness of the Transaction
to Stockholders" beginning on page 12.
WHAT ARE THE UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OF THE REVERSE STOCK
SPLIT?
As a result of the reverse stock split, a stockholder who receives Common Stock
will not recognize gain or loss. A stockholder who receives cash will recognize
a gain or loss, which may be treated as income or capital gain/loss depending on
the individual stockholder's circumstances and the amount of time the
stockholder held the shares. The reverse stock split will be a tax free
reorganization described in Section 368(a) (1) (E) of the Internal Revenue Code
of 1986, as amended (the "Code"), and, accordingly, the Company will not
recognize taxable income, gain or loss in connection with the reverse stock
split. See "Special Factors - United States Federal Income Tax Consequences of
the Transaction" on page 11.
HOW WILL THE COMPANY FUND THE REVERSE STOCK SPLIT?
It is estimated that approximately $1,524,000 will be required to effect the
reverse stock split, including approximately $1,396,000 to pay for the
repurchase of fractional shares exchanged and $128,000 for legal, accounting,
solicitation and other related expenses. Funds required to implement the reverse
stock split will come from working capital. See "Amendment to the Certificate of
Incorporation - Description of the Transaction - Source of Funds and Expenses"
on page 24.
DO I HAVE APPRAISAL RIGHTS IN CONNECTION WITH THE REVERSE STOCK SPLIT?
No. Neither Delaware law nor the Certificate of Incorporation or the Company's
Bylaws provides dissenters' rights of appraisal in connection with the reverse
stock split. See "Amendment to the Certificate of Incorporation - No Appraisal
Rights" on page 25.
HOW WILL THE REVERSE STOCK SPLIT BE EFFECTED?
As soon as practicable after the effective date of the split, the Company will
(i) instruct the nominee of any shares held in book-entry form to adjust the
number of shares for each holder to reflect the number of shares held after the
split and (ii) send the holder of any certificated shares a letter of
transmittal that will provide instructions for surrendering stock certificate(s)
and obtaining new certificates evidencing the number of shares of Common Stock,
if any, to which the holder is entitled as a result of the reverse stock split.
See "Amendment to the Certificate of Incorporation - Description of the
Transaction" beginning on page 22.
HOW DO I RECEIVE PAYMENT FOR MY FRACTIONAL SHARE?
If you are receiving cash for a fractional share in a book-entry account,
payment will be posted to your account by your nominee upon receipt of payment
from the Company. If you hold certificated shares, instructions for receiving
payment will be contained in the transmittal letter you receive soon after the
effective date of the reverse stock split. See "Amendment to the Certificate of
Incorporation - Description of the Transaction" beginning on page 22.
WHEN WILL THE REVERSE STOCK SPLIT BE EFFECTIVE?
The reverse stock split will be effective upon filing of the amendment to the
Certificate of Incorporation with the Secretary of State of the State of
Delaware, which is expected to occur on or about _________, 2005. As soon as
practicable after the effective date of the reverse stock split, each
stockholder will be notified and asked to surrender the stockholder's
certificate(s) representing shares of Common Stock for new certificate(s) or
cash. See "Amendment to the Certificate of Incorporation - Description of the
Transaction - Effectiveness of the Reverse Stock Split" beginning on page 23.
WHOM DO I CALL IF I HAVE QUESTIONS?
If you have any questions, require assistance or need additional copies of this
proxy statement, the proxy or other related materials, please call Eloise L.
Mackus, Corporate Secretary, at 330.666.7979.
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WHAT IS THE VOTING RECOMMENDATION OF THE BOARD OF DIRECTORS?
The Board is sending you this proxy statement to request that you allow your
shares of Common Stock to be represented at the Special Meeting by the persons
named on the enclosed proxy.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" APPROVAL OF
THE AMENDMENT TO THE COMPANY'S CERTIFICATE OF INCORPORATION.
HAVE THE DIRECTORS AND OFFICERS INDICATED THEIR PERSONAL VOTING INTENTIONS?
It is the Company's understanding that the directors and officers of the Company
intend to vote all their shares in favor of the proposal to amend the
Certificate of Incorporation to effect the reverse stock split. After reasonable
inquiry, the Company is unaware of any recommendation in support of or opposed
to the proposal made by any director or executive officer of the Company, other
than the recommendation of the Board to vote in favor of the proposal. However,
the Company believes that any director or officer of the Company would recommend
a vote in favor of the proposal to any stockholder making inquiry.
DEFINED TERMS
The following defined terms are used in this Proxy Statement.
"Board" means the Company's Board of Directors.
"Certificate of Incorporation" means the Company's Certificate of Incorporation.
"Code" means the United States Internal Revenue Code of 1986, as amended.
"Common Stock" means the Company's common stock, par value $0.01 per share.
"Company" means Central Federal Corporation, a Delaware corporation.
"IRS" means the United States Internal Revenue Service.
"Donnelly Penman & Partners" means Donnelly Penman & Partners, the independent
valuation firm retained by the Board to assist in determining the fair market
value of the fractional shares of Common Stock to be repurchased.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Opinion" or "Fairness Opinion" means the written fairness opinion, dated
November 18, 2004, of Donnelly Penman & Partners as to the fair market value of
the Common Stock as of November 15, 2004.
"Proxy Statement" means this proxy statement.
"Record Date" means __________, 2005.
"Sarbanes-Oxley" means the Sarbanes-Oxley Act of 2002.
"SEC" means the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended.
"Special Meeting" means the special meeting of the Company's stockholders to be
held on ______, _______, 2005 at 10:00 a.m., local time, at the Company's
principal executive offices, 2923 Smith Road, Fairlawn, Ohio 44333.
"Transaction" means, collectively, the reverse stock split and the subsequent
termination of the Exchange Act registration of the Common Stock.
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SPECIAL FACTORS
BACKGROUND OF THE TRANSACTION
David C. Vernon, Chairman, President and Chief Executive Officer, joined the
Company, then known as Grand Central Financial Corp, in January 2003. In the
following month, he came to a realization that the Company had gone public in
December 1998 as the result of a mutual-to-stock conversion of its subsidiary
bank without any capital utilization plan. In fact, in February 2000 the Board
had declared a return of capital dividend in the amount of $6 per share.
Accordingly, Mr. Vernon began to consider whether the Company should continue to
be a public company or whether it would be in the best interest of the Company
and its stockholders to engage in a transaction that would permit termination of
the Exchange Act registration of the Common Stock pursuant to Section 12(g)(4)
of the Exchange Act. Given the continuing low trading volume and limited
liquidity of the Common Stock, there seemed to Mr. Vernon to be little benefit
to stockholders and little reason for the Company to continue to incur the
expense of being a public company. However, Mr. Vernon took no action during the
next 18 months, as he devoted his energies primarily to recruiting a management
team for CFBank, the Company's bank subsidiary, upgrading the Company's systems
and services, expanding the operations of CFBank to new locations and increasing
the products offered.
On September 3, 2004, after CFBank's new management team was in place, all
systems had been upgraded and bank offices to facilitate growth and increased
profitability had been established in Fairlawn and Columbus, Ohio, Mr. Vernon
initiated some preliminary research on going private and concluded that the
subject should be further explored. On September 7, 2004, facing even greater
costs of regulatory compliance in 2005, he, Eloise L. Mackus, who had joined the
Company as Senior Vice President, General Counsel and Secretary in July 2003,
and Therese A. Liutkus, who had joined the Company as Chief Financial Officer
and Treasurer in November 2003, began meeting regularly to discuss the prospect
of going private. Their discussions included the continuing and increasingly
more burdensome impact of compliance with the Sarbanes-Oxley Act of 2002
("Sarbanes-Oxley") and the regulations promulgated thereunder. Ms. Mackus and
Ms. Liutkus were tasked to conduct further research. On September 8, 2004, Mr.
Vernon contacted Mark S. Allio, a Board member and the Audit Committee's
financial expert, to discuss the prospect of taking the Company private. In
telephone conferences on September 10, 13 and 15, 2004, management and outside
legal counsel discussed the going private process, specifically (i) the various
means for going private and their respective advantages, disadvantages and
associated costs, (ii) whether, if the Board opted to go private by means of a
reverse stock split, all resulting fractional shares should be repurchased or
only the minimum shares necessary to reduce the number of stockholders to fewer
than 300, (iii) the advisability of obtaining an appraisal and fairness opinion
and (iv) the requisite stockholder vote under Delaware law and the Company's
corporate governance documents for each of the various going private
alternatives.
The Board did not meet in September; however, the Board of Directors of CFBank
did meet on September 16, 2004, and the directors of CFBank are the directors of
the Company. Following the CFBank Board meeting, management met informally with
the directors and proposed the possibility of going private. All members of the
Board participated in the meeting. The discussion included the perceived
advantages and disadvantages of going private, including the respective
associated costs. At the meeting, the Board decided that going private likely
would be in the best interest of stockholders and, accordingly, that management
should investigate the matter further and present a recommendation to the Board
at its October meeting.
On or about October 20, 2004, Mr. Vernon, after discussions with the investment
banking firm, Friedman Billings Ramsey, contacted Donnelly Penman & Partners to
discuss an engagement, subject to Board approval, to make an appraisal of the
Common Stock and render a fairness opinion. At a Board meeting held on October
21, 2004, management made its presentation to the Board and recommended going
private by means of a reverse stock split. After a full and complete discussion
of the proposed reverse stock split and the other going private alternatives,
including an issuer tender offer, a sale of the Company and market repurchases
followed by a short-form merger, the Board determined that it would be advisable
for the Company to engage in a going private transaction by means of a
one-for-1,000 reverse stock split. The Board also determined that all fractional
shares resulting from the split would be repurchased. The Board authorized the
calling of a special meeting of stockholders to vote on the proposal and
authorized the independent directors to retain an investment banking or
appraisal firm to assist in providing a valuation of the Common Stock and render
a fairness opinion. All directors, except Mr. Whitmer, participated in the
meeting. On October 22, 2004, the Company issued a press release to announce a
special stockholder meeting to
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vote on a one-for-1,000 reverse stock split. On October 28, 2004, the
independent directors retained Donnelly Penman & Partners to act as the
Company's financial advisor with respect to the reverse stock split.
During the period November 1 to November 15, 2004, management team engaged in
due diligence discussions with Donnelly Penman & Partners, including a session
at the Company's headquarters on November 15, 2004, which was attended by Mr.
Vernon, Ms. Mackus, Mr. Allio, CFBank's management and John C. Donnelly of
Donnelly Penman & Partners. That same day Ms. Liutkus and Sean M. O'Donnell of
Donnelly Penman & Partners discussed the Company's financial statements in a
telephone conference. The Board met again on November 18, 2004. All members of
the Board were present, except Jeffrey W. Aldrich and William R. Downing. At
that meeting, Donnelly Penman & Partners delivered its oral fairness opinion and
written valuation report to the Board and discussed its process and methodology
used to determine the fair market value per share of Common Stock. Members of
the Board questioned Messrs. Donnelly and O'Donnell regarding the financial
adviser's methodology and conclusions, and there was further discussion
regarding the going private alternatives. Afterward, the Board affirmed its
earlier determination to engage in a reverse stock split. The Board also
discussed the valuation, concluded that $14.04 was the fair value per share and
approved Donnelly Penman & Partners' report. The Board and Messrs Donnelly and
O'Donnell then discussed the appropriate premium to be paid in connection with
the repurchase of fractional shares. The Board decided that a premium of $0.46
per share would be fair, and, accordingly, the Board fixed the price to be paid
for fractional shares at $14.50 per pre-split share. Finally, in order to (i)
reduce the cost of repurchasing fractional shares and (ii) further reduce the
number of persons who no longer would be stockholders after the split, the Board
changed the reverse stock split ratio from one-for-1,000, as previously
announced, to one-for-500. Subsequently, on that same date, Donnelly Penman &
Partners delivered its written Fairness Opinion, a copy of which is included
with this Proxy Statement as Exhibit A. On November 24, 2004, the Company issued
an updated press release announcing the revised split ratio.
At a meeting held on January ___, 2005, attended by all members of the Board,
the Board changed the reverse stock split ratio to one-for-____ and determined
that the Company would repurchase only the fractional share of any stockholder
who held fewer than 500 shares before the reverse stock split. A fractional
share created by the split would be issued to any holder of 500 or more shares
before the split, and such holder would not receive any cash payment. However,
in order to facilitate future trading in the over-the-counter-market, the
company would consider proposing to its remaining stockholders, at some time
after the reverse stock split were completed, a 500-for-one forward stock split
that would eliminate any then existing fractional shares. These actions were
taken to further reduce transaction costs and minimize the number of
stockholders who would be cashed out as a result of the split.
In all its deliberations, the Board carefully considered the impact of the
reverse split on unaffiliated stockholders, both those who would be cashed out
and those who would remain as stockholders after the split. The Board determined
that deregistering and delisting the Company's capital stock would be in the
best interest of the Company and all its stockholders, whether affiliated or
unaffiliated. The Board also fully discussed and considered the potential
adverse impact that terminating the Company's Exchange Act registration of the
Common Stock could have on stockholders, market makers and potential investors,
as well as the additional expense that would be incurred should the Company
effect another Exchange Act registration in the future. The Board noted the
following:
1. Being a public company generally provides investment liquidity for
stockholders, easier access to capital, the option to use company
stock as capital in an acquisition and an enhanced corporate image.
While these benefits often justify the additional accounting, legal
and other costs of being a public company, their availability
depends upon active trading of the company's stock and a market
price that provides some certainty in valuing the company. Although
not unexpected, given the Company's size, the Common Stock trades so
infrequently and in such small volumes that few, if any, of the
benefits of being a public company are available to the Company.
2. Recent legislation, most notably Sarbanes-Oxley and the regulations
adopted by the SEC and Nasdaq(R) in furtherance of the purposes of
Sarbanes-Oxley, has greatly increased the compliance costs of being
a public company, both with respect to substantially higher legal
and accounting costs and the significantly greater amount of time
the Company's executives and employees must devote to compliance
with securities laws. Although the Company has been subject to some
provisions of Sarbanes-Oxley for more than two years, as a small
business issuer it will not become subject to the legal, accounting
and other costs attendant to complying with the internal control
provisions of Sarbanes-Oxley until fiscal 2005.
7
3. A private company does not have to implement many complex and costly
requirements of Sarbanes-Oxley, file reports with the SEC or comply
with the corporate governance rules and onerous disclosure
requirements of the SEC and Nasdaq(R). Thus, a private company's
costs are much lower, and its management can focus on long-term
goals and values, rather than each quarter's financial results and
the attendant market reaction.
PURPOSES OF AND REASONS FOR THE TRANSACTION
The primary purpose of the reverse stock split is to enable the Company to
terminate the registration of the Common Stock under Section 12(g) of the
Exchange Act. The Board believes the Company and its stockholders currently
derive no material benefit from continued registration under the Exchange Act.
Although the Common Stock is quoted on Nasdaq(R), trading is limited. During the
period October 1, 2003 through December 31, 2004, the average daily trading
volume was only 3,466 shares, notwithstanding that the Company has approximately
1,131 stockholders (approximately 603 record holders). Since the Company's
principal operating asset is a small community bank and the Common Stock
historically has not traded in any appreciable volumes, the Board believes there
is little likelihood that a more active trading market will develop in the
foreseeable future.
The lack of a more active trading market for the Common Stock denies the
Company's stockholders the liquidity and more certain valuation that a public
company stockholder expects and ought to receive. In addition, given the lack of
interest in the Common Stock, management cannot use the Company's public company
status to raise capital through sales of securities in a public offering or to
acquire other businesses using the Common Stock as consideration. Finally, the
Board does not believe that customers of the Company's operating subsidiaries
consider the status of the holding company parent as a private or public company
to be important in a decision to do business with the Company's subsidiaries.
The Company's status as a public company not only has failed to provide any
material benefit to the Company or its stockholders, but it also places a
significant financial burden on the Company. As an Exchange Act registrant, the
Company must comply with the disclosure and reporting requirements of the
Exchange Act. The cost of complying with these requirements has increased
dramatically in recent years, as a result of the enactment of Sarbanes-Oxley and
the adoption of SEC and Nasdaq(R) regulations intended to further its purposes.
These costs will increase even more dramatically as the Company becomes subject
to reporting on internal controls beginning with fiscal year 2005. The Company's
current annual legal and accounting costs for securities law compliance are
approximately $120,000. Management estimates that compliance with the more
onerous requirements applicable to the Company in 2005 will add at least an
additional $160,000 to the Company's annual compliance costs, for a total annual
cost of at least $280,000. The Company also incurs printing, postage, data
entry, stock transfer and other administrative expenses related to servicing its
stockholders. In addition to these direct costs, the Company's management and
employees must devote substantial time and energy to preparing the current,
periodic and other reports that must be filed under the Exchange Act. Those
costs currently aggregate approximately $103,000 annually, but they are expected
to increase substantially in 2005 as the Company becomes subject to internal
control regulations. As a private company, the Company will avoid more than
$280,000 in direct annual costs, and the Company's management and employees will
be able to focus more time and effort on the Company's operations.
The Board believes it would be imprudent to expend the Company's limited
financial and executive resources to continue the registration of the Common
Stock to the probable detriment of the Company's ongoing business. The savings
realized by the Company in no longer having to comply with the onerous reporting
and other requirements imposed upon a public company will be invested in the
business. The Board believes that stockholder value will be increased as
management is allowed to focus its attention and resources on implementing the
Company's business plan and long-term strategy.
The Company's acquisition of Reserve Mortgage Services, Inc. in October 2004 was
not a factor in the decision to take the Company private through a reverse stock
split.
ALTERNATIVES CONSIDERED
After determining that continuing to incur the substantial costs attendant to
being a public company would be detrimental to the Company's stockholders, the
Board made a decision to proceed with a going private transaction.
8
Before approving a reverse stock split as the method to be used for that
purpose, the Board considered the following alternatives:
- Sale of the Company. The Board considered a sale of the Company to
an affiliate or a third party and determined that selling the
Company was not a viable alternative. That determination was
influenced to a considerable extent by the Board's perception that
awareness of an impending sale might create an unstable work
environment that could result in employee resignations and otherwise
disrupt the Company's business. Moreover, there was no assurance
that a purchaser willing to pay a fair price could be found in a
reasonably short period of time, given the limited progress that had
been made in expanding the operations of CFBank for growth and
increased profitability. Since relieving the Company of its
reporting and other burdens as a public company is of paramount
importance to management's strategy for making the Company
profitable, it is important to the Board that a going private
transaction be completed on the earliest practicable date. Unwilling
to subject the Company to the potential adverse impacts of a
possible sale or to accept the uncertain timing of a sale, the Board
decided to explore other methods of taking the Company private.
- Issuer Tender Offer. The Board the considered a tender offer by the
Company to repurchase sufficient shares of the Common Stock to
reduce the number of stockholders to fewer than 300. This method
also was determined to be unacceptable. First, it is uncertain a
sufficient number of stockholders would tender all their shares so
that that the number of stockholders would be reduced to fewer than
300. Second, if even that objective were met, the cost of the
transaction potentially would exceed substantially the cost of a
reverse stock split, given the requirement of pro rata acceptance of
stockholder offers. If the Company did not repurchase all shares
tendered, it could not repurchase any shares unless it repurchased
the same percentage of shares owned by each tendering stockholder.
- Market Repurchases Followed by a Short-Form Merger. The Board
considered forming a group of the Company's largest stockholders to
engage in market repurchases followed by a short-form merger. The
Company has only two 5% or greater stockholders: the CFBank
Employees' Savings & Profit Sharing Plan, all the shares held by
which are voted by the individual plan participants, and Richard J.
O'Donnell, a member of management. Given that management
collectively owns only 18.6% of the outstanding shares of Common
Stock (including the shares owned by Mr. O'Donnell), this option was
not deemed to be a viable alternative. Moreover, it was considered
to be unfair to unaffiliated stockholders.
EFFECTS OF THE TRANSACTION ON THE COMPANY
- Approximately 96,254 shares will be exchanged for cash in lieu of
fractional shares in the reverse stock split. The number of
outstanding shares of Common Stock will decrease from 2,200,849
before the split to approximately 4,209.19 following the split, and
there will be less liquidity for stockholders than currently exists.
- The Common Stock is registered under the Exchange Act and quoted on
Nasdaq(R). The Company may terminate the registration of its Common
Stock, if there are fewer than 300 record holders of outstanding
shares of the Common Stock. The reverse stock split will reduce the
Company's number of stockholders of record from approximately 650 to
approximately 247, and the Company intends to apply to the SEC for
termination of the registration of the Common Stock under the
Exchange Act. Following termination of registration, the Common
Stock no longer will be quoted on Nasdaq(R). Termination of
registration under the Exchange Act will reduce substantially the
information required to be furnished by the Company to its
stockholders. The Company no longer will be required to file proxy
statements or current, periodic and other reports or statements with
the SEC, but the Company will continue to file reports with the
Officer of Thrift Supervision. The Company no longer will be subject
to the provisions of Sarbanes-Oxley and the rules promulgated
thereunder or the liability provisions of the Exchange Act, and the
chief executive and financial officers of the Company no longer will
be required to certify as to the accuracy of the Company's financial
statements.
- Approximately $1,396,000 will be required to pay for the fractional
shares of Common Stock exchanged for cash in the reverse stock
split. Legal, accounting and other fees and expenses related to the
transaction will be approximately $128,000. Of that amount,
approximately $25,000 will be expended for the costs of
9
fair market valuation of the Common Stock and the fairness opinion,
$75,000 for legal fees, $5,000 for accounting fees; $10,000 for
printing costs; $8,500 for solicitation costs and $4,500 for other
fees and expenses. Although, in the short term, the Company's
available cash will be reduced by the cost of the transaction, the
incurrence of these costs is not expected to have any material
adverse effect on the Company's capital, liquidity, operations or
cash flow. However, (i) aggregate stockholders' equity as of
September 30, 2004, will be reduced from approximately $18,395,000
on an historical basis to approximately $16,871,000 on a pro forma
basis, (ii) book value per share of Common Stock as of September 30,
2004 will increase from $8.92 per share on an historical basis to
approximately $4,290.94 per share on a pro forma basis and (iii) net
loss per share of Common Stock of $0.61 on an historical basis for
the nine months ended September 30, 2004, will increase to
approximately $341.97 per share on a pro forma basis.
- Beginning in fiscal year 2005, the Company expects to save more than
$280,000 annually in direct costs and an indeterminable amount in
indirect costs. These projected savings result from termination of
the registration of the Common Stock under the Exchange Act. As a
private company, the Company will not incur the substantial legal,
accounting and other costs associated with Exchange Act compliance,
and the time and effort of management and other employees can be
focused more directly on the Company's operations.
- The directors and officers of the Company before the Transaction is
completed will be the directors and officers of the Company after
the Transaction is completed.
- Generally, it is more difficult for a private company than a public
company to sell its capital stock or debt securities. Accordingly,
it is expected that the Company's ability to raise capital that
might be needed for expansion or otherwise will be significantly
reduced as a private company.
EFFECTS OF THE TRANSACTION ON STOCKHOLDERS
- On the effective date of the reverse stock split, each stockholder
will receive one share of common stock for each 500 shares held
immediately prior thereto. No fractional share will be issued to any
holder of fewer than 500 shares; such fractional share will be
repurchased by the Company for a cash payment equal to $14.50 per
pre-split share. Thus, any stockholder who owned fewer than 500
shares before the split will be cashed out, no longer will be a
stockholder of the Company and will not be entitled to vote as a
stockholder or share in the Company's assets, earnings or profits.
The fractional share, if any, held by any holder of 500 or more
shares prior to the split will not be repurchased.
- The ability of a stockholder to buy and sell shares of the Common
Stock will be adversely impacted by the split. The Common Stock no
longer will be quoted on Nasdaq(R), and, although at least one
market maker is expected to continue to make a market in the Common
Stock on NASD's Electronic Bulletin Board (OTCBB), there is no
certainty that an active trading market for the Common Stock will
develop at any time following the completion of the reverse stock
split. Since the Company no longer will file reports with the SEC, a
continuing stockholder's legally mandated access to information
about the Company's business and results of operations also will be
adversely impacted by the reverse stock split.
