EX-13.1 4 cfbk-20181231xex13_1.htm EX-13.1 Exhibit 131 Annual Report

 







Exhibit 13.1





Annual Report to Security Holders For the Fiscal Year ended December 31, 2018












 

 

TABLE OF CONTENTS



 

 



Page



 

 

MESSAGE TO STOCKHOLDERS

 



 

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Selected Financial and Other Data

Forward-Looking Statements

Business Overview

Financial Condition

Comparison of Results of Operations for 2018 and 2017

Comparison of Results of Operations for 2017 and 2016

Quantitative and Qualitative Disclosures about Market Risk

13 

Liquidity and Capital Resources

14 

Impact of Inflation

16 

Critical Accounting Policies

16 

Market Prices and Dividends Declared

17 



 

FINANCIAL STATEMENTS

 

Management’s Report on Internal Control Over Financial Reporting

Report of Independent Registered Public Accounting Firm

Consolidated Financial Statements

Notes to Consolidated Financial Statements



 

 

BOARD OF DIRECTORS AND OFFICERS

45 



 

 

CFBANK LOCATIONS

45 



 

 

CORPORATE DATA

46 

Annual Report

46 

Annual Meeting

46 

Shareholder Services

46 





 


 





Dear fellow Shareholders,

Our story for 2018, is one of continued quality growth and expansion.   Our growth has been profitable while maintaining strong credit quality.  During 2018:

Ø

We expanded our presence in the Cincinnati market.

Ø

We successfully recruited proven Business Banking talent, expanding our Teams in both the Cincinnati and Columbus Markets.

Ø

We built a residential mortgage lending division with a national footprint.

Ø

We achieved net loan recoveries for the 5th consecutive year.

Ø

We completed a private placement of $10 million of Subordinated Debt during December, which further increased bank capital to facilitate continued growth.



Our growth has been achieved through organic growth, coupled with geographic expansion into attractive Commercial Banking markets.  Since the recapitalization in 2012, our footprint has been expanded into the Cleveland and Cincinnati markets. Our six-year CAGR for loan growth, is an impressive 23.8%, with 2018 growth topping 35% +. Through a highly effective team-oriented sales culture, and user-friendly approach to doing business, CFBank continues to grow and expand in Ohio, gaining new relationships with successful businesses and entrepreneurs.

Increased scale is resulting in improving earnings leverage. We successfully balanced investments in the residential mortgage lending business, our Cincinnati market presence, plus adding talented bankers, all while increasing earnings and EPS in 2018. These investments are now in place to support our continuing growth and expansion for 2019 and beyond.

The competitive landscape and outlook for our niche Commercial Bank continues to look very attractive. We have proven our ability to compete effectively with the larger regionals for quality business customers.

Our industry faces challenges with a flattened yield curve and increasing deposit costs. However, we believe that CFBank is well positioned in this interest rate environment by having approximately 45% of our Commercial Loans tied to floating interest rates as of December 31, 2018.  In addition, we continue to focus on growing our core deposits, and we expect to introduce online deposit gathering capabilities during the first half of 2019.

Our focus and efforts aimed at increasing Noninterest Income is producing results. Noninterest Income more than doubled during 2018. We expect Mortgage Lending and SBA Lending to contribute significantly to non-interest income in 2019.

We are excited and extremely bullish about our business prospects as we enter 2019. We feel in many ways, CFBank is just getting revved up!

As shareholders, we invite all of you to become CFBank customers. Please contact me directly (Tim O’Dell at 614-318-4660) to learn more about our full service Commercial and Consumer products and services.

Our slogan describes us very well, “We are all about relationships!”

On behalf of our CFBank colleagues and our Directors, we express our appreciation and sincere thanks to our Shareholders for your continued support.





 

/s/ Timothy T. O’Dell

/s/ Robert E. Hoeweler

Timothy T. O’Dell

Robert E. Hoeweler

President and Chief Executive Officer

Chairman of the Board





Note: 6 year CAGR represents compounded annual growth rate on net loans for the period of 2013 through 2018





 


 

Table of Contents

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 







SELECTED FINANCIAL AND OTHER DATA

The information in the following tables should be read in conjunction with our Consolidated Financial Statements, the related Notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in this report.





 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

At December 31,



2018

 

2017

 

2016

 

2015

 

2014



 

(Dollars in thousands)

Selected Financial Condition Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

$

665,025 

 

$

481,425 

 

$

436,112 

 

$

351,293 

 

$

315,588 

Cash and cash equivalents

 

67,304 

 

 

45,498 

 

 

57,941 

 

 

25,895 

 

 

28,207 

Securities available for sale

 

10,114 

 

 

11,773 

 

 

14,058 

 

 

9,368 

 

 

10,445 

Loans held for sale

 

17,385 

 

 

1,124 

 

 

2,812 

 

 

889 

 

 

3,505 

Loans and leases, net (1)

 

550,683 

 

 

406,406 

 

 

346,125 

 

 

297,064 

 

 

257,085 

Allowance for loan and lease loss (ALLL)

 

7,012 

 

 

6,970 

 

 

6,925 

 

 

6,620 

 

 

6,316 

Nonperforming assets

 

415 

 

 

470 

 

 

908 

 

 

3,061 

 

 

3,184 

Foreclosed assets

 

38 

 

 

 -

 

 

204 

 

 

1,636 

 

 

1,636 

Deposits

 

579,786 

 

 

419,028 

 

 

375,364 

 

 

290,467 

 

 

258,315 

FHLB advances and other debt

 

19,500 

 

 

13,500 

 

 

13,500 

 

 

14,500 

 

 

14,500 

Subordinated debentures

 

14,767 

 

 

5,155 

 

 

5,155 

 

 

5,155 

 

 

5,155 

Total stockholders' equity

 

45,559 

 

 

40,261 

 

 

39,292 

 

 

38,312 

 

 

34,509 







 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

For the year ended December 31,



2018

 

2017

 

2016

 

2015

 

2014



 

(Dollars in thousands)

Summary of Operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total interest income

$

24,886 

 

$

17,207 

 

$

14,409 

 

$

12,405 

 

$

10,611 

Total interest expense

 

6,997 

 

 

3,534 

 

 

3,096 

 

 

2,608 

 

 

1,889 

    Net interest income

 

17,889 

 

 

13,673 

 

 

11,313 

 

 

9,797 

 

 

8,722 

Provision for loan and lease losses

 

 -

 

 

 -

 

 

230 

 

 

250 

 

 

278 

    Net interest income after provision for loan and lease losses

 

17,889 

 

 

13,673 

 

 

11,083 

 

 

9,547 

 

 

8,444 

Noninterest income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    Net loss on sale of securities

 

 -

 

 

 -

 

 

 -

 

 

(12)

 

 

 -

    Other

 

2,716 

 

 

743 

 

 

1,177 

 

 

1,360 

 

 

1,492 

         Total noninterest income

 

2,716 

 

 

743 

 

 

1,177 

 

 

1,348 

 

 

1,492 

Noninterest expense

 

15,275 

 

 

10,955 

 

 

9,823 

 

 

9,611 

 

 

9,457 

Income before income taxes

 

5,330 

 

 

3,461 

 

 

2,437 

 

 

1,284 

 

 

479 

Income tax expense (benefit)

 

1,057 

 

 

2,115 

 

 

810 

 

 

(3,193)

 

 

 -

Net income

$

4,273 

 

$

1,346 

 

$

1,627 

 

$

4,477 

 

$

479 

Dividends on Series B preferred stock, accretion of discount and value of warrants exercised

 

62 

 

 

(666)

 

 

(857)

 

 

(857)

 

 

(421)

Net income available to common stockholders

$

4,335 

 

$

680 

 

$

770 

 

$

3,620 

 

$

58 





 

1


 

Table of Contents

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

At or for the year ended December 31,



2018

 

2017

 

2016

 

2015

 

2014



 

(Dollars in thousands)

Selected Financial Ratios and Other Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Performance Ratios (2)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Return on average assets

 

0.78% 

 

 

0.31% 

 

 

0.43% 

 

 

1.36% 

 

 

0.17% 

Return on average equity

 

10.11% 

 

 

3.36% 

 

 

4.19% 

 

 

12.84% 

 

 

1.67% 

Average yield on interest-earning assets (3)

 

4.75% 

 

 

4.25% 

 

 

4.09% 

 

 

4.06% 

 

 

4.03% 

Average rate paid on interest-bearing liabilities

 

1.71% 

 

 

1.14% 

 

 

1.06% 

 

 

1.00% 

 

 

0.85% 

Average interest rate spread (4)

 

3.04% 

 

 

3.11% 

 

 

3.03% 

 

 

3.06% 

 

 

3.18% 

Net interest margin, fully taxable equivalent (5)

 

3.41% 

 

 

3.38% 

 

 

3.21% 

 

 

3.21% 

 

 

3.31% 

Average interest-earning assets to interest bearing liabilities

 

128.04% 

 

 

130.09% 

 

 

121.04% 

 

 

117.42% 

 

 

119.19% 

Efficiency ratio (6)

 

74.13% 

 

 

75.99% 

 

 

78.65% 

 

 

86.14% 

 

 

92.59% 

Noninterest expenses to average assets

 

2.78% 

 

 

2.54% 

 

 

2.60% 

 

 

2.92% 

 

 

3.31% 

Common stock dividend payout ratio

 

n/m

 

 

n/m

 

 

n/m

 

 

n/m

 

 

n/m



 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital Ratios: (2)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity to total assets at end of period

 

6.85% 

 

 

8.36% 

 

 

9.01% 

 

 

10.91% 

 

 

10.93% 

Average equity to average assets

 

7.68% 

 

 

9.28% 

 

 

10.27% 

 

 

10.60% 

 

 

10.05% 

Tangible capital ratio (7)

