20160331 Q1

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, 2016



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 6, 2016, there were 16,024,210 shares of the registrant’s Common Stock outstanding.



 

 

 

 


 

CENTRAL FEDERAL CORPORATION







 

 

PART I.  Financial Information

Page



 

 

Item 1.  Financial Statements



 

 



Consolidated Balance Sheets as of March  31, 2016 (unaudited)

 



and December 31, 2015



 

 



Consolidated Statements of Income for the three months ended

 



March 31, 2016 and 2015 (unaudited)



 

 



Consolidated Statements of Comprehensive Income

 



for the three months ended March 31, 2016 and 2015 (unaudited)



 

 



Consolidated Statements of Changes in Stockholders’ Equity

 



for the three months ended March 31, 2016 and 2015 (unaudited)



 

 



Consolidated Statements of Cash Flows for the three months ended

 



March 31, 2016 and 2015 (unaudited)



 

 



Notes to Consolidated Financial Statements (three months ended March 31, 2016 and 2015 unaudited)



 

 

Item 2.  Management’s Discussion and Analysis of

 



Financial Condition and Results of Operations

43 



 

 

Item 3.     Quantitative and Qualitative Disclosures About Market Risk

61 



 

 

Item 4.     Controls and Procedures

62 



 

 

PART II.  Other Information

63 



 

 

Item 1.     Legal Proceedings

63 



 

 

Item 1A.   Risk Factors

63 



 

 

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

63 



 

Item 3.     Defaults Upon Senior Securities

63 



 

Item 4.     Mine Safety Disclosures

63 



 

Item 5.     Other Information

63 



 

Item 6.     Exhibits

63 



 

Signatures

64 





 

 

 

 


 

CENTRAL FEDERAL CORPORATION

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands except per share data)







 

 

 

 

 



March 31,

 

December 31,



2016

 

2015



(unaudited)

 

 

 

ASSETS

 

 

 

 

 

Cash and cash equivalents

$

24,779 

 

$

25,895 

Interest-bearing deposits in other financial institutions

 

-  

 

 

-  

Securities available for sale

 

9,372 

 

 

9,368 

Loans held for sale, at fair value

 

1,598 

 

 

889 

Loans, net of allowance of $6,716 and $6,620

 

300,479 

 

 

297,064 

FHLB stock

 

1,942 

 

 

1,942 

Foreclosed assets, net

 

1,636 

 

 

1,636 

Premises and equipment, net

 

3,561 

 

 

3,609 

Bank owned life insurance

 

4,830 

 

 

4,797 

Accrued interest receivable and other assets

 

5,154 

 

 

6,093 

Total assets

$

353,351 

 

$

351,293 



 

 

 

 

 



 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

Deposits

 

 

 

 

 

Noninterest bearing

$

37,266 

 

$

42,926 

Interest bearing

 

255,168 

 

 

247,541 

Total deposits

 

292,434 

 

 

290,467 

FHLB advances

 

14,500 

 

 

14,500 

Advances by borrowers for taxes and insurance

 

353 

 

 

656 

Accrued interest payable and other liabilities

 

2,369 

 

 

2,203 

Subordinated debentures

 

5,155 

 

 

5,155 

Total liabilities

 

314,811 

 

 

312,981 



 

 

 

 

 

Commitments and contingent liabilities

 

-  

 

 

-  



 

 

 

 

 

Stockholders' equity

 

 

 

 

 

Common stock, $.01 par value;

 

 

 

 

 

shares authorized: 50,000,000;

 

 

 

 

 

shares issued: 16,135,917 in 2016 and 16,135,917 in 2015

 

161 

 

 

161 

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

 

 

 

 

 

 480,000 issued at March 31, 2016 and December 31, 2015

 

 

 

Additional paid-in capital

 

59,994 

 

 

59,937 

Accumulated deficit

 

(18,435)

 

 

(18,537)

Accumulated other comprehensive income

 

60 

 

 

(9)

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

 

(3,245)

 

 

(3,245)

Total stockholders' equity

 

38,540 

 

 

38,312 

Total liabilities and stockholders' equity

$

353,351 

 

$

351,293 



















 

 

See accompanying notes to consolidated financial statements.

