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 September 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 October 31, 2012, there were 15,824,710 shares of the registrant’s Common Stock outstanding.

 

 

 


Table of Contents

FORM 10-Q

QUARTER ENDED SEPTEMBER 30, 2012

INDEX

 

      Page  

PART I. Financial Information

  

Item 1. Financial Statements

  

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

     3   

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

     4   

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

     5   

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

     6   

Consolidated Statements of Cash Flows for the nine months ended September  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

     59   

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     86   

Item 4. Controls and Procedures

     87   

PART II. Other Information

  

Item 1. Legal Proceedings

     88   

Item 1A. Risk Factors

     88   

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

     88   

Item 3. Defaults Upon Senior Securities

     88   

Item 4. Mine Safety Disclosures

     88   

Item 5. Other Information

     88   

Item 6. Exhibits

     88   

Signatures

     89   


Table of Contents

CENTRAL FEDERAL CORPORATION

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands except per share data)

 

     September 30,     December 31,  
     2012     2011  
     (unaudited)        

ASSETS

    

Cash and cash equivalents

   $ 65,147      $ 61,436   

Interest-bearing deposits in other financial institutions

     1,984        1,984   

Securities available for sale

     14,300        18,516   

Loans held for sale

     2,571        1,210   

Loans, net of allowance of $5,442 and $6,110

     122,940        151,160   

FHLB stock

     1,942        1,942   

Loan servicing rights

     29        37   

Foreclosed assets, net

     1,572        2,370   

Premises and equipment, net

     5,369        5,534   

Assets held for sale

     167        167   

Other intangible assets

     59        89   

Bank owned life insurance

     4,371        4,273   

Accrued interest receivable and other assets

     1,680        2,202   
  

 

 

   

 

 

 
   $ 222,131      $ 250,920   
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

Deposits

    

Noninterest bearing

   $ 17,015      $ 18,409   

Interest bearing

     162,563        198,640   
  

 

 

   

 

 

 

Total deposits

     179,578        217,049   

Long-term FHLB advances

     10,000        15,742   

Advances by borrowers for taxes and insurance

     125        159   

Accrued interest payable and other liabilities

     2,911        2,871   

Subordinated debentures

     5,155        5,155   
  

 

 

   

 

 

 

Total liabilities

     197,769        240,976   

Stockholders’ equity

    

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

     —          7,120   

Common stock, $.01 par value, shares authorized; 50,000,000 in 2012 and 2011 shares issued; 15,936,417 in 2012 and 937,417 in 2011

     159        9   

Additional paid-in capital

     47,979        27,837   

Accumulated deficit

     (20,863     (22,163

Accumulated other comprehensive income

     332        386   

Treasury stock, at cost; 111,707 shares

     (3,245     (3,245
  

 

 

   

 

 

 

Total stockholders’ equity

     24,362        9,944   
  

 

 

   

 

 

 
   $ 222,131      $ 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     Nine months ended  
     September 30,     September 30,  
     2012     2011     2012     2011  

Interest and dividend income

        

Loans, including fees

   $ 1,656      $ 2,165      $ 5,316      $ 6,957   

Securities

     45        68        166        379   

FHLB stock dividends

     20        20        63        63   

Federal funds sold and other

     41        38        122        109   
  

 

 

   

 

 

   

 

 

   

 

 

 
     1,762        2,291        5,667        7,508   

Interest expense

        

Deposits

     501        681        1,651        2,133   

Long-term FHLB advances and other debt

     78        111        268        419   

Subordinated debentures

     46        41        138        124   
  

 

 

   

 

 

   

 

 

   

 

 

 
     625        833        2,057        2,676   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income

     1,137        1,458        3,610        4,832   

Provision for loan losses

     543        405        943        2,256   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest income after provision for loan losses

     594        1,053        2,667        2,576   

Noninterest income

        

Service charges on deposit accounts

     63        69        180        199   

Net gains on sales of loans

     146        158        281        222   

Loan servicing fees, net

     6        1        19        13   

Net gain on sales of securities

     —          232        143        232   

Earnings on bank owned life insurance

     33        31        98        96   

Other

     14        15        39        42   
  

 

 

   

 

 

   

 

 

   

 

 

 
     262        506        760        804   

Noninterest expense

        

Salaries and employee benefits

     1,013        1,004        2,957        3,078   

Occupancy and equipment

     68        64        201        218   

Data processing

     146        142        425        431   

Franchise taxes

     65        63        166        193   

Professional fees

     234        177        651        736   

Director fees

     28        44        119        135   

Postage, printing and supplies

     28        20        132        107   

Advertising and promotion

     4        10        11        34   

Telephone

     17        17        50        57   

Loan expenses

     69        9        100        39   

Foreclosed assets, net

     776        —          982        1,185   

Depreciation

     54        93        183        311   

FDIC premiums

     144        177        442        527   

Amortization of intangibles

     10        10        30        30   

Regulatory assessment

     39        46        105        121   

Other insurance

     36        42        116        93   

Other

     34        76        89        151   
  

 