- Although the Common Stock will be eligible for quotation in the
over-the-counter market maintained by the NASD Electronic Bulletin
Board (OTCBB), so long as the Company remains current in its filings
with the U.S. Department of Treasury - Office of Thrift Supervision,
the OTCBB is not an issuer listing service, market or exchange, and,
accordingly, the Common Stock will be quoted on the OTCBB, only if
one or more market makers decides to make a market in the Common
Stock. While there is no certainty, at least one market maker that
currently follows the Company is expected to continue to make a
market in the Common Stock on the OTCBB. However, on the OTCBB, the
spread between bid and ask prices likely will be greater than on
Nasdaq(R).
- There are no differences between the respective rights, preferences
and limitations of the shares of Common Stock currently outstanding
and the shares to be outstanding after the reverse stock split
becomes effective. There will be no difference with respect to
dividend, voting, liquidation or other rights associated with the
Common Stock before and after the reverse stock split.
10
- The percentage of beneficial ownership of the Common Stock held by
the Company's directors and officers as a group will increase from
approximately 18.6% pre-split to approximately 19.3% post-split.
This group of directors and officers will have greater voting power,
as a group, in any matter submitted to a vote of stockholders.
- After the reverse stock split, the Common Stock will not be
registered under the Exchange Act. The Company's directors, officers
and major stockholders no longer will be subject to the Exchange Act
reporting and short-swing profit provisions of Section 16. However,
they also will be deprived of the ability to dispose of shares of
Common Stock pursuant to the Rule 144 exemption from the
registration requirements of the Securities Act of 1933 (the
"Securities Act). The Company's directors and officers will continue
to be subject to the fiduciary and other obligations of Delaware
law.
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OF THE TRANSACTION
Although the following discussion is intended to set forth all material tax
consequences to the Company and its stockholders as a result of the reverse
stock split, you are strongly urged to consult your tax advisor to determine the
particular tax consequences to you of the reverse stock split, including the
applicability and effect of federal, state, local, foreign and other tax laws.
With respect to a stockholder, the discussion addresses only the United States
federal income tax consequences to a stockholder who holds shares as a capital
asset. It does not cover all federal income tax consequences that may be
relevant to a particular stockholder based upon individual circumstances or to
any stockholder subject to special rules, such as a financial institution, a
tax-exempt organization, an insurance company, a dealer in securities or a
foreign holder who acquired shares pursuant to the exercise of employee stock
options or otherwise as compensation. The disclosure is based upon the Code and
laws, regulations, rulings and decisions in effect as of the date of this proxy
statement, all of which are subject to change, possibly with retroactive effect,
and to differing interpretations. The disclosure does not address the tax
consequences to a stockholder under state, local and foreign laws. The Company
has neither requested nor received a tax opinion from legal counsel with respect
to any of the matters discussed herein. No rulings have been or will be
requested from the Internal Revenue Service (the "IRS") with respect to any of
the matters discussed. There can be no assurance that future legislation,
regulations, administrative rulings or court decisions would not alter the
consequences set forth below.
The Company. The reverse stock split will be a tax free reorganization, as
described in Section 368(a)(1)(E) of the Code, and, accordingly, the Company
will not recognize taxable income, gain or loss in connection with the reverse
stock split. Moreover, the Company has sufficient cash reserves for the
repurchase of fractional shares, and it will not require a dividend from its
subsidiary, CFBank, for that purpose.
Receipt of Shares of New Common Stock. A stockholder who receives shares of new
Common Stock in the transaction (i.e., a stockholder who owns 500 or more shares
on a pre-split basis) will not recognize gain or loss, or dividend income, as a
result of the shares received in the reverse stock split, and the basis and
holding period of such stockholder in shares of old Common Stock will carry over
as the basis and holding period of such stockholder's shares of new Common
Stock.
Receipt of Cash in Lieu of Fractional Share. The receipt by a stockholder of
cash in lieu of a fractional share of new Common Stock pursuant to the reverse
stock split will be treated as a redemption of stock and will be a taxable
transaction for federal income tax purposes. The tax treatment of a redemption
of stock is governed by Section 302 of the Code and, depending on a
stockholder's situation, will be taxed as either: (i) a sale or exchange of the
repurchased shares, in which case the stockholder will recognize gain or loss
equal to the difference between the cash payment and the stockholder's tax basis
for the repurchased shares; or (ii) a cash distribution which is treated: (1)
first, as a taxable dividend to the extent of the Company's earnings and the
Company's accumulated earnings and profits; (2) then, as a tax-free return of
capital to the extent of the stockholder's tax basis in the repurchased shares;
and (3) finally, as gain from the sale or exchange of the repurchased shares.
11
FAIRNESS OF THE TRANSACTION TO STOCKHOLDERS
At meetings held on October 21, 2004 and November 18, 2004, the Board fully
considered the relative advantages and disadvantages of being a public or
private company, as discussed above and below under this caption "Special
Factors," which begins on page 6. The Board concluded that the Company and its
stockholders derived little, if any, benefit from operation as a public company.
That determination primarily was based upon the increasing costs of regulatory
compliance. After discussing various alternatives, the Board decided that the
most effective means to take the Company private was through an appropriate
reverse stock split. At the meeting on October 21, 2004, the Board determined
that the split would be one-for-1,000. At the meeting on November 18, 2004, the
split ratio was changed to one-for-500. At a meeting on January ___, 2005, the
ratio was further reduced to one-for-____. The Board's purposes in changing the
split ratio were to (i) reduce the Company's transaction costs and (ii) keep to
a reasonably practicable minimum the number of stockholders who would be cashed
out and cease to be stockholders of the Company, while still meeting the
Company's objective to reduce the number of stockholders to fewer than 300. As
discussed below, the Board expressly found that the reverse stock split was both
procedurally and substantively fair to affiliated and unaffiliated stockholders.
Procedural Fairness. The Board carefully followed the procedures mandated by
Delaware law, applicable securities law and the Company's Certificate of
Incorporation and Bylaws. The seven-member Board, six of whose members are
independent, unanimously approved the reverse stock split, after carefully
considering the impact of the proposed split on both affiliated and unaffiliated
stockholders. Each director is an affiliate of the Company, who will continue to
be a stockholder of the Company after the split is completed, as will any
unaffiliated stockholder holding 500 or more shares prior to the split. The
proceedings in which the Board approved the transaction were duly noticed and
convened.
Under Delaware law, a reverse stock split also must be approved by a majority of
the outstanding shares of Common Stock. The Board has duly called and noticed a
Special Meeting of Stockholders to be held on January ___, 2005 for the purpose
of considering and approving the reverse stock split. Management collectively
owns only 18.6% of the outstanding shares of Common Stock, and thus will not
control the vote on the Board's proposal to take the Company private.
The approving vote of a majority of the outstanding shares held by unaffiliated
stockholders is not required under Delaware law or by the Company's Certificate
of Incorporation or Bylaws to approve the Transaction. Thus, the Company's
unaffiliated stockholders will not be entitled to vote as a class on the
proposal. The unaffiliated stockholders who will be cashed out also do not have
the right to vote as a class on the Transaction. If either group of unaffiliated
stockholders had that right, it could defeat the proposal irrespective of its
approval by a majority of all stockholders.
In addition, as noted below under the caption "No Appraisal Rights,"
stockholders, whether unaffiliated or affiliated, do not have appraisal rights
under Delaware law, the Certificate of Incorporation or the Company's Bylaws in
connection with the reverse stock split. Thus no stockholder will be entitled to
dissent from the price offered by the Company and ask an appropriate court to
determine the fair price of such stockholder's shares. If the proposal is
approved by a majority of the outstanding shares, irrespective of whether held
by affiliated or unaffiliated stockholders, an unaffiliated stockholder holding
fewer than 500 shares prior to the split will have no choice but to except the
Company's price of $14.50 per pre-split share.
Given the experience of the Board and its familiarity with the Company,
including its financial condition and prospects, the Board decided that the
expense of establishing an independent advisory board or hiring an independent
party to represent the interests of the Company's unaffiliated stockholders was
not warranted. In reaching that decision, the Board noted that there were no
significant differences between the benefits to be enjoyed by unaffiliated and
affiliated stockholders as a result of the Transaction. The distinction among
stockholders is based upon the number of shares held on the effective date of
the reverse stock split, rather than affiliation with the Company. Any
stockholder who holds 500 or more shares and wishes to benefit from receipt of
the premium being paid for fractional shares may sell shares to reduce holdings
to fewer than 500 shares. Any stockholder who holds fewer than 500 shares and
prefers to remain as a stockholder following the split may purchase sufficient
shares prior to the effective date to increase holdings to 500 or more shares. A
stockholder who is cashed out, whether affiliated or unaffiliated, will enjoy
the benefits of receiving a premium and selling shares in a fee-free
transaction; no stockholder, whether affiliated or unaffiliated, who remains as
a stockholder after the split will receive those
12
benefits. If the Board had retained an independent party to represent only the
interests of unaffiliated stockholders or stockholders who would be cashed out,
it is possible that the ultimate proposal, if any, might have been structured
more favorably to the interests of such stockholders. The independent directors,
however, did retain Donnelly Penman & Partners, an independent financial
adviser, to give its opinion as to the fair market value of the Common Stock and
to render its opinion as to fairness, from a financial point of view, of the
consideration to be received by stockholders of the Company, to ensure that
stockholders being cashed out received a fair price for their fractional shares.
Substantive Fairness. While stockholders, whether affiliated or unaffiliated,
whose fractional shares are not repurchased will not receive the benefit of the
premium or share repurchase without transaction costs and will hold stock in a
company whose shares no longer are traded on Nasdaq(R), such stockholders will
enjoy the benefit of continued ownership of a Company with significantly lower
operating costs, and the Board believes that the direct and indirect costs
savings the Company will enjoy when it terminates its public company status will
be more significant to such stockholders than the benefits that derive from
being a public company. These costs savings should have no adverse impact on the
ability of the Company and its subsidiaries to deliver services to customers,
and, accordingly, a continuing stockholder will profit from any increased value
of the Company that might result from reducing the costs of doing business.
Any stockholder who is cashed out in the reverse stock split will receive a fair
price for the stockholder's shares. Although a cashed-out stockholder, whether
affiliated or unaffiliated, will have to surrender such stockholder's shares
involuntarily, and thus will exert no control over the timing or price of the
sale of the stockholder's shares, there is no certainty that the stockholder
could effect a sale of shares at a time of the stockholder's choosing or at the
same or a more favorable price; and the sale will be effected without incurring
brokerage costs. Of course, any stockholder who is cashed out no longer will be
a stockholder of the Company and will not be entitled to vote as a stockholder
or share in the Company's future assets, earnings or profits.
Factors in Support of the Transaction
- A stockholder who owns at least 500 shares and thus will remain a
stockholder following the reverse stock split will benefit from the
savings realized by the Company in reducing the direct and indirect
operating costs the Company otherwise would incur as a public
company.
- Any stockholder who owns fewer than 500 shares will receive a fair
price for the fractional share that otherwise would be owned
following the reverse stock split. The Board did consider that a
stockholder who will receive only cash will have no control over the
timing or price of the sale of the stockholder's shares. However,
the Board also noted that there is limited liquidity for shares of
the Common Stock, and thus a stockholder already has a limited
choice as to timing and price. The Board determined that the
certainty of liquidity through the reverse stock split, together
with the price being paid in lieu of a fractional share, made the
transaction fair, even taking into account the lack of control over
timing and price. The Board also noted that a stockholder would be
able to dispose of shares without incurring brokerage costs.
Factors Not in Support of the Transaction
- Following termination of its Exchange Act registration, the Common
Stock no longer will be listed or traded on Nasdaq(R), and thus the
liquidity of the Common Stock and the ability of the Company to
raise capital will be adversely affected. The Common Stock will be
eligible for quotation in the over-the-counter market maintained by
the NASD Electronic Bulletin Board (OTCBB), so long as the Company
remains current in its filings with the U. S. Department of Treasury
- Office of Thrift Supervision. The OTCBB is a regulated quotation
service that displays real-time quotes, last-sale prices and volume
information in over-the-counter securities. Securities eligible for
quotation on the OTCBB generally include any equity security not
listed or traded on Nasdaq(R) or a national securities exchange, but
with respect to which periodic reports are filed either with the SEC
or another applicable governmental regulatory agency. However, the
OTCBB is not an issuer listing service, market or exchange, and thus
the Common Stock will be quoted on the OTCBB, only if one or more
market makers decides to make a market in the Common Stock. While
there is no certainty, at least one market maker that currently
follows the Company is expected to continue to make a market in the
Common Stock on the OTCBB. However, even if the Common Stock is
quoted on the OTCBB, at any given time the spread between the bid
price and asked
13
price likely would be greater than it would be if the Common Stock
continued to be traded on Nasdaq(R). In addition, it generally will
be more difficult to obtain accurate, timely information concerning
pricing and trading volume and execute trades. As a practical
matter, no stockholder should assume that there will be an active
trading market for the Common Stock following completion of the
reverse stock split. However, the current Nasdaq(R) public trading
market for the Common Stock is not highly liquid, and the Board
believes that any further loss of liquidity will have little effect
on the Company's stockholders and will be outweighed by the benefits
of going private.
- Upon termination of the registration of the Common Stock, the
Company no longer will file proxy statements and current, periodic
and other reports and statements with the SEC, and information
regarding the Company's operations and financial results no longer
will be publicly available. Continuing stockholders will have a
limited right to obtain such information from the Company under
Delaware law. The Board does not believe this factor makes the
transaction unfair to any affiliated or unaffiliated stockholder who
remains as a stockholder of the Company, because any detriment that
may result from termination of public filings will be offset by the
cost-saving benefits to the Company of no longer being a public
company.
- Any unaffiliated stockholder who will be cashed out will have no
further interest in the Company and thus will not have the
opportunity to participate in the potential upside of any increase
in the value of shares of the Common Stock.
Fairness of the Price. In analyzing the fairness of the price to be paid for
fractional shares of the Common Stock, the Board considered and reviewed the
following documentation and information:
- Written Fairness Opinion of the value of the Common Stock by
Donnelly Penman & Partners
- Company's annual financial statements, including consolidated
audited financial statements for each of the past five years up to
and including December 31, 2003
- Company's quarterly unaudited financial statements for the fiscal
quarters ended March 31, 2004, June 30, 2004 and September 30, 2004
- Management projected revenue and cost budgets for the fiscal year
ending December 31, 2004 (see Discounted Dividend Analysis
discussion below for information regarding these 2004 projected
revenue and cost budgets)
- Terms of the reverse stock split and its effect on the Company's
stockholders
- Market information on recent prices and trading volumes of the
Common Stock
- Pro forma financial effects of the reverse stock split on the
Company and its stockholders
- Tax effects of the reverse stock split on the Company's stockholders
The Board considered the following specific factors in reaching its (i) decision
to approve and recommend the reverse stock split and (ii) its conclusion that
the price to be paid to certain unaffiliated stockholders in lieu of fractional
shares resulting from the reverse stock split was fair to such stockholders.
Individual directors may have given differing weights to different factors. Due
to the relative illiquidity of the Common Stock, the Board as a whole generally
placed more emphasis on the Fairness Opinion than on the stock price as quoted
on Nasdaq(R), and the Board ultimately adopted the findings of Donnelly Penman &
Partners.
- Current and Historical Market Prices of the Company's Common Stock.
Although the Common Stock is quoted on Nasdaq(R), there is a limited
trading market for the Common Stock. The high and low sale prices
for the Common Stock from January 1, 2003 to December 31, 2004,
ranged from a high of $18.00 on June 15, 2004 to a low of $9.28 per
share on February 21, 2003. The closing sale price of the Common
Stock on October 21, 2004, which was the last trading day on which
the Common Stock was traded before announcement of the proposed
reverse stock split on October 22, 2004, was $12.70 per share.
14
- Premium Over Market Price. In order to increase the value of the
transaction to those unaffiliated stockholders who hold fewer than
500 shares pre-split and thus will be cashed out in the reverse
stock split, the Board decided to add a premium to the price to be
paid for fractional shares. The $14.50 price to be paid for
fractional shares includes a premium of $0.46 per share over the
fair value of $14.04, as determined by Donnelly Penman & Partners,
and also represents a premium of $1.80 per share (14.2%) over the
last closing trading price of $12.70 prior to the announcement of
the reverse stock split on October 21, 2004, and a premium of $1.70
per share (13.3%) over the average closing trading price of $12.80
for the thirty calendar days prior to October 21, 2004.
- Net Book Value. As of September 30, 2004, the book value per share
of common stock was $8.92.
- Going Concern Value. In rendering its opinion as to valuation,
Donnelly Penman & Partners valued the Company as a going concern
operating entity rather than as an asset intensive business or a
business in liquidation. In assessing the fairness of the opinion as
to value, the Board concurred with Donnelly Penman & Partners'
valuation of the company as a going concern and adopted it as its
own.
- Liquidation Value. The Board did not consider the liquidation value
of the Company when selecting the purchase price. A liquidation
analysis is not believed to be a relevant factor because the
liquidation of a bank or discontinuance of a bank's operations is
not considered to be a viable alternative. Historically, banks have
generally only been liquidated in the event of insolvency or
receivership. The Fairness Opinion provided by Donnelly Penman &
Partners assumed, as one method of analysis, the sale of the Company
as a "whole" rather than in parts through liquidation or
dissolution, and neither the Company's management nor the Board has
any intention of liquidating the bank.
As noted below under the caption, "Opinion of Financial Advisor," using the
discounted dividend analysis or the comparable transaction analysis would have
resulted in a higher price to be paid for fractional shares. However, as
discussed below under the same caption, Donnelly Penman & Partners arrived at
its Opinion based on the results of all the analyses it undertook, assessed as a
whole, and it did not draw conclusions from or with regard to any one method of
analysis, and, accordingly, Donnelly Penman & Partners did not believe the value
derived from using discounted dividend analysis or the comparable transaction
analysis accurately reflected the fair value of the shares. The preparation of a
valuation is a complex process involving subjective judgments and is not
necessarily susceptible to partial analysis or summary description. In its
review of the findings of Donnelly Penman & Partners, the Board also took into
consideration that, (i) although there is no present intent to reduce or
eliminate the dividend, the Company has not been profitable since fiscal 2002,
and thus it may not be realistic to assume the Company will have the ability to
continue to pay a dividend at historic levels or at all and (ii) the comparable
transaction analysis assumes the purchase of the Company, and the Company does
not have an offer to purchase the Company. The Board adopted the conclusions of
Donnelly Penman & Partners in fixing the price to be paid for fractional shares
at $14.50 per share of Common Stock on a pre-split basis. That price includes a
premium of $0.46 per share over the fair value of $14.04 per share.
Other Offers. From time to time the Company receives expressions of interest
regarding business combinations or acquisition of certain Company assets.
Recently an unaffiliated person approached management regarding the purchase of
certain operating assets of CFBank, a subsidiary of the Company. The offer was
not accepted, because the purchase would have involved most of CFBank's deposits
and would have caused the loss of substantial loan volume. In effect, accepting
the offer would have gutted the Company of significant assets and greatly
diminished its value, and thus accepting the offer was considered not to be in
the best interest of the Company's stockholders. Information regarding this
person's interest was made available to the Board and was considered in
determining the premium to be included in the price to be paid to certain
unaffiliated stockholders for fractional shares resulting from the reverse stock
split. In mid-2004, Mr. Vernon received a preliminary expression of interest
from an unaffiliated group in purchasing the Company. However, the group was
unable to raise the necessary financing and did not make a firm offer.
Accordingly, the Board did not consider that a serious offer had been made, and
the expression of interest was not considered in determining the price to be
paid for fractional shares. Other than the offer to purchase certain key assets
of CFBank, no firm offer has been made by any person (affiliate or
non-affiliate) during the preceding two years for (i) merger or consolidation of
the Company into or with such person, (ii) the sale or other transfer of all or
any substantial part of the Company's assets or (iii) the purchase of a number
of shares of Common Stock that would enable the holder thereof to exercise
control of the Company.
15
Fair Price. On October 21, 2004, the Board met to discuss its initial
conclusions and give approval to the reverse stock split. On November 18, 2004,
the Board met again to consider the written valuation opinion and oral fairness
opinion. The Board also determined that, based upon the factors discussed above,
a payment of $14.50 per pre-split share was a fair price to be paid to certain
unaffiliated stockholders for fractional shares resulting from the reverse stock
split, and, accordingly, the Board decided to proceed with the reverse stock
split at that price. Subsequently, Donnelly Penman & Partners delivered its
written Fairness Opinion, a copy of which is included as Exhibit A to this Proxy
Statement.
OPINION OF FINANCIAL ADVISOR
The Company engaged Donnelly Penman & Partners to render its report and opinion
with respect to the fair market per share value of the Common Stock for purposes
of evaluating the proposed transaction and the fairness of the proposed
transaction. At the November 18, 2004 meeting of the Board of Directors,
Donnelly Penman & Partners presented a valuation report and opinion that
reflected the fair value per share of the Common Stock of $14.04 as of November
l5, 2004 and gave an oral opinion on the fairness of the proposed $14.50 per
share price offered in the reverse stock split. The $14.04 value was derived
utilizing a weighted average of valuation techniques and subset metrics of those
valuation techniques. The analyses performed by Donnelly Penman & Partners were
assigned a weighting based on its opinion of their relative comparability and
significance with regard to the specific characteristics of the Company. The
weightings assigned by Donnelly Penman & Partners are as follows:
- Discounted Cash Flow Analysis (25%)
- Recent Trading (24%: 8% each for 30 day, 90 day and 1 year trading
averages)
- Comparable Company Analysis (24%: 12% each for book value and
tangible book value metrics)
- Comparable Acquisition Analysis (24%: 8% each for book value,
tangible book value and premium to core deposits metrics)
Each metric's weighting is multiplied by the implied valuation calculated using
that metric, the cumulative weightings sum to 100% and the resulting cumulative
value is Donnelly Penman & Partner's calculated value per share of $14.04.
Pursuant to the Company's request, Donnelly Penman & Partners confirmed its
verbal fairness opinion with a written fairness opinion dated November 22, 2004,
in which it stated that, as of November 18, 2004, the $14.50 per share price
offered in the reverse stock split was fair from a financial point of view to
the Company's shareholders.
This fairness opinion is attached to this Proxy Statement as Exhibit A.
Donnelly Penman & Partners is a regional investment banking firm of recognized
standing. As part of its investment banking services, they are regularly engaged
in the valuation of corporate entities on a stand-alone basis or in connection
with capital raising and merger and acquisition transactions. No limitations
were imposed by the Company upon Donnelly Penman & Partners with respect to the
investigations made or procedures followed by Donnelly Penman & Partners in
rendering its Opinion.
Donnelly Penman & Partners was selected by the Company's independent directors.
Donnelly Penman & Partners was selected based on the firm's reputation,
experience (including particularly the firm's general experience with community
banks in the Midwest) and price. No material relationship has existed during the
past two years or is mutually understood to be contemplated, or compensation
received or to be received, as a result of the relationship between Donnelly
Penman & Partners and its affiliates and the Company and its affiliates except
for the engagement described in this Proxy Statement. Donnelly Penman & Partners
has been paid a fee of $25,000 plus reimbursement of its expenses, for
performing the valuation and providing its fairness opinion. No part of the fee
is contingent upon the success of the transaction.
