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
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
--------------------------------------------------------------------------------
(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:
[CENTRAL FEDERAL CORPORATION LOGO]
2923 Smith Road
Fairlawn, Ohio 44333
330.666.7979
__________, 200__
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 ______, _______, 200__ 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 reduce the number of shares
of capital stock the company is authorized to issue and 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. No
fractional shares will be issued. Any fractional share resulting from the split
will be redeemed by the company for a cash payment equal to $14.50 per pre-split
share.
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 and 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
[CENTRAL FEDERAL CORPORATION LOGO]
2923 Smith Road
Fairlawn, Ohio 44333
330.666.7979
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
To be held on ______, _______, 200__
NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders of Central Federal
Corporation will be held ______, _______, 200__ 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 (i) reduce the number of shares of capital stock
the company is authorized to issue and (ii) 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.
Record holders of the common stock of Central Federal Corporation at the close
of business on __________, 200__ are entitled to receive notice of the Special
Meeting and to vote at the Special Meeting and any adjournment or postponement
of the Special Meeting. The Special Meeting may be adjourned to permit the
company to solicit additional proxies if there are insufficient shares
represented for a quorum or to approve the proposal at the time of 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
__________, 200__
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.
[CENTRAL FEDERAL CORPORATION LOGO]
2923 Smith Road
Fairlawn, Ohio 44333
330.666.7979
PROXY STATEMENT
SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ______, _______, 200__
The Board of Directors 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
______, _______, 200__ (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
__________, 200__ to stockholders of record as of __________, 200__.
At the Special Meeting, stockholders of record will vote on a proposal to amend
the Company's Certificate of Incorporation (the "Certificate of Incorporation")
to (i) reduce the number of shares of capital stock the Company is authorized to
issue and (ii) 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.
Each 500 shares of Common Stock outstanding on the effective date of the reverse
split will be exchanged for one share of new Common Stock. No fractional shares
will be issued. Any fractional share of Common Stock resulting from the split
will be redeemed by the Company for a cash payment equal to $14.50 per pre-split
share.
The number of shares of capital stock the Company is authorized to issue will be
reduced from (i) 7,000,000 shares, comprised of 6,000,000 shares of common stock
and 1,000,000 shares of preferred stock, to (ii) 14,000 shares, comprised of
12,000 shares of common stock and 2,000 shares of preferred stock.
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.
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 the documents incorporated by reference before voting
your shares.
SPECIAL MEETING
- A Special Meeting of Stockholders will be held on ______, _______, 200__
at the Company's offices at 2923 Smith Road, Fairlawn, Ohio 44333 at 10:00
a.m. (Please read "Questions and Answers About the Transaction - What is
the Purpose of the Special Meeting?" on page 5, " - Who Can Attend the
Special Meeting?" on page 5, " - What Constitutes a Quorum for the Special
Meeting?" on page 6 and " - Who Is Soliciting Proxies and Paying
Solicitation Costs?" on page 7.)
- The Special Meeting will consider a proposal to amend the Company's
Certificate of Incorporation to (i) reduce the number of shares of capital
stock the Company is authorized to issue and (ii) effect a one for 500
reverse stock split of the Company's common stock, thereby permitting the
Company to apply to the SEC to terminate the registration of its common
stock (the "Common Stock") pursuant to Section 12(g)(4) of the Securities
Exchange Act of 1934 (the "Exchange Act"). (Please read "Special Factors -
Background of the Transaction" on page 10 and "Amendment to the
Certificate of Incorporation" beginning on page 22.)
- Stockholders of record on __________, 200__ will be entitled to vote on
the proposal at the Special Meeting. (Please read "Questions and Answers
About the Transaction - Who is Entitled to Vote?" on page 5, " - What Vote
is Required to Approve the Proposal?" on page 6, " - Can I Revoke or
Change My Vote After I Submit My Proxy?" on page 6, " - How Do I Vote?" on
page 6 and " - Who Will Count the Vote?" on page 6.)
- The proposal must be approved by a majority of the outstanding shares of
Common Stock. (Please read "Questions and Answers About the Transaction -
What Vote is Required to Approve the Proposal?" on page 6.)
EFFECTS OF THE TRANSACTION
- If the proposal (the "Transaction") is approved, and the reverse stock
split is completed, each stockholder will receive one share of new Common
Stock for each 500 shares of Common Stock of the Company owned on the
effective date of the reverse stock split. All outstanding shares of
Common Stock will be subject to the reverse split, including shares held
(i) in the name of the stockholder, (ii) in the street name of a brokerage
firm, (iii) by the trustee of the CFBank's Employees' Savings & Profit
Sharing Plan and Trust or (iv) by the trustee of the Central Federal
Corporation 1999 Stock-Based Incentive Plan. (Please read "Amendment to
the Certificate of Incorporation - Description of the Transaction"
beginning on page 22.)
- The number of shares subject to currently outstanding options and the
corresponding exercise price also will be adjusted to give effect to the
reverse stock split. (Please read "Amendment to the Certificate of
Incorporation - Description of the Transaction" beginning on page 22.)
- No fractional shares will be issued. Any fractional share resulting from
the split will be redeemed by the Company for a cash payment equal to
$14.50 per pre-split share. That amount includes a premium of $0.46 (3.3%)
over the fair value of $14.04 determined by Donnelly Penman & Partners and
reflects a premium of $1.80 over the market price of $12.70 on the day
preceding announcement of the proposed reverse stock split on October 22,
2004 and a premium of $1.70 over the over the average closing trading
price of $12.80 for the thirty calendar days preceding the date of
announcement. (Please read "Amendment to the Certificate of Incorporation
- Description of the Transaction" beginning on page 22.)
- Following the split, the Company will have fewer than 300 stockholders of
record and will apply to the SEC to terminate the registration of the
Common Stock under the Securities Exchange Act of 1934. (Please read
"Special Factors - Effects of the Transaction on the Company" on page 12.)