 

   

 

 

   

 

 

   

 

 

 
     2,765        1,994        6,759        7,446   
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

     (1,909     (435     (3,332     (4,066

Income tax expense

     —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

     (1,909     (435     (3,332     (4,066

Preferred stock dividends and accretion of discount on preferred stock

     (107     (107     (328     (317

Discount on redemption of preferred stock

     4,960        —          4,960        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (loss) available to common stockholders

   $ 2,944      $ (542   $ 1,300      $ (4,383
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (loss) per common share:

        

Basic

   $ 0.38      $ (0.66   $ 0.42      $ (5.31

Diluted

   $ 0.38      $ (0.66   $ 0.42      $ (5.31

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 September 30,     Nine months ended September 30,  
     2012     2011     2012     2011  

Net loss

   $ (1,909   $ (435   $ (3,332   $ (4,066

Other comprehensive income (loss):

        

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

     1        (98     89        (14

Reclassification adjustment for gains realized in income

     —          (232     (143     (232
  

 

 

   

 

 

   

 

 

   

 

 

 

Net change in unrealized gains (losses)

     1        (330     (54     (246

Tax effect

     —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income (loss)

     1        (330     (54     (246
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive loss

   $ (1,908   $ (765   $ (3,386   $ (4,312
  

 

 

   

 

 

   

 

 

   

 

 

 

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

             (3,332         (3,332

Other comprehensive loss

               (54       (54

Accretion of discount on preferred stock

     39              (39         —     

Release of 1,050 stock-based incentive plan shares, net of forfeitures

          3               3   

Stock option expense, net of forfeitures

          3               3   

Preferred stock dividends

             (289         (289

Redemption of TARP obligations, including $801 accrued dividends

     (7,159           4,960            (2,199

Proceeds from issuance of 15.0 million shares in common stock offering, net of $2,214 offering expenses

       150         20,136               20,286   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2012

   $ —        $ 159       $ 47,979       $ (20,863   $ 332      $ (3,245   $ 24,362   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

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

              (4,066         (4,066

Other comprehensive loss

                (246       (246

Accretion of discount on preferred stock

     38               (38         —     

Release of 9,134 stock-based incentive plan shares, net of forfeitures

           20               20   

Stock option expense, net of forfeitures

           13               13   

Preferred stock dividends

              (279         (279
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2011

   $ 7,107       $ 47       $ 27,792       $ (20,696   $ 426      $ (3,245   $ 11,431   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

7


Table of Contents

CENTRAL FEDERAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)

 

     Nine months ended September 30,  
     2012     2011  

Net loss

   $ (3,332   $ (4,066

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

    

Provision for loan losses

     943        2,256   

Provision for losses on foreclosed assets

     962        1,139   

Valuation (gain) loss on mortgage servicing rights

     (1     (2

Depreciation

     183        311   

Amortization, net

     529        632   

Net gains on sales of securities

     (143     (232

Originations of loans held for sale

     (20,676     (27,562

Proceeds from sale of loans held for sale

     19,486        27,475   

Net gains on sales of loans

     (281     (222

Loss on disposal of premises and equipment

     4        —     

Loss on sale of assets held for sale

     —          2   

Gain on sale of foreclosed assets

     (9     (8

Earnings on bank owned life insurance

     (98     (96

Stock based compensation expense

     6        33   

Net change in:

    

Accrued interest receivable and other assets

     525        (609

Accrued interest payable and other liabilities

     552        860   
  

 

 

   

 

 

 

Net cash used by operating activities

     (1,350     (89

Cash flows from investing activities

    

Net increase in interest-bearing deposits in other financial institutions

     —          (1,984

Available-for-sale securities:

    

Sales

     2,144        6,390   

Maturities, prepayments and calls

     8,730        7,331   

Purchases

     (7,000     (4,550

Loan originations and payments, net

     27,105        30,027   

Additions to premises and equipment

     (22     (53

Proceeds from the sale of assets held for sale

     —          533   

Proceeds from the sale of foreclosed assets

     98        1,000   

Proceeds from mortgage insurance on foreclosed assets

     29        —     
  

 

 

   

 

 

 

Net cash from investing activities

     31,084        38,694   

Cash flows from financing activities

    

Net change in deposits

     (37,533     (700

Repayments on long-term FHLB advances and other debt

     (5,742     (8,200

Net change in advances by borrowers for taxes and insurance

     (34     (164

Redemption of TARP obligations

     (3,000     —     

Net proceeds from issuance of common stock

     20,286        —     
  

 

 

   

 

 

 

Net cash used by financing activities

     (26,023     (9,064

Net change in cash and cash equivalents

     3,711        29,541   

Beginning cash and cash equivalents

     61,436        34,275   
  

 

 

   

 

 

 

Ending cash and cash equivalents

   $ 65,147      $ 63,816   
  

 

 

   

 

 

 

Supplemental cash flow information:

    

Interest paid

   $ 1,906      $ 2,523   

Income taxes paid

     —          —     

Supplemental noncash disclosures:

    

Transfers from loans to repossessed assets

   $ 282      $ —     

Loans transferred from held for sale to portfolio

     109        —     

See accompanying notes to consolidated financial statements.