3

 


 

CENTRAL FEDERAL CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

(Dollars in thousands except per share data)

(Unaudited)





 

 

 

 

 



Three months ended



March 31,



2016

 

2015

Interest and dividend income

 

 

 

 

 

Loans, including fees

$

3,279 

 

$

2,946 

Securities

 

30 

 

 

35 

FHLB stock dividends

 

20 

 

 

20 

Federal funds sold and other

 

29 

 

 

17 



 

3,358 

 

 

3,018 

Interest expense

 

 

 

 

 

Deposits

 

589 

 

 

485 

FHLB advances and other debt

 

58 

 

 

57 

Subordinated debentures

 

45 

 

 

40 



 

692 

 

 

582 

Net interest income

 

2,666 

 

 

2,436 

Provision for loan losses

 

50 

 

 

75 

Net interest income after provision for loan losses

 

2,616 

 

 

2,361 



 

 

 

 

 

Noninterest income

 

 

 

 

 

Service charges on deposit accounts

 

173 

 

 

116 

Net gains on sales of loans

 

28 

 

 

84 

Net gain (loss) on sales of securities

 

-  

 

 

(12)

Earnings on bank owned life insurance

 

33 

 

 

32 

Other

 

70 

 

 

135 



 

304 

 

 

355 

Noninterest expense

 

 

 

 

 

Salaries and employee benefits

 

1,152 

 

 

1,220 

Occupancy and equipment

 

134 

 

 

139 

Data processing

 

275 

 

 

249 

Franchise and other taxes

 

88 

 

 

80 

Professional fees

 

324 

 

 

244 

Director fees

 

47 

 

 

33 

Postage, printing and supplies

 

54 

 

 

72 

Advertising and promotion

 

17 

 

 

45 

Telephone

 

31 

 

 

25 

Loan expenses

 

31 

 

 

37 

Foreclosed assets, net

 

33 

 

 

46 

Depreciation

 

53 

 

 

52 

FDIC premiums

 

114 

 

 

104 

Regulatory assessment

 

28 

 

 

51 

Other insurance

 

31 

 

 

30 

Other

 

42 

 

 

38 



 

2,454 

 

 

2,465 

Income before incomes taxes

 

466 

 

 

251 

Income tax expense

 

150 

 

 

-  

Net income

 

316 

 

 

251 

Dividends on Series B preferred stock and accretion of discount

 

(214)

 

 

(214)

Net income attributable to common stockholders

$

102 

 

$

37 



 

 

 

 

 

Earnings per common share:

 

 

 

 

 

Basic

$

0.01 

 

$

0.00 

Diluted

$

0.01 

 

$

0.00 

















 

 

See accompanying notes to consolidated financial statements.

4

 


 

CENTRAL FEDERAL CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Dollars in thousands except per share data)

(Unaudited)













 

 

 

 

 



Three months ended



March 31,



2016

 

2015



 

 

 

 

 

Net income

$

316 

 

$

251 

Other comprehensive income:

 

 

 

 

 

Unrealized holding gain arising during the period related to securities available for sale, net of tax of $37 and $0

 

69 

 

 

34 

Less: reclassification adjustment for net losses realized during the period on investment securities available for sale, net of tax of $0 and $0

 

 -

 

 

12 

Other comprehensive income (loss), net of tax

 

69 

 

 

46 

Comprehensive income

$

385 

 

$

297 































 

 

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, 2016

$

161 

 

$

 

$

59,937 

 

$

(18,537)

 

$

(9)

 

$

(3,245)

 

$

38,312 

Net income

 

 

 

 

 

 

 

 

 

 

316 

 

 

 

 

 

 

 

 

316 

Other comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

69 

 

 

 

 

 

69 

Restricted option expense, net of forfeitures

 

 

 

 

 

 

 

22 

 

 

 

 

 

 

 

 

 

 

 

22 

Stock option expense, net of forfeitures

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

27 

 

 

(214)

 

 

 

 

 

 

 

 

(187)

Balance at March 31, 2016

$

161 

 

$

 

$

59,994 

 

$

(18,435)

 

$

60 

 

$

(3,245)

 

$

38,540 









 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 



 

 

 

Series B

 

Additional

 

 

 

 

Other

 

 

 

 

Total



Common

 

Preferred

 

Paid-In

 

Accumulated

 

Comprehensive

 

Treasury

 

Stockholders'



Stock

 

Stock

 

Capital

 

Deficit

 

Income

 

Stock

 

Equity



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at January 1, 2015

$

159 

 

$

 

$

59,696 

 

$

(22,157)

 

$

51 

 

$

(3,245)

 

$

34,509 

Net income (loss)

 

 

 

 

 

 

 

 

 

 

251 

 

 

 

 

 

 

 

 

251 

Other comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

46 

 

 

 

 

 

46 

Stock option expense, net of forfeitures

 

 

 

 

 

 

 

35 

 

 

 

 

 

 

 

 

 

 

 

35 

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

 

 

 

 

 

 

 

27 

 

 

(214)

 

 

 

 

 

 

 

 

(187)

Balance at March 31, 2015

$

159 

 

$

 

$

59,758 

 

$

(22,120)

 

$

97 

 

$

(3,245)

 

$

34,654 



























 

 

See accompanying notes to consolidated financial statements.

