10-Q 1 cfbk-20150630x10q.htm 10-Q 20150630 Q2

UNITED STATES

SECURITIES AND EXCHANGE COMMISION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark one)

 

[X]     QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June  30, 2015

 

Or

 

[   ]     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

 

For the transition period from __________ to______________

 

Commission File Number 0-25045

 

CENTRAL FEDERAL CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

Delaware

34-1877137

(State or other jurisdiction of

(IRS Employer

incorporation or organization)

Identification No.)

 

7000 North High St.,  Worthington, Ohio  43085

(Address of principal executive offices) (Zip Code)

 

(614) 334-7979

(Registrant’s telephone number, including area code)

 

 

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes [X]        No [  ]

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     Yes [X]   No [  ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer [  ]Accelerated filer [  ]  Non-accelerated filer [  ]  Smaller reporting company [X]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes [  ]     No[X]

 

As of August  13, 2015, there were 15,823,710 shares of the registrant’s Common Stock outstanding.

 

 

 

 

 


 

CENTRAL FEDERAL CORPORATION

 

 

 

 

 

PART I.  Financial Information

Page

 

 

 

Item 1.  Financial Statements

 

 

 

 

Consolidated Balance Sheets as of June 30, 2015 (unaudited)

 

 

and December 31, 2014

 

 

 

 

Consolidated Statements of Operations for the three and six months ended

 

 

June 30, 2015 and 2014 (unaudited)

 

 

 

 

Consolidated Statements of Comprehensive Income (Loss)

 

 

for the three and six months ended June 30, 2015 and 2014 (unaudited)

 

 

 

 

Consolidated Statements of Changes in Stockholders’ Equity

 

 

for the six months ended June 30, 2015 and 2014 (unaudited)

 

 

 

 

Consolidated Statements of Cash Flows for the six months ended

 

 

June  30, 2015 and 2014 (unaudited)

 

 

 

 

Notes to Consolidated Financial Statements

 

 

 

Item 2.  Management’s Discussion and Analysis of

 

 

Financial Condition and Results of Operations

43 

 

 

 

Item 3.     Quantitative and Qualitative Disclosures About Market Risk

63 

 

 

 

Item 4.     Controls and Procedures

64 

 

 

 

PART II.  Other Information

65 

 

 

 

Item 1.     Legal Proceedings

65 

 

 

 

Item 1A.   Risk Factors

65 

 

 

 

Item 2.     Unregistered Sales of Equity Securities and Use of Proceeds

65 

 

 

Item 3.     Defaults Upon Senior Securities

65 

 

 

Item 4.     Mine Safety Disclosures

65 

 

 

Item 5.     Other Information

65 

 

 

Item 6.     Exhibits

65 

 

 

Signatures

66 

 

 

 

 

 

 


 

CENTRAL FEDERAL CORPORATION

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands except per share data)

 

 

 

 

 

 

 

 

 

June 30,

 

December 31,

 

2015

 

2014

 

(unaudited)

 

 

 

ASSETS

 

 

 

 

 

Cash and cash equivalents

$

28,293 

 

$

28,207 

Interest-bearing deposits in other financial institutions

 

494 

 

 

494 

Securities available for sale

 

9,135 

 

 

10,445 

Loans held for sale, at fair value

 

1,992 

 

 

3,505 

Loans, net of allowance of $6,480 and $6,316

 

284,160 

 

 

257,085 

FHLB stock

 

1,942 

 

 

1,942 

Foreclosed assets, net

 

1,636 

 

 

1,636 

Premises and equipment, net

 

3,691 

 

 

3,775 

Bank owned life insurance

 

4,730 

 

 

4,665 

Accrued interest receivable and other assets

 

3,240 

 

 

3,834 

Total assets

$

339,313 

 

$

315,588 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

Deposits

 

 

 

 

 

Noninterest bearing

$

31,549 

 

$

37,035 

Interest bearing

 

250,500 

 

 

221,280 

Total deposits

 

282,049 

 

 

258,315 

FHLB advances

 

14,500 

 

 

14,500 

Advances by borrowers for taxes and insurance

 

280 

 

 

401 

Accrued interest payable and other liabilities

 

2,383 

 

 

2,708 

Subordinated debentures

 

5,155 

 

 

5,155 

Total liabilities

 

304,367 

 

 

281,079 

 

 

 

 

 

 

Commitments and Contingent Liabilities

 

-  

 

 

-  

 

 

 

 

 

 

Stockholders' equity

 

 

 

 

 

Common stock, $.01 par value;

 

 

 

 

 

shares authorized: 50,000,000;

 

 

 

 

 

shares issued: 15,935,417 in 2015 and 2014

 

159 

 

 