 

8


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 nine months ended September 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 every 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.

 

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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)

 

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 September 30,     Nine months ended September 30,  
     2012     2011     2012     2011  

Basic

        

Net loss

   $ (1,909   $ (435   $ (3,332   $ (4,066

Less: Preferred dividends and accretion of discount on preferred stock

     (107     (107     (328     (317

Plus: Discount on redemption of preferred stock

     4,960        —          4,960        —     

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

     (1     3        (1     27   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (loss) available to common stockholders

   $ 2,943      $ (539   $ 1,299        (4,356
  

 

 

   

 

 

   

 

 

   

 

 

 

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

     7,673,201        825,364        3,113,356        825,368   

Less: Unvested share-based payment awards

     (2,167     (4,500     (2,722     (5,102
  

 

 

   

 

 

   

 

 

   

 

 

 

Average shares

     7,671,034        820,864        3,110,634        820,266   
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic earnings (loss) per common share

   $ 0.38      $ (0.66   $ 0.42      $ (5.31
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

        

Earnings (loss) available to common stockholders

   $ 2,943      $ (539   $ 1,299      $ (4,356
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common shares outstanding for basic earnings (loss) per common share

     7,671,034        820,864        3,110,634        820,266   

Add: Dilutive effects of assumed exercises of stock options

     273        —          92        —     

Add: Dilutive effects of assumed exercises of stock warrant

     —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Average shares and dilutive potential common shares

     7,671,307        820,864        3,110,726        820,266   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted earnings (loss) per common share

   $ 0.38      $ (0.66   $ 0.42      $ (5.31
  

 

 

   

 

 

   

 

 

   

 

 

 

 

10


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 stock options and warrant were not considered in computing diluted earnings (loss) per common share because the options or warrant were anti-dilutive or the Company reported a net loss for the periods presented.

 

     Three months ended September 30,      Nine months ended September 30,  
     2012      2011      2012      2011  

Stock options

     39,694         44,656         39,694         44,656   

Stock warrant

     63,574         67,314         66,067         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 amended existing guidance to achieve common fair value measurement and disclosure requirements between U.S. and international accounting principles. Overall, the guidance was consistent with existing U.S. accounting principles; however, there were 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 were 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 required that comprehensive income be presented in either a single continuous statement or in two separate consecutive statements. The amendments in this update were effective for fiscal years, and interim periods within those years, beginning after December 15, 2011 and were 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 were effective at the same time as the amendments in ASU 2011-05 so that entities would not be required to comply with the presentation requirements in ASU 2011-05 that this ASU deferred. The amendments in this ASU were 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 (the OTS), the primary regulator of the Holding Company and CFBank at the time the Orders were issued. In July 2011, in accordance with the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act), the Board of Governors of the Federal Reserve System (the FED) replaced the OTS as the primary regulator of the Holding Company and the Office of the Comptroller of the Currency (the OCC) replaced the OTS as the primary regulator of CFBank.

The Holding Company Order requires the Holding Company, 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 CFBank, 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; (iv) not originate, participate in or acquire any nonresidential real estate loans or commercial loans without regulatory approval; (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 (the FDIC) limits on brokered deposits. As a result of the CFBank Order, CFBank is considered “adequately capitalized” for regulatory purposes. 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.

 

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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 (continued)

 

The following approvals, non-objections, notifications and waivers were received or provided with regard to the Orders:

 

   

approval was received from the Federal Reserve Bank of Cleveland on July 13, 2012 and regulatory non-objection was received from the OCC on August 23, 2012 for redemption of the TARP obligations;

 

   

approval was received from the FED on October 29, 2012 for payment of interest on the subordinated debentures;

 

   

regulatory non-objection was received from the OCC on June 14, 2012 and from the Federal Reserve Bank of Cleveland on June 20, 2012 for the additions of Timothy T. O’Dell, Thad R. Perry, Robert E. Hoeweler, James Howard Frauenberg, II and Donal Malenick as directors of the Company and CFBank, and Mr. O’Dell, Mr. Perry as Chief Executive Officer and President, respectively, of the Company and CFBank;

 

   

notification of new contractual arrangements related to compensation or benefits for new senior executive officers was provided to the FED and OCC on September 24, 2012;

 

   

the contingency plan requirement was extended by the OCC until the earlier of 15 days after termination of the stock offering or January 31, 2012, and further extended by the OCC to 90 days after FED approval of the standby purchasers’ change-in-control application;

 

   

the requirement for regulatory approval to originate, participate in or acquire any nonresidential real estate loans or commercial loans was waived by OCC on November 9, 2011, subject to certain Board approval conditions, loan policies and credit administration procedures.

