UNITED STATES
SECURITIES AND EXCHANGE COMMISION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2014
Or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to______________
Commission File Number 0-25045
CENTRAL FEDERAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware |
34-1877137 |
(State or other jurisdiction of |
(IRS Employer |
incorporation or organization) |
Identification No.) |
7000 North High St., Worthington, Ohio 43085
(Address of principal executive offices) (Zip Code)
(614) 334-7979
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ]Accelerated filer [ ] Non-accelerated filer [ ] Smaller reporting company [X]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No[X]
As of May 15, 2014, there were 15,823,710 shares of the registrant’s Common Stock outstanding.
CENTRAL FEDERAL CORPORATION
PART I. Financial Information |
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Item 1. Financial Statements |
3 | |
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Consolidated Balance Sheets as of March 31, 2014 (unaudited) |
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and December 31, 2013 |
3 |
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Consolidated Statements of Loss for the three months ended |
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March 31, 2014 and 2013 (unaudited) |
4 |
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Consolidated Statements of Comprehensive Income (Loss) |
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for the three months ended March 31, 2014 and 2013 (unaudited) |
5 |
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Consolidated Statements of Changes in Stockholders’ Equity |
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for the three months ended March 31, 2014 and 2013 (unaudited) |
6 |
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Consolidated Statements of Cash Flows for the three months ended |
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March 31, 2014 and 2013 (unaudited) |
7 |
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Notes to Consolidated Financial Statements |
8 |
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Item 2. Management’s Discussion and Analysis of |
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Financial Condition and Results of Operations |
43 |
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Item 3. Quantitative and Qualitative Disclosures About Market Risk |
61 | |
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Item 4. Controls and Procedures |
62 | |
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PART II. Other Information |
63 | |
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Item 1. Legal Proceedings |
63 | |
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Item 1A. Risk Factors |
63 | |
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds |
63 | |
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Item 3. Defaults Upon Senior Securities |
63 | |
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Item 4. Mine Safety Disclosures |
63 | |
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Item 5. Other Information |
63 | |
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Item 6. Exhibits |
65 | |
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Signatures |
64 |
CENTRAL FEDERAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands except per share data)
March 31, |
December 31, |
||||
2014 |
2013 |
||||
(unaudited) |
|||||
ASSETS |
|||||
Cash and cash equivalents |
$ |
21,578 |
$ |
19,160 | |
Interest-bearing deposits in other financial institutions |
1,486 | 1,982 | |||
Securities available for sale |
9,074 | 9,672 | |||
Loans held for sale, at fair value |
4,090 | 3,285 | |||
Loans, net of allowance of $5,763 and $5,729 |
208,902 | 207,141 | |||
FHLB stock |
1,942 | 1,942 | |||
Foreclosed assets, net |
1,636 | 1,636 | |||
Premises and equipment, net |
3,753 | 3,547 | |||
Bank owned life insurance |
4,567 | 4,535 | |||
Accrued interest receivable and other assets |
1,961 | 2,848 | |||
Total assets |
$ |
258,989 |
$ |
255,748 | |
LIABILITIES AND STOCKHOLDERS' EQUITY |
|||||
Deposits |
|||||
Noninterest bearing |
$ |
30,772 |
$ |
27,652 | |
Interest bearing |
184,916 | 180,657 | |||
Total deposits |
215,688 | 208,309 | |||
FHLB advances |
13,000 | 10,000 | |||
Other secured borrowings |
- |
6,526 | |||
Advances by borrowers for taxes and insurance |
137 | 575 | |||
Accrued interest payable and other liabilities |
2,309 | 2,319 | |||
Subordinated debentures |
5,155 | 5,155 | |||
Total liabilities |
236,289 | 232,884 | |||
Commitments and Contingent Liabilities |
|||||
Stockholders' equity |
|||||
Common stock, $.01 par value; |
|||||
shares authorized: 50,000,000; |
|||||
shares issued: 15,935,417 in 2014 and 2013 |
159 | 159 | |||
Additional paid-in capital |
48,141 | 48,067 | |||
Accumulated deficit |
(22,429) | (22,215) | |||
Accumulated other comprehensive income |
74 | 98 | |||
Treasury stock, at cost; 111,707 shares |
(3,245) | (3,245) | |||
Total stockholders' equity |
22,700 | 22,864 | |||
$ |
258,989 |
$ |
255,748 |
See accompanying notes to consolidated financial statements.