6

 


 

CENTRAL FEDERAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)







 

 

 

 

 



 

Three months ended



 

March 31,



 

2016

 

 

2015



 

 

 

 

 

Net Income

$

316 

 

$

251 

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

 

 

 

 

 

Provision for loan losses

 

50 

 

 

75 

Depreciation

 

53 

 

 

52 

Amortization, net

 

(8)

 

 

(6)

Net loss on sales of securities

 

-  

 

 

12 

Originations of loans held for sale

 

(2,936)

 

 

(12,123)

Proceeds from sale of loans held for sale

 

2,255 

 

 

14,134 

Net gains on sales of loans

 

(28)

 

 

(84)

Earnings on bank owned life insurance

 

(33)

 

 

(32)

Stock-based compensation expense

 

30 

 

 

35 

Change in deferred income taxes

 

(31)

 

 

-  

Net change in:

 

 

 

 

 

Accrued interest receivable and other assets

 

939 

 

 

362 

Accrued interest payable and other liabilities

 

166 

 

 

(135)

Net cash from operating activities

 

773 

 

 

2,541 



 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

Available-for-sale securities:

 

 

 

 

 

Maturities, prepayments and calls

 

86 

 

 

1,073 

Loan originations and payments, net

 

(4,567)

 

 

(10,049)

Proceeds from the sale of loans

 

1,124 

 

 

-  

Additions to premises and equipment

 

(6)

 

 

(6)

Net cash used by investing activities

 

(3,363)

 

 

(8,982)



 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

Net change in deposits

 

1,964 

 

 

2,415 

Proceeds from FHLB advances

 

-  

 

 

2,500 

Repayments on FHLB advances

 

-  

 

 

(2,500)

Net change in advances by borrowers for taxes and insurance

 

(303)

 

 

(100)

Cash dividends paid on Series B preferred stock

 

(187)

 

 

(187)

Net cash from financing activities

 

1,474 

 

 

2,128 



 

 

 

 

 

Net change in cash and cash equivalents

 

(1,116)

 

 

(4,313)



 

 

 

 

 

Beginning cash and cash equivalents

 

25,895 

 

 

28,207 



 

 

 

 

 

Ending cash and cash equivalents

$

24,779 

 

$

23,894 



 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

 

Interest paid

$

687 

 

$

578 



 

 

 

 

 

Supplemental noncash disclosures:

 

 

 

 

 

Loans transferred from held for sale to portfolio

$

-  

 

 

834 

Dividends payable on Series B preferred stock

 

187 

 

 

187 



























 

 

See accompanying notes to consolidated financial statements.

7

 


 

CENTRAL FEDERAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands)



NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

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

In the opinion of the management of the Company, the accompanying unaudited interim consolidated financial statements include all adjustments necessary for a fair presentation of the Company’s financial condition and the results of operations for the periods presented.  These adjustments are of a normal recurring nature, unless otherwise disclosed in this Form 10-Q. The financial performance reported for the Company for the three months ended March 31, 2016 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 on file with the SEC.  Reference is made to the accounting policies of the Company described in Note 1 to the Audited Consolidated Financial Statements contained in the Company’s 2015 Annual Report to Stockholders that was filed as Exhibit 13.1 to the Company’s Form 10-K for the year ended December 31, 2015 (referred to herein as the “2015 Audited Financial Statements”).  The Company has consistently followed those policies in preparing this Form 10-Q.

Loans:  Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal balance outstanding, adjusted for purchase premiums and discounts, deferred loan fees and costs and an allowance for loan losses (ALLL).  Interest income is accrued on the unpaid principal balance.  Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income using the level yield method without anticipating prepayments. 

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

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

Allowance for Loan Losses (ALLL):  The ALLL is a valuation allowance for probable incurred credit losses.  Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed.  Subsequent recoveries, if any, are credited to the allowance.  Management estimates the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors.  Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged off.

