Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark one)

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

For the quarterly period ended June 30, 2012

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

incorporation or organization)

 

(IRS Employer

Identification No.)

2923 Smith Road,

Fairlawn, Ohio

  44333
(Address of principal executive offices)   (Zip Code)

(330) 666-7979

(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 July 31, 2012, there were 825,710 shares of the registrant’s Common Stock outstanding.

 

 

 


Table of Contents

FORM 10-Q

QUARTER ENDED JUNE 30, 2012

INDEX

 

     Page  

PART I. Financial Information

  

Item 1. Financial Statements

  

Consolidated Balance Sheets as of June 30, 2012 (unaudited) and December 31, 2011

     3   

Consolidated Statements of Operations for the three and six months ended June  30, 2012 and 2011 (unaudited)

     4   

Consolidated Statements of Comprehensive Loss for the three and six months ended June  30, 2012 and 2011 (unaudited)

     5   

Consolidated Statements of Changes in Stockholders’ Equity for the three and six months ended June 30, 2012 and 2011 (unaudited)

     6   

Consolidated Statements of Cash Flows for the three and six months ended June  30, 2012 and 2011 (unaudited)

     8   

Notes to Consolidated Financial Statements

     9   

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     57   

Item 4. Controls and Procedures

     85   

PART II. Other Information

  

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

     86   

Item 6. Exhibits

     86   

Signatures

     87   


Table of Contents

CENTRAL FEDERAL CORPORATION

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands except per share data)

 

     June 30,     December 31,  
     2012     2011  
     (unaudited)        

ASSETS

    

Cash and cash equivalents

   $ 55,209      $ 61,436   

Interest-bearing deposits in other financial institutions

     1,984        1,984   

Securities available for sale

     17,312        18,516   

Loans held for sale

     1,573        1,210   

Loans, net of allowance of $5,434 and $6,110

     132,352        151,160   

FHLB stock

     1,942        1,942   

Loan servicing rights

     31        37   

Foreclosed assets, net

     2,345        2,370   

Premises and equipment, net

     5,423        5,534   

Assets held for sale

     167        167   

Other intangible assets

     69        89   

Bank owned life insurance

     4,338        4,273   

Accrued interest receivable and other assets

     2,870        2,202   
  

 

 

   

 

 

 
   $ 225,615      $ 250,920   
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

Deposits

    

Noninterest bearing

   $ 15,042      $ 18,409   

Interest bearing

     183,310        198,640   
  

 

 

   

 

 

 

Total deposits

     198,352        217,049   

Long-term FHLB advances

     10,000        15,742   

Advances by borrowers for taxes and insurance

     55        159   

Accrued interest payable and other liabilities

     3,771        2,871   

Subordinated debentures

     5,155        5,155   
  

 

 

   

 

 

 

Total liabilities

     217,333        240,976   

Stockholders’ equity

    

Preferred stock, Series A, $.01 par value; aggregate liquidation value $7,886 in 2012, $7,691 in 2011 1,000,000 shares authorized; 7,225 shares issued

     7,147        7,120   

Common stock, $.01 par value, shares authorized; 50,000,000 in 2012 and 2011 shares issued; 937,417 in 2012 and 2011

     9        9   

Additional paid-in capital

     27,847        27,837   

Accumulated deficit

     (23,807     (22,163

Accumulated other comprehensive income

     331        386   

Treasury stock, at cost; 111,707 shares

     (3,245     (3,245
  

 

 

   

 

 

 

Total stockholders’ equity

     8,282        9,944   
  

 

 

   

 

 

 
   $ 225,615      $ 250,920   
  

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

3


Table of Contents

CENTRAL FEDERAL CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in thousands except per share data)

(Unaudited)

 

     Three months ended     Six months ended  
     June 30,     June 30,  
     2012     2011     2012     2011  

Interest and dividend income

        

Loans, including fees

   $ 1,769      $ 2,350      $ 3,660      $ 4,792   

Securities

     58        156        121        311   

FHLB stock dividends

     21        21        43        43   

Federal funds sold and other

     41        41        81        71   
  

 

 

   

 

 

   

 

 

   

 

 

 
     1,889        2,568        3,905        5,217   

Interest expense

        

Deposits

     557        750        1,150        1,452   

Long-term FHLB advances and other debt

     81        141        190        308   

Subordinated debentures

     45        42        92        83   
  

 

 

   

 

 

   

 

 

   

 

 

 
     683        933        1,432        1,843   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

     1,206        1,635        2,473        3,374   

Provision for loan losses

     200        432        400        1,851   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income after provision for loan losses

     1,006        1,203        2,073        1,523   

Noninterest income

        

Service charges on deposit accounts

     58        69        117        130   

Net gains on sales of loans

     92        24        135        64   

Loan servicing fees, net

     5        4        13        12   

Net gains on sales of securities

     143        —          143        —     

Earnings on bank owned life insurance

     32        33        65        65   

Other

     10        12        25        27   
  

 

 

   

 

 

   

 

 

   

 

 

 
     340        142        498        298   

Noninterest expense

        

Salaries and employee benefits

     953        1,033        1,944        2,074   

Occupancy and equipment

     59        69        133        154   

Data processing

     137        145        279        289   

Franchise taxes

     46        64        101        130   

Professional fees

     199        258        417        559   

Director fees

     46        45        91        91   

Postage, printing and supplies

     56        39        104        87   

Advertising and promotion

     4        14        7        24   

Telephone

     16        18        33        40   

Loan expenses

     23        20        31        30   

Foreclosed assets, net

     188        1,152        206        1,185   

Depreciation

     62        104        129        218   

FDIC premiums

     142        175        298        350   

Amortization of intangibles

     10        10        20        20   

Regulatory assessment

     21        38        66        75   

Other insurance

     38        34        80        51   

Other

     30        44        55        75   
  

 

 

   

 

 

   

 

 

   

 

 

 
     2,030        3,262        3,994        5,452   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

     (684     (1,917     (1,423     (3,631

Preferred stock dividends and accretion of discount on preferred stock

     (111     (106     (221     (210
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to common stockholders

   $ (795   $ (2,023   $ (1,644   $ (3,841
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss per common share:

        

Basic

   $ (0.96   $ (2.45   $ (1.99   $ (4.65

Diluted

   $ (0.96   $ (2.45   $ (1.99   $ (4.65

See accompanying notes to consolidated financial statements.

 

 

4


Table of Contents

CENTRAL FEDERAL CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(Dollars in thousands except per share data)

(Unaudited)

 

     Three months ended June 30,     Six months ended June 30,  
     2012     2011     2012     2011  

Net loss

   $ (684   $ (1,917   $ (1,423   $ (3,631

Other comprehensive income (loss):

        

Change in unrealized holding gains (losses) on securities available for sale

     (305     149        (198     84   

Reclassification adjustment for gains realized in income

     143        —          143        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Net change in unrealized gains (losses)

     (162     149        (55     84   

Tax effect

     —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

     (162     149        (55     84   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive loss

   $ (846   $ (1,768   $ (1,478   $ (3,547
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

5


Table of Contents

CENTRAL FEDERAL CORPORATION

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

(Dollars in thousands except per share data)

(Unaudited)

 

     Preferred
Stock
     Common
Stock
     Additional
Paid-In
Capital
     Accumulated
Deficit
    Accumulated
Other
Comprehensive
Income
    Treasury
Stock
    Total
Stockholders’
Equity
 

Balance at January 1, 2012

   $ 7,120       $ 9       $ 27,837       $ (22,163   $ 386      $ (3,245   $ 9,944   

Net loss

              (1,423         (1,423

Other comprehensive loss

                (55       (55

Accretion of discount on preferred stock

     27               (27         —     

Release of 1,200 stock-based incentive plan shares

           7               7   

Stock option expense, net of forfeitures

           3               3   

Preferred stock dividends

              (194         (194
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2012

   $ 7,147       $ 9       $ 27,847       $ (23,807   $ 331      $ (3,245   $ 8,282   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

6


Table of Contents

CENTRAL FEDERAL CORPORATION

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

(Dollars in thousands except per share data)

(Unaudited)

 

     Preferred
Stock
     Common
Stock
     Additional
Paid-In
Capital
     Accumulated
Deficit
    Accumulated
Other
Comprehensive
Income
     Treasury
Stock
    Total
Stockholders’
Equity
 

Balance at January 1, 2011

   $ 7,069       $ 47       $ 27,759       $ (16,313   $ 672       $ (3,245   $ 15,989   

Net loss

              (3,631          (3,631

Other comprehensive loss

                84           84   

Accretion of discount on preferred stock

     25               (25          —     

Release of 1,227 stock-based incentive plan shares, net of forfeitures

           16                16   

Stock option expense, net of forfeitures

           9                9   

Preferred stock dividends

              (185          (185
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Balance at June 30, 2011

   $ 7,094       $ 47       $ 27,784       $ (20,154   $ 756       $ (3,245   $ 12,282   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

7


Table of Contents

CENTRAL FEDERAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)

 

     Six months ended June 30,  
     2012     2011  

Net loss

   $ (1,423   $ (3,631

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

    

Provision for loan losses

     400        1,851   

Provision for losses on foreclosed assets

     182        1,139   

Valuation gain on mortgage servicing rights

     (1     (3

Depreciation

     129        218   

Amortization, net

     357        367   

Net gains on sales of securities

     (143     —     

Originations of loans held for sale

     (11,697     (18,927

Proceeds from sale of loans held for sale

     11,360        19,133   

Net gains on sales of loans

     (135     (64

Loss on disposal of premises and equipment

     4        —     

Loss on sale of assets held for sale

     —          2   

Stock based compensation expense

     10        25   

Net change in:

    

