Central Federal Corporation (CFBank) — Q2 2012 Form 10-Q
Reporting period: Three and six months ended June 30, 2012; unaudited. The filing identifies the registrant as Central Federal Corporation. The company is a savings and loan holding company whose principal subsidiary, CFBank, operates as a community bank in Ohio. Unless noted otherwise, dollar amounts below are in thousands.
Financial results and position
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Net interest income | $1,206 | $1,635 | $2,473 | $3,374 |
| Provision for loan losses | $200 | $432 | $400 | $1,851 |
| Noninterest income | $340 | $142 | $498 | $298 |
| Noninterest expense | $2,030 | $3,262 | $3,994 | $5,452 |
| Net loss | $(684) | $(1,917) | $(1,423) | $(3,631) |
| Loss per common share | $(0.96) | $(2.45) | $(1.99) | $(4.65) |
| Net interest margin | 2.30% | 2.44% | 2.26% | 2.55% |
- Q2 net loss narrowed by $1.2 million year over year; management attributed the improvement chiefly to lower loan-loss provision and expenses, plus higher noninterest income. Six-month net loss improved by $2.2 million.
- Interest income fell substantially as average loan and securities balances and yields declined. Lower funding costs partly offset the decline, but net interest income fell 26.2% in Q2 and 26.7% for the first half. Management cited excess low-yield liquidity and a smaller loan book as pressures on margin.
- Q2 noninterest income included a $143 gain on securities sales; these gains also supported CFBank’s core capital ratio. Lower foreclosed-asset expense was a major reason expenses fell: Q2 2011 included a $1.1 million property valuation charge.
- At June 30, assets were $225.6 million, down 10.1% from year-end 2011. Net loans were $132.4 million, down 12.4%; deposits were $198.4 million, down 8.6%; FHLB advances were $10.0 million, down from $15.7 million. Stockholders’ equity was $8.3 million, down from $9.9 million.
- Cash and cash equivalents were $55.2 million, compared with $61.4 million at year-end. First-half operating cash flow was $(984), investing cash flow was $19.3 million, and financing cash flow was $(24.6) million; cash declined $6.2 million.
- Credit measures improved but remained material: nonperforming loans were $5.2 million, or 3.74% of loans, versus $8.3 million, or 5.28%, at year-end. The allowance for loan losses was $5.4 million, 3.94% of loans. Criticized and classified loans also declined, while first-half net charge-offs remained $1.1 million.
Capital, liquidity, outlook, and risks
- Going concern: Management disclosed substantial doubt about the company’s ability to continue as a going concern. The company had been unprofitable for more than three years and stated that additional capital was important to preserve liquidity, meet regulatory requirements, and support future operations. Without it, regulators could impose further restrictions, require a merger or liquidation, or place CFBank into receivership.
- Regulatory capital: At June 30, CFBank’s core capital-to-assets ratio was 5.47% and total risk-based capital was 10.42%, below the cease-and-desist order’s requirements of 8% and 12%, respectively. The bank was considered adequately capitalized for prompt-corrective-action purposes, but was not well-capitalized and remained subject to regulatory restrictions.
- Recapitalization: The restructured registered stock offering comprised an $18.0 million rights offering, a $4.5 million standby-purchaser commitment, and a public offering of unsold shares. Standby purchases were conditioned on at least $13.5 million in net proceeds. The rights period ended July 16, 2012, and the public offering was scheduled to end on or before August 14; the filing does not report the final amount raised. Treasury agreed to permit redemption of TARP preferred stock and the warrant, and forgive accrued preferred dividends, for $3.0 million only if the company raised the full $22.5 million. Federal Reserve approval was received July 13; OCC approval for redemption was still required.
- Management estimated holding-company cash would cover operating and offering expenses at projected levels through approximately December 31, 2012, but gave no assurance. CFBank could not pay dividends to the parent without OCC approval. Preferred dividends and subordinated-debt interest had been deferred; cumulative deferred amounts were $661 and $302, respectively, at June 30.
- CFBank’s $43.3 million of brokered deposits were subject to restrictions on renewal, with a limited reciprocal-CDARS waiver expiring September 14, 2012. Cash, unpledged securities, and deposits at other institutions totaled $56.2 million and were reported as sufficient to cover brokered-deposit maturities. FHLB advances were restricted to a maximum 30-day term; FRB borrowing was limited to the Secondary Credit Program.
- Interest-rate swaps could be called by the counterparty because CFBank did not meet well-capitalized standards; a call would require payment of $1.055 million at the June 30 valuation, with possible additional exposure if rates changed. Separately, after quarter-end, the pension plan trustees required a $908 letter of credit or contribution, up from $579; CFBank intended to provide a letter of credit.
- Management cited Ohio economic weakness, real-estate values, loan performance, funding costs, deposit retention, regulatory actions, and the success of the capital offering as key uncertainties. It expected foreclosed-asset expense could remain at current levels or rise. No earnings or other numerical guidance was provided.
Most important facts for investors to verify
- Whether the stock offering closed, how much net capital was raised, and whether the full $22.5 million threshold and OCC approval for TARP redemption were achieved.
- CFBank’s subsequent regulatory capital ratios and any changes to its cease-and-desist orders, lending restrictions, or dividend permissions.
- Holding-company cash runway, actual operating costs, and ability to meet obligations without dividends from CFBank.
- Renewal of the CDARS waiver, brokered-deposit runoff, deposit retention, and available borrowing capacity.
- Subsequent loan delinquencies, charge-offs, criticized/classified assets, collateral values, and allowance adequacy.
- Any demand on the $1.055 million swap liability or pension letter of credit, and any further valuation losses on foreclosed properties.