 

n/a

 

 

n/a

 

 

n/a

 

 

n/a

 

 

11.03% 

Tier 1 (core) capital to adjusted total assets (Leverage ratio) (7)

 

10.13% 

 

 

9.37% 

 

 

9.66% 

 

 

11.12% 

 

 

11.03% 

Total capital to risk weighted assets (7)

 

12.37% 

 

 

11.91% 

 

 

12.46% 

 

 

13.67% 

 

 

14.18% 

Tier 1 (core) capital to risk weighted assets (7)

 

11.12% 

 

 

10.65% 

 

 

11.20% 

 

 

12.40% 

 

 

12.92% 

Common equity tier 1 capital to risk weighted assets (7)

 

11.12% 

 

 

10.65% 

 

 

11.20% 

 

 

12.40% 

 

 

n/a



 

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset Quality Ratios: (2)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nonperforming loans to total loans (8)

 

0.07% 

 

 

0.11% 

 

 

0.20% 

 

 

0.47% 

 

 

0.59% 

Nonperforming assets to total assets (9)

 

0.06% 

 

 

0.10% 

 

 

0.21% 

 

 

0.87% 

 

 

1.01% 

Allowance for loan and lease losses to total loans

 

1.26% 

 

 

1.69% 

 

 

1.96% 

 

 

2.18% 

 

 

2.39% 

Allowance for loan and lease losses to nonperforming loans (8)

 

1859.95% 

 

 

1482.98% 

 

 

983.66% 

 

 

464.56% 

 

 

408.01% 

Net charge-offs (recoveries) to average loans

 

(0.01%)

 

 

(0.01%)

 

 

(0.02%)

 

 

(0.02%)

 

 

(0.13%)



 

 

 

 

 

 

 

 

 

 

 

 

 

 

Per Share Data: (10)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per common share

$

1.02 

 

$

0.21 

 

$

0.28 

 

$

1.27 

 

$

0.00 

Diluted earnings per common share

 

1.00 

 

 

0.19 

 

 

0.28 

 

 

1.10 

 

 

0.00 

Dividends declared per common share

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Tangible book value per common share at end of period

 

10.51 

 

 

9.48 

 

 

9.19 

 

 

9.02 

 

 

7.81 







 

 



 

 



 

 

(1)

 

Loans and leases, net represents the recorded investment in loans net of the ALLL.

(2)

 

Asset quality ratios and capital ratios are end-of-period ratios.  All other ratios are based on average monthly balances during the indicated periods.

(3)

 

Calculations of yield are presented on a taxable equivalent basis using the federal income tax rate.

(4)

 

The average interest rate spread represents the difference between the weighted average yield on average interest-earning assets and the weighted average cost of average interest-bearing liabilities.

(5)

 

The net interest margin represents net interest income as a percent of average interest-earning assets.

(6)

 

The efficiency ratio equals noninterest expense (excluding amortization of intangibles and foreclosed asset writedowns) divided by net interest income plus noninterest income (excluding gains or losses on securities transactions).

(7)

 

Regulatory capital ratios of CFBank.

(8)

 

Nonperforming loans consist of nonaccrual loans and other loans 90 days or more past due. 

(9)

 

Nonperforming assets consist of nonperforming loans and foreclosed assets.

(10)

 

Adjusted to reflect the 1-for-5.5 reverse stock split effected on August 20, 2018.

 

 

 



 

n/m - not meaningful

 

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Table of Contents

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 









FORWARD LOOKING STATEMENTS

Statements in this annual report that are not statements of historical fact are forward-looking statements which are made in good faith by us. Forward-looking statements include, but are not limited to: (1) projections of revenues, income or loss, earnings or loss per share of common stock, capital structure and other financial items; (2) plans and objectives of the management or Boards of Directors of Central Federal Corporation (the “Holding Company”) or CFBank, National Association (“CFBank”); (3) statements regarding future events, actions or economic performance; and (4) statements of assumptions underlying such statements.  Words such as "estimate," "strategy," "may," "believe," "anticipate," "expect," "predict," "will," "intend," "plan," "targeted," and the negative of these terms, or similar expressions, are intended to identify forward-looking statements, but are not the exclusive means of identifying such statements.  Various risks and uncertainties may cause actual results to differ materially from those indicated by our forward-looking statements, including, without limitation, those detailed from time to time in our reports filed with the Securities and Exchange Commission (the “SEC”), including those identified in “Item 1A. Risk Factors” of Part I of our Form 10-K filed with the SEC for the year ended December 31, 2018

Forward-looking statements are not guarantees of performance or results.  A forward-looking statement may include a statement of the assumptions or bases underlying the forward-looking statement.  The Holding Company, including its subsidiaries (together referred to as the “Company”) believes it has chosen these assumptions or bases in good faith and that they are reasonable.  We caution you, however, that assumptions or bases almost always vary from actual results, and the differences between assumptions or bases and actual results can be material.  The forward-looking statements included in this report speak only as of the date of the report.  We undertake no obligation to publicly release revisions to any forward-looking statements to reflect events or circumstances after the date of such statements, except to the extent required by law.

Business Overview

The Holding Company is a financial holding company that owns 100% of the stock of CFBank, which was formed in Ohio in 1892 and converted from a federal savings association to a national bank on December 1, 2016.  Prior to December 1, 2016, the Holding Company was a registered savings and loan holding company.  Effective as of December 1, 2016 and in conjunction with the conversion of CFBank to a national bank, the Holding Company became a registered bank holding company and elected financial holding status with the FRB.

CFBank has a presence in four major metro Ohio markets – Columbus, Cleveland, Cincinnati and Akron, as well as its two locations in Columbiana County, Ohio.  CFBank provides personalized Business Banking products and services including commercial loans and leases, commercial and residential real estate loans and treasury management depository services.  As a full service commercial bank, our business, along with our products and services, is focused on serving the banking and financial needs of closely held businesses.  Our business model emphasizes personalized service, customer access to decision makers, quick execution, and the convenience of online internet banking, mobile banking, remote deposit and corporate treasury management.  In addition, CFBank provides residential lending and full service retail banking services and products.  Most of our deposits and loans come from our market area.  Because of CFBank’s concentration of business activities in Ohio, the Company’s financial condition and results of operations depend in large part upon economic conditions in Ohio.

Our principal market area for loans and deposits includes the following Ohio counties: Franklin County through our office in Worthington, Ohio and our loan production office (opened in February 2018) in Columbus, Ohio; Summit County through our office in Fairlawn, Ohio; Hamilton County through our office in Glendale, Ohio; Columbiana County through our offices in Calcutta and Wellsville, Ohio; and Cuyahoga County, through our agency office in Woodmere, Ohio.    

Our net income is dependent primarily on net interest income, which is the difference between the interest income earned on loans and securities and our cost of funds, consisting of interest paid on deposits and borrowed funds.  Net interest income is affected by regulatory, economic and competitive factors that influence interest rates, loan demand, the level of nonperforming assets and deposit flows.

Net income is also affected by, among other things, provisions for loan and lease losses, loan fee income, service charges, gains on loan sales, operating expenses, and taxes.  Operating expenses principally consist of employee compensation and benefits, occupancy, advertising and marketing, FDIC insurance premiums and other general and administrative expenses.  Our results of operations are significantly affected by general economic and competitive conditions, changes in market interest rates and real estate values, government policies and actions of regulatory authorities.  Our regulators have extensive discretion in their supervisory and enforcement activities, including the authority to impose restrictions on our operations, to classify our assets and to require us to increase the level of our allowance for loan and lease losses.  Any change in such regulation and oversight, whether in the form of regulatory policy, regulations, legislation or supervisory action, may have a material impact on our business, financial condition, results of operations and/or cash flows.

 

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Table of Contents

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 



Management’s discussion and analysis represents a review of our consolidated financial condition and results of operations for the periods presented.  This review should be read in conjunction with our consolidated financial statements and related notes.

Financial Condition

General.    Assets totaled $665.0 million at December 31, 2018 and increased $183.6 million, or 38.1%, from $481.4 million at December 31, 2017.  The increase was primarily due to a $144.3 million increase in net loan balances, a $21.8 million increase in cash and cash equivalents, and a $16.3 million increase in loans held for sale.

Cash and cash equivalents.    Cash and cash equivalents totaled $67.3 million at December 31, 2018, and increased $21.8 million, or 47.9%, from $45.5 million at December 31, 2017.  The increase in cash and cash equivalents was primarily attributed to increased deposits.

Securities.  Securities available for sale totaled $10.1 million at December 31, 2018, and decreased $1.7 million, or 14.1%, compared to $11.8 million at December 31, 2017.  The decrease was primarily due to principal maturities.

Loans and Leases.    Net loans and leases totaled $550.7 million at December 31, 2018, and increased $144.3 million, or 35.5%, from $406.4 million at December 31, 2017.  The increase was primarily due to a $61.6 million increase in commercial real estate loan balances, a $24.9 million increase in commercial loan balances, a $22.8 million increase in single-family loan balances, and an  $18.9 million increase in construction loan balances.  The increases in the aforementioned loan balances were primarily due to increased sales activity and new relationships.  Single-family residential mortgage loan balances increased due to the purchase of residential mortgage loan-pools and organic growth in the residential mortgage portfolio due to sales activity.