Bank owned life insurance

     (65     (65

Accrued interest receivable and other assets

     (667     (94

Accrued interest payable and other liabilities

     705        572   
  

 

 

   

 

 

 

Net cash from (used by) operating activities

     (984     523   

Cash flows from investing activities

    

Available-for-sale securities:

    

Sales

     2,144        —     

Maturities, prepayments and calls

     5,854        4,737   

Purchases

     (7,000     (3,491

Loan originations and payments, net

     18,338        17,445   

Additions to premises and equipment

     (22     (53

Proceeds from the sale of assets held for sale

     —          533   

Proceeds from the sale of foreclosed assets

     —          1,000   

Proceeds from mortgage insurance on foreclosed assets

     29        —     
  

 

 

   

 

 

 

Net cash from investing activities

     19,343        20,171   

Cash flows from financing activities

    

Net change in deposits

     (18,740     10,801   

Repayments on long-term FHLB advances and other debt

     (5,742     (5,200

Net change in advances by borrowers for taxes and insurance

     (104     (134
  

 

 

   

 

 

 

Net cash from (used by) financing activities

     (24,586     5,467   

Net change in cash and cash equivalents

     (6,227     26,161   

Beginning cash and cash equivalents

     61,436        34,275   
  

 

 

   

 

 

 

Ending cash and cash equivalents

   $ 55,209      $ 60,436   
  

 

 

   

 

 

 

Supplemental cash flow information:

    

Interest paid

   $ 1,344      $ 1,727   

Supplemental noncash disclosures:

    

Transfers from loans to repossessed assets

   $ 186      $ —     

Loans transferred from held for sale to portfolio

     (109     —     

See accompanying notes to consolidated financial statements.

 

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Table of Contents

CENTRAL FEDERAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands except per share data)

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 with the Holding Company referred to as “the Company.” 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 six months ended June 30, 2012 is not necessarily indicative of the results that may be expected for the full year. This information should be read in conjunction with the Company’s latest Annual Report to Stockholders and Form 10-K. Reference is made to the accounting policies of the Company described in Note 1 of the Notes to Consolidated Financial Statements contained in the Company’s 2011 Annual Report that was filed as Exhibit 13.1 to the Company’s Form 10-K for the year ended December 31, 2011. The Company has consistently followed those policies in preparing this Form 10-Q.

Reclassifications and Reverse Stock Split: Some items in the prior period financial statements were reclassified to conform to the current presentation. Reclassifications did not impact prior period net loss or total stockholders’ equity. On May 4, 2012, the Company completed a 1-for-5 reverse stock split, whereby each 5 shares of the Company’s common stock were reclassified into one share of common stock. All share and per share amounts for all periods presented have been adjusted to reflect the reverse split as though it had occurred prior to the earliest period presented.

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

 

     Three months ended June 30,     Six months ended June 30,  
     2012     2011     2012     2011  

Basic

        

Net loss

   $ (684   $ (1,917   $ (1,423   $ (3,631

Less: Preferred dividends and accretion of discount on preferred stock

     (111     (106     (221     (210

Less: Net loss allocated to unvested share-based payment awards

     3        13        6        25   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss allocated to common stockholders

   $ (792   $ (2,010   $ (1,638   $ (3,816
  

 

 

   

 

 

   

 

 

   

 

 

 

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

     825,491        825,366        825,469        825,363   

Less: Unvested share-based payment awards

     (2,700     (5,100     (3,000     (5,402
  

 

 

   

 

 

   

 

 

   

 

 

 

Average shares

     822,791        820,266        822,469        819,961   
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic loss per common share

   $ (0.96   $ (2.45   $ (1.99   $ (4.65
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

        

Net loss allocated to common stockholders

   $ (792   $ (2,010   $ (1,638   $ (3,816
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common shares outstanding for basic loss per common share

     822,791        820,266        822,469        819,961   

Add: Dilutive effects of assumed exercises of stock options

     —          —          —          —     

Add: Dilutive effects of assumed exercises of stock warrant

     —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Average shares and dilutive potential common shares

     822,791        820,266        822,469        819,961   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted loss per common share

   $ (0.96   $ (2.45   $ (1.99   $ (4.65
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

CENTRAL FEDERAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands except per share data)

 

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

 

The following potential average common shares were anti-dilutive and not considered in computing diluted loss per common share because the Company reported a net loss for the periods presented.

 

     Three months ended June 30,      Six months ended June 30,  
     2012      2011      2012      2011  

Stock options

     42,116         44,756         42,116         44,756   

Stock warrant

     67,314         67,314         67,314         67,314   

Adoption of New Accounting Standards:

In May 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2011-04 to Fair Value Measurement (ASC 820), Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. This ASU amends existing guidance to achieve common fair value measurement and disclosure requirements between U.S. and international accounting principles. Overall, the guidance is consistent with existing U.S. accounting principles; however, there are some amendments that change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. The amendments in this guidance are effective for interim and annual reporting periods beginning after December 15, 2011. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements, but the additional disclosures are included in Note 6.

In June 2011, the FASB issued ASU No. 2011-05 to Comprehensive Income (ASC 220), Presentation of Comprehensive Income. This ASU amended existing guidance and eliminated the option to present the components of other comprehensive income as part of the statement of changes in stockholder’s equity. The amendment requires that comprehensive income be presented in either a single continuous statement or in two separate consecutive statements. The amendments in this update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011 and are to be applied retrospectively. The adoption of this amendment changed the presentation of the statement of comprehensive income for the Company to two consecutive statements instead of presented as part of the consolidated statement of stockholders’ equity.

In December 2011, the FASB issued ASU No. 2011-12 to Comprehensive Income (ASC 220), Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in ASU 2011-05. This ASU amended the guidance in ASU 2011-05 related to the presentation of the effects of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income. The amendments in this ASU are effective at the same time as the amendments in ASU 2011-05 so that entities will not be required to comply with the presentation requirements in ASU 2011-05 that this ASU is deferring. The amendments in this ASU are effective for public entities for fiscal years, and interim periods within those years, beginning after December 15, 2011. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.

 

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CENTRAL FEDERAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands except per share data)

 

NOTE 2 – GOING CONCERN CONSIDERATIONS AND MANAGEMENT’S PLANS

Going Concern Considerations:

The consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business for the foreseeable future. However, the events and circumstances described in this Note create substantial doubt about the Company’s ability to continue as a going concern.

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 (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 Board of Governors of the Federal Reserve System (FED) replaced the OTS as the primary regulator of the Holding Company and the Office of the Comptroller of the Currency (OCC) replaced the OTS as the primary regulator of CFBank.

The Holding Company Order requires it, among other things, to: (i) submit by June 30, 2011 (and update by December 31, 2011 and every December 31 thereafter) a capital plan to regulators that establishes a minimum tangible capital ratio commensurate with the Holding Company’s consolidated risk profile, reduces the risk from current debt levels and addresses the Holding Company’s cash flow needs; (ii) not pay cash dividends, redeem stock or make any other capital distributions without prior regulatory approval; (iii) not pay interest or principal on any debt or increase any Holding Company debt or guarantee the debt of any entity without prior regulatory approval; (iv) obtain prior regulatory approval for changes in directors and senior executive officers; and (v) not enter into any new contractual arrangement related to compensation or benefits with any director or senior executive officer without prior notification to regulators.

The CFBank Order requires it, among other things, to: (i) have by September 30, 2011, and maintain thereafter, 8% core capital and 12% total risk-based capital, after establishing an adequate allowance for loan and lease losses; (ii) submit by June 30, 2011 (and update by December 31, 2011 and every December 31 thereafter) a capital and business plan to regulators that describes strategies to meet these required capital ratios and contains operating strategies to achieve realistic core earnings; (iii) submit a contingency plan providing for a merger or voluntary dissolution of CFBank if capital does not reach the required levels, which requirement was extended by the OCC until the earlier of 15 days after termination of the stock offering or January 31, 2012, and a further extension of this date has been requested of the OCC; (iv) not originate, participate in or acquire any nonresidential real estate loans or commercial loans without regulatory approval, which prohibition was waived by OCC on November 9, 2011 subject to certain Board approval conditions, loan policies and credit administration procedures; (v) adopt a revised credit administration policy, problem asset reduction plan, management succession plan and liquidity management policy; (vi) limit asset growth to net interest credited on deposit liabilities absent prior regulatory approval for additional growth; (vii) not pay cash dividends or make any other capital distributions without prior regulatory approval; (viii) obtain prior regulatory approval for changes in directors and senior executive officers; (ix) not enter into any new contractual arrangement related to compensation or benefits with any director or senior executive officer without prior notification to regulators; (x) not enter into any significant arrangement or contract with a third party service provider without prior regulatory approval; and (xi) comply with the Federal Deposit Insurance Corporation (FDIC) limits on brokered deposits. As a result of the CFBank Order, CFBank is considered “adequately capitalized” for regulatory purposes.

The Company has been unprofitable for over the past three years and, unless additional capital is infused into the Holding Company and CFBank, it is unlikely that we will be able to generate profits in the future. This would cause our capital levels to continue to erode. If that happens, the regulators could take additional enforcement action against us, including the imposition of further operating restrictions. The regulators could also direct us to seek a merger partner, liquidate CFBank or be placed into receivership.

The Holding Company is significantly dependent on dividends from CFBank to provide the liquidity necessary to meet its obligations. As of June 30, 2012, pursuant to the CFBank Order, CFBank may not 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 and the approval of the OCC. The payment of dividends from CFBank to the Holding Company is not likely to be approved by the OCC while CFBank is suffering significant losses.