3
CENTRAL FEDERAL CORPORATION
CONSOLIDATED STATEMENTS OF LOSS
(Dollars in thousands except per share data)
(Unaudited)
Three months ended |
|||||
March 31, |
|||||
2014 |
2013 |
||||
Interest and dividend income |
|||||
Loans, including fees |
$ |
2,122 |
$ |
1,596 | |
Securities |
44 | 60 | |||
FHLB stock dividends |
20 | 21 | |||
Federal funds sold and other |
17 | 34 | |||
2,203 | 1,711 | ||||
Interest expense |
|||||
Deposits |
355 | 408 | |||
FHLB advances and other debt |
45 | 76 | |||
Subordinated debentures |
42 | 41 | |||
442 | 525 | ||||
Net interest income |
1,761 | 1,186 | |||
Provision for loan losses |
20 | 326 | |||
Net interest income after provision for loan losses |
1,741 | 860 | |||
Noninterest income |
|||||
Service charges on deposit accounts |
103 | 73 | |||
Net gains on sales of loans |
17 | 6 | |||
Earnings on bank owned life insurance |
32 | 32 | |||
Other |
93 | 22 | |||
245 | 133 | ||||
Noninterest expense |
|||||
Salaries and employee benefits |
1,103 | 892 | |||
Occupancy and equipment |
158 | 75 | |||
Data processing |
207 | 163 | |||
Franchise taxes |
50 | 85 | |||
Professional fees |
297 | 212 | |||
Director fees |
12 | 5 | |||
Postage, printing and supplies |
84 | 58 | |||
Advertising and promotion |
3 | 6 | |||
Telephone |
25 | 16 | |||
Loan expenses |
4 | 17 | |||
Foreclosed assets, net |
11 | (19) | |||
Depreciation |
52 | 54 | |||
FDIC premiums |
79 | 111 | |||
Amortization of intangibles |
- |
9 | |||
Regulatory assessment |
39 | 39 | |||
Other insurance |
36 | 37 | |||
Other |
40 | 43 | |||
2,200 | 1,803 | ||||
Income (loss) before incomes taxes |
(214) | (810) | |||
Income tax expense |
- |
- |
|||
Net income (loss) |
(214) | (810) | |||
Earnings (loss) attributable to common stockholders |
$ |
(214) |
$ |
(810) | |
Earnings (loss) per common share: |
|||||
Basic |
$ |
(0.01) |
$ |
(0.05) | |
Diluted |
$ |
(0.01) |
$ |
(0.05) |
See accompanying notes to consolidated financial statements.
4
CENTRAL FEDERAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Dollars in thousands except per share data)
(Unaudited)
Three months ended March 31, |
|||||
2014 |
2013 |
||||
Net income (loss) |
$ |
(214) |
$ |
(810) | |
Other comprehensive income (loss): |
|||||
Change in unrealized holding gains (losses) on securities available for sale |
(24) | 25 | |||
Reclassification adjustment for gains realized in income |
- |
- |
|||
Net change in unrealized gains (losses) |
(24) | 25 | |||
Tax effect |
- |
- |
|||
Other comprehensive income (loss) |
(24) | 25 | |||
Comprehensive income (loss) |
$ |
(238) |
$ |
(785) |
See accompanying notes to consolidated financial statements.
5
CENTRAL FEDERAL CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
(Dollars in thousands except per share data)
(Unaudited)
Accumulated |
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Additional |
Other |
Total |
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Common |
Paid-In |
Accumulated |
Comprehensive |
Treasury |
Stockholders' |
||||||||||||
Stock |
Capital |
Deficit |
Income |
Stock |
Equity |
||||||||||||
Balance at January 1, 2014 |
$ |
159 |
$ |
48,067 |
$ |
(22,215) |
$ |
98 |
$ |
(3,245) |
$ |
22,864 | |||||
Net loss |
(214) | (214) | |||||||||||||||
Other comprehensive Income (loss) |
(24) | (24) | |||||||||||||||
Stock option expense, net of forfeitures |
74 | 74 | |||||||||||||||
Balance at March 31, 2014 |
$ |
159 |
$ |
48,141 |
$ |
(22,429) |
$ |
74 |
$ |
(3,245) |
$ |
22,700 |
Accumulated |
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Additional |
Other |
Total |
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Common |
Paid-In |
Accumulated |
Comprehensive |
Treasury |
Stockholders' |
||||||||||||
Stock |
Capital |
Deficit |
Income |
Stock |
Equity |
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Balance at January 1, 2013 |
$ |
159 |
$ |
47,919 |
$ |
(21,297) |
$ |
107 |
$ |
(3,245) |
$ |
23,643 | |||||
Net loss |
(810) | (810) | |||||||||||||||
Other comprehensive income (loss) |
25 | 25 | |||||||||||||||
Release of 100 stock-based |
(6) | (6) | |||||||||||||||
Stock option expense, net of |
27 | 27 | |||||||||||||||
Offering costs associated with issuance |
(11) | (11) | |||||||||||||||
Balance at March 31, 2013 |
$ |
159 |
$ |
47,929 |
$ |
(22,107) |
$ |
132 |
$ |
(3,245) |
$ |
22,868 |
See accompanying notes to consolidated financial statements.
