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 September 30, 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)
N/A
(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 October 31, 2014, there were 15,823,710 shares of the registrant’s Common Stock outstanding.
CENTRAL FEDERAL CORPORATION
PART I. Financial Information |
Page |
|
|
|
|
Item 1. Financial Statements |
3 | |
|
|
|
|
Consolidated Balance Sheets as of September 30, 2014 (unaudited) |
|
|
and December 31, 2013 |
3 |
|
|
|
|
Consolidated Statements of Operations for the three and nine months ended |
|
|
September 30, 2014 and 2013 (unaudited) |
4 |
|
|
|
|
Consolidated Statements of Comprehensive Income (Loss) |
|
|
for the three and nine months ended September 30, 2014 and 2013 (unaudited) |
5 |
|
|
|
|
Consolidated Statements of Changes in Stockholders’ Equity |
|
|
for the nine months ended September 30, 2014 and 2013 (unaudited) |
6 |
|
|
|
|
Consolidated Statements of Cash Flows for the nine months ended |
|
|
September 30, 2014 and 2013 (unaudited) |
8 |
|
|
|
|
Notes to Consolidated Financial Statements |
9 |
|
|
|
Item 2. Management’s Discussion and Analysis of |
|
|
|
Financial Condition and Results of Operations |
44 |
|
|
|
Item 3. Quantitative and Qualitative Disclosures About Market Risk |
65 | |
|
|
|
Item 4. Controls and Procedures |
66 | |
|
|
|
PART II. Other Information |
67 | |
|
|
|
Item 1. Legal Proceedings |
67 | |
|
|
|
Item 1A. Risk Factors |
67 | |
|
|
|
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds |
67 | |
|
|
|
Item 3. Defaults Upon Senior Securities |
67 | |
|
|
|
Item 4. Mine Safety Disclosures |
67 | |
|
|
|
Item 5. Other Information |
67 | |
|
|
|
Item 6. Exhibits |
67 | |
|
|
|
Signatures |
68 |
CENTRAL FEDERAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands except per share data)
September 30, |
December 31, |
||||
2014 |
2013 |
||||
(unaudited) |
|||||
ASSETS |
|||||
Cash and cash equivalents |
$ |
30,184 |
$ |
19,160 | |
Interest-bearing deposits in other financial institutions |
742 | 1,982 | |||
Securities available for sale |
8,143 | 9,672 | |||
Loans held for sale, at fair value |
5,861 | 3,285 | |||
Loans, net of allowance of $6,256 and $5,729 |
248,168 | 207,141 | |||
FHLB stock |
1,942 | 1,942 | |||
Foreclosed assets, net |
1,636 | 1,636 | |||
Premises and equipment, net |
3,823 | 3,547 | |||
Bank owned life insurance |
4,633 | 4,535 | |||
Accrued interest receivable and other assets |
2,498 | 2,848 | |||
Total assets |
$ |
307,630 |
$ |
255,748 | |
LIABILITIES AND STOCKHOLDERS' EQUITY |
|||||
Deposits |
|||||
Noninterest bearing |
$ |
33,012 |
$ |
27,652 | |
Interest bearing |
217,951 | 180,657 | |||
Total deposits |
250,963 | 208,309 | |||
FHLB advances |
14,500 | 10,000 | |||
Other secured borrowings |
- |
6,526 | |||
Advances by borrowers for taxes and insurance |
212 | 575 | |||
Accrued interest payable and other liabilities |
2,443 | 2,319 | |||
Subordinated debentures |
5,155 | 5,155 | |||
Total liabilities |
273,273 | 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 | |||
Series B Preferred stock, $0.01 par value; 480,000 shares authorized; |
|||||
480,000 issued at September 30, 2014 and 0 shares issued at December 31, 2013 |
3 |
- |
|||
Additional paid-in capital |
59,651 | 48,067 | |||
Accumulated deficit |
(22,278) | (22,215) | |||
Accumulated other comprehensive income |
67 | 98 | |||
Treasury stock, at cost; 111,707 shares of common stock |
(3,245) | (3,245) | |||
Total stockholders' equity |
34,357 | 22,864 | |||
Total liabilities and stockholders' equity |
$ |
307,630 |
$ |
255,748 |
See accompanying notes to consolidated financial statements.