 

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Table of Contents

CENTRAL FEDERAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands except per share data)

 

NOTE 2 – GOING CONCERN CONSIDERATIONS AND MANAGEMENT’S PLANS (continued)

 

The significant directives contained in the Orders, including higher capital requirements, requirements to reduce the level of our criticized and classified assets, growth and operating restrictions, restrictions on brokered deposits, restrictions on certain types of lending and restrictions on dividend payments have impeded and may further impede our ability to operate our business and to effectively compete in our markets. In addition, the regulators must approve any deviation from our business plan, which could limit our ability to make any changes to our business and could negatively impact the scope and flexibility of our business activities.

The requirements of the Orders will remain in effect until terminated, modified or suspended by regulators.

Management’s Plans:

The Company announced the terms of a registered common stock offering of up to $30,000 on August 9, 2011. The registered common stock offering consisted of a $24,965 rights offering and a $5,035 offering to a group of standby purchasers. Under the terms of the rights offering, all record holders of the Company’s common stock as of February 8, 2012 received, at no charge, one subscription right for each share of common stock held as of the record date, which was prior to the 1 for 5 reverse stock split effective May 4, 2012. Each subscription right entitled the holder of the right to purchase 6.0474 shares of Company common stock (pre-split) at a subscription price of $1.00 per share (pre-split). Shares were also available to the public at $1.00 per share. In addition, for each three shares of company stock purchased, purchasers were to receive, at no charge, one warrant to purchase one additional share of common stock at a purchase price of $1.00 per share. The warrants were to be exercisable for three years. The Company had separately entered into a series of standby purchase agreements with a group of investors led by Timothy T. O’Dell, Thad R. Perry and Robert E. Hoeweler. Under the standby purchase agreements, the standby purchasers were to acquire 5.0 million shares of Company common stock at a price of $1.00 per share and receive warrants with the same terms and conditions as all purchasers in the rights offering. The standby purchasers had conditioned their purchase of shares of common stock upon the receipt by the Company of at least $16,500 in net proceeds from the rights offering. The registration statement related to the rights offering is on file with the SEC and became effective on February 8, 2012.

The Company suspended this offering and returned all subscriptions received. The Company modified the terms of the offering and filed post-effective amendments to its registration statement with the SEC, which was declared effective on June 14, 2012.

The terms of the restructured registered common stock offering were as follows: a rights offering of up to $18,000 and a $4,500 offering to a group of standby purchasers, as well as a public offering of any unsold shares. Under the terms of the rights offering, all holders of the Company’s common stock as of the record date, June 14, 2012, received, at no charge, one subscription right for each share of common stock held as of the record date, which was after the 1 for 5 reverse stock split effective May 4, 2012. Each subscription right entitled the holder of the right to purchase 14.5329 shares of Company common stock (post-split) at a subscription price of $1.50 per share (post-split). The rights offering period expired on July 16, 2012, and unsubscribed shares were made available to the public beginning on July 17, 2012 at $1.50 per share. The public offering of unsubscribed shares of common stock will end on or before August 14, 2012. The Company separately entered into a series of standby purchase agreements with a group of investors led by Timothy T. O’Dell, Thad R. Perry and Robert E. Hoeweler. Under the standby purchase agreements, the standby purchasers will acquire 3.0 million shares of Company common stock at a price of $1.50 per share. The standby purchasers have conditioned their purchase of shares of common stock upon the receipt by the Company of at least $13,500 in net proceeds from the rights offering and public offering.

A portion of the proceeds from the restructured registered common stock offering is expected to be retained by the Holding Company for general corporate purposes and is estimated to be sufficient to support the Holding Company’s cash requirements. Given the uncertainty surrounding CFBank’s future ability to pay dividends to the Holding Company, the current levels of problem assets, the continuing depressed economy and the longer periods of time necessary to work out problem assets in the current economy, the Board of Directors and management are relying on completion of the restructured registered common stock offering to provide additional funding to support the Holding Company’s working capital needs. Should the restructured registered common stock offering be unsuccessful, there can be no assurance that additional funding sources will be available, which would have a material adverse impact on our financial condition.

 

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Table of Contents

CENTRAL FEDERAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands except per share data)

 

NOTE 2 – GOING CONCERN CONSIDERATIONS AND MANAGEMENT’S PLANS (continued)

 

Without additional capital, it is unlikely that the Holding Company will have sufficient liquidity to continue to meet its operating expenses as they become due. This could result in the Holding Company being subject to additional regulatory restrictions which could ultimately result in the Holding Company being instructed to seek a merger partner, liquidate CFBank or be placed into receivership.

The Holding Company’s available cash at June 30, 2012 is believed by management to be sufficient to cover operating expenses and expenses in connection with the restructured registered common stock offering, at their current projected levels, through approximately December 31, 2012. No assurance can be given that operating expenses, including expenses in connection with the registered common stock offering, will not increase from their current projected levels. As a result, there can be no assurance of the sufficiency of the Holding Company’s cash through December 31, 2012. The Board of Directors elected to defer scheduled dividend payments related to the Preferred Stock, as defined in Note 11 to these consolidated financial statements, beginning with the November 15, 2010 payment, and the interest payments on the subordinated debentures beginning with the December 30, 2010 payment, in order to preserve cash at the Holding Company. The Company expects that the Board will also elect to defer future payments until the Company is recapitalized. Pursuant to the Holding Company Order, the Holding Company may not pay dividends on the Preferred Stock or interest on the subordinated debentures without the prior written notice to and written non-objection from the FED.

As of June 30, 2012, the Company had incurred and paid $1.2 million in costs related to the registered common stock offering that are included in other assets in the consolidated balance sheet. Costs related to the registered common stock offering incurred and paid by the Holding Company totaled $452,000 and those incurred and paid by CFBank totaled $768,000 as of June 30, 2012. The Company expects to incur additional costs prior to completion of the restructured stock offering. In the event the restructured registered common stock offering is not successful, these costs will be charged against current operations and will have a negative impact on earnings.

Because CFBank is no longer considered to be well-capitalized for regulatory purposes, it is prohibited from accepting or renewing brokered deposits, including reciprocal deposits in the Certificate of Deposit Account Registry Service® (CDARS) program, without FDIC approval. 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 and a current limited waiver which expires on September 14, 2012. The current limited waiver allows CFBank to roll over or renew core deposits in the reciprocal CDARS program that have yet to mature or have matured and remained with CFBank between June 17, 2012 and September 14, 2012. Management intends to submit additional requests for waivers in the future; however, there can be no assurance that the requests will be granted by the FDIC or that customers will roll over or renew their CDARS deposits even if CFBank is granted additional waivers.

The prohibition on brokered deposits significantly limits CFBank’s ability to participate in the CDARS program and impacts CFBank’s liquidity management. As a result of the losses in 2009, 2010 and the first quarter of 2011, management had been concerned that CFBank would be restricted from accepting or renewing brokered deposits, in addition to other regulatory restrictions, and moved aggressively in 2011, prior to receipt of the CFBank Order, to build on-balance-sheet liquidity to deal with scheduled brokered deposit maturities and the potential impact of other regulatory restrictions on liquidity. At June 30, 2012, CFBank had $43,335 in brokered deposits with maturity dates from July 2012 through August 2016. At June 30, 2012, cash, unpledged securities and deposits in other financial institutions totaled $56,194, which was sufficient to cover all brokered deposit maturities. Brokered deposit maturities over the next five years are as follows:

 

June 30, 2013

   $ 18,942   

June 30, 2014

     14,367   

June 30, 2015

     3,412   

June 30, 2016

     6,415   

June 30, 2017

     199   
  

 

 

 
   $ 43,335   
  

 

 

 

 

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Table of Contents

CENTRAL FEDERAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands except per share data)

 

NOTE 2 – GOING CONCERN CONSIDERATIONS AND MANAGEMENT’S PLANS (continued)

 

We have taken such actions as we believe are necessary to comply with all requirements of the Orders which are currently effective, except the higher capital requirements, and we are continuing to work toward compliance with the provisions of the Orders having future compliance dates.

These financial statements do not include any adjustments that may result should the Company be unable to continue as a going concern.

 

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Table of Contents

CENTRAL FEDERAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands except per share data)

 

NOTE 3 – SECURITIES

The following table summarizes the amortized cost and fair value of the available-for-sale securities portfolio at June 30, 2012 and December 31, 2011 and the corresponding amounts of unrealized gains and losses recognized in accumulated other comprehensive income (loss):

 

     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair
Value
 

June 30, 2012

           

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

           

Mortgage-backed securities—residential

   $ 1,655       $ 100       $ —         $ 1,755   

Collateralized mortgage obligations

     15,326         231         —           15,557   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 16,981       $ 331       $ —         $ 17,312   
  

 

 

    

 

 

    

 

 

    

 

 

 
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair
Value
 

December 31, 2011

           

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

           

Mortgage-backed securities—residential

   $ 1,475       $ 198       $ —         $ 1,673   

Collateralized mortgage obligations

     16,655         204         16         16,843   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 18,130       $ 402       $ 16       $ 18,516   
  

 

 

    

 

 

    

 

 

    

 

 

 

There was no other-than-temporary impairment recognized in accumulated other comprehensive income (loss) for securities available for sale at June 30, 2012 or December 31, 2011.

The proceeds from the sales of securities for the three and six months ended June 30, 2012 are listed below. There were no proceeds from sales for the three and six months ended June 30, 2011.

 

     Three months ended
June 30,
     Six months ended
June 30,
 
     2012      2012  

Proceeds

   $ 2,144       $ 2,144   

Gross gains

     143         143   

Gross losses

     —           —     

Tax effect—expense

   $ —         $ —     

At June 30, 2012 and December 31, 2011, there were no debt securities contractually due at a single maturity date. The amortized cost and fair value of mortgage-backed securities and collateralized mortgage obligations which are not due at a single maturity date, totaled $16,981 and $17,312 at June 30, 2012, respectively, and $18,130 and $18,516 at December 31, 2011, respectively.