In arriving at its Opinion, Donnelly Penman & Partners has:
1. Reviewed the Annual Reports of the Company for the years ended
December 31, 2002 through 2003 as well as interim financial
statements through October 31, 2004;
2. Reviewed the November 18, 2004 Board of Directors report;
3. Reviewed the Company's budget for the year ending December 31, 2004;
16
4. Compared certain financial characteristics of the Company to certain
publicly held companies Donnelly Penman & Partners deemed relevant;
5. Reviewed current banking industry conditions and trends concerning
the valuation of recent mergers and acquisitions;
6. Conducted discussions with the senior management of the Company
concerning the business and future prospects of the Company;
7. Prepared a discounted dividend analysis of the Company based on a
financial forecast derived from discussions with and deemed
reasonable by management of the Company; and
8. Reviewed such other data, including financial and industry data,
performed such other analyses and taken into account such other
matters as they deemed necessary or appropriate.
In connection with rendering its Opinion to the Company, Donnelly Penman &
Partners performed a variety of financial analyses, which are summarized below.
Donnelly Penman & Partners believes that its analyses must be considered as a
whole and that selecting portions of its analyses and the factors considered by
it, without consideration of all factors and analyses, could create a misleading
view of the analyses and the processes underlying Donnelly Penman & Partners
Opinion. Donnelly Penman & Partners arrived at its Opinion based on the results
of all the analyses it undertook, assessed as a whole, and it did not draw
conclusions from or with regard to any one method of analysis. The preparation
of a valuation is a complex process involving subjective judgments and is not
necessarily susceptible to partial analysis or summary description.
The methods utilized by Donnelly Penman & Partners are among the most accepted
methods of bank securities valuation. Donnelly Penman & Partners utilized four
methods to value the Common Stock and is of the opinion that utilizing any other
methods of valuation would be less relevant and would not lead to a materially
different result. Donnelly Penman & Partners regularly values bank securities
for purposes of "going private" transactions as well as for other
non-transaction related strategic initiatives. The methods utilized for the
Common Stock are substantially similar to those used by Donnelly Penman &
Partners in previous valuations.
Donnelly Penman & Partners did not make or obtain any independent evaluation,
valuation or appraisal of the assets or liabilities of the Company, nor was it
furnished with such materials. Donnelly Penman & Partners has not reviewed any
individual credit files of the Company and has assumed, without independent
verification, that the reported allowances for credit losses are adequate to
cover such losses.
With respect to the comparable company analysis and comparable acquisition
transaction analysis summarized below, no public company utilized as a
comparison is identical to the Company, and such analyses necessarily involve
complex considerations and judgments concerning the differences in financial and
operating characteristics of the financial institutions and other factors that
could affect the acquisition or public trading values of the financial
institutions concerned. The forecasted financial information furnished by the
Company's management contained in or underlying Donnelly Penman & Partners'
analyses is not necessarily indicative of future results or values, which may be
significantly more or less favorable than such forecasts and estimates. The
forecasts and estimates were based on numerous variables and assumptions that
are inherently uncertain, including without limitation factors related to
general economic and competitive conditions. In that regard, Donnelly Penman &
Partners assumed, with the Company's consent, that the financial forecasts had
been reasonably prepared by management on a basis reflecting the best currently
available judgments of management, and that such forecasts will be realized in
the amounts and at the times contemplated thereby.
Estimates of values of financial institutions or assets do not purport to be
appraisals or necessarily reflect the prices at which financial institutions or
their securities actually may be sold. Accordingly, actual results could vary
significantly from those assumed in the financial forecasts and related
analyses. The analyses performed by Donnelly Penman & Partners were assigned a
weighting based on Donnelly Penman & Partners' opinion of their relative
comparability and significance with regard to the specific characteristics of
the Company.
17
In its analyses, Donnelly Penman & Partners made numerous assumptions with
respect to industry performance, business and economic conditions and other
matters, many of which are beyond the control of the Company. These assumptions
include: the expectation that interest rates will trend gradually upward through
2006 and remain constant thereafter; the expectation that general economic
conditions will neither deteriorate nor improve significantly relative to their
current state; the expectation that no significant industry regulations or
events that would impair the Company's ability to earn income at projected
levels will occur; and the expectation that industry trading and transaction
multiples will not change significantly from current values.
Donnelly Penman & Partners deemed the comparable companies and transactions to
be comparable based on relevant asset size, relevant geography, relevant
industry and relevant time-frame criteria. The specifics of these criteria for
each type of analysis are displayed in the following table:
COMPARABLE ACQUISITION
CRITERIA COMPARABLE COMPANY ANALYSIS (TRANSACTION) ANALYSIS
-------- --------------------------- ----------------------
Asset Size: Between $150 and $250 million Between $100 and $500 million
Geography: Located in MI, IN, KY or OH Located in MI, IN, KY or OH
Industry: Community Banks Community Banks
Time Frame: Closing price as of 11/16/2004, Transactions announced between
most other data as or 6/30/2004 1/1/2002 and 11/16/2004
or 9/30/2004
No company or transaction is identical to the Company. Donnelly Penman &
Partners uses the criteria set discussed in the previous table to identify the
comparable trading companies and comparable target companies in a transaction
that are most similar to the Company. Donnelly Penman & Partners utilizes the
median multiple from the analysis to calculate the implied valuation. In order
to gather enough data points to calculate a meaning median, Donnelly Penman &
Partners will narrow or broaden its criteria until an appropriate number of
comparable companies and transactions are gathered.
The following is a brief summary of the analyses performed by Donnelly Penman &
Partners in connection with its Opinion:
- Analysis of Comparable Acquisition Transactions. Donnelly Penman &
Partners analyzed bank and thrift acquisition transactions announced
and/or completed since January 1, 2002. Each selling bank or thrift
had total assets between $100 and $500 million and was headquartered
in Michigan, Indiana, Kentucky or Ohio. This analysis provided an
approximate median multiple of 2.09 times price to book value, 2.111
times price to tangible book value, 24.8 times last twelve months
earnings per share and a premium to core deposit metric of 17.3%.
Applying the median multiple for price to book value of 2.09 times
to the Company's September 30, 2004 book value per share of $8.92
results in an implied value per share of $18.64 on a control,
marketable basis. Using the same methodology, the value implied by
applying the relevant multiple to the Company's tangible book value
per share at September 30, 2004 of $8.92 was found to be $18.83 per
share. Applying the median premium to core deposits of 17.3% to the
Company's $79.6 million in core deposits as of September 30, 2004
resulted in a calculated value of $13.8 million. When added to the
Company's book value of $18.4 million as of September 30, 2004 and
divided by the 2,062,138 shares outstanding at the same date, the
result is an implied value per share of $15.60. Core deposits are
defined as all deposits less CDs over $100,000 and brokered or
network deposits.
In this analysis, Donnelly Penman & Partners reviewed the following
transactions, identified by buyer and seller: Park National
Corporation/First Clermont Bank, Sky Financial Group, Inc./Prospect
Bancshares, Inc., First Defiance Financial Corporation/Combanc Inc.,
Park National Corporation/First Federal Bancorp, Inc., First
Federal, MHC/Frankfort First Bancorp, Inc., WesBanco, Inc./Western
Ohio Financial Corporation, Lincoln Bancorp/First Shares Bancorp,
Inc., First Citizens Banc Corporation/FNB Financial Corporation,
Independent Bank Corporation/Midwest Guaranty Bancorp, Inc.,
Harrodsburg First Financial Bancorp, Inc./Independence Bancorp,
Fentura Financial, Inc./West Michigan Financial Corporation,
Chemical Financial Corporation/Caledonia Financial Corporation,
Monarch Community Bancorp, Inc./MSB Financial Inc., Sky Financial
Group, Inc./GLB Bancorp, Inc., Citizens First Bancorp, Inc./Metro
Bancorp, Inc., Standard
18
Bancshares, Inc./Security Financial Bancorp, Inc., First Southern
Bancorp, Inc./South Central Bancshares, Inc., Wayne Bancorp,
Inc./Banc Services Corporation, Peoples Bancorp, Inc./Kentucky
Bancshares, Inc., MainSource Financial Group/First Community
Bancshares, Inc., First Indiana Corporation/MetroBanCorp, First
Merchants Corporation/CNBC Bancorp, and Charter One Financial,
Inc./Charter National Bancorp, Inc.
Donnelly Penman & Partners notes that no selling bank or thrift
reviewed was identical to the Company and that, accordingly, any
analysis of comparable transactions necessarily involves complex
considerations and judgments concerning differences in financial and
operating characteristics of the parties to the transactions being
compared. In addition, Donnelly Penman & Partners considered the
fact that the proposed transaction does not represent the sale of a
control position and the values associated with the Analysis of
Comparable Acquisition Transactions do include a control premium.
- Analysis of Selected Comparable Companies. DP&P compared selected
operating results of the Company to a select group of publicly
traded thrifts headquartered in Michigan, Indiana, Kentucky and
Ohio. The comparable set had total assets of between $150 and $250
million. Some companies meeting these criteria may have been
eliminated based on lack of data as generated by SNL Financial - the
source for the comparable transactions data. The selected group had
approximately the following median values: $160.4 million in total
assets, $17.4 million in total equity, a Tier One risk-based capital
ratio of 6.4%, last twelve months return on average assets of .71%,
last twelve months return on average equity of 6.34% and a last
twelve months efficiency ratio of 65.4%. This analysis provided
valuation benchmarks including the median price multiples of 1.237
times book value, 1.241 times tangible book value and 19.2 times
last twelve months earnings per share. Applying the median price to
book value multiple to the Company's book value per share of $8.92
as of September 30, 2004 resulted in an implied per share value of
$11.03 on a marketable basis. Using the same methodology, the
implied value provided by application of the relevant multiple to
the Company's September 30, 2004 tangible book value of $8.92 was
found to be $11.07. The implied value based on last twelve months
earnings per share was not applicable because the Company's last
twelve months earnings per share were negative.
In this analysis, Donnelly Penman & Partners reviewed the following
companies: 1st Independence Financial Group, Inc. (FIFG), AMB
Financial Corporation (AMFC), ASB Financial Corporation (ASBP), Blue
River Bancshares, Inc. (BRBI), City Savings Financial Corporation
(CSFC), CKF Bancorp, Inc. (CKFB), Community Investors Bancorp, Inc.
(CIBI), FFW Corporation (FFWC), Fidelity Federal Bancorp (FFED),
Frankfort First Bancorp, Inc. (FKKY), HFS Bank, FSB (HFSK), Home
Loans Financial Corporation (HLFC), Lawrence Financial Holdings,
Inc. (LWFH), Mid-Southern Savings Bank, FSB (MSVB), Northeast
Indiana Bancorp, Inc. (NEIB), Peoples Ohio Financial Corporation
(POHF) and Peoples-Sidney Financial Corporation.
No thrift used in the above analyses as a comparison is identical to
the Company. Accordingly, an analysis of the results of the
foregoing necessarily involves complex considerations and judgments
concerning differences in financial and operating characteristics of
the companies and other factors that could affect the trading values
of the Company and the banks to which it is being compared.
- Discounted Dividend Analysis. Donnelly Penman & Partners prepared a
discounted dividend stream analysis of the Company, which estimated
the future after tax income that the Company might produce over a
period from November 15, 2004 through December 31, 2008. These
estimates were derived from discussions with and deemed reasonable
by the Company's management team. The estimates assumed that the
Company's net income would grow from ($1,245,609) in the year ended
December 31, 2004 to $2,331,065 in the year ended December 31, 2008.
This growth in net income is due to the acquisition of Reserve
Mortgage Services, Inc. in October 2004 and balance sheet growth
driven by commercial loan growth (subject to regulatory limitations
of 400% of capital) and the deposits typically associated with those
commercial customers.
Donnelly Penman & Partners utilized the following material
assumptions to produce its financial
19
forecast from November 15, 2004 to December 31, 2008:
- Loan growth ranged from 17.2% to 34.4% in the years ended
December 31, 2005 to 2008, with the majority of new loan
growth coming from residential and commercial mortgage in 2005
and residential mortgage thereafter, which is primarily
related to the activities of Reserve Mortgage Services.
- Loan loss reserve was increased to 1.0% of total loans and
charge offs were assumed to be .10% of average loans over the
projection period.
- Interest bearing deposits are projected to increase
significantly in 2005 due to the Company's expansion into high
growth markets. The Company is assumed to rely primarily on
FHLB Advances and to a lesser extent deposit growth to fund
loan growth in 2006 and thereafter.
- Yields and cost of borrowing throughout the projection period
were assumed to be approximately the rates as of November,
2004.
- Reserve Mortgage Services is expected to contributed
approximately $2.75 million to non-interest income in 2005 and
grow at 8% thereafter. Non-interest expense associated with
Reserve Mortgage Services is projected to be $2.23 million in
2005.
- Slight increases for non-interest income, which included
Reserve Mortgage expenses, are projected after 2005 at a
growth rate of 3% annually.
- Dividend payments throughout the projection period were
assumed to be $.36 per share, which is consistent with
historical dividend payments.
- The effective tax rate was assumed to be 34%.
The resulting dividends were then discounted to a present value
using a discount rate of 10.5%, based on Ibbotson Associates(1)
build up method with an industry discount applicable to commercial
banks. Based on the most recent Ibbotson's data the risk less rate
is 4.8%, market risk premium is 7.0% and industry specific premium
was -1.3%, resulting in a discount rate of 10.5%, which Donnelly
Penman & Partners regards as appropriate given the nature of the
Company, industry risk and general economic conditions. Donnelly
Penman & Partners also estimated the residual value for the
Company's common stock using an earning multiple of 19.2 times
applied to projected 2008 net income of $2,331,065, which is an
approximation derived from the analysis of price to earnings
multiples in comparable publicly traded companies (see Analysis of
Selected Comparable Companies). The discounted dividend analysis
implied a value of $14.87 per share for the Company's common stock
on a marketable basis. This analysis does not purport to be
indicative of actual values or actual future results and does not
purport to reflect the prices at which any securities may trade at
the present or at any time in the future. Donnelly Penman & Partners
included this analysis because it is a widely used valuation
methodology, but noted that the results of such methodology are
highly dependent upon the numerous assumptions that must be made,
including earnings growth rates, dividend payout rates, terminal
values and discount rates.
Management projected revenue and costs budgets projecting
($1,245,609) net loss for the fiscal year ending December 31, 2004
included the Company's performance thru October 31, 2004 and the
following major assumptions for November and December 2004:
- Commercial loan growth at approximately $3.0 million per
month
- Home equity line of credit growth at approximately
$500,000 per month
- Deposit growth at approximately $2.5 million per month
- Market interest rates remaining constant at approximate
October 31, 2004 levels
----------
(1) Ibbotson Associates, "Stocks, Bonds, Bills, and Inflation," Valuation
Edition 2003 Yearbook
20
- Loan and deposit pricing levels remaining constant at
approximate October 31, 2004 levels
- Provision for loan losses projected at 1.60% of
commercial loan portfolio growth
- Noninterest income and expenses remain constant at
current expected levels
- Effective tax rate assumed to be 34%
- Historical closing stock prices and trading volumes. Donnelly Penman
& Partners analyzed the quoted trades listed on Nasdaq(R) for the
Company for varying historical periods. Donnelly Penman & Partners
used a weighted average of the closing stock price quoted for a
period of 30 and 90 trading days and one calendar year. Only days in
which the security actually traded were counted in the weighted
average. For the past 30 trading days, as of November 15, 2004, the
historical weighted average price was $11.65 with a period volume of
100,533. For the past 90 trading days, as of November 15, the
historical weighted average price was $12.14 with a period volume of
221,623. For the past calendar year, as of November 15, 2004, the
historical weighted average price was $13.42 with a period volume of
532,811. It should be noted that volume may reflect "double
counting" due to both the buy and sell side of a transaction being
counted. In addition, the prices and volumes displayed are per the
trading information provided on the www.nasdaq.com website and may
not reflect all transactions that occurred over the aforementioned
time period.
- Net Book Value. The net book value or net equity method implies that
a company is worth its accumulated retained earnings, or deficit,
plus its original capitalization. Net book value is primarily an
amount arrived at over a company's existence which reflects
accounting history expressed in unadjusted dollars and not the
company's potential.
In most going concerns with a viable future it can be demonstrated
that these companies would change hands for more than net book
value. Book value is only of importance to the extent it provides an
adequate base for the continuance of operations. In most instances
where a company earns a significant return on its assets (both
tangible and intangible); the net book value approach is not
representative of the company's intrinsic business value. We have
reviewed the book value of the Company's assets in limited detail
and have found net book value to be $18.4 million or $8.92 per share
as of September 30, 2004.
Donnelly Penman & Partners typically applies either a marketability or minority
discount, or combination thereof, to value a minority share of a relatively
illiquid corporation on a comparable basis. No such discounts have been applied
to the Common Stock in this valuation. If such a discount were applied, it would
result in a valuation that would be significantly lower than the assigned value.
Donnelly Penman & Partners did not utilize a liquidation analysis in part
because, as with book value, in most instances where a company earns a
significant return on its assets (both tangible and intangible), the liquidation
value approach is not representative of the Company's intrinsic business value.
In addition, the purpose of the Opinion was to determine the fair market value
of the Common Stock, viewing the Company as a going concern. The liquidation of
the Company is not a method of valuation typically considered when deriving fair
market concern as a going concern for regulated financial institutions.
Donnelly Penman & Partners' Opinion was directed to the Company's Board of
Directors and did not constitute a recommendation to the Company's Board of
Directors or the existing holders of Common Stock. Its Opinion is limited solely
to the value of the Common Stock as of November 15, 2004, given the relevant
market and Company specific information available at the present time, and the
fairness of the transaction from a financial point of view.
On the basis of, and subject to the foregoing, Donnelly Penman & Partners is of
the opinion that, as of November 15, 2004, the fair market value of the Common
Stock was $14.04 per share. The Board determined to pay $14.50 for each share of
Common Stock that will be cashed out as a result of the transaction,
representing a 3.3% premium to the fair value of the Common Stock as of November
15, 2004. On November 18, 2004 Donnelly Penman & Partners issued an oral opinion
that the price of $14.50 per share to be paid to shareholders receiving cash as
a result of the Merger was fair from a financial point of view to those
shareholders as of such date, the date the Board of Directors adopted the
Amendment to the Certificate of Incorporation and determined the $14.50 price
per share.
Donnelly Penman & Partners does not utilize any premium analysis in its
valuation. Rather, it calculated the fair value of the Common Stock using
generally accepted valuation techniques excluding any discounts for minority
21
ownership or lack of marketability. Donnelly Penman & Partners is of the opinion
that this calculates a fair and full value to the shareholders. The Board
utilized this valuation as one tool to assist it in selecting a transaction
price, which was above the fair value as calculated by Donnelly Penman &
Partners. Therefore, Donnelly Penman & Partners states in its fairness opinion
that the price selected by the Board was fair to the shareholders. Donnelly
Penman & Partners utilized a weighted average of multiple valuation techniques
including comparable acquisitions, which typically yield a higher value because
of the control premium paid by the acquiring company. Although Donnelly Penman &
Partners considers price paid for control acquisitions to be a relevant factor,
it does not consider the implied valuation yielded by this technique to be the
only relevant factor, and therefore a weighted average or this and other
analyses is used to determine the fair value.
The Company will make the Opinion available at its principal office in Fairlawn,
Ohio, during regular business hours until the date of the Special Meeting for
inspection and copying by any interested shareholder or representative who has
been so designated in writing. Additionally, the Opinion will be attached as
Exhibit C to the Company's Schedule 13-E3 filing dated November 24, 2004.
Donnelly Penman & Partners has given its consent to such inspection and copying
by shareholders who are making their investment decision. Donnelly Penman &
Partners has consented to the reproduction of its fairness opinion in this Proxy
Statement. Donnelly Penman & Partners has consented to shareholders relying upon
Donnelly Penman & Partners' materials when making their investment decisions.
However, such materials do not constitute a recommendation by Donnelly Penman &
Partners as to how a shareholder should vote with respect to the Amendment to
the Certificate of Incorporation.
AMENDMENT TO CERTIFICATE OF INCORPORATION
GENERAL
The Board has declared advisable and has authorized and approved an amendment to
the Certificate of Incorporation to effect a one-for-500 reverse stock split of
the Common Stock at the earliest practicable date. The text of Article Fourth of
the Company's Certificate of Incorporation, as proposed to be amended to effect
the reverse stock split, is included with this proxy statement as Exhibit B.
On the effective date of the reverse stock split, each 500 shares of Common
Stock will be converted automatically into one share of Common Stock. The
effective date of the reverse stock split will be the date on which the
amendment to the Certificate of Incorporation is filed with the Secretary of
State of the State of Delaware, which is expected to be ___________, 2005.
The reverse stock split is structured to be a "going private" transaction as
defined in Rule 13e-3 promulgated under the Exchange Act, because it is intended
to terminate the Company's reporting requirements under Section 12(g) of the
Exchange Act. In connection with the reverse stock split, the Company also has
filed with the SEC a Rule 13e-3 Transaction Statement on Schedule 13E-3.
REQUIRED VOTE
The affirmative vote of a majority of the outstanding shares is required to
approve the amendment to the Certificate of Incorporation to effect the reverse
stock split.
DESCRIPTION OF THE TRANSACTION
The Common Stock is registered under the Exchange Act and, accordingly, the
Company is a reporting company under the Exchange Act. The reverse stock split
is intended to reduce the number of holders of the Common Stock to fewer than
300, which would permit the Company to apply to the SEC to terminate the
registration of the Common Stock under the Exchange Act and thereby become a
private company. The Company intends to apply for termination of the Exchange
Act registration of the Common Stock, as soon as practicable after the effective
date of the reverse stock split.
Conversion of Shares and Payment in Lieu of Fractional Shares. The reverse stock
split will be effective upon the filing of an amendment to the Certificate of
Incorporation providing for the conversion and reclassification of each
outstanding share of the Common Stock into one five-hundredth (1/500) of a share
of Common Stock. In the reverse stock split, you will receive one share of
common stock for each 500 shares you hold immediately prior to
22
the effective date of the reverse stock split. If the number of shares you hold
pre-split is greater than 500 and not evenly divisible by 500, your certificate
also will include a fractional share. If you hold fewer than 500 shares
pre-split, the fractional share to which you would otherwise be entitled as a
result of the split will not be issued, but you will receive instead a cash
payment from the Company equal to $14.50 per pre-split share. Thus, any
stockholder who owned fewer than 500 shares before the split will be cashed out
and no longer will be a stockholder of the Company.
Example 1: Stockholder Owning Fewer than 500 Shares of Record
On the effective date of the reverse stock split, Stockholder A owns of record
450 shares of the Common Stock. Using the ratio of one share of Common Stock for
each 500 shares owned immediately prior to the reverse stock split, Stockholder
A would be entitled to receive only 0.9 of a share of Common Stock after the
split. However, Stockholder A will not receive a certificate for the 0.9 share
of Common Stock, but will instead receive a cash payment of $14.50 per pre-split
share for the fractional share. In this example, Stockholder A would receive a
cash payment of $6,525 (i.e., $14.50 for each of the 450 pre-split shares not
convertible into whole shares) and would no longer be a stockholder of the
Company.
Example 2: Stockholder Owning 500 or More Shares of Record
On the effective date of the reverse stock split, Stockholder B owns of record
2,000 shares of Common Stock. Using the ratio of one share of Common Stock for
each 500 shares owned immediately prior to the reverse stock split, Stockholder
B would receive four shares of Common Stock after the split and would continue
to be a stockholder of the Company. If Stockholder B instead owned 2,400 shares
of Common Stock before the split, Stockholder B would receive 4.8 shares of
Common Stock after the split.
Authorized Capital Stock Following the Reverse Stock Split Will Not Change. The
amendment to the Certificate of Incorporation, a copy of which is included with
this proxy statement as Exhibit B, will not change the Company's authorized
capital stock. The Board currently has, and will continue to have, authority to
issue all authorized but unissued shares of capital stock at such times and for
such consideration as the Board determines. Other than the issuance of shares of
Common Stock upon exercise of outstanding options or other rights, and, in
connection with the 500-for-one forward stock split that the Company will
propose at some future date to the stockholders remaining after the split, the
Company has no plan to issue any shares of Common Stock. The fractional shares
purchased in the reverse stock split will be retired and will not be reissued.