The requirements of the Orders will remain in effect until terminated, modified or suspended by our 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 common 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 was filed with the SEC and became effective on February 8, 2012.

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

The restructured registered common stock offering consisted of 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 ended on 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 agreed to purchase 3.0 million shares of Company common stock at a price of $1.50 per share. The standby purchasers had 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.

On August 20, 2012, the Company announced the successful completion of its restructured registered common stock offering. The Company sold 15.0 million shares of its common stock (including shares sold to the standby purchasers) at $1.50 per share, resulting in gross proceeds of $22,500 before expenses of $2,214.

 

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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)

 

A portion of the proceeds from the restructured registered common stock offering was retained by the Holding Company for general corporate purposes and is estimated to be sufficient to support the Holding Company’s cash requirements for the foreseeable future based on our current business plan. The Holding Company and its subsidiaries, other than CFBank, had available cash of $5,268 at September 30, 2012. Holding Company cash provided from net proceeds of the stock offering was reduced by $3,000 for redemption of the TARP obligations and a $13,500 capital contribution to CFBank to improve its capital ratios and support future growth and expansion, bringing CFBank into compliance with the capital ratios required by the CFBank Order. See Note 11 – Preferred Stock and Note 12 – Common Stock Warrant for additional information on redemption of the TARP obligations. The Holding Company’s current cash requirements include debt service on the subordinated debentures and operating expenses. See Note 9 Subordinated Debentures for additional information on debt service requirements of the subordinated debentures. Management believes the Holding Company’s liquidity is sufficient at September 30, 2012.

The Company has been unprofitable for over the past three years. Exclusive of the discount on redemption of the TARP obligations during the three months ended September 30, 2012, a net loss attributable to common stockholders would have been reported for the three and nine months ended September 30, 2012. With the successful completion of the stock offering, additional capital was infused into the Holding Company and CFBank. Management expects that deployment of the additional capital and existing on-balance-sheet liquidity into newly originated loans improves the potential for the Company to generate profits in the future. If we do not generate profits in the future, our capital levels will be negatively impacted and the regulators could take additional enforcement action against us, including the imposition of further operating restrictions. The regulators could also direct us to seek a merger partner, liquidate CFBank or be placed into receivership.

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, September 14, 2012 and a current limited waiver which expires on December 13, 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 September 15, 2012 and December 13, 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 September 30, 2012, CFBank had $36,039 in brokered deposits with maturity dates from October 2012 through August 2016. At September 30, 2012, cash, unpledged securities and deposits in other financial institutions totaled $66,946, which was sufficient to cover all brokered deposit maturities. Brokered deposit maturities over the next four years are as follows:

 

September 30, 2013

   $ 17,516   

September 30, 2014

     8,491   

September 30, 2015

     7,428   

September 30, 2016

     2,604   
  

 

 

 
   $ 36,039   
  

 

 

 

We have taken such actions as we believe are necessary to comply with all requirements of the Orders which are currently effective 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 September 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
 

September 30, 2012

           

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

           

Mortgage-backed securities—residential

   $ 1,564       $ 107       $ —         $ 1,671   

Collateralized mortgage obligations

     12,404         225         —           12,629   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 13,968       $ 332       $ —         $ 14,300   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     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 September 30, 2012 or December 31, 2011.

The proceeds from the sales of securities for the three and nine months ended September 30, 2012 and 2011 are listed below.

 

     Three months ended September 30,     

Nine months ended September 30,

 
     2012      2011      2012      2011  

Proceeds

   $ —         $ 8,036       $ 2,144       $ 8,036   

Gross gains

     —           232         143         232   

Gross losses

     —           —           —           —     

Tax effect—expense

   $ —         $ —         $ —         $ —     

At September 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 $13,968 and $14,300 at September 30, 2012, respectively, and $18,130 and $18,516 at December 31, 2011, respectively.

 

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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:

 

     September 30,
2012
     December 31,
2011
 

Pledged as collateral for:

     

FHLB advances

   $ 6,691       $ 9,336   

Public deposits

     1,610         2,820   

Customer repurchase agreements

     —           3,557   

Interest-rate swaps

     1,480         1,464   
  

 

 

    

 

 

 

Total

   $ 9,781       $ 17,177   
  

 

 

    

 

 

 

At September 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 September 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.

 

     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.

 

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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.