 

15


Table of Contents

CENTRAL FEDERAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands except per share data)

 

NOTE 3 – SECURITIES (continued)

 

Fair value of securities pledged was as follows:

 

     June 30,
2012
     December 31,
2011
 

Pledged as collateral for:

     

FHLB advances

   $ 5,994       $ 9,336   

Public deposits

     1,917         2,820   

Customer repurchase agreements

     5,330         3,557   

Interest-rate swaps

     1,770         1,464   
  

 

 

    

 

 

 

Total

   $ 15,011       $ 17,177   
  

 

 

    

 

 

 

At June 30, 2012 and December 31, 2011, 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.

There were no securities with unrealized losses at June 30, 2012. The following table summarizes securities with unrealized losses at December 31, 2011 aggregated by major security type and length of time in a continuous unrealized loss position.

 

December 31, 2011    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:

                 

Collateralized mortgage obligations

   $ 2,882       $ 16       $ —         $ —         $ 2,882       $ 16   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total temporarily impaired

   $ 2,882       $ 16       $ —         $ —         $ 2,882       $ 16   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The unrealized loss at December 31, 2011 is related to two Ginnie Mae collateralized mortgage obligations. These securities carry the full faith and credit guarantee of the U.S. government. 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 December 31, 2011.

 

16


Table of Contents

CENTRAL FEDERAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands except per share data)

 

NOTE 4 – LOANS

The following table presents the recorded investment in loans by portfolio segment. The recorded investment in loans includes the principal balance outstanding adjusted for purchase premiums and discounts, deferred loan fees and costs and includes accrued interest.

 

     June 30,
2012
    December 31,
2011
 

Commercial

   $ 20,599      $ 25,994   

Real estate:

    

Single-family residential

     17,710        18,214   

Multi-family residential

     23,070        27,163   

Commercial

     61,632        69,757   

Consumer:

    

Home equity lines of credit

     13,662        14,921   

Other

     1,113        1,221   
  

 

 

   

 

 

 

Subtotal

     137,786        157,270   

Less: ALLL

     (5,434     (6,110
  

 

 

   

 

 

 

Loans, net

   $ 132,352      $ 151,160   
  

 

 

   

 

 

 

 

17


Table of Contents

CENTRAL FEDERAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands except per share data)

 

NOTE 4 – LOANS (continued)

 

The ALLL is a valuation allowance for probable incurred credit losses in the loan portfolio based on management’s evaluation of various factors including past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions and other factors. A provision for loan losses is charged to operations based on management’s periodic evaluation of these and other pertinent factors described in Note 1 of the Notes to Consolidated Financial Statements contained in the Company’s 2011 Annual Report that was filed as Exhibit 13.1 to the Company’s Form 10-K for the year ended December 31, 2011.

The following tables present the activity in the ALLL by portfolio segment for the three and six months ended June 30, 2012:

 

     Three months ended June 30, 2012  
           Real Estate     Consumer        
     Commercial     Single-family     Multi-family     Commercial     Home equity lines of
credit
    Other     Total  

Beginning balance

   $ 1,802      $ 190      $ 1,446      $ 1,912      $ 274      $ 17      $ 5,641   

Addition to (reduction in) provision for loan losses

     (589     58        (58     712        45        32        200   

Charge-offs

     (84     (7     (18     (496     (40     (34     (679

Recoveries

     248        4        —          2        7        2        263   

Reclass of ALLL on loan-related commitments (1)

     9        —          —          —          —          —          9   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 1,386      $ 245      $ 1,370      $ 2,130      $ 286      $ 17      $ 5,434   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

Reclassified from (to) accrued interest payable and other liabilities in the consolidated balance sheet

 

18


Table of Contents

CENTRAL FEDERAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands except per share data)

 

NOTE 4 – LOANS (continued)

 

    Six months ended June 30, 2012  
          Real Estate     Consumer        
    Commercial     Single-family     Multi-family     Commercial     Home equity lines of
credit
    Other     Total  

Beginning balance

  $ 2,281      $ 207      $ 1,470      $ 1,863      $ 272      $ 17      $ 6,110   

Addition to (reduction in) provision for loan losses

    (1,097     39        312        1,059        64        23        400   

Charge-offs

    (99     (7     (434     (930     (60     (34     (1,564

Recoveries

    292        6        22        138        10        11        479   

Reclass of ALLL on loan-related
commitments
(1)

    9        —          —          —          —          —          9   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

  $ 1,386      $ 245      $ 1,370      $ 2,130      $ 286      $ 17      $ 5,434   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

Reclassified from (to) accrued interest payable and other liabilities in the consolidated balance sheet

The following tables present the activity in the ALLL by portfolio segment for the three and six months ended June 30, 2011:

 

    Three months ended June 30, 2011  
          Real Estate     Consumer        
    Commercial     Single-family     Multi-family     Commercial     Construction     Home equity lines of
credit
    Other     Total  

Beginning balance

  $ 3,141      $ 233      $ 1,939      $ 3,848      $ 34      $ 201      $ 21      $ 9,417   

Addition to (reduction in) provision for loan losses

    240        14        693        (488     (34     16        (9     432   

Charge-offs

    (640     (7     (450     (850     —          —          —          (1,947

Recoveries

    —          2        1        122        —          3        7        135   

Reclass of ALLL on loan-related commitments (1)

    13        —          —          —          —          —          —          13   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

  $ 2,754      $ 242      $ 2,183      $ 2,632      $ —        $ 220      $ 19      $ 8,050   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

Reclassified from (to) accrued interest payable and other liabilities in the consolidated balance sheet

 

19


Table of Contents

CENTRAL FEDERAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands except per share data)

 

NOTE 4 – LOANS (continued)

 

    Six months ended June 30, 2011  
          Real Estate     Consumer        
    Commercial     Single-family     Multi-family     Commercial     Construction     Home equity lines of
credit
    Other     Total  

Beginning balance

  $ 1,879      $ 241      $ 2,520      $ 4,719      $ 74      $ 303      $ 22      $ 9,758   

Addition to (reduction in) provision for loan losses

    1,945        11        911        (860     (74     (88     6        1,851   

Charge-offs

    (1,140     (14     (1,250     (1,350     —          —          (18     (3,772

Recoveries

    71        4        2        123        —          5        9        214   

Reclass of ALLL on loan-related commitments (1)

    (1     —          —          —          —          —          —          (1
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

  $ 2,754      $ 242      $ 2,183      $ 2,632      $ —        $ 220      $ 19      $ 8,050   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

Reclassified from (to) accrued interest payable and other liabilities in the consolidated balance sheet

 

20


Table of Contents

CENTRAL FEDERAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands except per share data)

 

NOTE 4 – LOANS (continued)

 

The following table presents the balance in the ALLL and the recorded investment in loans by portfolio segment and based on the impairment method as of June 30, 2012:

 

          Real Estate     Consumer        
    Commercial     Single-family     Multi-family     Commercial     Home equity lines of
credit
    Other     Total  

ALLL:

             

Ending allowance balance attributable to loans:

             

Individually evaluated for impairment

  $ 569      $ 49      $ 12      $ 285      $ —        $ —        $ 915   

Collectively evaluated for impairment

    817        196        1,358        1,845        286        17        4,519   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total ending allowance balance

  $ 1,386      $ 245      $ 1,370      $ 2,130      $ 286      $ 17      $ 5,434   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans:

             

Individually evaluated for impairment

  $ 809      $ 130      $ 4,032      $ 5,815      $ —        $ —        $ 10,786   

Collectively evaluated for impairment

    19,790        17,580        19,038        55,817        13,662        1,113        127,000   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total ending loan balance

  $ 20,599      $ 17,710      $ 23,070      $ 61,632      $ 13,662      $ 1,113      $ 137,786   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

21


Table of Contents

CENTRAL FEDERAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands except per share data)

 

NOTE 4 – LOANS (continued)

 

The following table presents the balance in the ALLL and the recorded investment in loans by portfolio segment and based on the impairment method as of December 31, 2011:

 

          Real Estate     Consumer        
    Commercial     Single-family     Multi-family     Commercial     Home equity lines of
credit
    Other     Total  

ALLL:

             

Ending allowance balance attributable to loans:

             

Individually evaluated for impairment

  $ 624      $ —        $ 11      $ 262      $ —        $ —        $ 897   

Collectively evaluated for impairment

    1,657        207        1,459        1,601        272        17        5,213   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total ending allowance balance

  $ 2,281      $ 207      $ 1,470      $ 1,863      $ 272      $ 17      $ 6,110   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans:

             

Individually evaluated for impairment

  $ 821      $ —        $ 5,090      $ 6,085      $ 135      $ —        $ 12,131   

Collectively evaluated for impairment

    25,173        18,214        22,073        63,672        14,786        1,221        145,139   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total ending loan balance

  $ 25,994      $ 18,214      $ 27,163      $ 69,757      $ 14,921      $ 1,221      $ 157,270   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

22


Table of Contents

CENTRAL FEDERAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands except per share data)

 

NOTE 4 – LOANS (continued)

 

The following table presents loans individually evaluated for impairment by class of loans at June 30, 2012. The unpaid principal balance is the contractual principal balance outstanding. The recorded investment is the unpaid principal balance adjusted for partial charge-offs, purchase premiums and discounts, deferred loan fees and costs and includes accrued interest. There was no cash-basis interest income recognized during the three and six months ended June 30, 2012.