159 

Series B Preferred stock, $0.01 par value; 480,000 shares authorized;

 

 

 

 

 

480,000 issued at June 30, 2015 and December 31, 2014

 

 

 

Additional paid-in capital

 

59,821 

 

 

59,696 

Accumulated deficit

 

(21,868)

 

 

(22,157)

Accumulated other comprehensive income

 

74 

 

 

51 

Treasury stock, at cost; 111,707 shares of common stock

 

(3,245)

 

 

(3,245)

Total stockholders' equity

 

34,946 

 

 

34,509 

Total liabilities and stockholders' equity

$

339,313 

 

$

315,588 

 

 

 

 

 

 

 

 

 

See accompanying notes to consolidated financial statements.

3

 


 

CENTRAL FEDERAL CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in thousands except per share data)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended

 

Six months ended

 

June 30,

 

June 30,

 

2015

 

2014

 

2015

 

2014

Interest and dividend income

 

 

 

 

 

 

 

 

 

 

 

Loans, including fees

$

3,044 

 

$

2,402 

 

$

5,990 

 

$

4,524 

Securities

 

34 

 

 

42 

 

 

69 

 

 

86 

FHLB stock dividends

 

19 

 

 

19 

 

 

39 

 

 

39 

Federal funds sold and other

 

16 

 

 

15 

 

 

33 

 

 

32 

 

 

3,113 

 

 

2,478 

 

 

6,131 

 

 

4,681 

Interest expense

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

558 

 

 

368 

 

 

1,043 

 

 

723 

FHLB advances and other debt

 

58 

 

 

26 

 

 

115 

 

 

71 

Subordinated debentures

 

41 

 

 

41 

 

 

81 

 

 

83 

 

 

657 

 

 

435 

 

 

1,239 

 

 

877 

Net interest income

 

2,456 

 

 

2,043 

 

 

4,892 

 

 

3,804 

Provision for loan losses

 

75 

 

 

108 

 

 

150 

 

 

128 

Net interest income after provision for loan losses

 

2,381 

 

 

1,935 

 

 

4,742 

 

 

3,676 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest income

 

 

 

 

 

 

 

 

 

 

 

Service charges on deposit accounts

 

116 

 

 

106 

 

 

232 

 

 

209 

Net gains on sales of loans

 

209 

 

 

132 

 

 

293 

 

 

149 

Net gain (loss) on sales of securities

 

-  

 

 

-  

 

 

(12)

 

 

-  

Earnings on bank owned life insurance

 

33 

 

 

32 

 

 

65 

 

 

64 

Other

 

106 

 

 

88 

 

 

241 

 

 

181 

 

 

464 

 

 

358 

 

 

819 

 

 

603 

Noninterest expense

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

1,217 

 

 

1,051 

 

 

2,437 

 

 

2,154 

Occupancy and equipment

 

134 

 

 

135 

 

 

273 

 

 

293 

Data processing

 

268 

 

 

224 

 

 

517 

 

 

431 

Franchise and other taxes

 

81 

 

 

49 

 

 

161 

 

 

99 

Professional fees

 

202 

 

 

257 

 

 

446 

 

 

554 

Director fees

 

33 

 

 

13 

 

 

66 

 

 

25 

Postage, printing and supplies

 

58 

 

 

57 

 

 

130 

 

 

141 

Advertising and promotion

 

45 

 

 

 

 

90 

 

 

Telephone

 

31 

 

 

27 

 

 

56 

 

 

52 

Loan expenses

 

 

 

11 

 

 

43 

 

 

15 

Foreclosed assets, net

 

28 

 

 

70 

 

 

74 

 

 

81 

Depreciation

 

52 

 

 

70 

 

 

104 

 

 

122 

FDIC premiums

 

103 

 

 

85 

 

 

207 

 

 

164 

Regulatory assessment

 

47 

 

 

39 

 

 

98 

 

 

78 

Other insurance

 

31 

 

 

33 

 

 

61 

 

 

69 

Other

 

42 

 

 

73 

 

 

80 

 

 

113 

 

 

2,378 

 

 

2,195 

 

 

4,843 

 

 

4,395 

Income (loss) before incomes taxes

 

467 

 

 

98 

 

 

718 

 

 

(116)

Income tax expense

 

-  

 

 

-  

 

 

-  

 

 

-  

Net income (loss)

 

467 

 

 

98 

 

 

718 

 

 

(116)

Dividends on Series B preferred stock and accretion of discount

 

(215)

 

 

(59)

 

 

(429)

 

 

(59)

Earnings (loss) attributable to common stockholders

$

252 

 

$

39 

 

$

289 

 

$

(175)

 

 

 

 

 

 

 

 

 

 

 

 

Earnings (loss) per common share:

 

 

 

 

 

 

 

 

 

 

 

Basic

$

0.02 

 

$

0.00 

 

$

0.02 

 

$

(0.01)

Diluted

$

0.02 

 

$

0.00 

 

$

0.02 

 

$

(0.01)

 

 

 

 

 

 

 

 

See accompanying notes to consolidated financial statements.