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- Following termination of Exchange Act registration, the Common Stock no
longer will be quoted on Nasdaq(R). 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 NASD's Electronic
Bulletin Board (the "OTCBB"). However, on the OTCBB, the spread between
bid and ask prices likely will be greater than on Nasdaq(R). (Please read
"Special Factors - Effects of the Transaction on the Company" on page 12,
" - Effects of the Transaction on Stockholders" beginning on page 12 and
" - Fairness of the Transaction to Stockholders - Substantive Fairness -
Factors Not in Support of the Transaction" on page 15.)
- 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. (Please read "Special Factors - Effects of the
Transaction on the Company" on page 12.)
- The percentage of ownership of the Common Stock beneficially owned by the
directors and officers of the Company as a group will increase from 18.1%
based on 2,200,849 shares outstanding on the Record Date to approximately
19.2% based on 4,134 shares outstanding following the split; control
of the Company will not be affected. (Please read "Special Factors -
Effects of the Transaction on Stockholders" beginning on page 12.)
- 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. (Please read "Special Factors - United States Federal Income
Tax Consequences of the Transaction" beginning on page 13 and "Questions
and Answers About the Transaction - What are the United States Federal
Income Tax Consequences of the Reverse Stock Split?" on page 8.)
- The receipt of stock in the reverse stock split should not be a taxable
event to a stockholder. (Please read "Special Factors - United States
Federal Income Tax Consequences of the Transaction" beginning on page 13
and "Questions and Answers About the Transaction - What are the United
States Federal Income Tax Consequences of the Reverse Stock Split?" on
page 8.)
PURPOSE OF AND REASONS FOR THE TRANSACTION
If the proposal is approved, the Company will be eligible to complete a one for
500 reverse stock split of the Common Stock, thereby permitting the Company to
apply to the SEC to terminate the registration of the Common Stock pursuant to
Section 12(g)(4) of the Securities Exchange Act. The Company then will be a
private, rather than a public, company. The purpose of the proposal and the
benefits of going private include:
- Eliminating costs associated with filing reports and other documents under
the Exchange Act. (Please read "Special Factors - Purpose of and Reasons
for the Transaction" beginning on page 10 and "Questions and Answers About
the Transaction - What Will Be the Effects of the Reverse Stock Split?"
beginning on page 7.)
- Eliminating costs of compliance with the Sarbanes-Oxley Act of 2002 and
related regulations. (Please read "Special Factors - Background of the
Transaction" on page 10, and " - Purpose of and Reasons for the
Transaction" beginning on page 10.)
- Reducing direct and indirect costs of administering stockholder accounts
and responding to stockholder requests. (Please read "Questions and
Answers About the Transaction - What are the Purposes of and Reasons for
the Reverse Stock Split?' on page 7.)
- Providing a stockholder with fewer than 500 shares immediately before the
transaction the opportunity to receive cash for all such shares without
having to pay brokerage commissions and other transaction costs and at a
price that represents a premium over fair market value. (Please read
"Special Factors - Fairness of the Transaction to Stockholders -
Substantive Fairness - Fairness of the Price - Premium Over Market Price"
on page 16 and " - Opinion of Financial Advisor" beginning on page 17.)
- Providing a stockholder with more than 500 shares immediately before the
transaction the opportunity to receive cash for the portion of such
shares, if any, represented as a fractional share after the split, without
having to pay brokerage commissions and other transaction costs and at a
price that represents a premium over fair market value. (Please read
"Special Factors - Opinion of Financial Advisor" beginning on page 17.)
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- Providing management flexibility to consider and initiate actions that may
produce long-term benefits and growth without the pressure and expectation
to produce quarterly earnings per share growth. (Please read "Special
Factors - Background of the Transaction" on page 10.)
DISADVANTAGES OF THE TRANSACTION
The disadvantages of the reverse stock split are that:
- The Company's working capital or assets will be decreased to fund the
purchase of fractional shares and the costs of the transaction. (Please
read "Questions and Answers - How Will the Company Fund the Reverse Stock
Split?" on page 8 and "Amendment to the Certificate of Incorporation -
Description of the Transaction - Source of Funds and Expenses" on page
24.)
- The Company's ability to raise capital will be significantly reduced.
(Please read "Special Factors - Effects of the Transaction on the Company"
on page 12.)
- The continuing stockholders will experience reduced liquidity for their
shares of Common Stock. (Please read "Special Factors - Fairness of the
Transaction to Stockholders - Substantive Fairness - Factors Not in
Support of the Transaction" on page 15.)
- Less public information about the Company will be available after the
split. (Please read "Special Factors - Fairness of the Transaction to
Stockholders - Substantive Fairness - Factors Not in Support of the
Transaction" on page 15.)
- A stockholder who is cashed out will be unable to participate in any
future earnings or growth of the Company. (Please read "Special Factors -
Fairness of the Transaction to Stockholders - Substantive Fairness -
Factors Not in Support of the Transaction" on page 15.)
- A stockholder whose fractional share is redeemed will not enjoy a
dissenter's right of appraisal. (Please read "Amendment to the Certificate
of Incorporation - No Appraisal Rights" on page 25.)
QUESTIONS AND ANSWERS ABOUT THE TRANSACTION
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 redeemed in connection with
the reverse stock split.
"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 of the fair market value of the
Common Stock as of November 15, 2004, a copy of which is included with this
Proxy Statement as Exhibit A.
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"Proxy Statement" means this proxy statement.
"Record Date" means __________, 200__.
"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 ______, _______, 200__ 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 subsequent
termination of the Exchange Act registration of the Common Stock.
WHAT IS THE PURPOSE OF THE SPECIAL MEETING?
The Company's Board of Directors (the "Board") is proposing an amendment to the
Certificate of Incorporation to (i) reduce the number of shares of capital stock
the Company is authorized to issue and (ii) effect a one for 500 reverse stock
split of the Common Stock, thereby permitting the Company to apply to the SEC to
terminate the registration of the Common Stock pursuant to Section 12(g)(4) of
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. No fractional shares will be issued. Any fractional share resulting
from the split will be redeemed by the Company for a cash payment equal to
$14.50 per pre-split share.