3
CENTRAL FEDERAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands except per share data)
(Unaudited)
Three months ended |
Nine months ended |
||||||||||
September 30, |
September 30, |
||||||||||
2014 |
2013 |
2014 |
2013 |
||||||||
Interest and dividend income |
|||||||||||
Loans, including fees |
$ |
2,848 |
$ |
1,822 |
$ |
7,372 |
$ |
5,152 | |||
Securities |
38 | 52 | 124 | 155 | |||||||
FHLB stock dividends |
19 | 21 | 58 | 62 | |||||||
Federal funds sold and other |
14 | 36 | 46 | 107 | |||||||
2,919 | 1,931 | 7,600 | 5,476 | ||||||||
Interest expense |
|||||||||||
Deposits |
400 | 417 | 1,123 | 1,246 | |||||||
FHLB advances and other debt |
41 | 79 | 112 | 232 | |||||||
Subordinated debentures |
41 | 42 | 124 | 125 | |||||||
482 | 538 | 1,359 | 1,603 | ||||||||
Net interest income |
2,437 | 1,393 | 6,241 | 3,873 | |||||||
Provision for loan losses |
75 | 76 | 203 | 726 | |||||||
Net interest income after provision for loan losses |
2,362 | 1,317 | 6,038 | 3,147 | |||||||
Noninterest income |
|||||||||||
Service charges on deposit accounts |
99 | 92 | 308 | 248 | |||||||
Net gains on sales of loans |
207 | (1) | 356 | 112 | |||||||
Earnings on bank owned life insurance |
33 | 33 | 97 | 98 | |||||||
Other |
107 | 52 | 288 | 120 | |||||||
446 | 176 | 1,049 | 578 | ||||||||
Noninterest expense |
|||||||||||
Salaries and employee benefits |
1,177 | 970 | 3,331 | 2,823 | |||||||
Occupancy and equipment |
138 | 70 | 431 | 229 | |||||||
Data processing |
223 | 158 | 654 | 464 | |||||||
Franchise taxes |
51 | 84 | 150 | 254 | |||||||
Professional fees |
317 | 211 | 871 | 598 | |||||||
Director fees |
39 | 5 | 64 | 13 | |||||||
Postage, printing and supplies |
49 | 42 | 190 | 169 | |||||||
Advertising and promotion |
36 | 20 | 40 | 32 | |||||||
Telephone |
31 | 18 | 83 | 55 | |||||||
Loan expenses |
12 | 29 | 27 | 55 | |||||||
Foreclosed assets, net |
167 | (4) | 248 | (22) | |||||||
Depreciation |
57 | 54 | 179 | 161 | |||||||
FDIC premiums |
105 | 80 | 269 | 227 | |||||||
Amortization of intangibles |
- |
11 |
- |
30 | |||||||
Regulatory assessment |
42 | 41 | 120 | 119 | |||||||
Other insurance |
30 | 37 | 99 | 110 | |||||||
Other |
48 | 52 | 161 | 157 | |||||||
2,522 | 1,878 | 6,917 | 5,474 | ||||||||
Income (loss) before incomes taxes |
286 | (385) | 170 | (1,749) | |||||||
Income tax expense |
- |
- |
- |
- |
|||||||
Net income (loss) |
286 | (385) | 170 | (1,749) | |||||||
Dividends on Series B preferred stock |
(174) |
- |
(233) |
- |
|||||||
Earnings (loss) attributable to common stockholders |
$ |
112 |
$ |
(385) |
$ |
(63) |
$ |
(1,749) | |||
Earnings (loss) per common share: |
|||||||||||
Basic |
$ |
0.01 |
$ |
(0.02) |
$ |
0.00 |
$ |
(0.11) | |||
Diluted |
$ |
0.01 |
$ |
(0.02) |
$ |
0.00 |
$ |
(0.11) |
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 |
Nine months ended |
||||||||||
September 30, |
September 30, |
||||||||||
2014 |
2013 |
2014 |
2013 |
||||||||
Net income (loss) |
$ |
286 |
$ |
(385) |
$ |
170 |
$ |
(1,749) | |||
Other comprehensive income (loss): |
|||||||||||
Change in unrealized holding gains (losses) on securities available for sale |
(7) | 4 | (31) | (6) | |||||||
Reclassification adjustment for gains realized in income |
- |
- |
- |
- |
|||||||
Net change in unrealized gains (losses) |
(7) | 4 | (31) | (6) | |||||||
Tax effect |
- |
- |
- |
- |
|||||||
Other comprehensive income (loss) |
(7) | 4 | (31) | (6) | |||||||
Comprehensive income (loss) |
$ |
279 |
$ |
(381) |
$ |
139 |
$ |
(1,755) |
See accompanying notes to consolidated financial statements.