4

 


 

CENTRAL FEDERAL CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Dollars in thousands except per share data)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended

 

Six months ended

 

June 30,

 

June 30,

 

2015

 

2014

 

2015

 

2014

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

$

467 

 

$

98 

 

$

718 

 

$

(116)

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

Unrealized holding gains (losses) arising during the period related to investment securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

Unrealized net gains (losses)

 

(23)

 

 

 

 

11 

 

 

(23)

Related income tax expense

 

 -

 

 

 -

 

 

 -

 

 

 -

Net unrealized gains (losses)

 

(23)

 

 

 

 

11 

 

 

(23)

Less: reclassification adjustment for net losses realized during the period on investment securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

Realized net losses

 

 -

 

 

 -

 

 

12 

 

 

 -

Related income tax expense

 

 -

 

 

 -

 

 

 -

 

 

 -

Net realized losses

 

 -

 

 

 -

 

 

12 

 

 

 -

Other comprehensive income (loss)

 

(23)

 

 

 

 

23 

 

 

(23)

Comprehensive income (loss)

$

444 

 

$

99 

 

$

741 

 

$

(139)

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to consolidated financial statements.

5

 


 

CENTRAL FEDERAL CORPORATION

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

(Dollars in thousands except per share data)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

Series B

 

Additional

 

 

 

 

Other

 

 

 

 

Total

 

Common

 

Preferred

 

Paid-In

 

Accumulated

 

Comprehensive

 

Treasury

 

Stockholders'

 

Stock

 

Stock

 

Capital

 

Deficit

 

Income

 

Stock

 

Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at January 1, 2015

$

159 

 

$

 

$

59,696 

 

$

(22,157)

 

$

51 

 

$

(3,245)

 

$

34,509 

Net income (loss)

 

 

 

 

 

 

 

 

 

 

718 

 

 

 

 

 

 

 

 

718 

Other comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

23 

 

 

 

 

 

23 

Stock option expense, net of forfeitures

 

 

 

 

 

 

 

71 

 

 

 

 

 

 

 

 

 

 

 

71 

Cash dividends declared on Series B preferred stock and accretion of discount

 

 

 

 

 

 

 

54 

 

 

(429)

 

 

 

 

 

 

 

 

(375)

Balance at June 30, 2015

$

159 

 

$

 

$

59,821 

 

$

(21,868)

 

$

74 

 

$

(3,245)

 

$

34,946 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

Series B

 

 

Additional

 

 

 

 

Other

 

 

 

 

Total

 

Common

 

Preferred

 

 

Paid-In

 

Accumulated

 

Comprehensive

 

Treasury

 

Stockholders'

 

Stock

 

Stock

 

 

Capital

 

Deficit

 

Income

 

Stock

 

Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at January 1, 2014

$

159 

 

$

-  

 

 

$

48,067 

 

$

(22,215)

 

$

98 

 

$

(3,245)

 

$

22,864 

Net income (loss)

 

 

 

 

 

 

 

 

 

 

 

(116)

 

 

 

 

 

 

 

 

(116)

Other comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(23)

 

 

 

 

 

(23)

Stock option expense, net of forfeitures

 

 

 

 

 

 

 

 

149 

 

 

 

 

 

 

 

 

 

 

 

149 

Cash dividends declared on Series B preferred stock and accretion of discount

 

 

 

 

 

 

 

 

 

 

 

(59)

 

 

 

 

 

 

 

 

(59)

Issuance of 270,000 shares Series B preferred stock at $.01 par value, net of $392 in offering expenses

 

 

 

 

 

 

 

6,355 

 

 

 

 

 

 

 

 

 

 

 

6,358 

Balance at June 30, 2014

$

159 

 

$

 

 

$

54,571 

 

$

(22,390)

 

$

75 

 

$

(3,245)

 

$

29,173 

 

 

 

 

 

 

 

 

See accompanying notes to consolidated financial statements.