The amendment to the Certificate of Incorporation also will decrease the
Company's authorized capital stock from 7,000,000 shares, of which 6,000,000
shares are Common Stock and 1,000,000 shares are preferred stock, to 14,000
shares, of which 12,000 shares are Common Stock and 2,000 shares are preferred
stock.
WHO CAN ATTEND THE SPECIAL MEETING?
If you are a stockholder of record as of the close of business on __________,
200__, you may attend the Special Meeting. However, if you are a beneficial
owner of Common Stock held by a broker, bank or other nominee, you will need
proof of ownership to be admitted to the Special Meeting. A recent brokerage
statement, or letter from a bank or broker, would serve as proof of ownership.
If you want to vote your shares of Common Stock held in street name in person at
the Special Meeting, you will have to get a written proxy in your name from the
broker, bank, or other nominee who holds your shares.
WHO IS ENTITLED TO 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 __________, 200__
(the "Record Date"). As of the close of business on the Record Date, a total of
2,200,849 shares of Common Stock were outstanding and entitled to vote. Each
share of Common Stock is entitled to one vote on each matter presented at the
Special Meeting, except that, as provided in the Certificate of Incorporation,
any record holder of Common Stock who beneficially owns, either directly or
indirectly, in excess of 10% of the outstanding shares of Common Stock is not
entitled to vote any shares in excess of the 10% limit, and those shares in
excess of the 10% limit are not treated as outstanding for voting purposes. A
person or entity is deemed to beneficially own shares owned by an affiliate of,
as well as by persons acting in concert with, such person or entity. The
Certificate of Incorporation authorizes the Board (i) to make all determinations
necessary to implement and apply the 10% limit, including determining whether
persons or entities are acting in concert and (ii) to demand that any person who
is reasonably believed to beneficially own stock in excess of the 10% limit
supply information to the Company to enable the Board to implement and apply the
10% limit. As of the date hereof no stockholder is known by the Company to
beneficially own, directly or indirectly, more than 5.6% of the outstanding
shares of Common Stock, and no group of stockholders is known to be acting in
concert.
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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. Pursuant to Article Fourth of the Certificate of Incorporation,
any holder of more than 10% of the outstanding shares of the Common Stock will
not be able to vote any shares held in excess of 10% of the outstanding shares,
and such shares in excess of the 10% limit will not be considered to be
outstanding. If there are not sufficient votes for a quorum or to approve the
proposal at the time the Special Meeting begins, the Special Meeting may be
adjourned to permit the further solicitation of proxies.
As noted above, as of the date hereof, no stockholder is known by the Company to
beneficially own, directly or indirectly, more than 5.6% of the outstanding
shares of Common Stock, and no group of stockholders is known to be acting in
concert. Accordingly, all 2,200,849 shares outstanding as of the Record Date
will be considered in determining the existence of a quorum and the approving
vote of a majority of such shares is required to approve the proposal.
The Company is not aware of any other matters to be presented at 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. This includes a motion to
adjourn or postpone the Special Meeting in order to solicit additional proxies.
If the Special Meeting is postponed or adjourned, your shares of Common Stock
may be voted by the persons named on the proxy on the new Special Meeting date,
unless you have revoked your proxy.
WHAT CONSTITUTES A QUORUM FOR THE SPECIAL MEETING?
The Special Meeting will be held if a quorum, consisting of a majority of the
outstanding shares of Common Stock entitled to vote (after subtracting any
shares in excess of the 10% limit), 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 item and has not received voting instructions from the beneficial
owner.
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 either 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.
HOW DO I VOTE?
Other than by attending the Special Meeting and voting in person, you are
requested to vote by completing the enclosed proxy and returning it signed and
dated in the enclosed postage-paid envelope. 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.
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. The Board
of Directors has designated ___________________________________________ to act
as the Inspector of Election. __________ is not otherwise employed by or a
director of the Company or any of its affiliates. After the final adjournment of
the Special Meeting, the proxies will be returned to the Company.
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WHO IS SOLICITING PROXIES AND PAYING SOLICITATION COSTS?
The Board is requesting your proxy. In addition to soliciting proxies by mail,
the Company has retained Georgeson Shareholder Services to assist with the
solicitation of proxies for a fee of $6,500 plus reimbursement of expenses up to
$1,000. The Company 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 Company's 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. The Board considered the
following factors when recommending the reverse stock split:
- The cost savings per year that the Company expects to realize as a
result of the deregistration of the Common Stock and the decrease in
expenses relating to servicing stockholders holding small positions
in the Common Stock
- The additional savings in terms of management's and employees' time
that no longer will be spent (i) preparing the current, periodic and
other reports required of publicly-traded companies and (ii)
managing stockholder relations and communications.
- The fact that the Company has not realized many of the benefits
associated with being a publicly traded company, such as enhanced
stockholder value, access to capital markets and business
credibility, due to the limited liquidity and low market price of
the Common Stock
- The belief that the Company's stockholders have not benefited
proportionately from the costs of registration and Nasdaq(R)
quotation of the Common Stock, principally as a result of the
relatively low volumes of trading of the Common Stock, which may
have resulted in (i) depressed market prices for the Common Stock;
(ii) a lack of market makers and analysts following the Company's
performance; and (iii) a limitation of the ability of the Company's
stockholders to sell relatively large blocks of shares in the open
market without significantly decreasing the market price
The Board believes deregistration and delisting of the Common Stock may provide
a more effective means of using the Company's capital to benefit its
stockholders.
WHAT ALTERNATIVES TO THE REVERSE STOCK SPLIT 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 and the sale of the Company, as alternative means to
effecting a going private transaction.
WHAT WILL BE THE EFFECTS OF THE REVERSE STOCK SPLIT?
The reverse stock split will have the following effects on the Company:
- The number of stockholders of record will be reduced from
approximately 650 to approximately 247 and the number of outstanding
shares of Common Stock will decrease from approximately 2,200,849 to
approximately 4,134.
- The Company will be able to apply to the SEC to terminate the
registration of the Common Stock under the Exchange Act, which will
mean that the Company no longer will be required to file reports
with the SEC.