CFBank has participated in a Mortgage Purchase Program with Northpointe Bank (Northpointe), a Michigan banking corporation, since December 2012.  Pursuant to the terms of a participation agreement, CFBank purchases participation interests in loans made by Northpointe related to fully underwritten and pre-sold mortgage loans originated by various prescreened mortgage brokers located throughout the U.S.  The underlying loans are individually (MERS) registered loans which are held until funded by the end investor.  The mortgage loan investors include Fannie Mae and Freddie Mac, and other major financial institutions.  This process on average takes approximately 14 days.  Given the short-term holding period of the underlying loans, common credit risks (such as past due, impairment and TDR, nonperforming, and nonaccrual classification) are substantially reduced.  Therefore, no allowance is allocated by CFBank to these loans.  These loans are 100% risk rated for CFBank capital adequacy purposes.  Under the participation agreement, CFBank agrees to purchase a 95% ownership/participation interest in each of the aforementioned loans, and Northpointe maintains a 5% ownership interest in each loan it participates.  During the twelve months ended December 31, 2018 and December 31, 2017, loan origination activity totaled $615.1 and $677.5 million, respectively, and payoffs for the same period totaled $616.0 and $686.7 million, respectively.  At December 31, 2018 and December 31, 2017, CFBank held $36.8 million and $37.7 million, respectively, of such loans which are included in single-family residential loan totals. 

Allowance for loan and  lease losses (ALLL).  The allowance for loan and lease losses totaled $7.0 million at December 31, 2018, and increased $42,000, or 0.6%, from $7.0 million at December 31, 2017.  The increase in the ALLL is due to net recoveries during the year ended December 31, 2018.  The ratio of the ALLL to total loans was 1.26% at December 31, 2018, compared to 1.69% at December 31, 2017.  In addition, the ratio of the ALLL to nonperforming loans was 1859.9% at December 31, 2018, compared to 1483.0% at December 31, 2017.   

The ALLL is a valuation allowance for probable incurred credit losses.  The ALLL methodology is designed as part of a thorough process that incorporates management’s current judgments about the credit quality of the loan portfolio into a determination of the ALLL in accordance with generally accepted accounting principles and supervisory guidance.  Management analyzes the adequacy of the ALLL quarterly through reviews of the loan portfolio, including the nature and volume of the loan portfolio and segments of the portfolio; industry and loan concentrations; historical loss experience; delinquency statistics and the level of nonperforming loans; specific problem loans; the ability of borrowers to meet loan terms; an evaluation of collateral securing loans and the market for various types of collateral; various collection strategies; current economic conditions, trends and outlook; and other factors that warrant recognition in providing for an adequate ALLL.  Based on the variables involved and the significant judgments management must make about outcomes that are uncertain, the determination of the ALLL is considered to be a critical accounting policy.  See the section titled “Critical Accounting Policies” for additional discussion.

The ALLL 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 of all classes within the commercial, commercial real estate and multi-family residential loan segments, regardless of size, and loans of all other classes over $250,000, 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,

 

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Table of Contents

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

or at the fair value of collateral, less costs to sell, if repayment is expected solely from the collateral.  Large groups of smaller balance 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.  Loans within any 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 are classified as impaired.  See Notes 1 and 4 to our consolidated financial statements included in this annual report for additional information regarding the ALLL.

Individually impaired loans totaled $3.2 million at December 31, 2018, and decreased $415,000, or 11.6%, from $3.6 million at December 31, 2017.  The decrease was primarily due to two loans that paid off and other loan repayments.  The amount of the ALLL specifically allocated to individually impaired loans totaled $22,000 at December 31, 2018 and $26,000 at December 31, 2017The decrease in the ALLL specifically allocated to impaired loans was primarily due to management’s updated analysis and loan payoffs.  

The specific reserve on impaired loans is based on management’s estimate of the present value of estimated future cash flows using the loan’s effective rate or the fair value of collateral, if repayment is expected solely from the collateral.  On at least a quarterly basis, management reviews each impaired loan to determine whether it should have a specific reserve or partial charge-off. Management relies on appraisals or internal evaluations to help make this determination.  Determination of whether to use an updated appraisal or internal evaluation is based on factors including, but not limited to, the age of the loan and the most recent appraisal, condition of the property and whether we expect the collateral to go through the foreclosure or liquidation process.  Management considers the need for a downward adjustment to the valuation based on current market conditions and on management’s analysis, judgment and experience. The amount ultimately charged-off for these loans may be different from the specific reserve, as the ultimate liquidation of the collateral and/or projected cash flows may be different from management’s estimates.

Nonperforming loans, which are nonaccrual loans and loans 90 days past due but still accruing interest, decreased $93,000, or 19.8%, and totaled $377,000 at December 31, 2018, compared to $470,000 at December 31, 2017.  The ratio of nonperforming loans to total loans was 0.07% at December 31, 2018, compared to 0.11% at December 31, 2017

The following table presents information regarding the number and balance of nonperforming loans at December 31, 2018 and December 31, 2017.  



 

 

 

 

 

 

 

 

 



December 31, 2018

December 31, 2017



# of loans

 

Balance

 

# of loans

 

Balance



(dollars in thousands)

Commercial

 

$

100 

 

 

$

115 

Single-family residential real estate

 

 

167 

 

 

 

253 

Home equity lines of credit

 

 

89 

 

 

 

102 

Other Consumer

 

 

21 

 

-  

 

 

-  

Total

 

$

377 

 

 

$

470 



Nonaccrual loans include some nonperforming loans that were previously modified and identified as TDRs.  TDRs included in nonaccrual loans totaled $100,000 at December 31, 2018 and $115,000 at December 31, 2017.  The decrease in TDRs included in nonaccrual loans was primarily due to loan repayments.

Nonaccrual loans at December 31, 2018 and December 31, 2017 do not include $3.1 million and $3.3 million, respectively, of TDRs where customers have established a sustained period of repayment performance, generally six months, loans are current according to their modified terms and repayment of the remaining contractual payments is expected.  These loans are included in total impaired loans.  See Notes 1 and 4 to our consolidated financial statements included in this annual report for additional information regarding impaired loans and nonperforming loans.

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 the Company over a three-year period.  The general component is calculated based on CFBank’s loan balances and actual historical 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.

 

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Management’s loan review process is an integral part of identifying problem loans and determining the ALLL. We maintain an internal credit rating system and loan review procedures specifically developed as the primary credit quality indicator to monitor credit risk for commercial, commercial real estate and multi-family residential real estate loans.  We analyze these loans individually and categorize loans into risk categories based on relevant information about the ability of borrowers to service their debt, such as current financial information, historical payment experience, credit documentation, public information and current economic trends, among other factors.  Credit reviews for these loan types are performed at least annually, and more often for loans with higher credit risk.  Loan officers maintain close contact with borrowers between reviews.  Adjustments to loan risk ratings are based on the reviews and at any time information is received that may affect risk ratings.  Additionally, an independent third party review of commercial, commercial real estate and multi-family residential loans is performed at least annually.  Management uses the results of these reviews to help determine the effectiveness of the existing policies and procedures and to provide an independent assessment of our internal loan risk rating system.

We have incorporated the regulatory asset classifications as a part of our credit monitoring and internal loan risk rating system.  In accordance with regulations, problem loans are classified as special mention, substandard, doubtful or loss, and the classifications are subject to review by the regulators.  Assets designated as special mention are considered criticized assets.  Assets designated as substandard, doubtful or loss are considered classified assets. See Note 4 to our consolidated financial statements included in this annual report for additional information regarding descriptions of the regulatory asset classifications.

The level of total criticized and classified loans increased by $2.2 million during the twelve months ended December 31, 2018 due to downgrades of loans during the year.  Loans designated as special mention increased $975,000, or 16.1%, and totaled $7.0 million at December 31, 2018, compared to $6.0 million at December 31, 2017.  Loans classified as substandard increased $1.3 million, or 62.0%, and totaled $3.3 million at December 31, 2018, compared to $2.0 million at December 31, 2017.  No loans were classified as doubtful at December 31, 2018 and December 31, 2017.  See Note 4 to our consolidated financial statements included in this annual report for additional information regarding risk classification of loans.

In addition to credit monitoring through our internal loan risk rating system, we also monitor past due information for all loan segments.  Loans that are not rated under our internal credit rating system include groups of homogenous loans, such as single-family residential real estate loans and consumer loans. The primary credit indicator for these groups of homogenous loans is past due information.

Total past due loans decreased $719,000, or 38.5%, and totaled $1.1 million at December 31, 2018, compared to $1.9 million at December 31, 2017.  Past due loans totaled 0.2% of the loan portfolio at December 31, 2018, compared to 0.5% at December 31, 2017.  See Note 4 to our consolidated financial statements included in this annual report for additional information regarding loan delinquencies.

All lending activity involves risk of loss.  Certain types of loans, such as option adjustable-rate mortgage (ARM) products, junior lien mortgages, high loan-to-value ratio mortgages, interest only loans, subprime loans and loans with initial teaser rates, can have a greater risk of non-collection than other loans.  CFBank has not engaged in subprime lending or used option ARM products.

Unsecured commercial loans may present a higher risk of non-collection than secured commercial loans.  Unsecured commercial loans totaled $6.5 million, or 5.1% of the commercial loan portfolio, at December 31, 2018 and $8.6 million, or 8.5% of the commercial loan portfolio, at December 31, 2017.   The unsecured loans are primarily lines of credit to small businesses in CFBank’s market area and are guaranteed by the small business owners.  At December 31, 2018 and December 31, 2017, none of the unsecured loans were 30 days or more delinquent.

Loans that contain interest only payments may present a higher risk than those loans with an amortizing payment that includes periodic principal reductions. Interest only loans are primarily commercial lines of credit secured by business assets and inventory, and consumer home equity lines of credit secured by the borrower’s primary residence. Due to the fluctuations in business assets and inventory of our commercial borrowers, CFBank has increased risk due to a potential decline in collateral values without a corresponding decrease in the outstanding principal. Interest only commercial lines of credit totaled $73.5 million, or 57.9% of the commercial loan portfolio, at December 31, 2018 compared to $31.6 million, or 30.9%, at December 31, 2017.  Interest only home equity lines of credit totaled $22.6 million, or 94.4% of total home equity lines of credit, at December 31, 2018 compared to $22.5 million, or 90.0%, at December 31, 2017.

