Filing summary
Entity note: The filing is for Central Federal Corporation, not “CF BANKSHARES INC.” as identified in the request metadata. Confirm the intended issuer before relying on this summary.
Business context and reporting period
This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2013. Central Federal is a savings and loan holding company whose principal business is conducted through CFBank, an Ohio community bank focused on commercial and real estate lending and local deposits. Amounts below are in thousands of dollars unless otherwise stated.
Financial performance and position
| Metric | Q3 2013 / September 30, 2013 | Comparison |
|---|---|---|
| Net interest income | $1,393 | Up 22.5% from $1,137 in Q3 2012 |
| Net interest margin | 2.53% | 2.26% in Q3 2012 |
| Noninterest income | $176 | Down from $262 in Q3 2012 |
| Noninterest expense | $1,878 | Down from $2,765 in Q3 2012 |
| Net loss | $(385); $(0.02) per diluted share | Net loss of $(1,909) in Q3 2012 |
| Net loss, nine months | $(1,749); $(0.11) per diluted share | Net loss of $(3,332) in the first nine months of 2012 |
| Net interest margin, nine months | 2.46% | 2.24% in the comparable 2012 period |
| Total assets | $250,392 | Up 16.4% from $215,035 at December 31, 2012 |
| Net loans / allowance for loan losses | $170,325 / $6,171 | Net loans up 11.3%; allowance was $5,237 at year-end 2012 |
| Deposits | $210,676 | Up 21.4% from $173,508 at year-end 2012 |
| Debt | $10,000 FHLB advances; $5,155 subordinated debentures | Both balances unchanged from year-end 2012 |
| Cash and cash equivalents | $46,785 | Up from $25,152 at year-end 2012 |
| Stockholders’ equity | $21,959 | Down from $23,643 at year-end 2012 |
For the first nine months, net interest income was $3,873, noninterest income was $578, and noninterest expense was $5,474. The company reported no income tax expense or benefit; it maintained a full valuation allowance against its deferred tax asset.
Cash used in operating activities was $4,872 for the nine months, compared with $1,350 used in the 2012 period. Investing activities used $10,544, while financing activities provided $37,049, principally reflecting $37,127 of deposit growth. Cash increased by $21,633 to $46,785.
Material changes versus the prior comparable period
- Q3 net loss improved by $1,524 year over year, mainly due to lower noninterest expense, lower loan-loss provision, and higher net interest income. Nine-month net loss improved by $1,583, with lower expenses and provision partly offset by lower noninterest income.
- Reported common-stockholder earnings in Q3 and the first nine months of 2012 included a $4,960 gain from the discounted redemption of TARP preferred stock. The 2012 comparison also included preferred dividends and accretion; the TARP obligations were fully redeemed in September 2012.
- Loan growth and deposit growth expanded the balance sheet. Nonperforming loans declined to $5,391, or 3.1% of loans, from $6,356, or 4.0%, at year-end 2012. Past-due loans declined to $2,787 from $3,185.
- The allowance-to-loans ratio rose to 3.50% from 3.31%. The allowance-to-nonperforming-assets ratio improved to 114.5% from 82.4%, according to management.
- Brokered deposits, including CDARS balances, declined to $24.5 million from $32.0 million at year-end. Management attributed the reduction to regulatory restrictions and runoff.
Outlook, risks, contingencies, and unusual items
- Regulatory orders: The holding company and CFBank remain subject to cease-and-desist orders. CFBank must maintain at least 8% core capital to adjusted assets and 12% total risk-based capital, and cannot pay dividends or accept or renew brokered deposits without the applicable regulatory approval. At September 30, CFBank reported 8.88% core capital to adjusted assets and 13.28% total risk-based capital, meeting the order’s stated ratios, but it is not treated as “well-capitalized” while the order remains in force.
- Liquidity and funding: Management said bank liquidity was sufficient. Cash, unpledged securities, and deposits in other institutions totaled $49.9 million; disclosed additional borrowing capacity at the FHLB, FRB, and a commercial-bank line brought stated liquidity resources to $82.7 million. Deposit-rate restrictions, brokered-deposit maturities, and the availability of future CDARS waivers could constrain funding.
- Credit and economic risks: Management cited lingering weakness in the economy and real estate markets, borrower cash flows, and collateral values. It said future provisions or charge-offs could rise if conditions deteriorate; regulators may also require additional reserves or asset write-downs. TDRs totaled $6.6 million at September 30, with $2.7 million in nonaccrual TDRs.
- Other contingencies: A counterparty could call the bank’s interest-rate swaps because the bank does not qualify as well-capitalized under regulatory standards. The payment would have been $678 at September 30, subject to valuation changes. CFBank also had a $908 letter of credit related to a multi-employer pension plan; the plan trustee could draw on it if circumstances warrant.
- Subsequent event: On October 29, 2013, the company completed the sale of its Fairlawn office building for approximately $3.2 million. Management expected an approximately $1.0 million gain in Q4 and had approval to contribute about $1.5 million of proceeds to CFBank. The company also planned a Cleveland office, expected to open in January 2014, subject to its plans and regulatory requirements.
- Management outlook: No numerical earnings guidance was provided. Management said it intended to focus on capital preservation, improving operating results, loan growth, and compliance with regulatory orders. It cautioned that forward-looking expectations are uncertain and that difficult market conditions may persist.
Important facts for investors to verify
- Confirm that Central Federal Corporation is the intended issuer, given the mismatch with the requested company name.
- Review the full regulatory orders, CFBank’s capital ratios, and the status and renewal terms of FDIC waivers for reciprocal CDARS deposits.
- Assess loan quality, criticized and classified exposures, impaired loans, TDRs, and the adequacy of the allowance for loan losses.
- Verify the completed building sale, realized gain, use of proceeds, and progress and costs associated with the planned Cleveland office.
- Evaluate the sustainability of liquidity and earnings given operating cash outflow, continued net losses, dividend restrictions, and the potential swap-call and pension-letter-of-credit exposures.