5
CENTRAL FEDERAL CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
(Dollars in thousands except per share data)
(Unaudited)
Accumulated |
||||||||||||||||||||
Series B |
Additional |
Other |
Total |
|||||||||||||||||
Common |
Preferred |
Paid-In |
Accumulated |
Comprehensive |
Treasury |
Stockholders' |
||||||||||||||
Stock |
Stock |
Capital |
Deficit |
Income |
Stock |
Equity |
||||||||||||||
Balance at January 1, 2014 |
$ |
159 |
$ |
- |
$ |
48,067 |
$ |
(22,215) |
$ |
98 |
$ |
(3,245) |
$ |
22,864 | ||||||
Net loss |
170 | 170 | ||||||||||||||||||
Other comprehensive Income (loss) |
(31) | (31) | ||||||||||||||||||
Stock option expense, net of forfeitures |
218 | 218 | ||||||||||||||||||
Cash dividends declared on Series B preferred stock |
(233) | (233) | ||||||||||||||||||
Issuance of 480,000 shares Series B preferred stock at $.01 par value, net of $631 in offering expenses |
3 | 11,366 | 11,369 | |||||||||||||||||
Balance at September 30, 2014 |
$ |
159 |
$ |
3 |
$ |
59,651 |
$ |
(22,278) |
$ |
67 |
$ |
(3,245) |
$ |
34,357 |
See accompanying notes to consolidated financial statements.
6
CENTRAL FEDERAL CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
(Dollars in thousands except per share data)
(Unaudited)
Accumulated |
|||||||||||||||||
Additional |
Other |
Total |
|||||||||||||||
Common |
Paid-In |
Accumulated |
Comprehensive |
Treasury |
Stockholders' |
||||||||||||
Stock |
Capital |
Deficit |
Income |
Stock |
Equity |
||||||||||||
Balance at January 1, 2013 |
$ |
159 |
$ |
47,919 |
$ |
(21,297) |
$ |
107 |
$ |
(3,245) |
$ |
23,643 | |||||
Net loss |
(1,749) | (1,749) | |||||||||||||||
Other comprehensive income (loss) |
(6) | (6) | |||||||||||||||
Release of 100 stock-based incentive plan shares, net of forfeitures |
(6) | (6) | |||||||||||||||
Stock option expense, net of forfeitures |
88 | 88 | |||||||||||||||
Offering costs associated with issuance |
(11) | (11) | |||||||||||||||
Balance at September 30, 2013 |
$ |
159 |
$ |
47,990 |
$ |
(23,046) |
$ |
101 |
$ |
(3,245) |
$ |
21,959 |
See accompanying notes to consolidated financial statements.