We believe the ALLL is adequate to absorb probable incurred credit losses in the loan portfolio as of December 31, 2018; however, future additions to the allowance may be necessary based on factors including, but not limited to, deterioration in client business performance, recessionary economic conditions, declines in borrowers’ cash flows and market conditions which result in lower real estate values.  Additionally, various regulatory agencies, as an integral part of their examination process, periodically review the ALLL.  Such agencies may require additional provisions for loan and lease losses based on judgments and estimates that differ from those used by management, or on information available at the time of their review.  Management continues to diligently monitor credit quality in the existing portfolio and analyze potential loan opportunities carefully in order to manage credit risk.  An increase in loan

 

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losses could occur if economic conditions and factors which affect credit quality, real estate values and general business conditions worsen or do not improve.

Foreclosed assets.  Foreclosed assets totaled $38 at December 31, 2018 compared to $0 at December 31, 2017.  Foreclosed assets at December 31, 2018 consisted of one single-family residential property that was transferred into REO at fair value during the fourth quarter of 2018.   The level of foreclosed assets and charges to foreclosed assets expense may increase in the future in connection with workout efforts related to foreclosed assets, nonperforming loans and other loans with credit issues.

Premises and equipment.  Premises and equipment, net, totaled $3.9 million at December 31, 2018, and increased $331,000, or 9.4%, from $3.5 million at December 31, 2017.  See Note 8 – Premises and Equipment to our consolidated financial statements included in this annual report for additional information.

DepositsDeposits totaled $579.8 million at December 31, 2018, an increase of $160.8 million, or 38.4%, from $419.0 million at December 31, 2017.  The increase is primarily attributed to a $91.4 million increase in certificate of deposit account balances and a $56.0 million increase in checking account balances.  The increase in certificate of deposit account balances was primarily attributed to a combination of management’s use of CDARs (1-way) deposits in anticipation of quarter end fluctuations associated with our mortgage business and the timing of loan fundings, an increase in core certificate of deposits due to on-going sales and marketing activities, and to a lesser extent, the use of brokered CDs for longer term duration in its certificate of deposit portfolio.  The increase in checking accounts is due to an increase in customer relationships and balances from on-going sales activities.        

Noninterest bearing checking account balances totaled $111.4 million at December 31, 2018 and increased $21.8 million, or 24.4%, compared to $89.6 million at December 31, 2017.  The majority of this increase is attributable to our focused sales efforts to grow core deposits and to expand our relationship opportunities with our customers.

CFBank is a participant in the Certificate of Deposit Account Registry Service® (CDARS) and Insured Cash Sweep (ICS) programs offered through Promontory Interfinancial Network.  Promontory works with a network of banks to offer products that can provide up to approximately $50 million of FDIC insurance coverage through these innovative productsBrokered deposits, including CDARS deposits that qualify as brokered, totaled $101.2 million at December 31, 2018, and increased $54.3 million, or 115.6%, from $46.9 million at December 31, 2017.  Customer balances in the CDARS reciprocal and ICS program, which no longer qualify as brokered, totaled $48.1 million at December 31, 2018 and increased $34.5 million, or 254.2%, from $13.6 million at December 31, 2017

FHLB advances and other debtFHLB advances and other debt totaled $19.5 million at December 31, 2018 and increased $6.0 million, or 44.4%, compared to $13.5 million at December 31, 2017.    In February 2018, the Holding Company entered into a credit facility with a third-party bank pursuant to which the Holding Company could borrow up to an aggregate principal amount of $6.0 million, which was subsequently increased to $8.0 million in July 2018 and to $10 million in December 2018In December 2018, the credit facility was also modified to a revolving line-of-credit.  The purpose of the credit facility is to provide an additional source of liquidity for the Holding Company and to provide funds for the Holding Company to downstream as additional capital to CFBank to support growth.  Loans under the credit facility bear interest at a rate equal to the Prime Rate plus 0.75%.  As of December 31, 2018, the Holding Company had an outstanding balance of $6.0 million on the credit facility.    See the section titled Liquidity and Capital Resources”  for additional information regarding FHLB advances and other debt.

Subordinated debentures.    Subordinated debentures totaled $14.8 million at December 31, 2018, an increase of $9.6 million, or 186.5%, from $5.2 million at December 31, 2017.  The increase was attributed to the issuance of $10 million of fixed-to-floating rate subordinated debt in December 2018, net of unamortized debt issuance costs of approximately $388,000.  The subordinated debentures related to the trust preferred securities were issued in 2003 in exchange for the proceeds of a $5.0 million trust preferred securities offering issued by a trust formed by the Holding Company.  The terms of the subordinated debentures allow for the Holding Company to defer interest payments for a period not to exceed five years.  Interest payment were current at December 31, 2018 and December 31, 2017.  See Note 11-Subordinated Debentures to our consolidated financial statements included in this annual report for additional information.

Stockholders’ equity.    Stockholders’ equity totaled $45.6 million at December 31, 2018, an increase of $5.3 million, or 13.2%, from $40.3 million at December 31, 2017.  The increase in total stockholders’ equity was primarily attributed to net income. 

Management continues to proactively monitor capital levels and ratios in its on-going capital planning process.  CFBank has leveraged its capital to support balance sheet growth and drive increased net interest income.  Management remains focused on growing capital though improving results from operations; however, should the need arise, CFBank has additional sources of capital and alternatives it could utilize.  Also, CFBank has the flexibility to manage its balance sheet size as a result of the short duration of the assets as discussed with the Northpointe mortgage program, as well as to deploy those assets into higher earning assets to improve net interest income as the opportunity presents itself.

 

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Conversion of Preferred Stock to Common Stock

On September 29, 2017, the Company announced the conversion of its Series B Preferred Stock into shares of Common Stock of the Company.  The conversion was effective October 6, 2017, and resulted in the conversion of all 480,000 of the Company’s issued and outstanding shares of Series B Preferred Stock into approximately 6,857,143 shares of Common Stock. 

The conversion of the Series B Preferred Stock resulted in the elimination of the non-cumulative preferred dividend payments on the Series B Preferred Stock beginning with the 4th quarter of 2017.  Prior to the conversion, the Company was obligated to pay preferred dividends in the aggregate amount of approximately $187,500 quarterly, or approximately $750,000 annually.

Comparison of Results of Operations for 2018 and 2017

General.    The Company’s income before income tax expense for the year ended December 31, 2018 totaled $5.3 million and increased $1.8 million, or 54.0%, compared to $3.5 million for the year ended December 31, 2017. The increase in income before income tax expense was due to a $4.2 million increase in net interest income and a $2.0 million increase in noninterest income, partially offset by a $4.3 million increase in noninterest expense.   

Net income for the year ended December 31, 2018 totaled $4.3 million and increased $3.0 million, or 217.5%, compared to net income of $1.3 million for the year ended December 31, 2017.  The increase in net income was due to a $4.2 million increase in net interest income, a $2.0 million increase in noninterest income, and a decrease in income tax expenses of $1.1 million, partially offset by a  $4.3 million increase in noninterest expense.  The decrease in income tax expense was due to the reduction in the federal corporate tax rate, effective January 1, 2018, as a result of the Tax Cuts and Jobs Act.  In addition, in the fourth quarter of 2017 the Company revaluated its existing deferred tax asset (DTA) to reflect the impact of the new tax rates, which resulted in the Company recording an additional tax expense in the amount of $979,000, during the quarter ended December 31, 2017.

Net income attributable to common stockholders for the year ended December 31, 2018, totaled $4.3 million, or $1.00 per diluted common share, and increased $3.7 million, compared to net income attributable to common stockholders of $680,000, or $0.19 per diluted common share, for the year ended December 31, 2017.  For the year ended December 31, 2018, the accretion of discount from the Company’s Series B Preferred Stock and the value of warrants exercised increased net income attributable to common stockholders by $62,000.  For the year ended December 31, 2017, preferred dividends and accretion of discount related to the Company’s Series B Preferred Stock reduced net income attributable to common stockholders by $666,000.  The change in the preferred dividends,  accretion of discount and value of warrants exercised related to the Series B Preferred Stock was primarily due to the conversion of all of the Company’s outstanding Series B Preferred Stock into shares of Common Stock of the Company effective October 6, 2017.



Net interest income.    Net interest income is a significant component of net income, and consists of the difference between interest income generated on interest-earning assets and interest expense incurred on interest-bearing liabilities.  Net interest income is primarily affected by the volumes, interest rates and composition of interest-earning assets and interest-bearing liabilities.  The tables below titled “Average Balances, Interest Rates and Yields” and “Rate/Volume Analysis of Net Interest Income” provide important information on factors impacting net interest income and should be read in conjunction with this discussion of net interest income.

Net interest income totaled $17.9 million for the year ended December 31, 2018 and increased $4.2 million, or 30.8%, compared to $13.7 million for the year ended December 31, 2017.  The increase in net interest income was primarily due to a $7.7 million, or 44.6%, increase in interest income, partially offset by a $3.5 million, or 98.0%, increase in interest expense.  The increase in interest income was primarily attributed to a $119.4 million, or 29.5%, increase in average interest-earning assets outstanding, resulting primarily from an increase in net loans and a 50bp increase in average yield on interest-earning assets.  The increase in interest expense was primarily attributed to a $98.2 million, or 31.6%, increase in average interest-bearing liabilities and a 57bps increase in the average cost of funds on interest-bearing liabilities.  As a result, the net interest margin of 3.41% for the year ended December 31, 2018 increased 3bps compared to the net interest margin of 3.38% for the year ended December 31, 2017.