6

 


 

CENTRAL FEDERAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

Six months ended

 

 

June 30,

 

 

2015

 

 

2014

 

 

 

 

 

 

Net Income (loss)

$

718 

 

$

(116)

Adjustments to reconcile net loss to net cash from operating activities:

 

 

 

 

 

Provision for loan losses

 

150 

 

 

128 

Depreciation

 

104 

 

 

122 

Amortization, net

 

(7)

 

 

134 

Net loss on sales of securities

 

12 

 

 

-  

Originations of loans held for sale

 

(28,193)

 

 

(22,953)

Proceeds from sale of loans held for sale

 

30,833 

 

 

23,127 

Net gains on sales of loans

 

(293)

 

 

(149)

Earnings on bank owned life insurance

 

(65)

 

 

(64)

Stock-based compensation expense

 

71 

 

 

149 

Net change in:

 

 

 

 

 

Accrued interest receivable and other assets

 

594 

 

 

344 

Accrued interest payable and other liabilities

 

(325)

 

 

1,862 

Net cash from operating activities

 

3,599 

 

 

2,584 

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

Net (increase) decrease in interest-bearing deposits in other financial institutions

 

-  

 

 

496 

Available-for-sale securities:

 

 

 

 

 

Maturities, prepayments and calls

 

1,280 

 

 

945 

Loan originations and payments, net

 

(30,661)

 

 

(40,714)

Proceeds from the sale of loans

 

2,663 

 

 

-  

Additions to premises and equipment

 

(18)

 

 

(414)

Net cash used by investing activities

 

(26,736)

 

 

(39,687)

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

Net change in deposits

 

23,719 

 

 

34,399 

Net change in short-term borrowings from the FHLB and other debt

 

-  

 

 

(1,026)

Proceeds from long-term FHLB advances and other debt

 

2,500 

 

 

5,000 

Repayments on long-term FHLB advances and other debt

 

(2,500)

 

 

(7,500)

Net change in advances by borrowers for taxes and insurance

 

(121)

 

 

(407)

Cash dividends paid on Series B preferred stock

 

(375)

 

 

-  

Net proceeds from issuance of Series B preferred stock

 

-  

 

 

6,358 

Net cash from financing activities

 

23,223 

 

 

36,824 

 

 

 

 

 

 

Net change in cash and cash equivalents

 

86 

 

 

(279)

 

 

 

 

 

 

Beginning cash and cash equivalents

 

28,207 

 

 

19,160 

 

 

 

 

 

 

Ending cash and cash equivalents

$

28,293 

 

$

18,881 

 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

 

Interest paid

$

1,242 

 

$

1,102 

 

 

 

 

 

 

Supplemental noncash disclosures:

 

 

 

 

 

Loans transferred from held for sale to portfolio

$

834 

 

 

-  

Loans transferred from portfolio to held for sale

 

175 

 

 

-  

Dividends payable on Series B preferred stock

 

187 

 

 

59 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to consolidated financial statements.

7

 


 

CENTRAL FEDERAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands)

 

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The consolidated financial statements include Central Federal Corporation (the “Holding Company”) and its wholly-owned subsidiary, CFBank.  The Holding Company and CFBank are sometimes collectively referred to herein as the “Company”.  Intercompany transactions and balances are eliminated in consolidation.  The accompanying unaudited interim consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) and in compliance with U.S. generally accepted accounting principles (GAAP).  Because this report is based on an interim period, certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted.

In the opinion of the management of the Company, the accompanying unaudited interim consolidated financial statements include all adjustments necessary for a fair presentation of the Company’s financial condition and the results of operations for the periods presented.  These adjustments are of a normal recurring nature, unless otherwise disclosed in this Form 10-Q. The financial performance reported for the Company for the three and six months ended June 30, 2015 is not necessarily indicative of the results that may be expected for the full year.  This information should be read in conjunction with the Company’s latest Annual Report to Stockholders and Form 10-K.  Reference is made to the accounting policies of the Company described in Note 1 to the Audited Consolidated Financial Statements contained in the Company’s 2014 Annual Report that was filed as Exhibit 13.1 to the Company’s Form 10-K for the year ended December 31, 2014 (referred to herein as the “2014 Audited Financial Statements”).  The Company has consistently followed those policies in preparing this Form 10-Q.

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, adjusted for purchase premiums and discounts, deferred loan fees and costs and an allowance for loan losses (ALLL).  Interest income is accrued on the unpaid principal balance.  Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income using the level yield method without anticipating prepayments. 

The accrual of interest income on all classes of loans, except other consumer loans, is discontinued and the loan is placed on nonaccrual status at the time the loan is 90 days delinquent unless the loan is well-secured and in process of collection.  Other consumer loans are typically charged off no later than 90 days past due.  Past due status is based on the contractual terms of the loan for all classes of loans.  In all cases, loans are placed on nonaccrual or charged-off at an earlier date if collection of principal or interest is considered doubtful.  Nonaccrual loans and loans past due 90 days still on accrual include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans.  Commercial loans, multi-family residential real estate loans and commercial real estate loans placed on nonaccrual status are individually classified as impaired loans.

