CF Bankshares Inc. (filed as Central Federal Corporation) — Q1 2012 Form 10-Q
Business context and period. The filing is for the three months ended March 31, 2012. The company is a savings and loan holding company whose principal subsidiary, CFBank, serves Ohio markets and focuses on commercial and real estate lending and deposits. Unless otherwise noted, financial statement amounts below are in thousands of dollars. The filing reports a 1-for-5 reverse stock split completed May 4, 2012, after the quarter; historical share and per-share figures were adjusted for it.
Key financial results and position
| Metric | Q1 2012 / March 31, 2012 | Comparable period / prior balance |
|---|---|---|
| Net interest income | $1.267 million | $1.739 million in Q1 2011 |
| Provision for loan losses | $200,000 | $1.419 million in Q1 2011 |
| Net loss | $739,000; common-stockholder loss $849,000; loss per common share $1.03 | Net loss $1.714 million; common-stockholder loss $1.818 million; loss per share $2.20 in Q1 2011 |
| Noninterest income / expense | $158,000 / $1.964 million | $156,000 / $2.190 million in Q1 2011 |
| Net interest margin | 2.26% | 2.67% in Q1 2011 |
| Total assets | $241.4 million | $250.9 million at December 31, 2011 |
| Net loans / allowance for loan losses | $140.3 million / $5.6 million | $151.2 million / $6.1 million at December 31, 2011 |
| Deposits | $207.9 million | $217.0 million at December 31, 2011 |
| Long-term FHLB advances / subordinated debentures | $15.7 million / $5.2 million | Unchanged from December 31, 2011 |
| Stockholders’ equity | $9.2 million | $9.9 million at December 31, 2011 |
| Cash and cash equivalents | $63.3 million | $61.4 million at December 31, 2011 |
| Operating cash flow | $27,000 | $504,000 in Q1 2011 |
Material changes and operating trends
- The net loss narrowed by $975,000 year over year, primarily because the loan-loss provision fell by $1.219 million and noninterest expense declined by $226,000. Lower net interest income partly offset those improvements.
- Net interest income fell 27.1%. Management attributed the margin decline to lower yields on earning assets, fewer loans, and a greater proportion of liquidity held in low-yielding cash; net interest margin decreased 41 basis points.
- Assets declined 3.8% from year-end, mainly as net loans fell $10.9 million. Management said lending had been slowed to support capital ratios and comply with regulatory restrictions.
- Credit indicators improved overall from year-end: nonperforming loans declined 29.5% to $5.853 million (4.01% of loans), past-due loans declined 15.0% to $4.725 million, and criticized/classified balances decreased. The allowance-to-loans ratio was 3.87%, versus 3.89% at year-end. Q1 net charge-offs were $669,000, compared with $1.746 million in Q1 2011.
- Deposits declined $9.2 million, including a $7.1 million decrease in brokered deposits. Brokered deposits totaled $46.8 million at quarter-end. The company stated that restrictions on renewing or accepting brokered deposits were expected to contribute to further declines.
Liquidity, capital, outlook and significant risks
- Going concern: Management disclosed substantial doubt about the company’s ability to continue as a going concern. It reported ongoing losses, inadequate capital relative to regulatory orders, dependence on a pending stock offering, and limited holding-company liquidity. The interim financial statements were prepared on a going-concern basis and include no adjustments that might be needed if the company cannot continue operations.
- Regulatory capital: At March 31, CFBank’s total risk-based capital ratio was 10.55% and core capital-to-adjusted-assets ratio was 5.39%, below the CFBank Order’s respective 12% and 8% requirements. CFBank was treated as adequately capitalized for regulatory purposes under the order, but did not meet the order’s higher requirements. Further regulatory restrictions, a required merger search, or liquidation were identified as possible outcomes.
- Offering and holding-company cash: The earlier registered offering was not completed and subscriptions were returned. A restructured offering was pending effectiveness: up to $25.5 million in rights offering, $4.5 million for standby purchasers, and a public offering of unsold shares. Standby purchasers required at least $13.5 million in net proceeds from the rights and public offerings. The filing said holding-company cash was $360,000 and, at projected expenses of about $100,000 monthly, was expected to cover expenses through approximately June 30, 2012. Failure to raise capital could leave the holding company unable to meet expenses; additional funding was not assured.
- Funding constraints: CFBank’s $65.5 million of cash, unpledged securities and deposits in other institutions was reported as sufficient to cover brokered-deposit maturities. Total stated liquidity, including borrowing capacity and an unused commercial-bank line, was $85.1 million, although access to borrowing was subject to regulatory and collateral constraints. The FHLB further reduced the maximum maturity for future advances to 30 days in April 2012; Federal Reserve borrowing was limited to the more restrictive Secondary Credit Program.
- Deferred obligations and distributions: The holding company had deferred preferred dividends since November 2010 and subordinated-debenture interest since December 2010. Six preferred dividend payments were deferred by March 31, with cumulative deferred dividends of $563,000; deferred debenture interest was $256,000. Regulatory approval or non-objection was required for payments and capital distributions.
- Other contingencies: A swap counterparty could call the swaps because CFBank was not well-capitalized; the March 31 liability was $970,000, and a call could require payment. CFBank also obtained a $579,000 letter of credit for a pension-plan funding shortfall, with possible further funding requirements if the shortfall grows.
- Management outlook and risks: Management said it was unlikely the company could return to profitability without additional capital and did not expect difficult economic conditions to improve in the short term. Risks include Ohio economic weakness, real estate values, loan losses and problem assets, deposit runoff and restricted funding, interest-rate changes, regulatory actions, and successful completion of the offering. No earnings guidance was provided.
- Controls: Management concluded disclosure controls were effective at quarter-end and reported no material changes in internal control over financial reporting during Q1.
Important facts for investors to verify
- Whether the restructured equity offering became effective and closed, the net proceeds raised, and the effect on holding-company liquidity and bank capital.
- Subsequent regulatory capital ratios, compliance with the CFBank Order, and any new supervisory restrictions or required remediation.
- Whether brokered-deposit and CDARS waivers were extended, how deposit maturities were funded, and whether borrowing capacity remained available.
- Subsequent trends in nonperforming, criticized and classified loans, charge-offs, foreclosed assets, and allowance adequacy.
- Whether the swap counterparty exercised its call rights and whether pension-plan funding or letter-of-credit requirements increased.