 

    As of June 30, 2012     Three months ended June 30, 2012     Six months ended June 30, 2012  
    Unpaid Principal
Balance
    Recorded
Investment
    ALLL
Allocated
    Average Recorded
Investment
    Interest Income
Recognized
    Average Recorded
Investment
    Interest Income
Recognized
 

With no related allowance recorded:

             

Commercial

  $ 147      $ 132      $ —        $ 133      $ —        $ 89      $ —     

Real estate:

             

Multi-family residential

    4,970        3,942        —          3,955        29        4,099        39   

Commercial:

             

Non-owner occupied

    2,672        1,882        —          1,909        —          1,571        —     

Owner occupied

    839        409        —          413        —          422        —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total with no allowance recorded

    8,628        6,365        —          6,410        29        6,181        39   

With an allowance recorded:

             

Commercial

    677        677        569        679        9        687        22   

Real estate:

             

Single-family residential

    130        130        49        131        —          111        —     

Multi-family residential

    90        90        12        90        2        91        3   

Commercial:

             

Non-owner occupied

    2,684        2,684        261        2,411        36        2,404        87   

Owner occupied

    405        405        7        406        6        407        12   

Land

    480        435        17        438        6        461        13   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total with an allowance recorded

    4,466        4,421        915        4,155        59        4,161        137   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 13,094      $ 10,786      $ 915      $ 10,565      $ 88      $ 10,342      $ 176   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

23


Table of Contents

CENTRAL FEDERAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands except per share data)

 

NOTE 4 – LOANS (continued)

 

The following table presents loans individually evaluated for impairment by class of loans at December 31, 2011. The unpaid principal balance is the contractual principal balance outstanding. The recorded investment is the unpaid principal balance adjusted for partial charge-offs, purchase premiums and discounts, deferred loan fees and costs and includes accrued interest. There was no cash-basis interest income recognized during the three and six months ended June 30, 2011.

 

     As of December 31, 2011      Three months ended June 30, 2011      Six months ended June 30, 2011  
     Unpaid Principal
Balance
     Recorded
Investment
     ALLL
Allocated
     Average Recorded
Investment
     Interest Income
Recognized
     Average Recorded
Investment
     Interest Income
Recognized
 

With no related allowance recorded:

                    

Commercial

   $ 573       $ 47       $ —         $ 154       $ —         $ 149       $ —     

Real estate:

                    

Multi-family residential

     6,742         4,996         —           —           —           47         —     

Commercial:

                    

Non-owner occupied

     2,177         1,755         —           75         —           76         —     

Owner occupied

     876         446         —           —           —           —           —     

Land

     —           —           —           686         11         690         21   

Consumer:

                    

Home equity lines of credit:

                    

Originated for portfolio

     135         135         —           136         —           136         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total with no allowance recorded

     10,503         7,379         —           1,051         11         1,098         21   

With an allowance recorded:

                    

Commercial

     796         774         624         1,112         —           1,487         —     

Real estate:

                    

Multi-family residential

     94         94         11         3,147         —           3,433         —     

Commercial:

                    

Non-owner occupied

     2,823         2,823         210         1,623         —           1,938         —     

Owner occupied

     411         411         20         1,051         —           1,051         —     

Land

     766         650         32         —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total with an allowance recorded

     4,890         4,752         897         6,933         —           7,909         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 15,393       $ 12,131       $ 897       $ 7,984       $ 11       $ 9,007       $ 21   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

24


Table of Contents

CENTRAL FEDERAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands except per share data)

 

NOTE 4 – LOANS (continued)

 

The following table presents the recorded investment in nonaccrual loans by class of loans:

 

     June 30, 2012      December 31, 2011  

Nonaccrual loans:

     

Commercial

   $ 132       $ 47   

Real estate:

     

Single-family residential

     551         736   

Multi-family residential

     2,035         4,996   

Commercial:

     

Non-owner occupied

     1,882         1,910   

Owner occupied

     409         446   

Consumer:

     

Home equity lines of credit:

     

Originated for portfolio

     66         157   

Purchased for portfolio

     81         9   
  

 

 

    

 

 

 

Total nonaccrual and nonperforming loans

   $ 5,156       $ 8,301   
  

 

 

    

 

 

 

Nonaccrual loans include both smaller balance single-family mortgage and consumer loans that are collectively evaluated for impairment and individually classified impaired loans. There were no loans 90 days or more past due and still accruing interest at June 30, 2012 or December 31, 2011.

 

25


Table of Contents

CENTRAL FEDERAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands except per share data)

 

NOTE 4 – LOANS (continued)

 

The following table presents the aging of the recorded investment in past due loans by class of loans as of June 30, 2012:

 

     30 - 59 Days
Past Due
     60 - 89 Days
Past Due
     Greater than 90
Days Past Due
     Total Past Due      Loans Not Past
Due
     Nonaccrual Loans Not
> 90 days Past Due
 

Commercial

   $ —         $ —         $ 132       $ 132       $ 20,467       $ —     

Real estate:

                 

Single-family residential

     348         248         91         687         17,023         460   

Multi-family residential

     —           —           2,035         2,035         21,035         —     

Commercial:

                 

Non-owner occupied

     301         —           1,016         1,317         29,799         866   

Owner occupied

     —           —           409         409         25,405         —     

Land

     —           —           —           —           4,702         —     

Consumer:

                 

Home equity lines of credit:

                 

Originated for portfolio

     54         —           66         120         11,143         —     

Purchased for portfolio

     132         —           81         213         2,186         —     

Other

     20         —           —           20         1,093         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 855       $ 248       $ 3,830       $ 4,933       $ 132,853       $ 1,326   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

26


Table of Contents

CENTRAL FEDERAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands except per share data)

 

NOTE 4 – LOANS (continued)

 

The following table presents the aging of the recorded investment in past due loans by class of loans as of December 31, 2011:

 

    30 - 59 Days
Past Due
    60 - 89 Days
Past Due
    Greater than 90
Days Past Due
    Total Past Due     Loans Not Past
Due
    Nonaccrual Loans Not >
90 Days Past Due
 

Commercial

  $ 103      $ —        $ —        $ 103      $ 25,891      $ 47   

Real estate:

           

Single-family residential

    714        474        491        1,679        16,535        245   

Multi-family residential

    —          —          3,065        3,065        24,098        1,931   

Commercial:

           

Non-owner occupied

    173        275        68        516        35,899        1,842   

Owner occupied

    —          —          —          —          27,900        446   

Land

    —          —          —          —          5,442        —     

Consumer:

           

Home equity lines of credit:

           

Originated for portfolio

    22        —          135        157        12,126        22   

Purchased for portfolio

    —          —          9        9        2,629        —     

Other

    —          30        —          30        1,191        —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 1,012      $ 779      $ 3,768      $ 5,559      $ 151,711      $ 4,533   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

27


Table of Contents

CENTRAL FEDERAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands except per share data)

 

NOTE 4 – LOANS (continued)

 

Troubled Debt Restructurings (TDRs):

The Company has allocated $915 and $897 of specific reserves to loans whose terms have been modified in TDRs as of June 30, 2012 and December 31, 2011. The Company has not committed to lend additional amounts as of June 30, 2012 or December 31, 2011 to customers with outstanding loans that are classified as nonaccrual TDRs.

During the quarter ended June 30, 2012, the terms of one loan were modified as a TDR, where concessions were granted to a borrower experiencing financial difficulties. The modification of the terms of this non-owner occupied commercial real estate loan included an extension of the maturity date from May 31, 2012 to September 30, 2012 and required a $50 principal repayment at the date of modification.

During the six months ended June 30, 2012, the terms of 2 loans were modified as TDRs, where concessions were granted to borrowers experiencing financial difficulties. In addition to the loan described in the preceding paragraph, one single-family residential loan was modified as a TDR during the six months ended June 30, 2012 and included a reduction in the stated interest rate of the loan from 10% to 5%, a waiver of a portion of the accrued and unpaid interest, addition of the remaining accrued and unpaid interest to the principal balance and extension of the maturity date from 2034 to 2042. This modification involved a reduction in the stated interest rate of the loan for a period of 30 years.

The following table presents loans modified as TDRs by class of loans during the three and six months ended June 30, 2012:

 

    Three months ended June 30, 2012     Six months ended June 30, 2012  
    Number of
Loans
    Pre-Modification
Outstanding Recorded
Investment
    Post-Modification
Outstanding Recorded
Investment
    Number of
Loans
    Pre-Modification
Outstanding Recorded
Investment
    Post-Modification
Outstanding Recorded
Investment
 

Real estate:

           

Single-family residential

    —        $ —        $ —          1      $ 132      $ 138   

Commercial:

           

Non-owner occupied

    1        478        428        1        478        428   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

    1      $ 478      $ 428        2      $ 610      $ 566   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The TDRs described resulted in a $46 increase in the ALLL during the three and six months ended June 30, 2012 and did not result in a charge-off during the three and six months ended June 30, 2012.

There were no TDRs in payment default or that became nonperforming during the period ended June 30, 2012, that had been modified within the twelve months ended June 30, 2012. A loan is considered to be in payment default once it is 90 days contractually past due under the modified terms, at which time the loan is re-evaluated to determine whether an impairment loss should be recognized, either through a write-off or specific valuation allowance, so that the loan is reported, net, at the present value of estimated future cash flows, or at the fair value of collateral, less cost to sell, if repayment is expected solely from the collateral.

The terms of certain other loans were modified during the six months ended June 30, 2012 that did not meet the definition of a TDR. These loans had a total recorded investment as of June 30, 2012 of $5,448. The modification of these loans involved either a modification of the terms of a loan to borrowers who were not experiencing financial difficulties, a delay in a payment that was considered to be insignificant or there were no concessions granted.

 

28


Table of Contents

CENTRAL FEDERAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands except per share data)

 

NOTE 4 – LOANS (continued)

 

In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. This evaluation is performed under the Company’s internal underwriting policy.