7
- The Common Stock no longer will be quoted on Nasdaq(R). However,
while there is no certainty, at least one market maker is expected
to continue to make a market in the Common Stock on NASD's
Electronic Bulletin Board (the "OTCBB"). On the OTCBB, the spread
between bid and ask prices likely will be greater than on Nasdaq(R).
(Please read "Special Factors - Fairness of the Transaction to
Stockholders - Substantive Fairness - Factors Not in Support of the
Transaction" on page 15.)
- The Company will pay cash of approximately $2,068,500 in the
aggregate to repurchase fractional shares and pay the costs of the
Transaction.
- Aggregate stockholders' equity as of September 30, 2004, will be
reduced from approximately $18,395,000 on an historical basis to
approximately $16,344,000 on a pro forma basis.
- Book value per share of Common Stock as of September 30, 2004 will
increase from $8.92 per share on an historical basis to $4,237.49
per share on a pro forma basis.
- 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 a net
loss per share of approximately $355.25 per share on a pro forma
basis.
The reverse stock split will have the following effects on the Company's
stockholders:
- The percentage ownership of the Common Stock beneficially owned by
executive officers and directors as a group will increase from
approximately 18.1% to approximately 19.2% after the effective time
of the reverse stock split.
- 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 shares will be issued. Any
fractional shares resulting from the split will be redeemed 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 and no longer will be a stockholder of the
Company.
- There will be less liquidity, if any, for the Common Stock following
the split.
IS THE REVERSE STOCK SPLIT FAIR TO ALL STOCKHOLDERS?
For the reasons set forth below in this Proxy Statement, the Board believes the
reverse stock split is fair to, and in the best interest of, all stockholders,
both those who will be cashed out and those who will remain stockholders. The
Board, which is comprised of seven members, six of whom are independent,
unanimously approved the reverse stock split. In making its determination with
respect to the reverse stock split and the price to be paid for fractional
shares, the Board considered, among other things, the written valuation report
dated November 18, 2004 and the written valuation report dated November 18, 2004
of Donnelly Penman & Partners of the fair market value of the Common Stock as of
November 15, 2004, which is discussed beginning on page 17 under the caption
"Special Factors - Opinion of Financial Advisor." The factors considered in
valuing the Common Stock are discussed on page 15 under the caption "Special
Factors - Fairness of the Transaction to Stockholders - Substantive Fairness -
Fairness of the Price - Premium Over Market Price" on page 16. The resulting
valuation of the Company was approximately $31.9 million, or $14.50 per share
based upon 2,200,849 shares of Common Stock outstanding at November 15, 2004.
Donnelly Penman & Partners subsequently delivered the written Fairness Opinion,
a copy of which is included as Exhibit A to this Proxy Statement.
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.
8
HOW WILL THE COMPANY FUND THE REVERSE STOCK SPLIT?
It is estimated that approximately $2,068,500 will be required to effect the
reverse stock split, including approximately $1,941,000 to pay for the
fractional shares of the Common Stock exchanged for cash in the reverse stock
split and $127,500 for legal, accounting and other related expenses. Funds
required to implement the reverse stock split will come from working capital.
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.
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 whole 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 whole shares of Common
Stock, if any, to which the holder is entitled as a result of the reverse stock
split.
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 for any fractional shares will be contained in the transmittal letter
you receive soon after the effective date of the reverse stock split.
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 _________, 200__. 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.
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.
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.
All shares of Common Stock represented at the Special Meeting by properly
executed proxies 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.
It is the Company's understanding that each director and executive officer of
the Company intends to vote all shares of Common Stock owned by such person in
favor of the proposal to amend the Certificate of Incorporation and effect the
reverse stock split. Other than the recommendation of the Board to vote for the
proposal set forth in this Proxy Statement, the Company, after reasonable
inquiry, is unaware of any recommendation in support of or opposed to the
proposal made by any director or executive officer of the Company, but it is the
Company's understanding that any such person would recommend a vote for the
proposal to any stockholder making inquiry.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" APPROVAL OF
THE AMENDMENT TO THE COMPANY'S CERTIFICATE OF INCORPORATION.
9
SPECIAL FACTORS
BACKGROUND OF THE TRANSACTION
For many months, management and the Board have been considering 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. At a meeting held on
October 21, 2004, the Board considered the comparative advantages and
disadvantages of remaining a public company or becoming a private company. After
full and complete discussion, the Board determined that the Company should
engage in a going private transaction. Following the meeting, the Company issued
a press release to announce the Board's decision. In reaching its decision to
approve and recommend to stockholders a reverse stock split for that purpose,
the Board considered alternatives to the split, including an issuer tender offer
and a sale of the Company. On October 28, 2004, the Board retained Donnelly
Penman & Partners to act as the Company's financial advisor with respect to the
reverse stock split. Donnelly Penman & Partners delivered its oral fairness
opinion, written valuation report on November 18, 2004, and the Board met again
on that date to discuss and approve the report and fix the price to be paid for
fractional shares. Subsequently, Donnelly Penman & Partners delivered its
written Fairness Opinion, a copy of which is included with this Proxy Statement
as Exhibit A.
The Board carefully considered this course of action and determined that
deregistering and delisting the Company's capital stock is in the best interest
of the Company and its stockholders. 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 the Sarbanes-Oxley Act of 2002 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 that the Company's executives and employees must
devote to compliance with securities laws.
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 that 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 _____, 200__, the average daily trading volume
was ____ shares, notwithstanding that the Company has approximately 1,131
stockholders (approximately 603 record holders). The Board believes there is
little likelihood that a more active trading market will develop in the
foreseeable future. Even if the Company's financial
10
performance improves, the Board believes there will be limited public interest
in the Common Stock at any time within 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
anticipates that its legal and accounting costs to ensure compliance will be at
least $280,000 annually. 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. 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.
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. 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. 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.
11
EFFECTS OF THE TRANSACTION ON THE COMPANY
- Approximately 133,849 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 4,134 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, and the SEC, but the Company will continue to file reports
with the Officer of Thrift Supervision.