All interest accrued but not received for loans placed on nonaccrual is reversed against interest income in the period in which the loan is placed in a nonaccrual status.  Interest received on such loans is accounted for on the cash-basis or cost recovery method, until qualifying for return to accrual status.  Loans are considered for return to accrual status if and when all the principal and interest amounts that are contractually due are brought current, there is a current and well documented credit analysis, there is reasonable assurance of repayment of principal and interest, and the customer has demonstrated sustained, amortizing payment performance of at least six months.

Allowance for Loan Losses (ALLL):  The ALLL 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. A loan is impaired when, based on current information and events, it is probable that CFBank will be unable to collect all amounts due according to the contractual terms of the loan agreement.  Loans within any loan class for which the terms have been modified resulting in a concession, and for which the borrower is experiencing financial difficulties, are considered troubled debt restructurings (TDRs) and classified as impaired.  

 

8

 


 

CENTRAL FEDERAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands)

 

Factors considered by management in determining impairment for all loan classes include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired.  Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed.

All loans within the commercial, multi-family residential and commercial real estate segments, regardless of size, and loans of all other classes with balances over $250 are individually evaluated for impairment when they are 90 days past due, or earlier than 90 days past due if information regarding the payment capacity of the borrower indicates that payment in full according to the loan terms is doubtful.  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, less costs to sell, if repayment is expected solely from the collateral.  Large groups of smaller balance homogeneous loans, such as consumer and single-family residential real estate loans, are collectively evaluated for impairment, and accordingly, they are not separately identified for impairment disclosures.

TDRs of all classes of loans are separately identified for impairment disclosures and are measured at the present value of estimated future cash flows using the loan’s effective rate at inception.  If a TDR is considered to be a collateral dependent loan, the loan is reported, net, at the fair value of the collateral. If the payment of the loan is dependent on the sale of the collateral, then costs to liquidate the collateral are included when determining the impairment.  For TDRs that subsequently default, the amount of reserve is determined in accordance with the accounting policy for the ALLL.

Interest income on all classes of impaired loans that are on nonaccrual status is recognized in accordance with the accounting policy on nonaccrual loans.  Cash receipts on all classes of impaired loans that are on nonaccrual status are generally applied to the principal balance outstanding.  Interest income on all classes of impaired loans that are not on nonaccrual status is recognized on the accrual method.  TDRs may be classified as accruing if the borrower has been current for a period of at least six months with respect to loan payments and management expects that the borrower will be able to continue to make payments in accordance with the terms of the restructured loan.

The general reserve component covers non-impaired loans of all classes and is based on historical loss experience adjusted for current factors.  The historical loss experience is determined by loan class and is based on the actual loss history experienced by CFBank over a three-year period.  The general component is calculated based on CFBank’s loan balances and actual three-year historical loss rates.  For loans with little or no actual loss experience, industry estimates are used based on loan segment. This actual loss experience is supplemented with other economic and judgmental factors based on the risks present for each loan class.  These economic and judgmental factors include consideration of the following:  levels of and trends in delinquencies and impaired loans; levels of and trends in charge-offs and recoveries; trends in volume and terms of loans; effects of any changes in risk selection and underwriting standards; other changes in lending policies, procedures, and practices; experience, ability, and depth of lending management and other relevant staff; national and local economic trends and conditions; industry conditions; and effects of changes in credit concentrations.

CFBank’s charge-off policy for commercial loans, single-family residential real estate loans, multi-family residential real estate loans, commercial real estate loans, construction loans and home equity lines of credit requires management to record a specific reserve or charge-off as soon as it is apparent that the borrower is troubled and there is, or likely will be, a collateral shortfall related to the estimated value of the collateral securing the loan.  Other consumer loans are typically charged off no later than 90 days past due.

9

 


 

CENTRAL FEDERAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands)

 

Earnings (Loss) Per Common Share: The two-class method is used in the calculation of basic and diluted earnings per share.  Under the two-class method, earnings available to common stockholders for the period are allocated between common stockholders and participating securities (unvested share-based payment awards) according to dividends declared (or accumulated) and participation rights in undistributed earnings.  The factors used in the earnings per share computation follow: 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended
June 30,

 

Six months ended
June 30,

 

 

2015

 

2014

 

2015

 

2014

Basic

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings (loss)

 

$

467 

 

$

98 

 

$

718 

 

$

(116)

Dividends on Series B preferred stock and accretion of discount

 

 

(215)

 

 

(59)

 

 

(429)

 

 

(59)

Earnings (loss) allocated to common stockholders

 

$

252 

 

$

39 

 

$

289 

 

$

(175)

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding including unvested share-based payment awards

 

 

15,823,710 

 