7
CENTRAL FEDERAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Nine months ended |
|||||
September 30, |
|||||
2014 |
2013 |
||||
Net loss |
$ |
170 |
$ |
(1,749) | |
Adjustments to reconcile net loss to net cash from operating activities: |
|||||
Provision for loan losses |
203 | 726 | |||
Depreciation |
179 | 161 | |||
Amortization, net |
169 | 338 | |||
Originations of loans held for sale |
(40,280) | (19,775) | |||
Proceeds from sale of loans held for sale |
38,061 | 15,656 | |||
Net gains on sales of loans |
(356) | (112) | |||
Gain on sale of foreclosed assets |
- |
(28) | |||
Earnings on bank owned life insurance |
(97) | (98) | |||
Stock-based compensation expense |
218 | 82 | |||
Net change in: |
|||||
Accrued interest receivable and other assets |
350 | (13) | |||
Accrued interest payable and other liabilities |
(52) | (60) | |||
Net cash from (used by) operating activities |
(1,435) | (4,872) | |||
Cash flows from investing activities |
|||||
Net (increase) decrease in interest-bearing deposits in other financial institutions |
1,240 | 744 | |||
Available-for-sale securities: |
|||||
Maturities, prepayments and calls |
1,398 | 6,864 | |||
Loan originations and payments, net |
(41,274) | (18,117) | |||
Additions to premises and equipment |
(456) | (198) | |||
Proceeds from the sale of foreclosed assets |
- |
149 | |||
Proceeds from mortgage insurance on foreclosed assets |
- |
14 | |||
Net cash from (used by) investing activities |
(39,092) | (10,544) | |||
Cash flows from financing activities |
|||||
Net change in deposits |
42,630 | 37,127 | |||
Net change in short-term borrowings from the FHLB and other debt |
(6,526) |
- |
|||
Proceeds from long-term FHLB advances and other debt |
12,000 |
- |
|||
Repayments on long-term FHLB advances and other debt |
(7,500) |
- |
|||
Net change in advances by borrowers for taxes and insurance |
(363) | (67) | |||
Cash dividends paid on Series B preferred stock |
(59) |
- |
|||
Net proceeds from issuance of Series B preferred stock |
11,369 |
- |
|||
Cost associated with issuance of common stock |
- |
(11) | |||
Net cash from (used by) financing activities |
51,551 | 37,049 | |||
Net change in cash and cash equivalents |
11,024 | 21,633 | |||
Beginning cash and cash equivalents |
19,160 | 25,152 | |||
Ending cash and cash equivalents |
$ |
30,184 |
$ |
46,785 | |
Supplemental cash flow information: |
|||||
Interest paid |
$ |
1,084 |
$ |
1,472 | |
Supplemental noncash disclosures: |
|||||
Transfers from loans to repossessed assets |
$ |
- |
$ |
74 | |
Transfer from premises and equipment to assets held for sale |
- |
1,903 |
See accompanying notes to consolidated financial statements.
8
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 and nine months ended September 30, 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 Annual Report on 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 Annual Report on 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 that are contractually due are brought current, there is a current and well-documented credit analysis, there is reasonable assurance of repayment of principal and interest, and the customer has demonstrated sustained, amortizing payment performance of at least six months.
Allowance for Loan Losses (ALLL): The ALLL is a valuation allowance for probable incurred credit losses. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. Management estimates the allowance balance required based on an evaluation of 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.
9
CENTRAL FEDERAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
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 loan’s existing rate, or at the fair value of collateral, less costs to sell, if repayment is expected solely from the collateral. Large groups of smaller balance homogeneous loans, such as consumer and single-family residential real estate loans, are collectively evaluated for impairment, and accordingly, they are not separately identified for impairment disclosures.
TDRs of all classes of loans are separately identified for impairment disclosures and are measured at the present value of estimated future cash flows using the loan’s effective rate at inception. If a TDR is considered to be a collateral dependent loan, the loan is reported, net, at the fair value of the collateral. If the payment of the loan is dependent on the sale of the collateral, then costs to liquidate the collateral are included when determining the impairment. For TDRs that subsequently default, the amount of reserve is determined in accordance with the accounting policy for the ALLL.
Interest income on all classes of impaired loans that are on nonaccrual status is recognized in accordance with the accounting policy on nonaccrual loans. Cash receipts on all classes of impaired loans that are on nonaccrual status are generally applied to the principal balance outstanding. Interest income on all classes of impaired loans that are not on nonaccrual status is recognized on the accrual method. TDRs may be classified as accruing if the borrower has been current for a period of at least six months with respect to loan payments and management expects that the borrower will be able to continue to make payments in accordance with the terms of the restructured loan terms.