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

8

 


 

CENTRAL FEDERAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands)





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

All loans within the commercial, multi-family residential and commercial real estate segments, regardless of size, and loans of all other classes with balances over $250 are individually evaluated for impairment when they are 90 days past due, or earlier than 90 days past due if information regarding the payment capacity of the borrower indicates that payment in full according to the loan terms is doubtful.  If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan’s existing rate, or at the fair value of collateral, less costs to sell, if repayment is expected solely from the collateral.  Large groups of smaller balance homogeneous loans, such as consumer and single-family residential real estate loans, are collectively evaluated for impairment, and accordingly, they are not separately identified for impairment disclosures.

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

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

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

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

Joint Ventures:  The Holding Company has contributed funds into a series of joint ventures (equity stake) for the purpose of allocating excess liquidity into higher earning assets while diversifying its revenue sources.  The funding for the joint ventures is related to shorter term operating activities and is related to the development of single family real estate in the form of condominiums.  Income is recognized based on a rate of return on the outstanding investment balance.  As units are sold, the Holding Company receives an additional incentive payment, which is recognized as income.

9

 


 

CENTRAL FEDERAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands)



Earnings 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
March 31,



 

2016

 

2015



 

(unaudited)

 

(unaudited)

Basic

 

 

 

 

 

 

Net income

 

$

316 

 

$

251 

Dividends on Series B preferred stock and accretion of discount

 

 

(214)

 

 

(214)

Net income allocated to common stockholders

 

$

102 

 

$

37 



 

 

 

 

 

 

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

 

 

16,024,210 

 

 

15,823,710 

Less: Unvested share-based payment awards

 

 

-  

 

 

-  

Average shares

 

 

16,024,210 

 

 

15,823,710 

Basic earnings per common share

 

$

0.01 

 

$

0.00 



 

 

 

 

 

 

Diluted

 

 

 

 

 

 

Net earnings allocated to common stockholders

 

$

102 

 

$

37 



 

 

 

 

 

 

Weighted average common shares outstanding for basic earnings per common share

 

 

16,024,210 

 

 

15,823,710 

Add:  Dilutive effects of assumed exercises of stock options

 

 

9,778 

 

 

7,444 

Add: Dilutive effects of assumed exercises of Series B preferred stock

 

 

-  

 

 

-  

Average shares and dilutive potential common shares

 

 

16,033,988 

 

 

15,831,154 

Diluted earnings per common share

 

$

0.01 

 

$

0.00 





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



 

 

 



Three months ended March 31,



2016

 

2015



(unaudited)

 

(unaudited)

Stock options

394,196

 

456,396

Series B preferred stock

6,857,143

 

6,857,143

Stock warrants

1,152,125

 

1,152,125



10

 


 

CENTRAL FEDERAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands)



Adoption of New Accounting Standards:

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606) (May 2014).  The topic of Revenue Recognition had become broad with several other regulatory agencies issuing standards, which lacked cohesion.  The new guidance establishes a “comprehensive framework” and “reduces the number of requirements to which an entity must consider in recognizing revenue” and yet provides improved disclosures to assist stakeholders reviewing financial statements.  The amendments in this Update are effective for annual reporting periods beginning after December 15, 2017.  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 2014-12, 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 January 2016, the FASB issued ASU 2016-01, Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.  ASU 2016-01 amends the guidance in U.S. GAAP on the accounting for equity investments, financial liabilities under the fair value option and the presentations and disclosure requirements of financial instruments.  ASU 2016-01 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years.  Early adoption is permitted for the accounting guidance on financial liabilities under the fair value option.  The Company will adopt the methodologies prescribed by the ASU by the date required.  Adoption of the ASU is not expected to have a significant effect on the Company’s consolidated financial statements.

On February 25, 2016, the FASB issued Accounting Standards Update (ASU) 2016-02, Leases (Topic 842), the long-awaited new standard on lease accounting.  Under the new ASU, lessees will recognize lease assets and liabilities on their balance sheet for all leases with terms of more than 12 months.  The new lessee accounting model retains two types of leases, and is consistent with the lessee accounting model under existing GAAP.  One type of lease (finance leases) will be accounted for in substantially the same manner as capital leases are accounted for today.  The other type of lease (operating leases) will be accounted for (both in the income statement and statement of cash flows) in a manner consistent with today’s operating leases.  Lessor accounting under the new standard is fundamentally consistent with existing GAAP.  Lessees and lessors would be required to provide additional qualitative and quantitative disclosures to help financial statement users assess the amount, timing, and uncertainty of cash flows arising from leases.  These disclosures are intended to supplement the amounts recorded in the financial statements so that users can understand more about the nature of an organization’s leasing activities.  For public business entities, the final leases standard will be effective for fiscal years beginning after December 15, 2018 including interim periods within those fiscal years.  Early application 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.