There were no loans which were modified during the three or six months ended June 30, 2012 that did not meet the definition of a TDR due to a delay in payment that was considered to be insignificant.

Nonaccrual loans include loans that were modified and identified as TDRs and the loans are not performing. At June 30, 2012 and December 31, 2011, nonaccrual TDRs were as follows:

 

     June 30, 2012      December 31, 2011  

Commercial

   $ —         $ 47   

Real estate:

     

Single-family residential

     130         —     

Multi-family residential

     —           2,527   

Commercial:

     

Owner occupied

     410         446   
  

 

 

    

 

 

 

Total

   $ 540       $ 3,020   
  

 

 

    

 

 

 

Nonaccrual loans at June 30, 2012 and December 31, 2011 do not include $6,198 and $4,597, respectively, of TDRs where customers have established a sustained period of repayment performance, generally six months, loans are current according to their modified terms and repayment of the remaining contractual payments is expected. These loans are included in total impaired loans.

Credit Quality Indicators:

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt, such as current financial information, historical payment experience, credit documentation, public information and current economic trends, among other factors. Management analyzes loans individually by classifying the loans as to credit risk. This analysis includes commercial, commercial real estate and multi-family residential real estate loans. Internal loan reviews for these loan types are performed at least annually, and more often for loans with higher credit risk. Adjustments to loan risk ratings are made based on the reviews and at any time information is received that may affect risk ratings. The following definitions are used for risk ratings:

Special Mention. Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of CFBank’s credit position at some future date.

Substandard. Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that there will be some loss if the deficiencies are not corrected.

Doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable.

 

29


Table of Contents

CENTRAL FEDERAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands except per share data)

 

NOTE 4 – LOANS (continued)

 

Loans not meeting the criteria to be classified into one of the above categories are considered to be not rated or pass-rated loans. Loans listed as not rated are primarily groups of homogeneous loans. Past due information is the primary credit indicator for groups of homogenous loans. Loans listed as pass-rated loans are loans that are subject to internal loan reviews and are determined not to meet the criteria required to be classified as special mention, substandard or doubtful. The recorded investment in loans by risk category and by class of loans as of June 30, 2012 and based on the most recent analysis performed follows. There were no loans rated doubtful at June 30, 2012.

 

     Not Rated      Pass      Special Mention      Substandard      Total  

Commercial

   $ 356       $ 15,768       $ 3,194       $ 1,281       $ 20,599   

Real estate:

              

Single-family residential

     17,159         —           —           551         17,710   

Multi-family residential

     —           12,418         5,840         4,812         23,070   

Commercial:

              

Non-owner occupied

     342         22,071         3,043         5,660         31,116   

Owner occupied

     —           21,543         3,078         1,193         25,814   

Land

     905         251         436         3,110         4,702   

Consumer:

              

Home equity lines of credit:

              

Originated for portfolio

     11,197         —           —           66         11,263   

Purchased for portfolio

     1,873         —           445         81         2,399   

Other

     1,113         —           —           —           1,113   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 32,945       $ 72,051       $ 16,036       $ 16,754       $ 137,786   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

30


Table of Contents

CENTRAL FEDERAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands except per share data)

 

NOTE 4 – LOANS (continued)

 

The recorded investment in loans by risk category and by class of loans as of December 31, 2011 follows.

 

     Not Rated      Pass      Special Mention      Substandard      Doubtful      Total  

Commercial

   $ 432       $ 19,591       $ 2,062       $ 3,909       $ —         $ 25,994   

Real estate:

                 

Single-family residential

     17,478         —           —           736         —           18,214   

Multi-family residential

     —           15,395         4,539         6,822         407         27,163   

Commercial:

                 

Non-owner occupied

     365         22,159         5,717         8,176         —           36,417   

Owner occupied

     —           22,526         3,474         1,898         —           27,898   

Land

     954         1,123         —           3,365         —           5,442   

Consumer:

                 

Home equity lines of credit:

                 

Originated for portfolio

     12,126         —           —           157         —           12,283   

Purchased for portfolio

     2,182         —           447         9         —           2,638   

Other

     1,221         —           —           —           —           1,221   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 34,758       $ 80,794       $ 16,239       $ 25,072       $ 407       $ 157,270   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

31


Table of Contents

CENTRAL FEDERAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands except per share data)

 

NOTE 5 – FORECLOSED ASSETS

Foreclosed assets were as follows:

 

     June 30, 2012     December 31, 2011  

Real Estate:

    

Single-family residential

   $ 48      $ —     

Commercial

     3,436        3,509   
  

 

 

   

 

 

 

Subtotal

     3,484        3,509   

Valuation allowance

     (1,139     (1,139
  

 

 

   

 

 

 

Total

   $ 2,345      $ 2,370   
  

 

 

   

 

 

 

Activity in the valuation allowance was as follows:

 

     Three months ended June 30,      Six months ended June 30,  
     2012     2011      2012     2011  

Beginning valuation allowance

   $ 1,139      $ —         $ 1,139      $ —     

Additions charged to expense

     182        1,139         182        1,139   

Direct write-downs

     (182     —           (182     —     
  

 

 

   

 

 

    

 

 

   

 

 

 

Ending valuation allowance

   $ 1,139      $ 1,139       $ 1,139      $ 1,139   
  

 

 

   

 

 

    

 

 

   

 

 

 

Expenses related to foreclosed assets include:

 

     Three months ended June 30,      Six months ended June 30,  
     2012      2011      2012      2011  

Net loss (gain) on sales

   $ —         $ —         $ —         $ —     

Provision for unrealized losses

     182         1,139         182         1,139   

Operating expenses, net of rental income

     6         13         24         46   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 188       $ 1,152       $ 206       $ 1,185   
  

 

 

    

 

 

    

 

 

    

 

 

 

Foreclosed assets at June 30, 2012 included one single-family residential property and five commercial real estate properties. Foreclosed assets at December 31, 2011 included three commercial real estate properties. The valuation allowance was established in the second quarter of 2011 due to a decline in real estate values on one of the commercial real estate properties, which is undeveloped commercial real estate located in Columbus, Ohio.

 

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CENTRAL FEDERAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands except per share data)

 

NOTE 6 – FAIR VALUE

Fair value is the exchange price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values:

Level 1 – Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2 – Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.

Level 3 – Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

The Company used the following methods and significant assumptions to estimate the fair value:

Securities available for sale: The fair value of securities available for sale is determined using pricing models that vary based on asset class and include available trade, bid and other market information or matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2).

Loans held for sale, at fair value: Loans held for sale are carried at fair value, as determined by outstanding commitments from third party investors (Level 2).

Derivatives: The fair value of derivatives is based on valuation models using observable market data as of the measurement date (Level 2).

Loan servicing rights: On a quarterly basis, loan servicing rights are evaluated for impairment based on the fair value of the rights as compared to carrying amount. If the carrying amount of an individual tranche exceeds fair value, impairment is recorded on that tranche so that the servicing asset is carried at fair value. Fair value is determined at a tranche level based on a valuation model that calculates the present value of estimated future net servicing income. The valuation model utilizes assumptions that market participants would use in estimating future net servicing income and that can be validated against available market data (Level 2).

Impaired loans: At the time a loan is considered impaired, it is valued at the lower of cost or fair value. Impaired loans carried at fair value generally receive specific allocations of the ALLL. For collateral dependent loans, fair value is commonly based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. Non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business, resulting in a Level 3 fair value classification. Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted accordingly.

Foreclosed assets: Assets acquired through or instead of loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. Fair value is commonly based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value.

 

33


Table of Contents

CENTRAL FEDERAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands except per share data)

 

NOTE 6 – FAIR VALUE (continued)

 

Assets and liabilities measured at fair value on a recurring basis, including financial assets and liabilities for which the Company has elected the fair value option, are summarized below:

 

     Fair Value
Measurements at
June 30, 2012
Using Significant Other
Observable Inputs
(Level 2)
 

Financial Assets:

  

Securities available for sale:

  

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

  

Mortgage-backed securities — residential

   $ 1,755   

Collateralized mortgage obligations

     15,557   
  

 

 

 

Total securities available for sale

   $ 17,312   
  

 

 

 

Loans held for sale

   $ 1,573   
  

 

 

 

Yield maintenance provisions (embedded derivatives)

   $ 1,055   
  

 

 

 

Interest rate lock commitments

   $ 40   
  

 

 

 

Financial Liabilities:

  

Interest-rate swaps

   $ 1,055   
  

 

 

 

 

34


Table of Contents

CENTRAL FEDERAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands except per share data)

 

NOTE 6 – FAIR VALUE (continued)

 

     Fair Value
Measurements at
December 31, 2011
Using Significant Other
Observable Inputs
(Level 2)
 

Financial Assets:

  

Securities available for sale:

  

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

  

Mortgage-backed securities—residential

   $ 1,673   

Collateralized mortgage obligations

     16,843   
  

 

 

 

Total securities available for sale

   $ 18,516   
  

 

 

 

Loans held for sale

   $ 1,210   
  

 

 

 

Yield maintenance provisions (embedded derivatives)

   $ 999   
  

 

 

 

Interest rate lock commitments

   $ 39   
  

 

 

 

Financial Liabilities:

  

Interest-rate swaps

   $ 999   
  

 

 

 

The Company had no assets or liabilities measured at fair value on a recurring basis that were measured using Level 1 or Level 3 inputs at June 30, 2012 or December 31, 2011.

