Business context and reporting period
Central Federal Corporation, a savings and loan holding company operating principally through CFBank in Ohio, filed this unaudited Form 10-Q for the quarter ended March 31, 2013. Its community banking business focuses on commercial, commercial real estate, residential mortgage and home equity lending. The filing states that quarterly performance is not necessarily indicative of full-year results.
Financial results and condition
- Profitability: Net loss was $810,000, or $0.05 per diluted share, compared with a $739,000 net loss and $1.03 loss per diluted share in Q1 2012. The prior-year common-stockholder loss included $110,000 of preferred dividends and discount accretion; preferred stock was redeemed in 2012. Per-share comparisons also reflect the much larger share count following the 2012 offering and reverse split.
- Revenue and margins: Net interest income declined 6.4% to $1.186 million from $1.267 million; interest income fell 15.1% to $1.711 million while interest expense declined 29.9% to $525,000. Net interest margin was 2.32%, versus 2.26%. Noninterest income decreased to $133,000 from $158,000. Noninterest expense fell 8.2% to $1.803 million from $1.964 million. No income tax expense or benefit was recorded.
- Credit costs: The loan-loss provision rose to $326,000 from $200,000, attributed mainly to portfolio growth and a downgraded commercial relationship. The allowance for loan losses was $5.682 million, or 3.29% of loans, versus $5.237 million, or 3.31%, at year-end. Q1 2013 had $119,000 of net recoveries, compared with $669,000 of net charge-offs in Q1 2012.
- Assets and lending: Total assets were $216.4 million, up 0.7% from December 31, 2012. Net loans increased 9.0% to $166.8 million; available-for-sale securities declined to $14.5 million from $17.6 million. The Northpointe mortgage-purchase program accounted for $27.4 million of residential loans at quarter-end; the bank purchases a 75% interest in pre-sold loans, subject to a $45 million aggregate limit.
- Credit quality: Nonperforming loans decreased to $5.565 million from $6.356 million, equal to 3.2% of loans at March 31. Total past-due loans were $2.247 million, or 1.3% of the portfolio, down from $3.185 million, or 2.0%, at year-end. Criticized loans were $12.1 million and substandard loans $15.8 million; no loans were rated doubtful. No loans 90 days past due remained on accrual.
- Funding, debt and equity: Deposits declined 2.8% to $168.7 million. FHLB advances totaled $15.955 million, other borrowings were $1.0 million at quarter-end (repaid the next day), and subordinated debentures were $5.155 million. Stockholders’ equity was $22.868 million, down from $23.643 million, primarily due to the quarterly loss.
- Cash flow and liquidity: Operating cash flow was negative $1.888 million and investing cash flow negative $10.942 million, partly offset by $2.084 million of financing cash flow. Cash and cash equivalents fell $10.746 million to $14.406 million, mainly as funds supported loan growth. Management reported $36.4 million of cash, unpledged securities and available borrowing capacity, versus $55.7 million at year-end; this included $18.781 million of cash, unpledged securities and deposits, $321,000 of additional FHLB capacity and $17.283 million of FRB capacity.
- Regulatory capital: CFBank reported 10.60% core capital to adjusted assets and 14.26% total risk-based capital, above the cease-and-desist order’s respective 8% and 12% minimums. The order nevertheless prevents the bank from being classified as “well-capitalized” under prompt corrective action rules.
Material changes versus comparable periods
- Compared with Q1 2012, lower asset yields reduced interest income, while lower deposit costs reduced interest expense. Net interest income still declined as the yield on earning assets fell more than funding costs.
- Operating expenses decreased, notably salaries and benefits, FDIC premiums and director fees. Management attributed lower salary expense partly to post-offering restructuring; director fees were suspended pending profitability.
- Loan balances grew substantially from year-end, while nonperforming loans and past-due loans declined. The allowance increased in dollars but edged down as a percentage of loans.
- Compared with December 31, 2012, cash, securities and deposits declined as the bank redeployed liquidity into loans; deposits also fell, including brokered deposits.
Outlook, risks and contingencies
- Outlook: The filing provides no quantified earnings or revenue guidance. Management said it did not expect difficult economic and market conditions to improve in the short term, anticipated continued brokered-deposit runoff, and said the holding company’s retained offering proceeds were expected to fund its needs for several years under its current plan. Management considered bank and holding-company liquidity sufficient at the reporting date.
- Regulatory restrictions: Cease-and-desist orders require prior regulatory approval for dividends and certain debt actions, impose capital and business-plan requirements, constrain certain lending and asset growth, and restrict brokered deposits and deposit pricing. The bank cannot pay dividends to the holding company without OCC approval; approval is considered unlikely while the bank is loss-making. The current limited CDARS renewal waiver was stated to run through June 12, 2013; future waivers and customer renewals were uncertain.
- Liquidity and funding risks: $27.760 million of brokered deposits had maturities extending from April 2013 through August 2016, including $17.709 million due by March 31, 2014. FHLB access was constrained, including a 30-day maximum maturity for future advances. Liquidity is exposed to deposit runoff, loan growth, market competition and collateral or borrowing-capacity changes.
- Credit and market risks: Management cited possible deterioration in borrower performance, real estate collateral values, delinquencies and charge-offs, and the possibility regulators may require additional loan-loss provisions or asset write-downs. Interest-rate changes may affect margins and funding. A significant portion of commercial lines and home-equity lines carried interest-only payments.
- Unusual and contingent items: The counterparty could call the interest-rate swaps because CFBank does not qualify as well-capitalized while subject to the order; a call would require $907,000 at the quarter-end valuation, and the amount could change with rates. CFBank also obtained a $908,000 letter of credit related to a multi-employer pension plan funding shortfall; further support could be required. A full valuation allowance was maintained against net deferred tax assets, and ownership-change limitations may restrict use of prior net operating losses.
- Other disclosures: The company reported no material changes to its previously disclosed risk factors, no material pending legal proceedings beyond routine banking matters, and effective disclosure controls at quarter-end. Management cited no formal forward-looking financial targets.
Important facts for investors to verify
- Confirm CFBank’s ongoing compliance with the cease-and-desist capital requirements and the status of regulatory orders, dividend restrictions and CDARS waiver renewals.
- Track liquidity after the decline in cash and available borrowing capacity, including brokered-deposit maturities and actual access to FHLB and FRB funding.
- Assess loan growth and credit performance, particularly commercial real estate, criticized and substandard loans, the allowance, and concentrations and turnover in the Northpointe program.
- Monitor whether the company can reach profitability, sustain net interest margin and control expenses, and whether holding-company cash remains sufficient without bank dividends.
- Verify developments in the potential $907,000 swap call exposure, pension-plan letter of credit and realizability of tax attributes.