- Approximately $1,941,000 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 $127,500. Of that amount,
approximately $25,000 will be expended for the costs of 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;
$7,500 for solicitation costs and $5,000 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 $16,344,000 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 $4,237.49
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 $355.25 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 shares will be issued. Any
fractional shares resulting from the split will be redeemed 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.
12
- 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.
- The percentage of beneficial ownership of the Common Stock held by
the Company's directors and officers as a group will increase from
approximately 18.1% pre-split to approximately 19.2% 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. The Company's
directors and officers will continue to be subject to the fiduciary
and other obligations of Delaware law.
- The number of shares subject to outstanding options and the
corresponding exercise price will be adjusted to give effect to the
reverse stock split. The exercise price of each outstanding stock
option will automatically increase by a factor of 500:1, and the
number of underlying shares will decrease by a factor of 500:1. When
the option is exercised, the optionee will tender the exercise price
for the whole number of shares for which the option is exercisable,
and the Company will deliver that number of shares and pay the
optionee the fair market value of the fractional share as of the
date of exercise. The fair market value on the date of exercise will
be determined by the Board in its discretion, in accordance with the
procedures set forth in the option plan.
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OF THE TRANSACTION
This discussion of United States federal income tax consequences set forth below
is for general information purposes only and does not purport to be a complete
discussion or analysis of all potential tax consequences that may apply to the
Company and its stockholders. 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.
The following disclosure 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 United States Internal Revenue
Code of 1986, as amended (the "Code"), and laws, regulations,
13
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 described
in Section 368(a) (1) (E) of the Code. Accordingly, the Company will not
recognize taxable income, gain or loss in connection with the reverse stock
split.
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. However, the receipt of cash in lieu of a fractional share by any such
stockholder may be a taxable event, as described below.
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
redeemed 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 redeemed 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 redeemed shares; and (3)
finally, as gain from the sale or exchange of the redeemed shares.
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 10, and 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 so that as few stockholders as reasonably
practicable 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. Selecting the smaller ratio also minimized the amount of cash
that the Company would have to pay for fractional shares. As discussed below,
the Board expressly found that the reverse stock split was both procedurally and
substantively fair to both 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 or Bylaws. The seven-member Board, six of whose members are
independent, unanimously approved the reverse stock 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. A majority of the shares held by
unaffiliated stockholders is not required under Delaware law or the Company's
Certificate of Incorporation or Bylaws. The Board has duly called and noticed a
Special Meeting of Stockholders to be held on __________, 200__ for the purpose
of considering and approving the reverse stock split.
Given the experience of the Board and its familiarity with the Company,
including its financial condition and prospects, as well as the fact that no
officer or director of the Company who is also a stockholder has any interest in
the Transaction different from the interest of any other stockholder, 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 stockholders
was not warranted. The Board, however, did retain Donnelly Penman & Partners, an
14
independent investment banking firm, 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 such stockholders received a fair price for their
fractional shares.
Substantive Fairness. Any stockholder (either affiliated or unaffiliated) who
remains a stockholder after the reverse stock split is completed will benefit
from the direct and indirect costs savings the Company will enjoy when it
terminates its public company status. 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 (either affiliated or unaffiliated) who is cashed out in the
reverse stock split will receive a fair price for such stockholder's shares,
and, although the stockholder will exert no control over the timing or price of
the sale of those shares, there is no certainty in any event that a stockholder
could effect a sale of shares at a time of the stockholder's choosing, and the
sale of fractional shares to the Company will be effected without incurring
brokerage costs.
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 such stockholder, who does not wish to own shares of a
private company, may be able to sell all the stockholder's holdings
in the open market prior to the effective time of the reverse stock
split.
- A 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 a price of the sale of the stockholder's shares. However,
the Board also noted that there is limited liquidity currently 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.
Furthermore, a stockholder who wishes to increase holdings above 500
shares to avoid being cashed out may be able to purchase shares in
the open market prior to the effective time of the reverse stock
split.
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 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
15
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 stockholders, 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.
- A 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
- 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 in lieu of fractional shares resulting from the reverse
stock split was fair to the Company's 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 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.
- Premium Over Market Price. In order to increase the value of the
transaction to stockholders, especially those who 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 per pre-split share price to
be paid for fractional shares includes a premium of $0.46 per pre-split
share over the fair value of $14.04 determined by Donnelly Penman &
Partners; the $14.50 price to be paid for each pre-split share not
convertible to whole shares also represents a premium of $1.80 per share
(14.2%) over the last closing trading price of $12.70 prior to the
16
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 a liquidation or
dissolution, and neither the Company's management nor the Board has
any intention of liquidating the bank.
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 to express
an interest in purchasing certain operating assets of the Company.
Information regarding this person's interest was made available to the
Board and was considered in determining the price to be paid for
fractional shares resulting from the reverse stock split. However, no firm
offers have been made by any unaffiliated person 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.
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 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 delivers 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. 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 management, in
consultation with the Board of 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
17
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.
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;
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.
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
18
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.
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.
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 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 &
19
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.
20
- 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 further assumed,
with management's guidance, that the Company would make dividend
payouts through the projection period equal to the existing rate of
$.36 per share, which is equal to the existing rate paid by the
Company. 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.
- 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.
--------
(1) Ibbotson Associates, "Stocks, Bonds, Bills, and Inflation," Valuation
Edition 2003 Yearbook
21
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.
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 amended to effect the reverse
stock split and to reduce the number of shares of capital stock the Company is
authorized to issue, 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 ___________, 200__.
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.
22
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 the effective
date of the reverse stock split. No fractional shares will be issued. Any
fractional share resulting from the split will be redeemed 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 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 four shares of
Common Stock after the split and a cash payment of $5,800 (i.e., $14.50 for each
of the 400 pre-split shares not convertible into whole shares).