The general reserve component covers non-impaired loans of all classes and is based on historical loss experience adjusted for current factors. The historical loss experience is determined by loan class and is based on the actual loss history experienced by CFBank over a three-year period. The general component is calculated based on CFBank’s loan balances and actual 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.
During the fourth quarter of 2013, after running parallel calculations and analyzing results for the last two quarters, CFBank 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 CFBank had 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 during the fourth quarter of 2013. The impact on prior quarters was not considered material.
10
CENTRAL FEDERAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
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:
Three months ended |
Nine months ended |
|||||||||||
2014 |
2013 |
2014 |
2013 |
|||||||||
Basic |
||||||||||||
Net earnings (loss) |
$ |
286 |
$ |
(385) |
$ |
170 |
$ |
(1,749) | ||||
Dividends on Series B preferred stock |
(174) |
- |
(233) |
- |
||||||||
Earnings (loss) allocated to common stockholders |
$ |
112 |
$ |
(385) |
$ |
(63) |
$ |
(1,749) | ||||
Weighted average common shares outstanding including unvested share-based payment awards |
15,823,710 | 15,823,677 | 15,823,710 | 15,823,805 | ||||||||
Less: Unvested share-based payment awards |
- |
(33) | (210) | |||||||||
Average shares |
15,823,710 | 15,823,644 | 15,823,710 | 15,823,595 | ||||||||
Basic earnings (loss) per common share (1) |
$ |
0.01 |
$ |
(0.02) |
$ |
0.00 |
$ |
(0.11) | ||||
Diluted |
||||||||||||
Net earnings (loss) allocated to common stockholders |
$ |
112 |
$ |
(385) |
$ |
(63) |
$ |
(1,749) | ||||
Weighted average common shares outstanding for basic loss per common share |
15,823,710 | 15,823,644 | 15,823,710 | 15,823,595 | ||||||||
Add: Dilutive effects of assumed exercises of stock options |
7,444 |
- |
- |
- |
||||||||
Add: Dilutive effects of assumed exercises of stock warrants |
- |
- |
- |
- |
||||||||
Average shares and dilutive potential common shares |
15,831,154 | 15,823,644 | 15,823,710 | 15,823,595 | ||||||||
Diluted earnings (loss) per common share (2) |
$ |
0.01 |
$ |
(0.02) |
$ |
0.00 |
$ |
(0.11) |
(1) |
Basic earnings (loss) per share is less than $0.01 per share for the nine months ended September 30, 2014. |
(2) |
Diluted earnings (loss) per share is less than $0.01 per share for the three months ended September 30, 2014. |
The following stock options, preferred share conversions and warrants 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. The shares shown do not reflect any weighting based on issuance date, and are outstanding amounts at period end.
Three months ended September 30, |
Nine months ended September 30, |
||||||
2014 |
2013 |
2014 |
2013 |
||||
Stock options |
614,552 | 247,216 | 621,996 | 247,216 | |||
Series B preferred stock |
6,857,143 |
- |
6,857,143 |
- |
|||
Stock warrants |
1,152,125 |
- |
1,152,125 |
- |
11
CENTRAL FEDERAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
Adoption of New Accounting Standards:
In January 2014, the FASB issued Accounting Standards Update (“ASU” or “Update”) 2014-01, Investments - Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Qualified Affordable Housing Projects (January 2014). This Update permits entities to make an accounting policy election to account for their investments in qualified affordable housing projects using the proportional amortization method if certain conditions are met. The ASU modifies the conditions that an entity must meet to be eligible to use a method other than the equity or cost methods to account for qualified affordable housing project investments. The ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2014. The amendments in this Update should be applied retrospectively to all periods presented. Adoption of the ASU is not expected to have a significant effect on the Company’s consolidated financial statements.