11

 


 

CENTRAL FEDERAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands)



The FASB has issued ASU No. 2015-03, Interest – Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs.  The amendments in this ASU require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts.  The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this ASU.  For public business entities, the amendments are effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years.  The amendments should be applied on a retrospective basis, wherein the balance sheet of each individual period presented should be adjusted to reflect the period-specific effects of applying the new guidance.  Upon transition, an entity is required to comply with the applicable disclosures for a change in an accounting principle. These disclosures include the nature of and reason for the change in accounting principle, the transition method, a description of the prior-period information that has been retrospectively adjusted and the effect of the change on the financial statement line items, i.e., debt issuance cost asset and the debt liability.  The Company has adopted the methodologies prescribed by this ASU.  Adoption of the ASU did not have a significant effect on the Company's consolidated financial statements. 

General Litigation

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

Reclassifications

Reclassification of certain amounts in the 2015 consolidated financial statements have been made to conform to the 2016 presentation.



NOTE 2- REGULATORY ORDER CONSIDERATIONS

Regulatory Order Considerations:  

On May 25, 2011, the Holding Company and CFBank each consented to the issuance of an Order to Cease and Desist (the “Holding Company Order” and the “CFBank Order”, respectively, and collectively, the “Orders”) by the Office of Thrift Supervision (the “OTS”), the primary regulator of the Holding Company and CFBank at the time the Orders were issued.  In July 2011, in accordance with the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), the Federal Reserve Board (the “FRB”) replaced the OTS as the primary regulator of the Holding Company and the Office of the Comptroller of the Currency (the “OCC”) replaced the OTS as the primary regulator of CFBank.    The Orders imposed significant directives applicable to the Holding Company and CFBank, including requirements that we maintain heightened capital levels, 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. 

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 was 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% until December 23, 2015.  In addition, in connection with the release and termination of the CFBank Order, CFBank 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 foregoing commitments remained in place until December 23, 2015.

12

 


 

CENTRAL FEDERAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands)



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 was 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 required 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 foregoing commitments remained in place until January 8, 2016.

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 provided challenges for the operation of our business and our ability to effectively compete in our markets over the past several years.  In addition, the Orders and our subsequent commitments to the regulators required that we obtain approval from our regulators for any deviations from our business plan, which limited our flexibility to make changes to the scope of our business activities. 

Under the terms of the Holding Company Order, the Holding Company was prohibited from declaring or paying any dividends on its stock, repurchasing any of its stock, or making any capital contributions to CFBank except with the prior approval of the FRB.  In accordance with the commitments made by the Holding Company in connection with the release and termination of the Holding Company Order, the Holding Company remained subject to such restrictions until January 8, 2016.    

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 guidelines impacting the Holding Company’s ability to pay dividends on its stock.  In addition, the Holding Company’s ability to pay dividends on its stock is conditioned upon the payment, on a current basis, of quarterly interest payments on the subordinated debentures underlying the Company’s trust preferred securities.  Finally, 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.

13

 


 

CENTRAL FEDERAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands)



NOTE 3 – SECURITIES

The following table summarizes the amortized cost and fair value of the available-for-sale securities portfolio at March 31, 2016 and December 31, 2015 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, 2016 (unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury

 

$

8,566 

 

$

63 

 

$

 

$

8,628 

Mortgage-backed securities - residential

 

 

432 

 

 

17 

 

 

-  

 

 

449 

Collateralized mortgage obligations

 

 

283 

 

 

12 

 

 

-  

 

 

295 

Total

 

$

9,281 

 

$

92 

 

$

 

$

9,372 









 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

Gross

 

Gross

 

 

 



 

Amortized

 

Unrealized

 

Unrealized

 

Fair



 

Cost

 

Gains

 

Losses

 

Value

December 31, 2015

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury

 

$

8,575 

 

$

 

$

43 

 

$

8,536 

Mortgage-backed securities - residential

 

 

463 

 

 

18 

 

 

-  

 

 

481 

Collateralized mortgage obligations

 

 

339 

 

 

12 

 

 

-  

 

 

351 

Total

 

$

9,377 

 

$

34 

 

$

43 

 

$

9,368 



There was no other-than-temporary impairment recognized in accumulated other comprehensive income (loss) for securities available for sale at March 31, 2016 or March 31, 2015.