 

     September 30,
2012
    December 31,
2011
 

Commercial

   $ 18,187      $ 25,994   

Real estate:

    

Single-family residential

     15,425        18,214   

Multi-family residential

     22,900        27,163   

Commercial

     57,687        69,757   

Consumer:

    

Home equity lines of credit

     13,145        14,921   

Other

     1,038        1,221   
  

 

 

   

 

 

 

Subtotal

     128,382        157,270   

Less: ALLL

     (5,442     (6,110
  

 

 

   

 

 

 

Loans, net

   $ 122,940      $ 151,160   
  

 

 

   

 

 

 

Commercial loans included $9,376 and $12,472, respectively, of commercial lines of credit which required interest only payments at September 30, 2012 and December 31, 2011.

Home equity lines of credit included $10,524 and $12,739, respectively, of loans which required interest only payments at September 30, 2012 and December 31, 2011.

 

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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 nine months ended September 30, 2012:

 

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

Beginning balance

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

Addition to (reduction in) provision for loan losses

    (370     (15     544        510        (115     (11     543   

Charge-offs

    —          —          —          (536     —          —          (536

Recoveries

    —          1        —          —          3        6        10   

Reclass of ALLL on loan-related commitments (1)

    (9     —          —          —          —          —          (9
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

  $ 1,007      $ 231      $ 1,914      $ 2,104      $ 174      $ 12      $ 5,442   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(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)

 

    Nine months ended September 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

    (1,467     23        856        1,570        (51     12        943   

Charge-offs

    (99     (7     (434     (1,467     (60     (34     (2,101

Recoveries

    292        8        22        138        13        17        490   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

  $ 1,007      $ 231      $ 1,914      $ 2,104      $ 174      $ 12      $ 5,442   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

19


Table of Contents

CENTRAL FEDERAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands except per share data)

 

NOTE 4 – LOANS (continued)

 

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

 

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

Beginning balance

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

Addition to (reduction in) provision for loan losses

    (266     (54     1,015        (387     100        (3     405   

Charge-offs

    —          —          (867     (580     (149     —          (1,596

Recoveries

    29        2        —          47        15        1        94   

Reclass of ALLL on loan-related commitments (1)

    2        —          —          —          —          —          2   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

  $ 2,519      $ 190      $ 2,331      $ 1,712      $ 186      $ 17      $ 6,955   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

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

 

    Nine months ended September 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

    1,679        (43     1,926        (1,247     (74     12        3        2,256   

Charge-offs

    (1,140     (14     (2,117     (1,930     —          (149     (18     (5,368

Recoveries

    100        6        2        170        —          20        10        308   

Reclass of ALLL on loan-related commitments (1)

    1        —          —          —          —          —          —          1   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

  $ 2,519      $ 190      $ 2,331      $ 1,712      $ —        $ 186      $ 17      $ 6,955   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

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

 

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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 September 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

  $ 564      $ 47      $ 585      $ 297      $ —        $ —        $ 1,493   

Collectively evaluated for impairment

    443        184        1,329        1,807        174        12        3,949   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total ending allowance balance

  $ 1,007      $ 231      $ 1,914      $ 2,104      $ 174      $ 12      $ 5,442   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans:

             

Individually evaluated for impairment

  $ 797      $ 129      $ 4,024      $ 6,610      $ —        $ —        $ 11,560   

Collectively evaluated for impairment

    17,390        15,296        18,876        51,077        13,145        1,038        116,822   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total ending loan balance

  $ 18,187      $ 15,425      $ 22,900      $ 57,687      $ 13,145      $ 1,038      $ 128,382   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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 September 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. The table presents accrual basis interest income recognized during the three and nine months ended September 30, 2012. Cash payments of interest during the three and nine months ended September 30, 2012 totaled $120 and $289, respectively.

 

    As of September 30, 2012     Three months ended September 30, 2012     Nine months ended September 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

  $ 143      $ 128      $ —        $ 130      $ —        $ 137      $ —     

Real estate:

             

Multi-family residential

    2,934        2,029        —          2,032        —          2,170        —     

Commercial:

             

Non-owner occupied

    2,645        1,839        —          1,869        —          2,357        —     

Owner occupied

    2,244        1,293        —          1,360        —          1,400        —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total with no allowance recorded

    7,966        5,289        —          5,391        —          6,064        —     

With an allowance recorded:

             

Commercial

    669        669        564        672        8        686        30   

Real estate:

             

Single-family residential

    129        129        47        129        1        131        1   

Multi-family residential

    2,117        1,995        585        1,996        61        2,002        103   

Commercial:

             

Non-owner occupied

    2,662        2,662        274        2,670        40        2,684        127   

Owner occupied

    401        401        7        402        6        406        19   

Land

    460        415        16        416        6        452        19   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total with an allowance recorded

    6,438        6,271        1,493        6,285        122        6,361        299   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 14,404      $ 11,560      $ 1,493      $ 11,676      $ 122      $ 12,425      $ 299   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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. The table presents accrual basis interest income recognized during the three and nine months ended September 30, 2011. Cash payments of interest during the three and nine months ended September 30, 2011 totaled $96 and $118, respectively.