In January 2014, the FASB issued ASU 2014-04, Receivables - Troubled Debt Restructurings by Creditors (Subtopic 310-40): Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure (January 2014). The objective of this Update is to reduce diversity by clarifying when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan receivable should be derecognized and the real estate property recognized. The ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2014. The amendments in this Update may be adopted using either a modified retrospective transition method or a prospective transition method. Adoption of the ASU is not expected to have a significant effect on the Company’s consolidated financial statements.
In April 2014 the FASB issued ASU 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity (April 2014).This Update seeks to better define the groups of assets which qualify for discontinued operations, in order to ease the burden and cost for preparers and stakeholders. This issue changed “the criteria for reporting discontinued operations” and related reporting requirements, including the provision for disclosures about the “disposal of an individually significant component of an entity that does not qualify for discontinued operations presentation.” The amendments in this Update are effective for fiscal years beginning after December 15, 2014. Early adoption is permitted only for disposals or classifications as held for sale. The Company will adopt the methodologies prescribed by this ASU by the date required. Adoption of the ASU is not expected to have a significant effect on the Company's consolidated financial statements.
In May 2014 the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606) (May 2014). Section A - Summary and Amendments That Create Revenue from Contracts with Customers (Topic 606) and Other Assets and Deferred Costs - Contracts with Customers (Subtopic 340-40). Section B - Conforming Amendments to Other Topics and Subtopics in the Codification and Status Tables. Section C - Background Information and Basis for Conclusions. The topic of Revenue Recognition had become broad with several other regulatory agencies issuing standards, which lacked cohesion. The new guidance establishes a “comprehensive framework” and “reduces the number of requirements to which an entity must consider in recognizing revenue” and yet provides improved disclosures to assist stakeholders reviewing financial statements. The amendments in this Update are effective for annual reporting periods beginning after December 15, 2016. Early adoption is not permitted. The Company will adopt the methodologies prescribed by this ASU by the date required. Adoption of the ASU is not expected to have a significant effect on the Company's consolidated financial statements.
In June 2014 the FASB issued ASU 2014-11, Transfers and Servicing (Topic 860): Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures (June 2014). This Update addresses the concerns of stakeholders’ by changing the accounting practices surrounding repurchase agreements. The new guidance changes the “accounting for repurchase-to-maturity transactions and linked repurchase financings to secured borrowing accounting, which is consistent with the accounting for other repurchase agreements.” The amendments in this Update are effective for annual reporting periods beginning after December 15, 2014. Early adoption is prohibited. The Company will adopt the methodologies prescribed by this ASU by the date required. Adoption of the ASU is not expected to have a significant effect on the Company's consolidated financial statements.
12
CENTRAL FEDERAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
In June 2014 the FASB issued ASU 2014-12, Compensation - Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period (June 2014). This Update defines the accounting treatment for share-based payments and “resolves the diverse accounting treatment of those awards in practice.” The new requirement mandates that “a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition.” Compensation cost will now be recognized in the period in which it becomes likely that the performance target will be met. The amendments in this Update are effective for annual reporting periods beginning after December 15, 2015. Early adoption is permitted. The Company will adopt the methodologies prescribed by this ASU by the date required. Adoption of the ASU is not expected to have a significant effect on the Company's consolidated financial statements.
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 Board (the “FRB”) replaced the OTS as the primary regulator of the Holding Company and the Office of the Comptroller of the Currency (the “OCC”) replaced the OTS as the primary regulator of CFBank.
The Orders imposed significant directives applicable to the Holding Company and CFBank, including requirements that we reduce the level of our classified and criticized assets, achieve growth and operating metrics in line with an approved business plan, and comply with restrictions on brokered deposits and on certain types of lending and prohibitions on dividends and repurchases of our capital stock. The CFBank Order required CFBank to have 8% core capital and 12% total risk-based capital, and CFBank could not be considered well-capitalized under the prompt corrective action regulations so long as the CFBank Order remained in place, even if it met or exceeded these capital levels. In addition, the regulators were required to approve any deviation from our business plan and certain compensation arrangements with directors and executive officers.
13
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.