6
CENTRAL FEDERAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Three months ended |
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March 31, |
|||||
2014 |
2013 |
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Net loss |
$ |
(214) |
$ |
(810) | |
Adjustments to reconcile net loss to net cash from operating activities: |
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Provision for loan losses |
20 | 326 | |||
Depreciation |
52 | 54 | |||
Amortization, net |
70 | 134 | |||
Originations of loans held for sale |
(7,821) | (4,658) | |||
Proceeds from sale of loans held for sale |
7,033 | 3,152 | |||
Net gains on sales of loans |
(17) | (6) | |||
Gain on sale of foreclosed assets |
- |
(21) | |||
Earnings on bank owned life insurance |
(32) | (32) | |||
Stock-based compensation expense |
74 | 21 | |||
Net change in: |
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Accrued interest receivable and other assets |
887 | (116) | |||
Accrued interest payable and other liabilities |
(11) | 68 | |||
Net cash from (used by) operating activities |
41 | (1,888) | |||
Cash flows from investing activities |
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Net (increase) decrease in interest-bearing deposits in other financial institutions |
496 |
- |
|||
Available-for-sale securities: |
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Maturities, prepayments and calls |
539 | 3,076 | |||
Loan originations and payments, net |
(1,807) | (14,094) | |||
Additions to premises and equipment |
(259) | (6) | |||
Proceeds from the sale of foreclosed assets |
- |
68 | |||
Proceeds from mortgage insurance on foreclosed assets |
- |
14 | |||
Net cash from (used by) investing activities |
(1,031) | (10,942) | |||
Cash flows from financing activities |
|||||
Net change in deposits |
7,372 | (4,793) | |||
Net change in short-term borrowings from the FHLB and other debt |
(1,026) | 6,955 | |||
Proceeds from long-term FHLB advances and other debt |
2,500 |
- |
|||
Repayments on long-term FHLB advances and other debt |
(5,000) |
- |
|||
Net change in advances by borrowers for taxes and insurance |
(438) | (67) | |||
Cost associated with issuance of common stock |
- |
(11) | |||
Net cash from (used by) financing activities |
3,408 | 2,084 | |||
Net change in cash and cash equivalents |
2,418 | (10,746) | |||
Beginning cash and cash equivalents |
19,160 | 25,152 | |||
Ending cash and cash equivalents |
$ |
21,578 |
$ |
14,406 | |
Supplemental cash flow information: |
|||||
Interest paid |
$ |
411 |
$ |
479 |
See accompanying notes to consolidated financial statements.
7
CENTRAL FEDERAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation:
The consolidated financial statements include Central Federal Corporation (the “Holding Company”) and its wholly-owned subsidiaries, CFBank, Ghent Road, Inc., and Smith Ghent LLC, (together referred to as the “Company”). Ghent Road, Inc. was formed in 2006 and owned the land adjacent to the corporate office, and Smith Ghent LLC owned the office building on such land. During October 2013, the Company consummated a sale of its corporate office building and adjacent land, and relocated its main office branch to a nearby location. After the sale was finalized, Ghent Road, Inc. and Smith Ghent LLC were legally dissolved, prior to year-end 2013. However, the results of operations of Ghent Road, Inc. and Smith Ghent LLC for 2013 prior to dissolution are included in these consolidated financial statements. Intercompany transactions and balances are eliminated in consolidation. The accompanying unaudited interim consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) and in compliance with U.S. generally accepted accounting principles (GAAP). Because this report is based on an interim period, certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted.
In the opinion of the management of the Company, the accompanying unaudited interim consolidated financial statements include all adjustments necessary for a fair presentation of the Company’s financial condition and the results of operations for the periods presented. These adjustments are of a normal recurring nature, unless otherwise disclosed in this Form 10-Q. The financial performance reported for the Company for the three months ended March 31, 2014 is not necessarily indicative of the results that may be expected for the full year. This information should be read in conjunction with the Company’s latest Annual Report to Stockholders and Form 10-K. Reference is made to the accounting policies of the Company described in Note 1 of the Notes to Consolidated Financial Statements contained in the Company’s 2013 Annual Report that was filed as Exhibit 13.1 to the Company’s Form 10-K for the year ended December 31, 2013. The Company has consistently followed those policies in preparing this Form 10-Q.
Loans: Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal balance outstanding, adjusted for purchase premiums and discounts, deferred loan fees and costs, accrued interest receivable and an allowance for loan losses (ALLL). Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income using the level yield method without anticipating prepayments. The recorded investment in loans includes accrued interest receivable.