Authorized Capital Stock Following the Reverse Stock Split. The amendment to the
Certificate of Incorporation, a copy of which is included with this proxy
statement as Exhibit B, will reduce the Company's authorized capital stock from
7,000,000 shares (of which 6,000,000 shares are Common Stock and 1,000,000
shares are preferred stock) to 14,000 shares (of which 12,000 shares will be
Common Stock and 2,000 shares will be preferred 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. This authority will continue, although the authorized number of
shares of capital stock will be significantly reduced. Other than the issuance
of shares of Common Stock upon exercise of outstanding options or other rights,
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
affiliate of the Company in
23
connection with the reverse stock split, except that each such person will
receive for any fractional share resulting from the split a cash payment from
the Company in the amount of $14.50 per pre-split share. The same payment will
be made to every other stockholder of the Company.
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 all stockholders, both unaffiliated stockholders and those who also
are employees of the Company or otherwise affiliated with the Company, for
fractional shares redeemed 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 and/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 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 __________, 200__. 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 whole 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 whole 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 $1,941,000 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 $127,500, as follows: $25,000
for the costs of
24
appraising the fair market value of the Common Stock, $75,000 for legal fees,
$5,000 for accounting fees; $10,000 for printing costs; $7,500 for solicitation
costs and $5,000 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. Of course, any such person who is a
stockholder of the Company at the time of the split will be required to tender
to the Company any fractional share resulting from the 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
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
The Board has the right to abandon the reverse stock split before the effective
time of the reverse stock split, even after stockholder approval, if for any
reason the Board determines that it is not advisable to proceed with the reverse
stock split.
FAILURE TO EFFECT THE TRANSACTION
Although the Board believes the reverse stock split will be consummated and the
Company will become a private company, there is no assurance the reverse stock
split will result in the Company's going private. The Board will not implement
the reverse stock split if it determines the reverse stock split would not
reduce to fewer than 300 the number of stockholders of record. The Common Stock
then 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.
25
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
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.
26
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.
MARK S. ALLIO, a director since 2003, has been President and Chief Executive
Officer of Quicken Loans/Rock Bank, 20555 Victor Parkway, Livonia, Michigan
48152, since April 2003; 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; 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.
27
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.
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.
28
INTERESTS OF EXECUTIVE OFFICERS AND DIRECTORS; POTENTIAL CONFLICTS OF INTEREST
The Company's executive officers and directors, who collectively beneficially
own approximately 18.1% of the Common Stock, will be paid cash for any
fractional shares they hold as a result of the reverse stock split in the same
manner and at the same price paid to the Company's other unaffiliated
stockholders.
After the reverse stock split, the Company's executive officers and directors
will collectively beneficially own approximately 19.2% 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, in which fractional shares
will be redeemed.
STOCK OWNERSHIP
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table provides information as of November 15, 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
29
SECURITY OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth information as of November 15, 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 Percent of
Nature of Common
Beneficial Stock
Name Title Ownership Outstanding
David C. Vernon Chairman of the Board, President and
Chief Executive Officer 52,274 (1) 2.4%
Eloise L. Mackus Senior Vice President, General Counsel and
Secretary 8,530 (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 3,135 (4) 0.1%
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 72,664 (7) 3.3%
All directors and
executive officers as
a group (12 persons) 409,088(10) 18.1%
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.
30
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 32 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.
31
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 rooms
in Washington, D.C., New York, New York and Chicago, Illinois. 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 ________,
200__ 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
__________, 200__
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.
32
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Central Federal Corporation
Wellsville, Ohio
We have audited the accompanying consolidated balance sheets of Central Federal
Corporation as of December 31, 2003 and 2002 and the related consolidated
statements of income, changes in shareholders' equity and cash flows for each of
the three years in the period ended December 31, 2003. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Central Federal
Corporation as of December 31, 2003 and 2002 and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
2003, in conformity with accounting principles generally accepted in the United
States of America.
Crowe Chizek and Company LLC
Cleveland, Ohio
February 12, 2004
CENTRAL FEDERAL CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, 2003 and 2002
(Dollars in thousands except per share data)
2003 2002
---------- ----------
ASSETS
Cash and cash equivalents $ 8,936 $ 12,861
Interest-bearing deposits in other financial institutions 1,587 7,205
Securities available for sale 27,126 1,439
Securities held to maturity (fair value 2002 - $18,169) - 17,822
Loans held for sale 106 -
Loans, net of allowance of $415 and $361 58,024 62,565
Federal Home Loan Bank stock 3,626 3,485
Loan servicing rights 221 200
Foreclosed assets, net 193 2
Premises and equipment, net 1,932 833
Bank owned life insurance 3,256 3,068
Accrued interest receivable 487 403
Other assets 1,517 668
---------- ----------
$ 107,011 $ 110,551
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Non-interest bearing $ 2,457 $ 1,396
Interest bearing 70,901 73,294
---------- ----------
Total deposits 73,358 74,690
Federal Home Loan Bank advances 7,500 11,430
Loan payable - 4,900
Advances by borrowers for taxes and insurance 207 448
Accrued interest payable and other liabilities 935 1,500
Subordinated debentures 5,155 -
---------- ----------
Total liabilities 87,155 92,968
Shareholders' equity
Preferred stock, 1,000,000 shares authorized;
none issued - -
Common stock, $.01 par value; 6,000,000 shares
authorized; 2003 - 2,280,020 shares issued,
2002 - 1,938,871 shares issued 23 19
Additional paid-in capital 11,845 8,306
Retained earnings 10,997 14,085
Accumulated other comprehensive income 201 28
Unearned Employee Stock Ownership Plan shares - (1,425)
Unearned stock based incentive plan shares (357) (160)
Treasury stock, at cost (2003 - 255,648 shares,
2002 - 292,950 shares) (2,853) (3,270)
---------- ----------
Total shareholders' equity 19,856 17,583
---------- ----------
$ 107,011 $ 110,551
========== ==========
See accompanying notes.