Interest income totaled $24.9 million and increased $7.7 million, or 44.6%, for the twelve months ended December 31, 2018, compared to $17.2 million for the twelve months ended December 31, 2017. The increase in interest income was primarily due to a $123.3 million, or 34.4%, increase in average loans and loans held for sale balances from $358.4 million for the year ended December 31, 2017, to $481.7 million for the year ended December 31, 2018

Interest expense totaled $7.0 million and increased $3.5 million, or 98.0%, for the year ended December 31, 2018, compared to $3.5 million for the year ended December 31, 2017The increase in interest expense resulted primarily from increased deposit costs due to a $91.7 million, or 31.4%, increase in average interest-bearing deposit balances. The overall cost of funds on total interest-bearing deposits increased 54bps to 159bps at December 31, 2018 compared to 105bps at December 31, 2017.

 

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Provision for loan and lease losses.    There was no provision for loan and lease losses for either the year ended December 31, 2018 or the year ended December 31, 2017, which is due to strong credit quality, favorable trends in certain qualitative factors and net recoveries.  Net recoveries for the year ended December 31, 2018 totaled $42,000, compared to net recoveries of $45,000 for the year ended December 31, 2017. 

The following table presents information regarding net charge-offs for 2018 and 2017.



 

 

 

 

 



2018

 

2017

(Dollars in thousands)

Charge-offs (recoveries)

Commercial

$

(2)

 

$

(2)

Single-family residential real estate

 

(18)

 

 

(20)

Home equity lines of credit

 

(22)

 

 

(23)

Total

$

(42)

 

$

(45)



See the section titled “Financial Condition – Allowance for loan and lease losses” for additional information.

Noninterest income.    Noninterest income for the year ended December 31, 2018 totaled $2.7 million and increased $2.0 million, or 265.6%, compared to $743,000 for the year ended December 31, 2017.  The increase was primarily due to a $1.9 million increase in net gain on sale of loans and an $82,000 increase in service charges on deposit accounts.  The increase in net gain on sale of loans was a result of increased sales volume due to the expansion of the mortgage business.  The increase in service charges on deposit accounts was related to increased account relationships and pricing.  

Noninterest expense.  Noninterest expense for the year ended December 31, 2018 totaled $15.3 million and increased $4.3 million, or 39.4%, compared to $11.0 million for the year ended December 31, 2017.  The increase in noninterest expense during the year ended December 31, 2018 was primarily due to a $2.1 million increase in salaries and employee benefits expense, a $1.2 million increase in advertising and marketing expense, a $287,000 increase in professional fees and a $203,000 increase in FDIC premium expense.  The increase in salaries and employee benefits expense was primarily due to the hiring of mortgage personnel in connection with the expansion of our mortgage business, consistent with our focus on driving noninterest income. The increase in salaries and employee benefits expense also resulted from the increase in personnel associated with the opening of our Glendale branch in the Cincinnati market, the addition of experienced treasury management personnel and an increase in credit and finance personnel to support our growth, infrastructure and risk management practices.  The increase in advertising and marketing expense is primarily due to increased expenditures related to the expansion of our mortgage business, coupled with increased advertising focused on increasing core deposits.  Professional fees increased primarily due to the reverse stock split that occurred during the third quarter and professional fees associated with the expansion of our mortgage business.  The FDIC premium expense increased as a result of an increase in the assessment rate and volume.

Income taxes.  Income tax expense was $1.1 million for the year ended December 31, 2018, a decrease of $1.0 million compared to $2.1 million for the year ended December 31, 2017.  The decrease was primarily due to the Company recording an additional tax expense of $979,000 during the fourth quarter of 2017 due to a revaluation of the Company’s deferred tax asset and the reduction of the federal corporate tax rate to 21%, effective January 1, 2018, pursuant to the Tax Cuts and Jobs Act, which was partially offset by an increase in earnings.  As a result, the effective tax rate for the year ended December 31, 2018 decreased to approximately 19.8%, as compared to approximately 61.1% for the year ended December 31, 2017.

Our deferred tax assets are composed of U.S. net operating losses (“NOLs”), and other temporary book to tax differences.  When determining the amount of deferred tax assets that are more-likely-than-not to be realized, and therefore recorded as a benefit, the Company conducts a regular assessment of all available information. This information includes, but is not limited to, taxable income in prior periods, projected future income and projected future reversals of deferred tax items.  Based on these criteria, the Company determined as of December 31, 2018 that no valuation allowance was required against the net deferred tax assetHowever, as discussed above, the Company performed a revaluation of its deferred tax asset during the fourth quarter of 2017 to reflect the impact of the new tax rates under the Tax Cuts and Jobs Act, which resulted in a decrease in the deferred tax asset and the recording of an additional tax expense by the Company in the fourth quarter of 2017 in the amount of $979,000.

Comparison of Results of Operations for 2017 and 2016

General.  The Company’s income before income tax expense for the year ended December 31, 2017 totaled $3.5 million and increased $1.1 million, or 42.0%, from $2.4 million at December 31, 2016.  The increase in income before income tax expense was due to a $2.4 million increase in net interest income and a $230,000 decrease in provision expense, partially offset by a $1.1 million increase in noninterest expense, and a $434,000 decrease in noninterest income.

 

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Net income for the year ended December 31, 2017 totaled $1.3 million and decreased $281,000, compared to net income of $1.6 million for the year ended December 31, 2016.  The decrease in net income was due to a $1.3 million increase in tax expense, a $1.1 million increase in noninterest expense, and a $434,000 decrease in noninterest income, partially offset by a $2.4 million increase in net interest income and a $230,000 decrease in provision expense.  Excluding the impact of the additional income tax expense recorded in the fourth quarter related to the enactment of the Tax Cuts and Jobs Act, as discussed below, net income for the year ended December 31, 2017 would have been $2.3 million, reflecting an increase of $698,000, or 42.9%, compared to the year ended December 31, 2016. 

Net income attributable to common stockholders for the year ended December 31, 2017, totaled $680,000, or $0.19 per diluted common share (on a post-reverse split basis), and decreased $90,000, compared to net income attributable to common stockholders of $770,000, or $0.28 per diluted common share (on a post-reverse split basis), for the year ended December 31, 2016.  For the year ended December 31, 2017, preferred dividends on the Company’s Series B Preferred Stock and accretion of discount reduced net income attributable to common stockholders by $666,000 compared to $857,000 for the year ended December 31, 2016.  The decrease in the preferred dividends on the Series B preferred stock and accretion of discount is due to the Company’s conversion of its Preferred Stock into shares of Common Stock of the Company, effective October 6, 2017, resulting in the elimination of the preferred stock dividend payments beginning with the fourth quarter of 2017 of approximately $187,500 quarterly.  Excluding the impact of the additional income tax expense recorded in the fourth quarter related to the enactment of the Tax Cuts and Jobs Act, as discussed below, net income attributable to common stockholders for the year ended December 31, 2017 would have been $1.7 million, or $0.50 per share (on a post-reverse split basis).

Impact of Tax Cuts and Jobs Act

On December 22, 2017, the “Tax Cuts and Jobs Act” was enacted into law reducing the federal corporate tax rate to 21%, effective January 1, 2018.  The Company conducted a revaluation of its existing deferred tax asset (DTA) to reflect the impact of the new tax rates, which resulted in the Company recording an additional tax expense in the fourth quarter of 2017 in the amount of $979,000, which impacts comparability of net income (after tax) between periods. The tables below summarize the impact of the additional tax expense related to the new tax law on the Company’s full year 2017 reported net income:



 

 

 

 

 

 

 

 

 



Twelve Months Ended December 31,

Dollars in thousands, except per share data

2017

 

2016

 

Var $

 

Var %

As Reported (GAAP):

 

 

 

 

 

 

 

 

 

Income before income tax expense

$

3,461 

 

$

2,437 

 

1,024 

 

42% 

Income tax expense

 

2,115 

 

 

810 

 

1,305 

 

161% 

Net income (loss)

$

1,346 

 

$

1,627 

 

(281)

 

-17%

Dividends on Series B preferred stock and accretion of discount

 

(666)

 

 

(857)

 

191 

 

-22%

Earnings (loss) attributable to common stockholders

$

680 

 

$

770 

 

(90)

 

-12%



 

 

 

 

 

 

 

 

 

Diluted earnings (loss) per common share (2)

$

0.19 

 

$

0.28 

 

(0.09)

 

 



 

 

 

 

 

 

 

 

 

Excluding impact of new tax legislation (non-GAAP):

 

 

 

 

 

 

 

 

 

Income before income tax expense

$

3,461 

 

$

2,437 

 

1,024 

 

42% 

Income tax expense (1)

 

1,136 

 

 

810 

 

326 

 

40% 

Net income (loss)

$

2,325 

 

$

1,627 

 

698 

 

43% 

Dividends on Series B preferred stock and accretion of discount

 

(666)

 

 

(857)

 

191 

 

-22%

Earnings (loss) attributable to common stockholders

$

1,659 

 

$

770 

 

889 

 

115% 



 

 

 

 

 

 

 

 

 

Diluted earnings (loss) per common share (2)

$

0.50 

 

$

0.28 

 

0.22 

 

 



 

 

 

 

 

 

 

 

 

(1) Impact of new tax legislation:

Full Year 2017

 

 

 

 

 

 

 

Income tax expense as reported

$

2,115 

 

 

 

 

 

 

 

Impact of new tax legislation due to revaluation of DTA

 

979 

 

 

 

 

 

 

 

Income tax expense, excluding impact of new tax legislation

$

1,136 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

Note: Certain tax legislation amounts are considered reasonable estimates as of December 31, 2017. 

(2)

Adjusted for 1-for-5.5 reverse stock split on August 20, 2018.