There is no term or arrangement in the reverse stock split that treats any
stockholder of the Company differently from any other stockholder of the
Company, except that any stockholder who owns fewer than 500 shares of Common
Stock prior to the split will not be a stockholder of the Company following the
split and thus will not be entitled to vote as a stockholder or share in the
Company's assets, earnings or profits. No shares of Common Stock or other
securities of the Company will be purchased from any officer, director or other
affiliate of the Company or from any other stockholder who owns 500 or more
shares pre-split.
Unaffiliated Stockholders. No unaffiliated stockholder of the Company will have
any access to the corporate files of the Company, other than the limited
reasonable access provided by law to stockholders, and the Company will not pay
the expenses of legal counsel or an additional appraiser for any stockholder. A
majority of directors who are not employees of the Company have not retained an
unaffiliated representative to act solely on behalf of unaffiliated security
holders for purposes of negotiating the terms of the reverse stock split or
preparing a report concerning the fairness of the transaction. However, the
Board, which is comprised of seven directors, only one of whom is an employee of
the Company, unanimously approved the selection of Donnelly Penman & Partners,
an independent valuation firm, to determine the fairness of the price that will
be paid to for fractional shares repurchased following the split.
Effectiveness of the Reverse Stock Split. On the effective date of the reverse
stock split, each certificate representing a share of Common Stock outstanding
immediately prior to the reverse stock split will be deemed, for all corporate
purposes and without any further action by any person, to evidence ownership of
the reduced number of shares of Common Stock resulting from the split or the
right to receive cash for a fractional share. Each stockholder who owns fewer
than 500 shares of record immediately prior to the reverse stock split will not
have any rights with
23
respect to the Common Stock and will have only the right to receive cash in lieu
of the fractional share to which the stockholder otherwise would be entitled.
Exchange of Stock Certificates. The Company will promptly file an amendment to
the Certificate of Incorporation with the Delaware Secretary of State upon
receipt of stockholder approval. The reverse stock split will become effective
on the date of filing the amendment; the Company expects to file the amendment
on or about __________, 2005. As soon as practicable after the effective date of
the split, the Company will (i) instruct the nominee of any shares held in
book-entry form to adjust the number of shares for each holder to reflect the
number of shares held after the split and (ii) send the holder of any
certificated shares a letter of transmittal that will provide instructions for
surrendering stock certificate(s) and obtaining new certificates evidencing the
number of shares of Common Stock, if any, to which the holder is entitled as a
result of the reverse stock split.
If a certificate evidencing the ownership of Common Stock has been lost or
destroyed, the Company will accept a duly executed affidavit and indemnity
agreement of loss or destruction, in a form satisfactory to the Company, in lieu
of the lost or destroyed certificate. Additional instructions regarding lost or
destroyed stock certificates will be included in the letter of transmittal sent
to stockholders after the reverse stock split becomes effective.
Except as described above with respect to lost stock certificates, there will be
no service charge or other cost payable by any stockholder in connection with
the exchange of a certificate or in connection with the receipt of cash in lieu
of a fractional share.
The letter of transmittal will be sent to stockholders promptly after the
effective date of the reverse stock split. DO NOT SEND IN YOUR STOCK
CERTIFICATE(S) UNTIL YOU HAVE RECEIVED THE LETTER OF TRANSMITTAL.
Payment for Fractional Shares. If you are receiving cash for a fractional share
in a book-entry account, payment will be posted to your account by your nominee
upon receipt of payment from the Company. If you hold certificated shares,
instructions for receiving payment for any fractional shares will be contained
in the transmittal letter you receive soon after the effective date of the
reverse stock split.
As soon as practicable after the effective date, the Company will send you a
letter of transmittal that will provide instructions for surrendering your stock
certificate(s) and obtaining certificates evidencing the shares of Common Stock,
if any, to which you are entitled as a result of the reverse stock split.
Source of Funds and Expenses. Approximately $1,396,000 will be required to pay
for the fractional shares of the Common Stock exchanged for cash in the reverse
stock split. The Company also will pay all expenses related to the reverse stock
split. These expenses are estimated to aggregate $128,000, as follows: $25,000
for the costs of appraising the fair market value of the Common Stock, $75,000
for legal fees, $5,000 for accounting fees; $10,000 for printing costs; $8,500
for solicitation costs and $4,500 for other fees and expenses. Funds required to
implement the reverse stock split will come from working capital.
CONDUCT OF BUSINESS AFTER THE TRANSACTION
Following the reverse stock split, the Company's business will be conducted in
the same manner as presently conducted. The directors, officers and other
employees immediately prior to the reverse stock split will continue to be the
directors, officers and other employees after the reverse stock split. The
Certificate of Incorporation will be amended to effect the reverse stock split,
but the Certification of Incorporation and the Bylaws otherwise will remain in
effect following, and be unchanged by, the reverse stock split.
The Company is not aware that any director, executive officer or affiliate of
the Company currently intends to sell any shares of Common Stock owned by such
person following the reverse stock split.
Following the split, the Company from time to time may receive inquiries
regarding a possible sale of the Company, the purchase of certain assets of the
Company, an acquisition by the Company or a merger or other business combination
involving the Company. As of the date of this proxy statement, the Company has
not entered into any agreement with respect to any such extraordinary corporate
transaction, nor does the Company have any understanding with any person
regarding any such transaction. However, the Company will continue to consider
24
any inquiries received. It is possible the Company may at some time engage in
such a transaction, and any continuing stockholder after the reverse stock split
may receive consideration for such stockholder's shares that is lower than,
equal to or in excess of the amount per share paid to a cashed-out stockholder
in the reverse stock split.
ABANDONMENT OF THE TRANSACTION
Under applicable Delaware law, the Board has a duty to act in the best interest
of the Company's stockholders. Accordingly, the Board reserves the right to
abandon the reverse stock split after stockholder approval and before the
effective time of the reverse stock split, if for any reason the Board
determines that, in the best interest of the Company's stockholders, it is not
advisable to proceed with the reverse stock split. The Board intends to complete
the reverse stock split if approved by the Company's stockholders, and the Board
is unaware of any circumstance that would cause it to abandon the transaction,
other than (i) a significant increase in transaction costs resulting from
purchases of shares prior to the effective date of the split apparently made
solely for the purpose of receiving the premium to be paid to holders of fewer
than 500 shares or (ii) a determination that the approved split will not reduce
the number of stockholders of record to fewer than 300.
FAILURE TO EFFECT THE TRANSACTION
If the reverse stock split were not implemented, the Common Stock would continue
to be quoted on Nasdaq(R), and the Company would continue to file Exchange Act
reports and be subject to the other provisions of the Exchange Act.
NO APPRAISAL RIGHTS
Stockholders do not have appraisal rights under Delaware law, the Certificate of
Incorporation or the Company's Bylaws in connection with the reverse stock
split.
TRADING, MARKET PRICES AND DIVIDENDS
The Common Stock is quoted on Nasdaq(R) under the trading symbol "GCFC." The
following table sets forth the high and low sales prices for the Common Stock
for the periods indicated, as reported by Nasdaq(R) for each quarter during the
period January 1, 2002 through September 30, 2004, and the dividends paid each
quarter during the same period. As of November 15, 2004 there were 2,200,849
outstanding shares of Common Stock and no shares of the Company's preferred
stock. The limited and sporadic trading of the Common Stock does not constitute,
nor should it be considered, an established public trading market for the Common
Stock.
QUARTER HIGH LOW DIVIDEND
------- ---- --- --------
2004
September 30 $15.22 $11.25 $0.09
June 30 18.00 12.35 0.09
March 31 16.10 12.99 0.09
2003
December 31 $16.18 $13.60 $0.09
September 30 14.00 10.70 0.09
June 30 13.13 10.49 0.09
March 31 11.03 9.28 0.09
2002
December 31 $10.00 $9.10 $0.09
September 30 10.79 9.01 0.09
June 30 11.36 10.25 0.09
March 31 11.00 9.65 0.09
25
PRIOR STOCK PURCHASES
During fiscal years 2002 and 2003 and the first three fiscal quarters of 2004,
the Company's purchase of the Common Stock by fiscal quarter were as follows:
# SHARES RANGE OF PRICES AVERAGE
QUARTER ENDED PURCHASED PAID PRICE PAID
------------- --------- -------------- ----------
2004
September 30 0 0 0
June 30 0 0 0
March 31 10,000 $ 13.05 $13.05
2003
December 31 0 0 0
September 30 0 0 0
June 30 0 0 0
March 31 0 0 0
2002
December 31 0 0 0
September 30 37,385 $10.49 - 10.53 $10.50
June 30 59,025 $ 11.03 $11.03
March 31 0 0 0
RECENT SECURITIES TRANSACTIONS
On October 22, 2004, the Company completed its acquisition of Reserve Mortgage
Services, Inc. (formerly RJO Financial Services, Inc.), an Akron, Ohio based
company licensed as a mortgage banker in Ohio, Florida and Georgia and founded
by Richard J. O'Donnell ("Reserve"). The acquisition of Reserve was effected by
the merger between Reserve and a subsidiary of the Company, in which Reserve was
the surviving corporation. Richard J. O'Donnell and Kathy K. Vidakovics were the
only shareholders of Reserve prior to the merger. Mr. O'Donnell continues to
serve as President and Chief Operating Officer and Ms. Vidakovics continues to
serve as Vice President and Chief Operating Officer of Reserve following the
acquisition. No other material relationship exists between Mr. O'Donnell or Ms.
Vidakovics and the Company or any of its affiliates, or between Mr. O' Donnell
or Ms. Vidakovics and any director or officer of the Company, or any associate
of any director or officer of the Company. The Company paid an aggregate of
127,077 shares of Common Stock and $339,966 to the two Reserve shareholders. Mr.
O'Donnell received 123,077 shares, and Ms. Vidakovics received the remaining
4,000 shares. Based on the average closing price of $14.06 per share of Common
Stock, during the week before and after the announcement of the proposed
acquisition on June 10, 2004, the value of the acquisition was approximately
$2.1 million. In connection with his service as an officer of Reserve, Mr.
O'Donnell also received an option to purchase 5,000 shares of Common Stock at
the then current market value, and Ms. Vidakovics received an option to purchase
10,000 shares at the same price.
DIRECTORS AND EXECUTIVE OFFICERS
During the past five years, no director or executive officer of the Company has
been convicted in a criminal proceeding or was a party to any judicial or
administrative proceeding that resulted in (i) a judgment, decree or final order
enjoining the person from future violations of, or prohibiting activities
subject to, federal or state securities laws or (ii) a finding of any violation
of federal or state securities laws.
Each director and executive officer of the Company is a citizen of the United
States of America.
DIRECTORS
JEFFREY W. ALDRICH, a director since 1979, has been President and Chief
Executive Officer of Sterling China Co., a dishware manufacturing company, 511
112th Street, Wellsville, Ohio 43920, since November 1970.
26
MARK S. ALLIO, a director since 2003, has been elected by the Board to serve as
Vice-Chairman, President and Chief Executive Officer of the Company and
Vice-Chairman and Chief Executive Officer of CFBank, 2923 Smith Road, Fairlawn,
Ohio, 44333, effective February 1, 2005; Mr. Allio was President and Chief
Executive Officer of Quicken Loans/Rock Bank, 20555 Victor Parkway, Livonia,
Michigan 48152, from April 2003 to December 2004; from February 1987 to December
2002, Mr. Alio was President, Third Federal Savings Bank, 7007 Broadway,
Cleveland, Ohio 44105.
THOMAS P. ASH, a director since 1985, has been Superintendent of Schools,
Mid-Ohio Educational Service Center, 1495 West Longview Avenue, Suite 202,
Mansfield, Ohio 44906, since January 2000; from August 1984 to December 1999,
Mr. Ash was Superintendent of Schools, East Liverpool City School District, 500
Maryland Avenue, East Liverpool, Ohio 43920.
WILLIAM R. DOWNING, a director since 2003, has been President of R. H. Downing,
Inc., an automotive supply, sales and marketing agency, 738 West Market Street,
Akron, Ohio 44303, since June 1973.
GERRY W. GRACE, a director since 1986, has been President of Grace Services,
Inc., a weed and pest control company, 715 North Meridian Road, Youngstown, Ohio
44509, since April 1980. Mr. Grace also has served a Trustee of Ellsworth
Township, Ohio, since January 1976.
DAVID C. VERNON, a director since January 2003, has been Chairman, President and
Chief Executive Officer of the Company and Chairman and Chief Executive Officer
of CFBank, 2923 Smith Road, Fairlawn, Ohio 44333 since March 2003, and,
effective February 1, 2005, he will continue as Chairman of the Company and
CFBank; from September 2002 to February 2003, Mr. Vernon was Chairman, President
and Chief Executive Officer, Founders Capital Corporation, 137 North Wheaton,
Akron, Ohio 44313; from May 2000 to July 2002; from May 2000 to July 2002, he
was a Strategic Planning Consultant to Westfield Bank, Two Park Circle,
Westfield, Ohio, 44251; from July 1999 to April 2002, he was a Consultant to
Champaign National Bank, 601 Scioto Street, Urbana, Ohio 43078; and from April
1999 to February 2001, he was a consultant to First Federal Savings and Loan of
Warren (now known as First Place Bank), 185 East Market Street, Warren, Ohio
44481. While serving as a Consultant to Champaign National Bank, Mr. Vernon also
served as a director and member of the Audit and Compensation Committees of the
bank's parent company, Futura Banc Corp. In February 1999 Mr. Vernon retired as
Chairman, President and Chief Executive Officer of Summit Bank, a community bank
he founded in January 1991.
JERRY F. WHITMER, a director since 2003, has been a Partner of Brouse McDowell,
LPA, a law firm, 388 South Main Street, Akron, Ohio 44311, since 1971.
EXECUTIVE OFFICERS
DAVID C. VERNON (See information under "Directors" above.)
THERESE A. LIUTKUS has been Chief Financial Officer and Treasurer of Central
Federal Corporation and CFBank since November 2003; from October 1986 to
November 2002, Ms. Liutkus was employed by First Place Financial Corp. and its
subsidiary First Place Bank (formerly FFY Financial Corp. and FFY Bank,
respectively, prior to the merger with First Place in December 2000), 185 East
Market Street, Warren, Ohio 44481, serving as Internal Auditor and Compliance
Officer from October 1986 to January 1992, Accounting Manager from February 1992
to February 1996 and as Chief Financial Officer from March 1996 to November
2002.
ELOISE L. MACKUS has been Senior Vice President, General Counsel and Secretary
of the Company since July 2003; from May 2001 to July 2003, she served as
President of the Consulting Division of Mackus Company, Suite 108F, 3800
Rosemont Boulevard, Fairlawn, Ohio 44333; and from March 1994 to April 2001, Ms.
Mackus was employed by The J. M. Smucker Company, Strawberry Lane, Orrville,
Ohio 44667, serving from May 1999 to April 2001 as Vice President and General
Manager, International Markets, from September 1998 to April 1999 as Director,
International Markets and from March 1994 to August 1998 as Assistant General
Counsel.
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.
27
RAYMOND E. HEH has been President and Chief Operating Officer, CF Bank, 2923
Smith Road, Fairlawn, Ohio 44333, since June 2003; and from January 1999 to
December 2002 he served as Regional President, Northeast Ohio, Bank One, NA, 50
South Main Street, Akron, Ohio 44308.
R. PARKER MACDONELL has been President, Columbus Region, CF Bank, Suite 125,
4249 Easton Way, Columbus, Ohio 43219, since May 2003; and from October 1999 to
October 2002 he served as Senior Vice President, Retail Market Manager, Bank One
Corporation (formerly Banc One Corporation), 1111 Polaris Parkway, Columbus,
Ohio 43271.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Federal regulations require that all loans or extensions of credit to executive
officers and directors of insured financial institutions must be made on
substantially the same terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions with the general public,
except for loans made pursuant to programs generally available to all employees,
and must not involve more than the normal risk of repayment or present other
unfavorable features. The Bank is therefore prohibited from making any new loans
or extensions of credit to executive officers and directors at different rate or
terms than those offered to the general public, except for loans made pursuant
to programs generally available to all employees, and has adopted policy to this
effect. In addition, loans made to a director or executive officer in an amount
that, when aggregated with the amount of all other loans to such person and his
or her related interests, are in excess of the greater of $25,000 or 5% of the
Bank's capital and surplus (up to a maximum of $500,000) must be approved in
advance by a majority of the disinterested members of the Board of Directors. As
of the date hereof, there are no loans outstanding to any executive officer,
director or related interest.
Founders Capital Corporation, of which Mr. Vernon, the President and Chief
Executive Officer of the Company, was the founder, received a consulting fee of
$75,000 from the Company on January 24, 2003, prior to the date Mr. Vernon
became an officer of the Company.
INTERESTS OF EXECUTIVE OFFICERS AND DIRECTORS; POTENTIAL CONFLICTS OF INTEREST
None of the Company's officers and directors, who collectively beneficially own
approximately 18.6% of the Common Stock, owns fewer than 500 shares.
Accordingly, no officer or director will receive any payment for fractional
shares. After the reverse stock split, the Company's executive officers and
directors will collectively beneficially own approximately 19.3% of the Common
Stock, and they will retain their positions in the Company. As a result of the
split, any executive officer or director owning 500 or more shares before the
split will increase his or her percentage of ownership of the Common Stock
without investing any additional money. However, every unaffiliated stockholder
who owns 500 or more shares pre-split will realize the same proportionate
increase in percentage of ownership as a result of the split.
STOCK OWNERSHIP
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table provides information as of December 31, 2004 regarding
persons known by the Company to be beneficial owners of more than 5% of the
outstanding Common Stock. A person may be considered to beneficially own any
shares of Common Stock over which the person has, directly or indirectly, sole
or shared voting or investment power.
Amount and Nature Percent of
of Beneficial Common Stock
Name and Address of Beneficial Owner Ownership Outstanding
------------------------------------ --------- -----------
CF Bank Employees' Savings & Profit Sharing Plan and Trust 118,402 5.4%
2923 Smith Road
Fairlawn, Ohio
Richard J. O'Donnell 123,077 5.6%
1730 Akron-Peninsula Road, Akron, Ohio 44313
28
SECURITY OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth information as of December 31, 2004 with respect
to the number of shares of Common Stock considered to be owned by each director
of the Company, each executive officer of the Company who would be named in a
Summary Compensation Table required to be included in a proxy statement for an
annual meeting and by all directors and executive officers of the Company as a
group. A person may be considered to own any shares of Common Stock over which
the person has, directly or indirectly, sole or shared voting or investment
power.
Amount and
Nature of Percent of
Beneficial Common Stock
Name Title Ownership Outstanding
David C. Vernon Chairman of the Board, President and
Chief Executive Officer 54,674 (1) 2.5%
Eloise L. Mackus Senior Vice President, General Counsel and
Secretary 8,830 (8) 0.4%
Therese A. Liutkus Chief Financial Officer and Treasurer 4,500 (9) 0.2%
Jeffrey W. Aldrich Director 33,572 (2) 1.5%
Mark S. Allio Director 26,335 (4) 1.2%
Thomas P. Ash Director 33,572 (3) 1.5%
William R. Downing Director 17,692 (5) 0.8%
Gerry W. Grace Director 43,572 (3) 2.0%
Jerry F. Whitmer Director 6,500 (4) 0.3%
Richard J. O'Donnell President and Chief Executive Officer,
Reserve Mortgage Services, Inc. 123,077 5.6%
Raymond E. Heh President and Chief Operating Officer, CF Bank 10,000 (6) 0.5%
R. Parker MacDonell President, Columbus Region, CF Bank 55,336 (7) 2.5%
All directors and
executive officers as
a group (12 persons) 417,660 (10) 18.6%
1. Includes (i) 13,325 shares awarded pursuant to the Company's equity
compensation plans which have not yet vested, but as to which he may
provide voting recommendations, (ii) 13,887 shares which may be acquired
by exercising stock options within 60 days and (iii) 412 shares owned by
Catherine Vernon, Mr. Vernon's spouse.
2. Includes (i) 9,694 shares which may be acquired by exercising stock
options within 60 days and (ii) 23,104 shares owned by Jean Aldrich, Mr.
Aldrich's spouse.
3. Includes 9,694 shares which may be acquired by exercising stock options
within 60 days.
4. Includes 1,000 shares awarded pursuant to the Company's equity
compensation plans which have not yet vested, but as to which he may
provide voting recommendations.
5. Includes (i) 1,000 shares awarded pursuant to the Company's equity
compensation plans which have not yet vested, but as to which he may
provide voting recommendations and (ii) 16,192 shares owned by R.H.
Downing, Inc., which is 100% owned by Mr. Downing.
6. Includes (i) 4,000 shares awarded pursuant to the Company's equity
compensation plans which have not yet vested, but as to which he may
provide voting recommendations, and (ii) 4,000 shares which may be
acquired by exercising stock options within 60 days.
7. Includes (i) 6,000 shares awarded pursuant to the Company's equity
compensation plans which have not yet vested, but as to which he may
provide voting recommendations, and (ii) 4,665 shares which may be
acquired by exercising stock options within 60 days.
8. Includes (i) 3,500 shares awarded pursuant to the Company's equity
compensation plans which have not yet vested, but as to which she may
provide voting recommendations, and (ii) 2,330 shares which may be
acquired by exercising stock options within 60 days.
9. Includes 4,500 shares awarded pursuant to the Company's equity
compensation plans which have not yet vested, but as to which she may
provide voting recommendations.
10. Includes (i) 34,325 shares awarded pursuant to the Company's equity
compensation plans which have not yet vested, but as to which they may
provide voting recommendations, and (ii) 53,964 shares which may be
acquired by exercising stock options within 60 days.
29
EQUITY COMPENSATION PLAN INFORMATION
The following table sets forth information about Company common stock that may
be issued upon exercise of options, warrants and rights under all of the
Company's equity compensation plans as of November 15, 2004.
Number of Securities
to be Issued Upon Weighted-Average Number of Securities
Exercise of Exercise Price of Remaining Available for
Outstanding Options, Outstanding Options, Future Issuance under
Plan Category Warrants and Rights Warrants and Rights Equity Compensation Plans
------------- ------------------- ------------------- -------------------------
Equity compensation plans
approved by stockholders 256,536 $ 11.32 14,474
Equity compensation plans
not approved by
stockholders - - -
------- ------- -------
Total 256,536 $ 11.32 14,474
======= ======= =======
FINANCIAL INFORMATION
Set forth following page 31 below are financial statements of the Company for
its fiscal years ended December 31, 2003 and 2002, and the nine-month period
ended September 30, 2004. These financial statements should be read together
with the accompanying notes. After the financial statements, you will find pro
forma information disclosing the effect of the transaction on certain items
included in the Company's financial statements for its most recent fiscal year
and latest interim period.
STOCKHOLDER PROPOSALS
As provided in the proxy statement for the 2004 Annual Meeting of Stockholders
held on April 20, 2004, the deadline for inclusion of stockholder proposals in
the proxy materials for the 2005 Annual Meeting of Shareholders was November 15,
2004. If the Exchange Act registration of the Common Stock is not terminated for
any reason, including a decision by the Board to abandon the Transaction, the
deadline for inclusion of stockholder proposals in the proxy materials for the
2006 Annual Meeting of Shareholders will be specified in the proxy materials for
the 2005 Annual Meeting of Stockholders.
30
WHERE YOU CAN FIND MORE INFORMATION
The Company files annual, quarterly and special reports, proxy statements and
other information with the SEC. You may read and copy any reports, statements or
other information that the Company has filed at the SEC's public reference room
in Washington, D.C. Please call the SEC at 1.800.SEC.0330 for further
information on the public reference rooms. The Company's SEC filings also are
available to the public from commercial document retrieval services and at the
website maintained by the SEC at www.sec.gov.