 

15,823,710 

 

 

15,823,710 

 

 

15,823,710 

Less: Unvested share-based payment awards

 

 

-  

 

 

-  

 

 

-  

 

 

-  

Average shares

 

 

15,823,710 

 

 

15,823,710 

 

 

15,823,710 

 

 

15,823,710 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings (loss) per common share (1)

 

$

0.02 

 

$

0.00 

 

$

0.02 

 

$

(0.01)

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings (loss) allocated to common stockholders

 

$

252 

 

$

39 

 

$

289 

 

$

(175)

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding for basic loss per common share

 

 

15,823,710 

 

 

15,823,710 

 

 

15,823,710 

 

 

15,823,710 

Add:  Dilutive effects of assumed exercises of stock options

 

 

12,482 

 

 

40,258 

 

 

9,963 

 

 

40,258 

Add:  Dilutive effects of assumed exercises of stock warrants

 

 

-  

 

 

-  

 

 

-  

 

 

-  

Average shares and dilutive potential common shares

 

 

15,836,192 

 

 

15,863,968 

 

 

15,833,673 

 

 

15,863,968 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings (loss) per common share (2)

 

$

0.02 

 

$

0.00 

 

$

0.02 

 

$

(0.01)

 

 

The following securities exercisable for or convertible into common shares were anti-dilutive and not considered in computing diluted earnings (loss) per common share.

 

 

 

 

 

 

 

 

 

Three months ended June 30,

 

Six months ended June 30,

 

2015

 

2014

 

2015

 

2014

Stock options

422,609

 

51,369

 

439,503 

 

51,369 

Series B preferred stock

6,857,143

 

3,857,143

 

6,857,143 

 

3,857,143 

Stock warrants

1,152,125

 

610,000

 

1,152,125 

 

610,000 

 

10

 


 

CENTRAL FEDERAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands)

 

Adoption of New Accounting Standards:

In January 2014, the FASB issued Accounting Standards Update (“ASU” or “Update”) 2014-01, Investments - Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Qualified Affordable Housing Projects (January 2014).  This Update permits entities to make an accounting policy election to account for their investments in qualified affordable housing projects using the proportional amortization method if certain conditions are met.  The ASU modifies the conditions that an entity must meet to be eligible to use a method other than the equity or cost methods to account for qualified affordable housing project investments.  The ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2014.  The amendments in this Update should be applied retrospectively to all periods presented.  Adoption of the ASU did not have a significant effect on the Company’s consolidated financial statements.

In January 2014, the FASB issued ASU 2014-04, Receivables - Troubled Debt Restructurings by Creditors (Subtopic 310-40): Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure (January 2014).  The objective of this Update is to reduce diversity by clarifying when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan receivable should be derecognized and the real estate property recognized.  The ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2014.  The amendments in this Update may be adopted using either a modified retrospective transition method or a prospective transition method.  Adoption of the ASU did not have a significant effect on the Company’s consolidated financial statements.

In April 2014, the FASB issued ASU 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity (April 2014).  This Update seeks to better define the groups of assets which qualify for discontinued operations, in order to ease the burden and cost for preparers and stakeholders.  This Update changed “the criteria for reporting discontinued operations” and related reporting requirements, including the provision for disclosures about the “disposal of an individually significant component of an entity that does not qualify for discontinued operations presentation.”  The amendments in this Update are effective for fiscal years beginning after December 15, 2014.  Early adoption is permitted only for disposals or classifications as held for sale.  The Company has adopted the methodologies prescribed by this ASU by the date required.  Adoption of the ASU did not have a significant effect on the Company's consolidated financial statements.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606) (May 2014).    The topic of Revenue Recognition had become broad with several other regulatory agencies issuing standards, which lacked cohesion.  The new guidance establishes a “comprehensive framework” and “reduces the number of requirements to which an entity must consider in recognizing revenue” and yet provides improved disclosures to assist stakeholders reviewing financial statements.  The amendments in this Update are effective for annual reporting periods beginning after December 15, 2016.  Early adoption is not permitted.  The Company will adopt the methodologies prescribed by this ASU by the date required.  Adoption of the ASU is not expected to have a significant effect on the Company's consolidated financial statements.

In June 2014, the FASB issued ASU 2014-11, Transfers and Servicing (Topic 860): Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures (June 2014).  This Update addresses the concerns of stakeholders by changing the accounting practices surrounding repurchase agreements.  The new guidance changes the “accounting for repurchase-to-maturity transactions and linked repurchase financings to secured borrowing accounting, which is consistent with the accounting for other repurchase agreements.”  The amendments in this Update are effective for annual reporting periods beginning after December 15, 2014. Early adoption is prohibited.  The Company has adopted the methodologies prescribed by this ASU by the date required.  Adoption of the ASU did not have a significant effect on the Company's consolidated financial statements.

