CFBank / Central Federal Corporation — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2011; filed August 12, 2011. The filing registrant is Central Federal Corporation, whose principal operating subsidiary is CFBank. Unless noted, dollar amounts below are in millions; financial statement amounts are reported in thousands.
Business context and financial performance
CFBank is a community-oriented lender funded primarily by customer deposits. Its lending includes commercial, commercial real estate, residential mortgage and home equity loans. Regulatory orders restricted certain lending, funding and capital actions during the period.
- Q2 results: Net loss was $1.917 million, or $0.49 per common share, compared with a $5.553 million loss, or $1.38 per share, in Q2 2010. The smaller loss primarily reflected a much lower loan-loss provision, partly offset by reduced net interest income and a $1.139 million foreclosed-property valuation charge.
- First-half results: Net loss was $3.631 million, or $0.93 per common share, versus a $5.648 million loss, or $1.43 per share, in the first half of 2010. No income tax benefit was recorded in 2011.
- Revenue and margin: Q2 net interest income was $1.635 million, down 25.0%; first-half net interest income was $3.374 million, down 23.5%. Net interest margin fell to 2.44% in Q2 from 3.23% a year earlier, and to 2.55% for the first half from 3.31%. Lower loan balances and yields, plus cash held in low-yielding assets, pressured income.
- Credit costs: Loan-loss provision was $0.432 million in Q2 and $1.851 million for the first half, compared with $5.938 million and $6.686 million, respectively, in 2010. First-half net charge-offs were $3.558 million. The allowance for loan losses was $8.050 million, 4.48% of loans, versus $9.758 million, or 4.87%, at year-end 2010.
- Operating expenses: Noninterest expense rose 55.4% to $3.262 million in Q2 and 29.7% to $5.452 million for the first half, chiefly due to the $1.139 million foreclosed-asset write-down. First-half FDIC premiums and professional fees also increased.
- Cash flow and liquidity: First-half operating cash flow was $0.523 million; investing cash flow was $20.171 million and financing cash flow was $5.467 million. Cash and cash equivalents increased $26.161 million to $60.436 million. Cash plus unpledged securities totaled $66.494 million at quarter-end.
- Balance sheet and funding: Total assets were $277.790 million, versus $275.232 million at December 31, 2010. Net loans declined to $171.482 million from $190.767 million; deposits increased to $238.223 million from $227.381 million. Long-term FHLB advances fell to $18.742 million from $23.942 million; subordinated debentures remained $5.155 million. Stockholders’ equity fell to $12.282 million from $15.989 million.
Material changes and credit quality
- Nonperforming loans declined to $7.152 million, or 3.98% of loans, from $10.057 million, or 5.02%, at year-end. Management attributed the reduction primarily to charge-offs, alongside payments and collateral-sale proceeds; $1.5 million of additional loans became nonperforming during the first half.
- Special-mention loans were $17.099 million and substandard loans were $26.921 million at June 30. Management said the allowance was adequate, while warning that worsening economic conditions, borrower performance or collateral values could require additional provisions.
- Foreclosed assets were $2.370 million, down from $4.509 million. A $1.139 million write-down was taken on undeveloped commercial land in Columbus after a new appraisal indicated lower value; management said a near-term sale was unlikely.
- Deposits grew, in part due to retail certificates of deposit, while money-market balances declined. Brokered deposits were $63.5 million, including $20.1 million in CDARS balances. The bank had $66.5 million of cash and unpledged securities, which management said covered brokered-deposit maturities.
Regulatory actions, outlook and unusual items
- On May 25, 2011, the holding company and CFBank consented to cease-and-desist orders. CFBank was required to reach, by September 30, 2011, 8% core capital to adjusted assets and 12% total capital to risk-weighted assets. At June 30, its respective ratios were 5.4% and 10.1%. It was considered adequately, but not well, capitalized.
- The orders restrict commercial and nonresidential real estate lending, asset growth, dividends and other capital distributions, and require regulatory approval for specified actions. CFBank cannot accept or renew brokered deposits without FDIC approval. The filing says an application to renew CDARS deposits was pending.
- Borrowing access tightened: the FHLB limited future advances to maturities of one year or less; the Federal Reserve moved CFBank from its Primary to Secondary Credit Program; and a $3.0 million commercial-bank credit line was terminated in March. CFBank reported $3.340 million of additional FHLB capacity and $19.938 million of FRB capacity at June 30, with FRB advances subject to individual approval.
- The holding company had $0.850 million in cash outside CFBank and estimated that cash at then-current operating expense levels covered about 1.4 years. It had deferred preferred dividends and subordinated-debt interest to preserve cash; further deferrals were expected. CFBank dividends to the holding company require regulatory approval.
- Subsequent events: On August 9, the company announced a proposed common-stock offering of up to $30 million: a $25 million rights offering and a $5 million standby purchase. The standby purchasers’ commitment was conditional on at least $16.5 million in net rights-offering proceeds. On August 10, CFBank was notified it must provide a $579,000 letter of credit or contribution for a pension-plan funding shortfall; it intended to provide a letter of credit.
- Management said it did not expect difficult economic and market conditions to improve in the short term. Risks include credit deterioration, real-estate valuation declines, liquidity and deposit-retention pressures, regulatory requirements, and the ability to raise capital. The filing provided no earnings guidance. Management reported disclosure controls were effective and no material second-quarter change in internal control over financial reporting.
Important facts for investors to verify
- Whether the proposed rights offering was completed, its final terms and proceeds, and whether the standby-purchase condition was met.
- CFBank’s subsequent capital ratios and progress toward the 8% core and 12% total-capital order requirements by September 30, 2011.
- FDIC decisions on brokered-deposit and CDARS renewals, and the timing and effect of brokered-deposit maturities on liquidity.
- Subsequent credit losses, allowance adequacy, foreclosed-property valuations and any further deterioration in commercial or real-estate collateral.
- The pension-plan letter of credit or contribution and any additional funding demands; also the continued deferral and accumulated amounts of preferred dividends and subordinated-debt interest.