 

35


Table of Contents

CENTRAL FEDERAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands except per share data)

 

NOTE 6 – FAIR VALUE (continued)

 

Assets and liabilities measured at fair value on a non-recurring basis are summarized below:

 

     Fair Value Measurements at June 30, 2012 Using  
     Significant Other  Observable
Inputs
(Level 2)
     Significant Unobservable
Inputs
(Level 3)
 

Loan servicing rights

   $ 1      
  

 

 

    

Impaired loans:

     

Commercial

      $ 132   

Real Estate:

     

Multi-family residential

        3,943   

Commercial:

     

Non-owner occupied

        1,882   

Owner occupied

        409   

Land

        162   
     

 

 

 

Total impaired loans

      $ 6,528   
     

 

 

 

Foreclosed assets

     

Real Estate:

     

Single-family residential

      $ 48   

Commercial:

     

Non-owner occupied

        985   

Land

        1,209   
     

 

 

 

Total foreclosed assets

      $ 2,242   
     

 

 

 

 

     Fair Value Measurements at December 31, 2011 Using  
     Significant Other  Observable
Inputs
(Level 2)
     Significant Unobservable
Inputs
(Level 3)
 

Loan servicing rights

   $ 9      
  

 

 

    

Impaired loans:

     

Commercial

      $ 108   

Real Estate:

     

Multi-family residential

        3,065   

Commercial:

     

Non-owner occupied

        2,887   

Owner occupied

        516   

Land

        233   
     

 

 

 

Total impaired loans

      $ 6,809   
     

 

 

 

Foreclosed assets

     

Real Estate:

     

Commercial:

     

Land

      $ 1,209   
     

 

 

 

Total foreclosed assets

      $ 1,209   
     

 

 

 

 

36


Table of Contents

CENTRAL FEDERAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands except per share data)

 

NOTE 6 – FAIR VALUE (continued)

 

The Company had no assets or liabilities measured at fair value on a non-recurring basis that were measured using Level 1 inputs at June 30, 2012 or December 31, 2011.

Impaired loan servicing rights, which are carried at fair value, were $1, which was made up of the amortized cost of $2, net of a valuation allowance of $1 at June 30, 2012. At December 31, 2011, impaired loan servicing rights, which are carried at fair value, were $9, which was made up of the amortized cost of $11, net of a valuation allowance of $2. There was a $1 charge against earnings with respect to servicing rights for the three months ended June 30, 2012, and a $1 increase in earnings for the six months ended June 30, 2012. There was a $1 increase in earnings with respect to servicing rights for the three months ended June 30, 2011, and a $3 increase in earnings for the six months ended June 30, 2011.

Impaired loans carried at the fair value of the collateral for collateral dependent loans, had an unpaid principal balance of $8,836, and a fair value of $6,528, with no valuation allowance at June 30, 2012. Impaired collateral dependent loans were written down to the fair value of collateral during the three and six months ended June 30, 2012, and there were no specific valuation allowances on these loans. The amount of charge-offs on these loans totaled $401 and $1,266, respectively for the three and six months ended June 30, 2012. Impaired loans carried at the fair value of collateral had an unpaid principal balance of $10,069 and a fair value of $6,809, with no valuation allowance at December 31, 2011. There was a $1,593 reduction in the valuation allowance for the three months ended June 30, 2011, and a $1,558 reduction in the valuation allowance for the six months ended June 30, 2011.

Foreclosed assets which are carried at fair value less costs to sell, were carried at $2,242, which was made up of the outstanding balance of $3,381, net of a valuation allowance of $1,139 at June 30, 2012. There was a $182 charge against earnings with respect to foreclosed assets for both the three and six months ended June 30, 2012. Foreclosed assets which are carried at fair value less costs to sell, were carried at $1,209, which was made up of the outstanding balance of $2,348, net of a valuation allowance of $1,139 at December 31, 2011. There was a $1,139 charge against earnings with respect to foreclosed assets for both the three and six months ended June 30, 2011.

During the six months ended June 30, 2012, the Company did not have any significant transfers of assets or liabilities between those measured using Level 1 or 2 inputs. The Company recognizes transfers of assets and liabilities between Level 1 and 2 inputs based on the information relating to those assets and liabilities at the end of the reporting period.

 

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Table of Contents

CENTRAL FEDERAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands except per share data)

 

NOTE 6 – FAIR VALUE (continued)

 

The following table presents quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at June 30, 2012:

 

    Fair Value    

Valuation Technique(s)

 

Unobservable Inputs

 

Range

(Weighted

Average)

Impaired loans:

       

Commercial

  $ 132      Income approach   Adjustment for differences in net operating income expectations   -10.0%

Commercial real estate:

       

Multi-family residential

    3,943      Comparable sales approach   Adjustment for differences between the comparable sales transactions  

-39.0% to

-27.1%

(-32.7%)

Commercial:

       

Non-owner occupied

    1,882      Comparable sales approach   Adjustment for differences between the comparable sales transactions  

-9.7% to

16.7%

(3.2%)

Owner occupied

    409      Comparable sales approach   Adjustment for differences between the comparable sales transactions   -6.3%

Land

    162      Income approach   Adjustment for differences in land contract cash flow expectations   0.0%
    Comparable sales approach   Adjustment for differences between the comparable sales transactions   8.1%

Foreclosed assets:

       

Real-estate

       

Single-family

    48      Market approach   See note (1)   0.0%

Commercial:

       

Non-owner occupied

    985      Market approach   See note (1)   0.0%

Land

    1,209      Comparable sales approach   Adjustment for differences between the comparable sales transactions   -31.7%

Note (1)—The market approach reflects values represented by sales contracts related to these foreclosed assets. The actual sales had not closed as of June 30, 2012.

Appraisals for both collateral-dependent impaired loans and foreclosed assets are performed by certified general appraisers (for commercial properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have been reviewed and verified by a third-party appraisal management company approved by the Board of Directors annually. Once received, the loan officer or a member of the credit department reviews the assumptions and approaches utilized in the appraisal as well as the overall resulting fair value in comparison with independent data sources such as recent market data or industry-wide statistics. Appraisals are updated as needed based on facts and circumstances associated with the individual properties. Real estate appraisals typically incorporate measures such as recent sales prices for comparable properties. Appraisers may make adjustments to the sales prices of the comparable properties as deemed appropriate based on the age, condition or general characteristics of the subject property. Management applies an additional discount to real estate appraised values, typically to reflect changes in market conditions since the date of the appraisal and to cover disposition costs (including selling expenses) based on the intended disposition method of the property.

 

38


Table of Contents

CENTRAL FEDERAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands except per share data)

 

NOTE 6 – FAIR VALUE (continued)

 

Financial Instruments Recorded Using Fair Value Option

The Company has elected the fair value option for loans held for sale. These loans are intended for sale and the Company believes that the fair value is the best indicator of the resolution of these loans. Interest income is recorded based on the contractual terms of the loan and in accordance with the Company’s policy on loans held for investment. None of these loans were 90 days or more past due or on nonaccrual as of June 30, 2012 or December 31, 2011.

As of June 30, 2012 and December 31, 2011, the aggregate fair value, contractual balance (including accrued interest) and gain or loss was as follows:

 

     June 30, 2012      December 31, 2011  

Aggregate fair value

   $ 1,573       $ 1,210   

Contractual balance

     1,555         1,196   

Gain

     18         14   

The total amount of gains and losses from changes in fair value included in earnings for the three and six months ended June 30, 2012 and 2011 for loans held for sale were:

 

     Three months ended June 30,      Six months ended June 30,  
     2012      2011      2012      2011  

Interest income

   $ 7       $ 7       $ 19       $ 18   

Change in fair value

     13         —           4         (12
  

 

 

    

 

 

    

 

 

    

 

 

 

Total change in fair value

   $ 20       $ 7       $ 23       $ 6   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

39


Table of Contents

CENTRAL FEDERAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands except per share data)

 

NOTE 6 – FAIR VALUE (continued)

 

The carrying amounts and estimated fair values of financial instruments at June 30, 2012 were as follows:

 

     Fair Value Measurements at June 30, 2012 Using:  
     Carrying
Value
    Level 1     Level 2     Level 3      Total  

Financial assets

           

Cash and cash equivalents

   $ 55,209      $ 55,209      $ —        $ —         $ 55,209   

Interest-bearing deposits in other financial institutions

     1,984        1,984          —           1,984   

Securities available for sale

     17,312        —          17,312        —           17,312   

Loans held for sale

     1,573        —          1,573        —           1,573   

Loans, net

     132,352        —          —          136,132         136,132   

FHLB stock

     1,942        —          —          —           n/a   

Accrued interest receivable

     83        14        69        —           83   

Yield maintenance provisions (embedded derivatives)

     1,055        —          1,055        —           1,055   

Interest rate lock commitments

     40        —          40        —           40   

Financial liabilities

           

Deposits

   $ (198,352   $ (80,407   $ (119,849   $ —         $ (200,256

FHLB advances

     (10,000     —          (10,442     —           (10,442

Subordinated debentures

     (5,155     —          (2,861     —           (2,861

Accrued interest payable

     (388     —          (388     —           (388

Interest-rate swaps

     (1,055     —          (1,055     —           (1,055

 

40


Table of Contents

CENTRAL FEDERAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands except per share data)

 

NOTE 6 – FAIR VALUE (continued)

 

The carrying amounts and estimated fair values of financial instruments at December 31, 2011 were as follows:

 

     December 31, 2011  
     Carrying
Amount
    Fair Value  

Financial assets

    

Cash and cash equivalents

   $ 61,436      $ 61,436   

Interest-bearing deposits in other financial institutions

     1,984        1,984   

Securities available for sale

     18,516        18,516   

Loans held for sale

     1,210        1,210   

Loans, net

     151,160        155,159   

FHLB stock

     1,942        n/a   

Accrued interest receivable

     92        92   

Yield maintenance provisions (embedded derivatives)

     999        999   

Interest rate lock commitments

     39        39   

Financial liabilities

    

Deposits

   $ (217,049   $ (219,235

FHLB advances

     (15,742     (16,327

Subordinated debentures

     (5,155     (2,810

Accrued interest payable

     (300     (300

Interest-rate swaps

     (999     (999

The methods and assumptions, not previously presented, used to estimate fair values are described as follows:

Cash and Cash Equivalents

The carrying amounts of cash and short-term instruments approximate fair values and are classified as Level 1.