There were no sales of securities for the three months ended March 31, 2016 or March 31, 2015; however, there was an early redemption of a municipal security during the first quarter of 2015 which is reflected in net gain (loss) on sales of securities.

14

 


 

CENTRAL FEDERAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands)



The amortized cost and fair value of debt securities at March 31, 2016 and December 31, 2015 are shown in the table below 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.





 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

March 31, 2016

 

 

December 31, 2015



 

(unaudited)

 

 

 

 

 

 



 

Amortized

 

Fair

 

Amortized

 

Fair



 

Cost

 

Value

 

Cost

 

Value

Due in one year or less

 

$

1,002 

 

$

1,002 

 

$

1,002 

 

$

1,000 

Due from one to five years

 

 

7,564 

 

 

7,626 

 

 

7,573 

 

 

7,536 

Mortgage-backed securities

 

 

432 

 

 

449 

 

 

463 

 

 

481 

Collateralized mortgage obligations

 

 

283 

 

 

295 

 

 

339 

 

 

351 

 Total

 

$

9,281 

 

$

9,372 

 

$

9,377 

 

$

9,368 







Fair value of securities pledged was as follows:





 

 

 

 

 



March 31, 2016

 

December 31, 2015



(unaudited)

 

 

 

Pledged as collateral for:

 

 

 

 

 

FHLB advances

$

3,491 

 

$

3,530 

Public deposits

 

2,064 

 

 

2,055 

Interest-rate swaps

 

243 

 

 

261 

Total

$

5,798 

 

$

5,846 



At March 31, 2016 and December 31, 2015, 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.

15

 


 

CENTRAL FEDERAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands)



The following table summarizes securities with unrealized losses at March 31, 2016 and December 31, 2015 aggregated by major security type and length of time in a continuous unrealized loss position.





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2016 (unaudited)

 

Less than 12 Months

 

12 Months or More

 

Total

Description of Securities

 

Fair Value

 

Unrealized Loss

 

Fair Value

 

Unrealized Loss

 

Fair Value

 

Unrealized Loss

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury

 

$

1,518 

 

$

 

$

-  

 

$

-  

 

$

1,518 

 

$

Mortgage-backed securities - residential

 

 

-  

 

 

-  

 

 

-  

 

 

-  

 

 

-  

 

 

-  

Collateralized mortgage obligations

 

 

 

 

-  

 

 

-  

 

 

-  

 

 

 

 

-  

Total temporarily impaired

 

$

1,521 

 

$

 

$

-  

 

$

-  

 

$

1,521 

 

$











 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2015

 

Less than 12 Months

 

12 Months or More

 

Total

Description of Securities

 

Fair Value

 

Unrealized Loss

 

Fair Value

 

Unrealized Loss

 

Fair Value

 

Unrealized Loss

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury

 

$

6,541 

 

$

43 

 

$

-  

 

$

-  

 

$

6,541 

 

$

43 

Mortgage-backed securities - residential

 

 

-  

 

 

-  

 

 

-  

 

 

-  

 

 

-  

 

 

-  

Collateralized mortgage obligations

 

 

-  

 

 

-  

 

 

-  

 

 

-  

 

 

-  

 

 

-  

Total temporarily impaired

 

$

6,541 

 

$

43 

 

$

-  

 

$

-  

 

$

6,541 

 

$

43 



The unrealized losses in U.S Treasuries at March 31, 2016 are related to two securities.  The unrealized losses in U.S. Treasuries at December 31, 2015 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, 2016 and December 31, 2015.



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, and deferred loan fees and costs.



 

 

 

 

 



 

 

 

 

 



March 31,

 

December 31,



2016

 

2015



( unaudited)

 

 

 

Commercial

$

47,505 

 

$

43,744 

Real estate:

 

 

 

 

 

Single-family residential

 

80,367 

 

 

81,985 

Multi-family residential

 

30,369 

 

 

28,950 

Commercial

 

98,116 

 

 

96,488 

Construction

 

23,064 

 

 

24,662 

Consumer:

 

 

 

 

 

Home equity lines of credit

 

23,250 

 

 

21,837 

Other

 

4,524 

 

 

6,018 

Subtotal

 

307,195 

 

 

303,684 

Less: ALLL

 

(6,716)

 

 

(6,620)

Loans, net

$