 

    As of December 31, 2011     Three months ended September 30, 2011     Nine months ended September 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      $ —        $ 1,248      $ 7      $ 515      $ 7   

Real estate:

             

Single-family residential

    —          —          —          —          —          32        —     

Multi-family residential

    6,742        4,996        —          787        1        262        1   

Commercial:

             

Non-owner occupied

    2,177        1,755        —          2,236        9        796        9   

Owner occupied

    876        446        —          1,314        21        438        21   

Land

    —          —          —          684        11        688        32   

Consumer:

             

Home equity lines of credit:

             

Originated for portfolio

    135        135        —          135        —          136        —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total with no allowance recorded

    10,503        7,379        —          6,404        49        2,867        70   

With an allowance recorded:

             

Commercial

    796        774        624        515        8        1,163        8   

Real estate:

             

Multi-family residential

    94        94        11        2,278        —          3,048        —     

Commercial:

             

Non-owner occupied

    2,823        2,823        210        1,379        31        1,752        31   

Owner occupied

    411        411        20        350        —          817        —     

Land

    766        650        32        —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total with an allowance recorded

    4,890        4,752        897        4,522        39        6,780        39   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 15,393      $ 12,131      $ 897      $ 10,926      $ 88      $ 9,647      $ 109   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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:

 

     September 30, 2012      December 31, 2011  

Commercial

   $ 667       $ 47   

Real estate:

     

Single-family residential

     44         736   

Multi-family residential

     3,937         4,996   

Commercial:

     

Non-owner occupied

     1,839         1,910   

Owner occupied

     1,293         446   

Consumer:

     

Home equity lines of credit:

     

Originated for portfolio

     66         157   

Purchased for portfolio

     81         9   
  

 

 

    

 

 

 

Total nonaccrual and nonperforming loans

   $ 7,927       $ 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 September 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 September 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

  $ 21      $ 112      $ 120      $ 253      $ 17,934      $ 547   

Real estate:

           

Single-family residential

    302        706        —          1,008        14,417        44   

Multi-family residential

    —          —          2,029        2,029        20,871        1,908   

Commercial:

           

Non-owner occupied

    42        —          1,243        1,285        29,507        596   

Owner occupied

    —          —          300        300        22,386        993   

Land

    —          —          —          —          4,639        —     

Consumer:

           

Home equity lines of credit:

           

Originated for portfolio

    —          —          66        66        10,734        —     

Purchased for portfolio

    130        —          81        211        2,134        —     

Other

    61        —          —          61        977        —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 556      $ 818      $ 3,839      $ 5,213      $ 123,599      $ 4,088   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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 $1,493 and $897 of specific reserves to loans whose terms have been modified in TDRs as of September 30, 2012 and December 31, 2011. The Company has not committed to lend additional amounts as of September 30, 2012 or December 31, 2011 to customers with outstanding loans that are classified as nonaccrual TDRs.

During the quarter ended September 30, 2012, no loans were modified as a TDR, where concessions were granted to a borrower experiencing financial difficulties.

During the nine months ended September 30, 2012, the terms of 2 loans were modified as TDRs, where concessions were granted to borrowers experiencing financial difficulties. One 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. One single-family residential loan was modified as a TDR during the nine months ended September 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 nine months ended September 30, 2012:

 

    Nine months ended September 30, 2012  
    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   
 

 

 

   

 

 

   

 

 

 

Total

    2      $ 610      $ 566   
 

 

 

   

 

 

   

 

 

 

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

There were no TDRs in payment default or that became nonperforming during the period ended September 30, 2012, that had been modified within the twelve months ended September 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 nine months ended September 30, 2012 that did not meet the definition of a TDR because the borrowers were not experiencing financial difficulties or there were no concessions granted. These loans had a total recorded investment as of September 30, 2012 of $9,235.

 

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 nine months ended September 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 September 30, 2012 and December 31, 2011, nonaccrual TDRs were as follows:

 

     September 30,
2012
     December 31,
2011
 

Commercial

   $ 539       $ 47   

Real estate:

     

Multi-family residential

     1,908         2,527   

Commercial:

     

Owner occupied

     300         446   
  

 

 

    

 

 

 

Total

   $ 2,747         3,020   
  

 

 

    

 

 

 

Nonaccrual loans at September 30, 2012 and December 31, 2011 do not include $3,824 and $4,597, respectively, of TDRs where customers have established a sustained period of repayment performance, generally six months, the 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 September 30, 2012 and based on the most recent analysis performed follows. There were no loans rated doubtful at September 30, 2012.