11

 


 

CENTRAL FEDERAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands)

 

In June 2014, the FASB issued ASU 2014-12, Compensation - Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period (June 2014).  This Update defines the accounting treatment for share-based payments and “resolves the diverse accounting treatment of those awards in practice.” The new requirement mandates that “a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition.”  Compensation cost will now be recognized in the period in which it becomes likely that the performance target will be met.   The amendments in this Update are effective for annual reporting periods beginning after December 15, 2015. Early adoption is permitted.  The Company will adopt the methodologies prescribed by this ASU by the date required.  Adoption of the ASU is not expected to have a significant effect on the Company's consolidated financial statements.

The FASB has issued ASU No. 2014-15, Presentation of Financial Statements—Going Concern (Subtopic 205-40):  Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern.  ASU 2014-15 is intended to define management’s responsibility to evaluate whether there is substantial doubt about an organization’s ability to continue as a going concern and to provide related footnote disclosures.  Under Generally Accepted Accounting Principles (GAAP), financial statements are prepared under the presumption that the reporting organization will continue to operate as a going concern, except in limited circumstances.  Financial reporting under this presumption is commonly referred to as the going concern basis of accounting.  The going concern basis of accounting is critical to financial reporting because it establishes the fundamental basis for measuring and classifying assets and liabilities.  Currently, GAAP lacks guidance about management’s responsibility to evaluate whether there is substantial doubt about the organization’s ability to continue as a going concern or to provide related footnote disclosures. This ASU provides guidance to an organization’s management, with principles and definitions that are intended to reduce diversity in the timing and content of disclosures that are commonly provided by organizations today in the financial statement footnotes. Adoption of the ASU is not expected to have a significant effect on the Company’s consolidated financial statements.

COSO’s Internal Control Framework has been updated and enhanced.  Since its release in 1992, COSO’s Internal Control – Integrated Framework has been widely accepted and adopted around the world. The updated framework, issued on May 14, 2013, maintains the fundamental elements of the original:  five components of an internal control system—control environment, risk assessment, control activities, information and communication—and monitoring activities supporting three categories of objectives:  effectiveness and efficiency of operations, reliability of reporting and compliance with applicable laws and regulations, structured through management’s judgment.  The five components are evaluated through principles and recommended points of focus.  A significant enhancement, however, is the expansion of the reporting objective to include nonfinancial and internal reporting objectives.  The mandatory principles have been updated to reflect today’s business environment—an environment of increased governance, regulatory and compliance demands and increased use of technology and complex business models. The original framework still may be used through December 15, 2014; beyond that date, COSO will consider the original framework obsolete. Adoption of the updated COSO Integrated Framework is not expected to have a material effect on the Company’s internal control environment or financial reporting.

General Litigation

The Company is subject to claims and lawsuits that arise primarily in the ordinary course of business.  It is the opinion of management that the disposition or ultimate resolution of such claims and lawsuits will not have a material adverse effect on the consolidated financial position, results of operations and cash flows of the Company. 

Reclassifications

Reclassification of certain amounts in the 2014 consolidated financial statements have been made to conform to the 2015 presentation.

 

NOTE 2- REGULATORY ORDER CONSIDERATIONS

Regulatory Order Considerations: On May 25, 2011, the Holding Company and CFBank each consented to the issuance of an Order to Cease and Desist (the “Holding Company Order” and the “CFBank Order”, respectively, and collectively, the “Orders”) by the Office of Thrift Supervision (the “OTS”), the primary regulator of the Holding Company and CFBank at the time the Orders were issued.  In July 2011, in accordance with the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), the Federal Reserve Board (the “FRB”) replaced the OTS as the primary regulator of the Holding Company and the Office of the Comptroller of the Currency (the “OCC”) replaced the OTS as the primary regulator of CFBank.

12

 


 

CENTRAL FEDERAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands)

 

The Orders imposed significant directives applicable to the Holding Company and CFBank, including requirements that we reduce the level of our classified and criticized assets, achieve growth and operating metrics in line with an approved business plan, and comply with restrictions on brokered deposits and on certain types of lending and prohibitions on dividends and repurchases of our capital stock.  The CFBank Order required CFBank to have 8% core capital and 12% total risk-based capital, and CFBank could not be considered well-capitalized under the prompt corrective action regulations so long as the CFBank Order remained in place, even if it met or exceeded these capital levels.    In addition, the regulators were required to approve any deviation from our business plan and certain compensation arrangements with directors and executive officers.