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROXY STATEMENT. THE
COMPANY HAS NOT AUTHORIZED ANYONE TO PROVIDE INFORMATION THAT IS DIFFERENT FROM
THAT CONTAINED IN THIS PROXY STATEMENT. THIS PROXY STATEMENT IS DATED
___________, 2005. YOU SHOULD NOT ASSUME THAT THE INFORMATION CONTAINED IN THIS
PROXY STATEMENT IS ACCURATE AS OF ANY DATE OTHER THAN SUCH DATE, AND THE MAILING
OF THIS PROXY STATEMENT TO YOU SHALL NOT CREATE ANY IMPLICATION TO THE CONTRARY.
BY ORDER OF THE BOARD OF DIRECTORS
Eloise L. Mackus
Corporate Secretary
Fairlawn, Ohio
__________, 2005
YOU ARE CORDIALLY INVITED TO ATTEND THE SPECIAL MEETING IN PERSON. WHETHER OR
NOT YOU PLAN TO ATTEND THE SPECIAL MEETING, YOU ARE REQUESTED TO SIGN, DATE AND
PROMPTLY RETURN THE ACCOMPANYING PROXY IN THE ENCLOSED POSTAGE-PAID ENVELOPE.
31
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Central Federal Corporation
Wellsville, Ohio
We have audited the accompanying consolidated balance sheets of Central Federal
Corporation as of December 31, 2003 and 2002 and the related consolidated
statements of income, changes in shareholders' equity and cash flows for each of
the three years in the period ended December 31, 2003. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Central Federal
Corporation as of December 31, 2003 and 2002 and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
2003, in conformity with accounting principles generally accepted in the United
States of America.
Crowe Chizek and Company LLC
Cleveland, Ohio
February 12, 2004
CENTRAL FEDERAL CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, 2003 and 2002
(Dollars in thousands except per share data)
2003 2002
--------- ---------
ASSETS
Cash and cash equivalents $ 8,936 $ 12,861
Interest-bearing deposits in other financial institutions 1,587 7,205
Securities available for sale 27,126 1,439
Securities held to maturity (fair value 2002 - $18,169) - 17,822
Loans held for sale 106 -
Loans, net of allowance of $415 and $361 58,024 62,565
Federal Home Loan Bank stock 3,626 3,485
Loan servicing rights 221 200
Foreclosed assets, net 193 2
Premises and equipment, net 1,932 833
Bank owned life insurance 3,256 3,068
Accrued interest receivable 487 403
Other assets 1,517 668
--------- ---------
$ 107,011 $ 110,551
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Non-interest bearing $ 2,457 $ 1,396
Interest bearing 70,901 73,294
--------- ---------
Total deposits
73,358 74,690
Federal Home Loan Bank advances 7,500 11,430
Loan payable - 4,900
Advances by borrowers for taxes and insurance 207 448
Accrued interest payable and other liabilities 935 1,500
Subordinated debentures 5,155 -
--------- ---------
Total liabilities
87,155 92,968
Shareholders' equity
Preferred stock, 1,000,000 shares authorized;
none issued - -
Common stock, $.01 par value; 6,000,000 shares
authorized; 2003 - 2,280,020 shares issued,
2002 - 1,938,871 shares issued 23 19
Additional paid-in capital 11,845 8,306
Retained earnings 10,997 14,085
Accumulated other comprehensive income 201 28
Unearned Employee Stock Ownership Plan shares - (1,425)
Unearned stock based incentive plan shares (357) (160)
Treasury stock, at cost (2003 - 255,648 shares,
2002 - 292,950 shares) (2,853) (3,270)
--------- ---------
Total shareholders' equity 19,856 17,583
--------- ---------
$ 107,011 $ 110,551
========= =========
See accompanying notes.
CENTRAL FEDERAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, 2003, 2002 and 2001
(Dollars in thousands except per share data)
2003 2002 2001
------- ------- -------
Interest and dividend income
Loans, including fees $ 4,203 $ 5,255 $ 6,685
Taxable securities 934 1,518 2,481
Tax exempt securities 5 - -
Federal Home Loan Bank stock dividends 141 157 215
Federal funds sold and other 152 137 207
------- ------- -------
5,435 7,067 9,588
Interest expense
Deposits 1,570 2,501 3,236
Federal Home Loan Bank advances and other debt 1,940 961 2,063
Subordinated debentures 11 - -
------- ------- -------
3,521 3,462 5,299
------- ------- -------
Net interest income 1,914 3,605 4,289
Provision for loan losses 102 19 62
------- ------- -------
Net interest income after provision for loan losses 1,812 3,586 4,227
Noninterest income
Service charges on deposit accounts 165 130 174
Net gain (loss) on sales of loans 429 313 (63)
Loan servicing fees 73 58 22
Net gains on sales of securities 42 16 15
Earnings on bank owned life insurance 188 68 -
Other 33 30 36
------- ------- -------
930 615 184
Noninterest expense
Salaries and employee benefits 3,549 1,713 1,758
Occupancy and equipment 224 96 105
Data processing 246 196 200
Franchise taxes 301 287 309
Professional fees 673 212 163
Director fees 119 84 81
Supplies 173 101 86
Loan expenses 91 143 130
Foreclosed assets, net 14 (34) 4
Depreciation and amortization 350 194 154
Branch closing expense - - 154
Other 364 222 357
------- ------- -------
6,104 3,214 3,501
------- ------- -------
Income (loss) before income taxes (3,362) 987 910
Income tax expense (benefit) (988) 313 312
------- ------- -------
Net income (loss) $(2,374) $ 674 $ 598
======= ======= =======
Earnings (loss) per share:
Basic $ (1.31) $ 0.44 $ 0.38
Diluted (1.28) 0.43 0.38
See accompanying notes.
CENTRAL FEDERAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Years ended December 31, 2003, 2002 and 2001
(Dollars in thousands except per share data)
2003 2002 2001
------- ----- -----
Net income (loss) $(2,374) $ 674 $ 598
Change in net unrealized gain (loss) on securities
available for sale (154) 34 17
Less: Reclassification adjustment for
gains and losses later recognized in net
income 42 16 15
------- ----- -----
Net unrealized gains and (losses) (196) 18 2
Unrealized gain on securities transferred from held
to maturity to available for sale 458 - -
Tax effect (89) (6) (1)
------- ----- -----
Other comprehensive income 173 12 1
------- ----- -----
Comprehensive income (loss) $(2,201) $ 686 $ 599
======= ===== =====
See accompanying notes.
CENTRAL FEDERAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years ended December 31, 2003, 2002 and 2001
(Dollars in thousands except per share data)
Unearned
Accumulated Employee
Additional Other Stock
Common Paid-In Retained Comprehensive Ownership
Stock Capital Earnings Income Plan Shares
----- ------- -------- ------ -----------
Balance at January 1, 2001 $ 19 $ 8,322 $ 13,846 $ 15 $ (1,853)
Comprehensive income:
Net income 598
Other comprehensive income 1
Total comprehensive income
Commitment to release 18,864 employee stock
ownership plan shares (12) 202
Release of 15,516 stock based incentive plan shares
Purchase of 7,500 shares of treasury stock
Cash dividends declared ($.31 per share) (482)
---- ---------- -------- ----- -----------
Balance at December 31, 2001 19 8,310 13,962 16 (1,651)
Comprehensive income:
Net income 674
Other comprehensive income 12
Total comprehensive income
Commitment to release 21,588 employee stock
ownership plan shares (4) 226
Release of 15,516 stock based incentive plan shares
Purchase of 96,410 shares of treasury stock
Cash dividends declared ($.36 per share) (551)
---- ---------- -------- ----- -----------
Balance at December 31, 2002 19 8,306 14,085 28 (1,425)
Comprehensive income:
Net income (loss) (2,374)
Other comprehensive income 173
Total comprehensive loss
Unearned
Stock Based Total
Incentive Plan Treasury Shareholders'
Shares Stock Equity
------ ----- ------
Balance at January 1, 2001 $ (365) $ (2,151) $ 17,833
Comprehensive income:
Net income 598
Other comprehensive income 1
----------
Total comprehensive income
599
Commitment to release 18,864 employee stock
ownership plan shares 190
Release of 15,516 stock based incentive plan shares 95 95
Purchase of 7,500 shares of treasury stock (75) (75)
Cash dividends declared ($.31 per share) (482)
------ -------- ----------
Balance at December 31, 2001 (270) (2,226) 18,160
Comprehensive income:
Net income 674
Other comprehensive income 12
----------
Total comprehensive income
686
Commitment to release 21,588 employee stock
ownership plan shares 222
Release of 15,516 stock based incentive plan shares 110 110
Purchase of 96,410 shares of treasury stock (1,044) (1,044)
Cash dividends declared ($.36 per share) (551)
------ -------- ----------
Balance at December 31, 2002 (160) (3,270) 17,583
Comprehensive income:
Net income (loss) (2,374)
Other comprehensive income 173
----------
Total comprehensive loss
Issuance of common stock in private
placement, net of offering costs of
$64 (312,649 shares) 3 3,116
Issuance of stock based incentive plan shares
(28,500 shares) 1 337
Sale of employee stock ownership plan shares
at plan termination (81,000 shares) 125 748
Final allocation of employee stock ownership plan
shares at plan termination (41,882 shares) (39) 677
Release of 16,002 stock based incentive plan shares
Stock options exercised (37,302 shares) (72)
Tax benefits from stock options exercised 47
Cash dividends declared ($.36 per share) (689)
---- ---------- -------- ----- -----------
Balance at December 31, 2003 $ 23 $ 11,845 $ 10,997 $ 201 $ -
==== ========== ======== ===== ===========
2,201
Issuance of common stock in private
placement, net of offering costs of
$64 (312,649 shares) 3,119
Issuance of stock based incentive plan shares
(28,500 shares) (338) -
Sale of employee stock ownership plan shares
at plan termination (81,000 shares) 873
Final allocation of employee stock ownership plan
shares at plan termination (41,882 shares) 638
Release of 16,002 stock based incentive plan shares 141 141
Stock options exercised (37,302 shares) 417 345
Tax benefits from stock options exercised 47
Cash dividends declared ($.36 per share) (689)
------ -------- ----------
Balance at December 31, 2003 $ (357) $ (2,853) $ 19,856
====== ======== ==========
See accompanying notes.
CENTRAL FEDERAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2003, 2002 and 2001
(Dollars in thousands except per share data)
2003 2002 2001
-------- -------- --------
Cash flows from operating activities
Net income (loss) $ (2,374) $ 674 $ 598
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Provision for loan losses 102 19 62
Valuation loss on mortgage servicing rights 56 - -
Depreciation and amortization 108 118 101
Net amortization of securities 63 (51) (131)
Net gain on sales of securities (42) (16) (15)
Loss on disposal of premises and equipment 50 - -
Write-down of assets from branch closing - - 154
Federal Home Loan Bank stock dividend (141) (157) (215)
ESOP expense 638 222 190
SBIP expense 141 110 95
Earnings on bank owned life insurance (188) (68) -
Net change in:
Loans held for sale (106) 8,221 (8,221)
Accrued interest receivable (84) 127 576
Other assets (1,021) (195) (120)
Accrued interest payable and other
liabilities (600) 865 (303)
-------- -------- --------
Net cash from operating activities
(3,398) 9,869 (7,229)
Cash flows from investing activities
Net change in interest bearing deposits 5,618 (199) (6)
Available-for-sale securities:
Sales 3,078 386 245
Maturities, prepayments and calls 28,968 594 1,077
Purchases (46,914) (290) (233)
Held-to-maturity securities:
Maturities, prepayments and calls 7,201 27,056 12,493
Purchases - (21,508) -
Loan originations and payments, net 4,434 8,010 15,676
Additions to premises and equipment (1,326) (127) (10)
Purchase of bank owned life insurance - (3,000) -
Cash received in repayment of ESOP loan 853 - -
-------- -------- --------
Net cash from investing activities
1,912 10,922 29,242
CENTRAL FEDERAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Years ended December 31, 2003, 2002 and 2001
(Dollars in thousands except per share data)
2003 2002 2001
---- ---- ----
Cash flows from financing activities
Net change in deposits (1,332) (1,478) 2,171
Proceeds from Federal Home Loan Bank
advances and other debt 7,500 - 49,320
Repayments on Federal Home Loan Bank
advances and other debt (16,330) (9,063) (71,463)
Net change in advances by borrowers for
taxes and insurance (241) (123) (85)
Proceeds from subordinated debentures 5,155 - -
Cash dividends paid (655) (551) (482)
Proceeds from private placement 3,119 - -
Proceeds from exercise of stock options 345 - -
Repurchase of common stock - (1,044) (75)
-------- -------- --------
Net cash from financing activities
(2,439) (12,259) (20,614)
Net change in cash and cash equivalents (3,925) 8,532 1,399
Beginning cash and cash equivalents 12,861 4,329 2,930
-------- -------- --------
Ending cash and cash equivalents $ 8,936 $ 12,861 $ 4,329
======== ======== ========
Supplemental cash flow information:
Interest paid $ 3,519 $ 3,495 $ 5,852
Income taxes paid 106 160 226
Supplemental noncash disclosures:
Transfer of securities from held to maturity
to available for sale $ 10,533 $ - $ -
Transfers from loans to repossessed assets 193 - 145
See accompanying notes.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands except per share data)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations and Principles of Consolidation: The consolidated financial
statements include Central Federal Corporation and its wholly-owned subsidiary,
Central Federal Bank, together referred to as "the Company". Intercompany
transactions and balances are eliminated in consolidation.
The Company provides financial services through its offices in Wellsville,
Fairlawn and Columbus, Ohio. Its primary deposit products are checking, savings,
and term certificate accounts, and its primary lending products are residential
mortgage, commercial, and installment loans. Substantially all loans are secured
by specific items of collateral including business assets, consumer assets, and
commercial and residential real estate. Commercial loans are expected to be
repaid from cash flow from operations of businesses. Other financial
instruments, which potentially represent concentrations of credit risk, include
deposit accounts in other financial institutions.
Use of Estimates: To prepare financial statements in conformity with accounting
principles generally accepted in the United States of America, Management makes
estimates and assumptions based on available information. These estimates and
assumptions affect the amounts reported in the financial statements and the
disclosures provided, and actual results could differ. The allowance for loan
losses, loan servicing rights, and fair values of financial instruments are
particularly subject to change.
Cash Flows: Cash and cash equivalents include cash and deposits with other
financial institutions under 90 days. Net cash flows are reported for loan and
deposit transactions.
Securities: Debt securities are classified as held to maturity and carried at
amortized cost when Management has the positive intent and ability to hold them
to maturity. Debt securities are classified as available for sale when they
might be sold before maturity. Equity securities with readily determinable fair
values are classified as available for sale. Securities available for sale are
carried at fair value, with unrealized holding gains and losses reported in
other comprehensive income. Trading securities are carried at fair value, with
changes in unrealized holding gains and losses included in income. Other
securities such as Federal Home Loan Bank stock are carried at cost.
Interest income includes amortization of purchase premium or discount. Gains and
losses on sales are based on the amortized cost of the security sold. Securities
are written down to fair value when a decline in fair value is not temporary.
Loans Held for Sale: Loans originated and intended for sale in the secondary
market are carried at the lower of cost or market in the aggregate. Net
unrealized losses, if any, are recorded as a valuation allowance and charged to
earnings.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands except per share data)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Loans: Loans that Management has the intent and ability to hold for the
foreseeable future or until maturity or payoff are reported at the principal
balance outstanding, net of unearned interest, deferred loan fees and costs, and
an allowance for loan losses. Interest income is reported on the interest method
and includes amortization of net deferred loan fees and costs over the loan
term. Interest income on mortgage and commercial loans is discontinued at the
time the loan is 90 days delinquent unless the loan is well-secured and in
process of collection. Consumer and credit card loans are typically charged off
no later than 180 days past due. In all cases, loans are placed on nonaccrual or
charged-off at an earlier date if collection of principal or interest is
considered doubtful.
All interest accrued but not received for loans placed on nonaccrual is reversed
against interest income. Interest received on such loans is accounted for on the
cash-basis or cost-recovery method, until qualifying for return to accrual.
Loans are returned to accrual status when all the principal and interest amounts
contractually due are brought current and future payments are reasonably
assured.
Allowance for Loan Losses: The allowance for loan losses is a valuation
allowance for probable incurred credit losses. Loan losses are charged against
the allowance when Management believes the uncollectibility of a loan balance is
confirmed. Subsequent recoveries, if any, are credited to the allowance.
Management estimates the allowance balance required using past loan loss
experience, the nature and volume of the portfolio, information about specific
borrower situations and estimated collateral values, economic conditions, and
other factors. Allocations of the allowance may be made for specific loans, but
the entire allowance is available for any loan that, in Management's judgment,
should be charged-off.
The allowance consists of specific and general components. The specific
component relates to loans that are individually classified as impaired or loans
otherwise classified as substandard or doubtful. The general component covers
non-classified loans and is based on historical loss experience adjusted for
current factors.
A loan is impaired when full payment under the loan terms is not expected.
Commercial and commercial real estate loans are individually evaluated for
impairment. If a loan is impaired, a portion of the allowance is allocated so
that the loan is reported, net, at the present value of estimated future cash
flows using the loan's existing rate or at the fair value of collateral if
repayment is expected solely from the collateral. Large groups of smaller
balance homogeneous loans, such as consumer and residential real estate loans,
are collectively evaluated for impairment, and accordingly, they are not
separately identified for impairment disclosures.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands except per share data)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Servicing Rights: Servicing rights represent the allocated value of retained
servicing rights on loans sold and the cost of purchased rights. Servicing
assets are expensed in proportion to, and over the period of, estimated net
servicing revenues. Impairment is evaluated based on the fair value of the
assets, using groupings of the underlying loans as to interest rates and then,
secondarily, as to geographic and prepayment characteristics. Fair value is
determined using prices for similar assets with similar characteristics, when
available, or based upon discounted cash flows using market-based assumptions.
Any impairment of a grouping is reported as a valuation allowance, to the extent
that fair value is less than the capitalized amount for a grouping.
Foreclosed Assets: Assets acquired through or instead of loan foreclosure are
initially recorded at fair value when acquired, establishing a new cost basis.
If fair value declines subsequent to foreclosure, a valuation allowance is
recorded through expense. Costs after acquisition are expensed.
Premises and Equipment: Land is carried at cost. Premises and equipment are
stated at cost less accumulated depreciation. Buildings and related components
are depreciated using the straight-line method with useful lives ranging from 7
to 40 years. Furniture, fixtures and equipment are depreciated using the
straight-line method with useful lives ranging from 3 to 25 years. Leasehold
improvements are amortized over the lives of the respective leases.
Bank Owned Life Insurance: The Company has purchased life insurance policies on
certain key executives. Bank owned life insurance is recorded at its cash
surrender value, or the amount that can be realized.
Long-term Assets: Premises and equipment and other long-term assets are reviewed
for impairment when events indicate their carrying amount may not be recoverable
from future undiscounted cash flows. If impaired, the assets are recorded at
fair value.
Loan Commitments and Related Financial Instruments: Financial instruments
include off-balance- sheet credit instruments, such as commitments to make loans
and commercial letters of credit, issued to meet customer financing needs. The
face amount for these items represents the exposure to loss, before considering
customer collateral or ability to repay. Such financial instruments are recorded
when they are funded. Instruments, such as standby letters of credit, that are
considered financial guarantees in accordance with Financial Accounting
Standards Board (FASB) Interpretation No. 45 are recorded at fair value.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands except per share data)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Stock Compensation: Employee compensation expense under stock options is
reported using the intrinsic value method. No stock-based compensation cost is
reflected in net income, as all options granted had an exercise price equal to
or greater than the market price of the underlying common stock at date of
grant. The following table illustrates the effect on net income and earnings per
share if expense was measured using the fair value recognition provisions of
FASB Statement No. 123, Accounting for Stock-Based Compensation.
2003 2002 2001
--------- --------- ---------
Net income (loss) as reported $ (2,374) $ 674 $ 598
Deduct: Stock-based compensation expense
determined under fair value based method 175 121 121
--------- --------- ---------
Pro forma net income (loss) $ (2,549) $ 553 $ 477
========= ========= =========
Basic earnings (loss) per share as reported $ (1.31) $ 0.44 $ 0.38
Pro forma basic earnings (loss) per share (1.40) 0.36 0.30
Diluted earnings (loss) per share as reported $ (1.28) $ 0.43 $ 0.38
Pro forma diluted earnings (loss) per share (1.37) 0.35 0.30
The pro forma effects are computed using option pricing models, using the
following weighted- average assumptions as of grant date.
2003
----
Risk-free interest rate 2.96%
Expected option life 5.9 years
Expected stock price volatility 44%
Dividend yield 3.13%
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands except per share data)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Income Taxes: Income tax expense is the total of the current year income tax due
or refundable and the change in deferred tax assets and liabilities. Deferred
tax assets and liabilities are the expected future tax amounts for the temporary
differences between carrying amounts and tax bases of assets and liabilities,
computed using enacted tax rates. A valuation allowance, if needed, reduces
deferred tax assets to the amount expected to be realized.
Employee Stock Ownership Plan: The cost of shares issued to the ESOP, but not
yet allocated to participants, is shown as a reduction of shareholders' equity.
Compensation expense is based on the market price of shares as they are
committed to be released to participant accounts. Dividends on allocated ESOP
shares reduce retained earnings; dividends on unearned ESOP shares reduce debt
and accrued interest. See Note 9 - ESOP Plan for information regarding
termination of this plan in 2003.
Earnings Per Common Share: Basic earnings per common share is net income divided
by the weighted average number of common shares outstanding during the period.
ESOP shares are considered outstanding for this calculation unless unearned.
Stock based incentive plan shares are considered outstanding as they are earned
over the vesting period. Diluted earnings per common share includes the dilutive
effect of stock based incentive plan shares and additional potential common
shares issuable under stock options.
Comprehensive Income: Comprehensive income consists of net income and other
comprehensive income. Other comprehensive income includes unrealized gains and
losses on securities available for sale, which are also recognized as a separate
component of equity.
Adoption of New Accounting Standards: During 2003, the Company adopted FASB
Interpretation 45, Guarantor's Accounting and Disclosure Requirements for
Guarantees, and FASB Interpretation 46, Consolidation of Variable Interest
Entities. Adoption of the new standards did not materially affect the Company's
operating results or financial condition.
Interpretation 45 requires recognizing the fair value of guarantees made and
information about the maximum potential payments that might be required, as well
as the collateral or other recourse obtainable. Interpretation 45 covers
guarantees such as standby letters of credit, performance guarantees, and direct
or indirect guarantees of the indebtedness of others, but not guarantees of
funding.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands except per share data)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Interpretation 46, as revised in December 2003, changes the accounting model for
consolidation from one based on consideration of control through voting
interests. Whether to consolidate an entity will now also consider whether that
entity has sufficient equity at risk to enable it to operate without additional
financial support, whether the equity owners in that entity lack the obligation
to absorb expected losses or the right to receive residual returns of the
entity, or whether voting rights in the entity are not proportional to the
equity interest and substantially all the entity's activities are conducted for
an investor with few voting rights. The Company owns a 100% interest in a trust
formed by the Company in 2003. Under this new accounting guidance, the trust is
not consolidated with the Company.
Loss Contingencies: Loss contingencies, including claims and legal actions
arising in the ordinary course of business, are recorded as liabilities when the
likelihood of loss is probable and an amount or range of loss can be reasonably
estimated. Management does not believe there now are such matters that will have
a material effect on the financial statements.
Restrictions on Cash: Cash on hand or on deposit with the Federal Reserve Bank
of $300 and $148 was required to meet regulatory reserve and clearing
requirements at year-end 2003 and 2002. These balances do not earn interest.
Dividend Restriction: Banking regulations require maintaining certain capital
levels and may limit the dividends paid by the bank to the holding company or by
the holding company to shareholders.
