Business context and reporting period
Central Federal Corporation, a savings and loan holding company operating principally through CFBank, filed this unaudited Form 10-Q for the quarter ended September 30, 2011. The bank focuses on community banking and lending, but regulatory orders sharply constrain commercial and nonresidential real estate lending and growth.
Financial performance and condition
Amounts are in millions of dollars unless noted. Comparisons are with the corresponding 2010 period or December 31, 2010, as applicable.
| Metric | Latest period / date | Comparison and change |
|---|---|---|
| Quarterly net loss | $0.435; $0.13 loss per common share | Prior-year-quarter loss was $0.232; $0.08 per share |
| Nine-month net loss | $4.066; $1.06 loss per common share | Prior-year nine-month loss was $5.880; $1.51 per share. Loss attributable to common stockholders was $4.383 million versus $6.187 million |
| Net interest income | $1.458 for the quarter; $4.832 for nine months | Down 29.1% and 25.3%, respectively |
| Net interest margin | 2.36% for the quarter; 2.49% for nine months | Down 0.76 percentage point versus each 2010 comparable period |
| Provision for loan losses | $0.405 for the quarter; $2.256 for nine months | Down $0.212 million and $5.047 million, respectively |
| Noninterest income / expense | $0.506 / $1.994 for the quarter; $0.804 / $7.446 for nine months | Nine-month income fell $0.586 million; expense rose $1.021 million, including a foreclosed-property valuation charge |
| Assets / net loans | $265.4 / $158.5 at September 30 | Assets down 3.6%; net loans down 16.9% from year-end 2010 |
| Deposits / FHLB advances | $226.7 / $15.7 at September 30 | Deposits down 0.3%; advances down $8.2 million from year-end |
| Stockholders’ equity | $11.4 at September 30 | Down 28.5% from $16.0 million at year-end |
| Cash flows, nine months | Operating $(0.089); investing $38.694; financing $(9.064); cash increased $29.541 | Prior-year operating cash flow was $2.533 million; cash ended at $63.816 million |
Quarterly and nine-month net interest income weakened as loan balances and asset yields declined; high cash balances invested at low yields also weighed on margin. Lower loan-loss provisions improved the year-to-date loss comparison, but were offset by lower net interest income and noninterest income and a $1.139 million charge to write down foreclosed real estate.
Credit quality, liquidity and capital
- Gross recorded loans were $165.5 million; the allowance for loan losses was $6.955 million, or 4.20% of loans, versus $9.758 million and 4.87% at year-end. Nine-month net charge-offs were $5.060 million, up from $4.336 million.
- Nonperforming loans declined to $5.280 million, or 3.19% of loans, from $10.057 million, or 5.02%, at year-end. The decline reflected charge-offs, payments and collateral sales; management noted new problem loans, including a multifamily relationship.
- Loans classified special mention totaled $17.812 million and substandard loans $22.173 million. A multifamily TDR subsequently defaulted and resulted in an $0.800 million third-quarter charge-off. The foreclosed-property write-down related to undeveloped commercial land whose near-term sale was considered unlikely.
- Cash and unpledged securities were $65.091 million. Reported total liquidity, including available borrowing capacity and unused bank lines, was $84.965 million. This liquidity was built partly through loan runoff and asset sales and reduced earning yields.
- CFBank’s September 30 capital ratios were 5.55% core capital to adjusted assets and 10.41% total capital to risk-weighted assets, below the CFBank Order’s respective 8% and 12% requirements. The filing says the bank was “adequately capitalized” for regulatory purposes, but not well-capitalized.
Outlook, regulatory matters and unusual items
- Cease-and-desist orders require capital and business plans, restrict lending, asset growth, dividends and other capital distributions, and impose approval requirements on management and certain contracts. The bank missed the order’s September 30 capital targets. Management expected no additional material restrictions or penalties if sufficient capital could be raised in a reasonable period, based on informal regulatory discussions; this was not assured.
- The company proposed a common-stock offering of up to $30 million: a $25 million rights offering and $5 million from standby purchasers. Standby purchases were conditional on at least $16.5 million in net rights-offering proceeds. The registration statement was not yet effective at the filing date.
- CFBank could not accept or renew brokered deposits without FDIC approval, subject to a limited waiver through December 19, 2011. Brokered deposits were $56.383 million and scheduled to mature from October 2011 through August 2016; cash and unpledged securities covered their stated maturities at September 30. The bank also faced limits on deposit pricing and reduced access to FHLB and Federal Reserve borrowing programs.
- Parent-company cash was $0.587 million, estimated to cover approximately eight months of operating expenses at then-current levels. Dividends from CFBank were restricted, and management was exploring additional funding. Preferred-stock dividends and subordinated-debenture interest had been deferred; cumulative deferred amounts were $0.370 million and $0.166 million, respectively.
- Interest-rate swaps could be called if the bank failed to maintain well-capitalized status; payment at September 30 valuations would cost $1.023 million, potentially more if rates declined. A pension-plan funding shortfall required a $0.579 million letter of credit, with possible further obligations if the shortfall grows.
- Management did not expect difficult economic and real estate conditions to improve in the near term and warned of potential further credit losses, foreclosures, funding pressure and regulatory costs. It believed the allowance was adequate but acknowledged that additional provisions may be needed. No quantified earnings guidance was provided.
Important facts for investors to verify
- Whether and when the proposed equity offering became effective, met its minimum proceeds condition, and raised enough capital to address regulatory requirements.
- Subsequent CFBank capital ratios, regulatory actions, lending and growth restrictions, and the status of brokered-deposit waivers and maturities.
- Trends in net interest margin, loan balances, net charge-offs, nonperforming and classified loans, TDR performance, and foreclosed-asset valuations.
- Parent-company liquidity, continued deferral of preferred dividends and debenture interest, and any additional funding sources or contingent obligations.