The accrual of interest income on all classes of loans, except other consumer loans, is discontinued and the loan is placed on nonaccrual status at the time the loan is 90 days delinquent unless the loan is well-secured and in process of collection. Other consumer loans are typically charged off no later than 90 days past due. Past due status is based on the contractual terms of the loan for all classes of loans. In all cases, loans are placed on nonaccrual or charged-off at an earlier date if collection of principal or interest is considered doubtful. Nonaccrual loans and loans past due 90 days still on accrual include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans. Commercial, multi-family residential real estate loans and commercial real estate loans placed on nonaccrual status are individually classified as impaired loans.
All interest accrued but not received for loans placed on nonaccrual is reversed against interest income in the period in which it is placed in a nonaccrual status. Interest received on such loans is accounted for on the cash-basis or cost recovery method, until qualifying for return to accrual status. Loans are considered for return to accrual status provided all the principal and interest amounts are contractually due are brought current, there is a current and well documented credit analysis, there is reasonable assurance of repayment of principal and interest, and the customer has demonstrated sustained, amortizing payment performance of at least six months.
8
CENTRAL FEDERAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
Allowance for Loan Losses (ALLL): The ALLL is a valuation allowance for probable incurred credit losses. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. Management estimates the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged off.
The allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired. A loan is impaired when, based on current information and events, it is probable that CFBank will be unable to collect all amounts due according to the contractual terms of the loan agreement. Loans within any loan class for which the terms have been modified resulting in a concession, and for which the borrower is experiencing financial difficulties, are considered troubled debt restructurings (TDRs) and classified as impaired.
Factors considered by management in determining impairment for all loan classes include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed.
Loans of all classes within the commercial, multi-family residential and commercial real estate segments, regardless of size, and loans of all other classes with balances over $250 are individually evaluated for impairment when they are 90 days past due, or earlier than 90 days past due if information regarding the payment capacity of the borrower indicates that payment in full according to the loan terms is doubtful. If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loans existing rate, or at the fair value of collateral, less costs to sell, if repayment is expected solely from the collateral. Large groups of smaller balance homogeneous loans, such as consumer and single-family residential real estate loans, are collectively evaluated for impairment, and accordingly, they are not separately identified for impairment disclosures.
TDRs of all classes of loans are separately identified for impairment disclosures and are measured at the present value of estimated future cash flows using the loan’s effective rate at inception. If a TDR is considered to be a collateral dependent loan, the loan is reported, net, at the fair value of the collateral. If the payment of the loan is dependent on the sale of the collateral, then costs to liquidate the collateral are included when determining the impairment. For TDRs that subsequently default, the amount of reserve is determined in accordance with the accounting policy for the ALLL.
Interest income on all classes of impaired loans that are on nonaccrual status is recognized in accordance with the accounting policy on nonaccrual loans. Cash receipts on all classes of impaired loans that are on nonaccrual status are generally applied to the principal balance outstanding. Interest income on all classes of impaired loans that are not on nonaccrual status is recognized on the accrual method. TDRs may be classified as accruing if the borrower has been current for a period of at least six months with respect to loan payments and management expects that the borrower will be able to continue to make payments in accordance with the terms of the restructured note.
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.
9
CENTRAL FEDERAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
During the fourth quarter, after running parallel calculations and analyzing results for the last two quarters, the Bank revised its ALLL methodology for the general reserve. Previously, the base methodology relied more heavily on industry data and loss given default rates and probability of default. Based on the fact that the Bank has been tracking historical loss rates for a significant time, the new methodology uses a historical three year loss rate as its base methodology. Similar to before, the base methodology may be supplemented with economic and judgmental factors. Based on the change in methodology which considered portfolio migration, three year loss rates and revised economic and judgmental factors, a $250 reduction to the allowance for loan loss was recorded. The impact on prior quarters was not considered material.
CFBank’s charge-off policy for commercial loans, single-family residential real estate loans, multi-family residential real estate loans, commercial real estate loans, construction loans and home equity lines of credit requires management to record a specific reserve or charge-off as soon as it is apparent that the borrower is troubled and there is, or likely will be a collateral shortfall related to the estimated value of the collateral securing the loan. Other consumer loans are typically charged off no later than 90 days past due.