Effective as of January 23, 2014, the OCC released and terminated the CFBank Order based upon the improved capital position of CFBank, among other factors.  Notwithstanding the release of the CFBank Order, CFBank is required to continue to maintain a minimum Tier 1 Leverage Capital Ratio of 8% and a Total Risk-based Capital to Risk-Weighted Assets ratio of 12%.  In addition, in connection with the release and termination of the CFBank Order, CFBank has made certain commitments to the OCC to continue to adhere to certain prudent practices, including, without limitation, maintaining a written program to continue to improve CFBank’s credit underwriting and administrative process; take actions to protect its interest in criticized assets as identified by CFBank, the OCC examiners or its external loan review process; implement its written program to effectively identify, monitor, control and continue to reduce the level of credit risk to CFBank; review and monitor progress against such plan with the Board of Directors; and continue CFBank’s aggressive workout efforts and individualized workout plans on all criticized assets greater than $250,000.

On May 15, 2014, the FRB announced the termination of the Holding Company Order, effective as of May 9, 2014.  Notwithstanding the termination of the Holding Company Order, the Holding Company is required to continue to adhere to certain requirements and restrictions based on commitments made to the FRB in connection with the termination of the Holding Company Order.  These commitments require the Holding Company, among other things, to continue to implement certain actions in accordance with the capital plan previously submitted to the FRB; not declare or pay dividends on its stock, purchase or redeem its stock, or accept dividends or other capital distributions from CFBank without the prior written approval of the FRB; not incur, increase or guarantee any debt without the prior written consent of the FRB; and provide prior written notice to the FRB with respect to certain changes in directors and senior executive officers.

The significant directives contained in the Orders and the commitments made by CFBank and the Holding Company in connection with the release and termination of the Orders have provided challenges for the operation of our business and our ability to effectively compete in our markets. In addition, the Orders and our ongoing commitments to the regulators have required that we obtain approval from our regulators for any deviations from our business plan, which has limited our flexibility to make changes to the scope of our business activities. 

Under the terms of the Holding Company Order, the Holding Company was prohibited from declaring or paying any dividends on its stock, repurchasing any of its stock, or making any capital contributions to CFBank except with the prior approval of the FRB.  In accordance with the commitments made by the Holding Company in connection with the release and termination of the Holding Company Order, the Holding Company remains subject to such restrictions and, therefore, must continue to obtain the prior approval of the FRB before making any future dividends on its common stock or Series B Preferred Stock.  The Holding Company received prior approval from the FRB for the payment of a quarterly cash dividend on its Series B Preferred Stock for the quarter ended June  30, 2015 in the aggregate amount of $187 (paid in July 2015).  The Holding Company also received prior approval from the FRB for the payment of quarterly cash dividends on its Series B Preferred Stock in each of the previous quarters commencing with the first dividend payment on July 15, 2014.  See Note 8 to the consolidated financial statements included in this Quarterly Report on Form 10-Q for additional information regarding the restrictions applicable to the payment of the dividends by the Holding Company and CFBank.

We have taken such actions as we believe are necessary to comply with all requirements of the Orders and the other regulatory requirements and commitments to which we are subject, and we continue to work toward ensuring compliance with those regulatory requirements and commitments to which we continue to be subject.

13

 


 

CENTRAL FEDERAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands)

 

NOTE 3 – SECURITIES

The following table summarizes the amortized cost and fair value of the available-for-sale securities portfolio at June 30, 2015 and December 31, 2014 and the corresponding amounts of unrealized gains and losses recognized in accumulated other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

 

Cost

 

Gains

 

Losses

 

Value

June 30, 2015

 

 

 

 

 

 

 

 

 

 

 

 

Corporate debt

 

$

2,902 

 

$

 

$

 

$

2,903 

State and municipal

 

 

-  

 

 

-  

 

 

-  

 

 

-  

Issued by U.S. government-sponsored entities and agencies:

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury

 

 

5,014 

 

 

23 

 

 

-  

 

 

5,037 

Mortgage-backed securities - residential

 

 

575 

 

 

32 

 

 

-  

 

 

607 

Collateralized mortgage obligations

 

 

570 

 

 

18 

 

 

-  

 

 

588 

Total

 

$

9,061 

 

$

75 

 

$

 

$

9,135 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

 

Cost

 

Gains

 

Losses

 

Value

December 31, 2014

 

 

 

 

 

 

 

 

 

 

 

 

Corporate debt

 

$

2,932 

 

$

 

$

 

$

2,936 

State and municipal

 

 

897 

 

 

-  

 

 

11 

 

 

886 

Issued by U.S. government-sponsored entities and agencies:

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury

 

 

5,018 

 

 

-  

 

 

 

 

5,011 

Mortgage-backed securities - residential

 

 

687 

 

 

40