Interest-Bearing Deposits in Other Financial Institutions

The carrying amounts of interest bearing deposits in other financial institutions approximate fair values and are classified as Level 1.

FHLB Stock

It is not practical to determine the fair value of FHLB stock due to restrictions placed on its transferability.

Loans

Fair values of loans, excluding loans held for sale, are estimated as follows: For variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values resulting in a Level 3 classification. Fair values for other loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality resulting in a Level 3 classification. Impaired loans are valued at the lower of cost or fair value as described previously. The methods utilized to estimate the fair value of loans do not necessarily represent an exit price.

Deposits

The fair values disclosed for demand deposits (e.g., interest and noninterest bearing checking, passbook savings, and money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amount) resulting in a Level 1 classification. Fair values for fixed rate certificates of deposit are estimated using a discounted cash flows calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits resulting in a Level 2 classification.

 

41


Table of Contents

CENTRAL FEDERAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands except per share data)

 

NOTE 6 – FAIR VALUE (continued)

 

Other Borrowings

The fair values of the Company’s long-term FHLB advances are estimated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements resulting in a Level 2 classification.

The fair values of the Company’s subordinated debentures are estimated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements resulting in a Level 2 classification.

Accrued Interest Receivable/Payable

The carrying amounts of accrued interest approximate fair value resulting in a Level 1 or 2 classification, consistent with the asset or liability they are associated with.

Off-Balance-Sheet Instruments

The fair value of off-balance-sheet items is not considered material.

 

42


Table of Contents

CENTRAL FEDERAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands except per share data)

 

NOTE 7 – FHLB ADVANCES

Advances from the FHLB were as follows:

 

     Rate     June 30, 2012      December 31, 2011  

Fixed-rate advances:

       

Maturing:

       

April 2012

     2.30   $ —         $ 5,000   

June 2012

     2.05     —           742   

January 2014

     3.12     5,000         5,000   

May 2014

     3.06     5,000         5,000   
    

 

 

    

 

 

 

Total

     $ 10,000       $ 15,742   
    

 

 

    

 

 

 

Each advance is payable at its maturity date, with a prepayment penalty for fixed-rate advances.

The advances were collateralized as follows:

 

     June 30, 2012      December 31, 2011  

Single-family mortgage loans

   $ 9,504       $ 11,141   

Multi-family mortgage loans

     5,839         4,222   

Commercial real estate loans

     1,272         3,384   

Securities

     5,994         9,336   

Cash

     3,300         800   
  

 

 

    

 

 

 

Total

   $ 25,909       $ 28,883   
  

 

 

    

 

 

 

Based on the collateral pledged to FHLB and CFBank’s holdings of FHLB stock, CFBank was eligible to borrow up to a total of $18,378 from the FHLB at June 30, 2012. In May 2011, CFBank was notified by the FHLB that, due to regulatory considerations, CFBank was only eligible for future advances with a maximum maturity of one year. CFBank was notified by the FHLB that the maximum maturity for future advances was further reduced to 180 days in November 2011 and 30 days in April 2012.

Payment information

 

Payments due during the twelve months ended:

  

June 30, 2014

   $ 10,000   
  

 

 

 

Total

   $ 10,000   
  

 

 

 

 

43


Table of Contents

CENTRAL FEDERAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands except per share data)

 

NOTE 8 – OTHER BORROWINGS

There were no outstanding borrowings with the Federal Reserve Bank (FRB) at June 30, 2012 or at December 31, 2011.

Assets pledged as collateral with the FRB were as follows:

 

     June 30, 2012      December 31, 2011  

Commercial loans

   $ 5,146       $ 6,559   

Commercial real estate loans

     18,858         21,007   
  

 

 

    

 

 

 
   $ 24,004       $ 27,566   
  

 

 

    

 

 

 

Based on the collateral pledged, CFBank was eligible to borrow up to $13,950 from the FRB at June 30, 2012. In April 2011, CFBank was notified by the FRB that, due to regulatory considerations, it was no longer eligible for borrowings under the FRB’s Primary Credit Program, but was only eligible to borrow under the FRB’s Secondary Credit Program. Under the FRB’s Primary Credit Program, CFBank had access to short-term funds at any time, for any reason based on the collateral pledged. Under the Secondary Credit Program, which involves a higher level of administration, each borrowing request must be individually underwritten and approved by the FRB, CFBank’s collateral is automatically reduced by 10% and the cost of borrowings is 50 basis points higher.

CFBank had a $1.0 million line of credit with a commercial bank at both June 30, 2012 and at December 31, 2011. There was no outstanding balance on this line of credit at June 30, 2012 or December 31, 2011. Interest on this line accrues daily and is variable based on the commercial bank’s cost of funds and current market returns.

 

44


Table of Contents

CENTRAL FEDERAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands except per share data)

 

NOTE 9 – SUBORDINATED DEBENTURES

In December 2003, Central Federal Capital Trust I, a trust formed by the Holding Company, closed a pooled private offering of 5,000 trust preferred securities with a liquidation amount of $1 per security. The Holding Company issued $5,155 of subordinated debentures to the trust in exchange for ownership of all of the common stock of the trust and the proceeds of the preferred securities sold by the trust. The Holding Company is not considered the primary beneficiary of this trust (variable interest entity); therefore, the trust is not consolidated in the Company’s financial statements, but rather the subordinated debentures are shown as a liability. The Holding Company’s investment in the common stock of the trust was $155 and is included in other assets.

The Holding Company may redeem the subordinated debentures, in whole or in part, in a principal amount with integral multiples of $1, on or after December 30, 2008 at 100% of the principal amount, plus accrued and unpaid interest. The subordinated debentures mature on December 30, 2033. The subordinated debentures are also redeemable in whole or in part, from time to time, upon the occurrence of specific events defined within the trust indenture. There are no required principal payments on the subordinated debentures over the next five years. The Holding Company has the option to defer interest payments on the subordinated debentures from time to time for a period not to exceed five consecutive years. The Company’s Board of Directors elected to defer interest payments beginning with the quarterly payment due on December 31, 2010 in order to preserve cash at the Holding Company. Cumulative deferred interest payments totaled $302 at June 30, 2012 and $210 at December 31, 2011.

The trust preferred securities and subordinated debentures have a variable rate of interest, reset quarterly, equal to the three-month London Interbank Offered Rate (LIBOR) plus 2.85%. The total rate in effect was 3.32% at June 30, 2012 and 3.43% at December 31, 2011.

Pursuant to the Holding Company Order, as defined in Note 2 – Going Concern Considerations and Management’s Plans, the Holding Company may not, directly or indirectly, incur, issue, renew, roll over, or pay interest or principal on any debt (including the subordinated debentures) or commit to do so, increase any current lines of credit, or guarantee the debt of any entity, without prior written notice to and written non-objection from the FED.

 

45


Table of Contents

CENTRAL FEDERAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands except per share data)

 

NOTE 10 – STOCK-BASED COMPENSATION

The Company has three stock-based compensation plans (the Plans), as described below, under which awards have been or may be issued. Total compensation cost that was charged against income for those Plans totaled $4 and $10, respectively, for the three and six months ended June 30, 2012, and $12 and $25, respectively, for the three and six months ended June 30, 2011.

The Plans, which are stockholder-approved, provide for stock option grants and restricted stock awards to directors, officers and employees. The 1999 Stock-Based Incentive Plan, which expired July 13, 2009, provided 38,778 shares for stock option grants and 15,511 shares for restricted stock awards. The 2003 Equity Compensation Plan (2003 Plan), as amended and restated, provided an aggregate of 100,000 shares for stock option grants and restricted stock awards, of which up to 30,000 shares could be awarded in the form of restricted stock awards. The 2009 Equity Compensation Plan, which was approved by stockholders on May 21, 2009, replaced the 2003 Plan and provides 200,000 shares, plus any remaining shares available to grant or that are later forfeited or expire under the 2003 Plan, that may be issued as stock option grants, stock appreciation rights or restricted stock awards.

Stock Options

The Plans permit the grant of stock options to directors, officers and employees for up to 338,778 shares of common stock, net of restricted stock awards. Option awards are granted with an exercise price equal to the market price of the Company’s common stock on the date of grant, generally have vesting periods ranging from one to three years and are exercisable for ten years from the date of grant. Unvested stock options immediately vest upon a change in control.

The fair value of each option award is estimated on the date of grant using a closed form option valuation (Black-Scholes) model that uses the assumptions noted in the table below. Expected volatilities are based on historical volatilities of the Company’s common stock. The Company uses historical data to estimate option exercise and post-vesting termination behavior. Management and other employee stock options are tracked separately. The expected term of options granted is based on historical data and represents the period of time that options granted are expected to be outstanding, which takes into account that the options are not transferable. The risk-free interest rate for the expected term of the option is based on the U.S. Department of the Treasury (Treasury) yield curve in effect at the time of the grant.

There were no options granted during the three and six months ended June 30, 2012, or during the three months ended June 30, 2011. The fair value of the options granted during the six months ended June 30, 2011 was determined using the following weighted-average assumptions as of the grant dates.

 

     Six months ended
June 30, 2011
 

Risk-free interest rate

     2.98

Expected term (years)

     7   

Expected stock price volatility

     46

Dividend yield

     1.41

 

46


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CENTRAL FEDERAL CORPORATION

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