CENTRAL FEDERAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, 2003, 2002 and 2001
(Dollars in thousands except per share data)
2003 2002 2001
---------- ---------- ----------
Interest and dividend income
Loans, including fees $ 4,203 $ 5,255 $ 6,685
Taxable securities 934 1,518 2,481
Tax exempt securities 5 - -
Federal Home Loan Bank stock dividends 141 157 215
Federal funds sold and other 152 137 207
---------- ---------- ----------
5,435 7,067 9,588
Interest expense
Deposits 1,570 2,501 3,236
Federal Home Loan Bank advances and other debt 1,940 961 2,063
Subordinated debentures 11 - -
---------- ---------- ----------
3,521 3,462 5,299
---------- ---------- ----------
Net interest income 1,914 3,605 4,289
Provision for loan losses 102 19 62
---------- ---------- ----------
Net interest income after provision for loan losses 1,812 3,586 4,227
Noninterest income
Service charges on deposit accounts 165 130 174
Net gain (loss) on sales of loans 429 313 (63)
Loan servicing fees 73 58 22
Net gains on sales of securities 42 16 15
Earnings on bank owned life insurance 188 68 -
Other 33 30 36
---------- ---------- ----------
930 615 184
Noninterest expense
Salaries and employee benefits 3,549 1,713 1,758
Occupancy and equipment 224 96 105
Data processing 246 196 200
Franchise taxes 301 287 309
Professional fees 673 212 163
Director fees 119 84 81
Supplies 173 101 86
Loan expenses 91 143 130
Foreclosed assets, net 14 (34) 4
Depreciation and amortization 350 194 154
Branch closing expense - - 154
Other 364 222 357
---------- ---------- ----------
6,104 3,214 3,501
---------- ---------- ----------
Income (loss) before income taxes (3,362) 987 910
Income tax expense (benefit) (988) 313 312
---------- ---------- ----------
Net income (loss) $ (2,374) $ 674 $ 598
========== ========== ==========
Earnings (loss) per share:
Basic $ (1.31) $ 0.44 $ 0.38
Diluted (1.28) 0.43 0.38
See accompanying notes.
CENTRAL FEDERAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Years ended December 31, 2003, 2002 and 2001
(Dollars in thousands except per share data)
2003 2002 2001
------- ------- -------
Net income (loss) $(2,374) $ 674 $ 598
Change in net unrealized gain (loss) on securities
available for sale (154) 34 17
Less: Reclassification adjustment for
gains and losses later recognized in net income 42 16 15
------- ------- -------
Net unrealized gains and (losses) (196) 18 2
Unrealized gain on securities transferred from held
to maturity to available for sale 458 - -
Tax effect (89) (6) (1)
------- ------- -------
Other comprehensive income 173 12 1
------- ------- -------
Comprehensive income (loss) $(2,201) $ 686 $ 599
======= ======= =======
See accompanying notes.
CENTRAL FEDERAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years ended December 31, 2003, 2002 and 2001
(Dollars in thousands except per share data)
Accumulated
Additional Other
Common Paid-In Retained Comprehensive
Stock Capital Earnings Income
------ ---------- -------- -------------
Balance at January 1, 2001 $ 19 $ 8,322 $ 13,846 $ 15
Comprehensive income:
Net income 598
Other comprehensive income 1
Total comprehensive income
Commitment to release 18,864 employee stock
ownership plan shares (12)
Release of 15,516 stock based incentive plan shares
Purchase of 7,500 shares of treasury stock
Cash dividends declared ($.31 per share) (482)
------ ---------- -------- -------------
Balance at December 31, 2001 19 8,310 13,962 16
Comprehensive income:
Net income 674
Other comprehensive income 12
Total comprehensive income
Commitment to release 21,588 employee stock
ownership plan shares (4)
Release of 15,516 stock based incentive plan shares
Purchase of 96,410 shares of treasury stock
Cash dividends declared ($.36 per share) (551)
------ ---------- -------- -------------
Balance at December 31, 2002 19 8,306 14,085 28
Comprehensive income:
Net income (loss) (2,374)
Other comprehensive income 173
Total comprehensive loss
Unearned
Employee Unearned
Stock Stock Based Total
Ownership Incentive Plan Treasury Shareholders'
Plan Shares Shares Stock Equity
----------- -------------- -------- ------------
Balance at January 1, 2001 $ (1,853) $ (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 202 190
Release of 15,516 stock based incentive plan shares 95 95
Purchase of 7,500 shares of treasury stock (75) (75)
Cash dividends declared ($.31 per share) (482)
----------- -------------- -------- ------------
Balance at December 31, 2001 (1,651) (270) (2,226) 18,160
Comprehensive income:
Net income 674
Other comprehensive income 12
------------
Total comprehensive income 686
Commitment to release 21,588 employee stock
ownership plan shares 226 222
Release of 15,516 stock based incentive plan shares 110 110
Purchase of 96,410 shares of treasury stock (1,044) (1,044)
Cash dividends declared ($.36 per share) (551)
----------- -------------- -------- ------------
Balance at December 31, 2002 (1,425) (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 $64 (312,649 shares) 3 3,116
Issuance of stock based incentive plan shares (28,500 shares) 1 337
Sale of employee stock ownership plan shares
at plan termination (81,000 shares) 125
Final allocation of employee stock ownership plan
shares at plan termination (41,882 shares) (39)
Release of 16,002 stock based incentive plan shares
Stock options exercised (37,302 shares) (72)
Tax benefits from stock options exercised 47
Cash dividends declared ($.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 $64 (312,649 shares) 3,119
Issuance of stock based incentive plan shares (28,500 shares) (338) -
Sale of employee stock ownership plan shares
at plan termination (81,000 shares) 748 873
Final allocation of employee stock ownership plan
shares at plan termination (41,882 shares) 677 638
Release of 16,002 stock based incentive plan shares 141 141
Stock options exercised (37,302 shares) 417 345
Tax benefits from stock options exercised 47
Cash dividends declared ($.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 redeemed no later than 2033.
Under new accounting guidance, FASB Interpretation No. 46, as revised in
December 2003, the trust is not consolidated with the Company. Accordingly, the
Company does not report the securities issued by the trust as liabilities, and
instead reports as liabilities the subordinated debentures issued by the Company
and held by the trust.