 

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Management’s Discussion and Analysis of Financial Condition and Results of Operations

 



Net interest income.    Net interest income is a significant component of net income, and consists of the difference between interest income generated on interest-earning assets and interest expense incurred on interest-bearing liabilities.  Net interest income is primarily affected by the volumes, interest rates and composition of interest-earning assets and interest-bearing liabilities.  The tables below titled “Average Balances, Interest Rates and Yields” and “Rate/Volume Analysis of Net Interest Income” provide important information on factors impacting net interest income and should be read in conjunction with this discussion of net interest income.

Net interest income totaled $13.7 million for the year ended December 31, 2017 and increased $2.4 million, or 20.9%, compared to $11.3 million for the year ended December 31, 2016.  The increase in net interest income was primarily due to a $2.8 million, or 19.4%, increase in interest income, partially offset by a $438,000, or 14.1%, increase in interest expense.  The increase in interest income was primarily attributed to a $52.8 million, or 15.0%, increase in average interest-earnings assets outstanding, and a 16bps increase in average yield on interest-earning assets.  The increase in interest expense was attributed to a $20.4 million, or 7.0%, increase in average interest-bearing liabilities outstanding and a 8bps increase in the average cost of funds on interest-bearing liabilities.  As a result, net interest margin of 3.38% for the year ended December 31, 2017 increased 17 bps compared to net interest margin of 3.21% for the year ended December 31, 2016.

Interest income totaled $17.2 million and increased $2.8 million, or 19.4%, for the twelve months ended December 31, 2017, compared to $14.4 million for the twelve months ended December 31, 2016. The increase in interest income was primarily due to a $44.9 million, or 14.3%, increase in average loans and loans held for sale balances from $313.5 million at December 31, 2016, to $358.4 million at December 31, 2017. 

Interest expense totaled $3.5 million and increased $438,000, or 14.1%, for the year ended December 31, 2017, compared to $3.1 million for the year ended December 31, 2016.  The increase in interest expense resulted primarily from increased deposit costs due to a $22.0 million, or 8.1%, increase in average interest-bearing deposit balances. The overall cost of funds on total interest-bearing deposits increased 7bps to 105bps at December 31, 2017 compared to 98bps at December 31, 2016.

Provision for loan and lease losses.  The provision for loan and lease losses totaled $0 for the twelve months ended December 31, 2017 and decreased $230,000, compared to $230,000 for the twelve months ended December 31, 2016.  The decrease in the provision for loan and lease losses for the year ended December 31, 2017 was primarily due to continued improved credit quality, favorable trends in certain qualitative factors and net recoveries for the twelve months ended December 31, 2017.  Net recoveries for the year ended December 31, 2017 totaled $45,000 compared to net recoveries of $75,000 for the year ended December 31, 2016.  The ratio of the ALLL to nonperforming loans at December 31, 2017 was 1483.0% compared to 983.7% at December 31, 2016.

The following table presents information regarding net charge-offs for 2017 and 2016.



 

 

 

 

 



2017

 

2016

(Dollars in thousands)

Charge-offs (recoveries)

Commercial

$

(2)

 

$

123 

Single-family residential real estate

 

(20)

 

 

105 

Multi-family residential real estate

 

-  

 

 

(143)

Commercial real estate

 

-  

 

 

(145)

Home equity lines of credit

 

(23)

 

 

(16)

Other consumer loans

 

-  

 

 

Total

$

(45)

 

$

(75)



See the section titled “Financial Condition – Allowance for loan and lease losses” for additional information.

Noninterest income.  Noninterest income for the year ended December 31, 2017 totaled $743,000, and decreased $434,000, or 36.9%, compared to $1.2 million for the year ended December 31, 2016.  The decrease was primarily due to a $332,000 decrease in service charges on deposit accounts, a $59,000 decrease in net gains on sales of loans, and a $45,000 decrease in other noninterest income.  The decrease in service charges on deposit accounts was primarily related to a decrease in overdraft fee income.  The decrease in net gains on sales of loans was due to low sales volume.  The decrease in other noninterest income was due to decreased activity related to the Company’s joint ventures. 

Noninterest expense.  Noninterest expense for the year ended December 31, 2017 totaled $11.0 million and increased $1.1 million, or 11.5%, compared to $9.8 million for the year ended December 31, 2016.  The overall increase in operating expenses is primarily attributed to a $1.1 million increase in salaries and employee benefits.  The increase in salaries and employee benefits was due to an increase in experienced commercial lenders and treasury management sales personnel, coupled with an increase in personnel in operations, credit, finance, and information technology to support our growth, infrastructure and risk management practices.  Also, there was an increase in personnel associated with the opening of our Glendale office in the third quarter of 2017, as we expanded into the Cincinnati market.

 

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Income taxes. Income tax expense totaled $2.1 million for year ended December 31, 2017, an increase of $1.3 million, or 161.1%, compared to $810,000 for the year ended December 31, 2016.  As previously mentioned, the Company recorded an additional tax expense of $979,000 during the fourth quarter of 2017 due to a revaluation of the Company’s deferred tax asset to reflect the impact of the new tax rates. As a result, the effective tax rate for the year ended December 31, 2017 increased to approximately 61.1%, as compared to approximately 33.2% for the year ended December 31, 2016.

Our deferred tax assets are composed of U.S. net operating losses (“NOLs”), and other temporary book to tax differences.    When determining the amount of deferred tax assets that are more-likely-than-not to be realized, and therefore recorded as a benefit, the Company conducts a regular assessment of all available information. This information includes, but is not limited to, taxable income in prior periods, projected future income and projected future reversals of deferred tax items.  Based on these criteria, the Company determined as of December 31, 2017 that no valuation allowance was required against the net deferred tax asset.  However, as discussed above, the Company performed a revaluation of its deferred tax asset during the fourth quarter of 2017 to reflect the impact of the new tax rates under the Tax Cuts and Jobs Act, which resulted in a decrease in the deferred tax asset and the recording of an additional tax expense by the Company in the fourth quarter of 2017 in the amount of $979,000.

Average Balances, Interest Rates and Yields.  The following table presents, for the periods indicated, the total dollar amount of fully taxable equivalent interest income from average interest-earning assets and the resultant yields, as well as the interest expense on average interest-bearing liabilities, expressed in both dollars and rates. Average balances are computed using month-end balances.





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



For the Years Ended December 31,



2018

 

2017

 

2016



Average

 

Interest

 

Average

 

Average

 

Interest

 

Average

 

Average

 

Interest

 

Average



Outstanding

 

Earned/

 

Yield/

 

Outstanding

 

Earned/

 

Yield/

 

Outstanding

 

Earned/

 

Yield/



Balance

 

Paid

 

Rate

 

Balance

 

Paid

 

Rate

 

Balance

 

Paid

 

Rate



 

(Dollars in thousands)

Interest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities (1) (2)

$

11,413 

 

$

185 

 

1.60% 

 

$

13,192 

 

$

183 

 

1.39% 

 

$

9,806 

 

$

125 

 

1.28% 

Loans and loans held for sale (3)

 

481,723 

 

 

23,855 

 

4.95% 

 

 

358,423 

 

 

16,487 

 

4.60% 

 

 

313,472 

 

 

14,050 

 

4.48% 

Other earning assets

 

27,811 

 

 

650 

 

2.34% 

 

 

30,351 

 

 

383 

 

1.26% 

 

 

26,839 

 

 

156 

 

0.58% 

FHLB and FRB stock

 

3,308 

 

 

196 

 

5.93% 

 

 

2,890 

 

 

154 

 

5.33% 

 

 

1,942 

 

 

78 

 

4.02% 

    Total interest-earning assets

 

524,255 

 

 

24,886 

 

4.75% 

 

 

404,856 

 

 

17,207 

 

4.25% 

 

 

352,059 

 

 

14,409 

 

4.09% 

Noninterest-earning assets

 

25,822 

 

 

 

 

 

 

 

26,413 

 

 

 

 

 

 

 

25,761 

 

 

 

 

 

    Total assets

$

550,077 

 

 

 

 

 

 

$

431,269 

 

 

 

 

 

 

$

377,820 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

$

383,951 

 

 

6,102 

 

1.59% 

 

$

292,242 

 

 

3,059 

 

1.05% 

 

$

270,239 

 

 

2,657 

 

0.98% 

FHLB advances and other borrowings

 

25,501 

 

 

895 

 

3.51% 

 

 

18,979 

 

 

475 

 

2.50% 

 

 

20,621 

 

 

439 

 

2.13% 

    Total interest-bearing liabilities

 

409,452 

 

 

6,997 

 

1.71% 

 

 

311,221 

 

 

3,534 

 

1.14% 

 

 

290,860 

 

 

3,096 

 

1.06% 

Noninterest-bearing liabilities

 

98,378 

 

 

 

 

 

 

 

80,019 

 

 

 

 

 

 

 

48,158 

 

 

 

 

 

    Total liabilities

 

507,830 

 

 

 

 

 

 

 

391,240 

 

 

 

 

 

 

 

339,018 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity

 

42,247 

 

 

 

 

 

 

 

40,029 

 

 

 

 

 

 

 

38,802 

 

 

 

 

 

    Total liabilities and equity

$

550,077 

 

 

 

 

 

 

$

431,269 

 

 

 

 

 

 

$

377,820 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest-earning assets

$

114,803 

 

 

 

 

 

 

$

93,635 

 

 

 

 

 

 

$

61,199 

 

 

 

 

 

Net interest income/interest rate spread

 

 

 

$

17,889 

 

3.04% 

 

 

 

 

$

13,673 

 

3.11% 

 

 

 

 

$

11,313 

 

3.03% 

Net interest margin

 

 

 

 

 

 

3.41% 

 

 

 

 

 

 

 

3.38% 

 

 

 

 

 

 

 

3.21% 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average interest-earning assets to average interest-bearing liabilities

 

128.04% 

 

 

 

 

 

 

 

130.09% 

 

 

 

 

 

 

 

121.04% 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1) Average balance is computed using the carrying value of securities.