On May 15, 2014, the FRB announced the termination of the Holding Company Order, effective as of May 9, 2014. Notwithstanding the termination of the Holding Company Order, the Holding Company is required to continue to adhere to certain requirements and restrictions based on commitments made to the FRB in connection with the termination of the Holding Company Order. These commitments require the Holding Company, among other things, to continue to implement certain actions in accordance with the capital plan previously submitted to the FRB; not declare or pay dividends on its stock, purchase or redeem its stock, or accept dividends or other capital distributions from CFBank without the prior written approval of the FRB; not incur, increase or guarantee any debt without the prior written consent of the FRB; and provide prior written notice to the FRB with respect to certain changes in directors and senior executive officers.
The significant directives contained in the Orders and the commitments made by CFBank and the Holding Company in connection with the release and termination of the Orders have provided challenges for the operation of our business and our ability to effectively compete in our markets. In addition, the Orders and our ongoing commitments to the regulators have required that we obtain approval from our regulators for any deviations from our business plan, which has limited our flexibility to make changes to the scope of our business activities.
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.
At September 30, 2014, CFBank had $37,787 in brokered deposits with maturity dates from October 2014 through August 2018. At September 30, 2014, cash, unpledged securities and deposits in other financial institutions totaled $31,463. Brokered deposit maturities over the next four years are as follows:
September 30, 2015 |
$ |
29,583 |
September 30, 2016 |
5,114 | |
September 30, 2017 |
1,536 | |
September 30, 2018 |
1,554 | |
$ |
37,787 |
14
CENTRAL FEDERAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
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, CFBank 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. In addition, any future dividends by the Holding Company on its preferred or common stock, and any dividends or capital contributions by CFBank to the Holding Company, are also subject to prior regulatory approval in accordance with the commitments made in connection with the release and termination of the Orders. In August 2014, the Holding Company received the prior approval from the FRB for the payment of a quarterly cash dividend on its Series B Preferred Stock in the amount of $187.5, which represents a dividend of $0.3906 per share, which was prorated for the preferred shareholders who closed on July 15, 2014.
The ability of the Holding Company to pay dividends on its common stock and Series B Preferred Stock is generally dependent upon the receipt of dividends and other distributions from CFBank. 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. 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, and pursuant to the commitments made to the FRB in connection with the termination of the Holding Company Order, the Holding Company may not declare or pay dividends on its stock without the prior written non-objection of the FRB. 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, which also requires the written non-objection of the FRB. Finally, so long as the Company’s Series B Preferred Stock remains outstanding, the Holding Company will be prohibited from paying dividends on (other than dividends payable solely in shares) the Company’s common stock, for the then-current dividend period, unless full dividends on the Series B Preferred Stock have been paid or set aside for payment. Dividends on the Series B Preferred Stock are non-cumulative, which means that if for any reason we do not declare cash dividends on the Series B Preferred Stock for a quarterly dividend period we will have no obligation to pay any dividends for that period (i.e., the dividends will not accrue or cumulate), whether or not we declare dividends on the Series B Preferred Stock for any subsequent dividend period.
We have taken such actions as we believe are necessary to comply with all requirements of the Orders and the other regulatory requirements and commitments to which we are subject, and we continue to work toward ensuring compliance with those regulatory requirements and commitments to which we continue to be subject.
15
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 September 30, 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 |
|||||||||
September 30, 2014 |
||||||||||||
Corporate debt |
$ |
4,308 |
$ |
14 |
$ |
1 |
$ |
4,321 | ||||
State and municipal |
1,902 | 1 | 19 | 1,884 | ||||||||
Issued by U.S. government-sponsored entities and agencies: |
||||||||||||
Mortgage-backed securities - residential |
728 | 40 |
- |
768 | ||||||||
Collateralized mortgage obligations |
1,138 | 32 |
- |
1,170 | ||||||||
Total |
$ |
8,076 |
$ |
87 |
$ |
20 |
$ |
8,143 |
Gross |
Gross |
|||||||||||
Amortized |
Unrealized |
Unrealized |
Fair |
|||||||||
Cost |
Gains |
Losses |
Value |
|||||||||
December 31, 2013 |
||||||||||||