PAYMENT INFORMATION:
Required payments on all debt over the next five years are:
2004 $ 7,500
========
NOTE 8 - OTHER BENEFIT PLANS
Multi-Employer Pension Plan: The Company Participates in a multiemployer
contributory trustee pension plan. The retirement benefits to be provided by the
plan were frozen as of June 30, 2003 and future employee participation in the
plan was stopped. The plan was maintained for all eligible employees and the
benefits were funded as accrued through the purchase of individual life
insurance policies. The cost of funding was charged directly to operations. The
unfunded liability at June 30, 2003 totaled $96. The Company's contribution for
the plan year ending June 30, 2004 totaled $34. The Company made no
contributions for 2002 or 2001.
401(k) Plan: In 2003, the Company instituted a 401(k) benefit plan. Employees 21
years of age and older are eligible to participate and are eligible for Company
matching contributions after one year of service. The plan allows employee
contributions up to 90% of their compensation, which may be matched by the
Company on a discretionary basis. There was no match in 2003.
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
Remaining Average Average
Range of Exercise Prices Number Contractual Life Exercise Price Number Exercise 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
Additional Other Stock 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 Nine months ended
September 30, 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-
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 (2,108) (1) $ 23,013
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 57 (1) 10,377
--------- --------- ---------
$ 148,459 $ (2,051) $ 146,408
========= ========= =========
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 (2,051) (1) 16,344
--------- --------- ---------
$ 148,459 $ (2,051) $ 146,408
========= ========= =========
Book value per share $ 8.92 (9) $4,237.49
========= =========
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 (52) (2) 100
------- ------- --------
5,435 (52) 5,383
Interest expense
Deposits 1,570 1,570
Debt 1,951 1,951
------- --------
3,521 3,521
------- ------- --------
Net interest income 1,914 (52) 1,862
Provision for loan losses 102 102
------- ------- --------
Net interest income after provision
for loan losses 1,812 (52) 1,760
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 673 128 (3),(4) 801
Director fees 119 119
Supplies 173 173
Depreciation and amortization 350 350
Other 469 469
------- ------- --------
6,104 128 6,232
------- ------- --------
Loss before income taxes (3,362) (180) (3,542)
Income tax benefit (988) (61) (5) (1,049)
------- ------- --------
Net loss $(2,374) $ (119) $ (2,493)
======= ======= ========
Loss per share
Basic $ (1.31) (6) $(741.24)
Diluted (1.31) (6),(8) (741.24)
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 (39) (2) 141
------- ------- --------
4,260 (39) 4,221
Interest expense
Deposits 993 993
Debt 412 412
------- --------
1,405 1,405
------- ------- --------
Net interest income 2,855 (39) 2,816
Provision for loan losses 366 366
------- ------- --------
Net interest income after provision
for loan losses 2,489 (39) 2,450
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 282 128 (3),(4) 410
Director fees 127 127
Supplies 184 184
Depreciation and amortization 252 252
Other 608 608
------- ------- --------
4,671 128 4,799
------- ------- --------
Loss before income taxes (1,900) (167) (2,067)
Income tax benefit (683) (57) (5) (740)
------- ------- --------
Net loss $(1,217) $ (110) $ (1,327)
======= ======= ========
Loss per share
Basic $ (0.61) (7) $(355.25)
Diluted (0.61) (7) (355.25)
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
($1,941 and $128, respectively), reduction in interest income on these
funds (2.50% annually) and related after-tax reduction in equity.
(2) Represents reduction in interest income on funds used to purchase
fractional shares and pay transaction costs at 2.50% annually.
(3) Represents transaction costs (legal, accounting and other expenses)
related to the reverse stock split.
(4) Does not include anticipated cost savings estimated to be realized as
a result of no longer being a public company.
(5) Federal income tax calculated at the Company's tax rate of 34%.
(6) Pro forma basic and diluted loss per share is based on 3,363 weighted
average shares outstanding for the year ended December 31, 2003.
(7) Pro forma basic and diluted loss per share is based on 3,736 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 3,953.56
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") 1) 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")
and 2) those holding 500 or more shares immediately prior to the Effective Time
that will be issued one new share of common stock for each 500 shares held
immediately prior to the Effective Time of the Amendment but who will receive
cash consideration of $14.50 per any 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 November 18, 2004 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, following the reverse stock
split, that the Certificate of Incorporation of the Company, as amended, be
further amended by changing Article Fourth thereof so that, as amended,
Subsection A of said Article Fourth shall be and read as follows:
"A. The total number of shares of all classes of stock which the
Corporation shall have authority to issue is fourteen thousand
(14,000) consisting of:
1. Two thousand (2,000) shares of Preferred Stock, par value one
($0.01) per share (the "Preferred Stock"); and
2. Twelve thousand (12,000) shares of Common Stock, par value one
cent ($0.01) per share (the "Common Stock").
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 shares will be
issued. Any fractional share resulting from the Reverse Split will be
redeemed by the Company for a cash payment equal to the fair market price
determined by the Board of Directors."
The remaining text of Article Fourth shall not change.
CENTRAL FEDERAL CORPORATION
By: ___________________________
David C. Vernon
Chairman, President
and Chief Executive Officer
Date: _________________________
CENTRAL FEDERAL CORPORATION
SPECIAL MEETING OF STOCKHOLDERS
________________, 200__
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 ______, _______, 200__ at 10:00
a.m., local time, and at any and all adjournments thereof, 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 and reduce the number of shares
that the Company is authorized to issue.
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, INCLUDING WHETHER OR NOT TO
ADJOURN THE 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 __________, 200__.
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 _________, 200__.
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 __________, 200__, 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 __________, 200__. 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
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 _______, 200__.
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 and reduce the number of shares
that the Company is authorized to issue.
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 ___________, 200__.
(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 _________, 200__.
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 __________,
200__. 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 _____________, 200__, 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
_____________, 200__.
Sincerely,
David C. Vernon
Chairman, President and Chief Executive Officer
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 _________, 200__.
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 and reduce the number of shares
that the Company is authorized to issue.
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 ______________, 200__.