 

     Not Rated      Pass      Special Mention      Substandard      Total  

Commercial

   $ 389       $ 13,568       $ 2,960       $ 1,270       $ 18,187   

Real estate:

              

Single-family residential

     15,381         —           —           44         15,425   

Multi-family residential

     —           12,285         5,815         4,800         22,900   

Commercial:

              

Non-owner occupied

     331         21,865         3,018         5,578         30,792   

Owner occupied

     —           18,555         1,629         2,072         22,256   

Land

     121         1,013         434         3,071         4,639   

Consumer:

              

Home equity lines of credit:

              

Originated for portfolio

     10,734         —           —           66         10,800   

Purchased for portfolio

     1,825         —           439         81         2,345   

Other

     1,038         —           —           —           1,038   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 29,819       $ 67,286       $ 14,295       $ 16,982       $ 128,382   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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:

 

     September 30, 2012      December 31, 2011  

Real estate:

     

Single-family residential

   $ 96       $ —     

Commercial:

     

Non-owner occupied

     1,029         1,161   

Land

     447         2,348   
  

 

 

    

 

 

 

Subtotal

     1,572         3,509   

Valuation allowance

     —           (1,139
  

 

 

    

 

 

 

Total

   $ 1,572       $ 2,370   
  

 

 

    

 

 

 

Activity in the valuation allowance was as follows:

 

     Three months ended September 30,      Nine months ended September 30,  
     2012     2011      2012     2011  

Beginning valuation allowance

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

Additions charged to expense

     780        —           962        1,139   

Direct write-downs

     (1,919     —           (2,101     —     
  

 

 

   

 

 

    

 

 

   

 

 

 

Ending valuation allowance

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

 

 

   

 

 

    

 

 

   

 

 

 

Expenses related to foreclosed assets include:

 

     Three months ended September 30,     Nine months ended September 30,  
     2012     2011     2012     2011  

Net loss (gain) on sales

   $ (9   $ (8   $ (9   $ (8

Provision for unrealized losses

     780        —          962        1,139   

Operating expenses, net of rental income

     5        8        29        54   
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 776      $ —        $ 982      $ 1,185   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

 

32


Table of Contents

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.

 

33


Table of Contents

CENTRAL FEDERAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands except per share data)

 

NOTE 6 – FAIR VALUE (continued)

 

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.

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
September 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

   $ 1,671   

Collateralized mortgage obligations

     12,629   
  

 

 

 

Total securities available for sale

   $ 14,300   
  

 

 

 

Loans held for sale

   $ 2,571   
  

 

 

 

Yield maintenance provisions (embedded derivatives)

   $ 1,054   
  

 

 

 

Interest rate lock commitments

   $ 45   
  

 

 

 

Financial Liabilities:

  

Interest-rate swaps

   $ 1,054   
  

 

 

 

 

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 September 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 September 30, 2012
Using
 
     Significant Other
Observable  Inputs
(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
 

Loan servicing rights

   $ 5      
  

 

 

    

Impaired loans:

     

Commercial

      $ 121   

Real Estate:

     

Multi-family residential

        3,937   

Commercial:

     

Non-owner occupied

        1,839   

Owner occupied

        1,293   

Land

        159   
     

 

 

 

Total impaired loans

      $ 7,349   
     

 

 

 

Foreclosed assets

     

Real Estate:

     

Commercial:

     

Non-owner occupied

      $ 967   

Land

        447   
     

 

 

 

Total foreclosed assets

      $ 1,414   
     

 

 

 

 

36


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)
    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   
   

 

 

 

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

At September 30, 2012, impaired loan servicing rights, which are carried at fair value, were $5, which was made up of the amortized cost of $6, net of a valuation allowance of $1. 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 no charge against earnings with respect to servicing rights for the three months ended September 30, 2012, and a $1 increase in earnings for the nine months ended September 30, 2012. There was no charge against earnings with respect to servicing rights for the three months ended September 30, 2011, and a $3 increase in earnings for the nine months ended September 30, 2011.

Impaired loans carried at the fair value of the collateral for collateral dependent loans, had an unpaid principal balance of $10,193, and a fair value of $7,349, with no valuation allowance at September 30, 2012. Impaired collateral dependent loans were written down to the fair value of collateral during the three and nine months ended September 30, 2012, and there were no specific valuation allowances on these loans. The amount of charge-offs on these loans totaled $536 and $1,802, respectively, for the three and nine months ended September 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. For the quarter ended September 30, 2011, there was a $379 additional provision recorded for impairment charges, and a $1,179 reduction in the valuation allowance for the nine months ended September 30, 2011.