   Average yield is computed using the historical amortized cost average balance for available for sale securities.

(2) Average yields and interest earned are stated on a fully taxable equivalent basis.

(3) Average balance is computed using the recorded investment in loans net of the ALLL and includes nonperforming loans.



 

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Management’s Discussion and Analysis of Financial Condition and Results of Operations

 



Rate/Volume Analysis of Net Interest Income.  The following table presents the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities.  It distinguishes between the increase and decrease related to changes in balances and/or changes in interest rates.  For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (i) changes in volume (i.e., changes in volume multiplied by the prior rate) and (ii) changes in rate (i.e., changes in rate multiplied by prior volume).  For purposes of this table, changes attributable to both rate and volume which cannot be segregated have been allocated proportionately to the change due to volume and the change due to rate.



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



Year Ended

 

Year Ended



December 31, 2018

 

December 31, 2017



Compared to Year Ended

 

Compared to Year Ended



December 31, 2017

 

December 31, 2016



Increase (decrease) due to

 

 

 

 

Increase (decrease) due to

 

 

 



Rate

 

Volume

 

Net

 

Rate

 

Volume

 

Net



(Dollars in thousands)

Interest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities (1)

$

27 

 

$

(25)

 

$

 

$

11 

 

$

47 

 

$

58 

Loans and loans held for sale

 

1,341 

 

 

6,027 

 

 

7,368 

 

 

377 

 

 

2,060 

 

 

2,437 

Other earning assets

 

301 

 

 

(34)

 

 

267 

 

 

205 

 

 

22 

 

 

227 

FHLB and FRB stock

 

18 

 

 

24 

 

 

42 

 

 

30 

 

 

46 

 

 

76 

    Total interest-earning assets

 

1,687 

 

 

5,992 

 

 

7,679 

 

 

623 

 

 

2,175 

 

 

2,798 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

1,896 

 

 

1,147 

 

 

3,043 

 

 

178 

 

 

224 

 

 

402 

FHLB advances and other borrowings

 

227 

 

 

193 

 

 

420 

 

 

73 

 

 

(37)

 

 

36 

    Total interest-bearing liabilities

 

2,123 

 

 

1,340 

 

 

3,463 

 

 

251 

 

 

187 

 

 

438 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net change in net interest income

$

(436)

 

$

4,652 

 

$

4,216 

 

$

372 

 

$

1,988 

 

$

2,360 



(1)

Securities amounts are presented on a fully taxable equivalent basis.



Quantitative and Qualitative Disclosures about Market Risk

Market risk is the risk of loss from adverse changes in market prices and interest rates. We have not engaged in and, accordingly, have no risk related to trading accounts, commodities or foreign exchange.  Our hedging policy allows hedging activities, such as interest-rate swaps, up to a notional amount of 10% of total assets and a value at risk of 10% of core capital.  Disclosures about our hedging activities are set forth in Note 19 to our consolidated financial statements.  The Company’s market risk arises primarily from interest rate risk inherent in our lending, investing, deposit gathering and borrowing activities.  The measurement of market risk associated with financial instruments is meaningful only when all related and offsetting on- and off-balance-sheet transactions are aggregated and the resulting net positions are identified. Disclosures about fair value are set forth in Note 6 to our consolidated financial statements. 

Management actively monitors and manages interest rate risk.  The primary objective in managing interest rate risk is to limit, within established guidelines, the adverse impact of changes in interest rates on our net interest income and capital. We measure the effect of interest rate changes on CFBank’s economic value of equity (EVE), which is the difference between the estimated market value of its assets and liabilities under different interest rate scenarios.  The change in the EVE ratio is a long-term measure of what might happen to the market value of financial assets and liabilities over time if interest rates changed instantaneously and CFBank did not change existing strategies.  At December 31, 2018, CFBank’s EVE ratios, using interest rate shocks ranging from a 400 bps rise in rates to a 200 bps decline in rates, are shown in the following table.  All values are within the acceptable range established by CFBank’s Board of Directors.

 

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Management’s Discussion and Analysis of Financial Condition and Results of Operations

 





 

 

Economic Value of Equity

as a Percent of Assets

(CFBank only)

Basis Point

 

Economic

Change in Rates

 

Value Ratio

+400

 

7.6%

+300

 

8.4%

+200

 

9.2%

+100

 

9.9%

0

 

10.5%

(100)

 

10.6%

(200)

 

10.6%



In evaluating CFBank’s exposure to interest rate risk, certain shortcomings inherent in the method of analysis presented in the foregoing table must be considered.  For example, the table indicates results based on changes in the level of interest rates, but not changes in the shape of the yield curve. CFBank also has exposure to changes in the shape of the yield curve.  Although certain assets and liabilities may have similar maturities or periods to which they reprice, they may react in different degrees to changes in market interest rates.  The interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates.  In the event of a change in interest rates, prepayments and early withdrawal levels would likely deviate significantly from those assumed in calculating the table.  The ability of many borrowers to service their debt may decrease when interest rates rise.  As a result, the actual effect of changing interest rates may differ materially from that presented in the foregoing table.

Changes in levels of market interest rates could materially and adversely affect our net interest income, loan volume, asset quality, value of loans held for sale and cash flows, as well as the market value of our securities portfolio and overall profitability.

We continue to originate the majority of fixed-rate single-family residential real estate loans for sale rather than retain long-term, low fixed-rate loans in portfolio.  Residential mortgage loan origination volumes are affected by market interest rates on loans.  Rising interest rates generally are associated with a lower volume of loan originations, while falling interest rates are usually associated with higher loan originations.  Our ability to generate gains on sales of mortgage loans is significantly dependent on the level of originations.  Changes in interest rates, prepayment speeds and other factors may also cause the value of our loans held for sale to change.

We originate commercial, commercial real estate,  multi-family residential and single family residential real estate mortgage loans for our portfolio, which, in many cases, have adjustable interest rates.  Many of these loans have interest-rate floors, which protect income to CFBank should rates fall.  While adjustable-rate loans better offset the adverse effects of an increase in interest rates as compared to fixed-rate loans, the increased payments required of adjustable-rate loan borrowers upon an interest rate adjustment in a rising interest rate environment could cause an increase in delinquencies and defaults.  The marketability of the underlying property also may be adversely affected in a rising interest rate environment. 

Cash flows are affected by changes in market interest rates.  Generally, in rising interest rate environments, loan prepayment rates are likely to decline, and in falling interest rate environments, loan prepayment rates are likely to increase. 

Liquidity and Capital Resources

In general terms, liquidity is a measurement of an enterprise’s ability to meet cash needs.  The primary objective in liquidity management is to maintain the ability to meet loan commitments and to repay deposits and other liabilities in accordance with their terms without an adverse impact on current or future earnings.  Principal sources of funds are deposits; amortization and prepayments of loans; maturities, sales and principal receipts of securities available for sale; borrowings; and operations.  While maturities and scheduled amortization of loans are predictable sources of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions and competition.

CFBank is required by regulation to maintain sufficient liquidity to ensure its safe and sound operation. Thus, adequate liquidity may vary depending on CFBank’s overall asset/liability structure, market conditions, the activities of competitors, the requirements of our own deposit and loan customers and regulatory considerations.  Management believes that each the Holding Company’s and CFBank’s current liquidity is sufficient to meet its daily operating needs and fulfill its strategic planning.

Liquidity management is both a daily and long-term responsibility of management.  We adjust our investments in liquid assets, primarily cash, short-term investments and other assets that are widely traded in the secondary market, based on our ongoing assessment of expected loan demand, expected deposit flows, yields available on interest-earning deposits and securities and the

 

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objective of our asset/liability management program.  In addition to liquid assets, we have other sources of liquidity available including, but not limited to, access to advances from the FHLB and borrowings from the FRB and our commercial bank line of credit. 

The following table summarizes CFBank’s cash available from liquid assets and borrowing capacity at December 31, 2018 and 2017.



 

 

 

 

 



 

 

 

 

 



December 31, 2018

 

December 31, 2017



(Dollars in thousands)

Cash, unpledged securities and deposits in other financial institutions

$

67,952 

 

$

46,767 

Additional borrowing capacity at the FHLB

 

54,769 

 

 

51,503 

Additional borrowing capacity at the FRB

 

58,502 

 

 

40,448 

Unused commercial bank line of credit

 

8,000 

 

 

8,000 

Total

$

189,223 

 

$

146,718 



Cash, unpledged securities and deposits in other financial institutions increased $21.2 million, or 45.3%, to $68.0 million at December 31, 2018 compared to $46.8 million at December 31, 2017The increase is primarily due to increased deposits.

CFBank’s additional borrowing capacity with the FHLB increased $3.3 million, or 6.3%, to $54.8 million at December 31, 2018 compared to $51.5 million at December 31, 2017.  The increase in additional borrowing capacity is a result of additional collateral pledged due to the increase in loans. 

CFBank’s additional borrowing capacity at the FRB increased $18.1 million, or 44.6%, to $58.5 million at December 31, 2018 from $40.4 million at December 31, 2017.  CFBank is eligible to participate in the FRB’s primary credit program, providing CFBank access to short-term funds at any time, for any reason, based on the collateral pledged.

CFBank’s borrowing capacity with both the FHLB and FRB may be negatively impacted by changes including, but not limited to, further tightening of credit policies by the FHLB or FRB, deterioration in the credit performance of CFBank’s loan portfolio or CFBank’s financial performance, or a decrease in the balance of pledged collateral.

CFBank had $8.0 million of availability in an unused line of credit with a commercial bank at December 31, 2018 and December 31, 2017

Deposits are obtained predominantly from the markets in which CFBank’s offices are located. We rely primarily on a willingness to pay market-competitive interest rates to attract and retain retail deposits. Accordingly, rates offered by competing financial institutions may affect our ability to attract and retain deposits. 