Earnings (Loss) Per Common Share: The two-class method is used in the calculation of basic and diluted earnings per share. Under the two-class method, earnings available to common stockholders for the period are allocated between common stockholders and participating securities (unvested share-based payment awards) according to dividends declared (or accumulated) and participation rights in undistributed earnings. The factors used in the earnings per share computation follow:
10
CENTRAL FEDERAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
Three months ended March 31, |
||||||
2014 |
2013 |
|||||
Basic |
||||||
Net loss |
$ |
(214) |
$ |
(810) | ||
Less: Net loss allocated to unvested share-based payment awards |
- |
- |
||||
Earnings (loss) allocated to common stockholders |
$ |
(214) |
$ |
(810) | ||
Weighted average common shares outstanding including unvested share-based payment awards |
15,823,710 | 15,824,181 | ||||
Less: Unvested share-based payment awards |
- |
(854) | ||||
Average shares |
15,823,710 | 15,823,327 | ||||
Basic earnings (loss) per common share |
$ |
(0.01) |
$ |
(0.05) | ||
Diluted |
||||||
Earnings (loss) allocated to common stockholders |
$ |
(214) |
$ |
(810) | ||
Weighted average common shares outstanding for basic loss per common share |
15,823,710 | 15,823,327 | ||||
Add: Dilutive effects of assumed exercises of stock options |
- |
- |
||||
Add: Dilutive effects of assumed exercises of stock warrant |
- |
- |
||||
Average shares and dilutive potential common shares |
15,823,710 | 15,823,327 | ||||
Diluted earnings (loss) per common share |
$ |
(0.01) |
$ |
(0.05) |
The following stock options were not considered in computing diluted earnings (loss) per common share because the options were anti-dilutive or the Company reported a net loss for the periods presented.
Three months ended March 31, |
||||
2014 |
2013 |
|||
Stock options |
632,126 |
259,076 |
Adoption of New Accounting Standards:
In July 2013, the FASB amended existing guidance related to the presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss or a tax credit carryforward exists. These amendments provide that an unrecognized tax benefit, or a portion thereof, be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except to the extent that a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date to settle any additional income taxes that would result from disallowance of a tax position, or the tax law does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, then the unrecognized tax benefit should be presented as a liability. These amendments are effective for interim and annual reporting periods beginning after December 15, 2013. Early adoption and retrospective application is permitted. The effect of adopting this standard did not have a material effect on the Company's operating results or financial condition.
11
CENTRAL FEDERAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
In February 2013, the FASB issued ASU No. 2013-02, Comprehensive Income (Topic 220); Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. The objective of this Update is to improve the reporting of reclassifications out of accumulated other comprehensive income. The amendments in this Update require an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required under U.S. GAAP to be reclassified in its entirety to net income. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures required under U.S. GAAP that provide additional detail about those amounts. For public entities, the amendments are effective prospectively for reporting periods beginning after December 15, 2012. The adoption of this ASU did not have a material impact on the Company; however, disclosures have been presented as part of notes to the financial statements.
In December 2011, the FASB amended existing guidance on disclosures about offsetting assets and liabilities. These amendments will enhance disclosures required by U.S. GAAP by requiring improved information about derivatives, repurchase agreements and reverse purchase agreements, and securities borrowing and securities lending transactions that are either offset in accordance with specific criteria contained in the Codification or subject to a master netting arrangement or similar agreement, irrespective of whether they are offset. This information will enable users of an entity's financial statements to evaluate the effect or potential effect of netting arrangements on an entity's financial position, including the effect or potential effect of rights of setoff associated with certain financial instruments and derivative instruments. In January 2013, the FASB clarified that ordinary trade receivables and receivables are not in the scope of the December 2011 amended guidance. These amendments are effective for fiscal years beginning on or after January 1, 2013, and interim periods within those years. Retrospective disclosure is required for all comparative periods presented. The effect of adopting this standard did not have a material effect on the Company's operating results or financial condition.
NOTE 2- REGULATORY ORDER CONSIDERATIONS
Regulatory Order Considerations: On May 25, 2011, the Holding Company and CFBank each consented to the issuance of an Order to Cease and Desist (the “Holding Company Order” and the “CFBank Order”, respectively, and collectively, the “Orders”) by the Office of Thrift Supervision (the “OTS”), the primary regulator of the Holding Company and CFBank at the time the Orders were issued. In July 2011, in accordance with the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), the Federal Reserve Bank (the “FRB”) replaced the OTS as the primary regulator of the Holding Company and the Office of the Comptroller of the Currency (the “OCC”) replaced the OTS as the primary regulator of CFBank.
The Orders have imposed significant directives applicable to the Holding Company and CFBank, including requirements that we reduce the level of our classified and criticized assets, achieve growth and operating metrics in line with an approved business plan, and comply with restrictions on brokered deposits and on certain types of lending and prohibitions on dividends and repurchases of our capital stock. The CFBank Order required CFBank to have 8% core capital and 12% total risk-based capital, and CFBank could not be considered well-capitalized under the prompt corrective action regulations so long as the CFBank Order remained in place, even if it met or exceeded these capital levels. In addition, the regulators were required to approve any deviation from our business plan and certain compensation arrangements with directors and executive officers.
