CF BANKSHARES INC. / CENTRAL FEDERAL CORPORATION — Q3 2012 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2012. The filing identifies the registrant as Central Federal Corporation; its principal operating subsidiary is CFBank. Amounts below are in millions of dollars unless stated otherwise.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Interest income | $1.762 | $2.291 | $5.667 | $7.508 |
| Net interest income | $1.137 | $1.458 | $3.610 | $4.832 |
| Provision for loan losses | $0.543 | $0.405 | $0.943 | $2.256 |
| Noninterest income | $0.262 | $0.506 | $0.760 | $0.804 |
| Noninterest expense | $2.765 | $1.994 | $6.759 | $7.446 |
| Net loss | $(1.909) | $(0.435) | $(3.332) | $(4.066) |
| Net income (loss) available to common shareholders | $2.944 | $(0.542) | $1.300 | $(4.383) |
| Basic and diluted EPS | $0.38 | $(0.66) | $0.42 | $(5.31) |
Common-shareholder earnings and positive EPS in 2012 reflect a $4.960 million accounting discount on redemption of TARP obligations, not operating profit. Excluding that item, the company says it would have reported a loss attributable to common shareholders for both 2012 periods.
- Net interest margin fell to 2.26% in Q3 from 2.36% a year earlier, and to 2.24% for the nine months from 2.49%. Management attributed pressure to lower asset yields, a smaller loan book, and substantial liquidity invested in low-yielding cash.
- Q3 noninterest expense rose 38.7%, mainly due to $0.776 million of foreclosed-asset expense, including write-downs. Nine-month expense declined 9.2%, but the efficiency ratio worsened to 136.43% from 116.15%.
- Operating cash flow was $(1.350) million for the nine months; investing cash flow was $31.084 million and financing cash flow was $(26.023) million. Cash increased $3.711 million to $65.147 million.
Financial condition, capital and liquidity
- Total assets were $222.131 million, down 11.5% from year-end 2011. Net loans fell 18.7% to $122.940 million; available-for-sale securities declined to $14.300 million.
- Deposits declined 17.3% to $179.578 million; long-term FHLB advances fell to $10.000 million from $15.742 million. Subordinated debentures remained $5.155 million. Stockholders’ equity increased to $24.362 million from $9.944 million, following the equity offering.
- The company sold 15.0 million common shares for gross proceeds of $22.5 million and reported consolidated net proceeds of $20.286 million. It contributed $13.5 million to CFBank and used $3.0 million to redeem TARP obligations, including the preferred stock and associated warrant.
- CFBank’s September 30 regulatory capital ratios were 20.00% total capital to risk-weighted assets, 18.71% Tier 1 capital to risk-weighted assets, and 10.52% Tier 1 capital to adjusted assets. It met the stricter capital thresholds in its regulatory order, but was not considered “well-capitalized” under applicable standards.
- Cash, unpledged securities and deposits at other institutions totaled $66.946 million; reported total liquidity including borrowing capacity was $91.041 million. Brokered deposits were $36.039 million, with $17.516 million maturing by September 2013. The filing states available liquid assets covered all brokered-deposit maturities.
Credit quality and material changes
- Nonperforming loans declined 4.5% to $7.927 million, but rose as a share of loans to 6.17% from 5.28% because the overall loan portfolio contracted. No loans were 90 days past due and still accruing.
- The allowance for loan losses fell to $5.442 million from $6.110 million, while allowance coverage increased to 4.24% of loans from 3.89%. Nine-month net charge-offs declined to $1.611 million from $5.060 million.
- Criticized and classified loans declined, including substandard loans to $16.982 million from $25.072 million at year-end. Nonetheless, impaired real estate exposures and collateral valuations remain significant; foreclosed assets were $1.572 million after valuation charges and sales.
- Deposits and loans contracted as brokered funding restrictions persisted and lending had been curtailed. Management says it expects to deploy liquidity and new capital into newly originated loans under its post-offering business plan.
Outlook, risks and unusual items
- Going concern: The filing states that regulatory events and circumstances create substantial doubt about the company’s ability to continue as a going concern. Management says the equity raise improved capital and believes holding-company liquidity is sufficient for foreseeable needs, but sustained profitability is not assured. Further losses could reduce capital and lead to additional regulatory action, operating restrictions, a required merger, liquidation or receivership.
- Regulatory orders: Cease-and-desist orders restrict dividends and capital distributions, debt payments and changes to operations; require capital and asset-quality measures; and constrain growth and brokered deposits. CFBank’s brokered-deposit renewal waiver was scheduled to expire December 13, 2012, and future waivers were uncertain. FHLB advance maturities were limited to 30 days; Federal Reserve borrowing was available only through its more restrictive Secondary Credit Program.
- Other contingencies: A counterparty could call the interest-rate swaps because CFBank was not “well-capitalized”; the September 30 liability value was $1.054 million. A $0.908 million letter of credit and pledged cash relate to a multi-employer pension-plan funding shortfall, which could require further funding.
- Tax uncertainty: The company maintained a full valuation allowance against deferred tax assets. The stock offering may have triggered a Section 382 ownership change that could limit net operating loss carryforwards; management’s review was ongoing.
- Management warned of risks from weak economic conditions, real-estate values, credit losses, funding restrictions, interest-rate changes, regulatory compliance and the ability to reduce problem assets and expenses. No specific financial guidance was provided.
Important facts for investors to verify
- Whether CFBank sustains required regulatory capital ratios and whether the regulators modify or terminate the orders.
- Whether brokered-deposit waivers are renewed and deposits remain stable as maturities approach.
- Whether new lending produces sustained operating profitability without worsening delinquency, nonperforming-loan and charge-off trends.
- Whether collateral values and foreclosed-asset sale outcomes require further write-downs or provisions.
- The final Section 382 determination and any effect on tax-loss carryforwards, plus the status of the swap counterparty and pension-plan funding exposure.