CFBank relies on competitive interest rates, customer service, and relationships with customers to retain deposits. To promote and stabilize liquidity in the banking and financial services sector, the FDIC, pursuant to the provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act, permanently increased deposit insurance coverage from $100,000 to $250,000 per depositor. 

The Holding Company has more limited sources of liquidity than CFBank.  In general, in addition to its existing liquid assets, sources of liquidity include funds raised in the securities markets through debt or equity offerings, funds borrowed from third party banks or other lenders, dividends received from CFBank or the sale of assets.

Management believes that the Holding Company had adequate funds at December 31, 2018 to meet its current and anticipated operating needs at this time.  The Holding Company’s current cash requirements include operating expenses and interest on subordinated debentures.  The Company may elect to pay dividends on its common stock, if and when declared by the Board of Directors.

Currently, annual debt service on the subordinated debentures, underlying the Company’s trust preferred securities, is approximately $291,000.  The subordinated debentures have a variable rate of interest, reset quarterly, equal to the three-month LIBOR plus 2.85%.  The total rate in effect was 5.65% at December 31, 2018.  An increase in the three-month LIBOR would increase the debt service requirement of the subordinated debentures. 

Currently, the annual debt service on the $10 million of fixed-to-floating rate subordinated notes is $700,000.  The subordinated notes have a fixed rate of 7.00% until December 2023 at which time the interest rate will reset quarterly to a rate equal to the then current three-month LIBOR plus 4.14%.

In February 2018, the Holding Company entered into a credit facility with a third-party bank pursuant to which the Holding Company could borrow up to an aggregate principal amount of $6 million.  In July 2018, the Holding Company increased the credit facility to an aggregate of $8 million.  In December 2018, the Holding Company increased the line by an additional $2 million bringing the total borrowing limit to $10 million and the credit facility was also modified to a revolving line-of-credit.  The purpose of the credit facility

 

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is to provide an additional source of liquidity for the Holding Company and to provide funds for the Holding Company to downstream as additional capital to CFBank to support growth.  During 2018, a total of $6.5 million was downstreamed as capital contributions to CFBank.  Loans under the credit facility bear interest at a rate equal to the Prime Rate plus 0.75%.  The credit facility is secured by a pledge of the Holding Company’s stock of CFBank.  The credit facility will expire in February 2020 unless extended or replaced.  As of December 31, 2018, the Company had an outstanding balance of $6 million on the credit facility. 

The ability of the Holding Company to pay dividends on its common stock is dependent upon the amount of cash and liquidity available at the Holding Company level, as well as the receipt of dividends and other distributions from CFBank to the extent necessary to fund such dividends.  As of December 31, 2018, the Holding Company a total of $2.7 million of cash at the Holding Company level, which included approximately $1.1 million of retained proceeds from the Holding Company’s issuance of $10 million of fixed-to-floating rate subordinated debt in December 2018, as well as an additional $4 million of availability under the Holding Company’s revolving line-of-credit.

The Holding Company is a legal entity that is separate and distinct from CFBank, which has no obligation to make any dividends or other funds available for the payment of dividends by the Holding Company.  Banking regulations limit the amount of dividends that can be paid to the Holding Company by CFBank without prior regulatory approval. Generally, financial institutions may pay dividends without prior approval as long as the dividend does not exceed the total of the current calendar year-to-date earnings plus any earnings from the previous two years not already paid out in dividends, and as long as the financial institution remains well capitalized after the dividend payment.  In addition, so long as CFBank has a negative accumulated deficit, any dividends or distributions by CFBank to the Holding Company will require prior non-objection of the OCC.  As of December 31, 2018, CFBank had an accumulated deficit of approximately $7.2 million, which reflected a reduction of $5.4 million since December 31, 2017 as a result of the retention of earnings. 

The Holding Company also is subject to various legal and regulatory policies and requirements impacting the Holding Company’s ability to pay dividends on its stock.  In addition, the Holding Company’s ability to pay dividends on its stock is conditioned upon the payment, on a current basis, of quarterly interest payments on the subordinated debentures underlying the Company’s trust preferred securities.  Finally, under the terms of the Company’s fixed-to-floating rate subordinated debt, the Holding Company’s ability to pay dividends on its stock is conditioned upon the Holding Company continuing to make required principal and interest payments, and not incurring an event of default, with respect to the subordinated debt.    Federal income tax laws provided deductions, totaling $2.3 million, for thrift bad debt reserves established before 1988. Accounting standards do not require a deferred tax liability to be recorded on this amount, which otherwise would have totaled  $473,000 at year-end 2018.   However, if CFBank were wholly or partially liquidated or otherwise ceases to be a bank, or if tax laws were to change, this amount would have to be recaptured and a tax liability recorded. Additionally, any distributions in excess of CFBank’s current or accumulated earnings and profits would reduce amounts allocated to its bad debt reserve and create a tax liability for CFBank.    

Impact of Inflation

The financial statements and related data presented herein have been prepared in accordance with U.S. generally accepted accounting principles, which presently require us to measure financial position and results of operations primarily in terms of historical dollars.  Changes in the relative value of money due to inflation are generally not considered.  In our opinion, changes in interest rates affect our financial condition to a far greater degree than changes in the inflation rate.  While interest rates are generally influenced by changes in the inflation rate, they do not move concurrently.  Rather, interest rate volatility is based on changes in the expected rate of inflation, as well as changes in monetary and fiscal policy.  A financial institution’s ability to be relatively unaffected by changes in interest rates is a good indicator of its ability to perform in a volatile economic environment.  In an effort to protect performance from the effects of interest rate volatility, we review interest rate risk frequently and take steps to minimize detrimental effects on profitability.

Critical Accounting Policies

We follow financial accounting and reporting policies that are in accordance with U.S. generally accepted accounting principles and conform to general practices within the banking industry.  These policies are presented in Note 1 to our consolidated financial statements.  Some of these accounting policies are considered to be critical accounting policies, which are those policies that are both most important to the portrayal of the Company’s financial condition and results of operations, and require management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.  Application of assumptions different than those used by management could result in material changes in our financial condition or results of operations.  These policies, current assumptions and estimates utilized, and the related disclosure of this process, are determined by management and routinely reviewed with the Audit Committee of the Board of Directors.  We believe that the judgments, estimates and assumptions used in the preparation of the consolidated financial statements were appropriate given the factual circumstances at the time.

 

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Table of Contents

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 



We have identified accounting policies that are critical accounting policies, and an understanding of these policies is necessary to understand our financial statements.  The following discussion details the critical accounting policies and the nature of the estimates made by management.

Determination of the allowance for loan and lease losses.    The ALLL represents management’s estimate of probable incurred credit losses in the loan portfolio at each balance sheet date. The allowance consists of general and specific components.  The general component covers loans not classified as impaired and is based on historical loss experience, adjusted for current factors. Current factors considered include, but are not limited to, management’s oversight of the portfolio, including lending policies and procedures; nature, level and trend of the portfolio, including past due and nonperforming loans, loan concentrations, loan terms and other characteristics; current economic conditions and outlook; collateral values; and other items.  The specific component of the ALLL relates to loans that are individually classified as impaired. Loans exceeding policy thresholds are regularly reviewed to identify impairment. 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 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 and classified as impaired.  Determining whether a loan is impaired and whether there is an impairment loss requires judgment and estimates, and the eventual outcomes may differ from estimates made by management.  The determination of whether a loan is impaired includes: review of historical data; judgments regarding the ability of the borrower to meet the terms of the loan; an evaluation of the collateral securing the loan and estimation of its value, net of selling expenses, if applicable; various collection strategies; and other factors relevant to the loan or loans.  Impairment is measured based on the fair value of collateral, less costs to sell, if the loan is collateral dependent, or alternatively, the present value of expected future cash flows discounted at the loan’s effective rate, if the loan is not collateral dependent. When the selected measure is less than the recorded investment in the loan, an impairment loss is recorded. As a result, determining the appropriate level for the ALLL involves not only evaluating the current financial situation of individual borrowers or groups of borrowers, but also current predictions about future events that could change before an actual loss is determined.  Based on the variables involved and the fact that management must make judgments about outcomes that are inherently uncertain, the determination of the ALLL is considered to be a critical accounting policy. Additional information regarding this policy is included in the previous section titled Financial Condition - Allowance for loan and lease losses” and in Notes 1, 4 and 6 to our consolidated financial statements.

Fair value of financial instruments.  Another critical accounting policy relates to fair value of financial instruments, which are estimated using relevant market information and other assumptions.  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.  Additional information is included in Notes 1 and 6 to our consolidated financial statements.

Market Prices and Dividends Declared 

The common stock of Central Federal Corporation trades on the Nasdaq® Capital Market under the symbol “CFBK.”  As of December 31, 2018, there were 4,335,062 shares of common stock outstanding and held by approximately 476 shareholders of record.

On August 20, 2018, the Company effected a 1-for-5.5 reverse stock split, whereby each 5.5 shares of the Company’s common stock were reclassified into one share of common stock.

The following table shows the quarterly reported high and low close prices of our common stock during 2018 and 2017.  There were no dividends declared or paid on our common stock during 2018 or 2017.  The amounts in the table have been restated for the 1-for-5.5 reverse stock split on August 20, 2018.



 

 

 

 

 

2018

High

 

Low

First Quarter

$

14.79 

 

$

12.54 

Second Quarter

$

13.64 

 

$

12.70 

Third Quarter

$

16.73 

 

$

13.14 

Fourth Quarter

$

14.86 

 

$

10.68 







 

 

 

 

 

2017

High

 

Low

First Quarter

$

17.05 

 

$

8.96 

Second Quarter

$

13.14 

 

$