12
CENTRAL FEDERAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
On August 20, 2012, the Holding Company announced the successful completion of its restructured registered common stock offering. The Holding Company sold 15.0 million shares of its common stock at $1.50 per share, resulting in gross proceeds of $22.5 million before expenses. With the proceeds from the stock offering, the Holding Company contributed $13.5 million to CFBank to improve its capital ratios and support future growth and expansion, bringing CFBank into compliance with the capital ratios required by the CFBank Order. In addition, the Holding Company used proceeds from the common stock offering to redeem its TARP obligations on September 26, 2012. The remaining proceeds from the restructured registered common stock offering were retained by the Company for general corporate purposes.
Effective as of January 23, 2014, the OCC released and terminated the CFBank Order based upon the improved capital position of CFBank, among other factors. Notwithstanding the release of the CFBank Order, CFBank is required to continue to maintain a minimum Tier 1 Leverage Capital Ratio of 8% and a Total Risk-based Capital to Risk-Weighted Assets ratio of 12%. In addition, in connection with the release and termination of the CFBank Order, CFBank has made certain commitments to the OCC to continue to adhere to certain prudent practices, including, without limitation, maintaining a written program to continue to improve CFBank’s credit underwriting and administrative process; take actions to protect its interest in criticized assets as identified by CFBank, the OCC examiners or its external loan review process; implement its written program to effectively identify, monitor, control and continue to reduce the level of credit risk to CFBank; review and monitor progress against such plan with the Board of Directors; and continue CFBank’s aggressive workout efforts and individualized workout plans on all criticized assets greater than $250,000.
The Holding Company Order remains in effect with the FRB. The Holding Company Order requires the Company, among other things, to: (i) submit by every December 31 a capital plan to the FRB that establishes a minimum tangible capital ratio commensurate with the Company’s consolidated risk profile, reduces the risk from current debt levels and addresses the Company’s cash flow needs; (ii) not pay cash dividends, redeem stock or make any other capital distributions without prior regulatory approval; (iii) not pay interest or principal on any debt or increase any Company debt or guarantee the debt of any entity without prior regulatory approval; (iv) obtain prior regulatory approval for changes in directors and senior executive officers; and (iv) not enter into any new contractual arrangement related to compensation or benefits with any director or senior executive officer without prior notification to the FRB.
The significant directives contained in the Orders, including the requirement to reduce the level of our criticized classified assets, maintain growth and operating parameters in line with our business plan, restrictions on broker deposits, restrictions on certain types of lending and restrictions on dividend payments, have provided challenges for our operation of our business and our ability to effectively compete in our markets. In addition, the Orders have required that we obtain approval from our regulators for any deviations from our business plan, which has limited our flexibility to make changes to the scope of our business activities. We have also incurred significant additional regulatory compliance expense in connection with the Orders, and it is possible that regulatory compliance expenses related to the Orders could continue to have a material adverse impact on us in the future.
The Company has been unprofitable for the past three years. If we do not generate profits in the future, our capital levels will be negatively impacted and the regulators could take additional enforcement action against us, including the imposition of further operating restrictions.
13
CENTRAL FEDERAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
At March 31, 2014, CFBank had $18,408 in brokered deposits with maturity dates from April 2014 through August 2016. At March 31, 2014, cash, unpledged securities and deposits in other financial institutions totaled $24,614, which is sufficient to cover brokered deposit maturities in 2014. Brokered deposit maturities over the next three years are as follows:
March 31, 2015 |
$ |
8,003 |
March 31, 2016 |
10,206 | |
March 31, 2017 |
199 | |
$ |
18,408 |
Previously, because CFBank was under a regulatory order, it was prohibited from accepting or renewing brokered deposits, including reciprocal deposits in the Certificate of Deposit Account Registry Service® (CDARS) program, without FDIC approval. While under the CFBank Order, the Bank received limited waivers from the prohibition on renewal of reciprocal CDARS deposits from the FDIC, each for 90 day periods which expired on September 20, 2011, December 19, 2011, March 18, 2012, June 16, 2012, September 14, 2012 and December 31, 2013. On January 8, 2014, CFBank received a waiver for a 90-day period to allow the bank to renew deposits under the CDARS program. With the release of the CFBank Order, CFbank is no longer subject to these restrictions.
CFBank dividends serve as a potential source of liquidity to the Holding Company to meet its obligations. As of December 31, 2013, CFBank was not permitted to declare or pay dividends or make any other capital distributions without receiving the prior written approval of the OCC. Future dividend payments by CFBank to the Holding Company would be based on future earnings. The payment of dividends from CFBank to the Holding Company is not likely to be approved by the OCC while CFBank is suffering losses.