Fair Value of Financial Instruments: Fair values of financial instruments are
estimated using relevant market information and other assumptions, as more fully
disclosed in a separate note. Fair value estimates involve uncertainties and
matters of significant judgment regarding interest rates, credit risk,
prepayments, and other factors, especially in the absence of broad markets for
particular items. Changes in assumptions or in market conditions could
significantly affect the estimates.
Operating Segments: While the chief decision-makers monitor the revenue streams
of the various products and services, the identifiable segments are not material
and operations are managed and financial performance is evaluated on a
Company-wide basis. Accordingly, all of the financial service operations are
considered by Management to be aggregated in one reportable operating segment.
Reclassifications: Some items in the prior year financial statements were
reclassified to conform to the current presentation.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands except per share data)
NOTE 2 - SECURITIES
The fair value of available for sale securities and the related gross unrealized
gains and losses recognized in accumulated other comprehensive income (loss)
were as follows:
Gross Gross
Fair Unrealized Unrealized
Value Gains Losses
----- ----- ------
2003
Federal agency $12,759 $ 8 $ (4)
State and municipal 1,375 5 -
Mortgage-backed 12,992 400 (105)
------- ---- -----
Total $27,126 $413 $(109)
======= ==== =====
2002
Mortgage-backed $ 1,439 $ 45 $ (1)
------- ---- -----
Total $ 1,439 $ 45 $ (1)
======= ==== =====
The carrying amount, unrecognized gains and losses, and fair value of securities
held to maturity were as follows:
Gross Gross
Carrying Unrecognized Unrecognized Fair
Amount Gains Losses Value
------ ----- ------ -----
2002
U.S. Government and federal agency $ 2,527 $ 30 $ - $ 2,557
Corporate 1,996 - - 1,996
Mortgage-backed 13,299 322 (5) 13,616
------- ---- --- -------
Total $17,822 $352 $(5) $18,169
======= ==== === =======
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands except per share data)
NOTE 2 - SECURITIES (Continued)
Sales of available for sale securities were as follows:
2003 2002 2001
---- ---- ----
Proceeds $ 3,078 $ 386 $ 245
Gross gains 42 16 15
The fair value of debt securities at year-end 2003 by contractual maturity were
as follows. Securities not due at a single maturity date, primarily
mortgage-backed securities, are shown separately.
Available
for Sale
Fair
Value
-----
Due in one year or less $ 503
Due from one to five years 12,256
Due from five to ten years 400
Due after ten years 975
Mortgage-backed 12,992
--------
Total $ 27,126
========
At year-end 2003 and 2002, there were no holdings of securities of any one
issuer, other than the U.S. Government and its agencies, in an amount greater
than 10% of shareholders' equity.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands except per share data)
NOTE 2 - SECURITIES (Continued)
Securities with unrealized losses at year-end 2003 not recognized in income are
as follows:
Less than 12 Months 12 Months or More Total
------------------- ----------------- -----
Unrealized Unrealized Unrealized
Description of Securities Fair Value Loss Fair Value Loss Fair Value Loss
------------------------- ---------- ---- ---------- ---- ---------- ----
Federal agency $4,026 $ 4 $ - $ - $4,026 $ 4
Mortgage-backed 4,021 105 - - 4,021 105
------ ------ ------ ------ ------ ----
Total temporarily impaired $8,047 $ 109 $ - $ - $8,047 $109
====== ====== ====== ====== ====== ====
Unrealized losses on the above securities have not been recognized in income
because the issuers of the bonds are all federal agencies and the decline in
fair value is temporary and largely due to changes in market interest rates. The
fair value is expected to recover as the bonds approach their maturity date
and/or market rates decline.
To improve liquidity, in 2003 the Company transferred all securities previously
classified as "held to maturity," which had a carrying value of $10,533, to
"available for sale." The unrealized gain on the securities transferred totaled
$458 before tax. The Company's equity and accumulated other comprehensive income
increased $302 after tax as a result of the transfer.
NOTE 3 - LOANS
Loans at year-end were as follows:
2003 2002
-------- --------
Commercial $ 4,116 $ 261
Real estate:
Residential 36,060 48,644
Commercial 5,040 -
Construction 610 134
Consumer 12,598 13,904
-------- --------
Subtotal 58,424 62,943
Less: Net deferred loan fees 15 (17)
Allowance for loan losses (415) (361)
-------- --------
Loans, net $ 58,024 $ 62,565
======== ========
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands except per share data)
NOTE 3 - LOANS (Continued)
Activity in the allowance for loan losses was as follows:
2003 2002 2001
----- ----- -----
Beginning balance $ 361 $ 373 $ 354
Provision for loan losses 102 19 62
Loans charged-off (50) (35) (53)
Recoveries 2 4 10
----- ----- -----
Ending balance $ 415 $ 361 $ 373
===== ===== =====
Impaired loans are not material for any period presented.
Nonperforming loans were as follows:
2003 2002
---- ----
Loans past due over 90 days still on accrual $ - $ -
Nonaccrual loans 741 781
Nonperforming loans include both smaller balance homogeneous loans that are
collectively evaluated for impairment and individually classified impaired
loans.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands except per share data)
NOTE 4 - SECONDARY MORTGAGE MARKET ACTIVITIES
Mortgage loans serviced for others are not reported as assets. The principal
balances of these loans were $32,584 and $25,930 at year-end 2003 and 2002.
Custodial escrow balances maintained in connection with serviced loans were $100
and $26 at year-end 2003 and 2002.
Activity for capitalized mortgage servicing rights and the related valuation
allowance follows:
2003 2002 2001
---- ---- ----
Servicing rights:
Beginning of year $ 200 $ 88 $ 58
Additions 195 162 45
Amortized to expense (118) (50) (15)
----- ----- ----
End of year $ 277 $ 200 $ 88
===== ===== ====
2003 2002 2001
---- ---- ----
Valuation allowance:
Beginning of year $ - $ - $ -
Additions expensed 56 - -
----- ----- ----
End of Year $ 56 $ - $ -
===== ===== ====
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands except per share data)
NOTE 5 - PREMISES AND EQUIPMENT
Year-end premises and equipment were as follows:
2003 2002
------- -------
Land $ 117 $ 63
Buildings 1,713 1,485
Furniture, fixtures and equipment 1,416 1,227
Leasehold improvements 10 -
------- -------
3,256 2,775
Less: Accumulated depreciation (1,324) (1,942)
------- -------
$ 1,932 $ 833
======= =======
Depreciation expense was $176, $118 and $101 for 2003, 2002 and 2001.
Rent expense was $14, $0, and $16 for 2003, 2002 and 2001. Rent commitments
under noncancelable operating leases were as follows, before considering renewal
options that generally are present.
2004 $ 60
2005 57
2006 57
2007 57
2008 57
----
Total $288
====
The Company is a one-third owner of a limited liability company that will own
and manage the office building at 2923 Smith Road, Fairlawn, Ohio 44333 where
the Company's headquarters and Central Federal Bank Fairlawn office will be
located. The Company is currently in negotiations with the limited liability
company to complete a lease agreement for this office space. As a result, rent
expense for this office is not included above. The lease is expected to be
accounted for as an operating lease.
The Company closed one branch during 2001 and took charges totaling $154. In
connection with the branch closings the Company paid a cancellation fee for
terminating the lease, wrote-off the remaining leasehold improvements and
abandoned equipment and wrote down the remaining equipment to its estimated
realizable value.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands except per share data)
NOTE 6 - DEPOSITS
Time deposits of $100 or more were $4,285 and $3,520 at year-end 2003 and 2002.
Scheduled maturities of time deposits for the next five years were as follows.
2004 $22,702
2005 8,652
2006 4,122
2007 703
2008 514
$36,693
=======
NOTE 7 - FEDERAL HOME LOAN BANK ADVANCES AND OTHER DEBT
At year end, advances from the Federal Home Loan Bank were as follows.
2003 2002
------ -------
Maturity January 2004 at 1.09% floating rate $7,500 $ -
Maturities August 2005 thru March 2009, primarily fixed
at rates from 5.07% to 6.96%, averaging 5.53% - 11,430
------ -------
Total $7,500 $11,430
====== =======
In December 2003, the Company prepaid $11,195 in Federal Home Loan Bank
advances, with an average cost of 5.52% and an average remaining maturity of 4.5
years. These fixed rate advances were arranged primarily in 1998 and 1999 and
were used to finance mortgage loans which had prepaid. Accordingly, the loans
represented an inappropriate and costly source of funding which was not
necessary due to the liquidity position of the Company. The pre-tax prepayment
penalty associated with this transaction was $1,270 and is included in interest
expense on Federal Home Loan Bank advances and other debt in the 2003
Consolidated Statement of Operations.
The floating rate advances outstanding at year-end 2003 can be prepaid at any
time with no penalty. The advances were collateralized by $34,795 and $47,004 of
first mortgage loans under a blanket lien arrangement and $1,296 and $2,343 of
securities at year-end 2003 and 2002.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands except per share data)
NOTE 7 - FEDERAL HOME LOAN BANK ADVANCES AND OTHER DEBT (Continued)
Loan Payable: The Company had a 4.30% note payable with a financial institution
with a balance of $4,900 at year-end 2002. The loan was repaid in full during
2003 and represented the remaining balance of a $7,000 loan which had been
obtained to fund a return of capital dividend declared in 2000. The note was
secured by stock the Company owns in the Bank and the Bank was required to
maintain a deposit with the lending institution in the amount of the loan which
earned interest at 1.90% below the loan rate.
Trust Preferred Securities: A trust formed by the Company issued $5,000 of 3
month LIBOR plus 2.85% floating rate trust preferred securities in 2003 as part
of a pooled offering of such securities. The Company issued subordinated
debentures to the trust in exchange for the proceeds of the offering, which
debentures represent the sole asset of the trust. The Company may redeem the
subordinated debentures, in whole but not in part, any time after five years at
par. The subordinated debentures must be repurchased no later than 2033.
Under new accounting guidance, FASB Interpretation No. 46, as revised in
December 2003, the trust is not consolidated with the Company. Accordingly, the
Company does not report the securities issued by the trust as liabilities, and
instead reports as liabilities the subordinated debentures issued by the Company
and held by the trust.
PAYMENT INFORMATION:
Required payments on all debt over the next five years are:
2004 $ 7,500
==========
NOTE 8 - OTHER BENEFIT PLANS
Multi-employer pension plan: The Company participates in a multiemployer
contributory trustee pension plan. The retirement benefits to be provided by the
plan were frozen as of June 30, 2003 and future employee participation in the
plan was stopped. The plan was maintained for all eligible employees and the
benefits were funded as accrued through the purchase of individual life
insurance policies. The cost of funding was charged directly to operations. The
unfunded liability at June 30, 2003 totaled $96. The Company's contribution for
the plan year ending June 30, 2004 totaled $34. The Company made no
contributions for 2002 or 2001.
401(k) Plan: In 2003, the Company instituted a 401(k) benefit plan. Employees 21
years of age and older are eligible to participate and are eligible for Company
matching contributions after one year of service. The plan allows employee
contributions up to 90% of their compensation, which may be matched by the
Company on a discretionary basis. There was no match in 2003.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands except per share data)
NOTE 8 - OTHER BENEFIT PLANS (Continued)
Stock Based Incentive Plans: Stock based incentive plans (SBIP) provide for
stock option grants and restricted stock awards to directors, officers and
employees. The 1999 Stock Based Incentive Plan was approved by shareholders on
July 13, 1999. The plan provided for 193,887 shares for stock option grants and
77,554 shares for restricted stock awards. The 2003 Equity Compensation Plan was
ratified by shareholders on April 23, 2003. The plan provided an aggregate of
100,000 shares for stock option grants and restricted stock awards, including up
to a maximum of 30,000 shares for restricted stock awards. Both plans provide
for options to be granted for terms of up to, but not exceeding ten years from
the date of grant and cannot be granted at a price less than the fair market
value of the common stock on the date of grant. Shares related to forfeited
stock options and restricted stock awards become available for subsequent grant
under the terms of the plans.
Compensation expense for restricted stock awards is based on the fair value of
the stock at the date of grant and is recognized over the vesting period. Total
restricted stock awards issuable under the plans are 107,554. 28,500 shares were
issued in 2003 and no shares were issued in 2002. At December 31, 2003, 97,526
restricted stock awards were outstanding of which 57,007 had vested.
Compensation expense was $141, $110 and $95 for 2003, 2002 and 2001. Unearned
compensation is reported as a reduction of shareholders' equity until earned.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands except per share data)
NOTE 9 - ESOP PLAN
Until the plan was terminated in 2003, employees participated in an Employee
Stock Ownership Plan (ESOP). The ESOP borrowed from the Company to purchase
155,111 shares of stock at $10 per share. The Company made discretionary
contributions to the ESOP, and paid dividends on unallocated shares to the ESOP,
and the ESOP used funds it received to repay the loan. When loan payments were
made, ESOP shares were allocated to participants based on relative compensation
and expense was recorded. Dividends on allocated shares increased participant
accounts.
The ESOP received $738 from a return of capital distribution paid by the Company
in 2000 and purchased an additional 83,353 shares with the proceeds.
At the time of termination, there were 122,882 unearned ESOP shares of which
81,000 shares were sold and the proceeds were used to repay the outstanding
balance of the loan incurred to fund the ESOP plan at inception. The remaining
41,882 shares were allocated to participants on a fully vested basis. The cost
associated with terminating the ESOP totaled $638 and is included in salaries
and employee benefits expense in the 2003 Consolidated Statement of Operations.
Contributions to the ESOP during 2003, 2002 and 2001 were $0, $159 and $152.
Expense for 2003, 2002, and 2001 was $638, $222 and $190.
Shares held by the ESOP were as follows:
2002
--------
Allocated to participants 108,483
Unearned 122,882
--------
Total ESOP shares 231,365
========
Fair value of unearned shares $ 1,153
========
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands except per share data)
NOTE 10 - INCOME TAXES
Income tax expense (benefit) was as follows.
2003 2002 2001
------- ---- ----
Current federal $ 95 $175 $276
Deferred federal (1,083) 138 36
------- ---- ----
Total $ (988) $313 $312
======= ==== ====
Effective tax rates differ from federal statutory rate of 34% applied to income
(loss) before income taxes due to the following.
2003 2002 2001
---- ---- ----
Federal statutory rate times financial statement income (loss) $(1,143) $ 336 $309
Effect of:
ESOP shares released at fair market value 207 1 -
Bank owned life insurance income (64) (23) -
Other 12 (1) 3
------- ----- ----
$ (988) $ 313 $312
======= ===== ====
Effective tax rate (29.4%) 31.7% 34.3%
Year-end deferred tax assets and liabilities were due to the following.
2003 2002
------ -------
Deferred tax assets:
Allowance for loan losses $ 141 $ 123
Deferred loan fees 160 265
Nonaccrual interest 36 30
Accrued stock awards 39 16
Net operating loss 1,325 -
Other 14 -
------ -------
1,715 434
Deferred tax liabilities:
Depreciation 229 76
FHLB stock dividend 378 330
Mortgage servicing rights 75 68
Unrealized gain on securities available for sale 103 14
Other - 10
------ -------
785 498
------ -------
Net deferred tax asset (liability) $ 930 $ (64)
====== =======
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands except per share data)
NOTE 10 - INCOME TAXES (Continued)
Federal income tax laws provided additional bad debt deductions through 1987,
totaling $2,250. Accounting standards do not require a deferred tax liability to
be recorded on this amount, which otherwise would total $765 at year-end 2003.
If the Bank were liquidated or otherwise ceases to be a bank or if tax laws were
to change, this amount would be expensed.
No valuation allowance has been recorded against the deferred tax asset for net
operating losses totaling $3,897 which expire in 2023 because the benefit is
more likely than not to be realized.
NOTE 11 - RELATED PARTY TRANSACTIONS
Loans to principal officers, directors, and their affiliates in 2003 were as
follows.
Beginning balance $ 607
New loans -
Effect of changes in related parties (599)
Repayments (8)
-----
Ending balance $ -
=====
Deposits from principal officers, directors, and their affiliates at year-end
2003 and 2002 were $384 and $300.
NOTE 12 - STOCK OPTIONS
Options to buy stock are granted to directors, officers and employees under the
1999 Stock Based Incentive Plan and 2003 Equity Compensation Plan, which provide
for issue of up to 293,887 options. Exercise price is the market price at date
of grant, so there is no compensation expense recognized in the income
statement. The maximum option term is ten years, and options vest over three to
five years.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands except per share data)
NOTE 12 - STOCK OPTIONS (Continued)
A summary of the activity in the plan is as follows.
2003 2002 2001
------------------------ ----------------------- -----------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
---------- ---------- ---------- ---------- ---------- ----------
Outstanding at
beginning of year 182,497 $ 9.23 182,497 $ 9.23 182,497 $ 9.23
Granted 77,758 11.79 - -
Exercised (37,302) 9.23 - -
Forfeited (13,232) 9.26 - -
---------- ---------- ---------- ---------- ---------- ----------
Outstanding at end
of year 209,721 $ 10.17 182,497 $ 9.23 182,497 $ 9.23
========== ========== ========== ========== ========== ==========
Options exercisable
at year-end 101,285 $ 9.20 107,903 $ 9.22 71,402 $ 9.21
========== ========== ========== ========== ========== ==========
Weighted average
fair value of
options granted
during year $ 3.96 $ - $ -
========== ========== ==========
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands except per share data)
NOTE 12 - STOCK OPTIONS (Continued)
Options outstanding at year-end 2003 were as follows.
Outstanding Exercisable
----------------------------------- -------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Contractual Exercise Exercise
Prices Number Life Price Number Price
-------------------- ------- ----------- -------- ------- --------
$9.19 - $13.94 209,721 7.0 years $ 10.17 101,285 $ 9.20
======= ========== ======== ======= ========
NOTE 13 - CAPITAL REQUIREMENTS AND RESTRICTIONS ON RETAINED EARNINGS
The Bank is subject to regulatory capital requirements administered by federal
banking agencies. Capital adequacy guidelines and, additionally for banks,
prompt corrective action regulations involve quantitative measures of assets,
liabilities, and certain off-balance-sheet items calculated under regulatory
accounting practices. Capital amounts and classifications are also subject to
qualitative judgments by regulators. Failure to meet capital requirements can
initiate regulatory action.
Prompt corrective action regulations provide five classifications: well
capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized, and critically undercapitalized, although these terms are not
used to represent overall financial condition. If adequately capitalized,
regulatory approval is required to accept brokered deposits. If
undercapitalized, capital distributions are limited, as is asset growth and
expansion, and capital restoration plans are required. At year-end 2003 and
2002, the most recent regulatory notifications categorized the Bank as well
capitalized under the regulatory framework for prompt corrective action. There
are no conditions or events since that notification that Management believes
have changed the institution's category.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands except per share data)
NOTE 13 - CAPITAL REQUIREMENTS AND RESTRICTIONS ON RETAINED EARNINGS (Continued)
Actual and required capital amounts and ratios are presented below at year-end.
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------------------- ------------------- --------------------
Amount Ratio Amount Ratio Amount Ratio
2003 ---------- ----- ---------- ----- ---------- -----
Total Capital to risk
weighted assets $ 15,093 21.6% $ 5,597 8.0% $ 6,997 10.0%
Tier 1 (Core) Capital to risk
weighted assets 14,678 21.0% 2,799 4.0% 4,198 6.0%
Tier 1 (Core) Capital to
adjusted assets 14,678 13.9% 4,217 4.0% 5,272 5.0%
Tangible Capital (to
adjusted total assets) 14,678 13.9% 1,584 1.5% N/A
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands except per share data)
NOTE 13 - CAPITAL REQUIREMENTS AND RESTRICTIONS ON RETAINED EARNINGS (Continued)
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------------------ ------------------ ------------------
Amount Ratio Amount Ratio Amount Ratio
2002 ------- ----- ------- ----- ------- -----
Total Capital to risk
weighted assets $21,163 38.6% $ 4,385 8.0% $ 5,482 10.0%
Tier 1 (Core) Capital to risk
weighted assets 20,802 38.0% 2,193 4.0% 3,289 6.0%
Tier 1 (Core) Capital to
adjusted assets 20,802 18.9% 4,403 4.0% 5,504 5.0%
Tangible Capital (to adjusted
total assets) 20,802 18.9% 1,650 1.5% N/A
The Qualified Thrift Lender test requires at least 65% of assets be maintained
in housing-related finance and other specified areas. If this test is not met,
limits are placed on growth, branching, new investments, FHLB advances and
dividends, or the Bank must convert to a commercial bank charter. Management
believes that this test is met.
When the Bank converted from a mutual to a stock institution, a "liquidation
account" was established at $14,300, which was net worth reported in the
conversion prospectus. Eligible depositors who have maintained their accounts,
less annual reductions to the extent they have reduced their deposits, would
receive a distribution from this account if the Bank liquidated. Dividends may
not reduce shareholders' equity below the required liquidation account balance.
Office of Thrift Supervision (OTS) regulations limit capital distributions by
savings associations. Generally, capital distributions are limited to
undistributed net income for the current and prior two years. At year-end 2003,
no amount is available to pay dividends to the Company without prior approval
from the OTS.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands except per share data)
NOTE 14 - LOAN COMMITMENTS AND OTHER RELATED ACTIVITIES
Some financial instruments, such as loan commitments, credit lines, letters of
credit, and overdraft protection, are issued to meet customer financing needs.
These are agreements to provide credit or to support the credit of others, as
long as conditions established in the contract are met, and usually have
expiration dates. Commitments may expire without being used. Off-balance-sheet
risk to credit loss exists up to the face amount of these instruments, although
material losses are not anticipated. The same credit policies are used to make
such commitments as are used for loans, including obtaining collateral at
exercise of the commitment.
The contractual amount of financial instruments with off-balance-sheet risk was
as follows at year-end.
2003 2002
Fixed Variable Fixed Variable
Rate Rate Rate Rate
----- -------- ----- --------
Commitments to make loans $ 486 $ 520 $ 123 $ 769
Unused lines of credit 4,257 2,294
Commitments to make loans are generally made for periods of 60 days or less. The
fixed rate loan commitments have interest rates ranging from 5.25% to 7.00% and
maturities ranging from 15 years to 30 years.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands except per share data)
NOTE 15 - FAIR VALUES OF FINANCIAL INSTRUMENTS
Carrying amount and estimated fair values of financial instruments were as
follows at year-end:
2003 2002
-------------------- --------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- -------- -------- --------
Financial assets
Cash and cash equivalents $ 8,936 $ 8,936 $ 12,861 $ 12,861
Interest-bearing deposits in other financial institutions 1,587 1,587 7,205 7,205
Securities available for sale 27,126 27,126 1,439 1,439
Securities held to maturity - - 17,822 18,169
Loans held for sale 106 107 - -
Loans, net 58,024 59,341 62,565 65,119
Federal Home Loan Bank stock 3,626 3,626 3,485 3,485
Accrued interest receivable 487 487 403 403
Financial liabilities
Deposits (73,358) (73,297) (74,690) (75,345)
Federal Home Loan Bank advances (7,500) (7,500) (11,430) (12,819)
Loan payable - - (4,900) (4,900)
Subordinated debentures (5,155) (5,155) - -
Accrued interest payable (65) (65) (63) (63)
The methods and assumptions used to estimate fair value are described as
follows.
Carrying amount is the estimated fair value for cash and cash equivalents,
short-term borrowings, Federal Home Loan Bank stock, accrued interest receivable
and payable, demand deposits, short-term debt, and variable rate loans or
deposits that reprice frequently and fully. Security fair values are based on
market prices or dealer quotes, and if no such information is available, on the
rate and term of the security and information about the issuer. For fixed rate
loans or deposits and for variable rate loans or deposits with infrequent
repricing or repricing limits, fair value is based on discounted cash flows
using current market rates applied to the estimated life and credit risk. Fair
values for impaired loans are estimated using discounted cash flow analysis or
underlying collateral values. Fair value of loans held for sale is based on
market quotes. Fair value of debt is based on current rates for similar
financing. The fair value of off-balance-sheet items is based on the current
fees or cost that would be charged to enter into or terminate such arrangements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands except per share data)
NOTE 16 - PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION
Condensed financial information of Central Federal Corporation follows.