Foreclosed assets which are carried at fair value less costs to sell, were carried at $1,414, which was made up of the outstanding balance of $3,509, with no valuation allowance at September 30, 2012. Foreclosed assets were written down to fair value less estimated costs to sell during the three and nine months ended September 30, 2012. The amount of charge-offs on foreclosed assets totaled $780 and $962, respectively, for the three and nine months ended September 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 charge of $1,139 for the nine months ended September 30, 2011. There was no charge against earnings for the three months ended September 30, 2011.

 

37


Table of Contents

CENTRAL FEDERAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands except per share data)

 

NOTE 6 – FAIR VALUE (continued)

 

During the nine months ended September 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.

 

38


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 September 30, 2012:

 

     Fair Value      Valuation
Technique(s)
   Unobservable Inputs   Range (Weighted
Average)

Impaired loans:

          

Commercial

   $ 121       Income approach    Adjustment for
differences in net
operating income
expectations
  -10.0%

Commercial real estate:

          

Multi-family residential

     3,937       Comparable sales
approach
   Adjustment for
differences between the
comparable market
transactions
  -39.0% to -27.1%
(-32.7%)

Commercial:

          

Non-owner occupied

     1,839       Comparable sales
approach
   Adjustment for
differences between the
comparable market
transactions
  -9.7% to 16.7%
(3.2%)

Owner occupied

     1,293       Comparable sales
approach
   Adjustment for
differences between the
comparable market
transactions
  -6.3% to 8.1%

(5.4%)

Land

     159       Income approach    Adjustment for
differences in net
operating income
expectations
  0.0%
      Comparable sales
approach
   Adjustment for
differences between the
comparable market
transactions
  8.1%

Foreclosed assets:

          

Real-estate

          

Commercial:

          

Non-owner occupied

     967       Market approach    See note (1)   0.0%

Land

     447       Comparable sales
approach
   Adjustment for
differences between the
comparable market
transactions
  -31.7%

Note (1) - The market approach reflects values represented by recent sales contracts related to this foreclosed asset.

 

39


Table of Contents

CENTRAL FEDERAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands except per share data)

 

NOTE 6 – FAIR VALUE (continued)

 

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.

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 September 30, 2012 or December 31, 2011.

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

 

     September 30, 2012      December 31, 2011  

Aggregate fair value

   $ 2,571       $ 1,210   

Contractual balance

     2,544         1,196   

Gain

     27         14   

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

 

     Three months ended September 30,      Nine months ended September 30,  
     2012      2011      2012      2011  

Interest income

   $ 15       $ 11       $ 34       $ 29   

Interest expense

     —           —           —           —     

Change in fair value

     9         20         13         8   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total change in fair value

   $ 24       $ 31       $ 47       $ 37   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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 September 30, 2012 were as follows:

 

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

Financial assets

           

Cash and cash equivalents

   $ 65,147      $ 65,147      $ —        $ —         $ 65,147   

Interest-bearing deposits in other financial institutions

     1,984        1,984          —           1,984   

Securities available for sale

     14,300        —          14,300        —           14,300   

Loans held for sale

     2,571        —          2,571        —           2,571   

Loans, net

     122,940        —          —          126,360         126,360   

FHLB stock

     1,942        —          —          —           n/a   

Accrued interest receivable

     68        11        57        —           68   

Yield maintenance provisions (embedded derivatives)

     1,054        —          1,054        —           1,054   

Interest rate lock commitments

     45        —          45        —           45   

Financial liabilities

           

Deposits

   $ (179,578   $ (76,931   $ (104,763   $ —         $ (181,694

FHLB advances

     (10,000     —          (10,403     —           (10,403

Subordinated debentures

     (5,155     —          (3,071     —           (3,071

Accrued interest payable

     (451     —          (451     —           (451

Interest-rate swaps

     (1,054     —          (1,054     —           (1,054

 

41


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     Fair  
     Amount     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.

 

42


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 with which they are associated.

Off-Balance-Sheet Instruments

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

 

43


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     September 30, 2012      December 31, 2011  

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:

 

     September 30, 2012      December 31, 2011  

Single-family mortgage loans

   $ 9,263       $ 11,141   

Multi-family mortgage loans

     5,036         4,222   

Commercial real estate loans

     1,254         3,384   

Securities

     6,691         9,336   

Cash

     3,300         800   
  

 

 

    

 

 

 

Total

   $ 25,544       $ 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 $20,116 from the FHLB at September 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 subsequently 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:

  

September 30, 2014

   $ 10,000   
  

 

 

 

Total

   $ 10,000   
  

 

 

 

 

44


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 (the FRB) at September 30, 2012 or at December 31, 2011.

Assets pledged as collateral with the FRB were as follows:

 

     September 30, 2012      December 31, 2011  

Commercial loans

   $ 5,122       $ 6,559   

Commercial real estate loans

     16,379         21,007   
  

 

 

    

 

 

 
   $ 21,501       $ 27,566   
  

 

 

</