The directives contained in the Orders, and in commitments with our regulators, including higher capital requirements, requirements to reduce the level of our classified and criticized assets and various operating restrictions, may impede our full ability to operate our business and compete effectively in our markets.
We have taken such actions as we believe are necessary to comply with all requirements of the Orders and the other regulatory requirements and directives to which we are subject, and we are continuing to work toward compliance with the provisions having future compliance dates. Management believes we have received or provided all required approvals, non-objections, notifications and waivers with regard to the Orders.
As previously noted, the CFBank Order was terminated by the OCC on January 23, 2014. The Holding Company Order will remain in effect until terminated, modified or suspended by the FRB.
14
CENTRAL FEDERAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
NOTE 3 – SECURITIES
The following table summarizes the amortized cost and fair value of the available-for-sale securities portfolio at March 31, 2014 and December 31, 2013 and the corresponding amounts of unrealized gains and losses recognized in accumulated other comprehensive income (loss):
Gross |
Gross |
|||||||||||
Amortized |
Unrealized |
Unrealized |
Fair |
|||||||||
Cost |
Gains |
Losses |
Value |
|||||||||
March 31, 2014 |
||||||||||||
Corporate debt |
$ |
4,343 |
$ |
13 |
$ |
5 |
$ |
4,351 | ||||
State and municipal |
1,918 |
- |
29 | 1,889 | ||||||||
Issued by U.S. government-sponsored entities and agencies: |
||||||||||||
Mortgage-backed securities - residential |
840 | 42 |
- |
882 | ||||||||
Collateralized mortgage obligations |
1,899 | 53 |
- |
1,952 | ||||||||
Total |
$ |
9,000 |
$ |
108 |
$ |
34 |
$ |
9,074 |
Gross |
Gross |
|||||||||||
Amortized |
Unrealized |
Unrealized |
Fair |
|||||||||
Cost |
Gains |
Losses |
Value |
|||||||||
December 31, 2013 |
||||||||||||
Corporate debt |
$ |
4,360 |
$ |
11 |
$ |
8 |
$ |
4,363 | ||||
State and municipal |
1,926 |
- |
7 | 1,919 | ||||||||
Issued by U.S. government-sponsored entities and agencies: |
- |
|||||||||||
Mortgage-backed securities - residential |
934 | 49 |
- |
983 | ||||||||
Collateralized mortgage obligations |
2,354 | 53 |
- |
2,407 | ||||||||
Total |
$ |
9,574 |
$ |
113 |
$ |
15 |
$ |
9,672 |
There was no other-than-temporary impairment recognized in accumulated other comprehensive income (loss) for securities available for sale at March 31, 2014 or March 31, 2013.
There were no sales of securities for the three months ended March 31, 2014 or March 31, 2013.
The amortized cost and fair value of debt securities at March 31, 2014 are shown by contractual maturity. Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity date are shown separately.
15
CENTRAL FEDERAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
March 31, 2014 |
December 31, 2013 |
|||||||||||
Amortized |
Fair |
Amortized |
Fair |
|||||||||
Cost |
Value |
Cost |
Value |
|||||||||
Due in one year or less |
$ |
2,379 |
$ |
2,373 |
$ |
2,386 |
$ |
2,379 | ||||
Due from one to five years |
3,882 | 3,867 | 3,900 | 3,903 | ||||||||
Mortgage-backed securities |
840 | 882 | 934 | 983 | ||||||||
Collateralized mortgage obligations |
1,899 | 1,952 | 2,354 | 2,407 | ||||||||
Total |
$ |
9,000 |
$ |
9,074 |
$ |
9,574 |
$ |
9,672 |
Fair value of securities pledged was as follows:
March 31, |
December 31, |
||||
2014 |
2013 |
||||
Pledged as collateral for: |
|||||
FHLB advances |
$ |
1,789 |
$ |
2,024 | |
Public deposits |
604 | 905 | |||
Interest-rate swaps |
422 | 443 | |||
Total |
$ |
2,815 |
$ |
3,372 |
At March 31, 2014 and December 31, 2013, there were no holdings of securities of any one issuer, other than U.S. government-sponsored entities and agencies, in an amount greater than 10% of stockholders’ equity.
The following table summarizes securities with unrealized losses at March 31, 2014 and December 31, 2013 aggregated by major security type and length of time in a continuous unrealized loss position.