CONDENSED BALANCE SHEETS
December 31
2003 2002
---------- ----------
ASSETS
Cash and cash equivalents $ 9,238 $ 516
Investment in banking subsidiary 15,099 20,831
Investment in and advances to other subsidiaries 155 -
Other assets 755 1,291
---------- ----------
Total assets $ 25,247 $ 22,638
========== ==========
LIABILITIES AND EQUITY
Debt $ 5,155 $ 4,900
Accrued expenses and other liabilities 236 155
Shareholders' equity 19,856 17,583
---------- ----------
Total liabilities and shareholders' equity $ 25,247 $ 22,638
========== ==========
CONDENSED STATEMENTS OF OPERATIONS
Years ended December 31
2003 2002 2001
---------- ---------- ----------
Interest income $ 20 $ 77 $ 86
Other income 11 - -
Interest expense 59 297 494
Other expense 338 173 204
---------- ---------- ----------
Loss before income tax and
effect of subsidiaries' operations (366) (393) (612)
Income tax benefit (125) (137) (208)
Effect of subsidiaries' operations (2,133) 930 1,002
---------- ---------- ----------
Net income (loss) $ (2,374) $ 674 $ 598
========== ========== ==========
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands except per share data)
NOTE 16 - PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION
(Continued)
CONDENSED STATEMENTS OF CASH FLOWS
Years ended December 31
2003 2002 2001
---------- ---------- ----------
Cash flows from operating activities
Net income (loss) $ (2,374) $ 674 $ 598
Adjustments:
Effect of subsidiaries' operations 2,133 (930) (1,002)
Change in other assets and other liabilities (236) (230) 421
---------- ---------- ----------
Net cash from operating activities (477) (486) 17
Cash flows from investing activities
Cash received in repayment of ESOP loan 853 212 212
Dividends received from bank 5,437 2,800 -
Investments in subsidiaries (155) - -
---------- ---------- ----------
Net cash from investing activities 6,135 3,012 212
Cash flows from financing activities
Proceeds of borrowings 5,155 - -
Repayments of borrowings (4,900) (2,100) -
Proceeds from stock issue 3,119 - -
Proceeds from exercise of stock options 345 - -
Purchase of treasury stock - (1,044) (75)
Dividends paid (655) (551) (482)
Dividends on unallocated ESOP shares - (53) (60)
---------- ---------- ----------
Net cash from financing activities 3,064 (3,748) (617)
---------- ---------- ----------
Net change in cash and cash equivalents 8,722 (1,222) (388)
Beginning cash and cash equivalents 516 1,738 2,126
---------- ---------- ----------
Ending cash and cash equivalents $ 9,238 $ 516 $ 1,738
========== ========== ==========
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands except per share data)
NOTE 17 - EARNINGS PER SHARE
The factors used in the earnings per share computation follow.
2003 2002 2001
------------ ------------ ------------
Basic
Net income (loss) $ (2,374) $ 674 $ 598
============ ============ ============
Weighted average common shares outstanding 1,815,210 1,530,429 1,564,797
============ ============ ============
Basic earnings (loss) per common share $ (1.31) $ 0.44 $ 0.38
============ ============ ============
Diluted
Net income (loss) $ (2,374) $ 674 $ 598
============ ============ ============
Weighted average common shares outstanding for basic earnings (loss) per
share 1,815,210 1,530,429 1,564,797
Add: Dilutive effects of assumed exercises of stock options and stock
based incentive plan shares 45,349 31,570 4,713
------------ ------------ ------------
Average shares and dilutive potential common shares 1,860,559 1,561,999 1,569,510
============ ============ ============
Diluted earnings (loss) per common share $ (1.28) $ 0.43 $ 0.38
============ ============ ============
All stock options for shares of common stock were considered in computing
diluted earnings per common share for 2003. Stock options for 8,000 shares of
common stock were not considered in computing diluted earnings per common share
for 2002 and 2001 because they were antidilutive.
CENTRAL FEDERAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands except per share data)
September 30, December 31,
2004 2003
------------ ------------
(unaudited)
ASSETS
Cash and cash equivalents $ 25,121 $ 8,936
Interest-bearing deposits in other financial institutions 298 1,587
Securities available for sale 13,234 27,126
Loans held for sale 104 106
Loans, net of allowance of $747 and $415 96,800 58,024
Federal Home Loan Bank stock 3,738 3,626
Loan servicing rights 212 221
Foreclosed assets, net 673 193
Premises and equipment, net 2,686 1,932
Bank owned life insurance 3,366 3,256
Accrued interest receivable 433 487
Other assets 1,794 1,517
------------ ------------
$ 148,459 $ 107,011
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Non-interest bearing $ 3,731 $ 2,457
Interest bearing 86,624 70,901
------------ ------------
Total deposits 90,355 73,358
Federal Home Loan Bank advances 33,670 7,500
Advances by borrowers for taxes and insurance 201 207
Accrued interest payable and other liabilities 683 935
Subordinated debentures 5,155 5,155
------------ ------------
Total liabilities 130,064 87,155
Shareholders' equity
Preferred stock, 1,000,000 shares authorized;
none issued - -
Common stock, $.01 par value; 6,000,000 shares
authorized; 2004 - 2,294,520 shares issued,
2003 - 2,280,020 shares issued 23 23
Additional paid-in capital 12,119 11,845
Retained earnings 9,161 10,997
Accumulated other comprehensive income 128 201
Unearned stock based incentive plan shares (425) (357)
Treasury stock, at cost (2004 - 232,382 shares,
2003 - 255,648 shares) (2,611) (2,853)
------------ ------------
Total shareholders' equity 18,395 19,856
------------ ------------
$ 148,459 $ 107,011
============ ============
See accompanying notes.
CENTRAL FEDERAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands except per share data)
(Unaudited)
Three months ended Nine months ended
September 30, September 30,
------------------------ ----------------------
2004 2003 2004 2003
Interest and dividend income
Loans, including fees $ 1,287 $ 1,101 $ 3,328 $ 3,287
Taxable securities 181 252 620 782
Tax exempt securities - - 20 -
Federal Home Loan Bank stock dividends 40 36 112 105
Overnight funds and other 109 36 180 94
------- ------- ------- -------
1,617 1,425 4,260 4,268
Interest expense
Deposits 360 456 993 1,215
Federal Home Loan Bank advances and other debt 146 156 250 514
Subordinated debentures 58 - 162 -
------- ------- ------- -------
564 612 1,405 1,729
------- ------- ------- -------
Net interest income 1,053 813 2,855 2,539
Provision for loan losses 296 - 366 83
------- ------- ------- -------
Net interest income after provision for loan losses 757 813 2,489 2,456
Noninterest income
Service charges on deposit accounts 36 41 98 126
Net gains on sales of loans 19 139 63 354
Loan servicing fees, net (6) (2) 49 (30)
Net gains (losses) on sales of securities (36) 1 (55) 1
Earnings on bank owned life insurance 36 49 110 148
Other 7 6 17 17
------- ------- ------- -------
56 234 282 616
Noninterest expense
Salaries and employee benefits 977 615 2,513 2,886
Occupancy and equipment 84 77 222 157
Data processing 105 64 315 176
Franchise taxes 55 62 168 255
Professional fees 90 101 282 493
Director fees 47 34 127 80
Postage, printing and supplies 89 50 184 147
Advertising and promotion 22 5 71 28
Telephone 20 21 64 32
Loan expenses 8 28 38 79
Foreclosed assets, net 12 (3) 3 (1)
Depreciation 98 34 252 101
Other 226 41 432 141
------- ------- ------- -------
1,833 1,129 4,671 4,574
------- ------- ------- -------
Loss before income taxes (1,020) (82) (1,900) (1,502)
Income tax benefit (355) (48) (683) (397)
------- ------- ------- -------
Net loss $ (665) $ (34) $(1,217) $(1,105)
======= ======= ======= =======
Loss per share:
Basic ($ 0.33) ($ 0.02) ($ 0.61) ($ 0.62)
Diluted ($ 0.33) ($ 0.02) ($ 0.61) ($ 0.62)
See accompanying notes.
CENTRAL FEDERAL CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(Dollars in thousands except per share data)
(Unaudited)
Accumulated Unearned Stock
Additional Other Based Total
Common Paid-In Retained Comprehensive Incentive Plan Treasury Shareholders
Stock Capital Earnings Income Shares Stock Equity
----- ------- -------- ------ ------ ----- ------
Balance at January 1, 2004 $ 23 $ 11,845 $ 10,997 $ 201 $ (357) $ (2,853) $ 19,856
Comprehensive income:
Net loss (1,217) (1,217)
Other comprehensive loss (73) (73)
---------
Total comprehensive loss (1,290)
Issuance of stock based incentive plan
shares (23,027 shares) 237 (237) -
Release of 15,596 stock based incentive
plan shares 169 169
Stock options exercised (33,266 shares) (67) 373 306
Tax benefits from stock options exercised 37 37
Purchase of 10,000 shares of treasury stock (131) (131)
Cash dividends declared ($.27 per share) (552) (552)
----- -------- -------- -------- --------- -------- ---------
Balance at September 30, 2004 $ 23 $ 12,119 $ 9,161 $ 128 $ (425) $ (2,611) $ 18,395
===== ======== ======== ======== ========= ======== =========
See accompanying notes.
CENTRAL FEDERAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Dollars in thousands)
(Unaudited)
Three months ended September 30, Nine months ended September 30,
2004 2003 2004 2003
---- ---- ---- ----
Net loss $ (665) $ (34) $(1,217) $(1,105)
Change in net unrealized gain (loss) on securities
available for sale 396 (123) (165) (179)
Less: Reclassification adjustment for
gains and (losses) later recognized in net income (36) 1 (55) 1
------- ------- ------- -------
Net unrealized gains and (losses) 432 (124) (110) (180)
Unrealized gain on securities transferred from held to
maturity to available for sale - - - 458
Tax effect (147) 42 37 (95)
------- ------- ------- -------
Other comprehensive income (loss) 285 (82) (73) 183
------- ------- ------- -------
Comprehensive loss $ (380) $ (116) $(1,290) $ (922)
======= ======= ======= =======
See accompanying notes.
CENTRAL FEDERAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Nine months ended September 30,
2004 2003
---- ----
Cash flows from operating activities $ (929) $ (388)
Cash flows from investing activities
Net decrease in interest bearing deposits 1,289 5,618
Available-for-sale securities:
Sales 15,191 1,067
Maturities, prepayments and calls 4,503 24,216
Purchases (6,076) (31,369)
Held-to-maturity securities:
Maturities, prepayments and calls - 7,201
Loan originations and payments, net (34,262) 7,376
Loans purchased (5,390) -
Additions to premises and equipment (1,007) (596)
Cash received in repayment of ESOP loan - 853
Proceeds from sale of foreclosed assets 74 -
Other 5 -
-------- --------
Net cash from investing activities (25,673) 14,366
Cash flows from financing activities
Net change in deposits 16,997 (2,409)
Proceeds from Federal Home Loan Bank
advances and other debt 28,120 -
Repayments on Federal Home Loan Bank
advances and other debt (1,950) (5,118)
Net change in advances by borrowers for
taxes and insurance (6) (269)
Cash dividends paid (549) (477)
Proceeds from private placement - 3,119
Proceeds from exercise of stock options 306 226
Repurchase of common stock (131) -
-------- --------
Net cash from financing activities 42,787 (4,928)
Net change in cash and cash equivalents 16,185 9,050
Beginning cash and cash equivalents 8,936 12,861
-------- --------
Ending cash and cash equivalents $ 25,121 $ 21,911
======== ========
Supplemental cash flow information:
Interest paid $ 1,407 $ 1,674
Income taxes paid - 106
Supplemental noncash disclosures:
Transfer of securities from held to maturity to available for sale $ - $ 10,533
Transfers from loans to repossessed assets 728 184
See accompanying notes.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation:
The accompanying consolidated financial statements have been prepared pursuant
to rules and regulations of the Securities and Exchange Commission (the "SEC")
and in compliance with accounting principles generally accepted in the United
States of America. Because this report is based on an interim period, certain
information and footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the
United States of America have been condensed or omitted.
In the opinion of the management of Central Federal Corporation (the "Company"),
the accompanying consolidated financial statements as of September 30, 2004 and
December 31, 2003 and for the three and nine months ended September 30, 2004 and
2003 include all adjustments necessary for a fair presentation of the financial
condition and the results of operations for those periods. The financial
performance reported for the Company for the three and nine months ended
September 30, 2004 are not necessarily indicative of the results to be expected
for the full year. This information should be read in conjunction with the
Company's Annual Report to Shareholders and Form 10-KSB for the period ended
December 31, 2003. Reference is made to the accounting policies of the Company
described in Note 1 of the Notes to Consolidated Financial Statements contained
in the Company's 2003 Annual Report that was filed as Exhibit 13 to the Form
10-KSB. The Company has consistently followed those policies in preparing this
Form 10-QSB.
Earnings Per Share:
Basic earnings per common share is net income divided by the weighted average
number of common shares outstanding during the period. ESOP shares are
considered outstanding for this calculation unless unearned. Stock based
incentive plan shares are considered outstanding as they are earned over the
vesting period. Diluted earnings per common share include the dilutive effect of
stock based incentive plan shares and additional potential common shares
issuable under stock options.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The factors used in the earnings per share computation follow.
(Dollars in thousands except per share data)
Three months ended September 30, Nine months ended September 30,
2004 2003 2004 2003
---- ---- ---- ----
Basic
Net loss $ (665) $ (34) $ (1,217) $ (1,105)
=========== =========== =========== ===========
Weighted average common shares outstanding 2,017,645 1,977,276 2,001,276 1,771,234
=========== =========== =========== ===========
Basic loss per common share $ (0.33) $ (0.02) $ (0.61) $ (0.62)
=========== =========== =========== ===========
Diluted
Net loss $ (665) $ (34) $ (1,217) $ (1,105)
=========== =========== =========== ===========
Weighted average common shares outstanding for basic
loss per share 2,017,645 1,977,276 2,001,276 1,771,234
Add: Dilutive effects of assumed exercises of stock
options and stock based incentive plan shares - - - -
----------- ----------- ----------- -----------
Average shares and dilutive potential common shares 2,017,645 1,977,276 2,001,276 1,771,234
=========== =========== =========== ===========
Diluted loss per common share $ (0.33) $ (0.02) $ (0.61) $ (0.62)
=========== =========== =========== ===========
The following potential average common shares were anti-dilutive and not
considered in computing diluted loss per share because the Company had a loss
from continuing operations, the exercise price of the options was greater than
the average stock price for the periods or the fair value of the stock based
incentive plan shares at the date of grant was greater than the average stock
price for the periods.
Three months ended September 30, Nine months ended September 30,
2004 2003 2004 2003
---- ---- ---- ----
Stock options 259,504 245,232 254,395 225,036
Stock based incentive plan shares 34,524 33,683 34,549 28,656
In prior periods, the Company had included stock options and stock based
incentive plan shares that increased the number of outstanding shares in
computing diluted earnings (loss) per share. However, because the Company had a
loss from continuing operations, these potential common shares were
anti-dilutive and should not have been considered for the computation. As a
result, the Company has revised prior period diluted loss per share amounts. The
impact of this change was not material to the diluted loss per share amounts
disclosed.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Stock Compensation:
Employee compensation expense under stock options is reported using the
intrinsic value method. No stock-based compensation cost is reflected in net
income, as all options granted had an exercise price equal to or greater than
the market price of the underlying common stock at date of grant. The following
table illustrates the effect on net income and earnings per share if expense was
measured using the fair value recognition provisions of Statement of Financial
Accounting Standards ("SFAS") No. 123, Accounting for Stock-Based Compensation.
(Dollars in thousands except per share data)
Three months ended September 30, Nine months ended September 30,
2004 2003 2004 2003
---- ---- ---- ----
Net loss as reported $ (665) $ (34) $ (1,217) $ (1,105)
Deduct: Stock-based compensation expense
determined under fair value based method 37 45 171 116
--------- -------- ---------- ----------
Pro forma net loss $ (702) $ (79) $ (1,388) $ (1,221)
========= ======== ========== ==========
Basic loss per share as reported $ (0.33) $ (0.02) $ (0.61) $ (0.62)
Pro forma basic loss per share (0.35) (0.04) (0.69) (0.69)
Diluted loss per share as reported $ (0.33) $ (0.02) $ (0.61) $ (0.62)
Pro forma diluted loss per share (0.35) (0.04) (0.69) (0.69)
The pro forma effects are computed using option pricing models, using the
following weighted- average assumptions as of grant date.
Three and nine
months ended
September 30,
2004
----
Risk-free interest rate 3.26%
Expected option life 6.00 years
Expected stock price volatility 41%
Dividend yield 2.86%
Reclassifications:
Some items in the prior year period financial statements were reclassified to
conform to the current presentation.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SECURITIES
The fair value of available for sale securities and the related gross unrealized
gains and losses recognized in accumulated other comprehensive income (loss)
were as follows:
Gross Gross
Fair Unrealized Unrealized
Value Gains Losses
----- ----- ------
September 30, 2004
Federal agency $ 4,019 $ 5 $ -
Mortgage-backed 9,215 241 (51)
--------- ------- ------
Total $ 13,234 $ 246 $ (51)
========= ======= ======
December 31, 2003
Federal agency $ 12,759 $ 8 $ (4)
State and municipal 1,375 5 -
Mortgage-backed 12,992 400 (105)
--------- ------- ------
Total $ 27,126 $ 413 $ (109)
========= ======= ======
Sales of available for sale securities were as follows:
Three months ended September 30, Nine months ended September 30,
2004 2003 2004 2003
---- ---- ---- ----
Proceeds $ 11,239 $ 1,067 $ 15,191 $ 1,067
Gross gains - 1 42 1
Gross losses (36) - (97) -
The fair value of debt securities at September 30, 2004 by contractual maturity
were as follows. Securities not due at a single maturity date, primarily
mortgage-backed securities, are shown separately.
Available for Sale Fair Value
-----------------------------
Due in one year or less $ -
Due from one to five years 4,019
Due from five to ten years -
Due after ten years -
Mortgage-backed 9,215
---------
Total $ 13,234
=========
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - SECURITIES (CONTINUED)
At September 30, 2004 and December 31, 2003, there were no holdings of
securities of any one issuer, other than the U.S. Government and its agencies,
in an amount greater than 10% of shareholders' equity.
Securities with unrealized losses at September 30, 2004 not recognized in income
are as follows:
Less than 12 Months 12 Months or More Total
------------------- ----------------- -----
Unrealized Unrealized Unrealized
Description of Securities Fair Value Loss Fair Value Loss Fair Value Loss
------------------------- ---------- ---- ---------- ---- ---------- ----
Federal agency $ - $ - $ - $ - $ - $ -
Mortgage-backed 909 5 2,614 46 3,523 51
-------- ------ --------- ------- --------- -------
Total temporarily impaired $ 909 $ 5 $ 2,614 $ 46 $ 3,523 $ 51
======== ====== ========= ======= ========= =======
Unrealized losses on the above securities have not been recognized in income
because the issuers of the bonds are all federal agencies and the decline in
fair value is temporary and largely due to changes in market interest rates. The
fair value is expected to recover as the bonds approach their maturity date
and/or market rates decline.
NOTE 3 - LOANS
Loans were as follows:
September 30, 2004 December 31, 2003
------------------ -----------------
Commercial $ 6,106 $ 4,116
Real estate:
Residential 42,759 36,060
Commercial 34,104 5,040
Construction 1,127 610
Consumer 13,542 12,598
----------- -----------
Subtotal 97,638 58,424
Less: Net deferred loan fees (costs) 91 (15)
Allowance for loan losses 747 415
----------- -----------
Loans, net $ 96,800 $ 58,024
=========== ===========
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - FEDERAL HOME LOAN BANK ADVANCES
Advances from the Federal Home Loan Bank were as follows.
September 30, 2004 December 31, 2003
------------------ -----------------
Maturity October 2004 at 1.88% fixed rate $ 21,400 $ -
Maturity January 2004 at 1.09% floating rate - 7,500
Maturities March 2005 thru September 2008, at fixed
rates from 1.50% to 3.41%, averaging 2.70% 12,270 -
----------- ---------
Total $ 33,670 $ 7,500
=========== =========
Fixed rate advances are payable at their maturity date, with a prepayment
penalty. Floating rate advances can be prepaid at any time with no penalty. The
advances were collateralized by $40,401 of first and second mortgage loans under
a blanket lien arrangement, $11,065 of multifamily mortgages, $9,608 of
nonresidential mortgages, $2,609 of home equity lines of credit and $799 of
securities at September 30, 2004. The advances were collateralized by $34,795 of
first mortgage loans under a blanket lien arrangement and $1,296 of securities
at December 31, 2003.
Required payments on all debt over the next five years are:
September 30, 2005 $ 23,400
September 30, 2006 4,000
September 30, 2007 4,270
September 30, 2008 2,000
NOTE 5 - BUSINESS COMBINATION
On October 22, 2004, the Company acquired 100% of the outstanding common stock
of RJO Financial Services, Inc., doing business as Reserve Mortgage Services
(Reserve), an Akron, Ohio based company licensed as a mortgage banker in Ohio,
Florida and Georgia. Reserve's name changed to Reserve Mortgage Services, Inc.
and it became an operating subsidiary of the Company's wholly owned subsidiary,
CFBank (the "Bank") on the date of the acquisition. The acquisition of Reserve
is expected to significantly expand the Company's mortgage services and increase
the Company's mortgage loan production. The acquisition was accounted for as a
purchase and the results of operations of Reserve will be included in the
consolidated financial statements beginning with the date of acquisition.
The aggregate purchase price was $2.2 million, including $340,000 in cash and
127,077 shares of Central Federal Corporation Common Stock valued at
approximately $1.8 million based on the $14.06 average closing price of Central
Federal Corporation Common Stock during the week before and after the terms of
the acquisition were agreed to and announced on June 10, 2004.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes the estimated fair values of the assets acquired
and liabilities assumed at the date of acquisition.
At October 22, 2004
-------------------
Cash $ 189
Loan sales proceeds receivable 1,299
Loans receivable 54
Premises and equipment 88
Other assets 3
Intangible assets 320
Goodwill 1,716
------------
Total assets acquired 3,669
Loans payable 1,232
Other liabilities 259
------------
Total liabilities assumed 1,491
------------
Net assets acquired $ 2,178
============
The acquired intangible assets have a weighted average useful life of
approximately 3 years and include a noncompete agreement for $25,000 with a
useful life of one year and prior owner intangible of $295,000 with a useful
life of 3 years. Goodwill of $1.7 million is not expected to be deductible for
tax purposes.
NOTE 6 - REVERSE STOCK SPLIT
On October 22, 2004, the Company announced that the Board had unanimously
approved a 1-to-1000 reverse stock split of the Company's common stock as part
of a "going private" transaction. At a special meeting of shareholders to be
held in the coming weeks, shareholders will be asked to approve the reverse
stock split by authorizing an amendment to the Company's Certificate of
Incorporation. The record date will be announced at a later time. If the
amendment receives shareholder approval, the Board intends to effect the reverse
split immediately thereafter.
As a result of the reverse split, the Company expects to have fewer than 300
record holders of its common stock, permitting the Company to terminate the
registration of its common stock with the SEC under the Securities Exchange Act
of 1934 (the "Exchange Act"). The Company intends to apply for such termination
as soon as practicable after effecting the split, and thereafter its common
stock no longer will be quoted on Nasdaq.
The Board carefully considered this course of action and concluded that it was
in the best interest of the Company and its shareholders. A public company
generally enjoys investment liquidity for shareholders, easier access to
capital, the option to use company stock as capital in an acquisition and an
enhanced corporate image. While these benefits often justify the additional
accounting, legal and other costs of being a public company, their availability
depends upon active trading of the company's stock and a market price that
provides some certainty in valuing the company. However, the Company's stock
does not actively trade, and thus few, if any, of the benefits of being a public
company are available to the Company. Recent legislation, most notably the
Sarbanes-Oxley Act of 2002 ("Sarbanes-Oxley") and regulations adopted by the SEC
and Nasdaq in furtherance of the purposes of Sarbanes-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Oxley, have greatly increased the compliance costs of being a public company,
both with respect to substantially higher legal and accounting costs and the
significantly greater amount of time the Company's executives must devote to
regulatory matters. As a private company, the Company will not have to implement
the requirements of Sarbanes-Oxley, file reports with the SEC or comply with the
corporate governance rules and onerous disclosure requirements of the SEC and
Nasdaq. Thus, the Company's legal, accounting and other costs will be much
lower, and management can focus on long-term goals and values rather than on
each quarter's financial results and the attendant market reaction. The savings
realized by the Company will be invested in the business. The Board believes
that shareholder value will be increased as management is allowed to focus its
attention and resources on implementing the Company's business plan and
long-term strategy.
Following is the unaudited pro forma condensed consolidated balance sheet of
Central Federal Corporation as of September 30, 2004, assuming the reverse stock
split was completed at that date.
Central Federal Corporation
Pro Forma Condensed Consolidated Balance Sheet (unaudited)
September 30, 2004
(Dollars in thousands, except per share data)
At September 30, 2004
-------------------------------------------------------
Pro Forma
Adjustments
increase Footnote
Historical (decrease) Reference Pro Forma
----------- --------- --------- -----------
Assets
Cash and cash equivalents $ 25,121 (1,524) (1) $ 23,597
Interest-bearing deposits in other financial institutions 298 298
Securities available for sale 13,234 13,234
Loans, net 96,800 96,800
Premises and equipment, net 2,686 2,686
Other assets 10,320 10,320
----------- --------- ----------
$ 148,459 $ (1,524) $ 146,935
=========== ========= ==========
Liabilities and shareholders' equity
Deposits $ 90,355 $ 90,355
Federal Home Loan Bank advances and other debt 33,670 33,670
Other liabilities 6,039 6,039
----------- --------- ----------
Total liabilities 130,064 130,064
Shareholders' equity
Total shareholders' equity 18,395 (1,524) (1) 16,871
----------- --------- ----------
$ 148,459 $ (1,524) $ 146,935
=========== ========= ==========
Book value per share $ 8.92 (9) $ 4,290.94
=========== ==========
See accompanying notes to pro forma condensed consolidated financial statements.
Following is the unaudited pro forma condensed consolidated statement of
operations of Central Federal Corporation for the year ended December 31, 2003,
assuming the reverse stock split was completed at the beginning of the year then
ended.
Central Federal Corporation
Pro Forma Condensed Consolidated Statement of Operations (unaudited)
(Dollars in thousands, except per share data)
Year ended December 31, 2003
--------------------------------------------------------------
Pro Forma
Adjustments
increase Footnote
Historical (decrease) Reference Pro Forma
---------- ---------- --------- ---------
Interest and dividend income
Loans, including fees $ 4,203 $ 4,203
Securities 939 939
Federal Home Loan Bank stock dividends 141 141
Federal funds sold and other 152 (35) (2) 117
--------- ------- -----------
5,435 (35) 5,400
Interest expense
Deposits 1,570 1,570
Debt 1,951 1,951
--------- -----------
3,521 3,521
--------- ------- -----------
Net interest income 1,914 (35) 1,879
Provision for loan losses 102 102
--------- ------- -----------
Net interest income after provision
for loan losses 1,812 (35) 1,777
Noninterest income
Service charges on deposit accounts 165 165
Net gain on sales of loans 429 429
Earnings on bank owned life insurance 188 188
Other 148 148
--------- -----------
930 930
Noninterest expense
Salaries and employee benefits 3,549 3,549
Occupancy and equipment 224 224
Data processing 246 246
Franchise taxes 301 301
Professional fees 673 8 (3),(4) 681
Director fees 119 119
Supplies 173 173
Depreciation and amortization 350 350
Other 469 469
--------- ------- -----------
6,104 8 6,112
--------- ------- -----------
Loss before income taxes (3,362) (43) (3,405)
Income tax expense (benefit) (988) 29 (5) (959)
--------- ------- -----------
Net loss $ (2,374) $ (72) $ (2,446)
========= ======= ===========
Loss per share
Basic $ (1.31) (6) $ (711.55)
Diluted (1.31) 6),(8) (711.55)
See accompanying notes to pro forma condensed consolidated financial statements.
Following is the unaudited pro forma condensed consolidated statement of
operations of Central Federal Corporation for the nine months ended September
30, 2004, assuming the reverse stock split was completed at the beginning of the
period then ended.
Central Federal Corporation
Pro Forma Condensed Consolidated Statement of Operations (unaudited)
(Dollars in thousands, except per share data)
Nine months ended September 30, 2004
--------------------------------------------------------------
Pro Forma
Adjustments
increase Footnote
Historical (decrease) Reference Pro Forma
---------- ----------- --------- ---------
Interest and dividend income
Loans, including fees $ 3,328 $ 3,328
Securities 640 640
Federal Home Loan Bank stock dividends 112 112
Federal funds sold and other 180 (26) (2) 154
--------- --------- ---------
4,260 (26) 4,234
Interest expense
Deposits 993 993
Debt 412 412
--------- ---------
1,405 1,405
--------- --------- ---------
Net interest income 2,855 (26) 2,829
Provision for loan losses 366 366
--------- --------- ---------
Net interest income after provision
for loan losses 2,489 (26) 2,463
Noninterest income
Service charges on deposit accounts 98 98
Net gain on sales of loans 63 63
Earnings on bank owned life insurance 110 110
Other 11 11
--------- ---------
282 282
Noninterest expense
Salaries and employee benefits 2,513 2,513
Occupancy and equipment 222 222
Data processing 315 315
Franchise taxes 168 168
Professional fees 282 38 (3),(4) 320
Director fees 127 127
Supplies 184 184
Depreciation and amortization 252 252
Other 608 608
--------- --------- ---------
4,671 38 4,709
--------- --------- ---------
Loss before income taxes (1,900) (64) (1,964)
Income tax expense (benefit) (683) 22 (5) (661)
--------- --------- ---------
Net loss $ (1,217) $ (86) $ (1,303)
========= ========= =========
Loss per share
Basic $ (0.61) (7) $ (341.97)
Diluted (0.61) (7) (341.97)
See accompanying notes to pro forma condensed consolidated financial statements.
Central Federal Corporation
Notes to Pro Forma Condensed Consolidated Financial Statements
(1) Represents cash paid for fractional shares and transaction expenses
($1,396 and $128, respectively), related after-tax reduction in equity.
(2) Represents reduction in interest income on funds used to purchase
fractional shares and pay transaction costs, net of reduced public company
expenses, at 2.50% annually.
(3) Includes $128 transaction costs (legal, accounting and other expenses)
related to the reverse stock split.
(4) Includes anticipated cost savings estimated to be realized as a result of
no longer being a public company totaling $120 annually ($90 for the nine
month period). These costs include accounting, legal, filing, printing and
other expenses.
(5) Federal income tax calculated at the Company's tax rate of 34%. Note that
the $128 reverse stock split transaction costs are not deductible for
federal income tax purposes.
(6) Pro forma basic and diluted loss per share is based on 3,437 weighted
average shares outstanding for the year ended December 31, 2003.
(7) Pro forma basic and diluted loss per share is based on 3,810 weighted
average shares outstanding for the nine months ended September 30, 2004.
(8) In 2003, the Company had included stock options and stock based incentive
plan shares that increased the number of outstanding shares in computing
diluted loss per share. However, because the Company had a loss from
continuing operations, these potential common shares were anti-dilutive
and should not have been considered for the computation. As a result, the
Company has revised the historical 2003 diluted loss per share amount
shown in these proforma financial statements. The impact of this change
was not material to the diluted loss per share amount reported previously.
The following potential average common shares were anti-dilutive and not
considered in computing diluted loss per share for 2003 because the
Company had a loss from continuing operations, the exercise price of the
options was greater than the average stock price for the period or the
fair value of the stock based incentive plan shares at the date of grant
was greater than the average stock price for the period.
Stock options 225,285
Stock based incentive plan shares 28,927
(9) Historical book value per share at September 30, 2004 does not include the
dilutive impact of 138,711 shares issued during the period from October 1,
2004 thru November 15, 2004 (primarily in the Reserve Mortgage Services,
Inc. acquisition and through option exercises). Accordingly, the proforma
book value per share at September 30, 2004 does not include the proforma
dilutive impact of these shares. If these shares had been outstanding at
September 30, 2004, book value per share at that date would have been as
follows:
Historical book value per share $ 8.36
Pro forma book value per share $ 4,008.13
EXHIBIT A
OPINION LETTER OF DONNELLY PENMAN & PARTNERS
November 22, 2004
Board of Directors
Central Federal Corporation
2923 Smith Road
Fairlawn, Ohio 44333
Members of the Board of Directors:
You have requested our opinion as to the fairness, from a financial point of
view, of the cash consideration of $14.50 per share ("Consideration") to be
received by the certain common shareholders of Central Federal Corporation
("Central Federal" or the "Company") holding fewer than 500 shares immediately
prior to the Effective Time as defined in the Proxy Statement relating to the
Amendment to the Certificate of Incorporation (the "Amendment") who will receive
cash consideration of $14.50 per fractional share created after the Effective
Time of the Amendment. Shareholders who hold fewer than 500 shares immediately
prior to the Effective Time will, as a result of the Amendment, no longer be
shareholders of the Company and shall cease to have any rights as shareholders
and their sole right shall be the right to receive the Consideration as
aforesaid, without interest thereon, upon surrender to the Company of their
certificates which theretofore represented shares of Central Federal Common
Stock.
Donnelly Penman & Partners ("Donnelly Penman") is an investment-banking firm of
recognized standing. As part of our investment banking services, we are
continually engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions, private placements and valuations for
stock plans, corporate and other purposes. We are acting as financial advisor to
the Company in connection with the Amendment and will receive a fee from the
Company for our services pursuant to the terms of our engagement letter with the
Company, dated as of October 28, 2004 (the "Engagement Letter").
In arriving at our Opinion, we have:
I. Reviewed the Annual Reports of the Company for the years ended December
31, 2002 through 2003 as well as interim financials through October 31,
2004;
II. Reviewed the November 18, 2004 Board of Directors Report;
III. Reviewed the Company's budget for the year ended December 31, 2004;
IV. Compared certain financial characteristics of the Company to certain
publicly held companies we deemed relevant;
V. Reviewed current banking industry conditions and trends concerning the
valuation of recent mergers and acquisitions;
VI. Conducted discussions with the senior management of the Company concerning
the business and future prospects of the Company;
VII. Prepared a discounted dividend analysis of the Company based on
projections derived from discussions with and deemed reasonable by
management of the Company; and
VIII. Reviewed such other data, including financial and industry data, performed
such other analyses and taken into account such other matters as we deemed
necessary or appropriate.
In conducting our review and arriving at our opinion, as contemplated under the
terms of our engagement by the Company, we, with the consent of the Company,
relied, without independent investigation, upon the accuracy and completeness of
all financial and other information provided to us by the Company. Donnelly
Penman has further
relied upon the assurance of management of the Company that they are unaware of
any facts that would make the information provided by or available to the
Company incomplete or misleading in any respect. With respect to the financial
forecast information discussed with us by the Company, we have assumed that they
have been reasonably prepared in good faith and reflect the best currently
available estimates and judgments of the senior management of the Company as to
the expected future financial performance of the Company. The Company's
management team has undertaken and agreed to advise us promptly if any
information previously provided has become inaccurate or is required to be
updated during the period of our review.
No limitations were imposed by the Company on Donnelly Penman on the scope of
Donnelly Penman's investigation or the procedures to be followed by Donnelly
Penman in rendering this opinion. On November 18, 2004, the Board of Directors
was provided with Donnelly Penman's valuation of the fully marketable,
undiscounted value of a share of Central Federal common stock as of November 15,
2004. Although Donnelly Penman believes the value presented to the board is a
reasonable valuation, the actual share valuation for purposes of this Amendment
is at the sole discretion of the Board of Directors. In addition, Donnelly
Penman was not requested to and did not make any recommendation to the Company's
Board of Directors as to the form of the consideration to be paid to the
Company's shareholders. Donnelly Penman was not requested to opine as to, and
this opinion does not address, The Company's underlying business decision to
proceed with or effect the Amendment or the relative merits of the Amendment
compared to any alternative transaction that might be available to the Company.
Donnelly Penman did not make or obtain any independent evaluation, valuation or
appraisal of the assets or liabilities of the Company, nor were we furnished
with such materials. Donnelly Penman has not reviewed any individual credit
files of the Company and has assumed, without independent verification that the
aggregate allowances for credit losses for the Company are adequate and
appropriate to cover such losses. Our opinion is necessarily based upon economic
and market conditions and other circumstances as they exist and have been
evaluated by us on the date of our opinion. We do not have any obligation to
update our opinion beyond the November 15, 2004 valuation, unless requested by
the Company in writing to do so, and we expressly disclaim any responsibility to
do so in the absence of any such request. Our services to the Company in
connection with the Amendment have been comprised solely of financial advisory
services, as described in the Engagement Letter.
In our analyses, we have made numerous assumptions with respect to industry
performance, business and economic conditions, and other matters, many of which
are beyond the control of the Company. These assumptions include:
- general economic conditions are not expected to improve or deteriorate
significantly from their current state;
- no significant industry regulations or events are expected to occur that
would impair the Company's ability to earn income at the projected levels;
and
- industry trading and transaction multiples are not projected to change
significantly from the current values.
Any estimates contained in our analyses are not necessarily indicative of future
results or value, which may be significantly more or less favorable than such
estimates. Estimates of values of companies do not purport to be appraisals or
to necessarily reflect the prices at which companies or their securities
actually may be sold. No company or merger utilized in our analyses was
identical to the Company. Accordingly, such analyses are not based solely on
arithmetic calculations; rather, they involve complex considerations and
judgments concerning differences in financial and operating characteristics of
the relevant companies, the timing of the relevant mergers and prospective buyer
interests, as well as other factors that could affect the public trading markets
of companies to which the Company is being compared. The analyses performed by
Donnelly Penman were assigned a weighting based on Donnelly Penman's opinion of
their relative comparability and significance with regard to the specific
characteristics of the Company. The complete valuation provided to the Company
on November 18, 2004, including a comprehensive explanation of methodologies
utilized has been delivered to the Board of Directors of the Company. Additional
copies are available to members of the Board of Directors of the Company and the
Company's management upon request. A summary of this valuation is also presented
in the Proxy Statement under the heading of Opinion of Financial Advisor.
Our opinion is furnished to the Board of Directors of the Company in connection
with its consideration of the proposed Amendment and does not constitute a
recommendation to or any advice to the Board of Directors of the Company or to
any shareholder to take any other action in connection with the Amendment.
Furthermore, this letter
should not be construed as creating any fiduciary duty on the part of Donnelly
Penman to any such party. We hereby consent to the reference to our opinion in
the proxy statement relating to the shares of common stock of the Company to be
repurchased as a result of the Amendment and to the inclusion of the foregoing
opinion in the materials relating to the Amendment. In giving such consent, we
do not thereby admit that we come within the category of persons whose consent
is required under Section 7 of the Securities Act of 1933 or the rules and
regulations of the Securities and Exchange Commission thereunder.
Based upon and subject to the foregoing, including the various assumptions and
limitations set forth herein, it is our opinion that, as of November 18, 2004,
the Consideration of $14.50 per share, is fair, from a financial point of view,
to the common shareholders of the Company.
Very truly yours,
John C. Donnelly
Managing Director
Donnelly Penman & Partners
EXHIBIT B
CERTIFICATE OF AMENDMENT
TO
CERTIFICATE OF INCORPORATION
Central Federal Corporation, a corporation duly organized and existing under and
by virtue of the General Corporation Law of the State of Delaware (the
"Corporation"), does hereby certify that the Board of Directors of Central
Federal Corporation on ________________, 2005 adopted a resolution proposing and
declaring advisable the following amendment to the Certificate of Incorporation
of Central Federal Corporation:
RESOLVED, that it is hereby declared advisable to amend the Company's
Certificate of Incorporation, as heretofore amended, by inserting the following
text at the end of Subsection A of Article Fourth:
As of [__________] at [_______] EST (the "Effective Time"), each five hundred
(500) shares of Common Stock issued and outstanding immediately prior to the
Effective Time automatically will be reclassified and continued, without any
action on the part of the holder, as one (1) share of new Common Stock (the
"Reverse Split"). No fractional share will be issued to any holder of fewer than
500 shares prior to the Reverse Split, and the resulting fractional share that
otherwise would have been issued to such holder will be repurchased by the
Company from such holder for a cash payment equal to the fair market price
determined by the Board of Directors. A certificate representing the number of
shares (including any fractional share) owned as a result of the reverse stock
split will be issued to any holder of 500 or more shares before the reverse
stock split."
The remaining text of Article Fourth shall not change.
CENTRAL FEDERAL CORPORATION
By: __________________________
David C. Vernon
Chairman, President
and Chief Executive Officer
Date: ________________________
PRELIMINARY COPY
CENTRAL FEDERAL CORPORATION
SPECIAL MEETING OF STOCKHOLDERS
________________, 2005
10:00 A.M. LOCAL TIME
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints the official proxy committee of the Board of
Central Federal Corporation (the "Company"), each with full power of
substitution, to act as proxy for the undersigned, and to vote all shares of
Common Stock of the Company which the undersigned is entitled to vote only at
the Special Meeting of Stockholders, to be held at the CFBank Fairlawn office
located at 2923 Smith Road, Fairlawn, Ohio on ______, _______, 2005 at 10:00
a.m., local time, with all of the powers the undersigned would possess if
personally present at such Special Meeting as follows:
Proposal Number 1. Amendment of the Company's Certificate of Incorporation to
effect a one-for-500 shares reverse stock split.
FOR AGAINST ABSTAIN
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" PROPOSAL NUMBER 1.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS.
THIS PROXY IS REVOCABLE AND WILL BE VOTED AS DIRECTED, BUT IF NO INSTRUCTIONS
ARE SPECIFIED, THIS PROXY WILL BE VOTED "FOR" PROPOSAL NUMBER 1. IF ANY OTHER
BUSINESS IS PRESENTED AT THE SPECIAL MEETING, THIS PROXY WILL BE VOTED BY THE
PROXY HOLDERS IN THEIR BEST JUDGMENT. AT THE PRESENT TIME, THE BOARD OF
DIRECTORS KNOWS OF NO OTHER BUSINESS TO BE PRESENTED AT THE SPECIAL MEETING.
The undersigned acknowledges receipt from the Company prior to the execution of
this proxy of a Notice of Special Meeting of Stockholders and of a Proxy
Statement dated __________, 2005.
Please sign exactly as you name appears on this card. When signing as attorney,
executor, administrator, trustee or guardian, please give your full title. If
shares are held jointly, each holder may sign but only one signature is
required.
Dated:________________
_________________________
SIGNATURE OF SHAREHOLDER
_________________________
SIGNATURE OF SHAREHOLDER
PLEASE COMPLETE, DATE, SIGN AND PROMPTLY MAIL THIS PROXY IN THE ENCLOSED
POSTAGE-PAID ENVELOPE
(Central Federal Corporation Letterhead)
Dear CFBank Employees' Savings & Profit Sharing Plan and Trust Participant:
On behalf of the Board, I am forwarding you the attached Vote Authorization Form
for the purpose of conveying your voting instructions to Pentegra (the
"Trustee") on the proposal to be presented at the Special Meeting of
Stockholders of Central Federal Corporation (the "Company") on _________, 2005.
Also enclosed is a Notice and Proxy Statement for the Company's Special Meeting
of Stockholders.
As a participant in the CF Bank Employees' Savings & Profit Sharing Plan and
Trust, you are entitled to direct the Trustee on how to vote the shares of
Common Stock in your account as of __________, 2005, the Special Meeting record
date. These shares will be voted as directed by you provided your instructions
are received by the Trustee by ____________. The Trustee, subject to its
fiduciary duties, will vote any shares of Common Stock for which no instructions
are provided in a manner calculated to most accurately reflect the instructions
the Trustee has received from participants regarding the shares of Common Stock
allocated to their 401(k) accounts.
In order to direct the voting of shares of Common Stock in your account, please
complete and sign the enclosed Vote Authorization Form and return it in the
enclosed postage-paid envelope no later than __________, 2005. Your vote will
not be revealed, directly or indirectly, to any employee or director of the
Company or CFBank.
Sincerely,
David C. Vernon
Chairman, President and Chief Executive Officer
PRELIMINARY COPY
VOTE AUTHORIZATION FORM
I understand that Pentegra (the "Trustee") is the holder of record and custodian
of all shares of Central Federal Corporation Common Stock allocated to me under
the CFBank Employees' Savings & Profit Sharing Plan and Trust. Further, I
understand that my voting instructions are solicited on behalf of the Board of
Directors for the Special Meeting of Stockholders to be held on _______, 2005.
Accordingly, vote my shares as follows:
Proposal Number 1. Amendment of the Company's Certificate of Incorporation to
effect a one-for-500 shares reverse stock split.
FOR AGAINST ABSTAIN
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" PROPOSAL NUMBER 1.
The Trustee is hereby authorized to vote all shares in my account in its trust
capacity as indicated above.
_____________________ ____________________________
Date Signature
Please date, sign and mail this form in the enclosed postage-paid envelope no
later than ___________, 2005.
(Central Federal Corporation Letterhead)
Dear Stock Award Recipient:
On behalf of the Board, I am forwarding to you the Attached Vote Authorization
Form for the purpose of conveying your voting instruction to First Banker's
Trust (the "Trustee") on the proposal to be presented at the Special Meeting of
Stockholders of Central Federal Corporation (the "Company") on _________, 2005.
Also enclosed is the Notice and Proxy Statement for the Company's Special
Meeting of Stockholders.
As a participant in the Central Federal Corporation 1999 Stock-Based Incentive
Plan (the "Incentive Plan") you are entitled to vote all unvested shares of
restricted stock awarded to you under the Incentive Plan as of __________, 2005.
The Incentive Plan Trustee will vote those shares of the Company stock in
accordance with instructions it receives from you and the other Stock Award
recipients. Shares of restricted stock for which instructions are not received
by _________, 2005, will not be voted by the Incentive Plan Trustee, as
directed by the Company.
At this time, in order to direct the voting of Common Stock awarded to you under
the Incentive Plan, you must complete and sign the enclosed Vote Authorization
Form and return it in the accompanying postage-paid envelope no later than
_____________, 2005.
Sincerely,
David C. Vernon
Chairman, President and Chief Executive Officer
PRELIMINARY COPY
Name________________________________
Shares______________________________
INCENTIVE PLAN VOTE AUTHORIZATION FORM
I understand that First Banker's Trust (the "Trustee"), is the holder of record
and custodian of all shares of Central Federal Corporation (the "Company")
Common Stock held in trust for the Central Federal Corporation 1999 Stock-Based
Incentive Plan (Incentive Plan). Further, I understand that my voting
instructions are solicited on behalf of the Board of Directors for the Special
Meeting of Stockholders to be held on _______, 2005.
Accordingly, I vote my shares as follows:
Proposal Number 1. Amendment of the Company's Certificate of Incorporation to
effect a one-for-500 shares reverse stock split.
FOR AGAINST ABSTAIN
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" PROPOSAL NUMBER 1.
The Incentive Plan Trustee is hereby authorized to vote all unvested shares of
Common Stock awarded to me under the Incentive Plan in its trust capacity as
indicated above.
_________________________ ____________________________
Date Signature
Please date, sign and mail this form in the enclosed postage-paid envelope no
later than ________, 2005.