March 31, 2014 |
Less than 12 Months |
12 Months or More |
Total |
|||||||||||||||
Description of Securities |
Fair Value |
Unrealized Loss |
Fair Value |
Unrealized Loss |
Fair Value |
Unrealized Loss |
||||||||||||
Corporate debt |
$ |
238 |
$ |
- |
$ |
1,001 |
$ |
5 |
$ |
1,239 |
$ |
5 | ||||||
State and municipal |
1,011 | 1 | 878 | 28 | 1,889 | 29 | ||||||||||||
Total temporarily impaired |
$ |
1,249 |
$ |
1 |
$ |
1,879 |
$ |
33 |
$ |
3,128 |
$ |
34 |
December 31, 2013 |
Less than 12 Months |
12 Months or More |
Total |
|||||||||||||||
Description of Securities |
Fair Value |
Unrealized Loss |
Fair Value |
Unrealized Loss |
Fair Value |
Unrealized Loss |
||||||||||||
Corporate debt |
$ |
239 |
$ |
1 |
$ |
1,002 |
$ |
7 |
$ |
1,241 |
$ |
8 | ||||||
State and municipal |
1,015 | 1 | 904 | 6 | 1,919 | 7 | ||||||||||||
Total temporarily impaired |
$ |
1,254 |
$ |
2 |
$ |
1,906 |
$ |
13 |
$ |
3,160 |
$ |
15 |
The unrealized losses in Corporate debt and State and municipal securities at March 31, 2014 and December 31, 2013, are related to multiple securities. Because the decline in fair value is attributable to changes in market conditions, and not credit quality, and because the Company does not have the intent to sell these securities and it is likely that it will not be required to sell these securities before their anticipated recovery, the Company did not consider these securities to be other-than-temporarily impaired at March 31, 2014 and December 31, 2013.
There was no unrealized loss in Collateralized mortgage obligations at March 31, 2014 and December 31, 2013.
16
CENTRAL FEDERAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
NOTE 4 – LOANS
The following table presents the recorded investment in loans by portfolio segment. The recorded investment in loans includes the principal balance outstanding adjusted for purchase premiums and discounts, deferred loan fees and costs and includes accrued interest.
March 31, |
December 31, |
||||
2014 |
2013 |
||||
Commercial |
$ |
43,105 |
$ |
37,526 | |
Real estate: |
|||||
Single-family residential |
25,169 | 32,219 | |||
Multi-family residential |
28,671 | 32,197 | |||
Commercial |
82,466 | 83,752 | |||
Construction |
17,306 | 11,465 | |||
Consumer: |
|||||
Home equity lines of credit |
15,377 | 14,851 | |||
Other |
2,571 | 860 | |||
Subtotal |
214,665 | 212,870 | |||
Less: ALLL |
(5,763) | (5,729) | |||
Loans, net |
$ |
208,902 |
$ |
207,141 |
Commercial loans included $14,371 and $12,918, respectively, of commercial lines of credit which required interest only payments at March 31, 2014 and December 31, 2013.
Home equity lines of credit included $12,983 and $12,144, respectively, of loans which required interest only payments at March 31, 2014 and December 31, 2013.
Mortgage Purchase Program
On December 11, 2012, CFBank entered into a Mortgage Purchase Program with Northpointe Bank (Northpointe), a Michigan banking corporation. Through a participation agreement, CFBank agreed to purchase an 80% interest from Northpointe fully underwritten and pre-sold mortgage loans originated by various prescreened mortgage brokers located throughout the U.S. The participation agreement provides for CFBank to purchase individually (MERS registered) loans from Northpointe and hold them until funded by the end investor. The mortgage loan investors include Fannie Mae and Freddie Mac, and other major financial institutions such as Wells Fargo Bank. This process on average takes approximately 14 days. Given the short term nature of each of these individual loans common credit risks such as the following are substantially reduced: past due, impairment and TDR, nonperforming, and nonaccrual classification, therefore no allowance is allocated to these loans. NorthPointe maintains a 20% ownership interest in each loan it participates. The agreement further calls for full control to be relinquished by the Broker to NorthPointe and its Participants with recourse to the broker after 120 days, at the sole discretion of Northpointe. As such, these purchased loans are classified as portfolio loans. These loans are 100% risk rated for CFBank capital adequacy purposes. At March 31, 2014 and December 31, 2013, CFBank held $4,998 and $12,743, respectively, of such loans which have been included in single-family residential loan totals above.
The ALLL is a valuation allowance for probable incurred credit losses in the loan portfolio based on management’s evaluation of various factors including past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions and other factors. A provision for loan losses is charged to operations based on management’s periodic evaluation of these and other pertinent factors described in Note 1 to the consolidated financial statements in the Company’s 2013 Annual Report to Stockholders incorporated by reference into our 2013 Annual Report on Form 10-K.
17
CENTRAL FEDERAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
The following table presents the activity in the ALLL by portfolio segment for the three months ended March 31, 2014:
Three months ended March 31, 2014 |
|||||||||||||||||||||||
Real Estate |
Consumer |
||||||||||||||||||||||
Single- |
Multi- |
Home Equity |
|||||||||||||||||||||
Commercial |